LONDON: Standard & Poor’s Ratings Services said that it revised to negative from stable the outlook on Dubai- based reinsurer Takaful Re Ltd. (TRL). At the same time, we affirmed our ‘BBB’ insurer financial strength and counterparty credit ratings on the company.
The outlook revision follows TRL’s material reduction in premium and anticipated poor results in 2014. We expect the company to restore its premium and earnings over the next two years, with its risk-based capital remaining extremely strong (well above the ‘AAA’ level). There are some uncertainties associated with this, but these are somewhat mitigated by the backing provided by TRL’s majority shareholder, Arab Insurance Group BSC.
“We believe that TRL’s premium is likely to increase to around $20 million-$22 million (2014: $16 million) mainly through new business. We expect the company to generate an improved combined ratio (losses plus expenses) in 2015-2016 of close to 110%, with a return on equity (ROE) between 0.5%-2percent. This is likely to result from better pricing and increased investment return reflecting the company’s new asset mix slightly geared toward equities and sukuk bonds.”
“We are lowering our assessment of liquidity to strong from exceptional, mostly reflecting the new asset allocation. The amount of liquid assets remains well above total expected claims. We continue to consider the new portfolio conservative relative to the capital base.”
“The ratings continue to be supported by our assessment of the financial risk position as upper adequate, based on our view of TRL’s moderate risk position and adequate financial flexibility.
“The negative outlook reflects our view of the substantial risk that TRL may not rebuild its premium base to a level that supports the ratings. It also reflects the risk that TRL may not be able to improve its operating performance in line with our expectations, as the company faces challenges across the Islamic insurance sector and is constrained to a degree by its small size.
“We could lower the ratings by one notch if we believe that TRL will not consistently and sustainably improve its competitive position by rebuilding its premium and earnings in line with our expectations over the next 12 months. Any additional setbacks are likely to trigger a downgrade.
“We could revise the outlook to stable in the next 12 months if TRL demonstrates stable, stronger earnings generation and builds up its premium base to support a more robust business risk profile that we assess as fair.”