Fitch Ratings has upgraded Saudi Arabia-based, The Company for Cooperative Insurance's (Tawuniya) Insurer Financial Strength (IFS) Rating to 'A' from 'A-'.

Simultaneously, Fitch has upgraded Tawuniya's National IFS Rating to 'AAA(sau)' from 'AA+(sau)'. The Outlooks are Stable.

The upgrade reflects the insurer's sustained strong financial performance backed by its prudent pricing and underwriting standards and an improved company profile. Fitch expects the company's disciplined approach to pricing to mitigate the risks of high claims inflation and to support underwriting performance and capital accumulation over the medium term.

Tawuniya's ratings continue to reflect the company's strong financial performance, company profile, capitalisation, as well as good reserve adequacy.

Key Rating Drivers

Improved Financial Performance: Tawuniya's Fitch-calculated net income return on equity (ROE) improved to 12% in 2022 (2021: 9%), supported by strong underwriting performance and resilient investment income. Its three-year average ROE was 12%, which Fitch views as very strong.

Tawuniya's Fitch-calculated non-life combined ratio was broadly unchanged at a strong 99% in 2022 (three-year average: 98%). The insurer reported a solid IFRS17 net income of SAR320 million in 1H23 (1H22: SAR51 million), supported by an improved insurance service result backed by strong business volumes. Tawuniya's Fitch-calculated non-life loss ratio improved to 80% in 2022 from 84% in 2021 (three-year average: 81%), supported mainly by its timely price adjustments to counter claims inflation in medical and motor insurance lines.

Fitch views medical claims inflation and stiff price competition, mainly in the motor insurance market, as key risks affecting Tawuniya's and the rest of the industry's underwriting performance. However, Tawuniya mitigates these risks by its prudent underwriting practices.

Strong Company Profile: Fitch assesses Tawuniya's business profile as 'Most Favourable' compared with that of other Saudi Arabian insurance companies due to its large operating scale, leading business franchise within its sector and strong competitive advantages. Tawuniya is one of the largest insurers in Saudi Arabia, recording a 40% increase in its gross written premiums (GWP) in 2022 to SAR14.3 billion on considerable growth in volumes across all business lines. Tawuniya reported SAR9.7 billion as GWP in 1H23 (1H22: SAR6.7 billion). Tawuniya's competitive positioning is also helped by its 26% state ownership through the General Organisation for Social Insurance, a government-owned entity.

Fitch regards Tawuniya to be a reasonably well-diversified insurer in the country by product lines. This assessment is supported by growing contribution from the motor, property and casualty segments to Tawuniya's GWP, despite material concentration in medical insurance, which is in line with the industry due to its compulsory nature.

Strong Capitalisation and Leverage: Fitch's view on Tawuniya's capitalisation reflects its Prism Factor-Based Model (FBM) score of 'Strong' at end-2022. This is a reduction compared with a 'Very Strong' score at-end 2021 due to an increase in non-life premium and reserve risk charges in the model as a result of considerable business growth in 2022. Despite expected strong GWP growth, Fitch expects Tawuniya's Prism FBM score to remain in the 'Strong' category, helped by its strong and consistent earnings. Tawuniya's financial leverage ratio was zero and unchanged at end-2022, which supports our assessment of strong capitalisation and leverage.

Good Reserve Adequacy: Tawuniya sets its reserves at best-estimate levels based on continual evaluation of historical results and expectations of claims experience. The majority of Tawuniya's policies are short-tailed, which helps limit the impact of significant adverse claims experience on reserve adequacy. In Fitch's view, Tawuniya's reserving sophistication has improved considerably since 2018.

Low Investment Risks Tawuniya's investment risk is limited as the insurer's investment portfolio is dominated by cash and cash equivalents, deposits and investment-grade securities (totaling around 90% at end-2022). The insurer's exposure to equity and mutual fund investments is modest.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

Sustained improvement in Tawuniya's Prism FBM score to 'Very Strong' while maintaining its strong financial performance

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Deterioration in capitalisation as reflected in the Prism FBM score falling to the lower end of 'Adequate' on a sustained basis

Significant weakening in underwriting profitability on a sustained basis

Deterioration of Tawuniya's company profile indicated, for example, by a sustained and substantial erosion of market position or franchise

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2023 Electronic News Publishing, source ENP Newswire