TEXT-S&P summary: Saudi National Insurance Co.
(The following statement was released by the rating agency)
Nov 19 -
Summary analysis -- Saudi National Insurance Co. ------------------ 19-Nov-2012
CREDIT RATING: Country: Bahrain
Local currency BBB/Stable/--
Primary SIC: Insurance
Credit Rating History:
Local currency Foreign currency
02-Dec-2010 BBB/-- --/--
The ratings on Bahrain-based Saudi National Insurance Co. (SNIC) reflect its strong capitalization sufficient to support significantly higher business volumes, its conservative investment strategies that allow for sufficient liquidity, and strategic and business links with its influential shareholders. Partially offsetting these positive factors is the company's modest business position. The economic and industry risks of developing new insurance and reinsurance activities in the increasingly crowded and competitive Gulf region constrain the rating further.
We view SNIC's capitalization as strong. It is measured at approximately $38 million when factoring in the company's investment in Jeddah-based affiliate Wataniya Cooperative Insurance Co. (Wataniya; BBB/Stable/--) at its book value of $6 million--its current market value is substantially higher. We therefore consider that the level of capitalization is sufficient for the expected business volumes over the rating horizon. Risk-based capital adequacy is likely to remain at least strong under all realistic scenarios.
We regard the company's investments as good. The investment portfolio is conservatively invested in U.S. dollar-denominated bonds and equities outside of the Kingdom of Bahrain (BBB/Negative/A-2). It also includes cash deposits in Gulf Cooperation Council (GCC) banks, which allow for ample liquidity.
In our opinion, SNIC benefits from strategic and business links with its three influential shareholders; E.A. Juffali & Brothers Co. (not rated) has 72.5%, Munich Reinsurance Co. (AA-/Stable) holds 22.5%, and Zurich Insurance Co. Ltd. (AA-/Stable) has 5%. The shareholders are committed to SNIC, and have demonstrated support and willingness to stand behind the company throughout its long history.
SNIC's current business position is modest, in our view, since it lost access to Kingdom of Saudi Arabia (KSA) compulsory primary insurance markets in February 2010. The company's diminished competitive position is a weakness to its overall credit profile. That said, it is supported by privileged access to shareholder business from E.A. Jullali. In addition, it has reasonable prospects for improvement as the company develops its diversified book of primary business in Bahrain and Saudi Arabia, and acts as a reinsurer to its affiliate Wataniya and other insurance companies with similar types of risks.
The company's board is also continuously evaluating options for expansion to other markets within the Gulf region. It is considering expansion both directly and by means of strategic participations in third-party insurance companies, or through outright acquisitions across the GCC region. That said, there is substantial uncertainty around these expansion plans because increasing competition has caused markets in the region to remain soft and is making it difficult to identify attractive targets that are reasonably valued.
Our base-case scenario assumes that gross premium written will reach $30 million in 2012 and that earnings during 2012 will be $3 million, similar to the figure reported in 2011. That said, the level of earnings remains quite modest in absolute terms. This reflects the reduced premium base after the 2010 transfer of renewal rights of the bulk of its KSA portfolio to Wataniya.
The ratings on SNIC are not currently constrained by those on the sovereign (Kingdom of Bahrain; BBB/Negative/A-2). According to our criteria, despite the insurance sector's sensitivity to country risk, we take into consideration the material contribution to earnings from outside the Kingdom, which currently stands at about 60% of total business. We view SNIC as a regional insurance player with limited exposure to Bahraini assets and liabilities; it holds all of its assets, aside from modest cash holdings for working capital needs, outside of Bahrain.
The stable outlook reflects our expectation that SNIC's business model will develop satisfactorily over the next two years, as its business in Bahrain, Saudi Arabia, and other neighboring countries of the GCC region grows steadily. Additionally, we expect SNIC to write more good-quality regional inward reinsurance premium. We anticipate that SNIC will maintain its margins for these activities, including those related to its plan to act as a reinsurer for its KSA-based affiliate, Wataniya, and other insurers with similar types of risks.
We expect the main shareholders to remain highly committed and supportive in activities where they have relevant expertise, notably influence, market information, and sophisticated technical support with underwriting, product design, and asset management. We expect the investment portfolio to continue to be held predominantly outside of the Kingdom of Bahrain.
A positive rating action is possible if SNIC establishes a strong and sustainable business position in preferred segments of the GCC marketplace. It would likely depend on SNIC delivering commensurate earnings and maintaining strong levels of capitalization. However, we do not expect this over the rating horizon because it is uncertain how the company will execute its growth plans across the GCC in markets that are largely soft.
We could consider a negative rating action if we see a material increase in the company's business or asset exposure to Bahrain. This could prompt us to recognize the dominance of the industry and economic risks of the sovereign rating on Bahrain. Under this scenario, the rating on the sovereign would serve as a ceiling to the rating on the insurer. We may also consider a downgrade if the company's competitive position weakens or if we see diminishing levels of support and commitment from the core shareholders.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal.
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Management And Corporate Strategy Of Insurers: Methodology And Assumptions, Jan. 20, 2011
-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Interactive Ratings Methodology, April 22, 2009
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