S&P affirms Saudi Re’s ratings at BBB+/gcAA+
DUBAI, June 29: Standard & Poor’s Ratings Services affirmed its ‘BBB+’ long-term issuer financial strength and counterparty credit ratings on Saudi Re for Cooperative Reinsurance Co (Saudi Re). The outlook remains stable. At the same time, we affirmed the ‘gcAA+’ Gulf Cooperation Council (GCC) regional scale rating.
The affirmation reflects our view that Saudi Re’s risk-adjusted capital adequacy remains extremely strong, despite attrition from technical losses and substantial tax (zakat) payments in recent years.
Following a net, post-tax loss of Saudi Arabian riyal (SAR) 117.2 million (US$31.2 million) in 2013, the company recorded a net loss of SAR4.3 million in 2014, mainly due to negative claims development in its engineering, health, and catastrophe excess of loss lines of business. As a result of Saudi Re’s weak earnings track record in recent years, which has led to an accumulation of losses and consequent deterioration of its capital base, we have revised our overall assessment of the company’s capital and earnings to strong from very strong.
At the same time, we now view the potential volatility of capital and earnings due to nontechnical risks as neutral, and have therefore revised our view on Saudi Re’s risk position to intermediate from moderate. Our overall assessment of the financial risk profile remains strong. Our assessment of Saudi Re’s business risk profile remains fair. This is based on the blended intermediate insurance industry and country risk the company faces from the markets it operates in, and a still less-than-adequate competitive position, given the reinsurer is still to some extent a start-up, having commenced operations only in 2008.
In 2014, premiums from Saudi Arabia contributed 49% of the company’s total premium income, followed by countries in the wider Middle East and North Africa region. We continue to assess the company’s competitive position as less than adequate, due to its degree of reliance on the Saudi Arabian market, and ongoing weak overall operating performance.
The combined ratio is the industry’s leading underwriting profitability metric. The lower the combined ratio, the more profitable the insurer, and a ratio of more than 100% signifies an underwriting loss. Although Saudi Re’s combined ratio showed some strong improvement to 102.4% in 2014 from 148.0% in 2013, we still view the results as weak. We expect that the overall combined ratio for 2015 will show some further modest improvement to just above 100%, which, together with positive investment income, will lead to a modest net surplus for the year.
We also believe that this positive trend will continue in 2016-2017, supported in particular by some expected insurance rate increases in Saudi Arabia.
Additionally, we have revised our assessment of Saudi Re’s liquidity to strong from exceptional, owing to the company’s shift to more illiquid assets than in 2013. However, the company’s investment portfolio still remains very liquid, as a large proportion of total invested assets are held in cash or cash-equivalent instruments. This change is neutral to the ratings. Our assessment of Saudi Re’s management and governance as fair and enterprise risk management as adequate are unchanged.
Criteria
The anchor is our stating point in assigning a rating to an issuer. Saudi Re’s fair business risk profile and strong financial risk profile result in either a ‘bbb’ or ‘bbb+’ anchor for Saudi Re under our insurance rating criteria.
We continue to use the higher anchor outcome, as the reinsurer benefits from a significant excess of capital at the ‘AAA’ level. We expect this buffer will be maintained over the next two years, supported by improving operating performance.
The stable outlook reflects our opinion that Saudi Re will maintain a strong financial risk profile and fair business risk profile over the next two years. It also reflects our expectation that the size of capital adequacy will not further reduce and will remain at an extremely strong level, supported by more profitable growth over the next two years.