Weqaya Takaful Insurance & Reinsurance Co.'s capitalization remains strong relative to risk, despite previous high depletion of shareholders' funds due to start-up and early operational costs.

In our opinion, the company's business profile in its domestic Saudi Arabian market will improve to a satisfactory level by 2013, bringing at least adequate, sustainable earnings.

We are therefore assigning 'BBB' counterparty credit and financial strength ratings to Weqaya Takaful.

The stable outlook incorporates our expectation that Weqaya Takaful's competitive strengths will help generate sufficient profitable new business in 2012. In turn, this should help to stabilize capitalization and produce satisfactory earnings.

LONDON (Standard & Poor's) Nov. 11, 2011--Standard & Poor's Ratings Services said today that it has assigned its 'BBB' long-term counterparty credit and financial strength ratings to Riyadh-based Weqaya Takaful Insurance & Reinsurance Co. (Weqaya Takaful). The outlook is stable.

The ratings reflect Weqaya Takaful's strong capitalization and investments, and prospectively satisfactory competitive position and operating performance. Partially offsetting factors include the company's limited operational track record since its start-up in mid-2010, and the increasingly competitive nature of the Saudi Arabian insurance sector.

In our opinion, financial strength at Weqaya Takaful is underpinned by strong capitalization relative to still limited underwritten risk. Cash-orientated investment strategies, whereby approximately 75% of investment assets continue to be held as cash or near-cash, further support capitalization. As of end-September 2011, the company reported shareholders' funds of Saudi Arabian riyal (SAR) 132 million ($35.2 million). This is two-thirds of the initial SAR200 million of shareholders' funds held by the company after its April 2010 IPO on the Riyadh Tadawul stock exchange. However, we believe that current capitalization strongly offsets the insurance risk inherent in the SAR49.2 million of net premium written over the first nine months of 2011. Moreover, we anticipate that both capitalization and reserving will remain strong as insurance exposures increase.

We also expect the competitive position of Weqaya Takaful to continue the steady improvement witnessed in 2011, with particularly robust premium growth anticipated for the current fourth quarter. This ongoing improvement is derived from what we view as the new company's clear differentiation in the Saudi Arabian market. We base our assumption on the combination of its advanced use of technology, its independence from any dominant owner or institution, and its explicitly Sharia-compliant, takaful mode of operation. Combining these competitive strengths with the local market knowledge of the senior management team, Weqaya Takaful will, in our view, be able to successfully negotiate distribution agreements with bank alliances in particular helping the company to develop its life and savings activities, as well as the more standard medical and motor covers that are typical of the Saudi Arabian market.

Although operating performance at present remains marginal-- cumulative losses of SAR25 million have been reported for the nine months to Sept. 30, 2011--we believe that the company will start to generate positive returns in the fourth quarter of 2011, and report increasingly satisfactory earnings during 2012. Moreover, by means of retained shareholder profits, we expect the company to have increased its capital back to the original IPO level of SAR200 million by the end of 2013.

The stable outlook reflects our expectation that Weqaya Takaful will create a sustainable, increasingly profitable business position for itself in the competitive but expanding Saudi Arabian life and non-life insurance markets, over the two-year outlook period.

We expect the erosion of Weqaya Takaful's shareholders' funds due to start-up and early operational costs to cease during the fourth-quarter of 2011, as revenues balance expenditure for the first time. During 2012, we expect to see steadily improving technical and overall profitability. We forecast net combined ratios of below 100% over the year, and anticipate that earnings will be retained and used to rebuild shareholders' funds to their original level of SAR200 million by mid-2013.

Weqaya Takaful will, in our view, be able to selectively write about SAR150 million of gross and SAR60 million of net premiums in 2011, rising to approximately SAR250 million gross and SAR100 million net in 2012, and to SAR325 million gross, SAR135 million net in 2013. We think it likely that the company will achieve this with the assistance of additional distribution alliances with banks, insurers, and other agents. Meanwhile, we expect risk-based capital outcomes to remain at least strong throughout the period, and modeled results to be supported by relatively low retained risk exposures, prudent general reserving, and low-risk, cash-orientated investment strategies. By end-2013, we expect earnings to have reached sustainable, good levels or better, with net non-life combined ratios stabilizing in the low 90% range, and both return on equity and return on revenues rising toward 10%. If it becomes apparent that Weqaya Takaful is going to fall substantially short of our expectations, we could lower the ratings.

RELATED CRITERIA AND RESEARCH

  • Principles of Credit Ratings, Feb. 16, 2011

  • Interactive Ratings Methodology, April 22, 2009

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