S&P Global Ratings calculates that net income for the whole sector dropped by 55 per cent to about Saudi Arabian riyal (SAR) 1.1 billion from SAR2.5 billion in 2016.

In addition, the sector posted a modest decline in gross premiums written (GPW) and a slim increase in overall shareholders' equity. While overall credit conditions in the market remained supportive in 2017, our recent rating actions on Mediterranean & Gulf Cooperative Insurance and Reinsurance Co. (MedGulf KSA) and Tawuniya/The Company for Cooperative Insurance reflected some company-specific issues.

The decline in 2017 net income follows an increase in earnings by 140 per cent in 2016, when risk-based actuarial pricing was more consistently applied. Overall, net earnings in 2017 declined mainly due to the materially weaker results of Tawuniya and Medgulf, the largest and fourth-largest insurers in the market, respectively.

While Tawuniya generated a net loss of SAR147 million in 2017 due to additional reserving requirements, compared with a net profit of SAR801 million in 2016, Medgulf reported a loss of SAR388 million due to bad debt provisioning against a profit of SAR68 million in 2016. While the Saudi insurance sector is expected to remain profitable this year, pressure to reduce motor rates—combined with the risk of pricing additional medical benefits without historic data—could lead to lower earnings.

In the absence of any new mandatory covers, market GPW declined by one per cent to SAR36.4 billion in 2017 from SAR36.8 billion the year before. While Saudi Enaya and Al Sagr recorded considerable year-on-year premium growth of 113 per cent and 87 per cent, respectively, Malath's GPW dropped by 66 per cent, indicating some considerable volatility in the market as some large accounts moved from one insurer to another.

S&P anticipates that efforts of the local authorities to tackle the large number of uninsured drivers, combined with the arrival of women drivers in mid-2018 and the introduction of additional benefits under the unified medical policy from 1 July, will support further premium growth in the industry in the medium term. However, these factors may be offset by the large number of foreign workers that have already left or will be leaving the Kingdom in 2018.

The sector's total shareholders' equity improved by two per cent to about SAR14.8 billion from SAR14.4 billion in 2016, as a number of insurers retained parts of their profits or raised additional funds through rights issues. The rate of increase in shareholders' equity exceeds premium growth, which indicates a slight improvement in overall capital adequacy.

Despite some increasing pressure on insurers to lower their rates, it is likely that credit conditions in the market will remain broadly supportive in 2018, due to satisfactory growth prospects in the medium term and overall improving capital levels. We also believe that the local regulator (SAMA) will remain committed to maintaining market discipline by introducing more sophisticated risk-based regulations. However, this in the longer term may mean that fewer, but more profitable insurers could be seen in the market.

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