Moody’s affirms Buruj's Baa2 Rating; changes outlook to stable

Moody's Investors Service (Moody's) has affirmed the Baa2 insurance financial strength rating (IFSR) of Buruj Cooperative Insurance Company (Buruj), based in Saudi Arabia, and changed the outlook to stable from positive. The rating affirmation and change in outlook to stable from positive reflects Buruj's improved capital adequacy and maintained profitability but also intense competitive pressures of the Saudi insurance market.
The affirmation of the Baa2 IFSR for Buruj reflects: (i) its sustained strong profitability, both in terms of underwriting profit and bottom line, with a 5-year average combined ratio (COR) of 83.3% and 5-year average return on capital (ROC) of 23.4% at YE 2018; (ii) the continued improvement in capitalisation, resulting from organic growth in consolidated equity (shareholders' and policyholders') of 13% to SAR456.5 million ($121.7 million) at YE 2018 from SAR403.8 million ($107.6 million) at YE 2017, having already organically grown significantly from YE 2015's SAR233.6 million ($62.3 million). This continued growth resulted in further enhanced capital adequacy metrics with gross underwriting leverage of 1.4x at YE 2018, down from 2.1x at YE 2017 and 3.1x at YE 2015. Moody's expects this ratio to remain below 2x going forward.
The affirmation of the Baa2 IFSR also reflects Buruj's: (i) maintained strong asset quality, with the vast majority of investments held as cash, bank deposits and investment grade Islamic sukuk bonds, translating into a low ratio of high risk assets (HRA) as a percentage of consolidated equity (37.5% at YE 2018); and (ii) a strengthening of the reserve setting and monitoring processes.
The change in outlook to stable from positive reflects the intensified competitive pressures that Buruj faces in the Saudi insurance market. Buruj's mid-market position weakened in 2018 with premiums dropping by 37.4% to SAR320 million in 2018 from SAR511.5 million in 2017. Whilst we note that the drop in premiums was a result of deliberate management actions taken in order to protect capital from volatile business and pricing practices of the market, the deterioration has impacted, and may continue to impact, Buruj's earnings as indicated by the 60% drop in the reported H1 2019 net income compared to H1 2018.


Source: Moody’s