Saudi insurance firms trade at higher price than the local banks

RIYADH Even after a 10% decline in Saudi insurance index since Q3 2017 and near term uncertainties, insurance companies trade at higher PE multiples (avg. 2018E PE: 14.2x) than Saudi banks (avg. 10.8x). Past data of insurance companies shows inconsistency in dividend pay-out (only 5 to 7 insurance companies paid dividend out of 33 vs 11 out of 12 banks), high sensitivity to insurance premium prices, regulatory uncertainties and impact from Fed hikes relative to Saudi banks, given large investment book in fixed income assets.

Theoretically, at lower pay-out than banks and higher cost of equity, current valuations imply much higher growth prospects. But, focus of insurance companies is increasingly shifting to profitable market share than growth and hence earnings growth may be weak for the near to medium term.

The investment case for the insurance sector in the Kingdom hinges on regulatory changes such as compulsory insurance for nationals in private companies, stricter implementation of third party motor insurance, allowing women to drive, higher private employment and public health insurance. Though these are all positive, the potential could be inflated and growth delayed. We believe growth rates would be at the best tepid or negative in the short to medium term as there are other challenges offsetting these benefits mainly in the form of no-claim/loyalty discounts, higher competition for motor and down trading in health segment.

As for latest quarterly numbers (Q3 2017), net profit declined by ~15%. Motor GWP decreased ~15% while Health segment GWP rose by ~7% (driven by mainly two companies). In a nutshell, we do believe in the long term story of Saudi insurance but one may have to employ a wait and watch approach in this macro till we begin to see stricter enforcement. SG