Tawuniya's underwriting performance was poor in 2018 resulting in an underwriting loss of SAR438 million (2017: loss of SAR561 million), as inaccurate pricing of previous years in relation to the health line affected 2018 results, despite remedial actions taken by the company in late 2017 and 2018. The overall Fitch-calculated combined ratio was 106% (2017: 108%) driven by the loss making health line.
Tawuniya was loss making for the second consecutive year reflected in a net income return on equity of -11% in 2018 (2017: -6%) as investment income did not offset the underwriting losses. Investment result (including realised and unrealised gains) was significantly lower in 2018 falling to SAR195 million from SAR411 million, mainly driven by lower dividend income from equity instruments of SAR179 million (2017: SAR361 million).
Fitch believes that Tawuniya's capital position has marginally weakened during 2018, as measured by a Fitch Prism Factor Based Model (Prism FBM) score at a lower level in the 'Adequate' category (end-2017: high end of 'Adequate'), driven by the SAR213 million losses. Total equity consequently decreased by 15% to SAR1,808 million (2017: SAR2,126 million). Moreover, Tawuniya did not meet its minimum solvency capital requirements in 2018, albeit by a small margin. However, Fitch expects that Tawuniya's solvency margin will be in line with regulatory requirements by end-2019.
Tawuniya has a strong Saudi business profile as one of the leading insurance companies in the country, being the second-largest insurer as measured by premium volumes in 2018. With gross written premiums of over SAR7.6 billion in 2018 (2017: SAR8.4 billion), the insurer has a strong competitive position in the local market, benefiting from a recognised brand as well as the largest distribution network of tied agents in Saudi Arabia.
Fitch views Tawuniya's investment strategy as strong and supportive of the rating level, with 56% of total invested assets in cash and cash equivalents, 21% in fixed income and 21% in mutual funds. All of Tawuniya's fixed income is of investment-grade credit quality and all cash and cash equivalents are held with financial institutions rated 'BBB-' or above.
Failure to show tangible signs of improvement in underwriting profitability during 1H19 would lead to a downgrade. Deterioration in capitalisation as measured by Prism FBM's score failing below 'Adequate' would also lead to a downgrade.
The Outlook may be revised to Stable if Tawuniya's Prism FBM score ends up at least at the higher end of 'Adequate' and underwriting profitability improves to the extent that the Fitch-calculated combined ratio falls below 100%.
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