Changing Sector Dynamics, Identify the Big Players

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1 Changing Sector Dynamics, Identify the Big Players Slowdown in business volumes; a challenging macro environment keep outlook muted: In 3Q17, gross written premium (GWP) in the Saudi insurance sector increased 7.5% YoY to SAR 8,255mn from SAR 7,678mn in 3Q16. On a sequential basis, GWP declined 6.1%. Total Net Earned Premium (NEP) increased 10.1% YoY (up 0.8% QoQ) to SAR 7,770mn. Despite the recent slowdown, drivers for the sector remain intact. These include 1) low insurance penetration in KSA 2) likely rise in motor insurance because of regulations allowing driving for women; expected to drive new vehicle sales 3) CCHI regulation on employee health coverage. GWP vs NEP Sector wise GWP breakdown 14,000 %60 14,000 12,000 10,000 8,000 6,000 4,000 2,000-11,494 11,752 9,018 8,789 7,621 8,066 8,255 7,678 7,781 7,626 7,455 7,710 7,770 7,055 GWP NEP QoQ% GWP QoQ% NEP %50 %40 %30 %20 %10 %0 %20- %10- %30-12,000 10,000 8,000 6,000 4,000 2,000 - Aviation Energy Engineering Marin e Property/ Fire Accident and Liability Motor Other Protection and Saving Health Insurance penetration as a percentage of the GDP of Saudi Arabia rose from 0.78% in 2012 to 1.54% in Health and motor insurance have been the primary drivers for the industry. General insurance s contribution (to total GDP) has increased from 0.33% in 2012 to 0.72% in While health insurance s contribution increased from 0.41% in 2012 to 0.78% in Despite increased insurance penetration (to 1.54% of GDP in 2016), Saudi Arabia still has ample room for growth considering a global insurance penetration rate of 6.2% (as % of GDP). Insurance Penetration of Total GDP (2012 to 2016, % of Total GDP) Insurance Penetration as of 2015 %2.00 %1.50 %1.00 %0.50 %0.00 %0.04 %0.04 %0.03 %0.77 %0.78 %0.03 %0.03 %0.56 %0.46 %0.41 %0.67 %0.72 %0.33 %0.41 % General Insurance Health Insurance P&S Insurance Global %6.2 Africa %2.9 Asia %5.3 Europe %6.9 North America %7.3 Egypt %0.7 Kuwait %0.9 Saudi Arabia %1.5 Qater %1.5 Oman %1.6 UAE %2.4 Bahrain % % 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Source: Industry report Head of Research Talha Nazar t.nazar@aljaziracapital.com.sa 1

2 Health and motor insurance has been the primarily driver for insurance sector; women drivers to give boost to motor insurance: Saudi insurance sector is largely dominated by non-life insurance, in which health and motor have been the largest sectors, contributing 55% and 27%, respectively, to the insurance industry s GWP (based on 3Q17 SAMA data). Over the past few quarters, health sector has continued to grow, whereas motor has been declining. For 3Q17, GWP of the health sector increased 8.0% YoY (down 2.8% QoQ) to SAR 4,581mn; however motor sector declined 1.9% YoY (down 6.2% QoQ) to SAR 2,264mn. On YoY basis, reinsurance ceded for health insurance has increased, while it has largely remained the same for motor insurance. Going forward, the rising medical costs and mandatory health insurance coverage for the private sector, for both Saudis and expatriates, are likely to drive health sector insurance which accounted for c.55% of the GWP (as on 3Q17). Furthermore, Vision 2030 aims at increasing the private sector s participation, especially in healthcare. Increased private sector role in healthcare will create new avenue of demand for the insurance companies. Motor sector which accounts for 27% of total insurance GWP is likely to see growth on account of Saudi government s decision to grant driving rights to Saudi women. Given this huge untapped market, motor insurance is likely to remain area of growth for medium to long term. However, sector growth in motor underwriting is expected to remain subdued given the introduction of VAT, driving up the car prices. The sector however can benefit from the change in regulation to mandatory yearly insurance, which can potentially open up the market, given that a number of vehicles are not insured due to the discrepancy between vehicle checkup time ( every 3 years) as compared to just 1 year of third party insurance coverage. Health Sector (GWP vs NWP vs NEP) 6,000 Motor Sector (GWP vs NWP vs NEP) 5,000 4,500 In Mn SAR 5,000 4,000 In Mn SAR 4,000 3,500 3,000 2,500 2,000 1,500 3,000 GWP NWP NEP 1,000 GWP NWP NEP CCHI (Council of Cooperative Health insurance) working to boost benefits In 2016, CCHI issued new regulations for private sector employers to provide health insurance coverage to their employees and dependents. This program is being implemented in phases, with the fourth and last stage covering organizations with 1 to 24 employees. Saudi and expats working (individual and family) in the private sector would be covered by the set health insurance, thus increasing the demand for health insurance. CCHI has also drafted regulations for visitors on a short-term visa or business visa to purchase travel health insurance from Saudi Insurance Company. Sector ripe for consolidation in an overcrowded market but dominated by few players; early signs visible: The Saudi Insurance sector has 33 listed companies with top 5 companies holding ~68% market share in terms of GWP (as of 3Q17), thus remaining 28 companies control ~32% of the market (average 1.14% per insurer). Bupa Arabia lead the market share race (c.31% share) followed by Tawuniya (c.17%), AlRajhi Takaful (c.9%), MEDGULF (c.6%) and AXA Cooperative (c.4% share). There are many small companies in the sector, which operate with low profitability levels despite growth in the overall sector over the past few years. We believe the sector is headed towards consolidation in the next few years, with smaller companies merging with larger ones. Top Players in Saudi Insurance Market (based on GWP as on 3Q-2017) %17 Tawuniya %32 Bupa Arabia %4 %31 AlRajhi Takaful MEDGULF AXA Co operative Others %6 9% Market share trend of top 5 companies (1Q-16 to 3Q-17) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Bupa Arabia Tawuniya AlRajhi Takaful MEDGULF AXA Co operative 2

3 Company wise net income ( 3Q-17 vs 3Q-16) Q17 3Q In Mn SAR Bupa Arabia Tawuniya MEDGULF AlRajhi Takaful WALAA Salama Buruj Arabian Shield Solidarity Trade Union SAICO Amana Insurance AXA Cooperative MALATH INSURANCE Al Alamiya ATC Wataniya Allianz SF JAZIRA Takaful CHUBB ACIG AICC Sagr Insurance Gulf General Al-Ahlia SABB Takaful Gulf Union Enaya Saudi Re U C A Alinma Tokio M WAFA Insurance METLIFE AIG ANB In fact, in October 2017, Ahmed Alkholifey, Governor of the Saudi Arabian Monetary Authority (SAMA), commented that consolidation is needed in the insurance sector. SAMA is looking at introducing a new supervisory framework that will compel companies to boost capital significantly, as well as improve internal risk controls. We believe such moves from SAMA could force smaller insurers to merge with larger players. Also, introduction of new reforms and regulation will increase interest of foreign investors in the untapped market. This is evident by a recent deal in which Banque Saudi Fransi sold an 18.5% stake in Allianz Saudi Fransi Cooperative Insurance to Allianz Europe BV (Europe based company). Furthermore, recently, there has been some movement in M&A activities in the sector. In March 2017, the board of Gulf Union Cooperative Insurance Co. started initial talks with Al Ahlia for Cooperative Insurance for a potential merger. We believe the merger of these two companies would pave the way for further consolidation in the sector. In a recent development, the Saudi British Bank (SABB) has announced the completion of the acquisition of HSBC s combined 32.5% shareholding in SABB Takaful. Underwriting capacity improving; RoE trending upwards: For 3Q17, among the top five companies in terms of capital base. Tawuniya has the largest capital (at SAR 3,000mn; up 9.9% YoY; up 5.0 QoQ) while WALAA has the lowest capital base of SAR 546mn (up 38.7% YoY; up 9.1% QoQ). In terms of return profile, AlRajhi Takaful has the highest ROE of 42.3% with low capital-tonet-earned-premium ratio of 0.8x. Saudi Re was the lowest ROE player for 3Q17. Overall sector return on equity (ROE) improved to 15.2% in 3Q17 (vs. 15.0% in 3Q16) while total sector s median Capital to NEP is 3.0x in 3Q17 (vs. 2.6x in 3Q 16). ROE % of top 5 Capital based companies %60 %50 %40 %30 Capital Base to NEP Ratio of top 5 Capital based companies %20 %10 %0 %10- %20- AlRajhi Takaful WALAA Tawuniya Bupa Arabia Saudi Re AlRajhi Takaful WALAA Tawuniya Bupa Arabia Saudi Re Investment income often under looked; a key driver for earnings growth in a rising rates scenario: The sector profitability trend is also impacted by the changing interest rates scenario (SAIBOR down 28 bps YTD). While existing investments could be under pressure, the recent bond/ sukuk issuances in KSA has enabled KSA players to further drive earnings growth by placing into higher yield instruments. In fact, Investment income for 3Q17 was SAR 92mn (down 19.1% YoY, down 35.4% QoQ), contributing c.12.5% of sector profit in 3Q17 (vs. 13.0% in 3Q16), while for 9M17 investment income rose 9.1% YoY to SAR 347mn. 3

4 Investment income (% of net income) %60 %50 49% %40 %30 30% 28% %20 18% 13% 15% 12% %10 %0 Loss ratio: Sector-wise (motor and health, among others) and company-wise breakup In 3Q17, the health sector, the largest sector by GWP, reported the highest loss ratio of 79% (up 649bps YoY; down 320bps QoQ) among all other insurance sector (except engineering with 86% loss ratio which has been showing high variation over the period). The increase in loss ratio in the health sector was due to 13.3% rise in net claims incurred while only 3.9% increase net premium earned. The motor sector (the second largest sector), improved its loss ratio to 70% (down 921bps YoY; down 203bps QoQ) as net earned premium increased 19.3% YoY while net claims incurred increased only 5.5% YoY. For 3Q17, total insurance sector reported a loss ratio of 74% (up 101bps YoY and down 196bps QoQ). Loss Ratio % Aviation 421% -6% 66% -51% 6% 366% 38% Energy 40% 26% -3% 40% 77% 55% -56% Engineering 36% 62% 17% 8% 65% 48% 86% Marine 19% 40% 62% 35% 31% 28% 62% Property/ Fire 71% 82% 63% 44% 91% 49% 35% Accident and Liability 19% 29% 18% 17% 56% 0% 25% Motor 80% 83% 80% 85% 76% 72% 70% Other 53% 39% 27% 60% 37% 45% 71% Protection and Saving 86% 85% 75% 88% 78% 75% 77% Health 80% 79% 72% 79% 85% 82% 79% Total sector 79% 80% 73% 79% 80% 76% 74% Among top insurance players, in 3Q17, Bupa Arabia reported the lowest loss ratio of 76% (up 402bps YoY; down 356bps QoQ). AlRajihi reported the highest loss ratio of 82% (up 155bps YoY; down 251% QoQ). On an annual basis, AXA Cooperative was the only insurance company to experience an improvement in loss ratio to 79% (down 273bps YoY; down 371bps QoQ). For 3Q17, Total insurance sector s loss ratio stood at 74% (up 95bps YoY; down 251bps QoQ). Loss Ratio % Bupa Arabia 85% 81% 72% 84% 89% 80% 76% Tawuniya 78% 76% 70% 75% 80% 79% 79% AlRajhi Takaful 83% 84% 81% 86% 86% 85% 82% MEDGULF 84% 89% 76% 87% 92% 92% 81% AXA Cooperative 82% 83% 82% 82% 82% 83% 79% 4

5 Combined ratios: Sector and company-wise data Among top insurance players, in 3Q17, Bupa Arabia reported the lowest combined ratio of 89% (up 324% YoY; down 428% QoQ), whereas AXA Cooperative reported the highest combined ratio of 100% (down 15bps YoY; down 7bps QoQ). After reporting combined ratio of over 100% for three consecutive quarters, MEDGULF was successful in reporting combined ratio of 94%, in 3Q17. The average combined ratio of the whole insurance sector stood at 94% (down 16bps YoY; down 689bps QoQ). Combined Ratio % Bupa Arabia 96% 96% 86% 93% 100% 94% 89% Tawuniya 95% 92% 87% 89% 95% 94% 95% AlRajhi Takaful 98% 98% 94% 99% 97% 96% 94% MEDGULF 104% 109% 95% 106% 122% 173% 94% AXA Cooperative 98% 99% 100% 100% 99% 100% 100% GWP growth total and sector wise (Motor, health etc) In 3Q17, motor insurance GWP stood at SAR 2,264mn (down 1.9% YoY; down 6.2% QoQ) whereas health insurance GWP was recorded at SAR 4,581mn (up 8.0% YoY; down 2.8%). Compared to other sectors, energy insurance showed the largest gain of 246.9% YoY (up 59.6% QoQ), while marine insurance reported the largest fall of 10.7% YoY (down 34.7% QoQ) in GWP to SAR 116mn. The total GWP of all the sectors stood at SAR 8,255mn (up 7.5% YoY; down 6.1% QoQ). Gross written premium GWP (SAR mn) Aviation Energy Engineering Marine Property/ Fire Accident and Liability Motor 4,464 2,911 2,308 2,103 4,321 2,414 2,264 Other Protection and Saving Health 5,433 4,490 4,242 4,434 5,325 4,715 4,581 Total 11,752 9,018 7,678 7,781 11,494 8,789 8,255 In 3Q17, among all insurance companies, Bupa Arabia reported highest GWP of SAR 2,523mn, a pure play health insurer. GWP (SAR mn) Bupa Arabia 2,446 1,828 2,579 1,086 2,253 1,848 2,523 Tawuniya 1,701 2,135 1,241 2,977 2,028 2,104 1,421 AlRajhi Takaful , MEDGULF 1, AXA Cooperative

6 Appendix Loss Ratio by Company Loss Ratio % Tawuniya 78% 76% 70% 75% 80% 79% 79% METLIFE AIG ANB 75% 83% 85% 89% 82% 76% 95% JAZIRA Takaful 16% 10% 23% -7% 9% 5% 27% MALATH INSURANCE 84% 114% 134% 122% 99% 83% 76% MEDGULF 84% 89% 76% 87% 92% 92% 81% Allianz SF 70% 77% 79% 69% 76% 78% 78% Salama 80% 80% 73% 73% 72% 77% 71% WALAA 62% 58% 52% 84% 57% 57% 51% Arabian Shield 79% 71% 64% 56% 70% 58% 66% SABB Takaful 9% 10% 14% 10% 11% 8% 8% SAICO 78% 71% 61% 66% 68% 68% 67% WAFA Insurance 64% 66% 67% 69% 77% 76% 74% Gulf Union 65% 57% 51% 105% 61% 63% 60% ATC 11% 38% 17% 55% 15% 28% -1% Al-Ahlia 83% 71% 63% 76% 50% 75% 60% ACIG 79% 78% 73% 86% 72% 68% 69% AICC 70% 66% 53% 66% 59% 58% 50% Trade Union 79% 89% 79% 67% 74% 62% 66% Sagr Insurance 42% 43% 36% 47% 53% 59% 58% U C A 81% 74% 67% 64% 8% -8% 41% Saudi Re 85% 89% 65% 38% 73% 69% 76% Bupa Arabia 85% 81% 72% 84% 89% 80% 76% AlRajhi Takaful 83% 84% 81% 86% 86% 85% 82% CHUBB 57% 31% 47% 54% 35% 31% 39% AXA Cooperative 82% 83% 82% 82% 82% 83% 79% Gulf General 62% 50% 48% 71% 58% 51% 43% Buruj 65% 52% 64% 29% 61% 53% 60% Al Alamiya 41% 45% 49% 59% 17% 27% 30% Solidarity 46% 45% 34% 40% 43% 36% 14% Wataniya 71% 72% 65% 41% 58% 65% 67% Amana Insurance 60% 81% 57% 24% 89% 60% -73% Enaya 86% 65% 45% 44% 64% 59% 58% Alinma Tokio M 79% 83% 70% 83% 58% 63% 51% Sector Total 78% 79% 73% 78% 79% 76% 74% 6

7 Combined Ratio by Company Combined Ratio % Tawuniya 95% 92% 87% 89% 95% 94% 95% METLIFE AIG ANB 126% 133% 125% 137% 128% 118% 125% JAZIRA Takaful 56% 43% 59% 30% 39% 34% 61% MALATH INSURANCE 112% 146% 158% 148% 130% 108% 98% MEDGULF 104% 109% 95% 106% 122% 173% 94% Allianz SF 100% 105% 103% 97% 102% 104% 104% Salama 99% 101% 93% 93% 92% 95% 89% WALAA 88% 85% 78% 108% 85% 85% 77% Arabian Shield 105% 101% 92% 72% 96% 88% 97% SABB Takaful 116% 121% 95% 88% 77% 108% 89% SAICO 110% 104% 99% 101% 107% 102% 99% WAFA Insurance 68% 102% 97% 115% 102% 103% 113% Gulf Union 138% 131% 143% 245% 115% 152% 80% ATC 43% 116% 46% 139% 41% 126% 38% Al-Ahlia 116% 110% 104% 116% 87% 99% 100% ACIG 101% 99% 97% 100% 98% 98% 104% AICC 108% 106% 118% 104% 99% 100% 99% Trade Union 93% 110% 88% 89% 91% 74% 85% Sagr Insurance 62% 65% 66% 90% 89% 94% 91% U C A 102% 96% 97% 112% 73% 79% 152% Saudi Re 106% 104% 96% 72% 107% 103% 110% Bupa Arabia 96% 96% 86% 93% 100% 94% 89% AlRajhi Takaful 98% 98% 94% 99% 97% 96% 94% CHUBB 108% 83% 86% 81% 77% 85% 90% AXA Cooperative 98% 99% 100% 100% 99% 100% 100% Gulf General 131% 158% 95% 117% 137% 111% 103% Buruj 90% 80% 94% 49% 84% 85% 84% Al Alamiya 70% 82% 91% 110% 53% 94% 88% Solidarity 80% 85% 76% 75% 82% 123% 53% Wataniya 125% 122% 116% 100% 110% 122% 114% Amana Insurance 98% 120% 95% 115% 169% 163% 28% Enaya 86% 65% 45% 44% 64% 59% 58% Alinma Tokio M 158% 165% 117% 140% 121% 142% 129% Sector Total 98% 101% 94% 98% 100% 101% 94% 7

8 Gross Premiums Written by Company GWP (SAR mn) Tawuniya 1,701 2,135 1,241 2,977 2,028 2,104 1,421 METLIFE AIG ANB JAZIRA Takaful MALATH INSURANCE 1, MEDGULF 1, Allianz SF Salama WALAA Arabian Shield SABB Takaful SAICO WAFA Insurance Gulf Union ATC Al-Ahlia ACIG AICC Trade Union Sagr Insurance U C A Saudi Re Bupa Arabia 2,446 1,828 2,579 1,086 2,253 1,848 2,523 AlRajhi Takaful , CHUBB AXA Cooperative Gulf General Buruj Al Alamiya Solidarity Wataniya Amana Insurance Enaya Alinma Tokio M Sector Total 11,654 8,922 8,125 7,701 11,367 8,707 8,226 8

9 Net claims Incurred by Company NCI (SAR mn) Tawuniya 1,268 1,306 1,230 1,300 1,408 2,853 1,484 METLIFE AIG ANB JAZIRA Takaful MALATH INSURANCE MEDGULF Allianz SF Salama WALAA Arabian Shield SABB Takaful SAICO WAFA Insurance Gulf Union ATC Al-Ahlia ACIG AICC Trade Union Sagr Insurance U C A Saudi Re Bupa Arabia 1,604 1,511 1,399 1,665 1,669 1,522 1,475 AlRajhi Takaful CHUBB AXA Cooperative Gulf General Buruj Al Alamiya Solidarity Wataniya Amana Insurance Enaya Alinma Tokio M Sector Total 5,925 7,276 5,495 5,908 5,918 7,534 5,762 9

10 RESEARCH DIVISION Head of Research Talha Nazar Analyst Waleed Al-jubayr Analyst Sultan Al Kadi, CAIA Analyst Muhanad Al-Odan Analyst Jassim Al-Jubran BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager Brokerage Services & sales Alaa Al-Yousef AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit AGM- Head of Western and Southern Region Investment Centers Mansour Hamad Al-shuaibi RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. 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