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Initiation of Saudi Insurance sector – Insuring success (Read full report)

We initiate coverage of the Saudi Insurance sector and take a detailed look at all 35 insurers listed on Tadawul, and initiate on Tawuniya (Buy; FV: SAR117) and Bupa (Buy; FV: SAR155). We expect the changing market place will create opportunities and see large insurers as best placed. Furthermore, we believe Tawuniya (our top pick) and Bupa are head-and-shoulders above the rest, given their i) superior profitability profile; ii) strong risk mgmt track record; iii) comfortable solvency levels; and iv) opportunity to enhance returns. Consolidation has already started and could gain momentum, as regulatory changes are likely to hit smaller insurers, and many companies are facing, or have faced, capital issues. (Murad Ansari and Shabbir Malik)   -  Tawuniya - The insurance juggernaut (Read full report) We initiate on Tawuniya, Saudi Arabia’s largest insurer (c21% market share), with a Buy. We believe it is well-positioned to benefit from opportunities in Saudi Arabia’s underpenetrated insurance sector. Strong capitalisation, economies of scale and focus on customer service give it a clear edge over small insurers, and we expect it to gain market share as the industry heads towards consolidation. We expect motor to be the key driver of premium growth (2015-18e earnings CAGR of 19%) over the next three years as i) it is an underpenetrated market (only c40% of motor vehicles are insured); ii) the authorities take steps to enforce compulsory insurance; iii) competitors grapple with capital constraints; and iv) electronic sales channels open up cheaper sales distribution. We expect Tawuniya to generate a ROE of 26-27% over 2016-18, while it is trading at an undemanding 2017e P/B of 2.5x.   -  Bupa – The healthy choice in Saudi Arabia (Read full report) We initiate coverage on Bupa Araba (Bupa) with a Buy rating as our FV of SAR155 implies 22% upside. Bupa is the largest and most profitable healthcare insurer in Saudi Arabia with a 43% GWP market share in 1H16. We like its i) strong growth opportunities; ii) large scale; iii) operational excellence; and iv) upside from investment income. Moreover, lower capital intensity (due to slower GWP growth and high profitability) should enhance free cash flows, dividend yields, and overall value appeal. Although we expect GWP growth to slow down vs. its super growth phase in 2014-15, we expect its ROE to remain at c30% over our forecast horizon. We estimate its dividend payout could easily rise from 25% in 2015 to 52% by 2018e. We also view Bupa as an attractive proxy to the Saudi healthcare system.

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