17-May-2017
Saudi Arabia Insurance Sector - What 1Q17 tells us about KSA insurers
Weak premium growth and pressure likely to persist in ST
Gross written premium (GWP) growth for the sector fell 2% Y-o-Y in 1Q17, down from 12% Y-o-Y in 1Q16, highlighting the pressure on premium pricing and volumes due to macro headwinds. GWP trends for Bupa and Tawuniya were divergent - Bupa reported an 8% drop in GWP in 1Q17, while Tawuniya reported a 19% increase.
Still stick with the leaders for the long term
We expect 2017 to be a challenging year, as pressure on premium growth is likely to persist in the ST; however, improved investment income, primarily due to higher yield on fixed income securities, should provide some respite. While we see downside risk to our estimates, we believe Bupa (Buy) and Tawuniya (Buy) are the best sector plays. Their large scale, operational excellence, prudent underwriting standards and strong solvency give them an enduring competitive advantage over other insurers in Saudi Arabia, in our view. We also view Bupa International increasing its stake in Bupa Arabia as a vote of confidence for prospects of the medical segment in the Kingdom.
Tawuniya: GWP growth & investment income drive earnings
Tawuniya reported a pre-zakat profit of SAR161mn, up 161% Y-o-Y, driven by GWP growth and stronger investment income. While tactical skirmishes between Tawuniya and Bupa can lead to swings in GWP, the increase in GWP for Tawuniya is likely to have been underpinned by the Saudi Airlines (Saudia) contract win in 4Q16. Also, Tawuniya is a multi-line insurer, and the motor segment may have contributed to its GWP growth as Saudi authorities are taking steps to increase the enforcement of motor insurance. While we believe ST growth prospects for Tawuniya are better, given its exposure to the under-penetrated motor segment, there are some risks to this thesis as there is anecdotal evidence that car sales are down sharply, while certain consumers have pushed back on the rise in motor insurance premiums over the past four years.
Bupa: Dented by weak premium and high loss rate
Bupa’s 1Q17 results were weak – earnings fell 50% Y-o-Y as GWP declined and its loss ratio deteriorated. Mgmt. attributed this weakness to a weak macro, general resistance to price increases on renewal, competition and some downgrading of insurance policies. We believe weakness in the labour market disproportionately affects Bupa as it is the largest player (c40% mkt share) in the medical segment. The pick-up in loss ratio is likely to be temporary, and we expect it to normalise over the remainder of 2017; however, it will be difficult for Bupa to maintain a loss ratio at the 2016 level of 80%, in our view.
Shabbir Malik
Murad Ansari
Gross written premium (GWP) growth for the sector fell 2% Y-o-Y in 1Q17, down from 12% Y-o-Y in 1Q16, highlighting the pressure on premium pricing and volumes due to macro headwinds. GWP trends for Bupa and Tawuniya were divergent - Bupa reported an 8% drop in GWP in 1Q17, while Tawuniya reported a 19% increase.
Still stick with the leaders for the long term
We expect 2017 to be a challenging year, as pressure on premium growth is likely to persist in the ST; however, improved investment income, primarily due to higher yield on fixed income securities, should provide some respite. While we see downside risk to our estimates, we believe Bupa (Buy) and Tawuniya (Buy) are the best sector plays. Their large scale, operational excellence, prudent underwriting standards and strong solvency give them an enduring competitive advantage over other insurers in Saudi Arabia, in our view. We also view Bupa International increasing its stake in Bupa Arabia as a vote of confidence for prospects of the medical segment in the Kingdom.
Tawuniya: GWP growth & investment income drive earnings
Tawuniya reported a pre-zakat profit of SAR161mn, up 161% Y-o-Y, driven by GWP growth and stronger investment income. While tactical skirmishes between Tawuniya and Bupa can lead to swings in GWP, the increase in GWP for Tawuniya is likely to have been underpinned by the Saudi Airlines (Saudia) contract win in 4Q16. Also, Tawuniya is a multi-line insurer, and the motor segment may have contributed to its GWP growth as Saudi authorities are taking steps to increase the enforcement of motor insurance. While we believe ST growth prospects for Tawuniya are better, given its exposure to the under-penetrated motor segment, there are some risks to this thesis as there is anecdotal evidence that car sales are down sharply, while certain consumers have pushed back on the rise in motor insurance premiums over the past four years.
Bupa: Dented by weak premium and high loss rate
Bupa’s 1Q17 results were weak – earnings fell 50% Y-o-Y as GWP declined and its loss ratio deteriorated. Mgmt. attributed this weakness to a weak macro, general resistance to price increases on renewal, competition and some downgrading of insurance policies. We believe weakness in the labour market disproportionately affects Bupa as it is the largest player (c40% mkt share) in the medical segment. The pick-up in loss ratio is likely to be temporary, and we expect it to normalise over the remainder of 2017; however, it will be difficult for Bupa to maintain a loss ratio at the 2016 level of 80%, in our view.
Shabbir Malik
Murad Ansari