Tawuniya reported its 2017 full financials yesterday, showing 4Q17 net loss before zakat of SAR715mn vs. profit of SAR212mn a year ago, primarily due to a spike in loss ratio to 132% in 4Q17 vs. 75% in 4Q16. Claims surged 89% Y-o-Y and 66% Q-o-Q due to SAR919mn extra net outstanding claims booked in 4Q17, as the insurer was required to beef-up its technical reserves. 
 
Owing to a surge in loss ratio to 93% in 2017 from 75% in 2016, net incurred claims rose 33% Y-o-Y, mainly due to SAR972mn movement in outstanding claims.
 
BVPS declined 24% Y-o-Y to SAR17.7 in 2017, from SAR23.4 in 2016, owing to a decline in retained earnings following FY17 loss. We estimate Tawuniya’s solvency ratio fell to 146% in 2017 vs.189% in 2016 – above the minimum regulatory required level of 100%. 
 
Key highlights:
 
      Loss ratio deteriorated to 132% in 4Q17 vs. 75% in 4Q16 due to extra technical reserves build-up: Tawuniya booked SAR918mn additional outstanding claims (net of reinsurers’ share of outstanding claims) in 4Q17. As a result, net incurred claims spiked 89% Y-o-Y, 66% Q-o-Q. The source of extra reserving was the medical segment. The insurer’s FY17 loss ratio rose to 93% in FY17 vs. 75% in FY16. Gross outstanding claims/net incurred claims ratio (an indication of reserving trends) rose to 34% in FY17 for the medical segment (highest level since 2014), from 23% in FY16. This ratio, however, was broadly stable for the other segments. 
 
      GWP fell 4% Y-o-Y in 4Q17, mainly owing to a decline in medical GWP: Medical GWP fell 6% Y-o-Y in 4Q17 on weak macro and labour market dynamics, a common trend across the sector in 2017. FY17 medical GWP rose 10% Y-o-Y, driven by above-sector growth in 9M17. The contribution of the medical segment to GWP rose to 68% in FY17 vs. 65% in FY16. Motor GWP fell 11% Y-o-Y in 4Q17, while FY17 motor GWP fell 8% Y-o-Y (accounts for 17% of GWP in 2017).
 
      Expense ratio worsened to 21% in 4Q17, but FY17 expense ratio was flat Y-o-Y at 16%: SG&A expenses increased 84% Y-o-Y and 65% Q-o-Q in 4Q17, leading to a higher expense ratio at 21% in 4Q17 vs. 15% in 3Q17 and 14% in 4Q16. It is worth noting that these expenses tend to be volatile on a Q-o-Q basis, particularly selling and marketing expenses. FY17 expense ratio was broadly unchanged Y-o-Y at 16%.    
 
      Exceptionally strong investment income – yield of 6.4% in FY17 vs. 3.4% in FY16: Investment income spiked 4.5x Y-o-Y, 4.0x Q-o-Q in 4Q17. When looking at the investment book composition, we can see a shift from equities and foreign fixed income investments and funds into local/regional fixed income investments in 2017 (their share of total investment book rose to 98% in 2017 vs. 87% in 2016). 

Tawuniya: SAR69.25 as of 20 Mar. 2018, Rating: Buy, TP: SAR118.00/share, MCap: USD2,308mn, TAWUNIYA AB/8010.SE