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DUBAI, Nov 29: Moody’s Investors Service has today affirmed the A3 insurance financial strength rating (IFSR) of Kuwait Insurance Company SAK (KIC). The outlook for KIC remains stable. Moody’s has affirmed the A3 IFSR reflecting:
(i) KIC’s strong position in the domestic market with an established brand and a good reputation for service and
(ii) its good and strengthening capitalisation with a gross underwriting leverage (GUL) of 1.4x as at YE 2017 from 1.7x as at YE 2016 and
(iii) its sustained strong underwriting profitability with the 5 year average combined ratio (COR) of 86.5 percent at YE 2017, albeit overall profitability remains exposed to volatility from the high risk investment portfolio as seen in 2016 results.
These strengths are partially constrained by the investment strategy that introduces income statement volatility with high risk assets (HRA), mostly equity, equating to 95.3 percent of shareholders’ equity as at YE 2017.
Furthermore, KIC remains exposed to the high levels of price competition in the Kuwaiti property and casualty (P&C) insurance market which pressures profitable growth. KIC has maintained its top tier position in the market, as the second largest insurance group with a relative market share of 1.7x at YE 2017. Furthermore, the underwriting driven profitability has ensured a good 5 year average return on capital (ROC) of 7.7 percent in 2017, despite the negative ROC of -1.0 percent in 2016 driven by investment impairment losses.
We expect KIC to continue to report strong underwriting results thanks to its focus on underwriting, leveraging its brand and reputation in the market. In addition we note that KIC has made major strides in advancing its governance and risk management structure with, for example, the setup of an in-house actuarial department.
The stable outlook for KIC is underpinned by our view that the company will continue to organically grow its capital by way of profitable results. According to Moody’s, KIC’s rating could be upgraded if there is: (i) improvements in asset quality, with a greater focus on high-rated bond investments and deposits equating to HRA ratio of below 75 percent; and/or (ii) increase in capitalisation levels with GUL of under 1x; and/ or (iii) wider geographic diversification, with good positions elsewhere in the Gulf Cooperation Council. Conversely, downward pressure on the rating could result from (i) a weakened capital position, with GUL increasing to 3x, or loss of major cedents in the reinsurance program; and/or (ii) a significant deterioration in the underwriting performance, with COR above 100 percent for several years, or significant losses related to the investment portfolio; and/or (iii) a deterioration in the quality and liquidity of the asset portfolio; and/or (iv) a significant reduction in market share.