Standard & Poor's Ratings Services has assigned its 'B+' long-term counterparty credit and financial strength ratings to Cairo-based life assurer, Egyptian Life Takaful Co. (ELTC). The outlook is stable, the ratings agency said in a statement released on Tuesday, October 20, 2015, "Our 'B+' ratings are in line with ELTC' indicative stand-alone credit profile of 'b+', which reflects our view of the company's creditworthiness, before our assessment of its exposure to sovereign risk. "ELTC is still building sustainable competitive advantages as it emerges from its initial start-up phase. ELTC operates solely in Egypt and offers Sharia-compliant life insurance protection and savings products. The company reported gross written premiums of Egyptian pounds (EGP) 342 million ($45 million) for its financial year ending June 2015, compared with just EGP 13 million as of June 2010. The premiums are largely derived from corporate business and comprise 38 per cent credit shield, 20 per cent medical insurance, 15 per cent group life, 13 per cent individual savings, and 12 per cent group savings, while the remaining two per cent accounts for individual life protection. "In our opinion, the company faces high industry and country risk exposure. Our view of Egyptian industry risk is constrained by what we regard as low formal barriers to entry, with few complex requirements for any insurer wishing to operate in the country. The institutional framework also lags behind some neighbouring countries in, for example, the Gulf Cooperation Council region, notably Bahrain or Saudi Arabia. This is partly offset by our view of the sector's good overall profitability and strong growth prospects. "Although ELTC uses different distribution channels, including direct and bancassurance agreements, broker-driven business represents over three-quarters of premiums. The company is working on enhancing its distribution strategy by introducing new technology-based sales tools for its direct and bancassurance channels. ELTC already has distribution agreements with banks such as Banque Audi Egypt and Abu Dhabi Islamic Bank Egypt, and also plans to launch one or more new agreements in the coming year. "Our view of ELTC's financial risk profile is constrained at weak, reflecting the average 'B' credit quality of its invested assets. As of June 2015, the company's invested assets comprised 63 per cent bonds, 35 per cent cash, and 2 per cent equities. All bond investments relate to the Egyptian government as the issuer, and the bank deposits are held with local financial institutions. ELTC's invested assets of EGP267 million include EGP144 million of unit-linked investments, for which ELTC's policyholders carry the underlying risk. "We regard ELTC's capital and earnings as lower adequate. The company's total shareholders' equity at end-June 2015 stood at EGP120.6 million ($15.4 million), which we regard as relatively small by global industry standards. Therefore, shareholder equity currently leaves ELTC relatively more exposed to single event losses. We also expect ELTC's capital adequacy to weaken slightly due to expected rapid business growth in the next two-to-three years, and to stabilize at lower adequate levels, according to our risk-based capital modelling. Moreover, ELTC enjoys adequate financial flexibility, in our opinion, notably in its ability to raise additional cash or capital in line with potential requirements, although the company had no debt outstanding on its balance sheet as of end June 2015. "Enterprise risk management and management and governance are considered neutral factors to the ratings. ELTC's unit-linked products, as well as the assets backing them, help the company reduce direct market risk. ELTC also benefits from support in risk management from its majority shareholder, Kuwait-based Gulf Insurance Group K.S.C.P. (GIG), through the operating company Gulf Insurance and Reinsurance Co. (GIRC; A-/Stable). Moreover, the management team is stable and understands the local market, its regulations, and the risks to which the company is exposed. "The ratings on ELTC are two notches above the long-term local currency sovereign credit rating on Egypt (B-/Positive). Under a hypothetical local currency sovereign stress scenario, we expect that ELTC would maintain positive regulatory capital, and a liquidity ratio in excess of 100 per cent. This means that the company is unlikely to default on its insurance liabilities under a sovereign stress scenario. As ELTC's business is predominantly life insurance, which we regard as highly sensitive to country risk, we cannot raise the ratings by more than two notches above the long-term rating on Egypt. "We consider ELTC as strategically important to GIG. It is one of two GIG insurance subsidiaries and one associate in Egypt, offering Takaful life and non-life, and conventional non-life insurance products. Although no explicit statements of support exist, GIG states that it is committed to supporting ELTC whenever necessary. We understand that GIG is looking to increase its ownership of ELTC to about 90 per cent from 59.5 per cent, and this has been approved by the Egyptian Financial Supervisory Authority. ELTC's total shareholders' equity only represents about five per cent of the GIG group's capital and is therefore not considered to be an onerous undertaking. "The stable outlook reflects our view that the average credit quality of ELTC's investment portfolio, notably government bonds and cash deposited with local banks, will likely remain in the 'B' range. However, we do not expect major shifts in the industry and country risk associated with the Egyptian life insurance sector or any material changes to ELTC's still developing competitive position. "We could lower the ratings on ELTC if we cease to believe that the company will be able to pass our sovereign stress scenario testing, as this would lead us to cap the ratings on ELTC at a level equal to that of the Egyptian government. This could occur as a result of high asset growth relative to ELTC's capital. "We view an upgrade as unlikely at this stage because it would require an improvement in the average credit quality of ELTC's asset portfolio. It would also require an upgrade of the sovereign credit ratings on Egypt."
