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Rating Action:

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

 The document has been translated in other languages

22 October 2019

London , October 22, 2019 – 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.

RATINGS RATIONALE

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.

The stable outlook reflects Moody's expectation that Buruj will maintain its profitability and capital adequacy levels, but also the challenges for Buruj to regain and maintain its top 20 mid-market position given the high level of competition currently prevailing in the Saudi market.

WHAT COULD CHANGE THE RATINGS UP/DOWN

According to Moody's, the rating could be upgraded if Buruj's market share increases to around 1%, in essence regaining and maintaining a top 20 market position, whilst maintaining its improved capitalisation levels with GUL below 2x and maintaining its improved profitability with ROC levels consistently over 12% and COR below 90%.

Conversely, Buruj's rating could be downgraded if: (i) its capital position deteriorates, with GUL increasing to over 3x, or if the credit quality of its reinsurance panel deteriorates; and/ or (ii) there is significant deterioration in the underwriting performance, as evidenced by a COR of 100% or above; and/ or (iii) there is a deterioration in invested asset quality with HRA equating to over 100% of consolidated equity.

AFFECTED RATINGS

..Issuer: Buruj Cooperative Insurance Company

Affirmation:

....Insurance Financial Strength Rating, Affirmed Baa2

Outlook

....Outlook changed to stable from positive

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Property and Casualty Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Local Market analyst for this rating is Mohammed Ali Riyazuddin Londe, +971.423.795.03.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Brandan Holmes
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Benjamin Serra
Senior Vice President
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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