Net profit before zakat up 23% Y-o-Y, beats EFGe: Bupa Arabia reported a 2Q18 net income before zakat of SAR179mn, up 23% Y-o-Y and exceeding our estimate of SAR146mn by 23%. The key driver of the earnings beat is better-than-expected loss ratio owing to lower-than-expected net incurred claims. Earnings in 2Q18 rebounded strongly Q-o-Q from a very low base in 1Q18 of SAR9mn, which was dented by a surge in provisions for bad debt (due to customers’ payment delays post VAT implementation) and some accrual operating costs. 
 
Key highlights:
GWP up 9% Y-o-Y, in-line with EFGe: GWP picked up 9% Y-o-Y to SAR2.0bn in 2Q18 (-19% Q-o-Q on seasonality), coming in broadly in line with our forecast. Bupa has been raising its pricing since early 2018, aided by the easing in competitive pressures particularly from its direct large competitors in addition to regulatory pressures on smaller peers (CCHI’s unified policy). 
 
Loss ratio down 181bps Y-o-Y to 77.9%, beat EFGe: we estimate a loss ratio of 77.9% in 2Q18, down from 79.7% in 2Q17 and vs. EFGe of 81.0%. We estimate net earned premiums at SAR2.0bn, up 3% Y-o-Y and above net incurred claims growth of 1% Y-o-Y. Net claims incurred stood at SAR1.5bn, up just 1% Y-o-Y but down 11% Q-o-Q, coming in 5% below our estimate. Bupa’s upward repricing exercise has contributed to the improvement of its loss ratio, in our view.
 
Investment income up 14% Y-o-Y, beats EFGe: investment income picked-up 14% Y-o-Y and 4% Q-o-Q to SAR45mn, and exceeded our estimate of SAR42mn by 8%. Rising interest rates in Saudi Arabia, with SAIBOR up 50bps Q-o-Q in 2Q18, have likely boosted investment income.
 
Bupa: SAR82.20 as of 2 Aug. 2018, Rating: Buy, TP: SAR114.00/share, MCap: USD1,754mn, BUPA AB/8210.SE