Moody's Investors Service has assigned an A3 insurance financial strength rating (IFSR) to Saudi Re For Cooperative Reinsurance Company (Saudi Re). The outlook for Saudi Re is stable.

Based in Saudi Arabia, Saudi Re writes reinsurance across the regions of Middle East, Africa, Asia and has affiliation in the Lloyd's market.

The A3 IFSR of Saudi Re reflects its:

 (i) strong brand and market position in Saudi Arabia as the sole Saudi professional reinsurer as well as a growing presence in its target markets of Asia, Africa and Lloyd's,
(ii) preferential position in Saudi market due to a right of first refusal on a portion of premiums ceded by primary carriers in the Saudi market,

(iii) strong asset quality exemplified by its conservative investment portfolio,

(iv) good capital adequacy, both in terms of capital levels, with gross underwriting leverage (GUL) of 2.2x, and relatively modest exposure to natural catastrophe risk,

(v) strong financial flexibility with non-existent leverage and good access to capital markets in Saudi Arabia given its listing on the Saudi stock exchange, and broad investor base.

While Saudi Re is of modest scale, relative to its global reinsurance peers, its scale is sufficient to allow it to provide meaningful levels of capacity to clients in its chosen markets, which exclude most of the large, very competitive and well-developed markets, such as North America, Europe and Australia.

Further, the group's strong relationships and detailed local knowledge strengthen its position in its key markets, and provides a competitive advantage relative to mid-tier global reinsurers which would typically have shallower local ties in these relatively niche markets.

Saudi Re's business mix is well-diversified by line of business, spread across property, short-tail casualty and specialty, with a modest amount of life and health business. Its product risk is moderate, given the predominance of short-to-medium tail business, and limited natural catastrophe exposure. Its small but growing life insurance business, which is predominately yearly-renewable term protection, provides a layer of diversification not typically present in smaller to mid-sized reinsurers.

Saudi Re's financial profile is underpinned by its good capital adequacy and strong asset quality. Good capital adequacy is evidenced in its moderate level of GUL, which at 2.2x is in line with our expectations for short-to-medium tailed P&C business. The company's capital is strong according to its regulatory and internal economic capital measures, with it maintaining adequate buffers above required levels, to provide resilience to stress.

Saudi Re's modest exposure to natural catastrophe risk, as measured by its modelled net catastrophe losses relative to equity, and extensive excess-of-loss (XoL) retrocession program reduce the potential for volatility in capital levels, and the risk of significant capital erosion due to large, unexpected events. The company maintains a relatively conservative investment portfolio, with significant liquidity and moderate exposure to high-risk assets (HRA), including real estate, equities and below investment grade debt. At year-end 2017, HRA as a per cent of shareholders' equity amounted to 41.6 per cent.

More negatively, Saudi Re's profitability has been weak and volatile historically, in terms of both underwriting as well as overall profitability, with a 5-year average return on capital (ROC) of minus 2.4 per cent and 5-year average combined ratio (COR) of 103.6 per cent between 2013-2017.

However we note that over the past three years profitability has improved as a result of growing sophistication in risk management, including underwriting actions taken to reduce exposure to under-performing business. Three-year average ROC was 0.6 per cent and 3-year average COR was 94.8 per cent, result levels which we expect Saudi Re will maintain in the future.

Outlook

The stable rating outlook reflects our expectation that Saudi Re will maintain its recent improvements in profitability whilst maintaining its strong assets quality, capital adequacy and adequate level of reserves.

Given the stable outlook, there is currently limited upward pressure on the rating. Nonetheless, upward pressure could result from: (i) significant improvement in Saudi Re's market position amongst global reinsurance peers, including increased geographic diversification and attaining the scale necessary to compete as a core reinsurer in a number of reinsurance markets; and/ or (ii) meaningful improvement in profitability, with through-the-cycle combined ratios in the low-to-mid 90 per cent range, and return on capital above 8 per cent, while maintaining good capital adequacy.

Conversely, negative rating pressure could result from: (i) a reversal of its recent improvements in profitability with COR consistently at or above 100 per cent; and/ or (ii) sustained deterioration in regulatory or economic capitalisation, including, for example GUL rising over 3x or a meaningful increase in modelled natural catastrophe loss exposure; and/or (iii) meaningful reduction in the extent or quality of its retrocessional protection; and/ or (iv) significant deterioration in asset quality including a shift in investment strategy to be more returns-focused versus the current capital preservation focus; and/ or (iv) deterioration in financial flexibility with financial leverage in excess of 15 per cent.

Saudi Re reported a 4.4 per cent decline in its premiums to SR942 million ($251 million) for 2017 from SR985.5 million in 2016 and still reported a 100.6 per cent growth in net income (before Zakat tax) equating to SR39.3 million in 2017 from SR19.6 million in 2016. As a result Saudi Re's consolidated (shareholders' and policyholders') equity increased by 3.0 per cent to SR831.4 million at YE 2017 from SR807.6 million at YE 2016. – TradeArabia News Service