S&P: Malath outlook revised to negative; ratings affirmed 'BBB+'

10/06/2015 18:55 AST

Standard & Poor's Ratings Services today revised its outlook on Malath Cooperative Insurance & Reinsurance Co. to negative from stable. At the same time, we affirmed our long-term issuer financial strength and counterparty credit ratings on Malath at 'BBB+'.

"The outlook revision follows significant deterioration in Malath's capital adequacy owing to very strong premium growth and weak technical results in 2014. Our assessment of Malath's financial risk profile remains at moderately strong, reflecting our expectation that the company's capital adequacy will be restored to a level supporting the current rating by extending its use of reinsurance and by exerting more control to ensure growth in 2015 and 2016 is profitable.

"Although the company's gross written premium increased by 83 per cent to SAR 1,412.8 million in 2014 (2013: SAR 770.9 million), Malath's shareholders' equity base dropped to SAR 276.9 million from SAR 290.9 million in 2013, failing to keep pace with the strong premium growth and leading to a significantly weaker capital position. We expect that Malath's risk-based capital adequacy will be restored to at least an upper adequate level in 2015. We continue to assess Malath's risk position as intermediate and its financial flexibility as adequate.

"We also continue to assess Malath's business risk profile as satisfactory, based on the intermediate insurance industry and country risk the company faces by operating in Saudi Arabia. At year-end 2014, Malath was the fourth-largest insurer in the country, measured by gross premium written. It was also, for the first time, the leading motor insurance provider, as the company acquired some new accounts and also increased its share of existing key motor accounts. We therefore assess Malath's competitive position as adequate.

"Although the combined ratio saw some modest improvement to 104.5 per cent from 107.6 per cent in 2013, we still view the results as weak (a combined ratio above 100 per cent signifies an underwriting loss). The company's operating results were mainly affected by losses in a large motor third-party liability account as a result of adverse claims developments. We expect that the overall combined ratio for 2015 will be no higher than 100 per cent and that it will show some further modest improvements in 2016 and 2017.

"We have revised downward our assessment of management and governance to fair from satisfactory, reflecting less conservative risk tolerances due to the acceptance of more risk exposure relative to capital. We acknowledge that management has taken some corrective action to restore the company's capital adequacy, but these efforts were somewhat delayed, in our view. We have also revised down our assessment of Malath's liquidity assessment to strong from exceptional due to strong growth in risk exposure. However, the company's investment portfolio still remains highly liquid; 73.5 per cent of total invested assets are in cash or cash-equivalent holdings. These changes to our assessments are neutral to the ratings.

"Our assessment of Malath's enterprise risk management remains unchanged. However, we now consider strategic risk management to be negative due to deficiencies in the capital management process.

"The negative outlook reflects the risk that Malath's capital position could remain below the level supporting the current 'BBB+' rating over the next two years.

"We could lower the ratings on Malath if the company's capital adequacy is not restored to at least an upper adequate level, initially through additional reinsurance utilization and capital adequacy continues to weaken because of strong premium growth and weak underwriting results.

CPI Financial