20/04/2014 13:14 AST
Standard & Poor's Ratings Services has affirmed at 'BBB' its insurer financial strength and counterparty credit ratings on Saudi Arabia-based Weqaya Takaful Insurance and Reinsurance Co. (Weqaya) but the outlook is negative.
The affirmation reflects S&P’s view that despite a comprehensive net loss of Saudi Arabian riyal (SAR) 90.7 million ($24.2 million) for 2013 that has reduced shareholders' funds to SAR 39.9 million from SAR 130.6 million at the start of 2013, Weqaya's new senior management is taking appropriate remedial action. Measures include increasing tariffs, reducing growth in risk exposures, and planning capital raising. Consequently, the ratings agency anticipates that policyholder confidence will be maintained and that Weqaya will continue to enjoy both a satisfactory business risk profile, and at least a lower adequate financial risk profile.
S&P said, “The satisfactory business risk profile reflects both our intermediate industry and country risk assessment of the Kingdom of Saudi Arabia (KSA) domestic insurance market, and Weqaya's own, still adequate competitive position. With 2013 gross premiums of SAR 351.0 million relating principally to motor (44.6 per cent), medical (42.4 per cent), life (9.9 per cent), and other commercial lines (3.1 per cent), Weqaya remains reasonably diversified by line of business relative to many local peers. The insurer is currently the 15th largest company in the KSA insurance sector, out of 34 players.
“Our assessment of Weqaya's financial risk profile is unchanged at a lower adequate level. Although the 2013 losses have weakened current risk-based capital adequacy, we expect the position to quickly return to an at least lower adequate level given the combined effect of improved profitability in 2014 following price increases, reduced underwriting volumes, greater risk transfer to reinsurers, potential reserve releases, and possibly also the proceeds of a proposed rights issue.
“Furthermore, our assessment of Weqaya's risk position remains unchanged at intermediate, as does our assessment of its financial flexibility at adequate--notably the ability to raise additional cash or capital in line with potential needs. Other modifiers to the rating outcome also remain neutral, namely management and governance, which we now assess as fair, enterprise risk management, which we believe remains adequate relative to the reasonably straightforward lines of business written by the company, and liquidity, which we assess as adequate on the basis of positive cash flows and predominantly cash-orientated investment strategies. Based on these outcomes, our criteria indicate an anchor for Weqaya at 'bbb', the same level as the final ratings.
“The losses for 2013, which have depleted Weqaya's capital, in large part derive from the effects of a 2012-2013 price war, affecting group medical and retail motor lines. The undoubtedly negative effects of persistent fine pricing were potentially exacerbated for many KSA-based insurers, including Weqaya, by a 2013 year-end regulatory reminder to actuaries that they must ensure appropriately conservative reserving levels at the companies they review. In the case of Weqaya, two respected sets of external actuaries reviewed the reserves and came to different conclusions. Ultimately, however, Weqaya has strengthened its reserves in line with the most prudent recommendations, which suggests that some degree of over-reserving may potentially have occurred. However, given that Weqaya wrote a full 40 per cent of its total gross premiums for 2013 in the fourth quarter as pricing levels started to improve, it will not be before these contracts expire in late 2014 that any potential release of reserves may occur.
CPI Financial
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