Standard and Poor's Ratings Services said today it has revised the outlook on takaful player Wethaq Takaful Insurance Co. (Wethaq) to stable from negative. At the same time, we have affirmed the 'BB' long-term counterparty credit and insurer financial strength ratings.
"The outlook revision reflects our belief that, despite substantial asset write-downs and the parent's financial troubles, Wethaq has sustained operations in Kuwait and launched a new business in Egypt," said Standard & Poor's credit analyst Lotfi Elbarhdadi.
Wethaq's business and financial profiles are consistent with the current ratings.
The affirmation reflects our view of Wethaq's marginal competitive position and aggressive investments. Mitigating factors are adequate risk-based capital adequacy and adequate operating performance.
We still view the troubles at parent Investment Dar (Dar, not rated) as a source of concern. However, our concerns about the possible impact on Wethaq have been somewhat alleviated because the insurer has continued to operate independently in its market. Wethaq's small size compared with its parent's assets and liabilities lead us to believe that if Dar is liquidated, Wethaq would probably be disposed of as a stand-alone company. Finally, Wethaq substantially impaired its investments in Dar's subsidiaries and recognized the related losses in its balance sheet in 2009 and the first quarter of 2010.
"The stable outlook reflects our opinion that Wethaq's adequate capitalization and operating performance are likely to mitigate its marginal competitive position and investments at the current 'BB' rating level," said Mr. Elbarhdadi.
Our outlook also factors in no dependence of Wethaq on its parent Dar for executing its strategy, and a potentially low impact if the parent is liquidated. However, we may change our opinion if we believe developments at Dar could negatively affect Wethaq.
We expect Wethaq to maintain at least adequate capital adequacy. The insurer should post a 100% to 105% net combined ratio in 2010, according to our calculations. We expect the expense ratio to remain above 40% in 2010. In our view, further investment impairment in the course of 2010 are likely to lead Wethaq to post a negative return on equity of 10%.
We would lower the rating if Wethaq does not reach the above mentioned targets in 2009, or if the outcome of its parent's restructuring is more detrimental to Wethaq than we expect. We may raise the ratings if Wethaq exceeds the above targets, while gaining more stability its business and investment profile.