(The following statement was released by the rating agency)
June 28 -
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Summary analysis -- Takaful International Co. BSC
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CREDIT RATING: Country: Bahrain
Local currency BBB/Negative/--
Primary SIC: Insurance
carriers, nec
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Credit Rating History:
Local currency Foreign currency
22-Dec-2008 BBB/-- --/--
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Rationale
The ratings on Bahrain-based composite insurer Takaful International Co. BSC (TIC) reflect the company's good operating performance and good financial flexibility. These positive factors are partially offset by the small absolute size of the company, which operates in the relatively small Gulf Cooperation Council (GCC) market of Bahrain (BBB/Negative/A-3), an equity bias in its investment portfolio and its only adequate capitalization, with a reliance on reinsurers.
TIC has a good earnings record, from both its takaful (Islamic insurance) fund in terms of underwriting performance--reflected in the increasing surplus in both the general and life policyholders' funds--and the overall shareholders' return on a conventional accounting basis. In Standard & Poor's view, technical earnings are likely to improve as the currently strong business growth delivers increasing economies of scale.
Financial flexibility for TIC remains good. This was reflected in the successful rights issue in 2009, which raised capital by an additional Bahrain dinar (BHD) 1.25 million. A further capital increase of BHD3.75 million to support the growth of the company was approved in February 2012 although the exact timing of this increase remains unclear. This further supports our opinion that shareholders' remain supportive of TIC raising additional capital.
We view TIC's investment portfolio as good and appropriate as it is constructed to comply with Sharia law. However, we believe that it exposes the company to market risk as compliance tends to result in a bias to equity-type instruments, and there is a relative paucity of rated instruments in the Islamic market place.
TIC currently has adequate capitalization. Capital adequacy had moderated slightly at March 31, 2012, reflecting an increase in charges related to premium risk as well as investment volatility, which has resulted in increased charges as the value of available for sale assets has risen. Reliance on reinsurers is high, with utilisation at 59% in 2011. Nevertheless, we view this as appropriate given the company's gross exposures.
In absolute terms, TIC is a small company with total assets equivalent to $88 million at March 31, 2012. However, it is an important member of the Bahraini insurance market, where its share has grown materially.
Outlook
The negative outlook on TIC reflects that on the sovereign and our view that we could lower the ratings if political turmoil were to weaken economic prospects and threaten external and fiscal performance. We could also lower the ratings if oil prices decline and remain low for a sustained period or if difficulties arise in implementing GCC development funds. In addition, our view of Bahrain's creditworthiness could weaken if public spending fails to stimulate economic growth.
The ratings could stabilize at the current level if a credible political process emerges and a renewed social contract appears likely. In addition, if the boost in public investment improves Bahrain's growth prospects, this would also support the current ratings.
We could also lower the ratings if the injection of new capital fails to materialize or if capital adequacy is strained as a result of high premium growth or a decline in earnings.
((Bangalore Ratings Team, Hotline: +91 80 4135 5898 satish.kb@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: satish.kb.thomsonreuters.com@reuters.net))
