Walaa Insurance: The main goal of increasing capital is not aimed to providing liquidity

Logo of Walaa Cooperative Insurance Co.

Walaa Cooperative Insurance Co. said that its capital increase is not aimed at raising cash for liquidity, but to sustain the company’s solvency margin and sustain its "A" credit rating. It also seeks to achieving several goals in line with the company’s long-term strategic plan.

In a statement to Argaam, the company indicated that the board of directors had on Jan. 12, 2021 announced its recommendation to increase capital by SAR 775 million by way of a rights issue.

In view of the potential merger opportunity with SABB Takaful Co., Walaa announced on July 15, 2021 a decision to delay the rights issue until the merger process is completed or the memorandum of understanding referred is terminated, the same was also highlighted in the 2022 annual board of directors’ report.

As the merger transaction was concluded successfully, leading to an increase in shareholders’ equity by SAR 294 million, the board of directors decided to proceed with increasing the capital by SAR 425 million, based on its earlier recommendation dated on Jan. 12, 2021, reducing the planned hike in view of the early recovery of the company’s performance.

The board of directors and senior management confirmed that Walaa's long-term growth plans remain intact, and that Walaa will emerge as a major player in the Saudi insurance industry which will see a great and promising future.

”Insurance companies are built over decades, and ”Walaa is here to grow and last”. This was evidenced over the past 10 years, as the company has now become the fifth largest insurance company with a 5% market share,” the company said in a statement.

The company stated that its objectives include investing in developing its capabilities and infrastructure in the health insurance operations, including the systems related to managing medical claims internally, in order to boost its market share in the health insurance sector.

Walaa also aims to Increase its risk-taking capacity (retention) in the Property and Casualty line of business, in addition to growing and developing its business in the inward reinsurance portfolio and better capitalize on its reinsurance license.

The board of directors took the decision to increase capital after weighing several options especially that the Saudi economy in general and the insurance sector in particular are poised for significant growth over the next few years.

Walaa also explained that, if it continues as a going concern (maintain the status quo) with its current capital without any increase, it will be able to maintain its financial solvency, but will not be able to grow significantly, as any exponential growth in its business without additional capital will weigh on its financial solvency.

The board of directors also took into account the reports issued by credit rating agencies S&P Global and Moody's, which highlighted the importance of raising additional capital to maintain financial solvency if the company aims to grow, said Walaa.

The credit rating is a key factor when underwriting Property and Casualty risks for large risk-averse establishments and companies that, and it is also of great importance in the operations of the reinsurance business (the company’s business as re-insurer), which the company underwrites and plans to grow and develop.

In case a third merger is implemented instead of a rights issue, Walaa could remain in need for raising capital, depending on the merged entity’s solvency that might be unstable. In addition, a merger is a long-term process that depends on the availability of potential targets, and should create synergy.

Therefore, the board prefers to raise capital then eye any merger opportunity going forward, only if it will achieve synergies with Walaa’s business and realize additional value to Walaa’s shareholders.

The capital increase will place the company in a solid and strong financial position and allow the management to focus on business growth and tap available market opportunities, as Walaa is still in its 15 years of operations and has many ambitions to fulfill.

The company highlighted that the recommendation to raise capital is subject to the approval of regulatory authorities such as the Saudi Central Bank (SAMA) and the Capital Market Authority (CMA), as well as shareholders' approval through voting on the decision in the extraordinary general meeting (EGM). If the meeting agenda is approved, shareholders who do not plan to exercise their right to subscribe to the rights issue, may sell all or part of their rights entitlement.

The company added that, in light of the current s interest rates, the option of raising funds through the issuance of Tier-1 Sukuk was excluded. It noted that the option of finding a strategic investor may not provide the required capital, and this process takes a long time and will dilute the shares of current shareholders.

Walaa confirmed that it benefited from the previous mergers with MetLife AIG ANB and SABB Takaful, which were reflected in its financial statements before and after the mergers. It also indicated that mergers may result in additional expenses in the short term, which would stabilize over time, synergies would be realized in years to come after the merger.

The benefites of these mergers are summarized as follows:

- Obtaining additional capital, which allowed the company to maintain its financial solvency and credit rating in line while growing the business.

- Posting positive investment income arising from the additional capital.

- Growing the company’s market share through the portfolios acquired from the merged entity.

- Obtaining the protection and savings product (including the license, system, and human expertise), as well as the portfolio and sales distribution channels of the merged entity.

- Obtaining bancassurance agreements through partnerships with two major banks.

- Having major shareholders, Saudi Awwal Bank (SAB), Arab National Bank (ANB), and American Life Insurance Co. (MetLife), which in turn leads to the consolidation of strategic institutional shareholding.

- An additional stake in Najm Insurance Services Co., which was reflected on the company’s investment income.

The company noted that investors will be informed of all developments related to its capital increase through announcements on Tadawul website, other channels, and investor meetings.

Reports of credit rating agencies on Walaa: 

- Moody’s Credit Opinion 

- Moody’s Rating Action 

- S&P Credit Opinion