Tariff increases and new business to boost Saudi insurance sector

Updated 29 September 2015

Tariff increases and new business to boost Saudi insurance sector

JEDDAH: Following a series of rights issues during 2014 and 2015, many local insurers are now actively choosing to operate at a stronger level of capitalization than in the past, according to a top rating agency.

“We believe gross premiums in Saudi Arabia could rise by nearly 25 percent in 2015, principally fueled by tariff increases, to over SR35 billion ($9.3 billion) for the full year,” said a press release from Standard and Poors Ratings Services.
“We expect the third quarter and 2015 year-end results to confirm the generally improving earnings trend of the past 18 months,” it stated.
“There are still no signs of any of the 34 companies in Saudi Arabia’s crowded insurance sector attempting to overcome legal and financial impediments to mergers and acquisitions,” said the agency.
“Although performance varies considerably among the 34 companies, Standard & Poor’s Ratings Services considers that the general trend is a positive one, encompassing improving tariffs, increasing earnings, enhanced capitalization, and growing total premium volumes,” said the report.
The S&P team explained they they expect the sector’s full-year 2015 gross premiums to be about 25 percent higher than those in 2014, largely because of price increases on the main insurance lines — group medical and motor.
“Growing demand for insurance in the near term, combined with regulatory encouragement of highly prudential “actuarial pricing” after the price war of 2012-2013, means that Saudi Arabia’s insurers are showing few signs of being affected by the fall in oil prices, though the subject of oil revenues remains a central concern at sovereign and macroeconomic levels,” said the report.
“Oil prices may have fallen well below $50 per barrel over the past 12 months — they routinely reached $115 per barrel (Brent Index) in mid-2014 — but Saudi insurers write relatively little commercial or industrial risk business, and retain less,” the report pointed out.
“Consequently, we consider that the strong growth in sector premiums is likely being driven by the demographics of an expanding population. There are some 30 million to 20 million Saudi nationals, plus 10 million foreign workers and dependents, who increasingly require insurance cover for their possessions and travel,” said the S&P report.
“Additionally, many local employers are now offering their Saudi staff access to the same group medical cover that is compulsory for their foreign colleagues,” it added.
Nearly all Saudi insurers are experiencing clear earnings benefits from the improved pricing environment in their single, domestic market.
The often underpriced business written during the 2012-2013 price war is running off and the more attractive margins on more recent business are emerging as profit. This takes time in Saudi Arabia because insurers typically hold sizeable unearned premium reserves and it is compulsory, but often technically redundant, to hold bad and doubtful debt provisions on all premium income deferred by more than 90 days from contract inception, S&P added.
Total results for H2 2015 are likely to comfortably exceed the SR183.2 million of post-tax comprehensive earnings reported for H1 2015, although performance will continue to vary greatly from company to company, according to S&P.
“Many insurers have told us that they have seen robust rate rises of 15 percent — 20 percent or more in 2015. Of Saudi Arabia’s 34 local insurers, 21 reported positive comprehensive net income for the first half of 2015 totaling SR602.0 million, while 13 reported cumulative first half losses of SR418.8 million,” added the report.
In most cases, those companies reporting losses despite the increasingly attractive pricing environment are relatively recent start-up companies such as MetLife, AIG & ANB Cooperative Insurance Co., which commenced active trading in 2014, or health insurance specialist, Saudi Enaya Cooperative Insurance Co., which became operational in 2013 but only wrote SR36.3 million of gross premiums during the first half of 2015.
In such cases, the high fixed costs, charges, and taxes associated with operating in Saudi Arabia will continue to consume pretax income until business volumes and margins rise sufficiently to help generate an overall profit. That said, internal operational and administrative issues have also affected some companies, leading to losses at several longer-established insurers, where the underlying book f business could normally be expected to generate robust earnings in current market conditions.
The report said that Tawuniya, BUPA Arabia, and MedGulf booked a full 52.4 percent of all the premium written in Saudi Arabia during the first half of 2015.
Over the same period, the top 15 insurers wrote SR16.2 billion or 85.2 percent of the sector’s total gross premiums of SR19.0 billion. Little premium was left for the sector’s other 19 companies.
“We do not expect the business breakdown to change much in 2015 and 2016, compared with 2014. In 2014, medical insurance comprised 51.6 percent of the sector’s GPW and 60.2 percent of net premium written, and motor accounted for 26.3 percent of gross and 31.2 percent of net premiums. Thus, these two lines together represented over 90 percent of all net retained business in Saudi Arabia. In our view, primary insurers will continue to cede most of their commercial and industrial exposure to international reinsurers, given the attractive rates and commissions available in the current soft reinsurance market,” S&P said.


S&P 500 inches closer to record high

Updated 12 August 2020

S&P 500 inches closer to record high

  • US stock market index returns to levels last seen before the onset of coronavirus crisis

NEW YORK: The S&P 500 on Tuesday closed in on its February record high, returning to levels last seen before the onset of the coronavirus crisis that caused one of Wall Street’s most dramatic crashes in history.

The benchmark index was about half a percent below its peak hit on Feb. 19, when investors started dumping shares in anticipation of what proved to be the biggest slump in the US economy since the Great Depression.

Ultra-low interest rates, trillions of dollars in stimulus and, more recently, a better-than-feared second quarter earnings season have allowed all three of Wall Street’s main indexes to recover.

The tech-heavy Nasdaq has led the charge, boosted by “stay-at-home winners” Amazon.com Inc., Netflix Inc. and Apple Inc. The index was down about 0.4 percent.

The blue chip Dow surged 1.2 percent, coming within 5 percent of its February peak.

“You’ve got to admit that this is a market that wants to go up, despite tensions between US-China, despite news of the coronavirus not being particularly encouraging,” said Andrea Cicione, a strategist at TS Lombard.

“We’re facing an emergency from the health, economy and employment point of view — the outlook is a lot less rosy. There’s a disconnect between valuation and the actual outlook even though lower rates to some degree justify high valuation.”

Aiding sentiment, President Vladimir Putin claimed Russia had become the first country in the world to grant regulatory approval to a COVID-19 vaccine. But the approval’s speed has concerned some experts as the vaccine still must complete final trials.

Investors are now hoping Republicans and Democrats will resolve their differences and agree on another relief program to support about 30 million unemployed Americans, as the battle with the virus outbreak was far from over with US cases surpassing 5 million last week.

Also in focus are Sino-US tensions ahead of high-stakes trade talks in the coming weekend.

“Certainly the rhetoric from Washington has been negative with regards to China ... there’s plenty of things to worry about, but markets are really focused more on the very easy fiscal and monetary policies at this point,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

Financials, energy and industrial sectors, that have lagged the benchmark index this year, provided the biggest boost to the S&P 500 on Tuesday.

The S&P 500 was set to rise for the eighth straight session, its longest streak of gains since April 2019.

The S&P 500 was up 15.39 points, or 0.46 percent, at 3,375.86, about 18 points shy of its high of 3,393.52. The Dow Jones Industrial Average was up 341.41 points, or 1.23 percent, at 28,132.85, and the Nasdaq Composite was down 48.37 points, or 0.44 percent, at 10,919.99.

Royal Caribbean Group jumped 4.6 percent after it hinted at new safety measures aimed at getting sailing going again after months of cancellations. Peers Norwegian Cruise Line Holdings Ltd. and Carnival Corp. also rose.

US mall owner Simon Property Group Inc. gained 4.1 percent despite posting a disappointing second quarter profit, as its CEO expressed some hope over a recovery in retail as lockdown measures in some regions eased.

Advancing issues outnumbered decliners 3.44-to-1 on the NYSE and 1.44-to-1 on the Nasdaq.

The S&P index recorded 35 new 52-week highs and no new low, while the Nasdaq recorded 50 new highs and four new lows.