Buruj reported 3Q18 net profit before zakat of SAR25mn, an increase of 6% Y-o-Y and 59% Q-o-Q (from a low base in 2Q18 on unusually high expense ratio), coming in well above our estimate of SAR19mn. Based on headline numbers, the key driver of the earnings beat is lower-than-expected loss ratio, which came in at 44% vs. EFGe of 62%. However, GWP was down 25% Y-o-Y in 3Q18, the fifth consecutive quarter of decline.
 
Key highlights:
 
GWP continues to decline, but at a more moderate pace than we expected: GWP fell 25% Y-o-Y to SAR71mn in 3Q18, vs. a decline of 42% in 2Q18 and 45% in 1Q18. We were expecting a steeper decline in GWP (EFGe:-30% Y-o-Y). We believe the insurer’s GWP has been affected by the expat exodus as medical accounted for 25% of Buruj’s GWP in 1H18, and as most of its customers are foreign workers in the SME segment. The insurer has also been letting go of those medical accounts, where it has not been able to reprice upwards to reflect the impact of the unified policy. Its GWP is also likely to have been affected by pressure on motor rates due to competition, rising no-claim discount and subdued motor volumes. Buruj’s mgmt. is not willing to compromise on margins, which is contributing to the decline in its GWP. 
 
Very low loss ratio at 44%: We estimate a loss ratio of 44% in 3Q18, down 17ppt Y-o-Y and well below EFGe of 62%. Net claims incurred halved Y-o-Y to SAR35mn, coming in well below our forecast of SAR63mn. We estimate net earned premiums (based on results commentary) at SAR86mn, a decline of 36% Y-o-Y and 20% below our forecast of SAR108mn. Management is committed to protecting its margins and keeping loss ratios under control. 
 
Strong investment income: Investment income rebounded Y-o-Y to SAR5mn in 3Q18, vs. a loss of SAR1mn last year. Investment income is a strong area for most insurers as rising interest rates drive higher returns on bank deposits, the biggest component of insurers’ investment portfolio. 

Rajae Aadel, Shabbir Malik
 
Buruj Cooperative Insurance: SAR23.38 as of 08 Nov 2018, Rating: Neutral, TP: SAR30.00/share, MCap: USD156mn, BURUJ AB/8270.SE