Fitch Ratings has assigned Gulf Union Alahlia Cooperative Insurance Company a first-time Insurer Financial Strength (IFS) Rating of 'BBB+' and a National IFS Rating of 'AA-(sau)'.

The Outlook is Stable.

Gulf Union Alahlia's ratings reflect the insurer's strong capitalisation, improving financial performance and good company profile.

The National IFS Rating is derived by using Fitch's National Ratings Correspondence Table for Saudi Arabia.

Key Rating Drivers

Good Company Profile: The insurer has a moderate operating scale and franchise. It is a small insurer in Saudi Arabia, with a market share of about 1% in 2023. This was marginally higher than in the previous year, as gross written premiums (GWP) reached SAR691 million in 2023, versus SAR548 million in 2022, driven by the medical retail and small- to medium-sized motor segments. The 26% increase in GWP was in line with that of the Saudi insurance industry.

Our assessment of the company profile is also influenced by the insurer's well-diversified product mix. Motor insurance contributed 44% of GWP in 2023 (2022: 41%), followed by medical at 38% (2022: 42%) and property and casualty at 18% (2022: 17%). The insurer has recently launched a number of products and aims to further expand its product offering in the short-to-medium term.

Strong Capitalisation and Leverage: Our assessment of Gulf Union Alahlia's capitalisation is reflected in a Prism Global score of 'Extremely Strong' at end-2023, unchanged from 2022's. Its solvency ratio improved to 237% from 178% over the same period on stronger profitability. The ratio was very low at end-2021, but it improved significantly in 2H22 following a mid-2022 capital raise of SAR229 million to support the insurer's solvency and growth plans. We expect the Prism Global score to remain at least 'Strong' in the medium term, helped by improving financial performance that is partly offset by significant business growth that could consume capital.

It has no financial leverage, which supports the ratings.

Improving Financial Performance: Net profit improved to SAR125 million in 2023, versus a net loss of SAR18 million in 2022 (restated on an IFRS17 basis). The significant improvement was driven by enhanced underwriting practices and volume growth in the motor SME and medical retail segments. The Fitch-calculated combined ratio reached 83% in 2023, improved from 100%, helped by better pricing and prudent underwriting practices. We expect the company's underwriting and pricing discipline to keep it profitable, albeit at more conservative levels due to its strong growth plans.

Good Reserving Practice: The majority of Gulf Union Alahlia's policies are short-tailed, which limits the impact of significant claims experience on reserve adequacy. The insurer sets reserves at best-estimate levels, based on regular evaluation of historical results and expectations of claims experience.

Conservative Investment Mix: We regard Gulf Union Alahlia's investment risk as low. Cash, deposits and other fixed-income investments make up around 70% of the insurer's investment portfolio. The majority of the fixed-income investments are in Saudi Arabia (A+/Stable) government sukuk. Exposure to equity and mutual fund investments is modest.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

The international IFS Rating could be upgraded on a sustained improvement in Gulf Union Alahlia's company profile, indicated by a significant increase in market position and franchise, while maintaining its capital position and financial performance

The National IFS Rating could be upgraded on a significant improvement in financial performance, while maintaining a strong capital position on a sustained basis

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Failure to maintain improvement in financial performance

Deterioration in capitalisation, as reflected in the Prism score falling to 'Adequate' on a sustained basis

Date of Relevant Committee

24 June 2024

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

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