Saudi insurers eye merger route out of losses, insolvency

Saudi Arabia’s insurance industry is facing a period of consolidation through mergers and acquisitions after years of fierce competition and price wars that have resulted in accumulated losses and solvency issues.

In March, Malath Cooperative Insurance & Reinsurance Company (Malath) and Allied Cooperative Insurance Group (ACIG) announced a preliminary understanding to initiate the necessary due diligence in preparation for a merger.

Gulf Union Cooperative Insurance and Al Ahlia for Cooperative Insurance also announced their intention to conduct due diligence necessary for a merger. A statement on Tadawul revealed that both companies intend to sign an unbinding MOU within the next 12 months to carry out the necessary analysis.

“The merger will create a strong entity that will increase benefits for shareholders, policyholders and employees of both companies,” Gulf Union chief executive Munir Al Borno told Argaam in a telephone interview earlier this month.

The industry regulator, Saudi Arabian Monetary Agency, has also increased regulatory pressure on insurers to review and restructure their businesses. The pressures emerge in part due to the fact that of the 35 companies operating in the Kingdom’s insurance sector, two account for as much as 45 percent of the market.

Forcing insurers to maintain high solvency ratios is one of the measures. However, SAMA is also making its conditions more stringent for the smaller loss-making companies to raise capital.

Just last week Weqaya Takaful, which had sought approval to raise capital to offset accumulated losses that have exceeded 50 percent of its capital, was asked by SAMA to submit a five-year action plan.

According to Abdulrahman Aljarboua, research and advisory officer at Riyadh-based Albilad Capital, 18 insurers reported accumulated losses in 2016.

“Some of these companies may face difficulties in meeting the SAMA requirements of financial solvency [and] may end up declaring bankruptcy as happened to Sanad Cooperative Insurance Co.,” he told Argaam.

In March 2017 Sanad applied for voluntary liquidation—the first of its kind in Saudi Arabia’s insurance sector—after losing more than 50 percent of its capital.

In addition, until the recent past, the inflated stock valuations of even small insurance companies were seen as a deterrent to consolidation. Valuations have now moved to more realistic levels, making the smaller companies more attractive.

However, the consolidation trend is likely to play out through mergers using share transactions rather than cash transactions, because “very few small insurers are at attractive market valuations to justify outright acquisition,” Shadi Salman, vice president of research at Dubai-based Shuaa Capital, told Argaam.

The trend also leaves the only possible route for large global insurance players to enter the lucrative Saudi market through M&A with local companies.

“We know that SAMA is not issuing any new licenses and a partnership of a foreign company with a local company could be a good option to enter the market. However, this kind of arrangement needs to be commercially viable and the high costs of operating in Saudi Arabia could be considered as a challenge,” said Emir Mujkic, insurance analyst at S&P Global Ratings.

Saudi insurance companies are closely linked to global insurance markets, not only through the presence of global companies in the local market, but also through the large outflows of reinsurance premiums.

“Therefore, the current situation may encourage large and global players to enter directly into the Saudi market, or increase their market share through M&A with local companies,” Aljarboua of Albilad Capital said.

Write to Brinda Darasha at brinda.d@argaamplus.com