Insurance company’s strong underwriting performance recognised by Standard & Poor’s.

Tawuniya/The Company for Cooperative Insurance has secured an ‘A’ rating from Standard & Poor’s after maintaining its “market leading position”.

The credit rating agency said the company was still the leading player in Saudi Arabia, despite strong competition from rival insurers.

Standard & Poor’s (S&P) added that Tawuniya’s strong underwriting performance contributed to its rating.

Concerns, however, were raised about the company’s capitalisation.

“Recent capital strategies are viewed as a relative weakness, as only a limited level of capital increase has taken place to date and recent strong earnings have been offset by the proposed dividend for 2009 of SAR200 million,” said S&P credit analyst Neil Gosrani.

“The company has accepted a significant rise in premium risk, which has also increased the need for capital support. Overall capitalisation is assessed as good, although it is a relative weakness for the ratings at their current level.”

Tawuniya is expected to introduce more cost-effective capital management and formulate a plan to strengthen its balance sheet in the coming months, Gosrani added.

“This is expected, ultimately, to result in capital adequacy being raised and maintained at a level more-appropriate for the current rating level.

“However, if the company fails to make substantive progress toward implementing a more-effective approach to capital management, this may lead to downward pressure on the ratings.”

According to S&P’s rating report, Tawuniya’s earnings will reflect its solid underwriting and investment results as financial markets stabilise. It added that the company would remain Saudi Arabia’s leading insurer, with no additional staff attrition expected despite an increase in competition.

SHORT-TERM TROUBLES EXPECTED FOR JORDAN'S ECONOMY

Kingdom’s tough short-term market conditions reflected in company’s latest classification.

A Jordanian insurance company has suffered a ratings blow after being downgraded by credit agency Standard & Poor’s (S&P).

Middle East Insurance Company’s (MEICO) ‘BBB’ classification has been lowered to ‘BBB-’, amid concerns that Jordan’s economy is set for troubled times.

On March 12, S&P downgraded the Kingdom’s long-term local currency sovereign credit rating, basing its reassessment on an uncertain trading environment.

“In our opinion, a microeconomic analysis of MEICO still reveals good and potentially improving business and financial profiles,” said S&P’s credit analyst David Anthony. “However, the current increase in economic and industry risks at the wider, macroeconomic level imply a likely short-to-medium-term deterioration in the overall operating and investment environment for all insurers and banks active in Jordan, including MEICO.”

But S&P added Jordan’s macroeconomic standing would stabilise following a period of uncertainty, while MEICO was expected to maintain its 6.5% insurance industry market share for Jordan this year.

‘In addition to a more stable macroeconomic outlook, we also expect to see reasonable stability and possibly some improvement in MEICO’s already good commercial and financial profiles,” Anthony said.

The insurance company would also reduce its exposure to equities, which may result in some residual investment gains being realised, according to the ratings agency.

However, S&P said it was unlikely MEICO’s rating would rise in the short-term due to the Kingdom’s challenging trading environment.

Al Ittihad’s improving capital position is rewarded with a B+ rating.

AM Best Co has assigned a financial strength rating of B+ (Good) and an issuer credit rating of “bbb-” to Al Ittihad Al Watani (L’Union Nationale) Societe Generale d’Assurances du Proche Orient sal (Al Ittihad) (Lebanon). The ratings of Al Ittihad reflect its improving capital position, robust underwriting performance and good business profile. Offsetting factors include its weak investment strategy and underdeveloped risk management framework.

Al Ittihad is a Lebanese-based insurer with branches in the UAE and Kuwait, concentrating mainly on motor and medical business. AM Best expects Al Ittihad to continue to grow within its key markets, between 10 to 15 per cent in each of the next two years, with gross premiums written expected to be in excess of LBP110bn (US$75m).

Al Ittihad’s pretax profits were US$5m in 2008 and technical profits of US$5.85m. A.M. Best expects Al Ittihad’s combined ratio to remain below 90 per cent over the next two years. Conversely, Al Ittihad’s investment performance has been weak (with returns consistently below four per cent), given its historic concentration in private equity and real estate assets.

Jordan Insurance Company’s ‘good’ rating reflects its robust performance, AM Best Co says.

AM Best Co has assigned a financial strength rating (FSR) of B++ (Good) and an issuer credit rating (ICR) of “bbb” to Jordan Insurance Company Plc (JIC). The ratings of JIC reflect its strong level of risk-adjusted capitalisation, robust underwriting performance and established profile in the Jordanian insurance market. An offsetting factor is the firm’s investment strategy, which gives rise to volatile investment performance.

According to AM Best, the company experienced robust underwriting results across all lines of business, with consistently improving technical profits of approximately JOD4.7m (US$ 6.8m) in 2008, supported by an excellent combined ratio of 75 per cent. Conversely, JIC has an investment strategy that gives rise to volatile investment performance, with significant concentration (in excess of 50 per cent at year-end 2008) of investments in equity markets.

In AM Best’s opinion, JIC is taking measures to adopt a more prudent approach to investment risk management in order to create a balanced portfolio. Despite JIC’s variable investment performance, the company has reported investment returns of 16 per cent in 2008, benefitting from JOD5.8m (US$8.3m) from realised gains on equity.

JIC has established a strong market position in Jordan with a diversified portfolio for both non-life and life insurance, accounting for nine per cent of gross market premiums.

Standard & Poor’s issues ratings boost for Jordanian insurance firm.

Jordan-based Middle East Insurance Co of Jordan (MEICO) has secured a “BBB” long-term counterparty credit and insurer financial strength rating from Standard Poor’s. “The ratings reflect the good business position of the company in its domestic market, as well as its very good financial profile relative to its liabilities and investment risks,” said S&P’s credit analyst David Anthony. “We expect capitalisation and financial flexibility to remain at least good even if, as expected, the company bids to acquire some of its smaller local competitors.”

“The company’s technical expertise and service quality is particularly recognised in the area of commercial and industrial lines, where it is a leader in marine and transport and also group life, property, liability and, to a more limited extent, group medical,” said Anthony. “In the somewhat overcrowded, highly competitive, but nonetheless in our view effectively regulated Jordanian domestic market of 28 licensed insurers, MEICO is the country’s second-largest insurer by capital, and the fourth-largest by gross premium income (JD21.8m), enjoying a 6.5 per cent market share,” he added.

“We expect MEICO to maintain its position as one of the leading domestic insurers with an approximately 12 per cent year-on-year increase in net premium volumes and sustainable underwriting profits reflected in net combined ratios in, at worst, the low-to-mid 90 per cent range.” Anthony added.

With investment income curtailed, rated insurance companies across the Middle East and North Africa face greater scrutiny of their financial strength and risk management practice. Policy spoke to Anandi Nangy-Kotecha, managing senior financial analyst at AM Best, and Kevin Willis, director at Standard & Poor’s.

Please comment on rating changes that have been made in 2009 (Middle East & North Africa based insurance companies). What trends have you seen in company performance/strength/behaviour?

Anandi Nangy-Kotecha
The trend on rating actions during 2009 cannot be generalised as there were a number of them remaining stable, some moving upwards (even if not with a straight upgrade) and others moving down.

Most of the companies in these regions are heavily invested in equities and/or real estate, therefore the impact of investment losses for 2008 and part of 2009 varied according to each company’s exposure to these assets.

Takaful players were faced with defaults across some of their Islamic-compliant investments as there were issuers in financial distress. The majority of rated companies are well capitalised and were in a position to sustain the investment losses for their rating level; however that was not the case for all.

After the major liquidity issues that hit the market, the most common strategy was to keep their additional assets in cash and avoid exposure to more volatile type assets. The industry has become aware of the importance of investment risk management and corrective measures have been/are being taken by some players.

Kevin Willis
There have been two key drivers to ratings in 2009. In the first half ratings movements in the GCC reflected the sharp deteriorations in profitability and capital strength caused by the investment market volatility of 2008. In the second half our ratings have been more stable across the whole of the MENA region, but for those insurers in Dubai the impact of the recent significant uncertainty caused by the Dubai government debt actions have caused us to view the insurance industry risks there more cautiously.

In 2009, for GCC-based companies, we have seen continuing strength in most rated companies’ technical performance.

Underwriting remains profitable with generally favourable claims ratios, but inwards reinsurance commissions continue to be strong contributors to overall profitability. Net profitability has improved in 2009 as a result of greater stability and recovery in the regional equity markets, so reducing fair value adjustments.

However, those companies with particularly high investment leverage through holdings of equities and real estate, remain exposed to investment value and performance volatility.

Insurers in the GCC are trading in dynamic insurance markets, where commercial risks tend to dominate and competition among participants and producers is fierce. Looking at North Africa and the Levant, the markets tend to be driven more by compulsory lines such as motor and workers’ compensation where there is higher overall risk retention and less “high single value at risk” impulse.

Underwriting earnings are less strong, but still positive and the impact of the investment market volatility is less.

Please comment on the outlook/prospects for Middle East insurance companies in 2010.

Anandi Nangy-Kotecha
Growth prospects were tempered for 2009 as the global financial crisis unfolded with the market looking into 2010 with more optimism. However, recent developments in Dubai and the uncertainty about possible delays or cancellations of some major projects pose a potential risk of lower income to some players writing property and engineering lines. If this is to happen it will add to the number of projects that were cancelled/delayed following the crisis in 2008.

So, overall, there could be lower than initially anticipated growth of premiums volume. An already competitive market may become even more challenging and companies are likely to look for further opportunities in other parts of the world.

Kevin Willis
We expect the whole of the Arab world to continue to experience increases in premium volume in 2010 and 2011. There is no single common factor to each domicile, but there will be a broadly favourable response as the global economy recovers from the recession of 2008/2009 and insurance penetrations rise across the region.

In the GCC other influential factors will be the continuing expansion of compulsory medical cover, benefitting Abu Dhabi, Bahrain and Saudi Arabia particularly.

There is an expectation that this will be introduced in Dubai too in the near/medium term, and if this is the case, this could easily compensate for the slowdown in volumes experienced in 2009 through the economic downturn.