• Initiating coverage; Tawuniya is our top pick We initiate coverage on the Saudi Insurance sector with BUYs on Tawuniya and Bupa given their i) superior profitability profile; ii) strong risk mgmt track record; iii) comfortable solvency levels; and iv) opportunity to enhance returns. Our detailed review of all 35 listed insurers (pages xx-xx) leads us to believe that scale and consistent risk management puts them head and shoulders above the rest. Our top pick is Tawuniya (a conviction Buy) given its exposure to motor insurance as better enforcement should drive stronger premium growth in the ST. Bupa, with its robust profitability (sustainable ROEs of c30%), is the quality health insurance play in the sector, and is well positioned to gain more market share as the sector consolidates, in our view.
• Changing dynamics creates opportunities; large insurers best placed The Saudi insurance landscape is changing. After two years of solid volume and price-driven growth, sector GWP growth is moderating. We estimate the sector’s GWP grew 7.5% Y-o-Y in 1H16 versus an average of 20% for the past three years. The weakening economy has created cost consciousness, and we expect GWP growth to remain weak in the ST. However, the govt’s fiscal challenges could accelerate the reform process, which should be favourable for motor and health insurers. Bupa and Tawuniya are strongly positioned to benefit from these medium-term drivers due to their scale and consistency of risk management – the holy grail for insurers. Near term, we believe that Tawuniya has stronger earnings growth profile than Bupa.
• Consolidation has already started and could gain momentum Rationalisation is perhaps the apt word, as industry sources suggest six insurers are in the process of winding down their businesses. Moreover, regulatory changes restricting direct sale of health insurance to individuals is likely to hit a number of health insurers’ business models, in our view. Our review of all listed insurers indicates that, excl. Bupa and Tawuniya, only two non-life insurer have been able to maintain a combined ratio below 100% over the past two years. While recent capital increases may provide some breathing space, slowing GWP growth is likely to challenge a number of insurers who have been chasing growth. This could hasten consolidation in the sector, in our view.
• Investment risks Key sector risks are weaker enforcement of mandatory insurance lines, aggressive pricing in the market, regulatory risks and volatility in investment returns due to exposure to equities. As of 2Q16, allocation to equities was 14% of the investment book for Tawuniya and 3% for BUPA. Insurance terms – cheat sheet: GWP - total premiums receivable for the period of cover provided by the insurer. Loss ratio - net claims incurred to net earned premiums. Expense ratio - underwriting expenses to net earned premiums. Combined ratio - sum of loss and expense ratios.

Murad Ansari
Shabbir Malik