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Saudi Arabia: NCCI Gets 'Add' Recommendation

JEDDAH, 2 January 2006 -- The Saudi Arabian insurance market is poised for tremendous growth. The government's initiatives on compulsory health care and motor insurance are expected to propel the insurance market to SR15 billion in 2009 from the current levels of around SR4.5 billion, a compounded annual growth rate (CAGR) of 27.2 percent.

Lack of proper regulations and enforcement, focus on insuring only high-risk oil and gas properties, low awareness among locals, and misconceptions or misunderstandings of the insurance concept left the Saudi Arabian insurance market relatively underdeveloped. Saudi Arabia's insurance penetration level as a percentage of gross domestic product at 0.5 percent in 2004 is the lowest in the world.

According to a report by BMG Financial Advisors, a regulated environment built around the concept of the "Islamically" acceptable principle of cooperative insurance could lead to increased awareness among the people of Saudi Arabia and convince them of the benefits of insuring against risk.

In a positive atmosphere conducive for exponential growth, BMG Chief Executive Officer Basil M. Al-Ghalayini said The National Company for Cooperative Insurance (NCCI), with its first-mover advantage in the Saudi Arabian insurance market, is likely to benefit immensely. NCCI, established as a national insurer nearly 20 years ago, is the first licensed company in Saudi Arabia and has the largest insurance distribution network in the country.

Saudi Arabia has made health insurance mandatory for expatriate workers. The law aimed to ease the financial burden on the Saudi government, which offers free medical services to over 22 million people. The new cooperative health insurance program to be implemented in three phases would cover about six million expatriates. The first phase, expected to begin in January 2006, requires companies with more than 500 expatriate workers to provide medical insurance coverage for their employees, and would cover 450 companies employing over 500,000 expatriates. The second phase would cover companies with 100 to 500 expatriate workers while the companies with a non-Saudi work force of less than 100 will be covered in the third and final phase. Medical insurance is expected to be compulsory for the Saudi nationals, eventually. The medical insurance premiums are estimated to grow from about SR1.1 billion in 2004 to SR6.3 billion in 2008, a CAGR of 54.8 percent.

BMG put NCCI at a 12-month fair value per share of SR738.4, 5.2 percent above the current market price of SR702.0 per share.

"We have arrived at the valuation using the Discounted Cash Flow (DCF) methodology and a comparison with international peers based on 2005 and 2006 price-to-earning multiples. Our DCF valuation yielded a 12-month fair value of SR778.9 per share, whereas the comparison-based valuation generated a fair value of SR617.0 per share. To derive the fair value, we have taken a weighted average of the two fair values: 75 percent weight to DCF and 25 percent weight to comparative valuation," Karim Kamal, head of research at BMG, told Arab News.

Accordingly, we initiate coverage of NCCI with an "Add" recommendation, he said.

The company's established brand and strong retail presence are likely to enable NCCI to maintain its leadership position in the growing motor and medical insurance business.

The medical insurance premiums are estimated to grow from about SR1.0 billion in 2004 to SR6.3 billion in 2008, a CAGR of 54.8 percent, while the motor insurance market is estimated to grow at a CAGR of 42.2 percent over the next four years to reach SR5.0 billion in 2008.

"Driven by a 75.0 percent growth in motor insurance and a 40.0 percent growth in health insurance premiums, we expect gross premiums written (GPW) by NCCI to grow by 39.7 percent year-on-year to SR1,773.8 in 2005 and increase to SR3,530.3 in 2008. We forecast revenues to grow by 52.0 percent to SR1,419.0, and EPS to increase by 81.6 percent to 34.1 in 2005," Al-Ghalayini said.

However, competition in the industry is likely to intensify in the coming years with 24 companies awaiting Saudi Arabian Monetary Agency's (SAMA's) approval and another seven companies are under review, which could result in pricing pressure and loss of market share for the incumbent. Although NCCI holds the competitive edge, its dominance could be threatened by some big players such as The Mediterranean & Gulf Insurance & Reinsurance Co. (MedGulf) and BUPA Arabia that have a capital of SR600 million and SR400 million, respectively.

"However, we do not see any significant market share decline in the short term, as these companies will need time to establish or expand their infrastructure. However, in the long term, we expect NCCI's market share to fall to 26.9 percent in 2009 from the current levels of 32.0 percent due to higher competition," Al-Ghalayini said.

NCCI, the largest insurer in Saudi Arabia with a 32-percent market share, established in 1986 as a national insurer on the principles of cooperative insurance, is the largest insurance company in Saudi Arabia.

NCCI's lines of business include motor vehicle, medical, fire and property, energy, engineering, marine, aviation, casualty insurance and Takaful insurance.

The company invests heavily in training Saudi nationals for upgrading their technical skills and helping them attain specialized qualifications necessary for running the insurance business.

NCCI was established as a closed joint stock company with the Public Investment Fund (PIF), the General Organization for Social Insurance (GOSI), and the Public Pension Agency (PPA) owning 50 percent, 25 percent, and 25 percent of the company's ordinary shares, respectively.

The company was privatized through a resolution passed by the Saudi Council of Ministers by offering 70 percent of the shares to Saudi nationals.

By Khalil Hanware

© Arab News 2006