Moody’s Investors Service has upgraded to A3 from Baa1 the insurance financial strength rating (IFSR) of Kuwait Insurance Company. The rating carries a stable outlook.
RATINGS RATIONALE
The rating upgrade for Kuwait Insurance Company reflects (i) its strong position in the domestic market with an established brand and a good reputation for service and (ii) its sustained strong bottom line profitability with a five year average return on capital of 8.5% and a very high Sharpe ratio of return on capital, which measures the very strong consistency of returns on a five year average basis.
Furthermore, underwriting performance was good with a five year average combined ratio of 82.9% in 2014 (all on a Moody’s basis) coupled with a conservative reserves policy.
Additionally Kuwait Insurance Company has strong product diversification, albeit within a small market. KIC also benefits from good capital levels with 2014 shareholders’ equity representing over 34% of total assets and a gross underwriting leverage, on a Moody’s basis, of 1.8x.
However, these strengths are partially constrained by an investment strategy that can introduce income statement volatility with high risk assets equating to 100.7% of shareholders’ equity at year-end 2014 on a Moody’s basis. Furthermore, there are high levels of price competition in the Kuwaiti property and casualty insurance market that could hinder growth or alternatively introduce underwriting volatility.
Kuwait Insurance Company’s strong domestic market position, focus on service and longstanding relationships with key departments and businesses in Kuwait demonstrate that the company is well placed to secure a significant proportion of the contracted insurance stemming from the upcoming government stimulus package (the draft budget for 2015-16 projects spending of KWD 19 billion).
Furthermore, the IFSR benefits from the company’s consistent albeit improved profitability with the five year average return on capital at year-end 2014 of 8.5% comparing favorably to the 3.8% at year-end 2013 and also translating to a very strong Sharpe ratio of 3109%, which measures the very strong consistency of returns on a five year average basis. Going forward, keeping in mind KIC’s market position, relations and reputation, we expect KIC to continue to post strong results. The company has also a conservative reserves policy, with reserves typically 20% redundant.
On a more negative side, KIC maintains a still significant level of investment risk, with meaningful levels of investments in Kuwaiti equity markets translating to the 2014 high risk assets being equal to 100.7% of shareholders’ equity, albeit marginally lower than the 111% at year-end 2013. This has previously contributed to some volatility in net income, despite real estate holdings being at comparatively low levels with its peers. Furthermore, the Kuwaiti property and casualty insurance market continues to exhibit high levels of price competition, impacting growth with KIC’s premium written growing by 5% in 2014, low compared to the 27% growth achieved in 2012.
RATING DRIVERS
Given the upgrade of KIC’s insurance financial strength rating, upward pressure on the rating is unlikely. However factors that would strengthen the rating by providing a buffer from negative pressures include (i) improvements in asset quality, with a greater focus on bond investments and deposits equating to high risk assets ratio of below 80%; and/ or (ii) increase in capitalization levels with gross underwriting leverage 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 gross underwriting leverage increasing to 3x, or loss of major cedents in the reinsurance program; and/ or (ii) a significant deterioration in the underwriting performance, with combined ratio above 100% 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.
The following rating was upgraded with a stable outlook:
Kuwait Insurance Company — Insurance Financial Strength Rating to A3 from Baa1
In 2014, KIC recorded a 5% increase in gross contributions to KWD 35.6 million from KWD 34.0 million in 2013, owing largely to the increase in its fire, general accident and life business. At the same time, net income increased by over 21% to KWD 5.1 million from KWD 4.2 million in 2013. Finally, KIC’s equity increased by over 11% to KWD 60.4 million in 2014 from KWD 54.2 million in 2013.