(The following statement was released by the rating agency)

Aug 13 -

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Summary analysis -- Mediterranean & Gulf Cooperative Insurance and 13-Aug-2012

Reinsurance Co. 8030.SE

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CREDIT RATING: Country: Saudi Arabia

Local currency A-/Stable/--

Primary SIC: Fire, marine, and

casualty

insurance

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Credit Rating History:

Local currency Foreign currency

18-May-2011 A-/-- --/--

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Rationale

The ratings on Riyadh-based Mediterranean & Gulf Cooperative Insurance & Reinsurance Co. (MedGulf KSA) reflect the company's strong domestic business position in the Kingdom of Saudi Arabia (KSA), its strong current and prospective operating performance, and its similarly strong, cash-orientated investment strategies and liquidity. Partially offsetting factors include our assessment of capitalization as a relative analytic weakness--it is good, rather than strong. More generally, the rating is constrained by the economic and industry risks of operating in a single market, which is particularly concentrated around two lines of domestic business: medical and motor. The KSA insurance sector is regionally important and still growing, but increasingly competitive.

Technically, MedGulf KSA is a start-up company--we define a start-up as one with less than five full years of operation--and has been fully operational only since Jan. 1, 2009. However, MedGulf KSA has considerably benefited from its acquisition of the large, profitable portfolio of KSA-related assets and underwriting built up since 1972 by its offshore predecessor and now-core shareholder, Mediterranean & Gulf Insurance & Reinsurance Co. B.S.C. (c) (MedGulf Bahrain) (unrated). This portfolio acquisition accelerated MedGulf KSA to its current position as the second-largest of over 30 companies in the KSA insurance sector. It is particularly strong in group medical and other commercial lines of business.

Operating performance at MedGulf KSA is also strong and we expect it to remain so. Its net combined ratios--claims and expenses relative to retained premium income--are typically below 90%, implying robust underwriting profitability. This more than offsets the currently low yields available on the strong, largely cash-based investment portfolio. MedGulf KSA is also establishing a track record of impressive, overall comprehensive net income; it reported a net result for 2011 of Saudi Arabian riyal (SAR) 204.9 million (US$54.6 million). Consequently, our base-case analysis for the company also anticipates continuing strong performance ratios, including return on revenues above 10%, and return on equity (ROE) above 12% relative to reported shareholders' equity.

Capitalization at MedGulf KSA is likely to remain good, in our opinion--the company reported SAR1,043.8 million of shareholders' equity in the latest, end-June 2012 interim accounts. We deduct SAR480.0 million for goodwill as part of our analysis, leaving SAR563.8 million. This capital position should be compared with what we expect to be net premium written (NPW) for the whole of 2012 of approaching SAR2.3 billion. Although we have a base-case expectation of future premium growth of at least 15% a year, this is not expected to significantly dilute risk-based capital adequacy. Shareholders' funds will, in our view, continue to be reinforced by retained earnings and ongoing prudential management of the solvency position through low-risk investment strategies and conservative use of reinsurance.

MedGulf KSA's equity is controlled by MedGulf Bahrain (40.5%). A further 19.0% is held by Saudi Investment Bank 1030.SE (SAIB; A-/Stable/--), 3.0% by Lebanon-based MedGulf S.A.L. (not rated), and 12.5% by various other core investors. The balance of 25% is widely held by local investors in Saudi Arabia following MedGulf KSA's initial public offering on the Riyadh Tadawul stock exchange in March 2007.

Outlook

The stable outlook indicates our belief that MedGulf KSA will successfully maintain and potentially further reinforce its strong competitive position in the Saudi Arabian insurance sector through improved regional representation, while maintaining its strong technical and overall operating performance, and at least good overall capitalization. In particular, we expect prospective net combined ratios to only occasionally rise significantly above 90%. Meanwhile, return on revenues is likely to average 10% or more, and return on equity to exceed 12% generally. We anticipate that investment strategies will remain prudent and strongly cash-orientated.

We could take positive rating action if modeled risk-based capital outcomes improve to sustainable strong levels. Alternatively, we could take a negative action if capital ratios weaken significantly relative to growing business volumes, or if narrowing margins cause operating performance to fall repeatedly below our base-case expectations.

Related Criteria And Research

-- Interactive Ratings Methodology, April 22, 2009

-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004

-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))