LONDON--(BUSINESS WIRE)--A.M. Best has downgraded the financial strength rating to B+ (Good) from B++ (Good) and the issuer credit rating to “bbb-” from “bbb” of Saudi United Cooperative Insurance Company (Wala’a) (Saudi Arabia). The outlook for both ratings remains stable.
The rating action reflects exceptionally weak technical performance in recent years, resulting from a shift in the company’s strategy to significantly improve its market profile in a highly competitive Saudi insurance market. In addition, despite the company successfully raising SAR 240 million (USD 64 million) of capital during 2015, following the operating losses, the company’s risk-adjusted capitalisation remains below the 2013 level.
The company’s risk-adjusted capitalisation, which was under pressure in 2014, has recovered to an adequate level following a successful rights issue that was completed in June 2015. The rights issue bolstered the company’s capital position, doubling shareholders’ paid-up capital from SAR 200 million (USD 53 million) to SAR 400 million (USD 106 million). In addition, Wala’a received SAR 40 million (USD 11 million) in share premium. Proceeds from the rights issue are expected to support increasing levels of underwriting activity and higher premium retention. Additionally, the capital increase has allowed the company to absorb high operating losses from the first nine months of 2015. The company’s capitalisation is projected to remain adequate to support the company’s strategic initiatives over the next few years, but remains under pressure from the company’s operating performance.
Following regulatory changes to motor reserving and pricing practices in Saudi Arabia during 2013, Wala’a implemented a strategy for aggressive growth in its motor line of business. The company has successfully achieved its growth targets, with gross written premium increasing 87% in 2014, which has enabled Wala’a to improve its ranking from 16th in the market in 2013 to 11th in 2014. However, the strategy to improve the scale of the company’s operation has been achieved to the detriment of earnings, with significant underwriting losses experienced in 2013 and 2014. In 2014, the company returned a technical loss of SAR 36.7 million (USD 9.8 million), driven primarily by poor performance from the company’s motor line of business. Published financial statements for year-to-date September 2015 indicate a further deterioration in profitability, with an overall comprehensive loss of SAR 80.8 million (USD 21.8 million), resulting from poor performance on both technical and investment operations. Whilst Wala’a has taken a number of corrective steps to improve performance, the market remains highly competitive, with the company’s motor business continuing to be an area of concern.
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