Best’s News & Research Service - May 15, 2014 12:01 PM (EDT)
A.M. Best Downgrades Ratings of Medgulf Bahrain and Its Main Subsidiary
London //BestWire// - A.M. Best has downgraded the financial strength rating to A- (Excellent) from A (Excellent) and issuer credit rating to "a-" from "a" of The Mediterranean & Gulf Insurance & Reinsurance Company B.S.C. (c) (Medgulf Bahrain) (Bahrain) and of The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (A Saudi Joint Stock Company) (Medgulf KSA) (Kingdom of Saudi Arabia). The outlook for all ratings remains stable.
The rating downgrades reflect the reduction in Medgulf Bahrain's risk-adjusted capitalisation in 2013 following a change in its reserving methodology, which resulted in a material underwriting loss at the Saudi subsidiary.
In 2013, the entire Saudi insurance market increased the level of conservatism in the calculation of technical reserves, as instructed by the Saudi Arabian Monetary Agency (SAMA). The change in reserving basis followed a market-wide strategic review of insurance products, with motor and medical business lines receiving the greatest scrutiny. Auditors and actuaries were instructed by SAMA to be more conservative in their assessments of companies' technical reserves. In 2013, Medgulf KSA reported an increase in net reserves for outstanding claims of SAR 466 million (USD 126 million), producing a net loss of SAR 192 million (USD 51 million) that drove a 16% decrease in the shareholders' equity. On a consolidated basis, Medgulf Bahrain reported a net loss of SAR 243 million (USD 65 million), reducing shareholders' equity by 11%.
While this increase in technical reserves has affected Medgulf KSA's risk-adjusted capitalisation, A.M. Best expects the company's historically strong operating performance to return and stabilise the group's capital position. Medgulf KSA has produced solid earnings for the first quarter of 2014, reporting a net profit of SAR 51 million (USD 14 million).
Upward rating movement for Medgulf Bahrain could result from evidence that this reserve charge was a one-time event, and through an improvement in risk-adjusted capitalisation to a level that is supportive of a higher rating. Downward rating pressure could occur if there was a further deterioration in Medgulf Bahrain's operating performance or its risk-adjusted capitalisation was to decrease to a level not supportive of the current ratings.
The ratings of Medgulf KSA benefit from rating enhancement from Medgulf Bahrain, given its strategic importance to the group.
Upwards and downwards rating movement for Medgulf KSA could result from a change in its stand-alone assessment or a change in parental support.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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This rating announcement has been issued by A.M. Best Europe - Rating Services Limited, which is a subsidiary of A.M. Best Company. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.