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Rating Action:

Moody’s affirms KFH Takaful’s Baa2 IFS Rating; stable outlook

21 May 2020

DIFC - Dubai , May 21, 2020 – Moody's Investors Service ("Moody's") has today affirmed the Baa2 insurance financial strength rating (IFSR) of KFH Takaful Insurance Company K.S.C. (KFH Takaful), based in Kuwait. The outlook remains stable.

RATINGS RATIONALE

The rating action reflects Moody's expectation that KFH Takaful will be able to maintain (i) a good capitalisation level despite recent volatility in financial markets, (ii) a good market position as the second largest takaful and sixth largest overall insurance group in the Kuwaiti market, and (iii) a good underwriting profitability.

The rating is also supported by strong product diversification with a mix of life, health and non-life insurance products as well as relatively good asset quality with high risk assets (HRA, which are investments in equity, real estate assets and other than investment-grade fixed income assets) equating to below 60% of consolidated equity at YE 2019.

However, these strengths are partially constrained by the high concentration in terms of the distribution channels. In fact 60% of 2019 gross premiums written are sourced from business written with its banking parent, Kuwait Finance House K.S.C.P. (A1 long-term deposit rating under review, baa3 BCA).

Commenting on the impact of the coronavirus outbreak, Moody's mentioned that KHF Takaful's capital has been impacted in the first quarter of 2020 by the decline in equity markets and may be further impacted throughout 2020. However, the company strengthened its capital in 2019, with consolidated (shareholders' and policyholders') equity reaching KD11.9 million (up from KD.11.1 million at YE 2018) and equating to 33% of total assets at YE 2019 despite a 16% growth in total assets in 2019.

While impacts from coronavirus on KFH Takaful's premiums and overall profitability remain uncertain, Moody's expects the company to maintain underwriting profits. In 2019, KFH Takaful reported a combined ratio (COR) of 90.2%.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

While an upgrade is considered unlikely at this stage, Moody's says that the following factors could further improve the resilience of KFH Takaful's rating: (i) if it were to diversify profitably its sourcing of business and distribution away from via its parent; and/ or (ii) if it were to profitably attain and maintain a top five market position with majority of business sourced from non-related parties.

Conversely, downward pressure on the rating could result from a long-lasting negative impact of the coronavirus outbreak and of low oil prices on the Kuwaiti economy, with negative implications on KFH Takaful's profitability and capital. More specifically downward pressure could arise from: (i) significant deterioration in the underwriting profitability of KFH Takaful with combined operating ratio (COR) consistently over 100% and or negative return on capital (ROC) levels; and/ or (ii) a diversification of the investment portfolio into HRA classes, such as equities or real estate with HRA equating to over 70% of consolidated equity; and/ or (iii) significant reduction in market share; and/ or (iv) significant negative rating pressure on the ratings of its parent Kuwait Finance House.

AFFECTED RATING

..Issuer: KFH Takaful Insurance Company K.S.C.

Affirmation:

....Insurance Financial Strength Rating, affirmed at Baa2

Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , and Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mohammed Ali Londe
AVP-Analyst
Financial Institutions Group
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Benjamin Serra
Senior Vice President
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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