Arqaam Capital: Saudi Re among preferred picks

Arqaam Capital maintained a “Buy” recommendation on Saudi Reinsurance Company (Saudi Re), placing the sole national reinsurer amongst its preferred picks in the Saudi insurance sector. It has also revised the target price higher to SAR 11 per share based on further improvement in margins and more sustainable investment yields.

In a recent report, the DIFC-based investment bank said the Tadawul-listed reinsurer is on track to further improve its underwriting margins, which is in line with its previous expectations. Further, Arqaam Capital expects underwriting margin to reach 4.2 percent by 2023, supported by further optimisation and geographical diversification in Saudi Re’s business portfolio.

Also, Arqaam Capital pointed out that Saudi Re’s improved credit rating coupled with the retreat of some of its competitors have availed new market share opportunities. Despite written premium slowdown by -4 percent CAGR in the last two years, Saudi Re outperformed peers of globally listed reinsurers with similar market cap and portfolio size, showing improved combined ratios by five percent compared to an eight percent worsening for peers.

Saudi Re’s investment returns achieved a growth of 59 percent in the first nine months of 2019 compared to the same period last year. “We welcome the reinsurer’s decision to increase its share of fixed income holding to 79 percent in 2019 to ease volatility” Arqaam Capital said.

The stock target price represents an upside of 15 percent from the market price, which trades below its book value at price to book value of 0.9, a valuation that does not reflect the improved earnings visibility, according to Arqaam Capital.