Saudi insurance sector faces M&A pressure, says Moody’s

Saudi Arabia’s insurance sector is likely to see consolidation as primary insurers report weaker profitability in the first half amid intense competition, Moody's Investors Service said a recent report.

“The profitability squeeze will hinder organic capital generation and thus pressure capitalization,” said Mohammed Ali Londe, AVP analyst at Moody's.

“The sector also faces a likely increase in capital requirements that small to medium-sized insurers may struggle to meet from their own resources. We therefore expect more pressure for Saudi insurers to consolidate and/or go into runoff,” he added.

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However, insurers' average return on capital in the first half of 2019 was 2.4 percent compared to 4.6 percent in 2018 and 8.4 percent in 2017.

Moody's said it expects flat to modest premium growth over the coming year, reflecting “sluggish” economic growth.

Compulsory motor and medical cover, which is sensitive to economic conditions, accounts for 80 percent of Saudi premiums.

“Lackluster premium growth will add to pressure on profitability, particularly for smaller players with inefficient cost bases and little brand recognition,” the report noted.

Meanwhile, the Saudi insurance market's ratio of shareholder's equity to total assets remained strong at 27.3 percent in the first half, but tightening profits have hindered organic capital generation, with the ratio having hardly improved from around 27 percent since 2016.

The industry also faces a likely increase in the minimum capital requirement for direct insurers to SAR 500 million from SAR 100 million currently, the ratings agency noted.