A.M. Best assigns ratings to Saudi United Cooperative Insurance Company, Wala'a

The ratings reflect the company's adequate level of risk-adjusted capitalisation, developing local business profile and improving operating performance.

Despite the company's start up nature, Wala'a is seen as a natural transition from Amity Insurance Company, which operated in Saudi Arabia during the pre-regulatory era. Most of the management team and a portion of the founding shareholders of Wala'a have a good understanding of the Saudi Arabia market as a result of this development. This has allowed Wala'a to rapidly achieve a good position in the local market where it is ranked as the 19th largest insurance company by gross written premium and ninth by net profit as at the second quarter of 2012. However, A.M. Best expects growth to slow in the coming years as Wala'a is likely to be challenged by fierce competition and tightening underwriting guidelines.

The company's level of risk-adjusted capitalisation is adequate and is expected to remain at this level as Wala'a grows. Its risk-adjusted capitalisation is supported by a relatively conservative investment portfolio and a reinsurance programme of good credit quality. Over the coming years, Wala'a will be retaining its profits as its level of capital is currently below the minimum required level, as seen with numerous companies in the market. As at the second quarter of 2012, the capital and surplus of Wala'a stood at SR162.2m ($43.3m), in contrast with SR200m ($53.4m) required by the regulator for companies that also write reinsurance inward business. Wala'a has many options in terms of actions that could be taken to comply with the minimum required level imposed by the regulator, such as increasing its paid-up capital or revoking its reinsurance license. In addition, Wala'a is adequately above the solvency requirements.

The operating performance of Wala'a has been improving since its inception. After incurring two consecutive losses in the first two years of operation, 2009 and 2010, the company achieved operational profitability in 2011.In 2011, net profit before tax reached almost SR4.6m ($1.2m), representing a return on capital and surplus of 1.77%. In addition, as per second quarter 2012 financials, net profit in the period reached SR6.6m ($1.86m), underpinned by a good level of investment return and underwriting performance.

Over the medium term, an improvement in the company's risk-adjusted capitalisation while maintaining a good operating performance could place upward movement in the ratings. A deterioration in its financial performance or risk-adjusted capitalisation could add negative pressures to the ratings.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilised include: "Risk Management and the Rating Process for Insurance Companies"; "Assessing Country Risk"; and "Understanding Universal BCAR".