First Takaful Insurance assigned 'BBB-' ratings on good capitalization; outlook stable

The outlook is stable.

"The rating reflects First Takaful's good level of capitalization, good liquidity, and good profitability," said Standard & Poor's credit analyst Wolfgang Rief.

These positives are partly offset by the company's aggressive and regionally concentrated investment policy, as well as by the company's position in a relatively small and very competitive market.

The company enjoys good capitalization. Capital adequacy is good according to Standard & Poor's risk-adjusted capital model. The capital base sufficiently covers the heavy capital requirements stemming from locally concentrated equity investments and this, together with a relatively small capital base, makes First Takaful's capital adequacy highly exposed to asset volatility.

The company's solvency position is currently pressured by the effects of the recent upheaval in the financial markets, reflected in a very high investment leverage level of 140% on Dec. 31, 2008.

We consider First Takaful's operating performance to be good overall. The company's underwriting performance, with a combined ratio of 98.6% for 2008 and a five-year average of about 97%, appears adequate for a cooperative model-driven company. However, results for the first half of 2009 were disappointing, with the very competitive motor segment being a particular drag on the results. The relatively high net expense ratios are additional offsetting factors. In our view, First Takaful's business volumes don't yet appear to allow the company to realize sufficient economies of scale. The return on equity was good, with a five-year average of 13%, but turned sour in 2008 to negative 2.8%, because a net loss had to be recorded due to significant asset value deterioration.

First Takaful, following its Islamic status, invests heavily in local and particularly unlisted equities and funds, which weakens the company's financial profile. This gives the company a very high investment leverage of 140%, which emphasizes the asset value sensitivity of shareholder funds.

The takaful market represents about 14% of the total Kuwaiti insurance market, and First Takaful boasts the largest market share (about 23%) of that sector.

The stable outlook reflects our assumptions that First Takaful will maintain its capitalization at least within the 'BBB' rating level, which might be helped if the recent first signs of recovering fair values continue.

"We anticipate that the company's liquidity will remain good, with total liquid assets clearly covering technical liabilities," said Mr. Rief.

We also expect the company to reinforce its underwriting discipline and demonstrate combined ratios of less than 100% at least for the three-year average ratio. Premium volumes are likely to decrease by up to 5% in 2009, reflecting the increasing competition and enhanced pricing discipline. Net profits will remain sensitive to asset value movements, but we expect a small profit for 2009.

A positive rating action within the rating horizon appears unlikely at this stage, but might be achievable if the company outperforms the targets mentioned above. A negative rating action may be taken if the company is unable to meet the above mentioned capitalization targets and fails to adhere to its generally sound underwriting principles.