We have noted improvements in Malath Cooperative Insurance & Reinsurance Co.'s competitive position and operating performance.

In our view, Malath delivered impressive levels of growth in 2010 while maintaining underwriting profitability and established momentum for further growth in 2011 and beyond.

We are therefore revising the outlook on Malath to positive from stable and affirming the 'BBB' ratings.

The positive outlook reflects our view that an upgrade is possible if Malath delivers further diversified growth in its market share and maintains good operating performance.

LONDON (Standard & Poor's) May 4, 2011--Standard & Poor's Ratings Services said today that it revised its outlook on Saudi Arabia-based insurer Malath Cooperative Insurance & Reinsurance Co. to positive from stable. At the same time, we affirmed the 'BBB' long-term counterparty credit and insurer financial strength ratings on Malath.

The positive outlook reflects our view of Malath's improving competitive position and operating performance, as well as our expectation that its business profile in the Kingdom of Saudi Arabia (KSA or the Kingdom; AA-/Stable/A-1+) will develop further. In our view, Malath demonstrated impressive levels of growth in 2010, while maintaining underwriting profitability, and has established strong momentum for further growth in 2011 and beyond. As a result, the company is emerging as one of the likely leaders in the competitive domestic insurance sector and is becoming increasingly well known in the local marketplace.

The ratings on Malath reflect strong overall capitalization; a good and improving competitive position underpinned by a growing and diverse regional base in the Kingdom; and good financial flexibility. However, these positive factors are partly offset by execution risks associated with planned growth and domestic regional expansion, as well as general economic and industry risks of a young insurer operating in an increasingly competitive sector and a potentially volatile region.

In our view, Malath enjoys an improving competitive position underpinned by a growing and diverse regional base in the Kingdom. Despite operating only since October 2007, Malath has already achieved a gross premium income of Saudi Arabian riyal (SAR) 600 million in 2010, increasing its market share to approximately 4% in Saudi Arabia. Over the medium term, Standard & Poor's believes that the company is likely to achieve a good business profile as one of the leaders in the KSA's commercial and industrial insurance sectors, while at the same time developing strength in the country's provincial and retail motor markets.

The company displays strong overall capitalization and good financial flexibility based on what we believe to be its ability to raise additional cash or capital in line with potential requirements. Although of still-modest absolute size by international standards, Malath's year-end 2010 shareholders' funds of SAR263 million ($70 million) are nonetheless strong relative to still-low levels of retained underwriting risk. Even with more than 65% year-on-year achieved premium growth in 2010 and a further 30%+ growth targeted in 2011, Malath's risk-based capital, according to Standard & Poor's capital model, is likely to remain strong over the rating horizon.

The positive outlook signals that an upgrade is possible if Malath delivers further diversified growth in its market share and achieves a good operating performance, for example, with a combined ratio on average at or below 95%, a net loss ratio at or below 65%, and expense ratios declining in line with growth in gross premiums written over the next 12-24 months. Consequently, sound underwriting, conservative investments, and the economies of increasing scale will produce a track record of good, sustainable earnings.

However, if the track record of positive earnings is not established, or capitalization is depleted by operating losses or by strategic activity, there could be a negative impact on the ratings.

RELATED CRITERIA AND RESEARCH

  • Group Methodology, April 22, 2009

  • Interactive Ratings Methodology, April 22, 2009

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