A.M. Best Affirms Ratings of Saudi United Cooperative Insurance Co.

07/11/2013 08:51 AST

A.M. Best Europe - Rating Services Limited has affirmed the financial strength rating of B++ (Good) and issuer credit rating of "bbb" of Saudi United Cooperative Insurance Company (Wala'a) (Saudi Arabia). The outlook for both ratings remains stable.

The ratings reflect the company's adequate level of risk-adjusted capitalisation, stable underwriting performance and developing local business profile. Wala'a has maintained a robust level of underwriting profitability despite challenging conditions in its domestic market. Weak underwriting performance from the company's motor and property business lines has been offset by strong results from its medical, marine, engineering and liability lines. Additionally, in 2012 and 2013-to-date, material capital gains from the company's equity portfolio have bolstered overall earnings and capital reserves. Despite resilient overall earnings and the full retention of profits, Wala'a is expanding premium revenue considerably faster than it is growing capital and surplus. Consequently, the company's risk-adjusted capitalisation is expected to fall from a strong level at year-end 2012 to a more marginal level by year-end 2014, although remaining adequate for the current ratings.

The Saudi Arabian insurance market, within which Wala'a maintains a modest franchise, has witnessed significant price-based competition in recent years. Regulatory intervention in 2013 requires all companies to set pricing for medical and motor business in line with independent actuarial analysis. This places Wala'a at a disadvantage to the established market leaders, who due to their significantly larger sizes have lower relative fixed costs and in some cases will be able to justify lower premium rates.

The company's anticipated revenue growth over the medium term is likely to enhance its economies of scale. However, this is accompanied by significant execution risk.

Upward rating movement could arise if Wala'a is able to maintain strong risk-adjusted capitalisation and a robust underwriting performance as it grows its franchise. Downward rating pressure could arise through a significant reduction in risk-adjusted capitalisation or a prolonged deterioration in profitability.

CPI Financial