London – MENA Herald: Moody’s Investors Service has today assigned a Baa1 insurance financial strength rating (IFSR) to Warba Insurance Company K.S.C.P. (Warba), based in Kuwait. The outlook is stable.
Established in 1976, Warba is a top tier insurer in Kuwait and writes most lines of non-life insurance, together with life and health insurance. Moody’s rating reflects (i) Warba’s strong position in the domestic market, ranking #3 in 2015 with a market share of around 11.4%; Warba has an established brand and a good reputation for its service capability, particularly within life and medical insurance, with overall total gross written premiums of KD37.1 million in 2015 (USD122 million); (ii) the company’s relatively strong product diversification within the Kuwaiti market; and (iii) Warba’s strong capitalisation with total equity of KD45.3 million (USD149 million), representing 52% of total assets and leading to a healthy gross underwriting leverage of 1.1x as at 31 December 2015.
These strengths are somewhat offset by significant investments in high-risk assets (HRA; include equity, property and non-investment grade securities) which can introduce volatility to the company’s profitability.
Exposure to HRA, in particular equity market, remains significant with HRA accounting for 66% of Warba’s invested assets as at YE 2015. HRA include significant holdings of quoted and unquoted equities, potentially exposing Warba to fluctuations in the financial markets. However as a percentage to shareholders’ equity the exposure to HRA has reduced to 57% in 2015 from 65% in 2011 and Moody’s expects the high-risk assets as a percentage of shareholders equity to continue to reduce.
Moody’s further notes that Warba has delivered a 2011-2015 average combined ratio of 92.5% (including reinsurance commission income), resulting in an average return on capital of 2.6% over the same period, which is somewhat lower than its top tier peers in Kuwait (both on a Moody’s basis).
OUTLOOK AND RATING DRIVERS
The stable rating outlook reflects Moody’s expectation that Warba’s market position in the Kuwait insurance market will remain strong. Combined with the focus on service and long-standing relationships with key clients in Kuwait, this should enable Warba to take advantage of the Kuwaiti government’s extensive economic stimulus package to be implemented over the coming few years, notwithstanding the current strong price competition within the market.
According to Moody’s, the rating could be upgraded if (i) there are significant improvements in asset quality, with a greater focus on bond investments and deposits; and/or (ii) there is an improvement in
profitability, with return on capital of over 8% and/or combined ratios below 85% consistently; and/or (iii) through wider geographic diversification, with profitable underwriting positions in the broader
Conversely, the rating could come under negative pressure if (i) the capital position deteriorates, with gross underwriting leverage increasing to 2x, or loss of major cedents in the reinsurance program
occurs; and/or (ii) a significant deterioration in the underwriting performance occurs, with combined ratios of above 100% for several years; and/or (iii) a deterioration in the liquidity of the asset portfolio; and/or (iv) a significant reduction in market share.