• Saudi Arabia’s leading insurer; initiate with a Buy We initiate coverage on The Company for Cooperative Insurance (Tawuniya), Saudi Arabia’s largest insurer (c21% market share), with a Buy rating. Our FV of SAR117 implies 30% upside. We believe it is well-positioned to benefit from opportunities in Saudi’s under-penetrated 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 also like it as its size means that it benefits from bargaining power over service providers, thus keeping its claims costs under control. We expect Tawuniya to generate a ROE of 26-27% over 2016-18, while it trades at an undemanding 2017e P/B of 2.5x. We believe that tight regulatory oversight and Tawuniya’s multi-line business model mitigate risks to profitability.
• Motor to drive premium growth; 2015-18e earnings CAGR of 19% We expect motor to be the key driver of premium growth over the next three years as i) the market is under-penetrated (only c40% of motor vehicles are insured); ii) the authorities take steps to enforce compulsory insurance; iii) competitors grapple with capital constraints; and iv) direct sales via electronic channels opens up cheaper sales distribution. We expect relatively slower growth of premiums in the health segment, as c90% of the expat segment is already covered. Further structural growth is subject to i) enforcement of health insurance for Saudis working in the private sector (penetration 57%); and ii) privatisation of the public healthcare system.
• Risks to our favourable view on the stock Saudi Arabia’s fiscal retrenchment could lead to reduce spending on insurance in the Kingdom. Tactical skirmishes between Tawuniya and Bupa to win large health accounts could lead to fluctuations in premiums and squeeze margins. Relatively high allocation to equities in the investment book (currently 14% of total investments) could also contribute to earnings volatility in the short term.

Shabbir Malik
Murad Ansari