Insuring Success SAUDI ARABIA INSURANCE SECTOR
August 2016 SAUDI ARABIA INSURANCE SECTOR
Murad Ansari [email protected]
Shabbir Malik [email protected]
TABLE OF CONTENTS
I. Executive Summary 03 II. Key divers of growth 06 III. Consolidation - Survival of the fittest 12 IV. Investments - Better opportunities for longer players 16 V. Valuation and risks 20 VI. Market Structure - Strongly regulated market 24 Appendix: Glossary of Insurance terms 32 Appendix: Saudi Insurance sector - Key regulations 34
Tawuniya - Initiation of Coverage 35 Bupa Arabia - Initiation of Coverage 52 Non-rated Insurers 70 SAUDI ARABIA INSURANCE SECTOR 25 August 2016
Insuring success
Initiation of Coverage Financials | Saudi Arabia Murad Ansari +966 11 2506149 Initiating coverage; Tawuniya is our top pick [email protected] 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 Shabbir Malik +971 4 363 4009 record; iii) comfortable solvency levels; and iv) opportunity to enhance [email protected] returns. Our detailed review of all 35 listed insurers leads us to believe that scale and consistent risk management puts them head and shoulders above Short-term catalyst the rest. Our top pick is Tawuniya (a conviction Buy) given its exposure to Loss ratios should ease off in 3Q16 motor insurance as better enforcement should drive stronger premium (seasonality), which should support Q-o-Q earnings improvement 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 Medium-term catalyst positioned to gain more market share as the sector consolidates, in our view. Improving enforcement in mandatory lines of insurance
Changing dynamics creates opportunities; large insurers best placed Long-term value drivers The Saudi insurance landscape is changing. After two years of solid volume Growth in insurance penetration, privatisation of public healthcare system and price-driven growth, sector GWP growth is moderating. We estimate the and new insurance lines – mortgages, sector’s GWP grew 7.5% Y-o-Y in 1H16 versus an average of 20% for the past bancassurance and travel & pilgrimage three years. The weakening economy has created cost consciousness, and we We initiate on: expect GWP growth to remain weak in the ST. However, the govt’s fiscal BUPA: FV SAR155, upside 22% challenges could accelerate the reform process, which should be favourable Tawuniya: FV SAR117, upside 30% for motor and health insurers. Bupa and Tawuniya are strongly positioned to Other interesting insurers: benefit from these medium-term drivers due to their scale and consistency of Al Rajhi: Third largest motor insurer risk management – the holy grail for insurers. Near term, we believe that with improving combined ratio Tawuniya has stronger earnings growth profile than Bupa. SAICO: multi-line, competitive loss rates Arabian Shield: A multi-line insurer, with steadily improving under-writing Consolidation has already started and could gain momentum business Rationalisation is perhaps the apt word, as industry sources suggest six Buruj: A motor play, with improving underwriting discipline 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. Please refer to the disclaimer and disclosures at the end of this note. SAUDI ARABIA INSURANCE SECTOR
Financials | Saudi Arabia
I. Executive summary
Strong potential for medium-term growth
At 1.4% of GDP, insurance penetration in Saudi Arabia is amongst the lowest in the region as well as globally. We believe a young and growing population remains the key driver for sustained double-digit growth over the medium term. Enforcement of mandatory lines – health and motor – will remain the key driver in the short to medium term. Industry experts estimate that only 45% of the cars are covered by insurance, while only 57% of the private sector Saudi workforce has medical insurance. We believe enforcement of mandatory lines still holds significant potential for growth. As low oil prices weigh on public finances, the government is likely to look to share its cost burden with the private sector, particularly in insurance.
Bupa and Tawuniya – Head and shoulders above the rest
Our analysis of the listed companies indicates that excluding Bupa and Tawuniya, there are only four listed Saudi insurers that have been able to maintain a combined ratio of less than 100% for the past two years. Of the four, two are pure life insurers - Aljazira and Alahli - which is a long-tail business and can maintain low loss ratios, but claims could surge in a year sharply. Clearly, a large majority of the insurers operating in the country lack the scale and consistency in risk management to maintain underwriting profitability. This makes Bupa and Tawuniya unique within the Saudi insurance sector, in our view, and the obvious candidates for exposure to the sector. While Tawuniya suffered underwriting losses in 2013 as price war intensified, it has recovered sharply, helped by strong pricing discipline.
Bupa – The healthy choice amongst Saudi insurers We initiate coverage on Bupa with a Buy rating; our fair value of SAR155.0/share implies 22% potential upside. A mono-line insurer, Bupa is the largest health insurance company, in terms of GWP size. It is the dominant player in the health insurance segment by a big margin, with c43% market share of sector health premiums; the combined market share of the next two biggest players is approximately equivalent to Bupa’s. The scale allows the company to negotiate services at a better price for its customers compared to peers, allowing it to manage claims inflation. While premium growth should moderate, Bupa’s quality proposition should allow it to continue gaining market share. We expect Bupa to deliver sustainable ROEs of c30%, as the company leverages off its strong risk management and scale of operations to maintain a combined ratio of around 90%. We see strong potential for investment return enhancement, as the company better manages its liquidity, which has -so far- delivered below- average returns. Moreover, reduced capital intensity due to slower-than-historical premium growth should free up capital, increasing potential for increase in dividend pay-out.
Tawuniya – Saudi insurance juggernaut We initiate coverage on Tawuniya, Saudi Arabia’s largest insurer (market share of c20%), with a Buy rating. Our FV of SAR117 implies 30% upside. 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. The company has the second largest market share (14% of sector GWP) in the motor insurance segment, where we expect premium growth to remain robust. 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 have insurance coverage); ii) the authorities take steps to enforce compulsory insurance;
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iii) competitors grapple with capital constraints; and iv) direct sales through electronic channels opens a cost-effective mode of distribution. The company’s scale allows it to benefit from bargaining power over service providers; thus, keeping its claims costs under control. We expect Tawuniya to generate of ROE of 26-27% over 2016-18, and it trades at 2017e P/B of 2.5x. We believe regulatory oversight by SAMA and Tawuniya’s multi-line business model mitigates risks to profitability.
After strong expansion during 2010-15, growth looks set to moderate
Low-hanging fruit already in the bag The strong regulatory enforcement of mandatory lines has driven strong GWP growth in the sector. In particular, health insurance of expatriates in the country is just shy of 90%, suggesting limited room for structural growth.
Some near-term hiccups to growth as the economy falters….. The weakening of the economy is filtering through to sectors, even ones that are considered defensive. After strong growth during the past two years, GWP growth has decelerated sharply, so far, in 2016, driven mainly by health and P&C segments. Motor insurance premium growth, however, has remained robust, up 30% Y-o-Y in 1H16.
Fig. 1. Sector GWP growth to Fig. 2. Driven by slowdown in Fig. 3. Motor premium growth moderate health premium growth should remain strong Y-o-Y growth Y-o-Y growth Y-o-Y growth
25% 25% 40% 35% 20% 20% 30% 15% 15% 25% 20% 10% 10% 15% 5% 10% 5% 5% 0% 0% 0% 1H16 2014a 2015a 2016e 2017e 1H16 1H16 2014a 2015a 2016e 2017e 2014a 2015a 2016e 2017e
Source: SAMA, EFG Hermes estimates Source: SAMA, EFG Hermes estimate Source: SAMA, EFG Hermes estimates
Insurance – two sides of the coin
On the face of it, the concept of an insurance business is quite straightforward. An insurance firm pools together premiums that customers pay to offset the risk of loss. This risk of loss can apply to many different areas, which explains why health, life, property and casualty (P&C) and specialty line (more unusual insurance where risks are more difficult to evaluate) insurers exist. The difficult part of being an insurer is properly estimating what future insurance claims will be and setting premiums at a level that will cover these claims, as well as leave an ample profit for shareholders.
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Beyond the above core insurance operations, insurers run and manage investment portfolios. The funds for these portfolios come from reinvesting profits (such as earned premiums, where the premium is kept because no claim occurred during the duration of the policy) and from premiums before they get paid out as claims.
Scale & underwriting discipline is essential for delivering shareholder value
Underwriting business profitability is driven by two key factors – loss ratios and expense ratio. Without scale, an insurer cannot achieve low expense ratios; however, pursuit of scale, as has been evident in the case of most small insurers in the country, could lead to slightly relaxed underwriting standards, leading to higher loss ratios. Thus, for an insurer to be profitable, both scale and underwriting standards are an essential combination, in our view.
Fig. 4. A combination of scale & better risk management is essential to generate high ROEs Top 15 Saudi insurers by GWP size (for the year 2015)
70%
50% Bupa
Allianz 30% ROE Sagr Tawuniya Saico ACIG 10% Trade Union Al Rajhi Axa
AICC -10% Saudi Re Malath Wala -30%
Medgulf -50% UCA
-70% 70% 80% 90% 100% 110% 120% 130% Combined Ratio
*size of the bubble indicates the GWP size Source: Comp[any reports, EFG Hermes
Valuation and risks
We value the Saudi insurers by discounting five years of explicitly forecast excess returns over cost of equity. Beyond this, we apply a terminal growth of 5%, which -in our view- is justified by the strong insurance under-penetration. We use a base case cost of equity of 10.5% and adjust it for beta for individual stocks. Key risks for the sector are around weaker enforcement of mandatory insurance lines, pricing in the market, financial market returns, as well as regulatory risks.
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II. Key drivers of growth
After strong growth over the past three years, we expect industry GWP growth to slow slightly, but remain in mid double digits Enforcement of mandatory lines – motor and health - remains a key short-term driver; fiscal consolidation of the government should be a long-term positive Scale means bigger players – Tawuniya & Bupa – are better placed in the current environment; we see stronger near-term growth in motor GWP
The insurance sector in Saudi Arabia has experienced a robust rate of growth over the past few years, primarily attributed to a set of structural reforms implemented by the government in 2005. Prior to this period, the insurance industry framework in the kingdom was highly unregulated. Subsequently, the industry’s gross written premium (GWP) grew from USD2.9bn in 2008 to USD9.7bn in 2015, registering a CAGR of 19.0% and outperforming the rest of the GCC. The Saudi Arabian market is the second-largest after UAE in the GCC, representing 33.5% of regional GWP in 2015. Mandatory health and motor insurance regulations launched by the government have fuelled demand for insurance products in the country, and are likely to remain the key driver for industry growth in the medium term. While competition for market share in the industry remains strong, weaker profitability and solvency levels of smaller players could drive consolidation in the sector, adding growth opportunities for the stronger players.
Fig. 5. Saudi insurers - Key drivers of growth and profitability
Source: EFG Hermes
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Penetration levels remain low
The Saudi insurance market had a total GWP of USD9.7bn in 2015, and is the second-fastest growing within the GCC. Data from Saudi Arabian Monetary Authority indicate that sector GWP has grown at a 2010-15 CAGR of 17%. Though penetration levels have been steadily rising, it remains well below global and regional peers. Despite strong growth helped by compulsory lines (medical and auto), insurance density of USD332/person in 2015 is one of the lowest amongst peers, and points to significant potential for growth, in our view.
Fig. 6. Saudi insurance penetration is low compared to emerging market peers 18%
16% South Africa 14%
12% Japan UK 10% France Switzerland Italy 8% US Germany 6% Malaysia Australia Spain 4% India Brazil UAE China Morocco Qatar 2% Iran Oman Saudi Kuwait Algeria 0% Pakistan - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000
Insurance Penetration (Premium as a % of GDP) 2014 GDP per Capita in USD (2015)
Source: Swiss Re
Mandatory business lines – motor and medical – have been the key drivers of growth. With significant under penetration in these segments, we expect growth to remain robust over the next five years. While we expect sector GWP growth to slow to 11% in 2016, we expect a steady recover to 14% by 2018.
Fig. 7. MENA countries by premium (USDmn) Fig. 8. Insurance penetration trends in Saudi Arabia 2014
10,000 2.5% As a % of GDP As a % of non-oil GDP 8,000 2.0% 6,000 1.5%
4,000 1.0% 0.5% 2,000 0.0% 0 UAE Saudi Qatar Oman Kuwait 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Sigma Source: SAMA, Official Statistics
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Favourable demographics Demographics play a key role in insurance growth. A young and growing population in Saudi Arabia (c60% of Saudis’ are under 30) should drive sustained double-digit premium growth, in our view. Economic environment is a near-term concern The sharp slowdown in economic growth driven by low oil prices and a shake-up of the economy under the national transformation plan is a risk to growth in the industry, in our view. However, we expect limited knock-on effects to the insurance industry due to high under penetration levels and the enforcement of compulsory insurance products. Actuarial pricing limits price competition The intervention by SAMA in 2013 to address severe price competition, which was eroding profitability in the sector has helped set a floor on premium pricing. SAMA conducts regular checks on insurance companies to ensure that premium pricing is in line with actuarial recommendations. As a result premium rates across most of the industry players have become standardised in a narrow range, with strong operators being able to charge a premium based on service quality.
Fig. 9. Saudi Arabia is amongst the fastest growing countries for insurance Global real premium growth in 2014
Source: Swiss Re Economic Research and Consulting
A. Enforcement will remain a key driver of growth
Mandatory lines continue to dominate the insurance business in Saudi Arabia, a trend that we expect to sustain. Together, health and motor insurance account for c80% of industry GWP. Health insurance has been relatively easier to enforce – being largely managed through corporate entities - and has seen a strong increase in penetration over the past few years. However, the proposed changes – reducing the registration cycle - could potentially drive strong growth in the motor insurance segment as well, in our view.
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Fig. 10. Gross written premium breakdown by segments Fig. 11. Gross written premium growth 2015 In SAR million Protection & Health Motor Property & Casualty Protection & Savings Savings Health 3% 51% Property & 40,000 Casualty 18% 30,000
20,000
10,000
0 Motor 2009 2010 2011 2012 2013 2014 2015 28%
Source: SAMA, EFG Hermes SAMA EFG Hermes
Health Insurance: Big steps taken, but gaps still exist The strong enforcement push by the regulator has seen the penetration level of medical insurance rise significantly over the past five years. Bupa estimates that c87% of the expat population is already covered by medical insurance. However, the domestic worker segment remains undercovered. While enforcement could add more numbers, this segment is widely believed to be low on premiums and profitability. The biggest opportunity lies in the enforcement of medical insurance on Saudi nationals working in the private sector, where according to Bupa estimates, roughly 40-45% of the individuals do not have health insurance.
Fig. 12. Private medical insurance – potential market size In millions, unless otherwise stated Saudis Expats Total Population 21.1 10.4 31.5
Mandated: Private Sector 5.64 9.06 14.7 Covered 3.1 7.9 11.0 Uninsured 2.5 1.2 3.7 % covered of mandated 56% 87% 75%
Public Health 15.47 1.35 16.82
Source: Bupa
Motor – Regularising third-party liability insurance could double the market size As it stands, the majority of third-party liability (TPL) insurance is linked to the car registration cycle. Registration is done every three years, and customers buy one-year TPL insurance, which is mandatory to renew at the time of car re-registration. However, these policies are not renewed until the next registration cycle. Data from SAMA indicates that there are currently 4mn active motor insurance policies at the end of 2015. When compared with the statistics on registered vehicles in the country, this suggests that only 25% of registered vehicles are insured. However, companies suggest that c40% of the registered automobiles are covered under insurance. Changing the registration cycle (from three years to one year) and other solutions are being considered to reduce non-compliance, and Tawuniya believes that it could raise industry coverage levels to over 60%.
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Fig. 13. Cars registered in the country Fig. 14. Active motor insurance policies In million GWP In million
Riyadh Western Eastern Others 5.0 20 4.0
15 3.0
10 2.0
5 1.0
0 0.0 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014
Source: General Directorate of Traffic Source: SAMA
B. Rising premium rates – More room in motor insurance
A key driving factor, apart from enforcement driving volumes, is the premium pricing controls enforced by SAMA, which started in 2013. While insurance companies were allowed to use an internal pricing mechanism, SAMA appointed independent actuaries in 2013 to determine whether risk was properly priced by the insurance companies. This was prompted by strong price competition amongst insurers, which led to a sharp deterioration in loss ratios and insurance companies’ profitability. Though price competition still exists, introduction of actuarial price checks by the regulator has led to a narrowing in the premium price differentials amongst competitors.
Fig. 15. Saudi insurance sector loss ratio trends Fig. 16. Saudi insurance sector profitability trends
90% 5% ROA ROE 20% 85% 80% 10% 75% 70% 0% 0% 65% 2009 2010 2011 2012 2013 2014 2015 60% -10% 55% 50% -5% -20% 2009 2010 2011 2012 2013 2014 2015
Source: SAMA Source: SAMA
Health premium rates might plateau in the short term A push by CCHI on the list of benefits to be provided to insure and actuarial-determined premium pricing has allowed health insurers to increase premium pricing. Moreover, the requirement imposed by the regulator allows insurance companies to demand the claim/loss history of applicants to allow better pricing of premiums. Insurance companies can now determine premium pricing based on the applicants’ loss history. This led to a narrowing of pricing amongst competitors, while at the same time it has allowed insurance companies to determine profitability at the time of writing insurance.
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Motor premiums still have room to grow Similar to health insurance, motor insurance policy has seen actuarial-driven premium pricing create a level playing field amongst competitors. Moreover, the increase in blood money rates by the Shura Council from SAR100,000 to SAR300,000 has pushed TPL insurance rates higher. This is driving up insurance premiums steadily, a trend we expect to continue for at least the next 6-12 months. Our channel checks suggest that TPL insurance premiums have risen to over SAR1,200 currently from SAR350-500 two years ago. Tawuniya estimates that the majority of motor insurance is TPL. A move from TPL to comprehensive insurance, which would likely take a significant amount of time, could also push up the industry’s blended motor insurance premium rates higher.
C. Public sector – Shifting the burden to private sector
The decline in oil prices, and the subsequent reform programme proposed by the government envisages shifting some of the costs in the public sector to the private sector. While the timeline remains a difficult one to predict, the intent appears clear. The government wants to shift some of its cost burden, while at the same time improving cost efficiencies.
Shifting medical insurance is possible, but extremely challenging, and a longer-term driver Currently, about 15mn of Saudi Arabia’s population is dependent on the public healthcare system. While this represents an opportunity, it is also a huge challenge. The healthcare facilities in the kingdom are not sufficient to cater to a growing population, and the private sector hospitals already have long waiting times to attend to patients. The effective management of the public sector healthcare, in our view, is likely to be a long and tedious process, which will likely start from operational improvements and privatisation of the healthcare facilities. We might see a gradual shift of some government departments to the private sector. However, we would not expect much progress on this issue in the short term.
Public sector vehicle insurance There are talks suggesting that the government is likely to look at getting its vehicles owned by different ministries/government departments insured through the insurance companies. Should this happen, it would be part of the fiscal consolidation being undertaken by the government. Currently, the maintenance of all these vehicles is done through direct cash payments by the government. While there are currently no estimates on the size of the fleet under different government departments, we estimate that this could potentially be a sizeable market for insurers. Tawuniya, being the government owned entity, could see itself at a slight advantage to peers. However, we would expect the government to invite bids and award the contract to the most competitive bidder.
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III. Consolidation – Survival of the fittest
Low profitability & lack of scale at smaller players should drive consolidation However, unless there is a regulatory push, we do not see M&A picking up Recent capital increases allow another two years of breathing space to smaller players, in our view
A high level of market share concentration amongst a few players and low profitability of the smaller players is likely to force consolidation within the sector, in our view. However, unless the regulator forces this, there is no value for the larger players to acquire the smaller players. We believe that natural consolidation in the sector is likely to be driven by the closure of some businesses, or mergers of smaller players in order to survive.
Profitability levels are low for the majority of players
While insurance companies have seen strong GWP growth, their profitability levels remain low. Of the 35 insurance companies operating in the country, 17 reported losses in 2015. Of the ones that are profitable, ROE for ten of the insurers was below 10%. So essentially, only 37% of the companies operating in the sector generated a ROE in excess of cost of capital. After the recent capital raising exercise by insurance companies, the situation has improved slightly. Only ten insurance companies reported losses in 1H16, while of those that reported a profit in 1H16, eight insurance companies had ROEs below 10%.
Fig. 17. Saudi Insurance sector – Profit mechanics differ significantly amongst players 2015
1 All ratios are a function of net premium earned; ROE not adjusted for goodwill 2 Others include the largest six insurance companies by GWP size after Bupa and Tawuniya Source: Company reports, EFG Hermes estimates
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Driven by high loss and expense ratios Higher loss ratios have been a key driver behind the lower profitability in the sector. Excluding Bupa and Tawuniya, we estimate that the aggregate loss ratio of the sector was 78%. However, a lack of scale of operations means that the expense ratio is also high – aggregate expense ratio (ex-Bupa and Tawuniya) stood at 35% for 2015. This translates in to an aggregate combined ratio of 113% for the sector ex-Bupa and Tawuniya.
Fig. 18. Saudi insurers - Combined ratios 2015
300% 190% 200% 287% 138% 137% 134% 129% 127% 125% 118% 117% 115% 113% 112% 109% 108% 105% 103% 103% 103% 103% 102% 102% 101% 216% 100% 100% 99% 97% 92% 90% 80%
100% 68% 58%
0% Ace Axa ATC ANB UCA Bupa Ahlia Wala AICC Buruj Wafa SABB ACIG Sagar Enaya SAICO Allianz Malath Alinma Salama Amana Aljazira Al Rajhi Medgulf Saudi Re Saudi Solidarity Wataniya Tawuniya Al Alamiya Gulf Union Trade Union Trade Gulf General Arabian Shield
Source: Company reports, EFG Hermes estimates
For most companies, lack of scale is a challenge driving higher expense ratios The biggest challenge for most of the insurance companies is the lack of scale. While the companies have been able to manage loss ratios, the expense ratio is high, driving up combined ratios to above 100%. The lack of scale has pushed companies to compete for market share, and while this has helped GWP growth, it has translated in to either higher loss ratios, or an increase in expense ratios due to high commissions paid to brokers.
Fig. 19. Saudi insurers – Expense ratio 2015
250%
200% 210.6%
150% 124.2% 112.7% 102.7% 100% 60.9% 53.6% 49.1% 48.2% 48.2% 48.0% 45.8% 45.4% 39.0% 34.9% 34.2% 32.9% 32.6% 32.6% 29.5% 28.2% 27.0% 26.4% 26.3% 22.3% 50% 22.1% 19.4% 19.0% 18.6% 18.4% 18.3% 17.3% 17.2% 12.2% 0% Axa Ace ATC ANB UCA Bupa Wala Ahlia AICC Buruj Wafa ACIG SABB Sagar Enaya SAICO Allianz Malath Alinma Salama Amana Aljazira Al Rajhi Medgulf Saudi Re Saudi Solidarity Wataniya Tawuniya Al Alamiya Gulf Union Trade Union Trade Gulf General Arabian Shield
Source: Company reports, EFG Hermes
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With low equity base The regulator – Saudi Arabian Monetary Agency (SAMA) - is making it challenging for smaller and unprofitable insurance companies to continue operating. SAMA is forcing the companies to maintain high solvency ratios, but at the same time making it difficult for unprofitable insurance companies to raise more capital. We estimate that insurance companies raised a total of SAR2.0bn in 2015, while there are completed and announced plans by insurance companies to raise another SAR700mn in 2016. Actual capital raising however would be higher as Malath Insurance has already announced plans for a rights issue, but has not indicated the size of the offering. In addition, we expect at least three more companies to raise capital through rights issue over the next twelve months as accumulated losses have risen to more than 50% of their paid up capital.
Fig. 20. Capital raising by insurance companies Fig. 21. Total equity as a percentage of paid up capital In SARmn June 2016
2,500 75% 2,035 2,000 50% 65% 62% 61% 1,500 61%
25% 56% 16% 52% 34% 35% 37% 39% 46% 1,000 695 0%
500 100 220 AICC ACIG - Wafa Enaya Alahlia Alinma Amana Sanad*
0 Malath* Solidarity
2012 2013 2014 2015 2016* Wataniya* Gulf Union8
*Includes announced capital plans *Companies with capital raising planned in 2016 Source: Company reports, announcements Source: Company reports, announcements
Market has started penalising companies with poor profitability
The reluctance of shareholders of some of the smaller insurers to cede control of their businesses, and the troubled finances of many smaller insurers has meant that mergers and acquisitions have long been discussed, but without any concrete developments. While many in the industry believe that a period of consolidation is inevitable, the question of timing remains debatable. We believe that the intervention of the regulator remains the key to forcing consolidation. One of the key challenges for consolidation in the sector in the past had been inflated valuations, particularly for the insurers with poor profitability. This has meant that there was no financial incentive for bigger companies to purchase smaller ones given their overvalued share prices. However, the end of the price war and enforcement of actuarial pricing has made visibility on the insurers’ profitability clear cut. While share prices in the past were primarily driven by growth potential, it is now evident that small companies will find it extremely difficult to generate decent profitability. The almost 50% decline in market cap of the smaller insurers since June 2015 – and hence lower valuations – means that some of the insurers might be more willing to merge now.
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Fig. 22. Aggregate sector profits Fig. 23. Saudi insurers – aggregate market cap In SARmn In SARmn
Sector Sector ex-Bupa & Tawuniya 60,000 Sector Sector (ex-Bupa, Tawuniya) 1,100 40,000
600 20,000
100 0 2014 2015 1H16 -400 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Source: Company reports Source: Bloomberg
Quality of service will be a key differentiator for survivors
With price competition becoming less severe – due to actuarial pricing being pushed by the regulator – we believe that quality and breadth of coverage offered by the insurance companies will be the key differentiator. Capitalising on the benefits of scale, we believe that the larger insurance companies can further augment their market share. We expect Tawuniya to be the clear beneficiary in the motor insurance segment, while Bupa should take the lead in health insurance.
Fig. 24. Dimensions of customer experience
Source: Capgemini
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IV. Investments – Better opportunities for larger players
Insurers have managed investment books conservatively due to strong premium growth requiring higher solvency levels Tawuniya is an exception in the sector, it has better managed its investment returns and offers a template for other big insurers to follow We see scope for improved investment returns, particularly at Bupa
Strong growth putting pressure on solvency, coupled with a low interest-rate environment has been a dampener on insurance companies’ investment returns as well as their ability to diversify their investments. The asset class weightings for calculating the solvency margin, which determines the ability of insurance companies to grow their GWP, is very restrictive. The regulatory framework for insurance companies penalises them when investing in riskier assets classes.
Fig. 25. Solvency margin – Regulatory weightings of assets for general insurers As a % of total assets Asset class Admissible weights Land & properties* 0% Listed securities 5% Unlisted securities 1% Saudi government development bonds 100% Government bond issued by A rate countries 100% Bonds by FIs 5% Deposits with FIs 10% Loans secured by insurance policies issued by the insurer 5% Derivative contracts 1% Reinsurance balances 100% Debts 5% Cash in hand 1% Accrued interest and rent 2.5% Cash in banks 100% Prepayments 2.50% Deferred acquisition costs 100% Prepaid expenses 2.50% Premiums due within 90 days 100% Tangible assets 2.50% Intangible assets 0% Personal loans or employee benefits 0% Treasury stock 0% *P&S insurers are allowed a 5% weighting for investment in land and properties Source: Insurance Regulations
Subsequently, insurance companies have been deploying most of their liquidity in to deposits with banks and financial institutions – carrying 100% weighting in the solvency margin calculation. This has allowed the insurance companies to continue growing their business. With overall GWP growth likely to slow, we expect insurance companies’ investment book to become more diversified as they seek better returns. This should be particularly relevant to the larger insurance companies – Bupa and Tawuniya. The weaker capital base at the smaller insurance companies might mean they continue to invest in highly solvent assets and bank deposits, which should also allow them to continue growing as they continue to chase market share to achieve scale.
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Equities and debt securities only Fig. 26. Insurance companies investible asset split accounted for c15% of investible assets Split of policy holder assets in 2015 20,000 Cash & cash equivalents 18,000 Deposits at FIs 16,000 Debt & Fixed Income 14,000 Equities 12,000 Others 10,000 43% 8,000 28% 6,000 19% 4,000 22% 17% 29% 41% 31% 2,000 37% 27% 38% 33% 0 2010 2011 2012 2013 2014 2015
Source: Saudi Arabian Monetary Agency
Saudi regulations are prescriptive on asset classes
In an effort to regulate the risk appetite of insurers, SAMA issued detailed guidance on investments in different asset classes. This was done to ensure that insurers do not take excessive risk in chasing returns, which can have the potential to dent the solvency of the insurance companies. The general insurers are required to maintain a minimum of 40% of their investments in local banks and local government bonds, whereas P&S insurers have a minimum requirement of 20%. From a domestic regulator perspective, these are the safest investment assets that an insurer can hold.
Fig. 27. Saudi Insurers - Limits on investments in different asset classes
General insurance P&S insurance Saudi authorised banks 20% minimum 10% minimum Saudi government bonds 20% minimum 10% minimum Saudi Riyal denominated investment funds 10% maximum 15% maximum Foreign currency denominated investment funds 10% maximum 10% maximum Foreign government bonds (Zone A) 5% maximum 5% maximum Bonds issued by domestic companies 5% maximum 5% maximum Bonds issued by foreign companies 5% maximum 5% maximum Equities 15% maximum 15% maximum Real estate in Saudi Arabia 0% 5% maximum Loans secured by real estate mortgages 0% 5% maximum Loans secured by policies issued by the insurer 0% 5% maximum Other investments 15% maximum 15% maximum
Source: Saudi Arabian Monetary Agency
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Financials | Saudi Arabia
Investment returns have significant room for improvement
Due to the short tail of the investment cycle – typical duration of an insurance policy is one- year – insurance companies manage their investment books conservatively. Typically, the investment book of a Saudi insurer would consist of highly liquid and short-term assets. This has been partially driven by regulations – allowing low admissibility of riskier assets – and strong premium growth. We believe that the larger insurance companies are particularly well placed to seek enhanced returns on their investment book due to the build-up of strong liquidity on their shareholder’s book.
Fig. 28. Divergent asset allocation strategies at the three largest Saudi insurers
Source: Company reports
Of the three large insurance companies in Saudi Arabia, only Tawuniya has been able to generate decent investment returns over the past three years. The stronger focus on investment returns at Tawuniya is due to a focus on profitability rather than growth. With more capital freed up as a result of restrained growth in premiums, Tawuniya has been able to focus on improvement returns on the investment book. Bupa, on the other hand, has witnessed exponential growth in premiums over the past three years, and hence had to maintain a highly conservative investment book profile to support premium growth.
Fig. 29. Investment income contribution to earnings is Fig. 30. Investment yields for Bupa and Medgulf are low; negligible for Bupa and Medgulf Tawuniya has achieved better returns 2015 Investment income/investible assets
Underwrting Profit Investment Income 2013 2014 2015 2,000 7.0%
1,500 5.0%
1,000 3.0% 500 1.0% 0 Bupa Medgulf Tawuniya -1.0% Bupa Medgulf Tawuniya
Source: Company reports, EFG Hermes estimates Source: Company reports, EFG Hermes estimates
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Financials | Saudi Arabia
Higher interest rates bode well for insurers A pick up in interest rates would benefit insurance companies, which in our view are better placed compared to banks to benefit from higher rates. Unlike banks, insurance companies’ liabilities are largely short term – motor and health insurance account for the bulk of the business, with an average duration of one year, which allows them greater investment allocation flexibility, in our view. Hence, they do not have any incentives to lock in money in longer-term assets – government bonds. However, tighter market liquidity has driven short- term bank deposit rates higher. Typical deposit rates on 3-month deposits are 2.5-3.0% compared to below 1.5% last year. This should help insurance companies improve investment returns, as the majority of insurance companies’ liquidity remains invested in bank deposits.
Investment book profiles of Saudi Insurers versus global peers
Unlike their global peers, Saudi insurers’ investment books can be viewed as extremely conservative. Majority of the invested assets are in cash and short-term investments – 75% versus global average of only 7%. This is largely attributed to regulatory factors and strong GWP growth in the industry, which has required Saudi insurers to maintain high solvency ratios. However, this has also meant that investment returns are low. As the industry matures, we believe the larger insurers are likely to diversify their investment portfolios and seek to invest in return-enhancing assets.
Fig. 31. Global non-life insurance industry – investment book Fig. 32. Saudi Insurers – Investment book profile profile
Bonds Others Bonds Common 61% 17% 7% Stock 1%
Preferred Others stock 8% Loans 1% 0% Common Cash & ST Stock investments Cash & ST Real Estate 22% investments 1% 75% 7%
Source: National Association of Insurance Commissioners Source: SAMA
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Financials | Saudi Arabia
V. Valuation and Risks
On the face of it, the concept of an insurance business is pretty straightforward. An insurance firm pools together premiums that customers pay to offset the risk of loss. This risk of loss can apply to many different areas, which explains why health, life, property and casualty (P&C) and specialty line (more unusual insurance where risks are more difficult to evaluate) insurers exist. The difficult part of being an insurer is properly estimating what future insurance claims will be and setting premiums at a level that will cover these claims, as well as leave an ample profit for shareholders. Beyond the above core insurance operations, insurers run and manage investment portfolios. The funds for these portfolios come from reinvesting profits (such as earned premiums, where the premium is kept because no claim occurred during the policy's duration) and from premiums before they get paid out as claims.
Saudi insurers - well deserved premium
Saudi insurers trade at a significant premium to their global peers on PBV. However, the premium is well-deserved, in our view, given strong ROEs and growth prospects. The current ROEs though appear high, are sustainable in our view, supported by structural dynamics of the sector. Moreover, competition is limited and still struggling to improve profitability, allowing the larger insurance companies to maintain dominance. We highlight that the current returns of the insurers are mainly driven by underwriting profitability, with very low income contribution from the investment book.
Fig. 33. Valuation comparable – ROE Vs. P/BV
3.5 2017e P/BV (x)
3.0 Discovery Rand Esure Tawuniya Bupa 2.5 Qatar Ins. Hastings 2.0 Direct Line Powszechny China Pac Sanlam 1.5 MMI Ping China Life Travellers Zurich PICC Cathay Sul America 1.0 Dongbu Allianz Peoples Samsung Life Hyundai Axa 0.5 Shin Kong Hanwha Life 2017e Return on Equity 0.0 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Source: Bloomberg, EFG Hermes estimates
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Financials | Saudi Arabia
Valuation methodology
Our primary valuation methodology for Saudi non-life insurers is the residual income model, as it accurately reflects the insurance cycle. We make explicit earnings forecast for five years. Beyond this, we apply a 5% growth rate. The higher growth rate reflects the low level of insurance penetration in Saudi Arabia and scope for consolidation in the sector which should deliver above nominal GDP growth in premiums over the long term, in our view. Our cost of equity assumptions are – 4.5% risk free rate, risk premium of 6.0%, and sustainable growth rate of 5.0%.
We initiate with Buy on Bupa and Tawuniya
With unrivalled scale and growth profile, both Tawuniya and Bupa are well positioned to benefit from sustained insurance penetration and possible consolidation in the sector. While valuations are at a premium to the sector and the market, we believe that they are justified by the unique position that both insurers enjoy, allowing them to maintain high profitability.
Bupa – Healthy outlook; initiate with a Buy We initiate coverage on Bupa Araba (Bupa) with a Buy rating, with our fair value of SAR155.0 implying 22% upside from current levels. Bupa is the largest and most profitable healthcare insurer in Saudi Arabia with a GWP market share of 43.6% as of 1H26. Our Buy rating is underpinned by i) strong growth opportunities, ii) large scale, iii) operational excellence, and iv) upside from investment income. Moreover, lower capital intensity (due to slower GWP growth and high profitability) should enhance free cash flows, dividend yields, and overall value appeal. We also view Bupa as an attractive alternative and a provxy to the healthcare providers in Saudi Arabia.
Tawuniya – Saudi Arabi’s leading insurer; initiate with a Buy Tawuniya is well positioned to benefit from the opportunities in Saudi Arabia’s under- penetrated insurance sector. It is the largest insurer by premium, with a market share of 21%. It has strong bargaining power with service providers owing to its size, which should keep its claims cost escalation under control. Its size enables it to achieve economies of scale which smaller insurers cannot match. Tawuniya is now less prone to participating in irrational price competition as greater regulatory intervention and self-help has made it a disciplined underwriter. Moreover, a multi-line business model – health 76% of net earned premium, motor 19% and P&C 2% - reduces its sector concentration risk. We initiate coverage on Tawuniya with a Buy rating. Our FV of SAR117 implies 30% potential upside.
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Financials | Saudi Arabia
Fig. 34. Tawuniya – 1-year forward P/BV Fig. 35. Bupa – 1-year forward P/BV
15,000 14,000 4x 5x 12,000 12,000 4x 3x 10,000 9,000 8,000 3x 2x 6,000 6,000 2x 1x 4,000 3,000 2,000
0 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-12 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-10 Jan-15 Jun-10 Jun-15 Feb-12 Oct-13 Apr-11 Sep-11 Apr-16 Dec-12 Nov-10 Nov-15 Mar-14 Aug-14 May-13
Source: Company reports, Bloomberg, and EFG Hermes estimates Source: Company reports, Bloomberg, and EFG Hermes estimates
As a sanity check on our valuations, we derive a theoretical price-to-book multiple for Tawuniya and Bupa using our ROE and COE assumptions.
Fig. 36. Saudi insurers – Theoretical P/BV calculation Tawuniya Bupa Sustainable ROE 26% 30% COE calculation Risk free rate 4.50% 4.50% Equity risk premium 6.00% 6.00% Beta 1.2 1.0 COE 11.70% 10.5% Terminal Growth 5.0% 5.0% Implied P//BV (x) 3.1 4.5 2017e book value per share (SAR) 35.7 31.9 Implied price target (SAR/share) 110.7 144.7
Source: Bloomberg, EFG Hermes estimates
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Financials | Saudi Arabia
General industry risks
A worsening in the loss ratios as players engage in price competition to gain market share. Deflationary economic environment putting pressure on GWP growth in the sector as job losses increase. This could be particularly relevant for health insurers that are more dependent on the mandatory health insurance for expats. A cut back on insurance premiums by corporates and individuals as they look to control their operational costs due to worsening economic environment. A reduction in the workforce due to layoffs could also reduce the coverage population. Increased inflation stemming from higher medical treatment and labour costs. Lower investment returns, particularly driven by poor performance of domestic equity markets as insurers chase returns by diversifying their so-far conservative investment portfolios
While the regulator has enacted fairly conservative regulations governing the insurance business, an increase in solvency requirements could put pressure on the insurance companies to maintain assets with high admissibility, and hence lower investment returns.
Why look at Price/Book ratio for insurers? The key determinant of an insurers price/book value is the company’s return on equity, which is seen as a proxy for book value growth. Generally, the higher the ROE, the higher price/book multiple. In other words, the faster the book value is expected to grow, the bigger a premium investors will pay to that book value.
Quality of book value: Concerns on the quality of the book value of an insurer can have a significant impact on the implied premium/discount to book value. This could arise due to lack of investor comfort on the adequacy of the insurer’s loss reserves. Predictability of earnings. Volatility in earnings could be another source of risk. If an insurer’s profitability is volatile – due to volatile loss ratios, investment income or expenses – investors would be inclined to apply a discount to the implied multiple. Sustainability of ROE. Generally, the less the sustainability of the insurer’s ROE, the more significant the valuation discount that will be reflected in the implied price/book multiple. Conversely, if company’s ROE is expected to improve, investors are likely to pay a higher premium to the book value. Investment portfolio. Perceived riskiness of the insurer’s investment portfolio could lead to a discount/premium to the implied price/book value. In a risk-off environment, investors are likely to penalise companies with high equity exposure. However, a fixed-income focused investment book might not be able to generate sufficient returns in a low interest rate environment. Moreover, when forecasting investment returns, we generally avoid focusing on realized gains/losses on investment, which could be significant in any given year. Leverage. The ROE vs. price/book analysis does not incorporate the concept of financial leverage. An unlevered ROE of 20% for example could be deemed as more valuable than a 20% ROE which is aided by high debt-to-capital ratio, which implies higher risk.
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VI. Market structure – Strongly regulated market
Insurance sector – Shaping up
The Co-operative Insurance Companies Control Law established by SAMA in 2003 was a key event that transformed the Saudi insurance sector. This marked an end to when Saudi businesses and individuals used insurance from offshore companies only, driving the emergence of Saudi Insurance companies. The law ruled that only Saudi registered firms incorporated by royal decree as public joint stock companies could provide insurance in the country. As a result, a raft of companies applied to register as an insurance company; there are a total of 35 insurers in Saudi Arabia currently.
Fig. 37. The Saudi insurance sector key event timeline
Source: EFG Hermes
Regulatory landscape
The Saudi Arabian Monetary Agency (SAMA) is the primary regulator of the insurance sector in Saudi Arabia. SAMA issues all guidelines relating to regulation and product offerings of the sector. However, in the case of health insurance, the Council of Cooperative Health Insurance, under the Ministry of Health is an added layer of regulation/regulator, determining the minimum services to be provided by the health insurance companies.
Fig. 38. Insurance sector regulatory structure
Source: EFG Hermes
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Financials | Saudi Arabia
Cooperative business model
Rather than adopting one of the various forms of takaful insurance, which were starting to see success elsewhere, Saudi regulatory formulated its own “cooperative” model. This model differs in small but significant ways. Although it is based on Shariah principles, the cooperative model does not demand a complete separation of shareholders and policy holders funds, nor does it compel insurance companies to invest only in instruments that are compatible with Shariah (Tawuniya’s investment book only recently became Shariah compliant), or demands the creation of Shariah boards for individual insurers. This makes it unique in the global shariah compliant insurance sector, and the flexibility that this regulatory framework affords is according to some industry observers, a distinct competitive advantage.
Fig. 39. The cooperative insurance model
Source: EFG Hermes
Market structure – Crowded but dominated by eight players
The Saudi insurance market is dominated by eight players, which together control c70% of the market’s gross written premium (GWP). Tawuniya, the incumbent state-owned multi-line insurance company continues to be the largest company in terms of GWP. However, BUPA, a mono-line health insurer has quickly grown in size over the past few years and is only marginally smaller in terms of GWP market share than Tawuniya. Overall, the top 3 insurance companies – Tawuniya, Bupa and Medgulf – have accounted for almost 50% of the GWP consistently over the past five years. While smaller insurance companies have also grown in size, most of them continue to have low profitability.
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Financials | Saudi Arabia
Fig. 40. Saudi insurers GWP market share Fig. 41. Top eight players have dominated the market 2015
Tawuniya 40,000 21% Top 8 Remaining Others 30% 30,000
Bupa 20,000 20%
10,000 69.6% 71.3% 68.8% 69.0%
SAICO 68.6% 71.1% AXA Medgulf 67.6% 2% UCA Al Rajhi Malath 0 3% 4% 4% 5% 11% 2009 2010 2011 2012 2013 2014 2015
Source: SAMA, EFG Hermes Source: SAMA, EFG Hermes
Health Insurance - The dominant slice of the insurance market
The health insurance segment accounts for c50% of the total insurance sector’s GWP, with growth fast-tracked by mandatory private medical insurance (PMI) for expatriates. The decision to make PMI compulsory for expatriates was first made in 1999. However, it was only after the formation of the Council of Cooperative Health Insurance (CCHI) in 2005 that this began to be enforced. As a result, health insurance GWP saw exponential growth over 2006-10 as CHHI enforced the implementation of mandatory health insurance for expatriates.
Fig. 42. Health insurance market share of GWP Fig. 43. Strong double-digit growth in GWP
Remaining Tawuniya 25% 20% 26% 20%
15%
10%
Megulf 5% 15% 0% Bupa 2010 2011 2012 2013 2014 2015 39%
Source: SAMA Source: SAMA
As the responsible body for the implementation and supervision of mandatory health insurance in the Kingdom, the CCHI adopted a three-phase plan to implement mandatory health insurance depending on the number of expatriates employed. The implementation rules of cooperative health insurance issued by the CCHI stipulated three phases for implementation depending on the number of expatriates employed as follows: Phase 1: Companies with more than 500 expatriate employees; Phase 2: Companies with between 100 and 500 expatriate employees; Phase 3: Companies with less than 100 expatriate employees.
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Financials | Saudi Arabia
Fig. 44. Private medical insurance – potential market size Saudis Expats Total Population 21.1 10.4 31.5
Mandated: private sector 5.64 9.06 14.7 Covered 3.1 7.9 11.0 Uninsured 2.5 1.2 3.7 % Covered 56% 87% 75%
Public Health 15.47 1.35 16.82
Source: EFG Hermes estimates
Auto Insurance – Still an under-penetrated segment
Auto insurance also received a boost from the Saudi government when mandatory third party liability insurance was established in 2002. However, premiums for third party liability insurance are substantially lower than comprehensive insurance. With low premium rates, the customer preference remains for TPL insurance.
Fig. 45. Motor insurance market share Fig. 46. Motor insurance GWP growth
Malath 40% Remaining 15% 32% 35% Tawuniya 30% 12% 25% 20% 15% 10% Salama Al Rajhi 5% 3% Wala 9% 0% AXA Trade Union Medgulf UCA 4% 2010 2011 2012 2013 2014 2015 5% 6% 6% 8%
Source: Company reports Source: SAMA
Other business lines – Still too small, but offer significant potential
Beyond the compulsory lines, growth has been much slower. In contrast to health (2010-15 CAGR of 17%) and motor (2010-15 CAGR of 27%), growth in protection and savings (P&S) and property and casualty (P&C) has been subdued at a 2010-15 CAGR of 10% and -5%, respectively. Together P&S and P&C accounted for only 18% of the total sector GWP in 2015. Moreover, the bulk of this business continues to be dominated through reinsurance with offshore companies. This is partially due to the lack of capacity and the lack of needed technical capabilities at domestic insurers, particularly for P&C, to manage a long tail business as opposed to short tail medical and auto insurance. Moreover, domestic insurers have a small capital base, which limits their ability to take on risks, which can be significant in the case of P&C insurance. For P&S, the savings element of the contract has to be retained in the Saudi company. Therefore retention for P&S is not directly comparable to other business lines.
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Financials | Saudi Arabia
Fig. 47. GWP growth of P&C and P&S Fig. 48. Retention ratios by lines of business Y-o-Y 2015
20% 100% 80% 10% 96% 92% 60% 48% 34% 0% 40% 18% 17% -10% 20% 2% 2% 0% -20% Motor Health Energy 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Marine Aviation
P&C P&S Liabilities Accidents & Engineering Property/Fire Source: SAMA, EFG Hermes Source: SAMA
But there is room for growth Further development of the mortgage market coupled with the possible inclusion of some P&C lines that are made mandatory could add to the market’s growth potential, in our view. In addition, developing the capacity and technical capabilities of domestic insurers would also likely go a long way to unleashing the potential growth in this segment. However, we view this as a long-term play, with limited opportunities for domestic players in the short term.
Mortgages The development and growth of the mortgage market could spur the development of property insurance. So far, mortgages represent a small part of banks’ overall business, with a total market size of cSAR110bn. With low house ownership amongst Saudis, the push to develop the mortgage market, with property insurance as mandatory, could provide another growth avenue for the insurance market.
Bancassurance While bancassurance products offer another avenue for growth, insurers’ activities in this segment have been circumscribed by a new regulatory structure introduced in 2011. The most important requirement is that insurers and banks that partner to sell insurance must establish an independent bancassurance agency, licensed by SAMA that sits between both companies, to market and sells insurance products independently of banking products. Banks are only permitted to establish an agency with one insurer and many of these relationships have already been cemented – in most cases banks have a stake in an insurance company.
Travel & pilgrimage insurance Another area that is gradually growing in to a sizeable market is the insurance of visitors to Saudi Arabia. According to official statistics, there are 8mn Umrah visitors annually. The government has made it mandatory for all pilgrims to get insurance from local insurers before travelling for Umrah. In addition, there are also efforts underway to improve the infrastructure allowing all travellers to obtain insurance before entering the country.
28 SAUDI ARABIA INSURANCE SECTOR
Financials | Saudi Arabia Source: SAMA, Company re SAMA, Source: Company 0.6 0.8 18.8 20.2 101.9 1.9 49.5 1.3 48.2 103.8 68.2 68.4 2.1 151.1 1.7 Gulf 101.1 29.319.285.2 17.2 85.4 4.8 (0.8) 130.4 78.8 64.839.0 3.5 36.085.2 44.2 1.0 117.8 104.4 0.2 82.0 2.3 5.6 100.7 ATC 102.6 3.2 3.0 General 82.7 129.5 183.0 34.9 72.7 111.8110.3 41.782.2 153.6 10.6 117.1 6.6Salama 1.4 82.3 0.7 68.8 72.340.9 30.776.9 26.3 109.7 Al 2.7 4.3 0.8 87.1 87.946.7 46.359.6102.9 39.0 133.7 122.7 1.8 2.9 103.1 0.7 134.2 309.3 98.7 Amana Alamiya 0.8 96.2 78.151.9 53.184.1 53.6 74.3 62.9 148.1 Buruj 104.4 10.7 1.8 2.5 44.3 46.6 32.6 1.6 131.1 118.6 83.4 101.6 1.0 13.7 137.7 109.5 9.7 137.0 1.2Wataniya 3.1 66.5 70.231.0 97.5 30.975.8 26.4 101.1 2.6 1.9 Wafa 102.2 80.5 1.5 1.6 103.1 31.633.478.6 32.9 78.8 84.5 78.726.7 5.1 26.6 72.1 28.2 134.7 111.2 Arabian 4.1 1.3 2.0 112.0 53.4 105.3 5.5 125.1 1.2 111.7 100.3 66.8 76.547.4 44.985.4 32.6 114.2 ACIG 2.3 0.5 Shield 121.5 150.4 11.4 11.4118.0 0.6 AICC 65.7 75.344.4 30.071.6 29.5 110.2 1.6 1.9 105.3 158.4 2.5 101.1 Wala Allianz 1.7 (3.9) 3.5 0.9 1.7 103.6 Saudi (6.1) 51.530.681.7 34.2 68.5 4.0 82.026.1 55.9 96.931.665.3 80.4 22.3 58.1 155.1 4.1 16.0 (7.0) 153.3 280.7112.3 116.9 5.6 117.5 115.1 102.7 22.1 0.9 Trade 1.3 88.3 77.735.6 28.376.3 27.0 16.0 Re 1.6 123.9 87.7 90.730.8 21.182.7 19.0 0.2 4.8 16.6 83.6 83.917.9 17.783.0 17.3118.4 106.0 4.8 101.5 1.8 2.1 110.3 0.3 93.1 3.0 111.9 100.3101.5103.3 101.6 4.2 Sagar 178.8 1.2 97.9 101.7 Union 100.3 4.4 SAICO 178.4 Axa 1.2 84.4 89.724.1 2.6 18.386.3 18.4 UCA 108.5 2.6 4.0 108.0 1.5 26.0 84.520.579.1 19.4 77.6 2.0 110.5 (2.5) 88.8 104.7 99.6 97.0 6.6 Al 0.4 227.7 1.6 1.0 101.3 1.0 14.114.683.8 18.3 94.3 5.7 2.0 Malath115.4 98.4 1.5 Rajhi 510.7 94.714.3 80.4 93.013.679.4 89.0 11.7 77.3 112.6 4.7 2,618.7 Medgulf 4.6 Bupa 4.0 103.3 15.815.6 5.178.2 19.9 73.2 2.5 2,400.0 119.0 93.8 93.1 Tawuniya Fig. 49. ny 141 . 8. 7. 7. 758140206824277272 . 11 (1.5) 1.1 1.9 0.0 1.5 822.4 735.8 257.7184.0 287.2 210.6 76.6 2.7 N/M53.3 58.5 N/M 82.5 71.2 73.7 135.8 3.1 1.3 86.6 0.0 129.7 N/M N/A 81.2 196.1 57.9 2.7 N/A 152.1 45.8 N/A 114.1 12.1 44.0 N/A Sanad 1.6 (0.1) 250.1 Enaya 10.2 2.1 Aljazira 529.7 408.0217.2116.8 190.5 112.7 77.8 121.7100.4 3.6 5.6 4.8 93.6 3.2 209.4 5.2 ANB 95.5 102.7 214.2 97.2 SABB 101.0 (2.0) 0.9 67.7 79.553.0 43.377.2 48.2 107.5 Alinma 0.9 120.6 0.9 0.4 5.3 0.0 122.9 59.4 57.846.0 55.960.6 48.0 0.6 105.4 58.0 125.4 2.2 1.1 2.2 113.8 Gulf 92.8 94.143.5 32.066.6 60.9 100.8 1.0 136.3 1.8 108.5 2.4 1.8 126.1 2.4 65.7 127.4 4.8 Alahlia 310.9 45.4 Union 116.0 56.1 83.7 152.5 10.3 194.9 96.5 129.1 5.3 Ace 131.7 Solidarity share market bytotal sorted Companies
Saudi insurers -ROEandits key drivers Saudi insurers k a mDT osRto() ExpenseRatio Loss Ratio (%) Mkt Cap 3mADVT USD mn USD mn 2013a 2014a 2015a 2013a 2014a 2015a 2013a 2014a 2015a 2013a 2014a 2015a 2015a 2014a 2013a 2015a 2014a 2013a 2015a 2014a 2013a 2015a 2014a 2013a USD mn USD mn
183.4 4.6 N/A 96.4 91.7 N/A 124.2 14953.7 N/A 215.9 15050.1 N/A 0.8 0.8 ports, and EFG Hermes ports, and EFG Hermes % Cmie ai % InvestmentYields(%) Combined Ratio(%) (%) 2013a 2013a (22.0) (49.8) (21.7) (87.7) (17.7) (45.5) (23.9) (89.4) (13.3) (14.6) (41.3) (41.8) (22.9) (13.6) (32.3) (31.2) (42.1) (28.5) (54.2) (3.9) (3.9) 12.4 11.3 17.9 22.7 N/A N/A N/A 9.3 4.0 3.9 7.3 1.2 5.2 7.0 4.8 ROE (%) 2014a 2014a (51.8) (18.4) (29.3) (45.7) (71.2) (64.1) (17.4) (74.4) (29.3) (6.6) (6.6) 14.1 17.0 21.7 14.6 (1.6) (2.0) (0.5) (7.7) 30.0 16.5 (4.8) 30.8 38.6 30.1 9.4 6.8 5.2 6.8 0.6 6.4 4.1 7.8 5.3 4.9 2015a 2015a (133.9) (133.9) (37.0) (21.3) (20.5) (12.8) (20.3) (24.5) (43.7) (47.7) (22.7) (30.6) (11.3) 15.9 14.1 17.4 15.3 (8.7) (2.1) 25.0 20.4 17.3 (3.7) 49.1 27.3 (9.6) (9.6) 9.4 6.2 1.9 9.1 9.6 6.0 6.2 4.6 1.0
29 SAUDI ARABIA INSURANCE SECTOR
Financials | Saudi Arabia Source: SAMA, Company re SAMA, Source: Company General Gulf ATC Salama Alamiya Al Amana Buruj Wataniya Wafa Arabian Shield ACIG AICC Wala Allianz Saudi Re Union Trade Sagar SAICO Axa UCA Al Rajhi Malath Medgulf Bupa Tawuniya Fig. 50. Sanad Enaya Aljazira ANB SABB Alinma Gulf Union Alahlia Ace Solidarity share market bytotal sorted Companies
Saudi insurers - Market share by segments bysegments share -Market Saudi insurers 2013a 2013a 16.4% 12.6% 22.2%
0.9% 0.2% 0.0% 0.0% 0.7% 0.2% 1.5% 0.9% 1.0% 0.8% 1.5% 0.6% 0.9% 1.3% 0.3% 1.1% 1.9% 0.8% 1.3% 1.4% 2.3% 1.4% 3.0% 1.7% 3.5% 1.0% 2.5% 3.1% 5.1% 2.7% 3.1% ports, and EFG Hermes ports, and EFG Hermes 2014a 2014a 14.5% 18.8% 20.4% Total 0.4% 0.1% 0.1% 0.0% 0.6% 0.3% 1.1% 0.8% 0.8% 0.6% 1.2% 1.1% 1.0% 1.1% 1.3% 1.2% 1.4% 0.7% 1.5% 1.0% 2.1% 2.1% 2.4% 1.8% 2.7% 0.8% 2.6% 3.4% 3.8% 3.1% 4.6% 2015a 2013a 2014a 2015a 2013a 2014a 2015a 2013a 2014a 2015a 2013a 2014a 2015a 2015a 2014a 2013a 2015a 2014a 2013a 2015a 2014a 2013a 2015a 2014a 2013a 2015a 08 80 64 59 68 30 20 1.% 73 2.% .% .% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 11.1% 0.0% 0.0% 23.4% 9.2% 13.0% 18.9% 23.5% 0.0% 14.2% 14.8% 20.2% 6.2% 8.5% 6.2% 17.3% 0.0% 24.6% 36.5% 18.1% 0.0% 38.6% 28.0%16.8%26.4% 13.0%20.8% 25.9% 12.0% 0.0% 0.0% 0.0% .%00 .%00 .%03 .% .% .% .% .% 07 5.8% 10.7% 6.1% 0.0% 7.6% 0.0% 7.4% 0.0% 0.0% 2.8% 6.2% 0.0% 0.8% 0.3% 3.1%0.0% 0.0%0.0% 2.2% 3.2% 0.0% 0.0% 1.0% 2.6% 0.0% 1.7% 0.9% 0.8%1.2% 0.8%0.2% 2.3% 0.9% 0.0% 3.3% 4.8% 1.0% 3.0% 0.5% 0.7% 0.5%1.4% 0.8%4.0% 2.4% 4.4% 2.1% 3.7% 4.9% 0.0% 1.9% 2.9% 2.5%1.9% 2.0%1.8% 2.5% 3.4% 0.0% 0.0% 1.7% 3.1% 0.4% 6.2% 5.0% 5.8% 5.0%2.2% 2.3%1.9% 3.1% 0.0% 7.1% 2.6% 9.1% 1.2% 1.1%0.7% 3.5% 1.6% 10.6% 7.3% 7.4% 0.0% 1.2% 0.0% 6.9% 8.2% 9.1%1.5% 1.2%1.1% 3.8% 0.0% 3.3% 2.9% 5.1% 1.7% 0.6% 0.5% 6.8% 14.4% 2.4% 14.7% .%07 .%00 .%08 .% .% .% .% .% .% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.6% 0.0% 9.6% 0.0% 1.0% 3.3% 1.4% 0.8% 0.0%0.7% 0.2%0.0% 0.0% 0.0% 0.0% 2.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%0.4% 0.2%0.4% 0.2% 0.0% 0.0% 0.6% 0.0% 0.0% 0.0% 0.0%0.0% 0.0%0.0% 0.2% 0.1% 18.2% 18.3% 23.4% 3.1% 0.5% 0.0% 1.9% 0.0% 0.0% 0.0%0.0% 0.0%0.5% 0.4% 0.5% 0.0% 0.0% 2.0% 0.6% 0.0% 0.0% 0.0% 0.0%0.0% 0.0%0.0% 0.6% 0.9% 0.0% 0.0% 2.0% 0.8% 0.0% 0.2% 0.3% 0.8%0.0% 0.0%0.0% 0.6% 2.3% 0.0% 0.0% 0.6% 2.5% 0.0% 1.6% 2.5% 2.0%1.1% 1.1%1.1% 0.6% 0.6% 0.0% 4.9% 3.4% 0.5% 0.0% 1.4% 1.2% 1.4%0.8% 0.7%0.4% 0.7% 3.3% 0.0% 0.0% 0.4% 3.7% 0.0% 0.9% 0.7% 0.7%0.0% 0.0%0.0% 0.7% 0.4% 0.0% 2.4% 0.2% 2.7% 1.4% 1.0%0.2% 0.3%0.7% 0.8% 2.6% 16.6% 37.7% 48.7% 0.0% 0.0% 2.7% 0.0% 2.1% 1.9% 1.3%0.8% 0.4%0.4% 1.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0%0.0% 0.0%0.0% 1.0% 0.3% 0.0% 0.0% 4.0% 0.3% 0.0% 2.8% 3.3% 3.2%0.2% 0.2%0.2% 1.1% 3.5% 0.0% 0.0% 0.2% 3.7% 0.0% 1.9% 1.6% 1.5%0.2% 0.1%0.0% 1.1% 0.8% 0.0% 3.9% 1.1% 0.1% 2.3% 0.3% 2.6% 0.4%0.4% 0.9%1.9% 1.1% 1.0% 1.8% 4.1% 1.0% 2.2% 2.7% 2.7%0.7% 0.7%0.5% 1.2% 4.0% 0.0% 0.0% 0.0% 3.6% 0.0% 0.0% 4.4% 2.2% 2.4%0.0% 0.0%0.0% 1.4% 0.0% 9.2% 13.0% 0.0% 1.8% 14.2% 0.0% 0.8% 0.8% 2.6%0.9% 0.8%1.1% 1.4% 1.3% 0.0% 0.0% 0.9% 1.6% 0.0% 1.6% 2.5% 2.0%1.1% 1.1%1.1% 1.5% 0.8% 0.0% 0.0% 2.5% 0.8% 0.0% 1.7% 1.6% 3.0%1.5% 0.8%0.9% 1.5% 2.2% 0.0% 4.6% 2.7% 4.2% 4.3% 2.5%1.4% 1.1%1.3% 1.8% 6.2% 21.0% 19.8% 23.1% 5.8% 3.8% 1.7% 3.0% 3.9%0.3% 0.3%0.4% 2.1% 5.8% 6.9% 2.4% 1.9% 1.8%0.5% 0.4%0.5% 2.2% elh Health Motor P&C & General Ins. P&C &General Life
30 SAUDI ARABIA INSURANCE SECTOR
Financials | Saudi Arabia Source: SAMA, Company re SAMA, Source: Company Sanad Malath ANB Ahlia ACIG ATC Enaya 0.0% Allianz SABB 0.0% 20.1% 21.6% 0.0% 30.8%45.2%26.9% 24.0% 53.0% 37.1% 41.4% Wala Saudi Aljazira 0.0% Re SAICO 0.0%Amana 32.2% 30.6% 0.0% 40.1%19.7%39.3% 40.2% 28.5% 39.5% 29.9% Wafa 2.1% AICC 0.0% Solidarity 0.9% 2.6% 18.8% 18.6% 2.3% 36.4%40.9%34.2% 20.3% 44.4% 31.3% 47.9% 0.0% Gulf 35.5% 27.8% 0.0% 52.1%36.1% 50.2% 62.5% 0.0% 9.7% 0.4% 11.8%14.3% 10.0% 10.7% 0.0% Trade 9.1% 27.5%63.5%19.9% 69.7% 15.9% 72.5% 0.0% General Gulf 0.0% 11.8% 10.0% 0.0% Union 56.4%16.0% 82.0% 85.1% 4.9% Arabian 6.1% 0.0% 27.6% 16.3% 17.7% 0.0% 64.4%19.0%66.9%Union 16.6% 16.8% 65.1% 17.2% Medgulf Shield Bupa Tawuniya Fig. 51. Wataniya Salama Alinma UCA Ace Al 11.9% Axa Rajhi Buruj 0.0% 0.0% 7.8% 12.3% Sagar 4.8% 12.4%82.9%26.8% 60.9% 44.9% 35.4% Al Alamiya share market bytotal sorted Companies
Saudi Insurers-GWPMix 0.%1 00 0.%00 .%00 .%00 .%00 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 100.0% 100.0% 0.0% 0.%1 00 0.%00 .%00 .%00 .%00 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 100.0% 100.0% 0.0% 2013a 2014a 201 2014a 2013a 65 82 05 60 07 02 75 4.%3.%00 00 0.0% 0.0% 0.0% 41.1% 39.3% 0.0% 26.5%36.0%18.2% 37.5% 40.7% 20.5% 40.2% 0.0% 0.0% 4.9% 5.7% 0.0% 7.7% 80.6% 82.7% 87.5% 7.6% 11.7%11.7% 0.0% 0.0% 3.1% 11.9% 8.7% 65.5%25.9%35.0% 53.1% 85.6% 11.3% 0.0% 0.0% 16.6% 19.6% 0.0% 43.9%31.4%38.3% 24.7% 45.0% 39.1% 41.3% 0.0% 0.0% 17.1% 13.1% 0.0% 17.7% 15.5% 16.6% 9.5% 72.8%67.3% 70.3% 80 33 58 93 19 99 27 1.%1.%00 00 0.0% 0.0% 14.7% 14.2% 0.0% 48.0%39.3%43.3% 12.7% 41.9% 25.8% 59.9% 78 07 24 70 97 75 38 4.%5.%00 00 0.0% 0.0% 40.0% 50.2% 0.0% 37.8%27.0%50.7% 33.8% 59.7% 92.4% 97.5% 0.0% 0.0% 14.9% 13.6% 0.0% 33.2%49.3%27.5% 17.6% 57.5% 21.8% 64.5% 0.0% 0.0% 0.0% 6.5% 22.5% 20.5% 6.7% 67.3%12.2%52.6% 24.9% 86.8% 28 73 91 3.%3.%5.%5.% 57 49 .% .% 0.0% 0.0% 55.7% 34.9% 0.0% 30.8%56.4% 37.0% 55.9% 9.1% 7.3% 12.8% 19 99 92 74 05 45 7.%336 0.%00 00 0.0% 61.9%27.4%59.9% 30.5% 39.2% 54.5% 372.1% 353.6% 0.0% 100.5% 0.0% 0.0% 23.1% 15.4% 17.2% 9.7% 18.8% 0.0% 12.0%16.1% 9.2% 3.6% 0.0% 75 07 / 00 07 / 25 86 / .%0.0% N/M 0.0% 22.5% 28.6% N/M 40.0% 50.7% N/M 37.5% 20.7% 67 07 22 18 38 83 15 1.% .% .% .% 0.0% 0.0% 0.0% 9.5% 15.5% 56.7%31.8%40.7% 11.5% 43.8% 32.2% 58.3% .% .% .% 81 15 98 86 5.%4.%32 48 5.6% 4.8% 53.7% 44.6% 3.2% 58.1%38.6% 41.5% 49.8% 0.0% 0.0% 0.0% 0.0% .%00 .%00 .%0.0% 16.1% 14.3% 14.4% 83.9% 85.7% 0.0% 0.0% 0.0% 0.0% 10.3% 18.8% 0.0% 56.5% 52.1% 0.0% 21.1%78.9% 24.7% 37.6% 0.0% 0.0% 0.0% 0.0% 0.0% 77.2% 72.7% 0.0% 21.9%76.1% 22.5% 27.3% 0.0% 0.3% 2.0% .%00 .%00 .%00 .%00 .%100 0.%100.0% 0.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 21.3% 46.3% 41.1% 20.6%47.3% 21.4% 12.8%24.7%23.8% 24.8% 7.6% 8.3% .%00 .%00 .%00 .%00 .%00 0.%100.0% 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% .% .% .% 58 75 14 79 6.%5.%00 00 0.0% 0.0% 60.1% 57.2% 0.0% 35.8%57.9% 37.5% 41.4% 1.4% 2.4% 6.3%
/ 1.%6.% / 00 01 NA 30 55 NA .% 11.5% 0.0% N/A 83.0% 25.5% N/A 0.1% 0.0% N/A 17.0% 62.9% N/A ports, and EFG Hermes ports, and EFG Hermes Health Health 0.0% 0.0% 5a 2013a 2014a 2015a 2013a 2014a 2015a 2013a 2014a 2015a 2015a 2015a 2014a 2014a 2013a 2013a 2015a 2014a 2013a 5a 12.1% Motor 4.5% 41. 1% 75.7% P&C & General Ins. P&C &General 78.1% 53.6% 12.2% 17.4% 5.3% Life 85.6% 0.0% 0.0% 0.0%
31 SAUDI ARABIA INSURANCE SECTOR Financials | Saudi Arabia
Appendix: Glossary of Insurance terms
Fig. 52. Glossary of terms used in this report Terms Description
Comprises the total premiums receivable for the whole period of cover provided by contracts Gross written premium (GWP) entered into during the accounting period.
The gross written premiums adjusted for the cession to reinsurers as the insurer transfers part of Net written premium (NWP) the risk to the reinsurance market
This ratio equals NWP to GWP. The ratio indicates how much insurance risk the insurer has not Risk retention ratio reinsured.
Net earned premium (NEP) The net written premiums after the change in the unearned premium reserve
This arises due to timing difference between premium received and premium earned. Premiums Unearned premium reserve are typically received at the beginning of a policy term, but they are typically earned over the life of the policy
This includes claims paid to the insured and establishing a loss reserve to pay the claim at some Net claims incurred future point
Loss ratio The loss ratio is the ratio of net claims incurred to net earned premiums.
These include selling and marketing expenses, policy acquisition costs (commissions to agents and Underwriting expense brokers) and general and administrative costs.
Expense ratio The expense ratio is underwriting expenses to net earned premiums
Combined ratio The sum of the loss ratio and expense ratio
Underwriting/technical profit margin Equals to 1- the combined ratio
There is a risk of insolvency if the insurer does not have a capital cushion to absorb potential Capital and solvency losses. A strong capital base allows insurers to grow premiums, invest in riskier assets and increase dividends.
Source: EFG Hermes research
32 SAUDI ARABIA INSURANCE SECTOR Financials | Saudi Arabia
Appendix: Saudi insurance sector - Key regulations
Fig. 53. Saudi Insurance sector - Snapshot of key regulations
Section Regulations Capital & solvency The applicant must be a joint stock company, with a minimum paid up capital of SAR100mn for an insurance Minimum capital company and SAR200mn for a reinsurance company Insurance or re-insurance companies may not open branches or offices inside or outside the Kingdom or Branches/acquisition/mergers agree to a merger with, own, control or purchase shares in other insurance or re-insurance companies without the Agency’s written approval. The statutory deposit shall be 10% of the paid up capital. The Agency, where the risk profile of the Statutory deposits Company’s business warrants it, shall increase this percentage to a maximum of 15% The Company’s gross written premium shall not exceed ten times the paid capital and reserves without the GWP levels Agency’s written approval Bonds issued/loans taken by The Company shall not consider assets obtained from the issuance of bonds or from obtaining loans in its the insurer solvency margin calculations without the Agency’s written approval. 1. Dividing gross premiums written into the categories set out in Table (3). 2. Deducting the outwards reinsurance relating to the gross premiums determined in (1) above, provided that Premium solvency margin in all cases the net premiums written is not less than 50% of gross premiums written 3. Multiplying the net premiums written for each category by relevant factors set out and aggregating the result for each category to come out with the appropriate solvency margin. 1. Dividing average gross claims incurred over the three most recent financial claims into categories set out in Table 4 of this Article. 2. Deducting the outwards reinsurance relating to the gross claims determined in (1) above, provided that in Claims solvency margin all cases the net claims amount is not less than 50% of gross claims amount. 3. Multiplying the net claims by (2) above for each category by the relevant factors set out in Table 4 and aggregating the result for each category to come out with the appropriate solvency margin. The Company shall evaluate the adequacy of its technical provisions on a quarterly basis. The minimum capital Technical provisions requirement shall be used to cover policyholders’ claims in the case whereby the technical reserves are deficient to meet the Company’s claims obligations. Re-insurance Total re-insurance limit An insurance company must retain at least 30% of its total premium within the country Domestic re-insurance An insurance company must re-insure a minimum of 30% of its insurance premium with domestic re-insurers The Company shall select a reinsurer, at a minimum, with an S&P Rating of BBB, or its equivalent rating from Selection of reinsurer a recognised international rating organization. Investments Proportion of investments in The company shall invest 50% of its total invested assets in Saudi Riyals. The Agency’s written approval is Saudi Riyals required if the Company wishes to reduce this percentage. The Company shall take in consideration the investment concentration risks. Concentration in an investment Concentration instrument shall not exceed 50% in one investment instrument mentioned in table (1). It is prohibited to invest in derivatives, option contracts, hedge funds, and deposits with foreign banks, private equity investments and any off-balance sheet instrument and should not be part of the Company’s asset Limitations on asset classes allocation, unless specifically approved by SAMA and based on efficient portfolio management justifications as per Article 62 of the Implementing Regulations.
33 SAUDI ARABIA INSURANCE SECTOR Financials | Saudi Arabia
Saudi Insurance sector - Snapshot of key regulations (Conti.)
Section Regulations Sukuk in general is considered a type of investments allowed for the Company to allocate, with no conflict Limitations on investment in with table (1) of the Implementing Regulation and equivalent to bonds, where the maximum limit of Sukuk allocating Sukuk that are issued by local companies in which the Government (sovereign) has a significant ownership is 20%, and the solvency margin is equivalent to the Government's participation in capital. Others 1. 10% of the total amounts due from reinsurers exceeding 180 days. 2. 15% of the total amounts due from the insured exceeding 90 days. Doubtful debt reserves 3. 25% of the total amounts due from the insured exceeding 180 days. 4. 75% of the total amounts of uncollected receivables exceeding 360 days. 5. 100% of any disputed and uncollected receivables 10% of the net surplus shall be distributed to the policyholders directly, or in the form of reduction in Distribution of surplus premiums for the next year. The remaining 90% of the net surplus shall be transferred to the shareholders’ income statement. The Company shall settle individual policyholder’s claims in a period not to exceed fifteen days from the date of receiving all requested and necessary documentation related to the claim, another fifteen day period shall be extended with a notification to the regulatory compliance officer with reason(s) of such extension. The Claim settlements Company shall settle commercial entities’ claims in a period not to exceed 45 days after receipt of all requested and necessary documentation including the report of the loss assessor who must be appointed by the company within one week from the 15 loss notification’s date.
Source: SAMA
34 HH TAWUNIYA
Saudi Insurance Juggernaut
Financials | Saudi Arabia
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 Initiation of Coverage 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 Stock Data heads towards consolidation. We also like it as its size means that it benefits Rating Buy from bargaining power over service providers, thus keeping its claims costs Price (24 Aug 2016) SAR89.78 under control. We expect Tawuniya to generate a ROE of 26-27% over 2016- Fair Value SAR117.00 18, while it trades at an undemanding 2017e P/B of 2.5x. We believe that tight Last Div. / Ex. Date SAR1.0 on 22 Mar 2016 regulatory oversight and Tawuniya’s multi-line business model mitigate risks to Mkt. Cap / Shares (mn) SAR8,978.0 / 100 Av. Monthly Liquidity (mn) SAR8.2 profitability. 52-Week High / Low SAR98.5 / SAR56.0 Bloomberg / Reuters TAWUNIYA AB / 8010.SE Motor to drive premium growth; 2015-18e earnings CAGR of 19% Est. Free Float 53.4% 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 Share Price Performance Relative To TASI 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 Price (SAR) TASI 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 105 health insurance for Saudis working in the private sector (penetration 57%); 95 and ii) privatisation of the public healthcare system. 85 75 Risks to our favourable view on the stock 65 Saudi Arabia’s fiscal retrenchment could lead to reduce spending on 55 insurance in the Kingdom. Tactical skirmishes between Tawuniya and Bupa to 24 Feb 16 24 Nov 15 24 Aug 15 24 Aug 16
win large health accounts could lead to fluctuations in premiums and 24 May 16 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. Key Financial Highlights Dec Year End (SAR mn) 2015a 2016e 2017e 2018e Net Earned Premium 5,665 7,053 8,119 9,360 Insurance Profit 528 764 802 952 Net Attributable Income 598 735 863 1,010 Shabbir Malik +971 4 363 4009 EPS (SAR) 5.98 7.35 8.63 10.10 [email protected] Price to Earnings (x) 15.0 12.2 10.4 8.9 Dividend Yield (%) 1.1 1.4 2.4 3.9 Murad Ansari Price to Book Value (x) 3.9 3.1 2.5 2.1 +966 11 2506149 ROAE (%) 27.3 28.1 26.6 25.9 [email protected] Combined Ratio (%) 90.7 89.2 90.1 89.8 Source: Tawuniya, EFG Hermes estimates
35 TAWUNIYA Insurance | Saudi Arabia
DataMiner Investment Thesis The Company for Cooperative Insurance (Dec Year End) In SAR million, unless otherwise stated 2015a 2016e 2017e 2018e (Tawuniya) was established in 1986 in Per Share Numbers Riyadh. It is the largest insurer in Saudi Arabia (21% market share), which is a relatively EPS (SAR) 5.98 7.35 8.63 10.10 attractive market, where insurance Reported Dividend Per Share (SAR) 1.00 1.25 2.16 3.54 penetration is low, awareness of the benefits BVPS (Reported) (SAR) 23.09 29.19 35.66 42.23 of insurance is growing and authorities are BVPS (Tangible) (SAR) 23.09 29.19 35.66 42.23 undertaking reforms for the expansion of compulsory insurance. It is a multi-line insurer Valuation Metrics with a strong presence in health (market Price to Earnings (x) 15.0 12.2 10.4 8.9 share 26%) and motor segments (12%). A P/BV (Tangible) (x) 3.9 3.1 2.5 2.1 strong capital base, economies of scale and a Dividend Yield (%) 1.1 1.4 2.4 3.9 focus on service quality give Tawuniya an enduring edge over smaller insurers in the Payout ratio 16.7 17.0 25.0 35.0 Kingdom, in our view. The company gets ROAA (%) 5.6 5.9 6.0 6.2 access to new business, primarily through its ROAE (%) 27.3 28.1 26.6 25.9 large tied agency network of 27 agents, 115 Gearing (Assets / Equity) (x) 4.9 4.8 4.4 4.2 branches, and relationship officers, local and Income Statement international brokers and more recently through electronic channels (e.g. smart Gross Written Premium 7,545 8,862 10,317 11,917 phone app). Net Written Premium 6,421 7,798 8,872 10,249 Net Earned Premium 5,665 7,053 8,119 9,360 Net Claims Incurred (4,144) (5,149) (6,008) (6,926) Underwriting Expenses (993) (1,140) (1,309) (1,481) Underwriting Result 528 764 802 952 Investment Income 288 280 324 364 Insurance Profit 816 1,044 1,126 1,316 Income before Taxes and Minorities 642 783 924 1,085 Net Attributable Income 598 735 863 1,010 Balance Sheet - Key Highlights Cash and investments 6,201 7,482 8,725 10,101 Valuation and Risks Total Assets 11,569 13,348 15,310 17,489 We have a Buy rating on Tawuniya of FV of Technical Reserves 7,084 8,086 9,140 10,375 SAR117/share. We value Tawuniya based on Total Liabilities 9,260 10,429 11,744 13,266 residual income model, using a discount rate of 11.7% and terminal growth rate of 5.0%. Minority Interest 0 0 0 0 We see significant room for long-term Shareholders’ Equity 2,309 2,919 3,566 4,223 growth as insurance penetration levels in the KPIs country are low. We believe the motor Gross Written Premium Growth (%) 22 17 16 16 segment will be the key driver for earnings growth as segment is currently under- Net Earned Premium Growth (%) 18 25 15 15 penetrated (40% cars have insurance), Insurance Profit Growth (%) 45 25 11 15 Tawuniya’s economies of scale would enable Net Attributable Income Growth (%) 7 23 17 17 it to gain market share from smaller insurers Retention Ratio (%) 75.1 79.6 78.7 78.5 and as undercapitalised insurers scale back or fold their businesses. Key risks to our Buy Claims Ratio (%) 73.2 73.0 74.0 74.0 rating include: i) aggressive competition Expense Ratio (%) 17.5 16.2 16.1 15.8 between large insurers in health segment; ii) Combined Ratio (%) 90.7 89.2 90.1 89.8 weak investment income; and iii) delay in Gross Written Premiums to Shareholders’ Equity (x) 3.4 3.4 3.2 3.1 implementation mandatory insurance in health and motor segments. Gross Written Premiums to Technical Reserves 115.7 116.8 119.8 122.1 Investment Yield (%) 5.3 4.4 4.5 4.3 Investment Income to Insurance Profit (%) 54.6 36.6 40.4 38.2 Source: Tawuniya, EFG Hermes estimates
36 TAWUNIYA Insurance | Saudi Arabia
A. Leading insurer in an underpenetrated market
Tawuniya is the leading insurance company in Saudi Arabia, accounting for 21% of the market, in terms of Gross Written Premium. It enjoys solid market shares in Health (26%), Motor (12%) and Property and Casualty (20%). A strong capital base, economies of scale and a focus on service quality give Tawuniya an enduring edge over smaller insurers in the Kingdom, in our view. The company gets access to new business, primarily through its large-tied agency network of 27 agents, 115 branches, relationship officers, local and international brokers and more recently through electronic channels (e.g. smart phone app).
Fig. 1. Market shares and positioning – overall and key business segments As of 2015
45% #1 #2 #2 #1 39% 40% 35% 30% 26% 25% 21% 20% 20% 20% 15% 15% 15% 11% 12% 9% 9% 7% 8% 10% 5% 6% 5% 2% 0% UCA UCA Bupa Bupa Malath Malath Amana Al Rajhi Medgulf Medgulf Medgulf Saudi Re Saudi Tawuniya Tawuniya Tawuniya Tawuniya Overall Motor Medical P&C
Source: SAMA, Company financials
Strong bargaining power over providers; cost advantage over other insurers
Tawuniya has the largest network of service providers (hospitals and repairs shops) in the country. It has strong bargaining power as it can lever the advantage of its scale with providers, enabling it to keep claims cost escalation under control. Moreover, Tawuniya enjoys a cost advantage over most other insurers due to its scale, an edge which we believe is sustainable.
Fig. 2. Expense ratios of Saudi insurers Average for 2014-15
60% 50% 40% 30% 20% 10% 0% Axa ATC UCA Saico Buruj AICC Wafa Bupa ACIG WALA Allianz Malath Amana Salama Al Rajhi Al Ahlia Medgulf Saudi Re Saudi Gulf Uni. Solidarity Gulf Gen Wataniya Tawuniya Trade Un. Trade Al Alamiya Ace Arabia Arabian Shd.
Source: Company financials
37 TAWUNIYA Insurance | Saudi Arabia
Superior capital base and healthy solvency
Tawuniya has the strongest capital base amongst Saudi insurers. Tawuniya’s paid-up capital amounts to SAR1bn compared to the minimum capital requirement of SAR200mn. There are only a few other insurance companies – Medgulf, BUPA, and Saudi Re – which have a paid-up capital of SAR1bn. Tawuniya is rated A- by Standard and Poor’s, one notch below Qatar’s QIC. With the Capital Markets Authority (CMA) taking a tough stance on insurers with large accumulated losses, the weak insurers are likely to exit the market, opening up space for a well-capitalised insurer such as Tawuniya to gain market share.
Fig. 3. Strongest capitalisation amongst Saudi insurers In SARmn as of 2Q16
3,000 2,500 2,000 1,500 1,000 500 0 Ace ATC Sagr ANB AXA UCA Saico AICC Buruj ACIG Wafa SABB Enaya Sanad BUPA WALA Allianz Malath Al rajhi Alinma Salama Amana Al Ahlia Gulf Un. Medgulf Saudi Re Saudi Wataniya Tawuniya Gulf Gen. Trade Un. Trade Al Alamiya Arabian Shd.
Source: Company financials
We estimate that Tawuniya had excess capital of SAR120mn in 2015 over the minimum solvency requirement. In 2013, Tawuniya ran a deficit, primarily due to a spike in claims as the insurer pursued an aggressive market strategy to preserve market share.
Fig. 4. Book value adjusted for inadmissible assets Fig. 5. Excess / (deficit) capital over minimum solvency required In SARmn In SARmn
Book value Adjusted book value 800 2,500 599 600 471 2,000 400 120 1,500 200 0 1,000 (200) 500 (400) 0 (600) (455) 2012 2013 2014 2015 2012 2013 2014 2015
Source: Company financials, EFG Hermes estimates Source: Company financials, EFG Hermes estimates
38 TAWUNIYA Insurance | Saudi Arabia
A multi-line business model reduces sector concentration risk
Tawuniya has a multi-line business model, with its operations organised primarily around three segments – Health, Motor and Property and Casualty. We believe this division of insurance risk in three segments makes the company more resilient and provides better opportunities for growth vis-à-vis BUPA, which focuses on health only. In light of the company’s scale and strong coverage on all major product lines, Tawuniya should also be the first to benefit from any sector reforms introduced by the government.
Fig. 6. Business mix by net earned premiums As of 2015
Manafeth: 3% Property and Casualty: 2%
Motor: 19%
Health: 76%
Source: Tawuniya
Regulatory oversight + self-help have led to disciplined underwriting
Tawuniya has improved its underwriting discipline since suffering a loss in 2013. The company’s loss rate had climbed to 103% - health 108%, motor 94% - as it participated in aggressive price competition to protect market share. Following this episode, Tawuniya became a more selective underwriter. With regard to Motor, it let go of leasing accounts because their loss rates were high, and it generally de-risked its portfolio by marking up the premium for clients who were not profitable. SAMA also intervened in the market in 2013 to address severe price competition and set a narrow band on premium pricing for the industry. While Tawuniya has ceded some market share since 2012, its improved underwriting discipline has helped bring its loss rate under control.
Fig. 7. Tawuniya has ceded market share due to regulator’s Fig. 8. …however, the disciplined underwriting has helped intervention and selective underwriting… improve the loss ratio Overall premium market share Historical loss ratio
28% 30% 26% 27% 120% 103% 24% 25% 22% 100% 20% 21% 82% 78% 73% 20% 80% 68% 62% 58% 15% 60% 10% 40% 5% 20% 0% 0% 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
Source: Tawuniya, SAMA Source: Tawuniya
39 TAWUNIYA Insurance | Saudi Arabia
Motor to drive earnings – three-year CAGR of 19%
We forecast Tawuniya’s earnings to grow at a CAGR of 19% over 2015-18, driven by: Premium growth: We expect Tawuniya’s net earned premium to grow 18% over the next three years, driven by growth in Motor segment. We believe the strong growth opportunity is in Motor, as the segment is relatively under-penetrated, with only c40% of vehicles insured, and due to growing enforcement. Growth in the health segment is likely to be driven by enforcement of health insurance for Saudi nationals working in the private sector (penetration currently at 56%) and the extension of private health insurance to the public sector. The adoption of actuarial pricing would allow Tawuniya to capture market share from smaller insurers as it leverages its low-cost advantage. Moreover, the exit of small insolvent insurers would create opportunities for Tawuniya to grow its market share. Loss ratio: We believe strict regulatory oversight, selective underwriting and changing business mix, are likely to keep Tawuniya’s loss ratio relatively stable at 75%. Tawuniya’s size gives it an advantage over service providers, enabling it to keep its claims escalation cost under control. Stronger growth in motor, where loss rates have historically been lower, relative to health, is also likely to be favourable for Tawuniya’s overall loss rate. Expense ratio: We expect incremental improvement in the expense ratio as a result of growing economies of scale. Tawuniya has been rolling out an electronic platform for direct sales and distribution of motor insurance. This platform allows users to conveniently buy insurance using their smartphones. Management states that the initiative has been successful, and this is a cost-effective mode of distributing motor insurance.
Fig. 9. Gross written premium growth Fig. 10. Combined ratio evolution % change Y-o-Y
Gross written premium growth Market share (RHS) 100% Loss ratio Expense ratio 25% 23% 90% 20% 22% 16% 20% 18% 18% 18% 15% 80% 21% 10% 70% 78% 5% 20% 60% 73% 73% 74% 74% 0% 19% 50% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Source: Tawuniya, EFG Hermes estimates Source: Tawuniya, EFG Hermes estimates
We expect a ROE of 26-27% over 2016-18
We expect Tawuniya to generate an ROAE of 26-27% (2015: 27%) over our forecast horizon, on the back of disciplined underwriting (2016-18 combined ratio 90%) and steady investment income (2016-18 average yield of c4%) supported by improved yield from fixed-income investments.
40 TAWUNIYA Insurance | Saudi Arabia
Fig. 11. Tawuniya – Drivers of ROE
Ratios based on net earned premium, unless otherwise stated Source: Company reports, EFG Hermes estimates
Motor insurance - The engine for growth
Tawuniya is the #2 motor insurer in Saudi Arabia. Motor insurance accounted for 17% of Tawuniya’s gross written premium in 2015. GWP in the segment has grown at a CAGR of 4% over 2011-15 for Tawuniya compared to the sector’s growth of 29% over this period. The loss ratio has remained under 70% for the past two years. Tawuniya provides both basic Third- Party Liability insurance and comprehensive insurance solutions. We believe the outlook for Tawuniya’s motor insurance segment is favourable, due to the following factors:
Room for improved penetration: Motor insurance penetration in Saudi Arabia is low, and there is scope for structural growth in the segment. Management believes that only c40% of cars in the country are insured. Unlike the UAE, where car registrations are carried out annually, in Saudi Arabia they are renewed every three years. The insurance coverage is typically bought in the first year and not renewed for the following two years. There are plans by the authorities to make registration renewal an annual process. Once this is done (time-line uncertain), motor insurance, which typically gets renewed once every three years, will be renewed annually.
41 TAWUNIYA Insurance | Saudi Arabia
Enforcement of pricing adequacy regulation: Third-party insurers’ profitability metrics were quite unstable in the past; however, as the regulator starts to enforce actuary-approved pricing on the industry, the product is likely to deliver steady profitability. Actuarial pricing kicked in from 2014; however, the industry still lags in terms of compliance. Tawuniya was the first major insurer to adopt actuarial pricing, and it expects other insurers to follow. Once pricing is standardised, large insurers, such as Tawuniya, should be able to gain market share from the smaller insurers by leveraging its economies of scale, solvency and superior customer service. Exit of weak players: Weak capitalisation of competitors is likely to cap their growth prospects and could potentially drive them out of business, creating an opportunity for Tawuniya to gain market share. Malath, the largest motor insurer in the Kingdom with a market share of 14%, had accumulated losses of 63% of paid up capital as of 2Q16. Malath is likely to carry out a rights issue to address its weak capitalisation.
New sources of growth: The government has expressed interest in opening the public sector motor fleet for insurance coverage. New distribution channel: Tawuniya has rolled out electronic channels to sell motor insurance directly to customers. This is a cost-effective way of selling insurance to young and tech-savvy Saudis via smartphone apps. Management said the response from the market on this initiative has been reassuring.
Fig. 12. We expect Tawuniya’s motor GWP growth to outpace Fig. 13. Loss ratio in motor segment has generally been sector growth lower than the overall loss ratio
150% 45% Tawuniya Sector Motor Overall
25% 100%
50% 5%
2012 2013 2014 2015 2016e 2017e 2018e 0% -15% 2010 2011 2012 2013 2014 2015
Source: Tawuniya, EFG Hermes estimates Source: Tawuniya, EFG Hermes estimates
Health - Growth subject to expansion of compulsory insurance to Saudis
Tawuniya introduced health insurance plans in 1995. The segment is the most important in terms of contribution to premiums, as it accounted for 65% of the company’s GWP in 2015. Tawuniya’s GWP in the health segment grew at a CAGR of 18% over 2011-15, broadly in line with the sector’s growth during this period. The company’s underwriting skills in this segment have historically been weaker than the segment leader, BUPA. The loss ratio in the health segment rose to 90% in 2012 and spiked to 108% in 2013, owing to under-reserving in 2010-11 and aggressive pricing. The company’s loss ratio, since then, has eased to a more satisfactory 77% in 2015.
42 TAWUNIYA Insurance | Saudi Arabia
While the strong growth phase in the health segment is most likely behind us, expansion of compulsory insurance into new segments is likely to drive premium growth for Tawuniya: Uncovered Saudis in private sector: Growth in the health segment is likely to be driven by enforcement of health insurance for Saudi nationals working in the private sector. Of the 5.6mn Saudi nationals, 2.5mn or 45% are currently uninsured, suggesting scope for growth. Privatisation of public health care: Nearly three-fourths of Saudis are currently being served by the public health care system. As low oil price pressures the government to rationalise and cut the subsidies and benefits for Saudis, one of the steps the government can take is to privatise the public health care system. This will open up a market of 15.5mn Saudis for private insurers such as Tawuniya and BUPA Uncovered expatriates segment: The growth opportunity in this segment is relatively moderate, as 87% of the expat population is already covered. That said, there are still 1.35mn expatriates (0.95mn domestic helpers and 0.40mn government employees), which can be brought under insurance coverage, if the authorities make it mandatory.
Fig. 14. Outlook for health GWP Fig. 15. Health loss rates relative to overall loss rates % change Y-o-Y
150% 45% Tawuniya Sector Health Overall
100% 25%
50% 5%
2012 2013 2014 2015 2016e 2017e 2018e 0% -15% 2010 2011 2012 2013 2014 2015
Source: Tawuniya, EFG Hermes estimates Source: Tawuniya, EFG Hermes estimates
Property and casualty: Strong profitability metrics, subdued growth
The segment accounted for 15% of the company’s GWP in 2015. Tawuniya offers Engineering, Fire and Property, Marine, Aviation and Energy products in this segment. Premium growth in this segment has been relatively moderate, with a 2011-15 CAGR of 9%. Property and casualty insurance is not mandatory in Saudi Arabia and, by nature, risky – claims can be large and long-tailed (can take quite a few years to materialise). Inadequate experience with respect to underwriting this risk, higher risk-based solvency requirements relative to health and motor insurance, and lack of awareness amongst Saudis, have contributed to slow premium growth in this segment, in our view. Tawuniya transfers a large proportion of this risk to the reinsurance market, and its risk retention rate for this segment is 12% compared to an overall risk retention of 75% in 2015. The challenging macro environment is the key constraint for growth in this segment. As government, individuals and businesses tighten their budgets, they are likely to cut spending on insurance. Travel insurance, medical malpractice and mortgage insurance are some of the growth opportunities in the medium to long term.
43 TAWUNIYA Insurance | Saudi Arabia
Fig. 16. Premium growth outlook for P&C Fig. 17. P&C’s loss rates are lower than overall loss rates
Tawuniya Sector 150% 25% Property and Casualty Overall
15% 100%
5% 50% -5% 2012 2013 2014 2015 2016e 2017e 2018e 0% -15% 2010 2011 2012 2013 2014 2015
Source: Tawuniya, EFG Hermes estimates Source: Tawuniya, EFG Hermes estimates
Investments: Strong solvency permits higher risk appetite…
As of 2Q16, Tawuniya had an investments book of SAR5.2bn, with the allocation skewed towards money market investments. The yield on the company’s investment book has been quite attractive at c5% over 2014-15. Strong solvency levels permit Tawuniya to have a higher risk appetite relative to BUPA. Tawuniya had an equities portfolio of SAR739mn (14% of the investment book), whereas BUPA only had SAR120mn (3% of the investment book). …however, relatively high allocation to risky assets can contribute to earnings volatility
In 1Q16, investment income was negative, as the company had to take an impairment charge to reflect the sharp drop in the prices of certain securities in its equities portfolio. Although Tawuniya’s investments are classified as Available-for-Sale, under-revised accounting standards, the company is required to perform an impairment testing on its equities portfolio every quarter, and any impairment charge needs to be routed through the income statement. A key condition for impairment is that stocks that are down more than 30% during the quarter will need to be impaired. Management’s asset allocation ceiling to risky assets including equities is 20% of investments; however, management intends to stay well below that level. We believe Tawuniya’s equities portfolio could contribute to volatility to the company’s earnings.
Fig. 18. Investment portfolio allocation Fig. 19. Investment yield As of 2Q16
9.0% Equity funds: 6.6% 14% 7.0% 5.1% 5.3% Money 4.5% 5.0% 3.9% market 3.4% funds: 86% 3.0% 2.5%
1.0%
-1.0% 2010 2011 2012 2013 2014 2015 1H16
Source: Tawuniya Source: Tawuinya
44 TAWUNIYA Insurance | Saudi Arabia
We initiate with a Buy and FV of SAR117, which implies 30% upside potential
We use a residual income model to arrive at our fair value for Tawuniya. This approach derives an equity value from the sum of the current book value and the present value of expected residual income in future years. Residual income is earnings in excess of the return required by investors, given the amount and cost of equity capital. Our cost of equity of 11.7% is derived using the CAPM. We use a risk free rate of 4.5% (a reflection of SAR 10 year mid swaps), Beta of 1.2x (adjusted Beta from Bloomberg) and equity risk premium of 6.0%. We set the terminal growth rate at 5%, which reflects Saudi Arabia’s long-term economic growth and higher growth prospects of insurance relative to the rest of the economy.
Fig. 20. Tawuniya - Residual income valuation In SARmn, unless otherwise stated 2015 2016e 2017e 2018e 2019e 2020e Terminal Beginning shareholders' equity 2,076 2,309 2,919 3,566 4,223 4,880 5,124 Cost of equity 11.7% 11.7% 11.7% 11.7% 11.7% 11.7% 11.7% Return on equity 28.8% 31.8% 29.6% 28.3% 28.3% 28.4% 28.0%
0 1 2 3 4 5 5 Net income 598 735 863 1,010 1,195 1,384 1,435 Less: Cost of equity 270 342 417 494 571 600 Residual income / Excess returns 465 521 593 701 813 835 Terminal growth rate 5.0% Terminal value of residual income / excess returns 12,466 PV of explicit forecasts 416 418 426 450 467 PV of terminal year 7,169
Equity invested 2,309 PV of excess equity returns 9,346 Equity value 11,655 Shares outstanding (mn) 100 FV (SAR/share) 117.00 Current market price (24 August 2016) 89.78 Upside / (Downside) 30% Source: Bloomberg, EFG Hermes estimates
45 TAWUNIYA Insurance | Saudi Arabia
Sensitivity of FV to cost of equity and terminal growth rate
Fig. 21. Fair value sensitivity table SAR/share Cost of equity 10.7% 11.2% 11.7% 12.2% 12.7% 3.0% 115 106 99 93 87
4.0% 126 115 107 99 92 5.0% 140 127 117 107 99 growth
Terminal 6.0% 161 144 130 118 108 7.0% 194 169 149 133 120 Source: EFG Hermes estimates
Tawuniya P/B and P/E in a historical context
Fig. 22. Trailing P/BV Fig. 23. Trailing P/E In times In times
6 20 5 15 4 3 10 2 5 1 0 0 Jan-16 Jun-16 Oct-14 Jun-15 Jun-16 Dec-13 Sep-15 Dec-14 Dec-15 Mar-15 Aug-15 May-14 Mar-15 Mar-16
Source: Bloomberg Source: Bloomberg
Investment risks
Challenging macro: Saudi Arabian companies and consumers are facing a period of relative austerity over the next few years as the government eyes fiscal retrenchment to grapple with low oil price. The National Transformation Program (NTP) calls for consolidation and efficient spending in Saudi Arabia, which is likely to be quite beneficial for large insurers, such as Tawuniya. Competition: A resumption of aggressive competition between insurers could be damaging for underwriting margins. Tawuniya has demonstrated pricing discipline, letting go of market share in the health and motor insurance segments. The introduction of actuarial pricing should also help mitigate irrational pricing competition between insurers and be beneficial for Tawuniya, which enjoys economies of scale. Investment income volatility: Tawuniya’s investment policy permits it to go up to 20% of its investment portfolio in relatively high risk assets such as equities. While the focus on equities should be returns-accretive, it can contribute to earnings volatility in the short term. Delay in reforms: The timing of the implementation of reforms, which would lead to expansion of mandatory insurance in Motor and Health, is uncertain.
46 TAWUNIYA Insurance | Saudi Arabia
Tawuniya - Company snapshot
The Company for Cooperative Insurance (Tawuniya) was established in 1986 in Riyadh. It operates primarily in Saudi Arabia, a relatively attractive market, where insurance penetration is low, awareness of the benefits of insurance is growing and authorities are undertaking reforms for the expansion of compulsory insurance. Tawuniya underwrites Motor, Health and Property and Casualty insurance. The company’s client base is well-diversified and operates in the following major sectors – energy, transport, communications, food and drugs and financial. The key shareholders of Tawuniya are the Public Pension Agency (PPA) – a 100%- Saudi-government-owned entity catering to the benefit plan for military and civil retirees – and General Organisation for Social Insurance (GOSI) – a state entity that provides social benefits to employees in the private sector.
Fig. 24. Tawuniya - shareholding breakdown
Public Pension Agency: 24% Public: 53%
General Organisation for Social Insurance 23%
Source: Tawuniya
47 TAWUNIYA Insurance | Saudi Arabia
Strategic pillars and management bios
Tawuniya’s strategy is to achieve an optimal balance amongst three objectives – market leadership, profitability and customer service – by utilising its strong balance sheet and adapting quickly to market dynamics.
Fig. 25. Tawuniya - Profile of key management
Name Position Brief Profile He joined Tawuniya in 1996 and over the past 20 years he has held a number of key positions including SVP- Technical, Vice President- Medical and Takaful Insurance, as well as the General Manager for HR & BS. In addition to his responsibilities at Tawuniya, Al-Tamimi Raeed Abdullah Al-Tamimi CEO serves as the Chairman of the General Committee for Insurance Companies under the Saudi Arabian Monetary Agency (SAMA). Al-Tamimi holds a Bachelor Degree from UK and is also a Certified Professional in Health and Hospital Administration (CPHHA) from the American Institute of Healthcare Quality. He oversees Tawuniya’s operations and his broad range of responsibilities include a number of vital divisions including Information Services, Customer Services, SMO, Human Resources, Support Services and Legal Affairs. Prior to this responsibility, Al-Arfaj worked in managerial Abdullah bin Abdulaziz Al-Arfaj COO positions such as VP-Medical & Takaful, General Manager for medical insurance & Takaful, and medical claims manager. He received a Bachelor’s degree in Quantitative Methods from King Saud University. He oversees the technical affairs of the three strategic business units, Medical & Takaful, Motor and Property & Casualty. Al Khomashi joined Tawuniya in 2001, and in the past has occupied several senior management positions including VP- Property and Casualty, GM Sultan Al Khomashi SVP-Technical Human Resources & Support Services and Non-Marine Claims management manager. He holds a Master and Bachelor's degrees in Chemical Engineering from King Saud University, besides the Master in Insurance and Risk Management from Cass Business School, UK. He became Tawuniya’s CFO in 2012. He has over 20 years of progressive business experience in the fields of accounting and finance. Before joining Tawuniya, Mr. Al-Nemari occupied different managerial and financial positions at many local and international companies. Mr. Amr A. Al-Nemary CFO Al-Nemary holds a bachelor degree in Accounting from King Abdul Aziz University in 1996. He is also a professional certified in finance and accounting from many local and international universities, schools and institutes. Source: Tawuniya
Tawuniya’s associates
United Insurance Company: Tawuniya holds a 50% stake in United Insurance. The company was established in 1986. Its main purpose is provide insurance to all vehicles which travel to or from Bahrain through the King Fahad’s causeway, a series of bridges and causeways connecting Saudi Arabia and Bahrain. The company reported a profit of SAR28mn for the first 11 months of 2015. Waseel Application Services Provider: Tawuniya holds a 45% stake in Waseel. The company provides health insurance and healthcare information technology products and services. It had a profit of SAR13mn in the first 11 months of 2015.
48 TAWUNIYA Insurance | Saudi Arabia
Manafeth
Tawuniya and a majority of the insurance companies in Saudi Arabia entered into an agreement on 1 January 2015 for co-insuring cars entering into the Kingdom from all borders except the border with Bahrain. Based on this agreement, all insurance companies participating in this coverage will have an equal share of the proceeds from the portfolio. Tawuniya would charge management fees for supervising the portfolio. The deal runs for three years starting from 1 January 2015. GWP from Manafeth was SAR195 mn in 2015, or 3% of the insurer’s total GWP.
SWOT analysis
Fig. 26. SWOT analysis Strengths Weaknesses - Unrivalled scale - It is the # 1 insurance provider in Saudi Arabia, - Equities portfolio (Tawuniya could go up to 20% of investment book accounting for 21% of gross written premium in 2015. It has a well- in relatively high risk assets such as equities) could contribute to recognised and trusted brand name in the market volatility in earnings - Solid market positioning: Health (market share: 26%), Motor (12%) - Underwriting skill in health insurance appears weaker than BUPA, in and Property and Casualty (20%) - implies strong scope for contract light of under-reserving between 2009-11 and higher loss ratios in renewals 2012-13 - Well capitalised and solvent - Multi-line business model - Wide distribution network (115 branches) - Superior knowledge of the landscape. Vast database of claims rate by age, gender, nationality and line of business - Advantage of scale with providers (hospitals and repairs shop) and back office operations Opportunities Threats - Saudi Arabia’s insurance penetration is low at 1.5% (% of GDP) - Price competition remains high between the large insurers. A - Motor insurance penetration is low (c40% of cars are insured) resumption of aggressive competition would result in squeezing of margins - Health coverage among Saudis working in private sector is 57%, suggesting room for growth - Timing of enforcement of measures, which would lead to growth in mandatory insurance lines, is uncertain - Privatisation of public healthcare system could grow target market by c15mn individuals - Slowdown in payments from public sector could lead to delays in premium receivables - Introduction of inbound travel insurance - Enforcement of mortgage finance law could spur growth in Property and Casualty insurance - Consolidation in the industry as insurers with weak solvency ratios exit - Widening of coverage to public sector motor fleet is an opportunity for Motor Source: Tawuniya, EFG Hermes estimates
49 TAWUNIYA Insurance | Saudi Arabia
B. Financial Statements
Income Statement ( Dec Year End) In SAR million 2015a 2016e 2017e 2018e Gross written premium 7,545 8,862 10,317 11,917 Net premium written 6,421 7,798 8,872 10,249 Net earned premium 5,665 7,053 8,119 9,360 Net claims incurred (4,144) (5,149) (6,008) (6,926) Policy acquisition costs (437) (514) (609) (703) Other underwriting expenses (556) (626) (700) (778) Underwriting results 528 764 802 952 Reinsurance commissions 69 65 89 103 Income from investments 288 280 324 364 Insurance profit 885 1,110 1,215 1,419 Other income/(expenses) (136) (209) (209) (236) Amortisation and impairment (54) (43) 0 0 Income before distributions 696 858 1,006 1,183 Distribution to policy holders (53) (74) (82) (98) Income before tax and minorities 642 783 924 1,085 Taxes and minority interest (44) (48) (61) (75) Net profit attributable to equity holders 598 735 863 1,010 Source: Tawuniya, EFG Hermes estimates
Balance Sheet ( Dec Year End) In SAR million 2015a 2016e 2017e 2018e Total cash and investments 6,201 7,482 8,725 10,101 Premium receivables 1,944 1,991 2,289 2,612 Reinsurance recoveries 2,126 2,431 2,706 3,025 Deferred acquisition costs 209 248 289 334 Intangibles Other 1,089 1,196 1,301 1,417 Total Assets 11,569 13,348 15,310 17,489 Accounts payable 503 553 608 669 Borrowings Outstanding claims 2,850 3,108 3,408 3,755 Unearned premiums 4,234 4,978 5,732 6,621 Other payables 1,674 1,790 1,996 2,222 Total liabilities 9,260 10,429 11,744 13,266 Shareholders’ equity 2,309 2,919 3,566 4,223 Total liabilities and shareholders' equity 11,569 13,348 15,310 17,489 Source: Tawuniya, EFG Hermes estimates
50 TAWUNIYA Insurance | Saudi Arabia
Key Performance Indicators In SAR million, unless otherwise stated 2015a 2016e 2017e 2018e Profitability Retention ratio 75.1 79.6 78.7 78.5 Claims ratio 73.2 73.0 74.0 74.0 Expense ratio 17.5 16.2 16.1 15.8 Combined ratio 90.7 89.2 90.1 89.8 Insurance profit to net earned premium 15.6 15.7 15.0 15.2 Net income to net earned premium 5.8 5.8 5.9 5.9 Investment income to insurance profit 32.5 25.2 26.7 25.7 Investment yield 4.5 6.6 5.1 5.3 ROAA 5.6 5.9 6.0 6.2 ROAE 27.3 28.1 26.6 25.9 Solvency Net earned premium to shareholders’ equity 258.3 269.8 250.4 240.3 Net earned premium to technical reserves 86.9 93.0 94.3 95.9 Cash & invested assets to technical reserves 87.5 92.5 95.5 97.4 Claim reserve development ratio 7.1 9.0 9.7 10.2 Investment Mix (%) Cash 13.3 12.8 11.1 11.0 Fixed Income 72.5 73.2 74.7 74.9 Equities 14.0 13.9 14.0 14.0 Real estate 0.2 0.1 0.1 0.1 Others 0.0 0.0 0.0 0.0 GWP Mix (%) Healthcare 65.1 66.5 65.7 64.9 Motor 17.2 19.9 21.3 22.9 Property 15.1 11.3 10.9 10.4 Others 2.6 2.3 2.0 1.9 Growth (%) Gross written premium 21.5 17.4 16.4 15.5 Net written premium 21.3 21.4 13.8 15.5 Net earned premium 17.9 24.5 15.1 15.3 Investment income 12.8 1.9 26.2 12.3 Insurance profit 45.2 25.2 10.8 15.3 Net attributable income 6.8 22.8 17.4 17.1 Cash and investments 10.0 20.6 16.6 15.8 Technical reserves 19.0 14.1 13.0 13.5 Total assets 16.4 15.4 14.7 14.2 Source: Tawuniya, EFG Hermes estimates
51 HH BUPA ARABIA
The healthy choice in Saudi Arabia
Insurance | Saudi Arabia
Initiating coverage with a Buy We initiate coverage on Bupa Arabia (Bupa) with a Buy rating as our FV of Initiation of Coverage SAR155.0 implies 22% potential upside. Bupa is the largest and most profitable healthcare insurer in Saudi Arabia with a 43% GWP market share in 1H16. Our Buy rating is underpinned by i) strong growth opportunities; ii) large scale; iii) operational excellence; and iv) upside from investment income. Moreover, lower capital intensity (due to slower GWP growth and high profitability) Stock Data should enhance free cash flows, dividend yields, and overall value appeal. We Rating Buy view Bupa as an attractive proxy to the Saudi healthcare system. The recent Price (24 Aug 2016) SAR127.27 weakness in the stock price provides a decent entry point, in our view. Fair Value SAR155.00 Last Div. / Ex. Date SAR2.0 on 02 June 16 Mkt. Cap / Shares (mn) SAR10,181.6 / 80.0 We forecast sustainable ROEs of c30% Av. Monthly Liquidity (mn) SAR14.4 Although we expect GWP growth to slow from its super growth phase in 2014- 52-Week High / Low SAR151.0 / SAR92.0 15, we expect Bupa to deliver an ROE of 30% over our forecast horizon. Bloomberg / Reuters BUPA AB / 8210.SE Est. Free Float 48% Improving investment returns should improve profitability, while high solvency ratios could free up capital for dividend distribution. We estimate its dividend Share Price Performance Relative pay-out to rise from 25% in 2015 to 52% by 2018. Transfer of public sector To TASI insurance (which appears difficult in the near term) or inorganic growth opportunities (M&A or expansion in to managing hospitals) could lead to higher earnings retention, and improve its growth outlook. Price (SAR) TASI
150 Plenty of room to enhance investment returns 140 Higher interest rates coupled with the reduced need to continue adding to 130 120 solvency, should free up the company to look for opportunities to enhance 110 investment returns. Unlike banks, the investment horizon for insurance 100 companies is short (healthcare is a short-tail business), allowing them to 90 80 quickly re-price their investment book. Bupa reported one of the lowest returns on its investment portfolio (0.4% in 2015). We expect it will benefit 24 Feb 16 24 Nov 15 24 Aug 15 24 Aug 16 from higher interest rates and by also selectively adding risk to its investment 24 May 16 portfolio, which is currently dominated by bank placements.
Key Financial Highlights Dec Year End (SAR mn) 2015a 2016e 2017e 2018e Net Earned Premium 6,739 7,746 8,670 9,793 Insurance Profit 761 813 851 986 Net Attributable Income 619 673 714 833 Murad Ansari EPS (SAR) 7.73 8.41 8.92 10.42 +966 11 2506149 Price to Earnings (x) 16.5 15.1 14.3 12.2 [email protected] Dividend Yield (%) 1.6 2.4 3.3 4.3 Price to Book Value (x) 6.5 4.9 4.0 3.3 Shabbir Malik ROAE (%) 49.1 36.9 30.8 29.8 +971 4 363 4009 Combined Ratio (%) 89.0 90.9 92.1 92.1 [email protected] Source: Bupa Arabia, EFG Hermes estimates
52 BUPA ARABIA Insurance | Saudi Arabia
DataMiner Investment Thesis Bupa Arabia (Bupa), a mono-line insurer, is (Dec Year End) In SAR million, unless otherwise stated 2015a 2016e 2017e 2018e the largest health insurance company in Per Share Numbers Saudi Arabia. It has a 43.6% market share of sector health GWP as of 1H16. Listed in EPS (SAR) 7.73 8.41 8.92 10.42 2008, the company started its operations in Reported Dividend Per Share (SAR) 2.00 3.07 4.20 5.43 Saudi Arabia in 1997. Bupa’s market share BVPS (Reported) (SAR) 20.83 27.24 33.09 39.31 has grown strongly over the past three years BVPS (Tangible) (SAR) 19.61 26.02 31.87 38.09 and has given the company unmatched scale Valuation Metrics in the sector. The company has demonstrated track record of consistent risk management, Price to Earnings (x) 16.5 15.1 14.3 12.2 with loss ratios remaining below 81% in its P/BV (Tangible) (x) 6.5 4.9 4.0 3.3 seven years of operations as a listed entity. Dividend Yield (%) 1.6 2.4 3.3 4.3 The strong build-up in scale of has also Payout ratio 25.9 36.5 47.0 52.1 allowed to improve its expense ratio, which is one of the lowest in the sector. We see more ROAA (%) 11.4 9.9 8.7 8.7 room for market share gains for Bupa as it ROAE (%) 49.1 36.9 30.8 29.8 leverages off its strong product offering and Gearing (Assets/Equity) (x) 3.7 3.4 3.3 3.3 quality of service. Investment returns, which Income Statement have been one of the lowest in the sector, have significant room for improvement, as Gross Written Premium 7,328 8,134 9,192 10,386 higher solvency ratio allows the company to Net Written Premium 7,286 8,077 9,118 10,303 focus on better asset allocation. Net Earned Premium 6,739 7,746 8,670 9,793 Net Claims Incurred (5,211) (6,112) (6,928) (7,834) Underwriting Expenses (786) (926) (1,058) (1,183) Underwriting Result 743 708 684 775 Investment Income 19 105 167 211 Insurance Profit 761 813 851 986 Income before Taxes and Minorities 645 702 746 869 Net Attributable Income 619 673 714 833 Balance Sheet Cash and investments 4,971 6,223 7,452 8,841 Total Assets 6,153 7,473 8,861 10,403 Technical Reserves 1,054 1,337 1,658 2,020 Total Liabilities 2,891 3,254 3,706 4,222 Minority Interest 4,487 5,294 6,213 7,258 Shareholders’ Equity 1,667 2,179 2,647 3,145 Valuation and Risks KPIs We have a Buy rating on Bupa with a fair Gross Written Premium Growth (%) 27.7 11.0 13.0 13.0 value of SAR155.0/share. We value Bupa Net Earned Premium Growth (%) 46.7 14.9 11.9 12.9 based on EVA model, using discount rate of Insurance Profit Growth (%) 116.9 6.8 4.7 15.9 10.5% and terminal growth of 5.0%. We see Net Attributable Income Growth (%) 102.3 8.8 6.1 16.8 significant room for long term growth as Retention Ratio (%) 99.4 99.3 99.2 99.2 insurance penetration levels in the country are low. Strong solvency ratios coupled with Claims Ratio (%) 77.3 78.9 79.9 80.0 a moderation in GWP growth reduces capital Expense Ratio (%) 11.7 12.0 12.2 12.1 intensity, opening up room for increase in Combined Ratio (%) 89.0 90.9 92.1 92.1 dividend pay-outs. Key risks to our Buy rating Gross Written Premiums to Shareholders’ Equity (x) 4.4 3.7 3.5 3.3 on Bupa include: i) stronger-than-expected claims inflation denting loss ratios, ii) Gross Written Premiums to Technical Reserves (x) 1.9 1.8 1.7 1.7 increased competition from smaller players Investment Yield (%) 0.4 1.9 2.4 2.6 leading to market share loss, and iii) lower- Investment Income to Insurance Profit (%) 2.4 12.9 19.6 21.4 than-expected investments returns. Source: Bupa Arabia, EFG Hermes estimates
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A. Well placed for profitable growth
Bupa has a strong history of above-segment growth and margins in the Saudi private medical insurance (PMI) market, supported by its strong focus on maintaining pricing, delivery of a quality product, customer service, and a strong support platform. Our analysis of the industry trend and Bupa’s positioning suggest that its above-market premium growth and profitability outlook should sustain. This should be helped by consolidation in the sector, which appears to have kick-started, as six companies are reportedly in the process or considering winding down operations. Investment in its support infrastructure coupled with investment in technology should allow for a cost-efficient operating model, in our view. The strong build up in market share (c43% of industry health GWP) has also given it the necessary scale to negotiate better prices for its customers and manage medical claim inflation.
Fig. 1. Bupa underwriting margins should remain strong Fig. 2. Enabling the company to sustain ROEs of c30%
12% 60% 10% 50% 8% 40% 6% 30% 4% 20% 2% 10% 0% 0% 2012 2013 2014 2015 2016e 2017e 2018e 2012 2013 2014 2015 2016e 2017e 2018e
Source: Company reports, EFG Hermes estimates Source: Company reports, EFG Hermes estimates
Top line growth plus strong cost controls to drive 3-year EPS CAGR of 15%
We forecast Bupa’s earnings to grow at a 3-year CAGR of 15%, supported by: Healthy volume growth: While expat health insurance has risen strongly due to enforcement, there still exists a gap. Moreover, enforcement of PMI for private sector Saudi national employees stands at only 57%, suggesting significant room for improvement. In addition, we expect the company to make further market share gains, though lower than in the previous two years. We forecast Bupa’s market share of GWP to rise to 45% over the next three years from 39% at the end of 2015. Premium pricing: We expect premium price growth of 3-5% over the next three years. This is significantly lower than in the past two years, when premium growth was supported by the addition of compulsory benefits provided to the insured thus allowing the company to raise premium rates. Combined ratio: Bupa’s loss ratio of 78% in 2015 was one of the lowest in the sector and is likely to be tough to improve further. We forecast a slight increase in loss ratio, but improved cost efficiencies due to scale should help drive improvement in the company’s expense ratio. Investment income: Higher interest rates are net positive to Bupa which had SAR4.2bn or c96% of its investment portfolio in bank deposits/fixed income securities. Insurance companies have a short investment horizon (one year or less) and should benefit from rising deposit rates being offered by the banks. Moreover, with GWP growth slowing, the need to continue ploughing funds in to low risk assets should ease. Bupa’s investment book net return of 0.4% in 2015 was one of the lowest among similar-sized peers, and far below the c4% return delivered by Tawuniya over the past three years.
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Sustainable ROEs of 30% We estimate Bupa’s ROE at c30% over our forecast period, helped by strong underwriting profitability and improving investment returns. We believe that our ROE forecasts are conservative. An improvement in the pay-out ratio could further enhance ROEs from our estimates. We estimate pay-out ratios to rise from 25% in 2015 to 52% by 2018. The retention of profits is likely to drive up its equity base, and further enhance solvency. However, the resulting decline in leverage could weigh on ROEs.
Fig. 3. Bupa Arabia – Drivers of ROE
1 Premiums refers to net earned premium Source: Company reports, EFG Hermes estimates
Valuation – Reduced capital intensity adds value, upside to dividends
Reduced capital intensity should enhance free cash flows, dividend yields, and overall value appeal. Slower GWP growth should ease the pressure of continued build up in solvency ratios, relaxing the capital deployment alternatives for the company, in our view. Additionally, this could also further enhance its pay-out ratio which jumped from 12% in 2014 to 25% in 2015. With non-organic growth limited by a lack of attractive options and current regulatory environment, we estimate that Bupa could easily afford to raise its payout ratio to 45-50% over the next three years. Bupa also looks attractively valued against private hospital operators, in our view.
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We initiate coverage with a Buy We use residual income valuation to derive our fair value for Bupa. Residual income or excess return to shareholders is the income generated by the company after deducting the cost of its capital. We calculate residual income by deducting from our net income estimates the equity charge, which we calculate as the beginning shareholders’ equity for each period multiplied by our cost of equity assumption. We estimate a cost of equity of 10.5% for Bupa (4.5% risk-free rate, 6.0% equity risk premium and a beta of 1.0).
Fig. 4. Bupa - Residual income valuation 2015a 2016e 2017e 2018e 2019e 2020e Terminal year Beginning shareholders’ equity 1,051 1,667 2,179 2,647 3,145 3,702 4,361 Cost of equity 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% Return on equity 49.1% 36.9% 30.8% 29.8% 29.8% 29.9% 28.9%
12345 5 Net Income 619 673 714 833 991 1,175 1,233 Less: Cost of equity 175 229 278 330 389 458 Residual income/excess returns 498 485 555 661 786 775 Terminal growth rate 5% Terminal value of residual income/excess returns 14,098 PV of explicit forecasts 450 397 412 443 477 PV of terminal year 8,557
Equity invested 1,667 PV of excess equity returns 10,737 Equity value 12,403 Shares outstanding (mn) 80.0 FV (SAR/share) 155.00 Current market price (23 August 16) 127.27 Upside/(Downside) 21.8% Source: EFG Hermes estimates
A cheaper alternative to play the healthcare system Although it is difficult to compare Bupa to other sectors given differences in growth profiles, ROE and capital intensity, we believe that it offers an attractive alternative to the healthcare sector in Saudi Arabia, which is largely driven by the same drivers. Moreover, Bupa’s ROE is unlevered (the company has no debt), making its ROE more attractive relative to healthcare operators. The critical factor for Bupa relative to healthcare players is i) management of loss ratios, and related factors; and ii) accurately forecasting medical insurance. Bupa’s eight year history of operations as a listed company (19 years in total) in Saudi Arabia indicates that the company has managed both factors well, even when the segment saw price wars in 2011-13.
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Fig. 5. Valuation comparison - Bupa versus Saudi healthcare companies
P/E (x) P/BV (x) Div Yld (%) ROE (%) 2015a 2016e 2017e 2015a 2016e 2017e 2015a 2016e 2017e 2015a 2016e 2017e Mouwasat 30.4 25.6 22.2 6.1 5.5 4.9 1.6 2.0 2.4 20.0 21.1 21.6 Dallah 29.5 22.1 21.1 3.5 3.3 3.0 1.8 2.4 2.4 12.4 15.2 14.9 CARE 21.9 16.8 16.0 3.2 2.9 2.7 0.0 3.1 3.5 15.1 18.1 17.6 Bupa 16.5 15.1 14.3 6.5 4.9 4.0 1.6 2.4 3.3 49.1 36.9 30.8 Source: Company reports, EFG Hermes estimates
Company specific risks In addition to the industry specific risks that we highlighted earlier, we identify company specific risks for Bupa: Greater competition: Bupa has been able to gain significant market share from its competitors over the past two years. A loss of a key customer due to competitive pricing could dent the company’s GWP market share and growth. Loss ratio: Bupa’s loss ratio for 2015 was one of the best in the large healthcare insurance segment. A higher-than-expected increase in loss ratio could dent profitability. Investment income: Increase in risk profile coupled with volatility in financial markets could lead to lower-than-expected investment returns. Our current forecasts are mainly based on improved interest rates. However, volatility in equity markets could lead to poor returns, and lead to lower-than-expected investment returns. Sharper than expected increase in medical inflation: Given that insurers file for annual premium increases at the end of the year, which do not become effective until the time of renewal, a sharp increase in medical inflation could impact profit margins on a one-year basis (assuming that issues can be re-priced for in the following year).
Snapshot of Bupa - Saudi Arabia’s largest and most profitable insurer
Bupa Arabia for Co-operative Insurance Company (Bupa Arabia) was established in 2007, and listed on Tadawul in 2008 as a cooperative insurance company, acquiring the Saudi assets of Bupa Middle East Limited (BME). A joint venture between Bupa Group and Nazer Group, BME, based out of Bahrain, started its health insurance business in Saudi Arabia in 1997, acting through its agent ASAS Health Care Co Ltd (a majority owned company of Nazer Group). Bupa Arabia is part of Bupa Group, a UK-based global healthcare provider, operating across 190 countries.
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Fig. 6. Bupa Arabia – Shareholding breakdown
Free Float, 48%
Modern Computer Programs Co., 9%
Nazer Group Holdings, 9% Bupa Investment ASAS Healthcare Overseas Limited, Co., 8% 26%
Source: Tadawul
Fig. 7. Bupa Arabia - Profile of key management
Name Position Brief Profile Tal Hisham Nazer has 13 years’ experience in Saudi Health insurance, having joined the Tal Hisham Nazer Chief Executive Officer business in 2002, as commercial finance manager, and he has been CEO, and a member of the Bupa Arabia Board of Directors, since its listing in 2008. Fraser Gregory has more than 20 years’ health experience (Insurance, Hospitals and Medical Services) since joining Bupa in its UK operation during 1995 he has held a variety Fraser Gregory Chief Financial Officer of senior finance roles covering; Bupa Group Financial Controller, Bupa Hospitals Finance Director and also Bupa Insurance CFO for a handful of years. Ali Mohammed Sheneamer has 18 years’ collective experience in marketing, sales and general management of which 3 years was in Saudi health insurance, having joined the business in 2013 in the current role. Ali has served, before joining Bupa Arabia, as the Ali Sheneamer Chief Commercial Officer Deputy Governor and chief operating officer (COO) of SAGIA for 5 years. Prior to this Ali was employed as group marketing head at the National Commercial Bank for 2 years and in various marketing assignments at Procter & Gamble for 8 years. Arif Hunashi joined Bupa Arabia during 2014, as chief operations officer, and before this he worked for Unilever Arabia for 15 years, 10 years of which was at director level, and Arif Hunashi Chief Operating Officer covering a number of general manager and customer development director roles across the Middle East (including Saudi Arabia, UAE, Oman, Bahrain and Qatar). Thamer Al Harthi has over 15 years’ experience in Human Resources management. His Chief Human Resource experience was built at prominent local and multinational organisations. Before joining Tahamer Al-Harthi Officer Bupa Arabia, in April 2010, he worked with Fonterra, the world’s largest dairy exporter based out of Dubai, as human resources director for the Middle East and Africa. Source: Bupa Arabia
A specialised health insurer Bupa Arabia is a mono-line insurer, providing only healthcare insurance. With gross written premiums of SAR7.3bn in 2015, BUPA Arabia is the second largest insurance and the largest healthcare insurance company. The company has made strong market share gains over the past three years, and has a commanding market share of 40% of medical GWP. The company is also the most profitable insurance company with a 2015 ROE of c46%. Out of the top eight insurance companies in terms of GWP, three companies reported a loss in 2015.
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Fig. 8. Bupa Arabia – Market share has seen healthy growth Fig. 9. Sector leading profitability Return on capital employed of top 8 insurance companies (2015)
50.0% 50% 45.0% 40% 40.0% 30%
35.0% 20% 45.5%
30.0% 43.6%
10% -7.7% -3.7% 27.3% 20.4% 17.3% 8.3% -11.9% 25.0% 38.6% 36.5% 0% 20.0% 15.0% -10%
10.0% 24.6% -20% 20.5% 20.1% 5.0% 19.4% AXA UCA Bupa
0.0% SAICO Malath Al Rajhi 2010 2011 2012 2013 2014 2015 1H16 Medgulf Tawuniya
Source: Company reports, SAMA, and EFG Hermes Source: Company reports, EFG Hermes
Market leader by a big margin; not by chance
With c40% of health insurance GWP, Bupa is the market leader in private medical insurance segment in Saudi Arabia. The second biggest player is Tawuniya, with a market share of 26%. Although the company’s market share has risen strongly over the past three years, we highlight that its leadership position has not come by chance. The company’s parent, Bupa Group, has a market leadership position across most countries it operates in. Globally, Bupa Group has a presence in 190 countries, and 32.2mn customers globally. Thus, it has demonstrated its capability and capacity which has allowed the company to maintain a dominant position in the markets it operates in. Moreover, the group’s strong global experience and scale allows for strong cost efficiencies compared to other domestic players.
Fig. 10. Bupa’s global presence and market share Fig. 11. Bupa Group’s customer base in different markets 2015 In million 2nd 2nd 1st 7th 4th 1st 2nd 1st Mkt 7.0 6.2 50% Position 6.0 5.3 40% 5.1 5.0 30% 3.7 4.0 20% 3.0 2.4 10% 2.0 1.3 0% 1.0
UK 0.0 India Chile Kong Spain Hong
Poland UK Spain Poland Saudi HK Australia Thailand Australia
Source: Bupa Group, EFG Hermes Source: Bupa Group
Strong positioning; global lineage provides unmatched advantage
Bupa is the premium healthcare insurance provider in Saudi Arabia, with a strong domestic franchise. Although the company’s pricing is generally at a premium to peers, the value it adds through its extensive network, strong customer service, and global linkages, means it has an unmatched advantage over peers. This is reflective in its high customer retention rate, which
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according to the company, has remained above 80% for the past three years. Globally, Bupa Group not only provides health insurance, but is a full service healthcare provider. Current regulations, however, do not allow the company, under the legal entity of an insurance company, to own/manage healthcare facilities in the Saudi Arabia.
Fig. 12. Bupa Group - Not only an insurer, but a global health service provider
Health Other funding Aged Health & care Insurance products Clinics Hospitals care engagement Australia & NZ • • • • • UK • • • • • • Spain & LatAm • • • • • • IDM • • • • • Bupa Global • • • Source: Bupa
Fig. 13. Bupa Arabia - SWOT analysis
Strengths Weaknesses Strong solvency and market positioning – premiums market share Commanding market share in healthcare sector could mean that the 44% as of 1H16 regulator could introduce measures to mitigate Bupa’s dominance Consistent risk management – loss ratio has remained at or below Mono-line business model exposes Bupa to cycles in healthcare 81% for seven consecutive years of operations as a listed entity. segment Solid relationship with healthcare providers (hospitals and clinics) helps Approach to investing has scope for improvement. Investments keep claims cost escalation below the market average allocation is biased towards Murabaha deposits (tenor 3 -12 months) Room for improvement in the premium receivables cycle. As of 2015, Bupa’s size and its singular focus on health insurance confers 37% of receivables were past-due three months based on policy advantage of economies of scale inception date Ability to leverage the international health care experience of Bupa Group and Bupa’s brand Superior customer service. Call centre embedded with doctors and nurses Opportunities Threats Push for better enforcement from authorities and coverage of public Layoffs in the corporate sector, particularly expats, could dent its sector customer base, and hence GWP Widening of private medical insurance coverage to Saudi nationals in Weak macro outlook could weigh on its ability to re-price premiums the public sector (target market 16.8mn) and private sector (2.5mn) and to collect receivables particularly from the public sector Banning of individual insurance market by authorities that should drive Low switching costs makes it easy for large corporate clients to switch an upwards revision of insurance premium for c3mn individuals health insurers, which could cap market share improvement Enforcement of inbound travel insurance (pilgrims are potentially a big market) Room for consolidation in the industry as insurers with weak solvency are likely to merge or go out of business Source: EFG Hermes
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Higher enforcement levels on expats might slow health GWP growth
Enforcement of PMI provision to expatriates has been a key factor driving strong GWP growth over the past few years. With 87% of expatriates covered by medical insurance, further room for sector GWP growth is limited. The company itself believes that of the remaining uncovered expatriate population the majority is from the low income segment, a segment which Bupa does not see as very profitable. Hence, the company is likely to have limited appetite here.
Public sector mandate for PMI can double potential market size Bupa estimates that only 56% of Saudis working in the private sector are covered under PMI. Moreover, almost 73% of Saudis are covered under the public healthcare programme. Rising healthcare funding requirements and growing financial constraints of the government could create an opportunity for private medical insurance to be extended to the public sector. Should the government opt for this, we expect the migration from public healthcare to private medical insurance to happen over phases, with the shifting of individual public sector entities. This could provide a strong driver for growth in health insurance, in our view. On a conservative basis, we estimate that the public sector, in total, could add cSAR45-50bn in sector GWP, almost doubling the sector’s GWP from 2015 levels.
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Fig. 14. Government spending on health Fig. 15. Public sector is the key provider of health services No. of beds
MOH Budget (SARmn) % of Govt Budget MOH Other Governmental Private Sector 80,000 70,000 7.2% 70,000 60,000 7.0% 60,000 50,000 6.8% 50,000 17.7% 40,000 6.6% 17.7% 40,000 19.3% 18.8% 18.7% 18.1% 30,000 6.4% 30,000 20,000 6.2% 59.3% 20,000 59.1% 58.7% 58.7% 60.2% 10,000 6.0% 59.5% 10,000 0 5.8% 0 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Source: Ministry of Health, Saudi Arabia Source: Ministry of Health, Saudi Arabia
But Bupa has invested in the scalability of its business model
Differentiation provides room for further market share gains Despite strong gains over the past three years, we see room for Bupa to improve market share further. Leveraging its strong support platform, Bupa has differentiated itself from peers by investing heavily to provide a high level of customer service, which ranks amongst the best in the sector.
Fig. 16. We expect Bupa to continue to outpace sector Fig. 17. Key corporate contracts added since 2014 growth GWP growth Y-o-Y Date Companies
Sector Bupa Jan 2014 Al Rajhi Bank 100%
80% Jan 2014 Abdul Latif Jamil Group 60% Jan 2014 Savola Group 40%
20% Jul 2014 SABIC 0% 2012 2013 2014 2015 2016e 2017e 2018e Oct 2015 Nesma & Partners Contracting Company
Source: Company reports, SAMA, and EFG Hermes estimates Source: Company announcement, EFG Hermes estimates
Leveraging economies of scale Bupa has been investing in expanding its services and operations across the country over the past few years. While capacity building should be an ongoing exercise, we believe that Bupa has reached a level of investment in infrastructure where it should start to benefit from economies of scale. We expect its expense ratio to continue to trend downwards, providing strong support to underwriting income growth.
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Fig. 18. Investing in building up support infrastructure will pay off in lower expense ratio In SARmn (LHS), unless otherwise stated
Selling & marketing General & adminsitrative Expense Ratio
1,400 15% 1,200 14% 1,000 13% 800 12% 600 11% 400 10% 200 9% 0 8% 2012 2013 2014 2015 2016e 2017e 2018e
Source: Company reports, EFG Hermes estimates
Pricing discipline should help manage loss ratios A key area of strength for Bupa is its strong pricing discipline. The company has compromised growth in favour of maintaining profitability. This was clearly evident in 2011-12 when Bupa avoided entering in to a pricing war with its competitors to capture market share. Although Bupa’s GWP growth slowed below the sector average, the company was able to gain market share quickly when the price wars ended. It has consistently improved its loss ratios over the past three years. With introduction of actuarial-based pricing, we believe that price competition similar to 2011-12 is unlikely to recur. With a commanding market share, and strong relationship with customers and health providers, we believe that Bupa should be able to deliver higher-quality products to its customer at a competitive price.
Fig. 19. We forecast Bupa’s loss ratios to deteriorate Fig. 20. Bupa has one the lowest loss ratios amongst leading marginally from a low base in 2015 players in the health insurance segment 2015
81% 100%
80% 90% 79% 80% 78% 70% 77% 76% 60% 75% 50% 2012 2013 2014 2015 2016e 2017e 2018e Bupa Tawuniya SAICO AXA Medgulf
Source: Company reports, EFG Hermes estimates Source: Company reports
Slower GWP growth could widen investment horizons
Strong GWP growth over the past three years has forced Bupa to maintain a conservative approach on investments, particularly on the shareholder book. Investments other than in fixed income assets attract higher haircuts on admissibility under regulations, when calculating capital levels. This has constrained Bupa’s ability to improve investment yields. Almost 95% of the policy holder investment book is accounted by murabaha deposits with less than one-year
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maturity. However, even if the investment mix does not change significantly, rising interest rates bode well for investment returns.
Fig. 21. Policyholder’s investment book size and returns Fig. 22. Shareholder’s investment book size and returns
Murabha (SARmn) FVIS (SARmn) Return Murabha (SARmn) FVIS (SARmn) Return 2300 4.0% 6,000 3.5% 1800 3.0% 5,000 3.0% 2.0% 4,000 2.5% 1300 2.0% 3,000 1.0% 1.5% 800 0.0% 2,000 1.0% 300 1,000 0.5% -1.0% 0 0.0% (200) 2013 2014 2015 2016e 2017e 2018e -2.0% 2013 2014 2015 2016e 2017e 2018e
Source: Company reports, EFG Hermes estimates Source: Company reports, EFG Hermes estimates
Solvency levels are strong, and should continue to improve After falling marginally short of the regulatory solvency requirement in 2014 (due to strong GWP growth), Bupa has built up a strong buffer as profitability improved in 2015. We estimate Bupa’s solvency level stood at 19% at the end of 2015. Without a significant shift in the risk profile of the company’s investment book, we estimate that solvency should continue to improve. A strong build up in the solvency base provides a strong base to add some risk and enhance returns of the investment portfolio. Insurance companies in Saudi Arabia are not required to publicly disclose their solvency levels, which makes assessment of the capital position independently a challenging exercise. However, the simple business profile of Bupa (only health insurance business), makes it slightly less challenging to estimate solvency. We estimate of Bupa’s solvency using the regulatory framework. The company does not disclose solvency ratios, and actual numbers could be different from our estimates.
Fig. 23. Bupa – NWP solvency estimates Fig. 24. Bupa – Claims solvency estimates
30% Bupa NWP Solvency Requirement 35% Bupa Claims Solvency Requirement
25% 30%
20% 25%
15% 20%
10% 15% 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018
Source: EFG Hermes estimates Source: EFG Hermes estimates
Investment book has been conservatively managed Bupa has maintained a conservative profile for its investment book so far, with the majority of liquidity deployed in bank deposits or fixed income assets, which attract lower risk weighting for solvency ratio calculations. This was clearly required during 2010-13 due to lower solvency levels, and more recently (2014-15) due to strong GWP growth rates. When comparing Bupa’s
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investment book profile with peers - Tawuniya and Medgulf – this clearly highlights the management’s conservative approach. With improving profitability driving solvency ratios comfortably above regulatory requirements, Bupa is now focusing on improving investment returns, which should support sustained high levels of ROE, in our view.
Fig. 25. Investment book split of top Fig. 26. Bupa – Growing investment Fig. 27. Bupa – Split of FVIS three insurers book, changing allocation investment book 2015 In SARmn
Equities Fixed Income 6,000 Cash Murabaha FVIS Sukuks/Bonds Mutual Funds 100% Equities Others 90% 5,000 80% 100% 70% 4,000 80% 60% 3,000 50% 60% 40% 2,000 40% 30% 20% 1,000 20% 10% 0% 0% 0 2015 1H16 Medgulf Tawuniya Bupa 2013 2014 2015 1H16
Source: Company reports Source: Company reports Source: Company reports
Investment returns’ contribution to earnings have been negligible; but should improve In comparison to peers, contribution of investment returns to Bupa’s earnings have been negligible. This is partly because it has been more focused on growing the underwriting business, which on average, has contributed c95% of the insurance business profitability.
Fig. 28. Investment income contribution should rise Fig. 29. Bupa has low income contribution from investments In SARmn (LHS) As a % of underwriting income in 2015
Investment Income As a % of underwriting income 9% 8% 300 30.0% 7% 250 25.0% 6% 200 20.0% 5% 4% 150 15.0% 3% 100 10.0% 2% 50 5.0% 1% 0 0.0% 0% 2012 2013 2014 2015 2016e 2017e 2018e 2019e Bupa Medgulf Tawuniya
Source: Company reports, EFG Hermes estimates Source: Company reports, EFG Hermes estimates
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B. Financial Statements
Income Statement (Dec Year End) In SAR million 2015a 2016e 2017e 2018e Gross written premium 7,328 8,134 9,192 10,386 Net premium written 7,286 8,077 9,118 10,303 Net earned premium 6,739 7,746 8,670 9,793 Net claims incurred (5,211) (6,112) (6,928) (7,834) Policy acquisition costs (467) (570) (663) (749) Other underwriting expenses (319) (356) (395) (434) Underwriting results 743 708 684 775 Income from investments 19 105 175 216 Insurance profit 761 813 860 991 Other income/(expenses) (5) (5) (6) (6) Amortisation and impairment (39) (30) (20) (20) Income before distributions 718 778 834 965 Distribution to policy holders (73) (76) (81) (92) Income before tax and minorities 645 702 753 873 Taxes and minority interest (27) (29) (32) (35) Net profit attributable to equity holders 619 673 721 837 Source: Bupa Arabia, EFG Hermes estimates
Balance Sheet (Dec Year End) In SAR million 2015a 2016e 2017e 2018e Total cash and investments 4,971 6,223 7,461 8,852 Premium receivables 749 758 881 996 Reinsurance recoveries 4 46 54 62 Deferred acquisition costs 78 81 92 104 Intangibles 98 98 98 98 Other 252 267 283 301 Total Assets 6,153 7,473 8,869 10,413 Accounts payable 313 360 413 475 Borrowings 0 0 0 0 Outstanding claims 1,054 1,337 1,658 2,020 Unearned premiums 2,891 3,254 3,706 4,222 Other payables 229 343 437 543 Total liabilities 4,487 5,294 6,215 7,260 Minority interest 0 0 0 0 Shareholders’ equity 1,667 2,179 2,655 3,153 Total liabilities and shareholders' equity 6,153 7,473 8,869 10,413 Source: Bupa Arabia, EFG Hermes estimates
66 BUPA ARABIA Insurance | Saudi Arabia
Key Performance Indicators 2015a 2016e 2017e 2018e Profitability Retention ratio (%) 99.4 99.3 99.2 99.2 Claims ratio (%) 77.3 78.9 79.9 80.0 Expense ratio (%) 11.7 12.0 12.2 12.1 Combined ratio (%) 89.0 90.9 92.1 92.1 Insurance profit to net earned premium (%) 11.3 10.5 9.8 10.1 Net income to net earned premium (%) 9.2 8.7 8.2 8.5 Investment income to insurance profit (%) 2.5 14.8 24.4 27.2 Investment yield (%) 0.4 1.9 2.4 2.6 ROAA (%) 11.4 9.9 8.7 8.7 ROAE (%) 49.1 36.9 30.8 29.8 Solvency Net earned premium to shareholders’ equity (%) 439.7 373.3 347.2 330.3 Net earned premium to technical reserves (%) 404.4 355.4 327.5 311.4 Cash &invested assets to technical reserves (%) 126.0 135.6 138.9 141.6 Claim reserve development ratio (%) 29.8 26.8 24.0 21.9 Investment Mix Cash (%) 16.9 17.5 18.0 18.6 Fixed Income (%) 80.8 80.2 79.6 79.0 Equities (%) 2.2 2.0 2.1 2.1 Real estate (%) 0.0 0.0 0.0 0.0 Others (%) 0.0 0.3 0.3 0.3 GWP Mix Healthcare (%) 100.0 100.0 100.0 100.0 Motor (%) 0.0 0.0 0.0 0.0 Property (%) 0.0 0.0 0.0 0.0 Others (%) 0.0 0.0 0.0 0.0 Growth Rates Gross written premium (%) 27.7 11.0 13.0 13.0 Net written premium (%) 28.8 10.9 12.9 13.0 Net earned premium (%) 46.7 14.9 11.9 12.9 Underwriting income (%) 131.1 (4.7) (3.4) 13.3 Investment income (%) (37.4) 465.9 58.9 26.4 Insurance profit (%) 116.9 6.8 4.7 15.9 Net attributable income (%) 102.3 8.8 6.1 16.8 Cash and investments (%) 31.8 25.2 19.8 18.6 Technical reserves (%) 23.4 16.4 16.8 16.4 Total assets (%) 30.1 21.4 18.6 17.4 Source: Bupa Arabia, EFG Hermes estimates
67
Non-Rated Insurers 01 – ACE Arabia Cooperative Insurance Company 70 02 – Al Ahlia Cooperative Insurance Company 72 03 – Al Alamiya for Cooperative Insurance Company 74 04 – AL Rajhi Company for Cooperative Insurance 76 05 – Al Sagr Cooperative Insurance Company (Al Sagr) 78 06 – Alahli Takaful Company (ATC) 80 07 – Alinma Tokio Marine Company (Alinma) 82 08– Aljazira Takaful Taawuni Company (Jazira) 84 09 – Allianz Saudi Fransi Cooperative Insurance Company (Allianz) 86 10 – Allied Cooperative Insurance Group (ACIG) 88 11 – Amana Cooperative Insurance Company (Amana) 90 12 – Arabia Insurance Cooperative Company (AICC) 92 13 – Arabian Shield Cooperative Insurance Company (Arabian Shield) 94 14 – AXA Cooperative Insurance Company (AXA) 96 15 – Buruj Cooperative Insurance Company (Buruj) 98 16 – Gulf General Cooperative Insurance Company (GGCI) 100 17 – Gulf Union Cooperative Insurance Company (Gulf Union) 102 18 – Malath Cooperative Insurance & Reinsurance Company (Malath) 104 19 – Mediterranean and Gulf Insurance & Reinsurance (Medgulf) 106 20 – Metlife AIG-ANB Cooperative Insurance (Metlife) 108 21 – SABB Takaful Company (SABB) 110 22 – Salama Cooperative Insurance Company (Salaama) 112 23 – Sanad Cooperative Insurance Company (Sanad) 114 24 – Saudi Arabian Cooperative Insurance Company (SAICO) 116 25 – Saudi Enaya Cooperative Insurance Company (Enaya) 118 26 – Saudi Indian Company for Cooperative Insurance (Wafa) 120 27 – Saudi Re for Cooperative Reinsurance (Saudi Re) 122 28 – Saudi United Cooperative Insurance Co. (Walaa) 124 29 – Solidarity Saudi Takaful Company (Solidarity) 126 30 – Trade Union Cooperative Insurance Company (Trade Union) 128 31 – United Cooperative Assurance Company (UCA) 130 32 – Wataniya Insurance Company (Wataniya) 132 33 – Weqaya Takaful Insurance and Reinsurance Company (Weqaya) 134 ACE Arabia Cooperative Insurance Company
Financials | Saudi Arabia
A P&C insurer with motor exposure Established in 2008, ACE Arabia is a multi-line insurer, established as a JV of ACE INA Stock Data International Holding Limited with Saudi investors. P&C insurance is the company’s major business line contributing 64% to GWP, followed by motor insurance (27%) Price SAR40.07 in 2015. Health insurance also contributed a small portion to GWP, but recent trends Bloomberg / Reuters ACE AB / 8240.SE suggest that it is winding down its health insurance business. The company’s history Mkt Cap / Shares (mn) SAR400.7 / 10.0 of insurance activity in Saudi Arabia goes back to 1970 when International Corpora- 3M ADVT (mn) SAR9.1 tion for Trade and Contract Services represented a Bahraini joint venture insurance company owned by the Al Khereiji Group and ACE INA International Holdings Limited. Float 60.0% Foreign Ownership Limit 49.0% Profitable, but ROE on a downward descent Ace Arabia is one of the few insurance companies that has reported a net profit Major Shareholders consistently for the last five years. However, its profitability has fallen with ROEs de- ACE INA Int. Holdings, USA 30.0% clining steadily to 5% in 2015 from 14% in 2012. While net earned premiums in- Abdulaziz & Mohammed A. Al Khereiji 5.0% creased 22% Y-o-Y in 2015, this was outpaced by a 28% Y-o-Y increase in net claims Al Khereiji Construction Co. Limited 5.0% incurred, driving the loss ratio to 61% in 2015 from 58% in 2014. Retention ratio improved from a six-year low of 40% in 2014 to 45% in 2015 as the share of motor premiums rose to 27% in 2015 from 23% in 2014. The loss ratio worsened in 2015 Share Price Performance mainly driven by the other general insurance segment, however strong cost controls allowed it to improve its expense ratio. As a result, ACE’s combined ratio improved Relative to TASI (Rebased) from 113.8% in 2014, which was its highest level in six years, to 108.5% in 2015. 78 Price (SAR) TASI 72 Profitable operations has warded off need to raise additional capital 66 ACE is one of the few insurers in Saudi Arabia that has not needed to raise additional 60 capital through a rights issue. By the end of 1H16, returned earnings were slightly 54 higher than its paid up capital. 48 42 36 30 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 116 94 115 117 Insurance Profit 18 17 16 24 Net Attributable Income 12 13 9 16 EPS (SAR) 1.16 1.29 0.91 1.58 Price to Earnings (x) 34.5 31.1 43.9 25.4 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.1 2.8 2.6 2.4 ROATE (%) 9.3 9.4 6.2 10.0 Loss Ratio (%) 59.4 57.8 60.6 54.7 Combined Ratio (%) 105.4 113.8 108.5 102.4
Source: ACE Arabia Cooperative Insurance Company, EFG Hermes
70 ACE Arabia Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 1.16 1.29 0.91 1.13 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 13.03 14.32 15.23 16.37 Income Statement Gross Written Premium 249 248 269 134 Net Written Premium 115 99 121 76 Net Earned Premium 116 94 115 58 Net Claims Incurred (69) (55) (70) (27) Underwriting Expenses (53) (53) (55) (32) Underwriting Income (6) (13) (10) (0) Investment Income 2 5 0 2 Reinsurance Commission & Other Income 22 25 26 14 Insurance Profit 18 17 16 16 Net Attributable Income 12 13 9 11 Balance Sheet - Key Highlights Cash & Investments 215 237 269 269 Total Assets 502 618 673 600 Outstanding Claims 142 210 239 161 Unearned Premium 73 91 104 115 Total Liabilities 328 431 477 393 Common Shareholders' Equity 174 187 196 207 KPIs Profitability Risk retention ratio (%) 46.0 40.1 44.9 56.9 Loss ratio (%) 59.4 57.8 60.6 45.9 Expense ratio (%) 46.0 55.9 48.0 54.6 Combined ratio (%) 105.4 113.8 108.5 100.4 Investment yield (%) 1.0 2.2 0.0 1.5 ROAA (%) 2.6 2.3 1.4 3.6 ROATE (%) 9.3 9.4 6.2 14.4 Solvency NEP to equity (%) 66.7 50.4 58.9 55.8 NEP to technical reserves (%) 54.0 31.2 33.6 42.0 Cash & invested assets to technical reserves (%) 100.1 78.4 78.3 97.5 Claim reserve development (%) 115.6 48.3 13.8 (26.6) GWP Mix Health (%) 2.0 0.3 0.0 0.0 Motor (%) 21.9 22.5 27.3 41.4 P&C (%) 65.2 67.8 63.8 48.4 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 10.9 9.4 8.9 10.2 Loss Ratio by Segments Health (%) 50.6 43.9 N/M N/M Motor (%) 75.1 65.2 64.8 54.7 P&C (%) 51.5 53.2 53.6 26.7 P&S (%) N/A N/A N/A N/A Others (%) 31.1 28.3 57.2 46.2 Growth Rates (Y-o-Y) Gross written premium (%) 19.4 (0.5) 8.5 (18.0) Net written premium (%) 13.3 (13.3) 21.4 (5.8) Net earned premium (%) 12.8 (18.8) 22.4 2.5 Source: ACE Arabia Cooperative Insurance Company, EFG Hermes
71 Al Ahlia Cooperative Insurance Company
Financials | Saudi Arabia
A small player focusing on motor insurance Established in 2007, Al Ahlia Insurance Company is a multi-line insurer, with focus Stock Data on motor and health insurance. Misr Life Insurance Company, 100% owned by the Egyptian Government, is the founding shareholder, and currently has a 5.6% stake. Price SAR7.20 The company had a market share of 0.9% of sector GWP in 2015. Motor and health Bloomberg / Reuters ALAHLIA AB / 8140.SE are the major drivers and collectively contributed 85.8% to its GWP in 2015. Motor insurance is the largest segment, accounting for 59.9% of GWP in 2015. The share Mkt Cap / Shares (mn) SAR230.4 / 32.0
of health insurance in GWP increased from 77% in 2010 to reach a peak of 82% in 3M ADVT (mn) SAR20.6 2011, but has subsequently declined to 25.8% in 2015. Float 94.4% Losses continue to rise; some signs of improvement in 1H16 Foreign Ownership Limit 49.0% Al Ahlia has reported losses consistently over the past three years, with the losses increasing since 2013. This deterioration in performance is due to a disproportion- ate increase in claims, as evident from the worsening of the loss ratio from 49.7% in Major Shareholders 2011 to 77.2% in 2015. The growth in NEP has lagged the growth in claims. In 2014 Misr Life Insurance Company, Egypt 5.6% the NEP increased by 66% Y-o-Y whereas the net claims incurred increased by 95% Y-o-Y; however there was a slight respite in 2015 when net claims incurred decreased by 11.4%, while NEP decreased by 8.8% Y-o-Y. There were some signs of improve- Share Price Performance ment in 1H16 as the company’s combined ratio eased to 111% from 125% in 2015, driven by a decline in expense ratio. Relative to TASI (Rebased)
13 Price (SAR) TASI Rising accumulated losses could require further capital raising 12 The company raised SAR220mn through a rights issue in 2014 with its paid up capi- 11 tal rising to SAR320mn. However, the company’s financial health has continued to 10 9 deteriorate, with accumulated losses accounting for 65% of paid up capital as of 8 June 2016. Though there are no announced plans for capital raising, the high level of 7 accumulated losses could push the company to look for further capital raising soon, 6 in our view. 5 4 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 138 229 209 220 Insurance Profit (18) (45) (53) (48) Net Attributable Income (18) (54) (56) (51) EPS (SAR) (0.55) (1.68) (1.75) (1.59) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 8.9 1.3 1.9 2.1 ROATE (%) (49.8) (51.8) (37.0) (43.7) Loss Ratio (%) 67.7 79.5 77.2 82.6 Combined Ratio (%) 120.6 122.9 125.4 120.5
Source: Al Ahlia Cooperative Insurance Company, EFG Hermes
72 Al Ahlia Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (0.55) (1.68) (1.75) (0.42) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 0.81 5.66 3.79 3.47 Income Statement Gross Written Premium 219 238 260 96 Net Written Premium 176 213 235 88 Net Earned Premium 138 229 209 111 Net Claims Incurred (93) (182) (161) (86) Underwriting Expenses (73) (99) (101) (38) Underwriting Income (28) (52) (53) (13) Investment Income 1 1 (5) (1) Reinsurance Commission & Other Income 10 7 5 3 Insurance Profit (18) (45) (53) (11) Net Attributable Income (18) (54) (56) (13) Balance Sheet - Key Highlights Cash & Investments 131 250 233 186 Total Assets 287 491 464 439 Outstanding Claims 51 53 73 75 Unearned Premium 129 104 129 101 Total Liabilities 262 309 343 328 Common Shareholders' Equity 26 181 121 111 KPIs Profitability Retention ratio (%) 80.0 89.5 90.6 91.1 Loss ratio (%) 67.7 79.5 77.2 77.4 Expense ratio (%) 53.0 43.3 48.2 34.0 Combined ratio (%) 120.6 122.9 125.4 111.4 Investment yield (%) 0.6 0.4 (2.0) (0.7) ROAA (%) (6.3) (13.8) (11.7) (3.0) ROATE (%) (49.8) (51.8) (37.0) (11.6) Solvency NEP to equity (%) 529.1 126.4 172.5 199.4 NEP to technical reserves (%) 76.9 145.2 103.8 62.8 Cash & invested assets to technical reserves (%) 73.3 158.8 115.9 105.5 Claim reserve development (%) (6.5) 5.5 36.6 58.4 GWP Mix Health (%) 48.0 43.3 25.8 30.8 Motor (%) 39.3 41.9 59.9 46.5 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 12.7 14.7 14.2 22.7 Loss Ratio by Segments Health (%) 60.3 58.4 66.8 92.5 Motor (%) 143.5 104.1 90.5 81.6 P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) 10.3 6.4 28.5 20.0 Growth Rates (Y-o-Y) Gross written premium (%) (6.9) 8.6 8.9 (33.9) Net written premium (%) 8.4 21.5 10.3 (34.3) Net earned premium (%) (20.2) 66.3 (8.8) 10.7 Source: Al Ahlia Cooperative Insurance Company, EFG Hermes
73 Al Alamiya for Cooperative Insurance Company
Financials | Saudi Arabia
Smaller player focused on motor and P&C segments Al Alamiya was established in 2009 and offers life and non-life insurance products in Stock Data the country. The company’s founding shareholders include Royal & Sun Alliance Insur- ance Middle East Ltd and Riyad Bank. Motor (41% of GWP) and P&C (46% of GWP) Price SAR29.46
are the company’s two largest business segments. Al Alamiya had an overall market Bloomberg / Reuters ALALAMIY AB / 8280.SE share of 1.4% of 2015 GWP, while the market share of its two main segments - mo- tor and P&C - stood at 1.8% and 7.3% respectively in 2015. The company has con- Mkt Cap / Shares (mn) SAR1,178.4 / 40.0 centrated its focus on motor and P&C with the combined share of GWP of the two 3M ADVT (mn) SAR11.1 business rising from 66% in 2010 to 82% in 2015. The share of health insurance has Float 30.0% fallen sharply from 7.8% in 2010 to only 1.4% in 2015. Foreign Ownership Limit 49.0%
Back in the black on improved loss and expense ratios The company reported its first solid year of performance, with a net profit of Major Shareholders SAR26.4mn in 2015 compared to a loss of SAR28.7mn in 2014. This was only the Royal & Sun Inus. Alliance (Middle East) 50.1% second time it has reported a positive bottom-line. The return to profitability was Riyad Bank 19.92% helped by a strong improvement in loss ratio, which fell to 59% in 2015 and an improvement in expense ratio to 39%. The combined ratio stood at 98.7% in 2015, and signifies a considerable improvement from 134.2% in 2014. The retention rate Share Price Performance also improved significantly from 51.2% in 2014 to 63.5% in 2015. Motor and P&C segments continued to be the main drivers of GWP growth in 2015, collectively in- Relative to TASI (Rebased) creasing 26.6% Y-o-Y. 80 Price (SAR) TASI
70 Capital raising in 2015 helped solvency and improve scale The company doubled its share capital in 2015 after accumulated losses had risen to 60 58% of capital by the end of 2014. The company raised SAR200mn through a rights 50
issue, resulting in a substantial improvement in its solvency. The bulk of the incremen- 40 tal cash raised through the rights offering has been invested in deposits with domestic 30 banks to support solvency. 20 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 155 160 235 246 Insurance Profit (22) (28) 30 49 Net Attributable Income (22) (29) 26 41 EPS (SAR) (1.11) (1.44) 0.66 1.03 Price to Earnings (x) N/M N/M 44.7 28.5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 5.2 7.1 4.0 3.7 ROATE (%) (17.7) (29.3) 14.1 13.5 Loss Ratio (%) 87.1 87.9 59.6 55.6 Combined Ratio (%) 133.7 134.2 98.7 91.1
Source: Al Alamiya for Cooperative Insurance Company, EFG Hermes
74 Al Alamiya for Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (0.55) (0.72) 0.66 0.62 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.66 4.14 7.31 7.95 Income Statement Gross Written Premium 331 335 402 159 Net Written Premium 160 172 255 87 Net Earned Premium 155 160 235 116 Net Claims Incurred (135) (141) (140) (55) Underwriting Expenses (72) (74) (92) (41) Underwriting Income (52) (55) 3 20 Investment Income 2 2 4 3 Reinsurance Commission & Other Income 28 25 23 8 Insurance Profit (22) (28) 30 32 Net Attributable Income (22) (29) 26 25 Balance Sheet - Key Highlights Cash & Investments 279 270 501 503 Total Assets 1,105 933 907 818 Outstanding Claims 664 472 260 210 Unearned Premium 139 151 158 124 Total Liabilities 992 850 615 500 Common Shareholders' Equity 113 83 292 318 KPIs Profitability Retention ratio (%) 48.3 51.2 63.5 54.8 Loss ratio (%) 87.1 87.9 59.6 47.1 Expense ratio (%) 46.7 46.3 39.0 35.4 Combined ratio (%) 133.7 134.2 98.7 82.5 Investment yield (%) 0.7 0.8 0.7 0.7 ROAA (%) (2.8) (2.8) 2.9 2.9 ROATE (%) (17.7) (29.3) 14.1 8.1 Solvency NEP to equity (%) 137.1 193.5 80.3 72.8 NEP to technical reserves (%) 19.3 25.7 56.1 34.6 Cash & invested assets to technical reserves (%) 34.8 43.4 119.8 150.5 Claim reserve development (%) 392.8 (28.9) (44.9) (55.7) GWP Mix Health (%) 6.3 2.4 1.4 1.0 Motor (%) 35.8 37.5 41.4 39.1 P&C (%) 42.1 40.4 40.9 47.0 P&S (%) 0.0 0.0 0.0 8.2 Others (%) 15.7 19.7 16.3 4.7 Loss Ratio by Segments Health (%) 66.2 113.3 49.3 38.9 Motor (%) 102.2 102.5 67.1 62.2 P&C (%) 77.2 34.7 43.6 15.8 P&S (%) N/A N/A N/A 44.8 Others (%) 11.8 36.3 41.5 31.6 Growth Rates (Y-o-Y) Gross written premium (%) 33.4 1.3 19.9 (22.8) Net written premium (%) 21.6 7.5 48.7 (32.6) Net earned premium (%) 29.0 3.3 46.6 10.3 Source: Al Alamiya for Cooperative Insurance Company, EFG Hermes
75 AL Rajhi Company for Cooperative Insurance
Financials | Saudi Arabia
Relatively large player in Saudi Insurance Al Rajhi Company for Cooperative Insurance was established in 2008, converting Stock Data from Al Rajhi Insurance Company, which had operated in Saudi Arabia since 1994. Al Rajhi Bank and Al Rajhi Insurance Company of Bahrain collectively own 49% of the Price SAR23.34 company. A multi-line insurer, the company had a decent market share of 4.7% at Bloomberg / Reuters ARCCI AB / 8230.SE the end of 2015. Motor insurance is the dominant contributor accounting for 79% Mkt Cap / Shares (mn) SAR933.6 / 40.0 of GWP in 2015. With a market share of 9.3% as of 2015, Al Rajhi is the third largest 3M ADVT (mn) SAR26.8 player in the motor insurance segment. Health insurance is the second largest busi- ness segment, accounting for 17% of GWP in 2015. Float 46.0% Foreign Ownership Limit 49.0% Back in the black since 2014 The company moved into the black in 2014 after a loss-making 2011-13. Its GWP Major Shareholders doubled during 2014-15, mainly driven by strong expansion in motor insurance GWP. Al Rajhi Insurance Co., Bahrain 26.5% While the health insurance segment also almost doubled in GWP size, it remains a Al Rajhi Bank 22.5% relatively small part of overall GWP. The company has reported a steady improvement Oman Insurance Company 6.0% in its loss and expense ratio, driving growth in profitability. The company’s combined ratio improved to 97% in 2015 from 110% in 2013. The strong build up in scale has allowed the company to improve its expense ratio, which came down to 19% in Share Price Performance 2015, a level similar to more established players in the industry. The improving trends continued in to 1H16, with GWP up 50% Y-o-Y, driven by strong growth in motor Relative to TASI (Rebased) insurance premiums. 29 Price (SAR) TASI
27
Rights issue, profitability helping drive improved solvency 25
Accumulated losses rose to 57% of paid up capital in 2013 as premium price wars 23 took their toll on the company’s solvency. However, a return to profitability in 2014 21 encouraged the company to expand its business. The company also raised its scale by 19 doubling its capital in 2015 through a rights issue. 17
15 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 506 712 1,019 1,235 Insurance Profit (21) 20 48 61 Attributable Net Income (22) 16 38 48 EPS (SAR) (1.12) 0.78 1.04 1.20 Price to Earnings (x) N/M 30.0 22.4 19.5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 5.4 4.6 2.7 2.5 ROATE (%) (22.9) 16.5 17.3 13.5 Loss Ratio (%) 84.5 79.1 77.6 80.5 Combined Ratio (%) 110.5 99.6 97.0 97.1
Source: AL Rajhi Company for Cooperative Insurance, EFG Hermes
76 AL Rajhi Company for Cooperative Insurance Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.12) 0.78 1.04 0.75 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 4.32 5.10 8.51 9.26 Income Statement Gross Written Premium 690 945 1,362 1,039 Net Written Premium 556 856 1,228 965 Net Earned Premium 506 712 1,019 687 Net Claims Incurred (428) (563) (791) (575) Underwriting Expenses (132) (146) (198) (99) Underwriting Income (53) 3 30 13 Investment Income 16 3 (2) 11 Reinsurance Commission & Other Income 16 14 20 12 Insurance Profit (21) 20 48 36 Net Attributable Income (22) 16 38 30 Balance Sheet - Key Highlights Cash & Investments 439 585 951 1,274 Total Assets 939 1,157 1,791 2,231 Outstanding Claims 204 260 361 447 Unearned Premium 343 448 678 988 Total Liabilities 853 1,055 1,450 1,861 Common Shareholders' Equity 86 102 340 370 KPIs Profitability Retention ratio (%) 80.6 90.6 90.2 92.8 Loss ratio (%) 84.5 79.1 77.6 83.7 Expense ratio (%) 26.0 20.5 19.4 14.4 Combined ratio (%) 110.5 99.6 97.0 98.1 Investment yield (%) 4.0 0.6 -0.2 2.0 ROAA (%) (2.5) 1.5 2.6 3.0 ROATE (%) (22.9) 16.5 17.3 16.8 Solvency NEP to equity (%) 585.7 697.3 299.4 370.9 NEP to technical reserves (%) 92.6 100.6 98.1 47.9 Cash & invested assets to technical reserves (%) 80.3 82.8 91.6 88.8 Claim reserve development (%) 70.7 27.5 38.9 28.3 GWP Mix Health (%) 27.5 19.9 15.9 12.3 Motor (%) 63.5 69.7 72.5 79.6 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.4 0.9 1.1 Others (%) 9.1 10.0 10.7 7.0 Loss Ratio by Segments Health (%) 55.3 67.8 72.3 80.0 Motor (%) 92.7 84.0 81.3 86.8 P&C (%) N/A N/A N/A N/A P&S (%) N/A 8.2 17.0 (7.2) Others (%) 12.4 39.4 19.0 29.0 Growth Rates (Y-o-Y) Gross written premium (%) 14.8 37.0 44.1 49.6 Net written premium (%) 24.5 54.0 43.5 50.9 Net earned premium (%) 24.7 40.5 43.3 45.7 Source: AL Rajhi Company for Cooperative Insurance, EFG Hermes
77 Al Sagr Cooperative Insurance (Al Sagr)
Financials | Saudi Arabia
Changes in health insurance regulations bode badly for Al Sagr Al Sagr Cooperative Insurance was established in 1998 as a JV between Al Sagr Na- Stock Data tional Insurance of UAE and a prominent Saudi business group. It has been operating in Saudi since 1983 as a branch of the UAE company. At the end of 2015, Sagr had Price SAR46.83 an overall market share of 2.4% of sector GWP. The healthcare segment accounted Bloomberg / Reuters SAGR AB / 8180.SE for 87% of GWP in 2015. In April 2016, SAMA suspended Al Sagr from issuing or Mkt Cap / Shares (mn) SAR1,170.8 / 25.0 renewing health insurance policies due to irregularities. One of the key issues facing its health insurance business outlook is that it caters mainly to individuals and SAMA 3M ADVT (mn) SAR58.9 recently regulated that all health insurance policies must be done through corporate Float 70.0% employers. Foreign Ownership Limit 49.0%
SAMA restriction deflates its health insurance business in 1H16 Major Shareholders The company reported a fourfold Y-o-Y increase in GWP in 2015, primarily driven by the health insurance segment. Faced with slowing GWP growth during 2012-14, Al Al Sagr National Insurance Co., UAE 26.0% Sagr aggressively focused on expanding the health insurance business in 2015, which Sheikh Abdulrahman Ali Al Turki 5.0% saw its health GWP rise 6x Y-o-Y. The sharp GWP growth led to a strong improvement in expense ratio, which eased to 22% in 2015 compared to 32% in the previous year. However, the restriction on issuing or renewing insurance contracts resulted in a 70% Share Price Performance Y-o-Y decline in GWP in 1H16. While NEP growth and underwriting profits continued to be strong in 1H16, they were supported by the unwinding of unearned premiums. Relative to TASI (Rebased)
50 Price (SAR) TASI Consistent profitability equals lower capital raising requirements 45
Al Sagr is one of the few insurance companies that has consistently reported positive 40
earnings over the past five years. Its solvency position appears solid, and we do not 35 foresee the need to raise capital in the near term. 30
25
20
15 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 271 162 443 660 Insurance Profit 64 29 113 243 Net Attributable Income 51 13 86 203 EPS (SAR) 2.02 0.51 3.45 8.11 Price to Earnings (x) 23.1 92.0 13.6 5.8 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.8 3.8 3.1 2.3 ROATE (%) 17.9 4.1 25.0 46.0 Loss Ratio (%) 55.9 65.3 58.1 46.8 Combined Ratio (%) 82.0 96.9 80.4 67.4
Source: Al Sagr Cooperative Insurance Company (Al Sagr), EFG Hermes
78 Al Sagr Cooperative Insurance Company (Al Sagr) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 2.02 0.51 3.45 4.88 Reported Dividend Per Share (SAR) 0.50 0.50 0.00 0.00 BVPS (Tangible) (SAR) 12.33 12.33 15.20 20.07 Income Statement Gross Written Premium 263 240 864 119 Net Written Premium 203 181 793 83 Net Earned Premium 271 162 443 358 Net Claims Incurred (151) (106) (258) (154) Underwriting Expenses (71) (51) (99) (74) Underwriting Income 49 5 87 130 Investment Income 8 16 17 10 Reinsurance Commission & Other Income 7 8 10 4 Insurance Profit 64 29 113 145 Net Attributable Income 51 13 86 122 Balance Sheet - Key Highlights Cash & Investments 456 455 954 873 Total Assets 805 825 1,294 1,320 Outstanding Claims 132 116 177 207 Unearned Premium 101 111 470 204 Total Liabilities 471 491 889 793 Common Shareholders' Equity 334 334 406 527 KPIs Profitability Retention ratio (%) 77.1 75.3 91.8 70.0 Loss ratio (%) 55.9 65.3 58.1 43.1 Expense ratio (%) 26.1 31.6 22.3 20.5 Combined ratio (%) 82.0 96.9 80.4 63.6 Investment yield (%) 1.7 3.5 1.7 1.2 ROAA (%) 6.6 1.6 8.1 9.3 ROATE (%) 17.9 4.1 25.0 55.4 Solvency NEP to equity (%) 81.1 48.7 109.3 135.9 NEP to technical reserves (%) 116.3 71.6 68.5 87.2 Cash & invested assets to technical reserves (%) 195.7 200.4 147.3 212.4 Claim reserve development (%) 36.3 34.5 (34.4) 49.5 GWP Mix Health (%) 67.3 52.6 86.8 42.2 Motor (%) 12.2 24.9 6.7 29.5 P&C (%) 5.5 6.4 1.8 9.1 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 15.0 16.0 4.7 19.2 Loss Ratio by Segments Health (%) 49.5 60.5 52.2 41.7 Motor (%) 108.3 85.4 97.7 66.4 P&C (%) 36.1 59.0 137.6 (5.8) P&S (%) N/A N/A N/A N/A Others (%) 19.7 36.6 3.8 21.1 Growth Rates (Y-o-Y) Gross written premium (%) (19.6) (8.8) 260.0 (69.7) Net written premium (%) (26.5) (10.8) 338.8 (76.0) Net earned premium (%) 35.9 (40.0) 172.8 153.4 Source: Al Sagr Cooperative Insurance Company (Al Sagr), EFG Hermes
79 Alahli Takaful Company
Financials | Saudi Arabia
Insurer of P&S Shariah compliant insurance Al Ahli Takaful (ATC) commenced operations in 2008 and is a JV between National Stock Data Commercial Bank (NCB), insurance specialists FWU and VHV and the International Finance Corporation. The company provides P&S products that are compliant with Price SAR35.84 Shariah principles. ATC’s business is organised in the following business units: individ- Bloomberg / Reuters ATC AB / 8130.SE ual, group life and group credit protection; however, individual is the most important Mkt Cap / Shares (mn) SAR597.3 / 16.7 segment by premiums. The company is a market leader in the P&S segment, with a 3M ADVT (mn) SAR8.9 GWP market share of 37.6%, as of 2015. In 1Q15, the insurer signed a contract with NCB to use the bank’s distribution channels for a period of 10 years. ATC’s profitability Float 44.5% is relatively good, with ROE of c16% over 2014-15. Foreign Ownership Limit 49.0%
Operating performance: Profitable since 2012 Major Shareholders ATC generated profits at an underwriting level in 2014 and 2015 as the combined National Commercial Bank 30.0% ratio was 68%. P&S is a long-tail business line; hence, the loss ratio has been quite FWU Group, Germany 13.1% manageable at under 20%. Strong growth in GWP in 2014 (143% Y-o-Y) has al- International Finance Corporation 8.2% lowed ATC to improve its scale of operations and bring down its cost ratio to 50% from 102% in 2013. Premium growth, however, has started stalling: in 2015, GWP growth slowed to 6%, and in 1H16, it contracted 1.5%. The outlook for P&S growth Share Price Performance is relatively challenging, in our view. The country’s macro dynamics are challenging, P&S insurance is not mandatory, and the target market is narrower (affluent segment) Relative to TASI (Rebased) than for health and motor insurance. An area which offers scope for improvement is 60 Price (SAR) TASI investment income as investment yield has been c1% over the past few years. 55
Relatively well-positioned, in terms of solvency 50 The company has not done a rights issue since 2011, and we believe it does not re- 45 quire recapitalisation in the short to medium term, considering its present solvency 40 and relatively subdued growth outlook. As of 2015, ATC’s capitalisation was quite 35 solid, with the NEP-to-equity at 38%. 30 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 31 79 74 74 Insurance Profit 9 34 39 32 Attributable Net Income 5 26 29 23 EPS (SAR) 0.32 1.55 1.72 1.38 Price to Earnings (x) 113.2 23.1 20.9 25.9 Dividend Yield (%) 0.0 0.0 1.4 0.0 Price to Book Value (x) 4.3 3.6 3.1 3.0 ROATE (%) 3.9 17.0 15.9 11.7 Loss Ratio (%) 1.9 18.8 20.2 21.4 Combined Ratio (%) 103.8 68.2 68.4 71.2
Source: Alahli Takaful Company (ATC), EFG Hermes
80 Alahli Takaful Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.32 1.55 1.72 0.85 Reported Dividend Per Share (SAR) 0.00 0.00 0.50 0.00 BVPS (Tangible) (SAR) 8.38 9.93 11.65 11.96 Income Statement Gross Written Premium 140 341 361 181 Net Written Premium 31 78 74 77 Net Earned Premium 31 79 74 38 Net Claims Incurred (1) (15) (15) (7) Underwriting Expenses (32) (39) (36) (17) Underwriting Income (1) 25 23 13 Investment Income 10 7 7 5 Reinsurance Commission & Other Income 0 2 8 1 Insurance Profit 9 34 39 19 Net Attributable Income 5 26 29 14 Balance Sheet - Key Highlights Cash & Investments 773 937 1,067 1,060 Total Assets 797 998 1,126 1,160 Outstanding Claims 0 6 14 49 Unearned Premium 1 1 1 4 Total Liabilities 658 832 931 960 Common Shareholders' Equity 140 166 194 199 KPIs Profitability Retention ratio (%) 22.4 23.0 20.6 21.5 Loss ratio (%) 1.9 18.8 20.2 19.4 Expense ratio (%) 101.9 49.5 48.2 46.3 Combined ratio (%) 103.8 68.2 68.4 65.7 Investment yield (%) 1.3 0.8 0.6 1.0 ROAA (%) 0.7 2.9 2.7 2.5 ROATE (%) 3.9 17.0 15.9 14.5 Solvency NEP to equity (%) 22.2 47.5 38.3 37.7 NEP to technical reserves (%) 5.0 10.7 9.1 9.1 Cash & invested assets to technical reserves (%) 125.1 127.2 131.4 129.3 Claim reserve development (%) N/M 1797.5 134.5 199.8 GWP Mix Health (%) 0.0 0.0 0.0 0.0 Motor (%) 0.0 0.0 0.0 0.0 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 100.0 100.0 100.0 100.0 Others (%) 0.0 0.0 0.0 0.0 Loss Ratio by Segments Health (%) N/A N/A N/A N/A Motor (%) N/A N/A N/A N/A P&C (%) N/A N/A N/A N/A P&S (%) 1.9 18.8 20.2 19.4 Others (%) N/A N/A N/A N/A Growth Rates (Y-o-Y) Gross written premium (%) (8.7) 142.9 6.0 (1.5) Net written premium (%) 9.0 149.7 (4.9) 0.7 Net earned premium (%) 7.7 154.1 (5.5) 0.2 Source: Alahli Takaful Company (ATC), EFG Hermes
81 Alinma Tokio Marine Company (Alinma)
Financials | Saudi Arabia
Fairly new entrant with small market share Alinma Tokio Marine (ATMC) commenced operations in 2012 and is a multi-line in- Stock Data surer. Its strategy is to provide fire, marine, general accident, engineering, motor, protection, property and savings coverage to the Saudi market by leveraging the in- Price SAR18.80 ternational expertise of Tokio Marine Group. Tokio Marine Group is one of the larg- Bloomberg / Reuters ALINMATO AB / 8312.SE est insurance groups in the world and operates in 38 countries. The P&C segment Mkt Cap / Shares (mn) SAR846.0 / 45.0 accounted for nearly half of ATMC’s GWP in 2015; the motor segment was 38% of 3M ADVT (mn) SAR23.2 GWP. ATMC is a small insurer with a market share of 1% 2015 GWP. The company Float 32.3% has a strong shareholder base which includes Alinma Bank, Tokio Marine (Japan) and Foreign Ownership Limit 49.0% SABIC Industrial Investment.
Major Shareholders Lack of scale weighs on profitability; but seeing strong GWP growth Alinma Bank 28.8% albeit from small base Tokio Marine & Nichido Fire, Japan 28.8% ATMC has been loss making since its inception in 2012 due to losses at the underwrit- SABIC 5.0% ing level. As of 1H16 the company had accumulated losses of SAR155mn. ATMC’s Saudi Est. for Trading & Dist. 5.0% combined ratio was 162% in 1H16 and 191% in 2015. The company is yet to opti- mise scale to deliver profits as seen by its high expense ratio – 80% in 1H16 (113% in 2015). The company transfers a large proportion of its risk to the reinsurance market Share Price Performance – risk retention ratio was 42% in 1H16 and 28% in 2015. ATMC has delivered strong Relative to TASI (Rebased) growth in GWP as it is growing from a small base. It grew its GWP by 138% in 2015 and 90% in 1H16. The growth in GWP is being driven by motor and P&C segments. 26 Price (SAR) TASI 24 Balance sheet recapitalisation to ensure that growth is not capped 22 ATMC is well capitalised and there is headroom for growth. The company’s NEP to 20 equity was 66% as of 1H16. The company raised SAR250mn through a rights issue in 18 2015, increasing its paid up capital to SAR450mn to ensure that its premium growth 16 was not constrained. ATMC’s retained losses amounted to 35% of paid up capital as 14 of 1H16. 12 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 9 33 46 79 Insurance Profit (32) (29) (22) (27) Net Attributable Income (32) (30) (23) (32) EPS (SAR) (1.61) (1.52) (0.74) (0.72) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.2 4.3 2.7 2.9 ROATE (%) (54.2) (29.3) (11.3) (10.6) Loss Ratio (%) 121.7 100.4 77.8 80.6 Combined Ratio (%) 529.7 217.2 190.5 163.3
Source: Alinma Tokio Marine Company (Alinma), EFG Hermes
82 Alinma Tokio Marine Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.61) (1.52) (0.74) (0.41) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.94 4.42 6.95 6.55 Income Statement Gross Written Premium 51 93 220 233 Net Written Premium 18 32 61 97 Net Earned Premium 9 33 46 52 Net Claims Incurred (11) (33) (36) (42) Underwriting Expenses (35) (39) (52) (42) Underwriting Income (37) (39) (42) (32) Investment Income 3 9 (0) 2 Reinsurance Commission & Other Income 3 0 20 12 Insurance Profit (32) (29) (22) (18) Net Attributable Income (32) (30) (23) (18) Balance Sheet - Key Highlights Cash & Investments 121 91 295 281 Total Assets 197 182 575 824 Outstanding Claims 19 36 87 184 Unearned Premium 18 24 76 162 Total Liabilities 78 93 262 529 Common Shareholders' Equity 119 88 313 295 KPIs Profitability Retention ratio (%) 35.1 35.0 27.7 41.6 Loss ratio (%) 121.7 100.4 77.8 81.2 Expense ratio (%) 408.0 116.8 112.7 80.9 Combined ratio (%) 529.7 217.2 190.5 162.1 Investment yield (%) 2.1 10.2 (0.1) 1.4 ROAA (%) (32.6) (16.0) (6.0) (5.2) ROATE (%) (54.2) (29.3) (11.3) (12.0) Solvency NEP to equity (%) 7.3 37.3 14.8 35.2 NEP to technical reserves (%) 23.4 54.7 28.4 15.0 Cash & invested assets to technical reserves (%) 325.6 150.8 181.4 81.0 Claim reserve development (%) N/M 88.6 140.0 184.2 GWP Mix Health (%) 0.0 0.0 0.0 3.1 Motor (%) 21.1 24.7 37.6 61.4 P&C (%) 78.9 56.5 52.1 29.6 P&S (%) 0.0 18.8 10.3 6.0 Others (%) 0.0 0.0 0.0 0.0 Loss Ratio by Segments Health (%) N/A N/A N/A 86.9 Motor (%) 135.4 114.7 101.5 87.9 P&C (%) 113.7 146.6 53.2 85.1 P&S (%) N/A 43.4 21.1 25.5 Others (%) N/A N/A N/A N/A Growth Rates (Y-o-Y) Gross written premium (%) N/M 81.8 138.0 83.2 Net written premium (%) N/M 80.8 88.8 196.6 Net earned premium (%) N/M 279.8 39.9 178.1 Source: Alinma Tokio Marine Company (Alinma), EFG Hermes
83 Aljazira Takaful Taawuni Company
Financials | Saudi Arabia
A specialised P&S insurer Aljazira Takaful (Jazira) offers Shariah-compliant life insurance policies to individuals Stock Data and organisations. The company received its commercial licence from SAMA in 2013. Bank Jazira (stake: 30%) [Rating Neutral; FV SAR12.5], a relatively small-sized bank Price SAR27.52 in Saudi Arabia, spun off its insurance business in a separate entity as required by the Bloomberg / Reuters JAZTAKAF AB / 8012.SE regulations. The bank will transfer the assets, liabilities and operations of its insur- Mkt Cap / Shares (mn) SAR963.2 / 35.0 ance business to Jazira. This transfer will be subject to completion of valuation of the 3M ADVT (mn) SAR7.0 business and approval by SAMA. Jazira had an overall market share of 0.2% in 2015, while its life insurance segment had a market share of 7.4%. Float 30.0% Foreign Ownership Limit 49.0% Small but steadily growing Jazira has consistently reported profits since 2014. Its underwriting profitability met- Major Shareholders rics have been strong, with a combined ratio of 58% in 2015 and 50% in 1H16. The Bank Aljazira 30.0% healthy underwriting results are due to a contained loss ratio – 12% in 2015 and 13% Khalifa A. Almulhem & Partners Co. 5.0% in 2016 – which reflects the long-tail nature of the insurer’s business. Its expense ratio Aljazira Capital 5.0% though is elevated – 46% in 2015 and 37% in 1H16 – which underscores the need to build up scale. GWP growth decelerated in 2015 to 6% after a strong start in 2014 (143%), reflecting the weak trends in the market. In 1H16, Jazira’s GWP contracted Share Price Performance marginally. Returns are subdued - 2015 ROE: 4.6% - as the balance sheet is under- leveraged. We believe the GWP growth outlook is unfavourable for P&S segment as Relative to TASI (Rebased) i) coverage is not mandatory; ii) the target market is smaller relative to motor and 48 Price (SAR) TASI health; and iii) the macro backdrop is challenging. 43
Solvent and generating capital 38 Jazira’s solvency is satisfactory, in our view. As of 1H16, the insurer’s NEP to equity ra- 33 tio was 6%. Unlike most insurers in the Kingdom, Jazira is profitable and is generating 28 capital. As of 2Q16, the insurer had retained earnings of SAR9mn. 23
18 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2014a 2015a TTM Net Earned Premium 6 23 27 Insurance Profit 10 19 23 Net Attributable Income 9 17 20 EPS (SAR) 0.27 0.48 0.58 Price to Earnings (x) 103.3 57.1 47.6 Dividend Yield (%) 0.0 1.8 0.0 Price to Book Value (x) 2.7 2.6 2.6 ROATE (%) 5.3 4.6 5.5 Loss Ratio (%) 44.0 12.1 12.9 Combined Ratio (%) 196.1 57.9 51.6
Source: Aljazira Takaful Taawuni Company (Jazira), EFG Hermes
84 Aljazira Takaful Taawuni Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.27 0.48 0.32 Reported Dividend Per Share (SAR) 0.00 0.50 0.00 BVPS (Tangible) (SAR) 10.14 10.62 10.44 Income Statement Gross Written Premium 30 71 39 Net Written Premium 18 28 11 Net Earned Premium 6 23 14 Net Claims Incurred (3) (3) (2) Underwriting Expenses (9) (11) (5) Underwriting Income (6) 10 7 Investment Income 11 6 5 Reinsurance Commission & Other Income 5 3 2 Insurance Profit 10 19 13 Net Attributable Income 9 17 11 Balance Sheet - Key Highlights Cash & Investments 349 406 405 Total Assets 390 466 498 Outstanding Claims 5 10 12 Unearned Premium 10 17 17 Total Liabilities 36 94 133 Common Shareholders' Equity 355 372 365 KPIs Profitability Retention ratio (%) 58.5 38.9 28.4 Loss ratio (%) 44.0 12.1 12.8 Expense ratio (%) 152.1 45.8 37.4 Combined ratio (%) 196.1 57.9 50.1 Investment yield (%) 3.1 1.5 2.3 ROAA (%) 4.8 3.9 4.6 ROATE (%) 5.3 4.6 6.1 Solvency NEP to equity (%) 1.7 6.2 7.4 NEP to technical reserves (%) 42.0 83.9 92.1 Cash & invested assets to technical reserves (%) 2,422.9 1,483.0 1,373.5 Claim reserve development (%) N/A 124.1 38.2 GWP Mix Health (%) 0.0 0.0 0.0 Motor (%) 0.0 0.0 0.0 P&C (%) 0.0 0.0 0.0 P&S (%) 100.0 100.0 100.0 Others (%) 0.0 0.0 0.0 Loss Ratio by Segments Health (%) N/A N/A N/A Motor (%) N/A N/A N/A P&C (%) N/A N/A N/A P&S (%) 44.0 12.1 12.8 Others (%) N/A N/A N/A Growth Rates (Y-o-Y) Gross written premium (%) N/A 135.5 93.0 Net written premium (%) N/A 56.6 93.4 Net earned premium (%) N/A 280.4 39.1 Source: Aljazira Takaful Taawuni Company (Jazira), EFG Hermes
85 Allianz Saudi Fransi Cooperative Insurance
Financials | Saudi Arabia
A mid-sized insurer with well diversified business Allianz was set up in 2007 as a JV between Banque Saudi Fransi (BSF), AGF France Stock Data and Allianz Mena Holding. BSF is a Saudi commercial bank with 83 branches and a loan market share of c10%. Allianz Group is a global financial services provider based Price SAR32.33 in Germany. The insurer’s business is well diversified between motor (25% of GWP), Bloomberg / Reuters ALLIANZ AB / 8040.SE health (13%), P&C (31%) and P&S (21%). The company provides insurance coverage Mkt Cap / Shares (mn) SAR400.0 / 20.0 to individual and corporates. Allianz had an overall share of 2.2% of sector GWP in 3M ADVT (mn) SAR7.4 2015. It had a 23% share of sector P&S GWP, making it the third largest player in the segment. Float 35.0% Foreign Ownership Limit 49.0% Investment income & reinsurance commissions underpin profitability Allianz has delivered consistent profitability since 2011, aided by investment income Major Shareholders and reinsurance commissions. It delivered an ROE of 9.6% on an underlying ROA Banque Saudi Fransi 32.5% of 1.0% in 2015. At an underwriting level however Allianz is not profitable as its Allianz Group France Int., France 16.2% combined ratio continues to exceed 100%. While the insurers loss ratio is impressive SNA Holding Company. Lebanon 16.2% – 72% in 2015 – its expense ratio is elevated – 30% in 2015 - due to lack of scale. The loss ratio in the health segment is quite low at 64% and is unlikely to be sustain- able. The loss rate in the motor segment at 80% is competitive, and suggests good Share Price Performance underwriting discipline. Allianz’s GWP growth has been sub-par. GWP contracted 3% (sector was + 21%) in 2014 and then grew 11% (sector +19%) in 2015. Relative to TASI (Rebased)
50 Price (SAR) TASI Internal capital generation supporting solvency 45 Allianz’s solvency is satisfactory, in our view. As of 2015 its NEP to equity was 193% (221% in 1H16). The insurer is profitable and generating capital internally, and hence 40 not raised additional capital since commencing commercial operations. As of 1H16, 35 Allianz had a paid up capital of SAR200mn while accumulated losses were small at SAR9mn. 30
25 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 355 421 388 448 Insurance Profit 14 17 26 28 Net Attributable Income 9 12 19 20 EPS (SAR) 0.44 0.58 0.93 1.01 Price to Earnings (x) 73.8 56.1 34.8 19.8 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.7 3.1 2.8 3.0 ROATE (%) 5.2 6.4 9.6 9.7 Loss Ratio (%) 65.7 75.3 71.6 73.7 Combined Ratio (%) 110.2 105.3 101.1 100.3
Source: Allianz Saudi Fransi Cooperative Insurance Company (Allianz), EFG Hermes
86 Allianz Saudi Fransi Cooperative Insurance Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.44 0.66 1.06 0.52 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 8.64 10.56 11.48 10.67 Income Statement Gross Written Premium 746 725 803 430 Net Written Premium 403 398 460 283 Net Earned Premium 355 421 388 236 Net Claims Incurred (233) (317) (278) (182) Underwriting Expenses (158) (126) (115) (59) Underwriting Income (36) (22) (4) (5) Investment Income 20 14 5 6 Reinsurance Commission & Other Income 30 25 25 13 Insurance Profit 14 17 26 14 Net Attributable Income 9 12 19 10 Balance Sheet - Key Highlights Cash & Investments 813 872 870 880 Total Assets 1,481 1,732 1,908 1,978 Outstanding Claims 226 402 448 433 Unearned Premium 271 289 423 472 Total Liabilities 1,308 1,547 1,707 1,765 Common Shareholders' Equity 173 185 201 213 KPIs Profitability Risk Retention ratio (%) 54.0 54.9 57.3 65.7 Loss ratio (%) 65.7 75.3 71.6 77.1 Expense ratio (%) 44.4 30.0 29.5 25.0 Combined ratio (%) 110.2 105.3 101.1 102.1 Investment yield (%) 2.5 1.6 0.6 1.5 ROAA (%) 0.7 0.7 1.0 1.1 ROATE (%) 5.2 6.4 9.6 10.1 Solvency NEP to equity (%) 205.1 227.6 193.2 221.5 NEP to technical reserves (%) 71.3 60.9 44.6 26.1 Cash & invested assets to technical reserves (%) 163.5 126.3 100.0 97.2 Claim reserve development (%) 54.2 97.8 (10.3) 28.3 GWP Mix Health (%) 8.3 7.6 12.8 12.8 Motor (%) 20.6 21.4 24.8 34.5 P&C (%) 16.5 35.6 31.2 24.4 P&S (%) 23.8 24.7 21.3 20.2 Others (%) 30.9 10.7 9.9 8.2 Loss Ratio by Segments Health (%) 83.8 75.0 63.5 66.5 Motor (%) 79.2 90.1 80.4 83.5 P&C (%) 35.3 19.6 7.6 8.3 P&S (%) 63.5 70.4 75.7 98.7 Others (%) 18.6 22.3 42.3 21.4 Growth Rates (Y-o-Y) Gross written premium (%) 20.1 (2.8) 10.8 0.1 Net written premium (%) 14.4 (1.2) 15.6 16.4 Net earned premium (%) 0.8 18.7 (7.7) 33.9
Source: Allianz Saudi Fransi Cooperative Insurance Company (Allianz), EFG Hermes
87 Allied Cooperative Insurance Group (ACIG)
Financials | Saudi Arabia
Increasingly focusing on Motor and Medical segments Allied Cooperative Insurance Group (ACIG), is a JV between Islamic Development Stock Data Bank and Allied Cooperative Insurance Group of Bahrain. The company commenced commercial operations in 2009 and provides all classes of general insurance products. Price SAR16.39 It had an overall market share of 1.5% of sector GWP in 2015. Motor and Medical Bloomberg / Reuters ACIG AB / 8150.SE are the two main operating segments and contributed 58.3% and 32.2% to its GWP, Mkt Cap / Shares (mn) SAR327.8 / 20.0 respectively, in 2015. It is becoming increasingly focused on Motor and Medical seg- 3M ADVT (mn) SAR10.0 ments with the combined share of the two segments increasing from 68% of GWP in 2010 to 91% of GWP in 2015. Float 60.0% Foreign Ownership Limit 49.0% Underwriting business supported by investment & commission income Major Shareholders Though ACIG’s combined ratio has averaged around 100% over the past three years, Islamic Development Bank 20.0% the company has been able to consistently report profits through better investment Allied Cooperative Insurance Group, Bahrain and commissions income. The company’s GWP almost doubled Y-o-Y in 2015, driven 20.0% mainly by the motor segment. However, profitability has been dented by an increase in the loss ratio and lower investment returns. The deterioration in the loss ratio was driven primarily by other general insurance segment, while the motor segment’s loss Share Price Performance ratio improved to 97% in 2015 from 128% in 2014. Loss ratio in the motor segment Relative to TASI (Rebased) has been steadily improving after touching a high of 127% in 2013, declining to 93% in 1H16. The strong growth in GWP has allowed the company to improve its scale 28 Price (SAR) TASI of operations, driving its expense ratio lower. Though higher relative to the sector, ACIG’s expense ratio improved to 26% in 2015 from 45% in 2012. 24
20 Rights issue in 2012 helped improve scale ACIG doubled its capital in 2012 by raising SAR100mn through a rights issue. The 16 improved solvency has allowed the company to improve business scale, with GWP 12 growing steadily, and a steady improvement in expense ratio. 8 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 205 213 384 435 Insurance Profit 14 10 12 14 Net Attributable Income 12 7 10 12 EPS (SAR) 0.60 0.36 0.52 0.59 Price to Earnings (x) 27.5 45.1 31.5 28.0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.2 2.9 2.8 2.6 ROATE (%) 12.4 6.8 9.1 9.7 Loss Ratio (%) 66.5 70.2 75.8 76.9 Combined Ratio (%) 97.5 101.1 102.2 100.8
Source: Allied Cooperative Insurance Group (ACIG), EFG Hermes
88 Allied Cooperative Insurance Group (ACIG) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.60 0.36 0.52 0.38 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.11 5.61 5.85 6.21 Income Statement Gross Written Premium 347 297 549 294 Net Written Premium 235 229 456 249 Net Earned Premium 205 213 384 210 Net Claims Incurred (136) (149) (291) (166) Underwriting Expenses (63) (66) (101) (47) Underwriting Income 5 (2) (8) (2) Investment Income 4 7 4 1 Reinsurance Commission & Other Income 4 5 17 10 Insurance Profit 14 10 12 9 Net Attributable Income 12 7 10 8 Balance Sheet - Key Highlights Cash & Investments 228 220 314 325 Total Assets 363 355 510 549 Outstanding Claims 34 44 72 78 Unearned Premium 156 155 235 278 Total Liabilities 261 243 393 425 Common Shareholders' Equity 102 112 117 124 KPIs Profitability Retention ratio (%) 67.6 77.1 83.0 84.8 Loss ratio (%) 66.5 70.2 75.8 78.7 Expense ratio (%) 31.0 30.9 26.4 22.2 Combined ratio (%) 97.5 101.1 102.2 100.8 Investment yield (%) 1.9 3.1 1.2 0.8 ROAA (%) 4.0 2.0 2.4 2.9 ROATE (%) 12.4 6.8 9.1 12.6 Solvency NEP to equity (%) 200.0 189.4 328.4 339.0 NEP to technical reserves (%) 107.7 107.1 125.1 59.2 Cash & invested assets to technical reserves (%) 120.1 110.7 102.1 91.5 Claim reserve development (%) 77.6 29.7 65.6 45.6 GWP Mix Health (%) 56.7 40.7 32.2 33.4 Motor (%) 31.8 43.8 58.3 57.9 P&C (%) 4.2 5.1 3.6 4.2 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 7.3 10.3 5.8 4.5 Loss Ratio by Segments Health (%) 20.3 32.4 30.6 45.0 Motor (%) 100.4 127.8 97.2 92.9 P&C (%) 12.6 5.7 13.2 4.6 P&S (%) N/A N/A N/A N/A Others (%) 92.5 25.4 362.8 274.9 Growth Rates (Y-o-Y) Gross written premium (%) 85.7 (14.3) 84.8 (11.1) Net written premium (%) 61.0 (2.2) 98.9 (11.2) Net earned premium (%) 53.0 4.0 80.6 32.2 Source: Allied Cooperative Insurance Group (ACIG), EFG Hermes
89 Amana Cooperative Insurance Company
Financials | Saudi Arabia
Focused mainly on health; another small player Amana Cooperative Insurance Company (Amana) started commercial operations in Stock Data 2010 and is engaged in providing primarily health and motor insurance. The two segments contributed 97% of its GWP in 2015. The company provides coverage to Price SAR9.98 individual and corporate clients. Amana is a small player in the market with an overall Bloomberg / Reuters AMANA AB / 8310.SE market share of 1.1% of sector GWP and 2.5% of health GWP. Amana’s key share- Mkt Cap / Shares (mn) SAR319.4 / 32.0 holder is Bahrain based Amana Gulf Insurance Company (Amana Gulf), which owns 3M ADVT (mn) SAR25.2 an 18% stake in the company. Float 78.5% Foreign Ownership Limit 49.0% Weak profitability due to lack of scale and high loss in motor Amana has been scaling down its losses – SAR15mn in 2015 versus SAR76mn in Major Shareholders 2014. Underwriting profitability metrics are weak as its combined ratio continues to Amana Gulf Insurance Co. Bahrain 18.4% exceed 100% (109% in 1H16 and 117% in 2015). Amana lacks economies of scale Mr Mahmoud Bin Mohammed Mahmoud as the expense ratio remains elevated (38% in 1H16 and 35% in 2015). While Ama- Al Toukhi 1.3% na’s overall loss ratio improved to 70% in 1H16 from 112% in 2014 as the impact of premium price wars has waned, its motor segment continues to struggle. The loss Mr. Abdulaziz E Bin Ibrahim Al Khamis 0.6% ratio in motor spiked to 200% in 1H16 from 106% in 2015. GWP growth has stalled as the insurer grapples with deteriorating solvency. After a strong 2014 (370% Y-o-Y) Share Price Performance GWP grew only 6% Y-o-Y in 2015 and contracted 45% Y-o-Y in 1H16. Relative to TASI (Rebased)
Focusing on internal capital generation to improve solvency 14 Price (SAR) TASI As of 1H16 Amana had an accumulated loss of SAR212mn, which represents 66% 12 of its paid-up capital. It has however not issued new capital yet. Instead, the insurer is making an effort to curb losses. It has also reined in GWP growth, particularly in the 10 health segment (down 50% Y-o-Y in 1H16). It has also transferred more risk to the reinsurance market. 8 6
4 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 43 191 277 311 Insurance Profit (4) (74) (13) 11 Net Attributable Income (8) (76) (15) 7 EPS (SAR) (0.26) (2.38) (0.47) 0.23 Price to Earnings (x) N/M N/M N/M 43.1 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.5 2.5 2.9 2.9 ROATE (%) (3.9) (45.7) (12.8) 6.7 Loss Ratio (%) 72.7 111.8 82.2 67.5 Combined Ratio (%) 183.0 153.6 117.1 105.3
Source: Amana Cooperative Insurance Company (Amana), EFG Hermes
90 Amana Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (0.26) (2.38) (0.47) (0.08) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 6.44 3.95 3.48 3.42 Income Statement Gross Written Premium 83 392 414 126 Net Written Premium 55 275 334 96 Net Earned Premium 43 191 277 164 Net Claims Incurred (31) (213) (228) (115) Underwriting Expenses (48) (80) (97) (62) Underwriting Income (36) (102) (47) (14) Investment Income 25 11 3 4 Reinsurance Commission & Other Income 7 18 31 10 Insurance Profit (4) (74) (13) (0) Net Attributable Income (8) (76) (15) (3) Balance Sheet - Key Highlights Cash & Investments 231 357 322 252 Total Assets 360 682 656 604 Outstanding Claims 32 104 124 133 Unearned Premium 48 181 203 138 Total Liabilities 154 556 544 494 Common Shareholders' Equity 206 126 111 110 KPIs Profitability Risk retention ratio (%) 65.6 70.3 80.8 75.6 Loss ratio (%) 72.7 111.8 82.2 70.4 Expense ratio (%) 110.3 41.7 34.9 38.2 Combined ratio (%) 183.0 153.6 117.1 108.6 Investment yield (%) 10.6 3.0 1.0 2.4 ROAA (%) (2.2) (14.6) (2.3) (0.8) ROATE (%) (3.9) (45.7) (12.8) (4.6) Solvency NEP to equity (%) 20.9 151.0 249.3 298.7 NEP to technical reserves (%) 54.1 66.8 85.0 120.7 Cash & invested assets to technical reserves (%) 290.3 125.0 98.7 92.9 Claim reserve development (%) (27.3) 227.8 18.9 25.6 GWP Mix Health (%) 65.5 35.0 85.6 63.4 Motor (%) 25.9 53.1 11.3 26.1 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 8.7 11.9 3.1 10.6 Loss Ratio by Segments Health (%) 83.8 71.4 66.6 64.4 Motor (%) 55.3 129.1 105.8 204.2 P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) (10.0) 48.6 (5.5) (8.2) Growth Rates (Y-o-Y) Gross written premium (%) 54.2 369.6 5.7 (44.7) Net written premium (%) 59.2 403.1 21.4 (40.4) Net earned premium (%) (26.2) 341.8 45.5 25.7 Source: Amana Cooperative Insurance Company (Amana), EFG Hermes
91 Arabia Insurance Cooperative Company (AICC)
Financials | Saudi Arabia
Small player that focuses on motor and health Arabia Insurance Cooperative Company (AICC) commenced commercial operations Stock Data in 2009. It is a multi-line insurer and its business is organised primarily around the health, motor and P&C segments. The motor segment accounted for 41% of GWP Price SAR12.44 while health made up 37%. AICC had a market share of 1.8% of sector GWP, while it Bloomberg / Reuters AICC AB / 8160.SE had 2.5% share of sector motor GWP in 2015. Its key shareholders are Arabia Insur- Mkt Cap / Shares (mn) SAR498 .0 / 40.0 ance Company of Lebanon (19%) and Jordan Insurance Company (12%). AICC trans- 3M ADVT (mn) SAR19.3 fers a relatively high proportion of its P&C insurance risk to the reinsurance market. As of 2015 its overall risk retention ratio was 58%. Float 65.5% Foreign Ownership Limit 49.0% High loss ratio in motor, lack of scale are key challenges AICC’s earnings history is mixed. After breaking-even in 2014, it swung to a loss in Major Shareholders 2015. In 1H16 it managed to deliver a profit of SAR4mn (ROE: 4%). The insurer’s un- Arabia Insurance Co., Lebanon 19.2% derwriting profitability is weak. Its combined ratio continues to be over 100%, as lack Jordan Insurance Company 12.2% of scale keeps the expense ratio elevated (33% in 2015). AICC’s loss ratio – 79% in Arab Supply and Trading Corporation 5.0% 2015 – is competitive but this is due to a low loss rate in the health segment (39% in 2015), which we believe is unsustainable. GWP growth slowed to 1.5% from 10% in 2014 and contracted 24% in 1H16, as AICC curtailed its motor exposure likely due to Share Price Performance the high loss rate it is experiencing in the segment (98% in 2015 and 89% in 2014). Relative to TASI (Rebased)
Well positioned with respect to solvency 19 Price (SAR) TASI We believe AICC solvency is satisfactory as its NEP to Equity was 151% as of 1H16. However, this is partially helped by the low risk retention rate. AICC’s solvency 16 improved after the insurer completed a rights issue in 2015. The company raised SAR200mn, doubling its paid-up capital to SAR400mn. As of 2Q16, it had an accu- 13 mulated loss of SAR153mn (38% of paid-up capital). 10
7 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 448 413 414 365 Insurance Profit (102) 2 (10) (8) Net Attributable Income (103) 0 (13) (11) EPS (SAR) (5.17) 0.02 (0.38) (0.26) Price to Earnings (x) N/M 600.4 N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.9 3.9 1.8 2.1 ROATE (%) (89.4) 0.6 (8.7) (4.4) Loss Ratio (%) 103.1 78.6 78.8 72.7 Combined Ratio (%) 134.7 112.0 111.7 112.7
Source: Arabia Insurance Cooperative Company (AICC), EFG Hermes
92 Arabia Insurance Cooperative Company (AICC) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (5.17) 0.02 (0.38) 0.11 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 3.20 3.18 6.89 6.06 Income Statement Gross Written Premium 586 644 654 218 Net Written Premium 378 443 379 132 Net Earned Premium 448 413 414 182 Net Claims Incurred (462) (325) (326) (124) Underwriting Expenses (141) (138) (136) (71) Underwriting Income (155) (50) (48) (13) Investment Income 16 12 7 3 Reinsurance Commission & Other Income 37 39 31 16 Insurance Profit (102) 2 (10) 6 Net Attributable Income (103) 0 (13) 4 Balance Sheet - Key Highlights Cash & Investments 298 303 453 412 Total Assets 1,010 951 1,088 946 Outstanding Claims 366 305 249 238 Unearned Premium 295 312 295 210 Total Liabilities 946 888 850 704 Common Shareholders' Equity 64 64 238 242 KPIs Profitability Risk Retention ratio (%) 64.4 68.8 57.9 60.6 Loss ratio (%) 103.1 78.6 78.8 68.2 Expense ratio (%) 31.6 33.4 32.9 38.8 Combined ratio (%) 134.7 112.0 111.7 107.0 Investment yield (%) 5.5 4.1 1.5 1.2 ROAA (%) (8.9) 0.0 (1.3) 0.9 ROATE (%) (89.4) 0.6 (8.7) 3.6 Solvency NEP to equity (%) 589.7 696.9 159.2 109.0 NEP to technical reserves (%) 67.8 67.0 76.0 81.6 Cash & invested assets to technical reserves (%) 45.1 49.1 83.2 92.2 Claim reserve development (%) (12.8) (16.8) (18.1) (22.5) GWP Mix Health (%) 30.8 26.9 37.1 40.5 Motor (%) 45.2 53.0 41.4 36.0 P&C (%) 20.9 17.5 18.7 19.3 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 3.1 2.6 2.9 4.2 Loss Ratio by Segments Health (%) 93.9 50.5 38.8 40.2 Motor (%) 109.9 88.5 98.2 88.3 P&C (%) 49.5 98.2 45.8 63.8 P&S (%) N/A N/A N/A N/A Others (%) 26.5 1.4 38.6 20.5 Growth Rates (Y-o-Y) Gross written premium (%) (10.3) 9.9 1.5 (24.3) Net written premium (%) (24.2) 17.3 (14.5) (24.0) Net earned premium (%) 9.7 (7.9) 0.3 (21.2) Source: Arabia Insurance Cooperative Company (AICC), EFG Hermes
93 Arabian Shield Cooperative Insurance Company
Financials | Saudi Arabia
10th largest health insurer Arabian Shield is a small multi-line non-life insurer, and commenced commercial op- Stock Data erations in 2009 as a cooperative insurance in Saudi Arabia. Arabian Shield is a JV between Arabian Shield Bahrain, Bahrain National Holding Company and a group of Price SAR24.87
Saudi businessmen. The group has a history of being active in the Saudi market since Bloomberg / Reuters SHIELD AB / 8070.SE 1998. HH Prince Sultan bin Mohammed bin Saud Al Kabeer, chairman of Almarai, is also the chairman of Arabian Shield. In terms of business mix, health and motor in- Mkt Cap / Shares (mn) SAR497.4 / 20.0 surance are the dominant segments of the company, collectively accounting for 80% 3M ADVT (mn) SAR7.8
of the company’s GWP in 2015. Arabian Shield had a total market share of 1.5% of Float 55.0% GWP in 2015, while its share of sector motor premiums stood at 2.0%. It is the 10th largest insurer in the health segment with a market share of 1.1% of sector health Foreign Ownership Limit 49.0% GWP as of 2015. Major Shareholders
Underwriting business breaks-even in 2015 Arabian Shield Insurance Co., Bahrain 30.0% Arabian Shield’s underwriting business has been making steady progress over the past Bahrain National Holding Co. 15.0% three years, with combined ratio falling to 100% in 2015. While expense ratio has averaged around 27% over 2013-15, the company’s loss ratio declined to 72% in 2015 from 85% in 2013. The improvement in loss ratio has mainly been driven by the Share Price Performance motor insurance business. The risk retention ratio of the motor segment has declined sharply to 54% in 2015 from 90% in 2013, suggesting that the company is reinsuring Relative to TASI (Rebased) a large part of its motor premiums, enabling lower loss ratios. This has also allowed 40 Price (SAR) TASI steady growth in re-insurance commissions, which has supported a steady improve- ment in profitability over the past two years. 35
30 Profitable operations means capital levels continue to improve 25 Arabia Shield has remained profitable throughout the past five years, translating in to steady improvement in the capital base. Hence, the company has not needed to raise 20 additional capital. 15 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 211 273 330 346 Insurance Profit 7 17 45 18 Net Attributable Income 2 10 33 43 EPS (SAR) 0.11 0.50 1.64 2.17 Price to Earnings (x) 228.8 49.3 15.2 11.5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 2.6 2.5 2.2 2.0 ROATE (%) 1.2 5.2 15.3 18.3 Loss Ratio (%) 84.5 78.7 72.1 70.5 Combined Ratio (%) 111.2 105.3 100.3 97.9
Source: Arabian Shield Cooperative Insurance Company (Arabian Shield), EFG Hermes
94 Arabian Shield Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.11 0.50 1.64 0.74 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 9.39 9.89 11.53 12.18 Income Statement Gross Written Premium 333 453 531 445 Net Written Premium 211 290 332 275 Net Earned Premium 211 273 330 177 Net Claims Incurred (179) (215) (238) (133) Underwriting Expenses (57) (73) (93) (51) Underwriting Income (24) (15) (1) (7) Investment Income 4 5 8 6 Reinsurance Commission & Other Income 26 26 39 20 Insurance Profit 7 17 45 19 Net Attributable Income 2 10 33 15 Balance Sheet - Key Highlights Cash & Investments 359 418 488 576 Total Assets 644 1,925 838 1,048 Outstanding Claims 183 1,373 246 283 Unearned Premium 127 169 161 322 Total Liabilities 408 1,678 558 756 Common Shareholders' Equity 237 247 280 293 KPIs Profitability Retention ratio (%) 63.4 64.1 62.5 61.8 Loss ratio (%) 84.5 78.7 72.1 74.9 Expense ratio (%) 26.7 26.6 28.2 28.9 Combined ratio (%) 111.2 105.3 100.3 103.9 Investment yield (%) 1.2 1.3 1.6 2.2 ROAA (%) 0.4 0.8 2.4 3.1 ROATE (%) 1.2 5.2 15.3 12.4 Solvency NEP to equity (%) 89.3 110.6 118.1 120.8 NEP to technical reserves (%) 68.2 17.7 81.1 58.5 Cash & invested assets to technical reserves (%) 115.7 27.1 120.0 95.2 Claim reserve development (%) 56.4 650.9 -82.1 13.7 GWP Mix Health (%) 43.9 38.3 39.1 38.7 Motor (%) 31.4 45.0 41.3 40.1 P&C (%) 10.6 8.5 10.9 11.8 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 14.1 8.2 8.7 9.4 Loss Ratio by Segments Health (%) 94.2 69.2 67.8 79.0 Motor (%) 71.2 102.3 82.0 72.6 P&C (%) 250.2 199.8 48.6 (8.3) P&S (%) N/A N/A N/A N/A Others (%) 35.6 28.1 19.4 43.4 Growth Rates (Y-o-Y) Gross written premium (%) 0.5 35.8 17.3 14.6 Net written premium (%) (15.6) 37.4 14.4 16.1 Net earned premium (%) (9.2) 29.2 20.9 9.5 Source: Arabian Shield Cooperative Insurance Company (Arabian Shield), EFG Hermes
95 AXA Cooperative Insurance Company
Financials | Saudi Arabia
Part of AXA family; the sixth largest player in Saudi Arabia AXA Cooperative Insurance is part of the AXA Group with headquarters in France, Stock Data which through its subsidiaries collectively owns 50% shareholding in the company. AXA Group is regionally present in Bahrain, UAE, Qatar, Oman, Lebanon, Jordan, Price SAR15.89
Turkey and Morocco. This regional coverage enables the company to leverage the Bloomberg / Reuters AXA AB / 8250.SE AXA group’s size, and it has the experience to differentiate their products and ser- vices. AXA Group operations in Saudi Arabia can be traced back to 1985, with offices Mkt Cap / Shares (mn) SAR715.1 / 45.0 located in each of the three key economic regions there. Motor and health are the 3M ADVT (mn) SAR11.7
dominant business segments, accounting for c80% of GWP as of 2015. Float 47.8%
Foreign Ownership Limit 49.0% Managed its stellar growth in 2013-2014 very well With a total market share of 3.4% of industry GWP in 2015, AXA is the sixth largest insurer in Saudi Arabia in terms of GWP. The company saw rapid growth in 2013-14 Major Shareholders with a GWP CAGR of 50%, compared to a CAGR of 18% during 2011-12. However, AXA Insurance (Gulf), Bahrain 32.0% despite strong growth, its loss and expense ratio have remained consistent over the AXA Mediterranean Holdings, Spain 18.0% past three years at around 83% and 17%, respectively. Combined ratio stood at 100.3% in 2015 in line with its historical level. The motor segment continues to be the main driver for GWP growth, with a 17% Y-o-Y increase in 2015. Health insur- Share Price Performance ance GWP remained broadly flat, while P&C insurance premiums grew 7% Y-o-Y. Relative to TASI (Rebased)
Capital base doubled in 2015; weighing on profitability 25 Price (SAR) TASI AXA insurance raised SAR250mn through a rights issue in 2015, increasing its capital 23 base to SAR450mn. While the company has had profitable operations since 2012, 21 overall profitability levels have remained low, with ROEs averaging c7%. The in- 19 creased capital base has further weighed on profitability, with an annualised ROE of 17 c5% in 1H16. 15 13 11 9 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 644 851 996 1,019 Insurance Profit 16 19 30 36 Net Attributable Income 13 16 21 23 EPS (SAR) 0.65 0.78 0.50 0.51 Price to Earnings (x) 24.6 20.4 31.6 30.9 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.7 1.5 1.7 1.6 ROATE (%) 7.0 7.8 6.2% 5.4% Loss Ratio (%) 83.6 83.9 83.0 82.8 Combined Ratio (%) 101.5 101.6 100.3 99.8
Source: AXA Cooperative Insurance Company (AXA), EFG Hermes
96 AXA Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.65 0.78 0.50 0.37 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 9.57 10.36 9.30 9.70 Income Statement Gross Written Premium 776 1,040 1,128 651 Net Written Premium 671 911 1,002 613 Net Earned Premium 644 851 996 518 Net Claims Incurred (538) (714) (827) (427) Underwriting Expenses (115) (151) (172) (84) Underwriting Income (9) (13) (3) 7 Investment Income 7 16 16 10 Reinsurance Commission & Other Income 19 17 17 8 Insurance Profit 16 19 30 25 Net Attributable Income 13 16 21 17 Balance Sheet - Key Highlights Cash & Investments 559 756 978 1,092 Total Assets 857 1,180 1,527 1,570 Outstanding Claims 313 480 459 525 Unearned Premium 218 280 293 372 Total Liabilities 665 973 1,058 1,083 Common Shareholders' Equity 191 207 468 487 KPIs Profitability Retention ratio (%) 86.5 87.6 88.8 94.2 Loss ratio (%) 83.6 83.9 83.0 82.4 Expense ratio (%) 17.9 17.7 17.3 16.2 Combined ratio (%) 101.5 101.6 100.3 98.6 Investment yield (%) 1.2 2.1 1.6 1.9 ROAA (%) 1.6 1.5 1.6 2.1 ROATE (%) 7.0 7.8 6.7% 7.7% Solvency NEP to equity (%) 336.5 410.7 212.7 213.0 NEP to technical reserves (%) 121.3 112.1 132.5 57.7 Cash & invested assets to technical reserves (%) 105.3 99.6 130.1 121.7 Claim reserve development (%) 44.9 53.3 (4.4) 11.3 GWP Mix Health (%) 36.4 34.2 31.3 28.8 Motor (%) 40.9 44.4 47.9 55.4 P&C (%) 20.0 18.5 18.3 13.0 P&S (%) 2.3 2.6 2.1 2.4 Others (%) 0.3 0.3 0.3 0.3 Loss Ratio by Segments Health (%) 86.7 82.7 82.4 84.0 Motor (%) 87.8 88.3 84.6 84.5 P&C (%) 12.7 13.3 18.2 17.0 P&S (%) 80.1 78.3 78.8 69.0 Others (%) 26.7 3.1 6.0 20.6 Growth Rates (Y-o-Y) Gross written premium (%) 68.4 34.1 8.5 5.5 Net written premium (%) 84.3 35.8 9.9 9.1 Net earned premium (%) 79.5 32.1 17.1 4.5 Source: AXA Cooperative Insurance Company (AXA), EFG Hermes
97 Buruj Cooperative Insurance Company
Financials | Saudi Arabia
A motor play with small health exposure Buruj’s insurance experience in the Saudi market goes back to 1979 when it oper- Stock Data ated through a local agent under the name of Saudi Pearl Insurance Company (reg- istered in Bahrain). After the issuance of insurance regulations in the Kingdom, Saudi Price SAR20.10 Pearl and its owner Gulf Insurance Group in Kuwait along with other major business Bloomberg / Reuters BURUJ AB / 8270.SE groups and Saudi businessmen established the Buruj Cooperative Insurance company Mkt Cap / Shares (mn) SAR502.5 / 25.0 in 2008. Buruj Cooperative Insurance is part of the Gulf Insurance Group in Kuwait, 3M ADVT (mn) SAR16.1 which in turn is regionally present in Bahrain, Egypt, Lebanon, Syria, and Jordan. Mo- Float 60.1% tor insurance accounted for 65% of the company’s GWP followed by health, which Foreign Ownership Limit 49.0% accounted for 22% of GWP.
Major Shareholders Steady profitable company, but has high combined ratio Gulf insurance Group, Kuwait 28.5% With a market share of 1.5% of sector GWP, Buruj is the 17th largest insurer in Battarjee Holding Company 5.0% Saudi Arabia. The company turned profitable in 2013, and since then has reported a steady improvement in profitability. Though its loss ratio deteriorated in 2013-15, Gulf Medical Co. Limited 5.0% its increased scale has allowed it to offset this via a steady decline in expense ratio. United Yousef M. Naghi Co. Ltd. 5.0% Its GWP grew 18% Y-o-Y in 2015, mainly driven by a 32% Y-o-Y expansion in motor insurance premiums. Buruj’s combined ratio has remained over 100% over the past Share Price Performance three years. However, it has been able to make decent revenue from reinsurance, in- vestments and other underwriting income, which has allowed it to remain profitable. Relative to TASI (Rebased)
28 Price (SAR) TASI Capital base doubled in 2015; weighing on profitability 26 After reporting strong GWP growth in 2014 (36% Y-o-Y), Buruj raised SAR120mn 24 through a rights issue at par value in April 2015. The rights issue enhanced its sol- 22 20 vency level, and created headroom for growth. However, GWP growth slowed sharply 18 in 2015 to 18% Y-o-Y and continued to remain sluggish in 1H16 (6% Y-o-Y). 16 14 12 10 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 172 274 332 368 Insurance Profit 8 23 38 55 Net Attributable Income 5 18 28 42 EPS (SAR) 0.39 1.36 1.28 1.69 Price to Earnings (x) 51.9 14.8 15.7 11.9 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.7 2.8 2.2 1.9 ROATE (%) 7.3 21.7 17.4 17.0 Loss Ratio (%) 68.8 72.3 76.9 70.6 Combined Ratio (%) 109.7 102.9 103.1 95.7
Source: Buruj Cooperative Insurance Company (Buruj), EFG Hermes
98 Buruj Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.39 1.36 1.28 1.24 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.48 7.08 9.32 10.59 Income Statement Gross Written Premium 279 379 447 227 Net Written Premium 199 325 386 203 Net Earned Premium 172 274 332 200 Net Claims Incurred (118) (198) (255) (120) Underwriting Expenses (71) (84) (87) (53) Underwriting Income (17) (8) (10) 26 Investment Income 4 8 7 3 Reinsurance Commission & Other Income 21 23 42 10 Insurance Profit 8 23 38 39 Net Attributable Income 5 18 28 31 Balance Sheet - Key Highlights Cash & Investments 199 302 536 579 Total Assets 335 458 801 900 Outstanding Claims 85 123 254 274 Unearned Premium 125 163 216 219 Total Liabilities 264 366 568 635 Common Shareholders' Equity 71 92 233 265 KPIs Profitability Risk retention ratio (%) 71.2 85.7 86.2 89.5 Loss ratio (%) 68.8 72.3 76.9 60.4 Expense ratio (%) 40.9 30.7 26.3 26.4 Combined ratio (%) 109.7 102.9 103.1 86.8 Investment yield (%) 1.8 2.7 1.4 1.0 ROAA (%) 1.6 4.5 4.5 7.3 ROATE (%) 7.3 21.7 17.4 25.0 Solvency NEP to equity (%) 241.9 297.8 142.4 150.8 NEP to technical reserves (%) 82.2 95.5 70.7 80.9 Cash & invested assets to technical reserves (%) 95.2 105.4 114.1 117.4 Claim reserve development (%) 29.4 45.8 105.6 32.0 GWP Mix Health (%) 33.2 27.5 21.8 37.0 Motor (%) 49.3 57.5 64.5 50.3 P&C (%) 13.4 11.0 9.3 6.4 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 4.2 3.9 4.3 6.2 Loss Ratio by Segments Health (%) 19.9 21.1 16.2 25.7 Motor (%) 86.0 95.9 97.5 77.4 P&C (%) 25.4 63.4 72.3 126.4 P&S (%) N/A N/A N/A N/A Others (%) 56.9 41.9 63.2 49.4 Growth Rates (Y-o-Y) Gross written premium (%) 19.6 35.8 17.8 6.3 Net written premium (%) 12.5 63.6 18.6 14.9 Net earned premium (%) 24.0 59.0 21.2 21.8 Source: Buruj Cooperative Insurance Company (Buruj), EFG Hermes
99 Gulf General Cooperative Insurance Company
Financials | Saudi Arabia
Small multi-line insurer Gulf General Cooperative Insurance (GGCI), a multi-line non-life insurer, was estab- Stock Data lished in 2009 resulting from a merger of Gulf Cooperative Insurance Company, Bah- rain and Saudi General Insurance Company Bahrain. Motor and P&C insurance are Price SAR16.12 the dominant business lines, accounting for 80% of the company’s GWP, while health Bloomberg / Reuters GGCI AB / 8260.SE insurance accounted for 20%. The company had a market share of c1% of total Mkt Cap / Shares (mn) SAR322.4 / 20.0 sector GWP in 2015, making it one of the smallest insurers in the country. GGCI has 3M ADVT (mn) SAR9.3 reported a decline in its GWP base since end of 2014, driven by shrinking business in health and P&C segments. Motor insurance though has remained broadly stable over Float 65.0% the past two years. Foreign Ownership Limit 49.0%
Gradual recovery post high losses in 2013 Major Shareholders After reporting steady profitability levels through 2012-14, GGCI reported a strong Gulf Cooperative Insurance (Bahrain) 15.0% deterioration in 2015, with a net loss of SAR32mn. The company’s GWP declined 4% Saudi General Insurance Co. (Bahrain) 15.0% Y-o-Y while loss ratio climbed to 85% in 2015 from 65% in 2014. While the jump in Ansaf International for Property Dev. 5.0% loss ratio was driven primarily by deterioration in the P&C segment, health and motor businesses also saw an uptick in loss ratios. In addition, the company also provided against receivables, which added to profitability pressures. While GGCI’s profitability Share Price Performance recovered in 1H16 as loss ratios normalised, the company reported further contrac- tion in GWP (-27% Y-o-Y), as it ceded market share in the health insurance seg- Relative to TASI (Rebased) ment. The weakening premium has meant that the company’s expense ratio has risen 27 Price (SAR) TASI sharply – rising to 44% in 2015 vs. 36% in 2014. 24 Steady profitability means that capital levels are sufficient 21 GGCI has maintained decent profitability levels in three of the last four years. As of 18
1H16, GGCI had a small balance of accumulated losses amounting to SAR21mn or 15 only 10% of paid-up capital. 12
9 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 165 190 169 161 Insurance Profit 12 34 (19) (6) Net Attributable Income 6 23 (32) (21) EPS (SAR) 0.30 1.13 N/M (1.04) Price to Earnings (x) 54.6 14.2 27.1 N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 2.2 1.9 2.3 2.3 ROATE (%) 3.2 11.5 (16.6) (11.7) Loss Ratio (%) 78.8 64.8 85.2 80.5 Combined Ratio (%) 118.1 101.8 134.4 127.6
Source: Gulf General Cooperative Insurance Company (GGCI), EFG Hermes
100 Gulf General Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.30 1.13 (1.60) 0.19 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 7.46 8.60 7.00 7.15 Income Statement Gross Written Premium 370 367 352 179 Net Written Premium 173 186 171 95 Net Earned Premium 165 190 169 76 Net Claims Incurred (130) (123) (144) (42) Underwriting Expenses (64) (68) (75) (43) Underwriting Income (29) (1) (50) (9) Investment Income 8 0 (2) 0 Reinsurance Commission & Other Income 33 34 33 18 Insurance Profit 12 34 (19) 9 Net Attributable Income 6 23 (32) 4 Balance Sheet - Key Highlights Cash & Investments 234 261 264 258 Total Assets 680 625 667 614 Outstanding Claims 201 149 200 155 Unearned Premium 137 108 112 136 Total Liabilities 495 417 491 434 Common Shareholders' Equity 186 208 176 179 KPIs Profitability Retention ratio (%) 46.8 50.6 48.7 53.2 Loss ratio (%) 78.8 64.8 85.2 55.8 Expense ratio (%) 39.0 36.0 44.2 56.4 Combined ratio (%) 117.8 100.7 129.5 112.2 Investment yield (%) 3.2 0.2 -0.8 0.3 ROAA (%) 0.9 3.5 (4.9) 1.2 ROATE (%) 4.0 14.1 (20.5) 5.5 Solvency NEP to equity (%) 88.8 91.3 95.7 84.9 NEP to technical reserves (%) 48.7 73.9 54.1 52.3 Cash & invested assets to technical reserves (%) 69.3 101.5 84.6 88.7 Claim reserve development (%) 3.2 (26.0) 34.3 2.0 GWP Mix Health (%) 26.5 18.2 20.5 14.1 Motor (%) 36.0 40.7 40.2 48.3 P&C (%) 37.5 41.1 39.3 37.6 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 0.0 0.0 0.0 0.0 Loss Ratio by Segments Health (%) 73.1 49.7 57.3 55.9 Motor (%) 83.5 77.7 80.9 66.4 P&C (%) 67.1 21.8 136.7 9.0 P&S (%) N/A N/A N/A N/A Others (%) N/A N/A N/A N/A Growth Rates (Y-o-Y) Gross written premium (%) (0.1) (0.9) (4.1) (26.9) Net written premium (%) 6.6 7.3 (7.7) (21.0) Net earned premium (%) (1.1) 15.4 (11.2) (9.1) Source: Gulf General Cooperative Insurance Company (GGCI), EFG Hermes
101 Gulf Union Cooperative Insurance Company
Financials | Saudi Arabia
One of the smaller insurers in Saudi Arabia Gulf Union Cooperative Insurance was established in 2007 and started its commercial Stock Data operations in 2011. The company however has a history of operating in Saudi Arabia since 1983. Gulf Union Insurance and Projects Management Holding Company Bah- Price SAR11.80
rain, owned by a group of Saudi, Kuwaiti and Bahraini businessmen, is the company’s Bloomberg / Reuters GULFUNI AB / 8120.SE sponsor shareholder. Gulf Union had a market share of 0.6% of sector GWP, making it one of the smallest insurance companies in the country. Motor and P&C insurance Mkt Cap / Shares (mn) SAR259.6 / 22.0 accounted for 77% of company’s GWP in 2015. The company reported a sharp de- 3M ADVT (mn) SAR6.9 cline in health insurance premiums in 2015, which accounted for 13% of its GWP in Float 68.0% 2015 compared to 38% in 2014. Foreign Ownership Limit 49.0%
Gradual recovery post high losses in 2013 Major Shareholders The company saw a strong decline in profitability in 2013, driven by a pick-up in loss ratios across all three major business lines. However, it has made a steady recovery Gulf Union Insurance & Projects Management Holdings Company BSC 23.5% since then, and turned profitable in 2015 on a sharp improvement in the loss ratio. The sharp decline in premiums in 2015 (34% Y-o-Y), which was mainly driven by the health segment, suggests that the company shed its non-profitable business. 1H16 results indicate that post rationalisation of the premium business risk profile, it is Share Price Performance focusing on growth, with premiums rising 11% Y-o-Y, driven by strong expansion in P&C business premiums. Though underwriting profitability remains weak (combined Relative to TASI (Rebased) ratio has remained over 120%), the company earns decent commission income from 16 Price (SAR) TASI reinsuring part of its business. 14
Rights issue planned; capital reduction to write off accumulated 12 losses 10 The company’s accumulated losses stood at 43% of paid up capital by end of 2015. In 2014, it announced plans to double its paid up capital by raising SAR220mn through 8 a rights issue. It has also announced that it plans to write off up to SAR100mn of its 6 accumulated losses and reduce its capital. 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 199 197 121 102 Insurance Profit (29) (6) 23 33 Net Attributable Income (31) (8) 11 20 EPS (SAR) (1.40) (0.36) 0.52 0.91 Price to Earnings (x) N/M N/M 22.8 13.0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.3 3.8 2.0 1.9 ROATE (%) (22.0) (6.6) 9.4 15.3 Loss Ratio (%) 92.8 94.1 66.6 63.8 Combined Ratio (%) 136.3 126.1 127.4 129.1
Source: Gulf Union Cooperative Insurance Company (Gulf Union), EFG Hermes
102 Gulf Union Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.40) (0.36) 0.52 0.30 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 3.57 3.13 5.77 6.09 Income Statement Gross Written Premium 388 342 225 135 Net Written Premium 208 187 100 62 Net Earned Premium 199 197 121 46 Net Claims Incurred (185) (186) (81) (26) Underwriting Expenses (87) (63) (74) (37) Underwriting Income (72) (52) (33) (17) Investment Income 3 4 2 2 Reinsurance Commission & Other Income 40 41 55 24 Insurance Profit (29) (6) 23 9 Net Attributable Income (31) (8) 11 7 Balance Sheet - Key Highlights Cash & Investments 139 183 169 161 Total Assets 745 580 526 487 Outstanding Claims 207 180 168 104 Unearned Premium 186 108 82 112 Total Liabilities 620 464 399 353 Common Shareholders' Equity 126 116 127 134 KPIs Profitability Retention ratio (%) 53.7 54.6 44.3 45.5 Loss ratio (%) 92.8 94.1 66.6 56.9 Expense ratio (%) 43.5 32.0 60.9 79.8 Combined ratio (%) 136.3 126.1 127.4 136.7 Investment yield (%) 2.4 2.4 1.1 2.3 ROAA (%) (4.0) (1.2) 2.1 2.6 ROATE (%) (22.0) (6.6) 9.4 10.2 Solvency NEP to equity (%) 158.6 170.4 95.3 68.6 NEP to technical reserves (%) 50.7 68.6 48.3 42.4 Cash & invested assets to technical reserves (%) 35.3 63.7 67.4 74.3 Claim reserve development (%) (8.1) (13.4) (6.2) (12.8) GWP Mix Health (%) 38.9 38.1 13.4 16.1 Motor (%) 27.2 21.9 36.5 37.7 P&C (%) 23.1 27.7 40.6 36.2 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 10.7 12.3 9.6 10.0 Loss Ratio by Segments Health (%) 102.6 110.0 67.6 54.4 Motor (%) 91.4 92.7 88.5 87.7 P&C (%) 53.7 24.2 28.3 24.7 P&S (%) N/A N/A N/A N/A Others (%) 40.5 (11.0) 2.3 6.7 Growth Rates (Y-o-Y) Gross written premium (%) (7.2) (11.8) (34.2) (9.9) Net written premium (%) 5.4 (10.3) (46.6) (5.7) Net earned premium (%) (0.9) (0.9) (38.7) (29.6) Source: Gulf Union Cooperative Insurance Company (Gulf Union), EFG Hermes
103 Malath Cooperative Insurance & Reinsurance Company
Financials | Saudi Arabia
The market leader in motor insurance Malath Insurance was founded in 2004 by a group of Saudi investors and provides Stock Data mainly non-life insurance products. As of 2015, Malath had a market share of 4.6% of industry GWP thanks to its market leading share (14.4% of sector GWP in 2015) Price SAR11.66 in the motor segment. Starting in 2013, the company shifted its focus to become a Bloomberg / Reuters MALATH AB / 8020.SE market leader in motor insurance and this contributed 85.1% of its GWP in 2015, up from 19.8% in 2011, with GWP for the segment rising c9.7x between 2012-15. The Mkt Cap / Shares (mn) SAR349.8 / 30.0 share of healthcare in GWP has simultaneously declined from 56% in 2013 to 5% in 3M ADVT (mn) SAR15.7 2015. Float 100.0%
Seen recent uptick in losses on surge in loss ratio Foreign Ownership Limit 49.0% After steady profitability in 2010-12, Malath swung to the red in 2013-15. The three- year streak of losses followed a phase of profitable operations and was due to rapid growth in premiums, outpaced by even higher claims growth. The company’s GWP grew at a three-year CAGR of 113% as it aggressively expanded its motor insurance portfolio. However, the loss ratio in the motor segment continues to remain high. Though net losses were relatively small over 2013-15, the company reported a surge in losses in 1H16 as the loss ratio jumped to 99%, driven primarily by the motor seg- Share Price Performance ment. The expense ratio also jumped to 30% in 1H16 from 18% in 2015 on high policy acquisition costs and rise in operating expenses. Relative to TASI (Rebased)
30 Price (SAR) TASI Capital raising likely post large loss in 1H16 28 26 The surge in losses in 1H16 increased Malath’s accumulated losses to 63% of paid up 24 capital. While Malath had announced plans to raise capital through a rights issue, the 22 company has not provided the size of the capital raising yet. The surge in accumulated 20 losses in 1H16 has dented the company’s solvency, in our opinion, and is likely to fast 18 16 track the company’s plan for the rights issue. 14 12 10 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 662 1,033 1,721 1,572 Insurance Profit (13) (12) (1) (104) Net Attributable Income (42) (14) (10) (129) EPS (SAR) (1.39) (0.46) (0.33) (4.30) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.2 1.3 1.4 3.0 ROATE (%) (13.6) (4.8) (3.7) (68.9) Loss Ratio (%) 84.4 89.7 86.3 93.4 Combined Ratio (%) 108.5 108.0 104.7 115.6
Source: Malath Cooperative Insurance & Reinsurance Company (Malath), EFG Hermes
104 Malath Cooperative Insurance & Reinsurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.39) (0.46) (0.33) (4.36) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 9.70 9.21 8.61 3.85 Income Statement Gross Written Premium 771 1,413 1,863 1,440 Net Written Premium 660 1,266 1,522 843 Net Earned Premium 662 1,033 1,721 697 Net Claims Incurred (559) (927) (1,485) (692) Underwriting Expenses (160) (189) (317) (212) Underwriting Income (56) (83) (81) (207) Investment Income 12 21 13 18 Reinsurance Commission & Other Income 31 50 67 78 Insurance Profit (13) (12) (1) (111) Net Attributable Income (42) (14) (10) (131) Balance Sheet - Key Highlights Cash & Investments 623 830 1,067 1,219 Total Assets 1,454 1,947 1,895 2,596 Outstanding Claims 651 844 733 760 Unearned Premium 286 545 476 853 Total Liabilities 1,163 1,671 1,637 2,480 Common Shareholders' Equity 291 276 258 116 KPIs Profitability Retention ratio (%) 85.7 89.6 81.7 58.6 Loss ratio (%) 84.4 89.7 86.3 99.3 Expense ratio (%) 24.1 18.3 18.4 30.4 Combined ratio (%) 108.5 108.0 104.7 129.7 Investment yield (%) 2.0 2.6 1.2 1.5 ROAA (%) (3.4) (0.8) (0.5) (5.8) ROATE (%) (13.6) (4.8) (3.7) (69.9) Solvency NEP to equity (%) 227.6 374.2 666.0 1,205.4 NEP to technical reserves (%) 70.7 74.4 142.4 43.2 Cash & invested assets to technical reserves (%) 66.5 59.8 88.2 75.6 Claim reserve development (%) 160.5 29.6 (13.1) 7.7 GWP Mix Health (%) 27.6 6.1 4.9 3.9 Motor (%) 56.4 82.0 85.1 90.8 P&C (%) 13.3 8.9 6.7 3.5 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 2.7 2.9 3.3 1.9 Loss Ratio by Segments Health (%) 58.5 43.0 56.7 74.9 Motor (%) 102.1 101.5 89.3 103.8 P&C (%) 93.4 6.0 (7.2) 0.0 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 12.3 38.2 44.4 (2.3) Growth Rates (Y-o-Y) Gross written premium (%) 38.1 83.3 31.9 38.4 Net written premium (%) 42.2 91.7 20.3 (12.9) Net earned premium (%) 43.2 56.0 66.6 (17.6) Source: Malath Cooperative Insurance & Reinsurance Company (Malath), EFG Hermes
105 Mediterranean and Gulf Insurance & Reinsurance (Medgulf)
Financials | Saudi Arabia
The third largest insurer in Saudi Arabia Medgulf is the third largest insurance company in Saudi Arabia, in terms of GWP size Stock Data and has a portfolio of over 1mn clients. Its business is organised around three seg- ments – health, motor and others. As of 2015, it had a market share of 11% overall, Price SAR21.07 15% in health and 6% in motor segment. Health is the key business segment for Bloomberg / Reuters MEDGULF AB / 8030.SE Medgulf, as it accounted for 70% of GWP in 2015. Its main shareholders are Mediter- Mkt Cap / Shares (mn) SAR2,007.0 / 100.0 ranean and Gulf Insurance Company of Bahrain and Saudi Investment Bank. Medgulf has been losing market share steadily over the past three years, particularly in the 3M ADVT (mn) SAR23.3 health segment. Its market share of health sector GWP declined to 15% in 2015 from Float 36.5% 23% in 2013. Medgulf’s board appointed Mohammed Alshaya as CEO in January Foreign Ownership Limit 49.0% 2016. He previously held senior positions at SAMA. Major Shareholders Loss in 2015 due to weak motor results The Mediterranean & Gulf Ins., Bahrain Medgulf swung to a loss in 2015 – SAR269mn loss in 2015 vs. SAR186mn in 2014 – 40.5% owing to weakness in underwriting results. The insurer’s combined ratio climbed to The Saudi Investment Bank 19.0% 113% in 2015 from 98% in 2014, as it built up claim reserves driving up the loss ratio to 94% from 84% in 2014. Motor was the key weak area, as its loss ratio spiked to 129% from 86%. We suspect that Medgulf relaxed underwriting standards in motor Share Price Performance to achieve market share gains in 2014. The insurer enjoys an advantage of scale as its expense ratio is competitive, even though it rose to 18% in 2015 from 15% in 2014. Relative to TASI (Rebased) Medgulf has continued to lose market share to peers, with GWP contracting 20% Y- 33 Price (SAR) TASI o-Y in 1H16 on top of the 9% decline in 2014. 29
High losses have dented capital levels 25 Medgulf has one of the highest paid-up capitals in the sector, of SAR1bn. It has, however, piled up an accumulated loss of SAR260mn as of 1H16. A return to profit- 21
ability should add to solvency. The insurer has cut its loss in 1H16 to SAR10mn from 17 SAR191mn in 2015. 13 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 2,598 3,127 3,467 3,303 Insurance Profit (192) 214 (245) (75) Net Attributable Income (197) 186 (269) (88) EPS (SAR) (1.97) 1.86 (2.69) (0.88) Price to Earnings (x) N/M 11.3 N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.9 2.9 4.6 4.8 ROATE (%) (32.3) 30.8 (47.7) (20.9) Loss Ratio (%) 101.3 83.8 94.3 88.1 Combined Ratio (%) 115.4 98.4 112.6 107.8
Source: Mediterranean and Gulf Insurance & Reinsurance (Medgulf), EFG Hermes
106 Mediterranean and Gulf Insurance & Reinsurance (Medgulf) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.97) 1.86 (2.69) (0.10) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.16 6.96 4.32 4.14 Income Statement Gross Written Premium 4,138 4,416 4,002 2,125 Net Written Premium 2,892 3,198 3,359 1,819 Net Earned Premium 2,598 3,127 3,467 1,547 Net Claims Incurred (2,632) (2,622) (3,269) (1,332) Underwriting Expenses (366) (457) (636) (314) Underwriting Income (400) 49 (437) (99) Investment Income 23 16 21 27 Reinsurance Commission & Other Income 184 150 171 69 Insurance Profit (192) 214 (245) (3) Net Attributable Income (197) 186 (269) (10) Balance Sheet - Key Highlights Cash & Investments 1,566 1,526 1,300 1,227 Total Assets 5,621 5,575 5,526 5,658 Outstanding Claims 1,452 1,272 1,665 1,489 Unearned Premium 2,299 2,484 2,054 2,287 Total Liabilities 4,625 4,399 4,614 4,764 Common Shareholders' Equity 996 1,176 912 894 KPIs Profitability Retention ratio (%) 69.9 72.4 83.9 85.6 Loss ratio (%) 101.3 83.8 94.3 86.1 Expense ratio (%) 14.1 14.6 18.3 20.3 Combined ratio (%) 115.4 98.4 112.6 106.4 Investment yield (%) 1.5 1.0 1.6 4.3 ROAA (%) (3.9) 3.3 (4.9) (0.4) ROATE (%) (32.3) 30.8 (47.7) (4.7) Solvency NEP to equity (%) 260.9 265.9 380.1 346.1 NEP to technical reserves (%) 69.3 83.3 93.2 81.9 Cash & invested assets to technical reserves (%) 41.8 40.6 35.0 32.5 Claim reserve development (%) 48.5 (12.4) 30.8 (5.9) GWP Mix Health (%) 72.8 67.3 70.3 71.4 Motor (%) 9.5 15.5 16.6 18.0 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 17.7 17.1 13.1 10.6 Loss Ratio by Segments Health (%) 107.1 85.7 90.6 88.4 Motor (%) 80.8 85.6 128.9 85.3 P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) 17.0 20.9 15.4 22.1 Growth Rates (Y-o-Y) Gross written premium (%) 24.7 6.7 (9.4) (20.2) Net written premium (%) 20.4 10.6 5.0 (20.0) Net earned premium (%) 18.7 20.4 10.9 (9.6) Source: Mediterranean and Gulf Insurance & Reinsurance (Medgulf), EFG Hermes
107 Metlife AIG-ANB Cooperative Insurance
Financials | Saudi Arabia
Relatively recent entrant focusing on health Established in 2012, Metlife-AIG-ANB Cooperative Insurance started commercial op- Stock Data erations in Aug 2013 and is one of the most recent entrants into the Saudi insurance market. The company is a JV between ANB and Metlife Alico and provides life and Price SAR20.72 non-life insurance. Health is the largest segment, contributing 63% of GWP in 2015, Bloomberg / Reuters METLIFE AB / 8011.SE followed by P&C (25% of GWP) and P&S (12% of GWP). The company has a reinsur- Mkt Cap / Shares (mn) SAR725.2 / 35.0 ance agreement with AIG under, which all life and P&S insurance is reinsured with 3M ADVT (mn) SAR17.8 Metlife Alico. The company is also compensated by MetLife for all expenses incurred by it when servicing ALICO run-off portfolio in a form of admin fees, which is booked Float 30.0% under “other underwriting income”. Foreign Ownership Limit 49.0%
Loss-making, but signs that it is turning around Major Shareholders The company has reported losses since its inception in 2014, however net losses American Life Ins. Co. - USA (ALICO) 30.0% decreased by 29.0% Y-o-Y in 2015. Underwriting revenue increased significantly in Arab National Bank 29.9% 2015 due to the increase in business volumes, which resulted in higher gross writ- EIGMIA Investment and Services 10.0% ten premiums and higher reinsurance commissions. The NEP also improved due to increased retention rate from 30.6% in 2014 to 66.8% in 2015. The combined ratio clocked in at 216.3% in 2015 driven by a loss ratio of 92% and expense ratio of Share Price Performance 124% due to higher initial costs related to underwriting. Relative to TASI (Rebased)
Capital levels boosted by recent rights issue 50 Price (SAR) TASI With accumulated losses reaching 49% of paid up capital at the end of 2015, Metlife 45
AIG –ANB announced a rights issue in February 2016. The company raised SAR175mn 40
through the rights issue, doubling its capital base. The company has used the bulk of 35 the capital raise to meet the solvency requirement of the regulator, by investing it in 30 time deposits with domestic banks. 25
20
15 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 0 0 34 95 Insurance Profit 0 (44) (31) (27) Attributable Net Income 0 (45) (32) (27) EPS (SAR) 0.00 (1.28) (0.92) (1.26) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 0.0 3.0 4.1 2.9 ROATE (%) 0.0 (74.4) (30.6) (16.2) Loss Ratio (%) 0.0 96.4 91.7 85.1 Combined Ratio (%) 0.0 N/M 215.9 132.7
Source: Metlife AIG-ANB Cooperative Insurance (Metlife), EFG Hermes
108 Metlife AIG-ANB Cooperative Insurance Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (2.57) (1.83) (0.33) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 BVPS (Tangible) (SAR) 6.90 5.06 7.08 Income Statement Gross Written Premium 6 145 112 Net Written Premium 2 97 73 Net Earned Premium 0 34 66 Net Claims Incurred (0) (31) (55) Underwriting Expenses (45) (42) (33) Underwriting Income (45) (39) (22) Investment Income 1 1 3 Reinsurance Commission & Other Income 0 7 7 Insurance Profit (44) (31) (11) Net Attributable Income (45) (32) (11) Balance Sheet - Key Highlights Cash & Investments 102 144 308 Total Assets 143 530 750 Outstanding Claims 1 40 54 Unearned Premium 5 92 111 Total Liabilities 22 441 502 Common Shareholders' Equity 121 89 248 KPIs Profitability Retention ratio (%) 30.6 66.8 65.6 Loss ratio (%) 96.4 91.7 83.3 Expense ratio (%) N/M 124.2 49.4 Combined ratio (%) N/M 215.9 132.7 Investment yield (%) 0.8 0.8 2.7 ROAA (%) (62.9) (9.5) (3.6) ROATE (%) (74.4) (30.6) (13.5) Solvency NEP to equity (%) 1.5 109.1 59.2 NEP to technical reserves (%) 5.4 25.6 40.1 Cash & invested assets to technical reserves (%) 1847.9 109.5 187.1 Claim reserve development (%) N/A 4935.0 139.9 GWP Mix Health (%) 17.0 62.9 53.9 Motor (%) 0.0 0.1 8.5 P&C (%) 53.3 24.5 N/A P&S (%) 0.0 11.5 11.9 Others (%) 29.7 1.0 25.7 Loss Ratio by Segments Health (%) 78.5 92.4 85.4 Motor (%) N/A 879.1 99.7 P&C (%) 94.6 75.4 N/A P&S (%) N/A 88.2 63.4 Others (%) 105.0 91.6 4.4 Growth Rates (Y-o-Y) Gross written premium (%) N/M 2,421.1 118.8 Net written premium (%) N/M 5,402.9 386.6 Net earned premium (%) N/M 11,209.4 1,259.6 Source: Metlife AIG-ANB Cooperative Insurance (Metlife), EFG Hermes
109 SABB Takaful Company
Financials | Saudi Arabia
A growing specialist P&S insurer SABB Takaful Company (SABB Takaful) was established in 2007. It provides Shariah Stock Data compliant protection and savings (P&S) products – children education, retirement and investment - for individual and commercial customers. SABB Takaful also provides Price SAR24.50
coverage for travel, personal accident and homes. Saudi British Bank owns a 33% Bloomberg / Reuters SABBT AB / 8080.SE stake in the insurer. This allows the company to distribute insurance through the bank’s branch network. HSBC also owns a 31% stake in SABB Takaful. SABB Takaful Mkt Cap / Shares (mn) SAR833.0 / 34.0 is a small insurer as it accounts for only 0.6% of the sector’s total GWP, but has a 23% 3M ADVT (mn) 13.0 share of P&S GWP. The P&S segment was 86% of the insurer’s GWP in 2015. Float 36.1%
Foreign Ownership Limit 49.0% Profitable but GWP growth is sluggish SABB Takaful has been consistently profitable over the past five years, primarily due to Major Shareholders investment and commission income. However its profitability has been subdued with an ROE of 1% in 2015 and an average ROE of 5% in 2013-14. The company gener- Saudi British Bank 32.5% ates a loss at an underwriting level (combined ratio over 100% in 2014-15), due to a HSBC Aisa Holdings (UK) Limited 31.0% high expense ratio. It has not yet achieved optimum scale to bring its expense ratio to a more reasonable level - c100% in 2015. However, loss ratios are low owing to the long-tail nature of claims. Growth in P&S business is challenging in the country as i) it Share Price Performance is not mandatory; ii) there is a lack of awareness; and iii) the target market is small as it caters mainly to the affluent segment. This is reflected in sluggish GWP– declining Relative to TASI (Rebased) 6% Y-o-Y in 1H16 after rising 5% Y-o-Y in 2015. 45 Price (SAR) TASI
40 Strong capital position, but weak growth dynamics 35 While SABB Takaful’s growth dynamics are relatively weak, we believe it has a strong capital position and has headroom for growth. As of 2015 NEP to equity stood at 30 49%. Unlike some of the small P&C insurers, SABB had positive retained earnings. 25
20
15 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 238 226 128 147 Insurance Profit 18 19 4 3 Net Attributable Income 16 17 4 3 EPS (SAR) 0.48 0.50 0.11 0.09 Price to Earnings (x) 50.9 49.0 228.8 278.8 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 2.4 2.3 2.3 2.3 ROATE (%) 4.8 4.9 1.0 0.8 Loss Ratio (%) 3.6 5.6 4.8 6.3 Combined Ratio (%) 97.2 101.0 107.5 109.4
Source: SABB Takaful Company (SABB Takaful), EFG Hermes
110 SABB Takaful Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 0.48 0.50 0.11 0.19 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 10.14 10.46 10.44 10.55 Income Statement Gross Written Premium 183 193 202 93 Net Written Premium 157 167 170 76 Net Earned Premium 238 226 128 88 Net Claims Incurred (9) (13) (6) (7) Underwriting Expenses (223) (216) (131) (83) Underwriting Income 7 (2) (10) (2) Investment Income 7 7 6 5 Reinsurance Commission & Other Income 4 14 7 4 Insurance Profit 18 19 4 7 Net Attributable Income 16 17 4 7 Balance Sheet - Key Highlights Cash & Investments 824 770 739 716 Total Assets 930 896 853 825 Outstanding Claims 64 70 48 55 Unearned Premium 21 20 21 18 Total Liabilities 586 540 498 466 Common Shareholders' Equity 345 356 355 359 KPIs Profitability Risk Retention ratio (%) 85.8 86.3 83.9 81.3 Loss ratio (%) 3.6 5.6 4.8 7.9 Expense ratio (%) 93.6 95.5 102.7 94.5 Combined ratio (%) 97.2 101.0 107.5 102.5 Investment yield (%) 0.9 0.9 0.9 1.4 ROAA (%) 1.7 1.9 0.4 1.6 ROATE (%) 4.8 4.9 1.0 3.7 Solvency NEP to equity (%) 69.0 63.7 36.0 49.0 NEP to technical reserves (%) 280.0 250.2 184.5 120.2 Cash & invested assets to technical reserves (%) 969.6 851.0 1,065.5 978.2 Claim reserve development (%) 2.4 9.6 (31.8) (24.1) GWP Mix Health (%) 0.0 0.0 0.0 0.0 Motor (%) 0.0 0.0 0.0 0.0 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 83.9 85.7 85.6 84.5 Others (%) 16.1 14.3 14.4 15.5 Loss Ratio by Segments Health (%) N/A N/A N/A N/A Motor (%) N/A N/A N/A N/A P&C (%) N/A N/A N/A N/A P&S (%) 3.0 5.0 9.6 7.6 Others (%) 14.8 16.8 (84.7) 16.0 Growth Rates (Y-o-Y) Gross written premium (%) (9.1) 5.5 4.7 (5.5) Net written premium (%) (11.0) 6.1 1.8 (12.4) Net earned premium (%) 9.0 (4.8) (43.5) 28.5
Source: SABB Takaful Company (SABB Takaful), EFG Hermes
111 Salama Cooperative Insurance Company
Financials | Saudi Arabia
Pioneer of Shariah-compliant insurance Salama Cooperative Insurance (Salama) was established in 2006 and is majority owned Stock Data by Islamic Arab Insurance Company (Salama Group) of UAE. Salama Group has been operating since 1979 and is the world’s largest Takaful and Re-Takaful company and Price SAR12.77 is considered the pioneer of Shariah compliant insurance. Salama however is one of Bloomberg / Reuters SALAMA AB / 8050.SE the small insurers in Saudi Arabia, with a GWP market share of c1% as of 2015. The company’s business is organised around three business lines - health, motor and oth- Mkt Cap / Shares (mn) SAR319.3 / 25.0
ers - however motor is the dominant segment as it accounts for 88% of the Salama’s 3M ADVT (mn) SAR18.5 GWP as of 2015. The company lost ground in the health segment with GWP down to 8% of GWP in 2015, down from 28% in 2011. Float 70.0% Foreign Ownership Limit 49.0% Motor segment drives strong GWP growth Salama managed to break-even for 2014-15 aided by investment income and reinsur- Major Shareholders ance commissions. At an underwriting level though the company has not been profit- able, with its combined ratio exceeding 100% for 2014-15. Salama has improved its Islamic Arab Insurance Co. UAE 30.0% expense ratio to 17% in 2015 from 40% in 2011, by scaling up its motor insurance business. Salama’s GWP grew 46% in 2014 and 23% in 2015 as it made market share gains in the motor segment. In 1H16 GWP growth was again solid at 25% Y-o-Y fol- Share Price Performance lowing the recapitalisation of the balance sheet in 2015. Relative to TASI (Rebased)
Price (SAR) TASI Improved capital base in 2015 19 Strong GWP growth and weak profitability dented Salama’s solvency by 2014. Salama 17 carried out a rights issue in 2015 of SAR150mn, which increased its capital base 15 to SAR250mn. Before this recapitalisation initiative, Salama’s accumulated loss was 13 c73% of its paid-up capital at the end of 2014. Its solvency was under stress as NEP 11 to equity was at 1100% in 2014. The insurer’s solvency has improved following the 9 rights issue with the NEP to equity ratio easing off to a reasonable 300% as of 1H16. 7 5 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 178 257 341 373 Insurance Profit (42) 0 3 4 Net Attributable Income (42) 2 2 1 EPS (SAR) (4.21) 0.18 0.11 0.04 Price to Earnings (x) N/M 69.8 119.4 333.8 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 4.7 4.7 1.9 1.8 ROATE (%) (87.7) 6.8 1.9 0.6 Loss Ratio (%) 101.1 85.2 85.4 84.2 Combined Ratio (%) 130.4 104.4 102.6 102.1
Source: Salama Cooperative Insurance Company (Salama), EFG Hermes
112 Salama Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (4.21) 0.18 0.11 0.12 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 2.72 2.70 6.87 7.00 Income Statement Gross Written Premium 218 319 392 283 Net Written Premium 203 299 369 270 Net Earned Premium 178 257 341 194 Net Claims Incurred (180) (219) (292) (156) Underwriting Expenses (52) (49) (59) (38) Underwriting Income (54) (11) (9) 0 Investment Income 8 7 6 3 Reinsurance Commission & Other Income 4 5 6 3 Insurance Profit (42) 0 3 6 Net Attributable Income (42) 2 2 3 Balance Sheet - Key Highlights Cash & Investments 150 192 363 421 Total Assets 251 296 488 590 Outstanding Claims 77 80 98 115 Unearned Premium 100 143 172 247 Total Liabilities 223 269 316 416 Common Shareholders' Equity 27 27 172 175 KPIs Profitability Retention ratio (%) 92.9 93.8 94.2 95.2 Loss ratio (%) 101.1 85.2 85.4 80.0 Expense ratio (%) 29.3 19.2 17.2 19.8 Combined ratio (%) 130.4 104.4 102.6 99.8 Investment yield (%) 5.6 3.5 1.7 1.3 ROAA (%) (17.0) 0.7 0.5 1.1 ROATE (%) (87.7) 6.8 1.9 3.5 Solvency NEP to equity (%) 655.7 953.4 198.7 222.3 NEP to technical reserves (%) 100.8 115.3 126.3 53.7 Cash & invested assets to technical reserves (%) 84.7 86.0 134.2 116.4 Claim reserve development (%) 53.7 3.2 23.1 44.8 GWP Mix Health (%) 11.7 11.7 7.6 6.7 Motor (%) 80.6 82.7 87.5 89.6 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 7.7 5.7 4.9 3.7 Loss Ratio by Segments Health (%) 90.8 53.4 55.9 70.2 Motor (%) 103.9 90.4 89.5 81.2 P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) 59.5 18.8 29.5 44.7 Growth Rates (Y-o-Y) Gross written premium (%) 6.9 46.1 22.8 24.9 Net written premium (%) 15.1 47.5 23.4 26.1 Net earned premium (%) (7.5) 44.2 32.8 19.1 Source: Salama Cooperative Insurance Company (Salama), EFG Hermes
113 Sanad Cooperative Insurance Company
Financials | Saudi Arabia
Non-life insurance provider, with capital issues Sanad is a provider of non-life insurance services and was established in 2007 as a JV Stock Data between Al Khazana Insurance Company of UAE and Aggad Investment Company, a Saudi family investment office. Motor and health are the two main operating seg- Price SAR15.23
ments and contributed 50.7% and 20.7% to gross written premium in 2014, respec- Bloomberg / Reuters SANAD AB / 8090.SE tively. SAMA restrained Sanad from accepting new subscribers to any of its insurance activities and banned it from issuing or renewing any insurance policies since 7 Sep- Mkt Cap / Shares (mn) SAR302.0 / 20.0 tember 2014 until a decision is issued by SAMA that it has changed its status. The 3M ADVT (mn) SAR0.0 Capital Markets Authority suspended trading of shares of the company due to high Float 70.8% accumulated losses. During 3Q15, the company obtained a conditional approval from Foreign Ownership Limit 49.0% SAMA to increase its share capital.
Repeated losses point to tough future Major Shareholders Sanad has reported losses for the past five years with 2014 loss clocking in at Al Khazna Insurance Co. P.S.C. 15.0% SAR25.9mn. Despite steady GWP growth, the company’s financial health has de- Aggad Investment Company 9.0% teriorated with combined ratio remaining above 110% during 2010-14. In 2015, its solvency margin dropped below the limit prescribed by SAMA. Sanad reported a net comprehensive loss of SAR0.5mn in 2015 that resulted in accumulated losses of Share Price Performance SAR165.9mn wiping out approximately 83% of the company’s equity base. Relative to TASI (Rebased)
Capital raising request approved, restructuring process ongoing 16 Price (SAR) TASI Sanad proposed to raise SAR200mn through a rights issue, planned to be completed 15 The Capital Markets Authority suspended in 2016. The board of directors announced a restructuring plan which includes 1) an 14 trading since 07 September 2014 increase in capital; 2) cancellation of reinsurance licence; 3) administrative restructur- 13 ing; and 4) financial restructuring. The board expects an improvement in performance 12 and that it will be able to continue its operations for the foreseeable future. 11 10 9 8 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2012a 2013a 2014a 2015a Net Earned Premium 140 149 141 13 Insurance Profit (5) (29) (25) 6 Net Attributable Income (1) (37) (34) (3) EPS (SAR) (0.05) (1.84) (1.68) (0.16) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 2.8 4.4 8.5 9.3 ROATE (%) (0.9) (42.1) (64.1) (9.6) Loss Ratio (%) 66.0 82.5 71.2 (125.9) Combined Ratio (%) 111.6 135.8 129.7 110.9
Source: Sanad Cooperative Insurance Company (Sanad), EFG Hermes, EFG Hermes
114 Sanad Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2012a 2013a 2014a 2015a Per Share Numbers EPS (SAR) (0.05) (1.84) (1.68) (0.16) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.31 3.46 1.78 1.62 Income Statement Gross Written Premium 184 228 124 0 Net Written Premium 138 179 73 (3) Net Earned Premium 140 149 141 13 Net Claims Incurred (93) (123) (100) 17 Underwriting Expenses (64) (80) (82) (32) Underwriting Income (16) (54) (42) (1) Investment Income 2 12 2 2 Reinsurance Commission & Other Income 9 12 15 5 Insurance Profit (5) (29) (25) 6 Net Attributable Income (1) (37) (34) (3) Balance Sheet - Key Highlights Cash & Investments 156 154 127 66 Total Assets 330 329 245 129 Outstanding Claims 91 89 94 24 Unearned Premium 68 99 23 1 Total Liabilities 224 260 210 97 Common Shareholders' Equity 106 69 36 32 KPIs Profitability Retention ratio (%) 75.3 78.6 58.9 N/M Loss ratio (%) 66.0 82.5 71.2 (125.9) Expense ratio (%) 45.6 53.3 58.5 236.8 Combined ratio (%) 111.6 135.8 129.7 110.9 Investment yield (%) 1.5 7.9 1.3 2.7 ROAA (%) (0.3) (11.2) (11.7) (1.8) ROATE (%) (0.9) (42.1) (64.1) (9.6) Solvency NEP to equity (%) 132.1 215.8 395.0 83.0 NEP to technical reserves (%) 88.5 79.7 119.7 53.3 Cash & invested assets to technical reserves (%) 98.2 82.2 107.8 263.1 Claim reserve development (%) (13.0) (2.1) 6.3 (74.4) GWP Mix Health (%) 37.2 37.5 20.7 N/M Motor (%) 40.5 40.0 50.7 N/M P&C (%) 7.7 9.0 12.6 N/M P&S (%) 0.0 0.0 0.0 N/M Others (%) 14.6 13.5 15.9 N/M Loss Ratio by Segments Health (%) 46.6 70.2 44.8 N/M Motor (%) 83.2 98.4 86.7 N/M P&C (%) 177.4 6.5 48.2 N/M P&S (%) 0.0 0.0 0.0 N/M Others (%) 25.4 13.2 173.9 N/M Growth Rates (Y-o-Y) Gross written premium (%) (20.7) 24.2 (45.7) (99.9) Net written premium (%) (18.0) 6.6 (5.8) (90.5) Net earned premium (%) (63.4) 199.8 (2.9) (100.9) Source: Sanad Cooperative Insurance Company (Sanad), EFG Hermes, EFG Hermes
115 Saudi Arabian Cooperative Insurance Company (SAICO)
Financials | Saudi Arabia
Decent-sized multi-line insurer SAICO started operations in 2009 as a multi-line insurer. Its business is organised Stock Data around the following segments: health, motor and P&C. Health accounted for 40% of GWP in 2015, while the rest of the business is equally split between motor (30%) Price SAR18.00 and P&C (30%). SAICO had an overall market share of 2.4% in 2015, making it the Bloomberg / Reuters SAICO AB / 8100.SE eighth largest insurer in the country in terms of GWP size. The fairly equal division of insurance risk from the three segments makes it resilient and provides better oppor- Mkt Cap / Shares (mn) SAR432.5 / 25.0 tunities for growth vis-à-vis mono-line insurers, in our view. Saudi Arabian Insurance 3M ADVT (mn) SAR19.3 Company, Bahrain (majority owned by Damana Holdings Bahrain) is the key share- holder of SAICO. Float 69.2% Foreign Ownership Limit 49.0% Weak underwriting profitability metrics, strong reinsurance income SAICO has been profitable since 2014 primarily due to reinsurance commissions it Major Shareholders generates from transferring P&C risk to the reinsurance market. The insurers under- writing profitability metrics are however weak. SAICO had a combined ratio of over Saudi Arabian Insurance Co., Bahrain 30.0% 100% in 2015 and 1H16, primarily due to a high expense ratio (27% in 2015 and 34% in 1H16). That said, the company’s loss ratio is quite competitive below 80% in 2015, which suggests that the insurer underwrites its policies prudently. In the health Share Price Performance segment, the loss rate eased to 78% in 2015 from 100% in 2013. Capital constraints have contributed to weak growth in GWP, in our view. SAICO’s GWP growth weak- Relative to TASI (Rebased) ened to 11% Y-o-Y in 2015 versus 29% Y-o-Y in 2014 and contracted 16% Y-o-Y in 26 Price (SAR) TASI 1H16. Risk retention is low (63% in 2015) as SAICO has a relatively large P&C portfo-
lio, which is typically reinsured. 22
Balance sheet recapitalised in 2015; current solvency satisfactory 18 SAICO recapitalised its balance sheet in 2015 through a rights issue of SAR150mn, which helped raise its equity to SAR247mn from SAR70mn in 2014. The insurer’s NEP 14 to equity eased to a decent 196% from 661% in 2014. 10 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 353 462 602 538 Insurance Profit (26) 23 41 50 Net Attributable Income (27) 18 32 40 EPS (SAR) (2.70) 1.82 1.72 1.61 Price to Earnings (x) N/M 9.9 10.4 11.2 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.5 2.6 1.8 1.7 ROATE (%) (41.3) 30.0 20.4 15.6 Loss Ratio (%) 88.3 77.7 76.3 71.4 Combined Ratio (%) 123.9 106.0 103.3 102.9
Source: Saudi Arabian Cooperative Insurance Company (SAICO), EFG Hermes
116 Saudi Arabian Cooperative Insurance Company (SAICO) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (2.70) 1.82 1.72 0.81 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.17 7.00 9.89 10.70 Income Statement Gross Written Premium 624 804 888 522 Net Written Premium 376 545 560 326 Net Earned Premium 353 462 602 262 Net Claims Incurred (312) (359) (460) (183) Underwriting Expenses (125) (131) (163) (90) Underwriting Income (84) (28) (20) (10) Investment Income 1 1 4 6 Reinsurance Commission & Other Income 58 50 56 30 Insurance Profit (26) 23 41 26 Net Attributable Income (27) 18 32 20 Balance Sheet - Key Highlights Cash & Investments 231 309 481 501 Total Assets 780 1,015 1,233 1,351 Outstanding Claims 398 529 601 540 Unearned Premium 219 301 240 366 Total Liabilities 728 945 985 1,083 Common Shareholders' Equity 52 70 247 267 KPIs Profitability Retention ratio (%) 60.3 67.9 63.1 62.5 Loss ratio (%) 88.3 77.7 76.3 69.7 Expense ratio (%) 35.6 28.3 27.0 34.2 Combined ratio (%)k 123.9 106.0 103.3 103.8 Investment yield (%) 0.3 0.2 0.9 2.4 ROAA (%) (3.5) 2.0 2.9 3.1 ROATE (%) (41.3) 30.0 20.4 15.7 Solvency NEP to equity (%) 681.9 660.9 243.6 196.0 NEP to technical reserves (%) 57.2 55.7 71.7 57.9 Cash & invested assets to technical reserves (%) 37.5 37.2 57.3 55.3 Claim reserve development (%) 18.2 33.0 13.5 1.7 GWP Mix Health (%) 40.1 39.3 39.5 34.7 Motor (%) 19.7 28.5 29.9 27.2 P&C (%) 37.9 30.2 28.6 36.6 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 2.3 2.0 2.1 1.4 Loss Ratio by Segments Health (%) 100.6 84.2 78.1 71.2 Motor (%) 72.4 71.2 78.7 73.6 P&C (%) 59.3 50.6 46.3 22.2 P&S (%) N/A N/A N/A N/A Others (%) 12.8 24.3 6.6 (9.8) Growth Rates (Y-o-Y) Gross written premium (%) 9.9 28.8 10.5 (16.4) Net written premium (%) 25.2 44.9 2.7 (18.6) Net earned premium (%) 25.2 31.1 30.3 (19.8) Source: Saudi Arabian Cooperative Insurance Company (SAICO), EFG Hermes
117 Saudi Enaya Cooperative Insurance Company
Financials | Saudi Arabia
A specialised health insurer Saudi Enaya (Enaya) is a specialised health insurance company providing coverage to Stock Data individuals and corporate. It commenced commercial operations in 2013. The insur- er’s key shareholders are Munich Re (15%), Khaled Juffali Company (5%) – a holding Price SAR10.92 company with various commercial interests - and Daman Health (5%) – a UAE-based Bloomberg / Reuters ENAYA AB / 8311.SE specialised health insurer. Enaya is one of the smallest insurer in the Saudi insurance Mkt Cap / Shares (mn) SAR436.8 / 40.0 sector. As of 2015, its market share was 0.2% of the overall market and 0.4% in the 3M ADVT (mn) SAR10.9 health segment. A key challenge facing Enaya is that premium growth is beginning to decelerate in the health segment, as room for structural growth has decreased in Float 40.0% segments, where medical insurance is mandatory. Foreign Ownership Limit 49.0%
Major Shareholders Operating performance: High expense ratio weighs on earnings Munich Reinsurance Co., Germany 15.0% Enaya has been loss-making since inception. As of 2Q16, the company had piled up an accumulated loss of SAR216mn. The insurer is unprofitable at the underwriting National Health Ins. Co.- Daman, UAE 5.0% level, with a combined ratio of 287% in 2015 and 160% in 1H16. While the com- HE Mohammed Youssef Mohammed Abdul- pany’s loss ratio is quite competitive (<80% since 2013), lack of scale means that wahab 2.5% the expense ratio is elevated (210% in 2015 and 94% in 1H16). GWP growth was strong – 87% in 1H16 and 117% in 2015 – as the company is growing from a very Share Price Performance small base. Relative to TASI (Rebased)
Capitalisation is satisfactory, but sustained losses could pose a 28 Price (SAR) TASI problem 24 Enaya is well-capitalised. As of 1H16, the insurer’s NEP-to-equity ratio stood at only 15%. It transfers a relatively high proportion of its risk to the reinsurance market – risk 20 retention rate of 60% versus 99% for BUPA – which helps. It is one of the few insur- 16 ers that has not resorted to raising additional capital from the market. Enaya’s pros- pects of becoming profitable and to stop burning through its capital appear weak: it is 12 at a competitive disadvantage due to lack of critical mass, and because GWP growth is decelerating. 8 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 12 30 27 46 Insurance Profit (84) (45) (52) (47) Net Attributable Income (93) (48) (51) (47) EPS (SAR) (2.33) (1.20) (1.28) (1.17) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.5 1.7 2.2 2.4 ROATE (%) (28.5) (17.4) (22.7) (24.4) Loss Ratio (%) 86.6 73.7 76.6 68.2 Combined Ratio (%) 822.4 257.7 287.2 187.5
Source: Saudi Enaya Cooperative Insurance Company (Enaya), EFG Hermes
118 Saudi Enaya Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (2.33) (1.20) (1.28) (0.43) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 7.49 6.29 5.01 4.58 Income Statement Gross Written Premium 49 33 71 68 Net Written Premium 28 20 42 41 Net Earned Premium 12 30 27 28 Net Claims Incurred (11) (22) (20) (18) Underwriting Expenses (90) (56) (56) (26) Underwriting Income (89) (48) (50) (17) Investment Income 5 2 (3) 1 Reinsurance Commission & Other Income 0 0 0 0 Insurance Profit (84) (45) (52) (15) Net Attributable Income (93) (48) (51) (17) Balance Sheet - Key Highlights Cash & Investments 263 217 184 171 Total Assets 380 297 305 339 Outstanding Claims 7 5 18 24 Unearned Premium 28 8 34 56 Total Liabilities 80 45 105 156 Common Shareholders' Equity 300 252 200 183 KPIs Profitability Retention ratio (%) 56.5 59.8 59.7 59.8 Loss ratio (%) 86.6 73.7 76.6 65.1 Expense ratio (%) 735.8 184.0 210.6 94.4 Combined ratio (%) 822.4 257.7 287.2 159.5 Investment yield (%) 1.9 1.1 (1.5) 1.6 ROAA (%) (25.1) (14.2) (17.0) (10.7) ROATE (%) (28.5) (17.4) (22.7) (17.9) Solvency NEP to equity (%) 4.1 12.0 13.3 15.2 NEP to technical reserves (%) 34.8 228.3 51.3 34.4 Cash & invested assets to technical reserves (%) 746.1 1,637.3 353.9 211.4 Claim reserve development (%) N/M (30.9) 245.2 296.4 GWP Mix Health (%) 100.0 100.0 100.0 100.0 Motor (%) N/A N/A N/A N/A P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) N/A N/A N/A N/A Loss Ratio by Segments Health (%) 86.6 73.7 76.6 65.1 Motor (%) N/A N/A N/A N/A P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) N/A N/A N/A N/A Growth Rates (Y-o-Y) Gross written premium (%) N/A (33.9) 117.1 87.3 Net written premium (%) N/A (29.9) 116.7 89.3 Net earned premium (%) N/A 146.9 (12.2) 249.6 Source: Saudi Enaya Cooperative Insurance Company (Enaya), EFG Hermes
119 Saudi Indian Company for Cooperative Insurance (Wafa)
Financials | Saudi Arabia
Small-sized insurer with a total market share of c1.4% Saudi Indian Cooperative Insurance, also known as Wafa Insurance, is a multi-line Stock Data non-life insurer, with motor and health segments collectively accounting for 94% of GWP in 2015. The company was granted a license by SAMA to commence insur- Price SAR16.92 ance operations in 2008. Wafa is a small-sized insurer with a total market share of Bloomberg / Reuters SINDIAN AB / 8110.SE c1.4%sector GWP in 2015. In 1H16, Wafa reduced its exposure in health, but con- tinued to scale-up its motor business. Its majority shareholders include Bahrain based Mkt Cap / Shares (mn) SAR347.5 / 20.5 Life Insurance Corporation and Life Insurance Corporation of India (LIC). LIC is one of 3M ADVT (mn) SAR42.8 the largest insurance companies in India. Float 84.9%
Foreign Ownership Limit 49.0% Profitability turning a corner Wafa reported a net profit of SAR40mn in 1H16 versus a loss of SAR64mn in 2015. Underwriting profitability metrics improved as the combined ratio fell to 86% in 1H16 Major Shareholders from 137% in 2015. The loss ratio dropped to 64% in 1H16 from 104% from 2015. The New India Assurance Co. 5.2% The loss ratio in the motor segment was 74%, a level that we believe is quite com- petitive. The loss ratio in health (35% in 1H16) is much lower and will be difficult to sustain, in our view. The insurer’s expense ratio improved to 22% from 33% in 2015, due to strong growth in GWP. However we believe the expense ratio is still high rela- Share Price Performance tive to the market leaders’ average of under 20%. Wafa’s GWP grew 144% in 2015 and 34% in 1H16 primarily due to strong trends in the motor segment. Relative to TASI (Rebased)
23 Price (SAR) TASI
Balance sheet recapitalised, but solvency still under stress 20 Wafa issued right shares in 2015 to boost its capitalisation. This issue nearly doubled 17 its paid-up capital to SAR205mn. That said, its solvency level still appears stretched. As of 2Q16 Wafa had an accumulated loss of SAR97mn representing 47% of paid-up 14 capital. Moreover, its NEP to equity ratio was 580% as of 1H16. 11
8
5 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 114 129 264 404 Insurance Profit (8) (0) (64) (25) Net Attributable Income (8) (0) (64) (29) EPS (SAR) (0.78) (0.05) (3.64) (1.40) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 5.7 5.8 4.5 3.2 ROATE (%) (23.9) (1.6) (133.9) (33.0) Loss Ratio (%) 74.3 62.9 104.4 89.3 Combined Ratio (%) 118.6 109.5 137.0 114.8
Source: Saudi Indian Company for Cooperative Insurance (Wafa), EFG Hermes
120 Saudi Indian Company for Cooperative Insurance (Wafa) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (0.78) (0.05) (3.64) 1.97 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 2.95 2.90 3.79 5.22 Income Statement Gross Written Premium 197 214 522 361 Net Written Premium 122 141 408 310 Net Earned Premium 114 129 264 236 Net Claims Incurred 85 81 276 152 Underwriting Expenses (51) (60) (86) (52) Underwriting Income (21) (12) (98) 32 Investment Income 7 7 5 3 Reinsurance Commission & Other Income 7 5 29 10 Insurance Profit (8) (0) (64) 45 Net Attributable Income (8) (0) (64) 40 Balance Sheet - Key Highlights Cash & Investments 68 52 297 348 Total Assets 240 231 702 741 Outstanding Claims 50 52 169 156 Unearned Premium 95 103 270 334 Total Liabilities 211 202 635 634 Common Shareholders' Equity 29 29 67 107 KPIs Profitability Retention ratio (%) 61.9 65.9 78.2 86.0 Loss ratio (%) 74.3 62.9 104.4 64.3 Expense ratio (%) 44.3 46.6 32.6 22.0 Combined ratio (%) 118.6 109.5 137.0 86.3 Investment yield (%) 9.7 13.7 1.6 2.1 ROAA (%) (3.4) (0.2) (13.8) 11.2 ROATE (%) (23.9) (1.6) (133.9) 92.8 Solvency NEP to equity (%) 386.8 445.7 395.8 441.4 NEP to technical reserves (%) 78.5 83.2 60.3 96.3 Cash & invested assets to technical reserves (%) 47.2 33.5 67.8 70.9 Claim reserve development (%) 10.6 4.3 224.6 -32.9 GWP Mix Health (%) 61.9 59.9 39.2 11.2 Motor (%) 27.4 30.5 54.5 79.2 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 10.7 9.6 6.3 9.6 Loss Ratio by Segments Health (%) 52.6 32.4 40.5 34.9 Motor (%) 93.8 105.3 140.4 74.4 P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) 42.6 63.2 74.2 15.7 Growth Rates (Y-o-Y) Gross written premium (%) 21.2 8.6 144.0 34.3 Net written premium (%) 19.5 15.6 189.2 46.8 Net earned premium (%) 44.7 13.3 104.8 144.6 Source: Saudi Indian Company for Cooperative Insurance (Wafa), EFG Hermes
121 Saudi Re for Cooperative Reinsurance
Financials | Saudi Arabia
Captive market for reinsurers Saudi RE for Cooperative Reinsurance (Saudi RE) was founded in 2008 as the first do- Stock Data mestic reinsurance company in Saudi Arabia. Reinsurance is an arrangement in which an insurance company enters into a contract with a reinsurer to transfer a portion Price SAR6.04
of its underwriting risk. SAMA’s regulations require that domestic insurers reinsure Bloomberg / Reuters SAUDIRE AB / 8200.SE at least 30% within the Kingdom, which provides a captive client base for Saudi Re. The insurer’s business segments includes motor, health, marine, fire, engineering, life, Mkt Cap / Shares (mn) SAR604.0 / 100.0 speciality and accident. However the motor segment dominates in terms of premiums 3M ADVT (mn) SAR15.4 (41% of GWP). Saudi RE had a market share of 2.8% in 2015 of sector GWP. Saudi Float 89.8% RE is 5% owned by Ahmad Hamad Algosaibi and Brothers, a holding company with Foreign Ownership Limit 49.0% varied business interests.
Loss making due to high combined ratio Major Shareholders Saudi Re has been loss making since 2012. The company’s combined ratio has re- Ahmad Hamad Algosaibi & Sons 5.0% mained above 100% over the past five years mainly due to an elevated expense ratio. The expense ratio has improved over the past three years though, easing to 34% in 2015 from 52% in 2012 as the insurer has built up scale. Saudi Re’s overall loss ratio however has deteriorated to 89% in 1H16 from 69% in 2015 as the loss rate for mo- Share Price Performance tor insurance rose to 90% from 72% in 2015. Saudi Re’s GWPs grew 158% Y-o-Y in 1H16 and 45% Y-o-Y in 2015 on the back of strong growth in the motor segment. Relative to TASI (Rebased)
10 Price (SAR) TASI
Strong capital base absorbing operational weakness 9 Saudi RE has one of the highest paid-up capital in the industry of SAR1bn. However, 8 weak underwriting results have led to an accumulated loss of SAR237 mn as of 2Q16. We believe the insurer has the capacity for growth as it is well capitalised – NEP to 7 equity was 229% as of 1H16. However, it would need to reach critical GWP mass to 6 stop burning through its capital. 5
4 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 290 491 496 1,196 Insurance Profit (100) 11 (1) (41) Net Attributable Income (117) (4) (17) (56) EPS (SAR) (1.17) (0.04) (0.17) (0.56) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 0.7 0.7 0.8 0.8 ROATE (%) (13.3) (0.5) (2.1) (7.1) Loss Ratio (%) 103.6 81.7 68.5 83.1 Combined Ratio (%) 155.1 112.3 102.7 103.4
Source: Saudi Re for Cooperative Reinsurance (Saudi Re), EFG Hermes
122 Saudi Re for Cooperative Reinsurance Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.17) (0.04) (0.17) (0.33) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 8.22 8.17 8.02 7.69 Income Statement Gross Written Premium 420 556 805 896 Net Written Premium 386 515 755 863 Net Earned Premium 290 491 496 881 Net Claims Incurred (300) (401) (339) (783) Underwriting Expenses (149) (150) (170) (140) Underwriting Income (160) (60) (14) (41) Investment Income 56 43 9 13 Reinsurance Commission & Other Income 4 28 3 2 Insurance Profit (100) 11 (1) (27) Net Attributable Income (117) (4) (17) (33) Balance Sheet - Key Highlights Cash & Investments 993 1,044 1,008 1,027 Total Assets 1,730 1,932 2,195 2,208 Outstanding Claims 424 610 674 715 Unearned Premium 219 240 503 485 Total Liabilities 909 1,115 1,393 1,440 Common Shareholders' Equity 822 817 802 769 KPIs Profitability Retention ratio (%) 91.8 92.5 93.8 96.4 Loss ratio (%) 103.6 81.7 68.5 88.8 Expense ratio (%) 51.5 30.6 34.2 15.9 Combined ratio (%) 155.1 112.3 102.7 104.7 Investment yield (%) 5.6 4.1 0.9 2.6 ROAA (%) (7.8) (0.2) (0.8) (3.0) ROATE (%) (13.3) (0.5) (2.1) (8.5) Solvency NEP to equity (%) 35.3 60.1 61.8 229.3 NEP to technical reserves (%) 45.0 57.8 42.1 73.4 Cash & invested assets to technical reserves (%) 154.2 122.9 85.6 85.5 Claim reserve development (%) 166.1 43.7 10.5 23.1 GWP Mix Health (%) 0.0 0.0 0.0 0.0 Motor (%) 12.1 4.5 41.1 58.0 P&C (%) 71.2 70.5 41.8 25.3 P&S (%) 12.2 17.4 5.3 3.8 Others (%) 4.5 7.5 11.8 12.9 Loss Ratio by Segments Health (%) N/A N/A N/A N/A Motor (%) 68.3 97.9 72.4 89.8 P&C (%) 112.3 76.0 53.8 83.8 P&S (%) 60.8 71.4 169.4 205.9 Others (%) 142.4 138.2 48.6 51.0 Growth Rates (Y-o-Y) Gross written premium (%) 71.4 32.4 44.7 158.4 Net written premium (%) 75.9 33.4 46.7 173.0 Net earned premium (%) 82.0 69.4 0.9 387.4
Source: Saudi Re for Cooperative Reinsurance (Saudi Re), EFG Hermes
123 Saudi United Cooperative Insurance Co. (Walaa)
Financials | Saudi Arabia
A small insurer, building up scale Saudi United Cooperative Insurance Co. (Walaa) received a licence for its insurance Stock Data business in 2008. Walaa is a multi-line insurer and its business is organised around the following segments – Medical, Motor and P&C. Motor is the key contributor to Price SAR15.30 premiums, as it accounted for 56% of GWP in 2015. The company has pursued a Bloomberg / Reuters WALAA AB / 8060.SE strategy of aggressive growth to build scale and improve cost efficiency. Walaa had a market share of 2.1% overall and a market share of 3.9% in the motor segment. Mkt Cap / Shares (mn) SAR612.0 / 40.0 Walaa’s major shareholder is UAE based International General Insurance Holdings. 3M ADVT (mn) SAR9.0
Float 94.5%
Operating performance: Return to profitability in 1H16 Foreign Ownership Limit 49.0% GWP growth since 2012 has been impressive - 3-year CAGR of 48% for Walaa versus 20% for the sector. Growth was underpinned by the motor segment where GWP nearly doubled over 2012-15. The strong growth however did not translate into prof- Major Shareholders its mainly due to a relatively high expense ratio (33% in 2015) and an elevated loss International General Insurance, UAE 5.3% ratio in the motor segment (85% in 2015). The insurer made a cumulative loss of SAR42mn during 2012-15. Walaa returned to profitability in 1H16, as loss rates in motor and the expense ratio improved. We believe the outlook for the motor seg- ment is favourable in the kingdom, however small insurers such as Walaa would be at Share Price Performance a competitive disadvantage due to a lack of economies of scale. Relative to TASI (Rebased)
Recapitalisation drives premium growth and improves risk 16 Price (SAR) TASI retention 14 In the past, strong GWP growth and operating losses weakened Walaa’s solvency. To address this Walaa raised SAR240mn in 2015 through a rights issue, which doubled 12 its paid up capital base to SAR400mn. The company is using the increased capital 10 headroom to grow premiums (GWP growth 22% Y-o-Y in 1H16) and increase risk retention (82% in 1H16 versus 52% in 2014). 8
6 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 165 270 449 540 Insurance Profit 25 5 (56) 50 Net Attributable Income 22 (4) (60) 38 EPS (SAR) 1.08 (0.18) (1.72) 0.95 Price to Earnings (x) 14.1 N/M N/M 16.1 Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.5 1.8 1.9 1.7 ROATE (%) 11.3 (2.0) (24.5) 11.1 Loss Ratio (%) 66.8 76.5 85.4 68.2 Combined Ratio (%) 114.2 121.5 118.0 95.9
Source: Saudi United Cooperative Insurance Co. (Walaa), EFG Hermes
124 Saudi United Cooperative Insurance Co. (Walaa) Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) 1.08 (0.18) (1.72) 1.18 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 10.34 8.42 8.07 9.17 Income Statement Gross Written Premium 347 650 753 484 Net Written Premium 193 335 539 397 Net Earned Premium 165 270 449 282 Net Claims Incurred (110) (206) (383) (162) Underwriting Expenses (78) (121) (146) (80) Underwriting Income (23) (58) (81) 41 Investment Income 26 43 4 4 Reinsurance Commission & Other Income 22 20 21 11 Insurance Profit 25 5 (56) 57 Net Attributable Income 22 (4) (60) 47 Balance Sheet - Key Highlights Cash & Investments 233 373 672 799 Total Assets 607 890 1,185 1,382 Outstanding Claims 181 332 359 367 Unearned Premium 132 259 349 426 Total Liabilities 400 722 862 1,016 Common Shareholders' Equity 207 168 323 367 KPIs Profitability Risk Retention ratio (%) 55.7 51.6 71.6 82.0 Loss ratio (%) 66.8 76.5 85.4 57.4 Expense ratio (%) 47.4 44.9 32.6 28.2 Combined ratio (%) 114.2 121.5 118.0 85.6 Investment yield (%) 11.4 11.4 0.5 1.2 ROAA (%) 4.1 (0.5) (5.8) 7.3 ROATE (%) 11.3 (2.0) (24.5) 27.3 Solvency NEP to equity (%) 79.9 160.1 139.0 153.9 NEP to technical reserves (%) 52.7 45.6 63.3 35.6 Cash & invested assets to technical reserves (%) 74.2 63.2 94.8 100.7 Claim reserve development (%) 69.1 82.9 8.2 21.7 GWP Mix Health (%) 12.8 7.3 9.1 19.5 Motor (%) 30.8 37.0 55.9 58.3 P&C (%) 43.5 46.5 26.5 11.4 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 12.9 9.2 8.4 10.9 Loss Ratio by Segments Health (%) 43.5 52.2 47.4 49.0 Motor (%) 89.9 90.2 95.5 58.3 P&C (%) 101.7 71.7 66.5 98.6 P&S (%) N/A N/A N/A N/A Others (%) 25.7 44.3 50.3 55.9 Growth Rates (Y-o-Y) Gross written premium (%) 48.3 87.1 15.9 22.1 Net written premium (%) 21.9 73.2 61.0 30.6 Net earned premium (%) (7.1) 63.1 66.4 47.4 Source: Saudi United Cooperative Insurance Co. (Walaa), EFG Hermes
125 Solidarity Saudi Takaful Company
Financials | Saudi Arabia
One of the smallest multi-line insurers in the country Established in 2010, Solidarity Saudi Takaful Company (Solidarity) is a multi-line insur- Stock Data er. It is majority owned by Solidarity Group Holding Bahrain, which is majority owned by Ithmaar Bank, Bahrain and Darinvest (Jersey Limited). Though the company offers Price SAR9.25 both life and non-life insurance products, non-life is the dominant part of the busi- Bloomberg / Reuters SOLIDARI AB / 8290.SE ness. Motor and health insurance accounted for 80% of the company’s total GWP in 2015. The company started offering group life insurance in 2015, which accounted Mkt Cap / Shares (mn) SAR513.4 / 55.5
for c12% of the company’s total GWP in 2015. Solidarity is one of the smallest players 3M ADVT (mn) SAR20.6 in the sector, with a market share of 0.8% of sector GWP. The company had a 1% market share of sector motor premiums, and 5% of sector P&S premiums. Float 72.0% Foreign Ownership Limit 49.0% Loss making during 2012-15; but made a profit in 1H16 After falling by 9% Y-o-Y in 2014, Solidarity’s GWP growth recovered strongly, ris- Major Shareholders ing 62% Y-o-Y in 2015. The strong expansion in premiums was driven by the health insurance segment, which almost tripled Y-o-Y in 2015. However, the company rein- Solidarity Group Holding B.S.C. 27.5% sured almost 50% of its health insurance premium. While the company has made a steady progress over the past three years, underwriting business remains loss making. The company’s combined ratio declined to 129% in 2015 from 311% in 2013. The Share Price Performance company’s loss ratio has more then halved from 2013 levels, and stood at 84% in 2015 as it reinsured most of its health business. However, the loss ratio on the motor Relative to TASI (Rebased) insurance business has remained consistently above 100%. The company announced 13 Price (SAR) TASI profit before zakat of SAR13mn supported by almost halving net claims incurred. GWP however declined 18% Y-o-Y in 1H16. 11
Capital levels are stretched; could limit further growth 9 Persistent losses over the past five years have driven accumulated losses of the com- pany to 63% of its paid up capital. This, in our view, has stretched the solvency of the 7 company, and is weighing on its ability to grow. 5 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2012a 2013a 2014a 2015a Net Earned Premium 4 64 156 205 Insurance Profit (29) (90) (65) (54) Net Attributable Net Income (29) (84) (57) (52) EPS (SAR) (0.52) (1.51) (1.03) (0.93) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.2 1.5 1.8 2.5 ROATE (%) (6.3) (21.7) (18.4) (21.3) Loss Ratio (%) 75.6 194.9 96.5 83.7 Combined Ratio (%) 1,361.5 310.9 152.5 129.1
Source: Solidarity Saudi Takaful Company (Solidarity), EFG Hermes
126 Solidarity Saudi Takaful Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2012a 2013a 2014a 2015a Per Share Numbers EPS (SAR) (0.52) (1.51) (1.03) (0.93) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 7.80 6.16 5.04 3.67 Income Statement Gross Written Premium 26 205 187 303 Net Written Premium 15 145 135 210 Net Earned Premium 4 64 156 205 Net Claims Incurred (3) (125) (151) (172) Underwriting Expenses (57) (74) (88) (93) Underwriting Income (56) (135) (82) (60) Investment Income 27 45 17 6 Reinsurance Commission & Other Income 0 6 8 5 Insurance Profit (29) (90) (65) (54) Net Attributable Income (29) (84) (57) (52) Balance Sheet - Key Highlights Cash & Investments 403 435 352 313 Total Assets 499 682 596 685 Outstanding Claims 3 36 45 155 Unearned Premium 19 120 99 131 Total Liabilities 66 340 317 481 Common Shareholders' Equity 433 342 280 203 KPIs Profitability Risk Retention ratio (%) 57.2 70.9 72.4 69.2 Loss ratio (%) 75.6 194.9 96.5 83.7 Expense ratio (%) 1,285.9 116.0 56.1 45.4 Combined ratio (%) 1,361.5 310.9 152.5 129.1 Investment yield (%) 6.6 10.3 4.8 1.8 ROAA (%) (5.7) (14.2) (8.9) (8.0) ROATE (%) (6.3) (21.7) (18.4) (21.3) Solvency NEP to equity (%) 1.0 18.7 55.9 100.9 NEP to technical reserves (%) 20.2 40.9 108.1 71.9 Cash & invested assets to technical reserves (%) 1,852.7 278.3 243.9 109.7 Claim reserve development (%) 21,971.2 1,007.1 24.9 242.9 GWP Mix Health (%) 56.3 12.4 26.8 44.9 Motor (%) 32.9 82.9 60.9 35.4 P&C (%) 8.7 3.9 10.0 6.9 P&S (%) 0.0 0.0 0.0 11.9 Others (%) 2.1 0.9 2.3 0.9 Loss Ratio by Segments Health (%) 36.2 103.3 54.2 28.8 Motor (%) 140.2 220.7 106.4 114.4 P&C (%) N/M N/M 98.2 27.9 P&S (%) N/A N/A N/A 64.6 Others (%) 0.0 43.7 34.3 23.1 Growth Rates (Y-o-Y) Gross written premium (%) 19,655.3 676.1 (8.7) 62.3 Net written premium (%) (3,398.5) 860.9 (6.7) 55.2 Net earned premium (%) (801.6) 1,349.7 144.3 31.4
Source: Solidarity Saudi Takaful Company (Solidarity), EFG Hermes
127 Trade Union Cooperative Insurance Company
Financials | Saudi Arabia
Medium-sized insurer that specialises in motor insurance Trade Union Cooperative Insurance was established in 2007 and started its commer- Stock Data cial operations in 2011. The company is a JV between Trade Union Insurance Com- pany, Bahrain (present in Saudi Arabia since 1983) and Al Ahlea Insurance Company, Price SAR14.30
Kuwait. As of 2015, motor insurance segment accounted for 73% of the company’s Bloomberg / Reuters TRDUNION AB / 8170.SE total GWP, while health insurance accounted for 7%. However, the company report- ed a strong recovery in health insurance premiums in 1H16 after an almost 73% Y-o- Mkt Cap / Shares (mn) SAR393.3 / 27.5 Y drop in 2015. As of 1H16, health insurance accounted for 28% of the company’s 3M ADVT (mn) SAR7.1
GWP. Trade Union had a market share of 2.3% of sector GWP in 2015, making it the Float 66.7% tenth largest Saudi insurer by GWP size. Foreign Ownership Limit 49.0%
Gradual recovery post high losses in 2013 The price wars in 2012-13 had a detrimental impact on the company’s profitability, Major Shareholders with the loss ratio rising to 87% in 2013. However, over the past two years, it has Trade Union Insurance Co., Bahrain 22.4% made a steady recovery. The company reported an almost 73% Y-o-Y drop in health Al-Ahleia Insurance Co., Kuwait 10.0% insurance premiums, though this was mitigated by equally strong growth in mo- tor insurance premiums. The company however recovered its lost health insurance market share partially in 1H16. The underwriting business, though loss making in Share Price Performance 2015, showed strong improvement with the combined ratio declining to 102% in 2015 from 118% in 2013. The loss ratio in the motor and health insurance segments Relative to TASI (Rebased) improved significantly in 2015, while the expense ratio has also shown some slight 37 Price (SAR) TASI improvement. The company has maintained steady levels of reinsurance and invest- ment income, which has mitigated underwriting losses. 32 27 Capital levels are satisfactory 22 Trade Union’s capital levels appear satisfactory, with NEP-to-equity at 289% as of 17 1H16. The company carries a small accumulated loss balance, which at only 2% of 12 capital is fairly small. 7 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 447 649 580 709 Insurance Profit (37) (14) 29 12 Net Attributable Income (42) (19) 14 (0) EPS (SAR) (1.52) (0.70) 0.53 (0.01) Price to Earnings (x) N/M N/M 27.1 N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 1.5 1.7 1.6 1.5 ROATE (%) (14.6) (7.7) 6.0 (0.1) Loss Ratio (%) 87.7 90.7 82.7 88.4 Combined Ratio (%) 118.4 111.9 101.7 103.0
Source: Trade Union Cooperative Insurance Company (Trade Union), EFG Hermes
128 Trade Union Cooperative Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (1.52) (0.70) 0.53 0.11 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 9.65 8.53 9.02 9.25 Income Statement Gross Written Premium 877 808 846 524 Net Written Premium 651 563 668 403 Net Earned Premium 447 649 580 373 Net Claims Incurred (391) (589) (480) (314) Underwriting Expenses (137) (137) (110) (68) Underwriting Income (82) (77) (10) (9) Investment Income 22 31 10 5 Reinsurance Commission & Other Income 23 32 29 13 Insurance Profit (37) (14) 29 9 Net Attributable Income (42) (19) 14 3 Balance Sheet - Key Highlights Cash & Investments 532 643 744 841 Total Assets 1,444 1,340 1,333 1,585 Outstanding Claims 418 414 380 452 Unearned Premium 482 369 438 500 Total Liabilities 1,174 1,101 1,080 1,326 Common Shareholders' Equity 270 239 252 259 KPIs Profitability Retention ratio (%) 74.2 69.6 78.9 77.0 Loss ratio (%) 87.7 90.7 82.7 84.1 Expense ratio (%) 30.8 21.1 19.0 18.2 Combined ratio (%) 118.4 111.9 101.7 102.3 Investment yield (%) 4.2 4.8 1.3 1.2 ROAA (%) (3.4) (1.4) 1.1 0.4 ROATE (%) (14.6) (7.7) 6.0 2.4 Solvency NEP to equity (%) 165.4 271.3 229.7 288.6 NEP to technical reserves (%) 49.7 82.9 70.9 78.5 Cash & invested assets to technical reserves (%) 59.2 82.1 90.9 88.3 Claim reserve development (%) 61.9 (1.1) (8.2) 30.3 GWP Mix Health (%) 28.4 30.4 7.8 27.7 Motor (%) 56.2 46.5 73.3 56.7 P&C (%) 0.0 9.1 7.4 4.7 P&S (%) 0.0 0.0 0.0 0.0 Others (%) 15.4 14.0 11.5 10.8 Loss Ratio by Segments Health (%) 56.1 51.1 44.0 35.1 Motor (%) 107.4 107.4 95.9 95.1 P&C (%) N/A 2.6 11.5 1.9 P&S (%) N/A N/A N/A N/A Others (%) 60.6 22.8 39.9 26.5 Growth Rates (Y-o-Y) Gross written premium (%) 56.4 (7.8) 4.6 27.5 Net written premium (%) 78.4 (13.6) 18.7 36.4 Net earned premium (%) 32.9 45.3 (10.6) 53.0 Source: Trade Union Cooperative Insurance Company (Trade Union), EFG Hermes
129 United Cooperative Assurance Company
Financials | Saudi Arabia
Fifth largest player in Saudi Arabia United Cooperative Assurance Co. (UCA) was set up in 2008. It acquired the insur- Stock Data ance operations of UCA Insurance Bahrain, which had been in the Saudi market for over thirty years. UCA is a multi-line insurer, however motor is the dominant segment Price SAR14.23 for the company accounting for 63% of its GWP in 2015. As of 2015, UCA account- Bloomberg / Reuters UCA AB / 8190.SE ed for c4% of the sector’s GWP, making it the fifth largest insurer in the country. The company announced last year that it received a claim from the Saudi Bin Laden Group Mkt Cap / Shares (mn) SAR697.3 / 49.0 over the collapse of one of its cranes in September 2015 at the Grand Mosque in 3M ADVT (mn) SAR14.9 Makkah. However, UCA transfers a large proportion of its P&C risk to the reinsurance Float 65.5% market (risk retention rate was 11% in 1H16), which is likely to limit the impact of this claim on the company’s profitability. Foreign Ownership Limit 49.0%
Loss making since 2013 Major Shareholders
UCA reported cumulative losses of SAR230mn for 2013-15. The insurer’s underwrit- UCA Insurance Company, Bahrain 32.50% ing profitability metrics have been weak with its combined ratio averaging c115% over 2013-15. The company reported a loss ratio of 93% in 2015, which was driven by health (115%) and motor (93%) segments. GWP growth recovered to 9% Y-o-Y in 2015 from a contraction of 10% Y-o-Y in 2014, aided by balance sheet recapitali- Share Price Performance sation in 2015. Though UCA’s GWP was flat Y-o-Y in 1H16, the company reported a strong improvement in profitability as the combined ratio declined to 96% on lower Relative to TASI (Rebased) risk retention. 16 Price (SAR) TASI
Rights issue in 2015 addressed stretched capital 14 UCA has focused on improving its solvency as it NEP to equity had expanded to 510% 12 in 2014 from 254% in 2012. After accumulated losses rose to 57% of paid up capi- tal, the company raised SAR210mn through a rights issue in 2015, raising its paid up 10
capital to SAR490mn. Increased capital headroom and a return to profitability should 8 support the insurer’s growth in the short term. 6 16 g 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Au
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 867 782 739 767 Insurance Profit (86) (83) (58) (10) Net Attributable Income (84) (83) (64) (21) EPS (SAR) (2.98) (2.96) (1.37) (0.43) Price to Earnings (x) N/M N/M N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 2.5 5.3 3.2 2.5 ROATE (%) (41.8) (71.2) (43.7) (8.5) Loss Ratio (%) 100.3 101.5 93.1 90.6 Combined Ratio (%) 116.9 117.5 115.1 112.3
Source: United Cooperative Assurance Company (UCA), EFG Hermes
130 United Cooperative Assurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (2.98) (2.96) (1.37) 1.25 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.63 2.68 4.41 5.64 Income Statement Gross Written Premium 1,293 1,165 1,272 609 Net Written Premium 873 796 892 244 Net Earned Premium 867 782 739 374 Net Claims Incurred (869) (794) (688) (277) Underwriting Expenses (144) (125) (163) (82) Underwriting Income (147) (137) (112) 16 Investment Income 8 11 10 11 Reinsurance Commission & Other Income 53 43 45 44 Insurance Profit (86) (83) (58) 70 Net Attributable Income (84) (83) (64) 61 Balance Sheet - Key Highlights Cash & Investments 398 370 572 563 Total Assets 1,350 1,377 1,870 2,163 Outstanding Claims 297 351 592 644 Unearned Premium 375 431 592 621 Total Liabilities 1,113 1,223 1,575 1,808 Common Shareholders' Equity 236 153 295 355 KPIs Profitability Retention ratio (%) 67.5 68.3 70.1 40.0 Loss ratio (%) 100.3 101.5 93.1 73.9 Expense ratio (%) 16.6 16.0 22.1 21.9 Combined ratio (%) 116.9 117.5 115.1 95.8 Investment yield (%) 2.0 2.9 1.7 3.8 ROAA (%) (7.0) (6.1) (3.9) 6.1 ROATE (%) (41.8) (71.2) (43.7) 49.0 Solvency NEP to equity (%) 367.0 510.2 250.9 211.0 NEP to technical reserves (%) 129.0 100.1 62.4 29.6 Cash & invested assets to technical reserves (%) 59.3 47.3 48.3 44.5 Claim reserve development (%) 57.2 18.2 68.9 121.8 GWP Mix Health (%) 11.8 14.3 9.7 4.9 Motor (%) 52.1 50.2 62.5 68.2 P&C (%) 0.0 0.0 0.0 0.0 P&S (%) 0.0 0.0 Others (%) 36.1 35.5 27.8 26.9 Loss Ratio by Segments Health (%) 118.3 90.1 114.8 71.5 Motor (%) 100.1 111.5 92.9 76.4 P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) 39.8 28.1 36.9 27.0 Growth Rates (Y-o-Y) Gross written premium (%) 26.3 (9.9) 9.1 0.2 Net written premium (%) 18.5 (8.8) 12.0 (45.5) Net earned premium (%) 6.8 (9.7) (5.5) 8.0
Source: United Cooperative Assurance Company (UCA), EFG Hermes
131 Wataniya Insurance Company
Financials | Saudi Arabia
A small insurer focusing on P&C and motor Established in 2009, Wataniya Insurance Company (Wataniya) is a JV between New Stock Data Reinsurance (part of Munich Re Group), Saudi Hollandi Bank and E.A. Juffali & Broth- ers, a prominent Saudi family business group. Munich Re and Zurich Insurance Group Price SAR25.32 have an indirect shareholding in Wataniya through Saudi National Insurance Com- Bloomberg / Reuters WATAN AB / 8300.SE pany of Bahrain. A multi-line insurer, Wataniya’s business is dominated by motor and Mkt Cap / Shares (mn) SAR253.2 / 10.0 P&C segments, which collectively account for c90% of company’s GWP. The company 3M ADVT (mn) SAR9.7 does not have any presence in health insurance segment, but has a small P&S pre- mium business. As of 2015, Wataniya had a market share of c1.4% of the sector’s Float 34.5% GWP, ranking it as the eighteenth largest insurer in the country. The company had Foreign Ownership Limit 49.0% 2.2% share of sector motor insurance premium as of 2015. Major Shareholders Weak underwriting metrics, receivable provisioning drives losses Saudi National Insurance Co., Bahrain 27.5% Wataniya insurance company reported a loss of SAR12.6mn in 2015, with the bottom- Saudi Hollandi Bank 20.0% line deteriorating from the previous year, where it reported a profit of SAR 9.2mn. New Reinsurance Co. (NewRe) 10.0% While GWP growth accelerated to 20% Y-o-Y in 2015, the decline in profitability was due to a deterioration in underwriting business and an almost doubling of receivable provisioning. Loss ratio increased from 78.1% in 2014 to 84.1% in 2015, driven by Share Price Performance higher losses in all three key business lines. Profitability recovered strongly in 1H16 as loss ratio improved to 71%, while the company maintained strong costs controls; Relative to TASI (Rebased) however, premium base contracted, with GWP declining 8% Y-o-Y in 1H16. 52 Price (SAR) TASI
47 Rights issue underway, should boost solvency Wataniya is currently in the process of raising additional capital of SAR100mn through 42 a rights issue, which should double its capital base. The company’s accumulated loss- 37 es had reached 44% of capital by end of 2015. The additional capital should boost 32 solvency and provide headroom for growth. 27
22 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2013a 2014a 2015a TTM Net Earned Premium 238 191 209 241 Insurance Profit (33) 15 (3) 8 Net Attributable Income (34) 9 (13) (1) EPS (SAR) (3.41) 0.92 (1.26) (0.13) Price to Earnings (x) N/M 27.6 N/M N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 4.4 3.7 4.6 3.9 ROATE (%) (45.5) 14.6 (20.3) (2.1) Loss Ratio (%) 96.2 78.1 84.1 80.4 Combined Ratio (%) 148.1 131.1 137.7 129.5
Source: Wataniya Insurance Company (Wataniya), EFG Hermes
132 Wataniya Insurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2013a 2014a 2015a 1H16a Per Share Numbers EPS (SAR) (3.41) 0.92 (1.26) 1.04 Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 5.80 6.81 5.56 6.52 Income Statement Gross Written Premium 477 434 519 298 Net Written Premium 249 166 234 134 Net Earned Premium 238 191 209 128 Net Claims Incurred (229) (149) (176) (91) Underwriting Expenses (123) (102) (112) (68) Underwriting Income (114) (60) (79) (31) Investment Income 2 3 2 1 Reinsurance Commission & Other Income 79 72 74 42 Insurance Profit (33) 15 (3) 12 Net Attributable Income (34) 9 (13) 10 Balance Sheet - Key Highlights Cash & Investments 161 152 184 211 Total Assets 697 573 678 725 Outstanding Claims 320 194 217 228 Unearned Premium 194 186 227 254 Total Liabilities 639 505 623 660 Common Shareholders' Equity 58 68 56 65 KPIs Profitability Retention ratio (%) 52.1 38.3 45.2 45.1 Loss ratio (%) 96.2 78.1 84.1 71.4 Expense ratio (%) 51.9 53.1 53.6 52.9 Combined ratio (%) 148.1 131.1 137.7 124.3 Investment yield (%) 1.0 1.8 0.8 0.8 ROAA (%) (5.5) 1.4 (2.0) 3.0 ROATE (%) (45.5) 14.6 (20.3) 34.6 Solvency NEP to equity (%) 409.4 281.0 375.9 391.8 NEP to technical reserves (%) 46.2 50.4 47.1 53.1 Cash & invested assets to technical reserves (%) 31.4 40.1 41.4 43.9 Claim reserve development (%) 120.2 (39.5) 11.9 (20.5) GWP Mix Health (%) 0.0 0.0 0.0 0.0 Motor (%) 58.1 41.5 49.8 45.4 P&C (%) 29.0 37.6 38.0 47.7 P&S (%) 3.2 4.8 5.6 6.9 Others (%) 0.0 0.0 0.0 0.0 Loss Ratio by Segments Health (%) N/A N/A N/A N/A Motor (%) 103.4 83.5 89.2 75.3 P&C (%) 16.7 32.1 43.7 32.7 P&S (%) 14.9 18.9 81.9 54.8 Others (%) Growth Rates (Y-o-Y) Gross written premium (%) 47.2 (9.0) 19.5 (8.0) Net written premium (%) 56.0 (33.1) 40.9 2.2 Net earned premium (%) 133.3 (19.4) 9.1 33.7 Source: Wataniya Insurance Company (Wataniya), EFG Hermes
133 Weqaya Takaful Insurance and Reinsurance Company
Financials | Saudi Arabia
Saudi’s first multi-line insurer to go out of business Weqaya Takaful Insurance and Reinsurance Company (Weqaya) is non-life multi line Stock Data insurer. Weqaya was established in 2009, and commenced commercial operations in 2010. It is a joint venture between three Kuwaiti companies - First Takaful Insurance Price SAR19.39 Company, Bayt Al Mal Investment Company and International Financial Advisors. As Bloomberg / Reuters WEQAYA AB / 8220.SE of 2013, motor and health insurance were the primary business segements of the Mkt Cap / Shares (mn) SAR387.8 / 20.0 company, accounting for 85% of total GWP. Trading in the shares of the company has 3M ADVT (mn) N/A been suspended since the beginning of June 2014 as accumulated losses had risen to more than 100% of paid up capital by the end of 2013. The company had submit- Float 69.5% ted a request to increase capital. However, in May 2016, the Saudi Arabian Monetary Foreign Ownership Limit 49.0% Agency announced that it is unable to grant the required approval for the company’s request for capital increase. Major Shareholders First Takaful Insurance Company, Kuwait 2.0% Premium price wars took its toll on the company Bayt Al Mal Investment, Kuwait 5.0% The strong premium price wars during 2012-13 amongst Saudi insurers dealt a hard International Financial Advisors, Kuwait 5.0% blow to Weqya, which reported a loss of SAR201mn in 2013. By the end of 2012, the company had accumulated losses of SAR74mn. The surge in losses in 2013 wiped off the equity base of the company. Though Weqaya’s GWP rose 50% in 2013, the Share Price Performance company’s loss ratio jumped to 153% from 60% in 2014. Loss ratio in the health seg- ment spiked to 193%, while motor segment loss ratio rose to 143%. Subsequently, Relative to TASI (Rebased) the company also steadily lost business. In May 2014, the company announced that 21 Price (SAR) TASI its contract to provide health insurance to expatriate employees of Saudi Electricity
Company expired. Due to insolvency, the company was also not allowed to write in- 19 The Capital Markets Authority suspended surance business since 2014. As a result, the asset base has shrunk to SAR138mn at trading since 04 June 2014 17 the end of 2015 from SAR405mn in 2013. 15
13
11 14 Aug 15 14 Nov 15 14 Feb 16 14 May 16 14 Aug 16
Key Financial Highlights Dec Year End (SAR mn) 2012a 2013a 2014a 2015a Net Earned Premium 164 248 264 6 Insurance Profit 9 (201) 6 (27) Net Attributable Income 12 (201) 6 (27) EPS (SAR) 0.61 (10.04) 0.29 (1.37) Price to Earnings (x) 31.9 N/M 67.7 N/M Dividend Yield (%) 0.0 0.0 0.0 0.0 Price to Book Value (x) 3.0 N/M N/M N/M ROATE (%) 9.8 N/M N/M N/M Loss Ratio (%) 60.4 153.6 71.5 N/M Combined Ratio (%) 103.6 193.4 101.8 572.1
Source: Weqaya Takaful Insurance and Reinsurance Company (Weqaya), EFG Hermes
134 Weqaya Takaful Insurance and Reinsurance Company Financials | Saudi Arabia
DataMiner
(Dec Year End) In SAR million, unless otherwise stated 2012a 2013a 2014a 2015a Per Share Numbers EPS (SAR) 0.61 (10.04) 0.29 (1.37) Reported Dividend Per Share (SAR) 0.00 0.00 0.00 0.00 BVPS (Tangible) (SAR) 6.53 (3.59) (3.44) (4.79) Income Statement Gross Written Premium 287 345 136 0 Net Written Premium 245 306 106 1 Net Earned Premium 164 248 264 6 Net Claims Incurred (99) (381) (189) 1 Underwriting Expenses (71) (99) (80) (34) Underwriting Income (6) (232) (5) (27) Investment Income 11 28 9 0 Reinsurance Commission & Other Income 5 3 2 0 Insurance Profit 9 (201) 6 (27) Net Attributable Income 12 (201) 6 (27) Balance Sheet - Key Highlights Cash & Investments 167 192 41 12 Total Assets 389 547 191 163 Outstanding Claims 57 140 74 38 Unearned Premium 120 174 11 0 Total Liabilities 258 619 260 258 Common Shareholders' Equity 131 (72) (69) (96) KPIs Profitability Risk Retention ratio (%) 85.3 88.8 78.2 N/A Loss ratio (%) 60.4 153.6 71.5 (17.4) Expense ratio (%) 43.3 39.8 30.3 589.5 Combined ratio (%) 103.6 193.4 101.8 572.1 Investment yield (%) 6.4 14.6 21.2 0.0 ROAA (%) 3.8 (42.9) 1.6 (15.5) ROATE (%) 9.8 N/M N/M N/M Solvency NEP to equity (%) 125.4 (345.4) (384.5) (6.1) NEP to technical reserves (%) 92.6 79.0 312.0 15.2 Cash & invested assets to technical reserves (%) 94.5 61.3 48.1 32.0 Claim reserve development (%) 194.6 148.1 (47.6) (48.3) GWP Mix Health (%) 61.0 43.2 39.0 N/A Motor (%) 23.7 43.8 30.5 N/A P&C (%) 0.0 0.0 0.0 N/A P&S (%) 0.0 0.0 0.0 N/A Others (%) 15.3 13.0 30.4 N/A Loss Ratio by Segments Health (%) 54.4 142.9 57.9 N/M Motor (%) 78.2 192.9 86.4 N/M P&C (%) N/A N/A N/A N/A P&S (%) N/A N/A N/A N/A Others (%) 44.2 39.5 65.4 N/M Growth Rates (Y-o-Y) Gross written premium (%) 160.2 20.3 (60.6) (100.0) Net written premium (%) 271.2 25.2 (65.3) (99.4) Net earned premium (%) 370.8 51.5 6.5 (97.8) Source: Weqaya Takaful Insurance and Reinsurance Company (Weqaya), EFG Hermes
135 RATING DISTRIBUTION
Rating Coverage Universe %
Buy 40% Neutral 47% Sell 12% N/R U/R 1%
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