Standard and Poor's: earnings Of Saudi Arabian insurers could improve this year

"We are guardedly optimistic regarding insurance earnings in 2013 and beyond, partly because the principal regulator, SAMA, has been actively encouraging participants to price cover at a rate that will enable them to make a profit, and this is expected to lead to more realistic pricing," said Standard & Poor's credit analyst David Anthony.

Furthermore, government infrastructure spending is boosting the level of insurable activity. Our preliminary calculations, based on the insurers' still unaudited accounts, indicate that premium volumes across the sector rose by about 12% in 2012, to approximately Saudi Arabian riyal SR20.6bn ($5.6bn). We expect a similar rate of growth in 2013.

We also anticipate a resurgence in residential construction, fueled by mortgage loans to individuals, when the 2012 Mortgage Law comes into effect. This should not only help generate increased demand for house and contents
cover, but also should open up a whole new segment of insurance activity as banks require their mortgage borrowers to take out term life protection.

Last year, a third of the Kingdom's insurers reported negligible or negative earnings, with competition the strongest in the medical and motor lines of business, which together represent some 80% of the total premium available to Saudi Arabia insurers.

Based on our preliminary statistical analysis of reported, unaudited results for 2012, the consolidated insurance sector appears to have made a moderate underwriting profit in 2012. The average net combined ratio (post reinsurance claims and expenses to net earned premium) for the sector stands at approximately 97% (2011: 99%). Lower combined ratios indicate better profitability.

A combined ratio of greater than 100% signifies an underwriting loss. We anticipate that net combined ratios will strengthen toward an average of 95% in 2013 and successive years, as growing business volumes dilute fixed costs and as pricing on medical and motor improves.

Saudi Arabia's insurance sector has over 30 players, but the three largest companies wrote 54% of the total gross premium across the consolidated insurance sector in 2012. These companies-Tawuniya/The Company for Cooperative Insurance, Mediterranean & Gulf Cooperative Insurance and Reinsurance Co. (Medgulf), and BUPA Arabia--enjoyed market shares of 27%, 16%, and 11%, respectively. They also generated most of the earnings reported by the sector.

"We consider some degree of consolidation to be almost inevitable in the longer term," said Mr. Anthony.