Tawuniya/The Company for Cooperative Insurance Downgraded To 'BBB+' On Drop In Capital Adequacy; Outlook Negative

  • Tawuniya/The Company for Cooperative Insurance (Tawuniya) posted significant losses in 2017 and 2018 because of the weak performance in its medical book. These losses indicate a weakening in the company's competitive position and capital adequacy according to our models.
  • Furthermore, the 2018 audited financial statement highlights that the company is below the required solvency margin prescribed by Saudi Arabian Monetary Authority (SAMA).
  • We are therefore lowering our rating on Tawuniya to 'BBB+' from 'A-'.
  • The negative outlook reflects our view that we may lower the rating by one or more notches if there is any further material deterioration in Tawuniya's operating performance and/or capital adequacy.
DUBAI (S&P Global Ratings) April 10, 2019--S&P Global Ratings today lowered its long-term issuer credit and insurer financial strength ratings on Saudi Arabia-based insurer Tawuniya/The Company for Cooperative Insurance to 'BBB+' from 'A-'. The outlook is negative.
The downgrade reflects the deterioration in Tawuniya's shareholder equity to Saudi Arabian Riyal (SAR) 1.8 billion as of December 2018 compared to SAR2.9 billion in 2016, primarily due to significant losses reported in 2017-2018 (totaling SAR479 million) along with a dividend distribution of SAR500 million for 2016 (paid in 2017). According to our risk-based model, capital adequacy has deteriorated to significantly below the 'BBB' level.
The net losses were mainly due to a poor underwriting performance with a net combined ratio of around 106%-109%, compared to the low 90s in 2014-2016. Medical business, which alone accounts for around 75% of the total premium income, had a loss ratio above 100%, with total underwriting losses (before unallocated general and administration expense) of SAR900 million over 2017-2018. The higher-than-expected loss ratio in 2017 was due to a reserve strengthening exercise on some underpriced medical business. The loss-making medical policies written in 2017 continued to affect 2018 results. Tawuniya also witnessed higher-than-expected claims in 2018. On an overall basis, apart from medical, all other lines continue to make underwriting profits, however it was insufficient to prevent a drop in the capital base.
On the investment side, while Tawuniya's investment income was SAR217 million in 2018, it marks a 50% drop compared to SAR434 million in 2017. While the drop looks significant, investment income in 2017 was exceptionally high due to some one-off investment gains. The investment income in 2018 is still better than in 2014-2016.
In 2018, Tawuniya's premium income declined by 9% to SAR7,641 million (2017: SAR8,401 million). This decline was mainly due to a decrease in motor premium by 51.7% to SAR672 million (2017: SAR1,388 million), because of the nonrenewal of some large leasing accounts. We expect that premium income for 2019-2021 will grow at a moderate 5%, reflecting management's corrective action to revise prices upward in the medical and other lines, coupled with some initiatives announced by the Saudi government. We also expect that Tawuniya will return to profits from 2019 onwards.
The audited financial statement of 2018 states that Tawuniya's solvency level is less than the minimum solvency ratio required by SAMA. Tawuniya expects to restore its solvency position by the end of 2019. In our base case, we do not anticipate any major regulatory action against the company.
The negative outlook reflects our view that we may lower the rating by one or more notches if Tawuniya's operating performance or capital adequacy continues to deteriorate.
We could lower the ratings on Tawuniya over the next two years if:
  • There was a further deterioration in Tawuniya's capital adequacy either due to operating losses or any other unexpected events.
  • As a result of severe losses and negative market indicators, we observe a weakness in Tawuniya's competitive position.
  • Although not expected, if there is a further material decline in solvency which could trigger the risk of regulatory action.
We could revise the outlook to stable over the next two years if Tawuniya's operating performance and capital adequacy improves and the solvency is fully restored at a comfortable level.
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