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Saudi insurance market to touch SR15b in 2009

JEDDAH —The Saudi Arabian insurance market is expected to reach SR15 billion in 2009 from the current levels of around SR4.5 billion, which amounts to a compounded annual growth rate (CAGR) of 27.2 per cent, according to a report by BMG Financial Advisers. The Kingdom's insurance penetration level as a percentage of gross domestic product (GDP) at 0.5 per cent in 2004 was the lowest in the world.

The report said that a regulated environment built around the concept of the Islamically acceptable principle of cooperative insurance could lead to increased awareness among the people of Saudi Arabia and convince them of the benefits of insuring against risk.

BMG Chief Executive Officer Basil M. Al-Ghalayini said the National Company for Cooperative Insurance (NCCI), with its first-mover advantage in the Saudi Arabian insurance market, was likely to benefit immensely. NCCI, established as a national insurer nearly 20 years ago, was the first licensed company in Saudi Arabia and had the largest insurance distribution network in the country.

Saudi Arabia has made health insurance mandatory for expatriate workers. The law aimed to ease the financial burden on the Saudi government, which offers free medical services to over 22 million people. The new cooperative health insurance programme to be implemented in three phases would cover about six million expatriates.

The first phase, beginning this month, requires companies with more than 500 expatriate workers to provide medical insurance coverage for their employees, and would cover 450 companies employing over 500,000 expatriates.

The second phase would cover companies with 100 to 500 expatriate workers while the companies with a non-Saudi work force of less than 100 will be covered in the third and final phase.

The medical insurance premiums are estimated to grow from about SR1.1 billion in 2004 to SR6.3 billion in 2008 a CAGR of 54.8 per cent. BMG put NCCI at a 12-month fair value per share of SR738.4, 5.2 per cent above the current market price of SR702.0 per share.

"We have arrived at the valuation using the Discounted Cash Flow (DCF) methodology and a comparison with international peers based on 2005 and 2006 price-to-earning multiples. Our DCF valuation yielded a 12-month fair value of SR778.9 per share, whereas the comparison-based valuation generated a fair value of SR617.0 per share. To derive the fair value, we have taken a weighted average of the two fair values: 75 per cent weight to DCF and 25 per cent weight to comparative valuation, explained Karim Kamal, head of research at BMG.

"Accordingly, we initiate coverage of NCCI with an Add recommendation," he said. The company's established brand and strong retail presence were likely to enable NCCI to maintain its leadership position in the growing motor and medical insurance business.