DUBAI: Standard and Poor’s Ratings Services affirmed its BBB counterparty credit and insurer financial strength ratings on Takaful Re Ltd. (TRL). The outlook is stable.
The ratings reflect our view of TRL’s fair business risk profile and moderately strong financial risk profile. Our assessment of business risk reflects TRL’s specialist niche, but less-than-adequate competitive position
in its operation as a purely takaful (Islamic insurance) reinsurer. The financial risk profile reflects moderately strong capital and earnings.
Capital adequacy will likely remain extremely strong, despite continuing underperformance of earnings–which we expect will improve over the next two years. From the combination of all of these factors, we derive our ‘bbb’ anchor for TRL. Management & governance and enterprise risk management (ERM) are neutral factors for the ratings. We note that liquidity is exceptional,
and in our opinion fully capable of supporting likely stressed loss-event scenarios.
TRL is majority-owned by Arab Insurance Group (Arig; not rated), which we view
as a committed, fully supportive shareholder. However, its ownership provides
no rating support to our rating on TRL.
“We view TRL’s competitive position as less than adequate and a continuing weakness for the rating. In 2013, gross premiums written declined very sharply to US$22 million, down by 43%. This was significantly lower than we had
expected, caused by TRL’s withdrawal from certain lines of business and geographies–cleansing the portfolio of loss-making accounts–and by a reduction in previous years’ estimated premiums. Although TRL potentially covers the global Islamic insurance market, its business is concentrated in the Gulf Cooperation Council region (approximately 75%) and Asia (10%), where Islamic insurance companies are most-established. After the sharp decline in
2013, we expect TRL’s income will recover in 2014 and beyond. We forecast premium written to rise by about 10% per year for the plan period.
“We regard TRL’s financial profile as moderately strong. The key driver to this
is its extremely strong capital adequacy. While we view capital as able to withstand further erosion, we do not expect this to arise again. We believe TRL will maintain extremely strong risk-based capital adequacy through the next two years of franchise development. We also expect TRL’s underwriting performance to recover in 2014, with the combined ratio of the Takaful fund improving to around 105%–still in deficit, but delivering at least break-even technical performances in 2015 and 2016. In our opinion, investment earnings will cover and support underwriting earnings to deliver a return on equity of 2%. We now see TRL’s risk position as moderate; although its investment
portfolio mix is unchanged, the operational setbacks in 2013 indicate greater exposure to one-off events than previously experienced. This partly reflects its small operational scale.
“The stable outlook reflects our view that TRL’s business and financial risk profiles are unlikely to change materially over the next two years. We anticipate that TRL will continue to be fully supported, operationally and financially, by its shareholders. Gross premiums written will increase by some 10% in 2014 and TRL will deliver modest profits, with return on equity of
above 2%. While a negative rating action is currently unlikely given the strength of
TRL’s capital and liquidity, this could be prompted by any weakening of its
business profile, through continuing underperformance in terms of planned
business growth and earnings delivery, relative to our base-case scenarios. We see no upside to the rating at this stage.”