Wala’a reported 3Q18 net profit before zakat of SAR23mn, down 49% Y-o-Y and 34% Q-o-Q, coming in well below our forecast of SAR43mn. Key drivers of the earnings miss were: higher-than-expected loss ratio, in addition to certain one-off expenses related to the acquisition of al-Mayazeen points of sale. GWP depicted weak trends, down 10% Y-o-Y likely on pressure on rates the motor segment. 
 
Key highlights:
 
GWP down 10% Y-o-Y, below EFGe: GWP fell 10% Y-o-Y, likely due to pressure on the motor segment, in addition to the business disruption related to the acquisition of al-Mayazeen points of sale. We believe Wala’a’s motor pricing was dented by rising no-claim discount, given its safer-than-peers drivers portfolio on selective underwriting. Expat exodus, which likely continued in 3Q18 as some expats were waiting for completion of Hajj before leaving, is another headwind that likely led to weak GWP this quarter. Wala’a’s medical portfolio (10% of GWP in 1H18) is skewed towards SME expat-workers, the segment that saw the highest outflows of foreign workers.
 
Loss ratio up 9ppt Y-o-Y to 64%, well above EFGe: We estimate a loss ratio for Wala’a at 63.9% in 3Q18, up from 55.0% in 3Q17 and EFGe of 55.0%. Net incurred claims rose 16% Y-o-Y to SAR124mn, coming in 15% above our estimate of SAR108mn, while net earned premium grew just 1% Y-o-Y. Higher utilisation in medical due to the unified policy could partly explain higher incurred claims, in addition to competitive pressures in motor and pressure on motor rates due to no-claim discount. 
 
Some one-off expenses related to al-Mayazeen POS acquisition: Results commentary states that the insurer’s other operating expenses rose SAR15.2mn Y-o-Y, mainly as a result of the acquisition of the 47 outlets of al-Mayazeen, Wala’a’s previous sole agent. Mgmt. had stated that the transaction could lead to some one-off integration costs in 3Q18 as Wala’a hires the existing staff (c68 employees) and restructures the outlets (rebranding, revamp of IT, compliance and risk systems).  
 
Investment income strongly rebounds Y-o-Y, ahead of EFGe: Investment income recovered to SAR6mn in 3Q18, vs. a loss of SAR1mn a year ago, well above our expectations. Rising interest rates drove higher commission on bank deposits, the biggest recipient of Wala’a’s investment portfolio. Management stated that the insurer has raised its exposure to equity ahead of EM inclusion in 2Q18 and 3Q18 to boost investment income. 

Rajae Aadel, Shabbir Malik
 
Wala’a Insurance: SAR23.60 as of 08 Nov 2018, Rating: Neutral, TP: SAR32.70/share, MCap: USD277mn, WALAA AB/8060.SE