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More GCC insurance mergers likely after flooding impact

GCC insurance companies may have to consolidate in the wake of payments for flooding damage in the region Reuters
GCC insurance companies may have to consolidate in the wake of payments for flooding damage in the region
  • Some insurers lack minimum buffers
  • Potential delays in payments
  • Largest companies most profitable

Consolidation in the GCC’s insurance sector – already underway because of rising competition and stricter regulations on solvency capital requirements – could be accelerated by the impact of the flooding in the region last week.

Ratings agency S&P Global said this week that many insurance companies – mainly in the UAE, Kuwait and Saudi Arabia – were failing to meet the required solvency capital requirements even before the heaviest rains in 75 years arrived to further test their financials. 

“We could see some solvency and liquidity issues among some of the [less] capitalised companies in the market,” Emir Mujkic, director of insurance ratings at S&P Global in Dubai, told a webinar on Tuesday.

Faisal Abbas, vice-president at insurer The Continental Group, added: “The insurance industry will inevitably grapple with low profitability in the near term and understandably increase premiums to offset losses. 

“However, it may not end at that. There is a strong likelihood of changes to underwriting processes to reduce exposure to such risks going forward.”

Of the UAE’s 60 licensed insurers, about one-fifth have capital and liquidity buffers that are only slightly above, or even lower than, the regulatory minimums, S&P Global estimates.

“We anticipate that the capital and liquidity buffers of some insurers with weak capital positions could become strained, potentially leading to some delays in claim payments,” S&P noted in a report published this week.

It added that most Gulf insurers that S&P rates benefit from robust capital and liquidity buffers and “should be able to absorb related claims” from the UAE floods.

In the UAE, the five largest of 26 listed insurers generated about 63 percent of total insurance revenues last year, up from 61 percent in 2022.

The five largest of the 25 listed insurers in Saudi Arabia, the GCC’s top insurance market, generated about 73 percent of its insurance revenue in 2023, up from 69 percent in 2022. 

Earnings are similarly concentrated. The five largest insurers generated about 81 percent of total profits in Saudi Arabia and 72 percent in the UAE last year. 

“As insurance markets continue to grow, the gap between larger and smaller insurers will likely widen,” said S&P. “The largest companies will expand at a faster pace than smaller companies, while generating a significant share of overall profits.”

Earlier in April Abu Dhabi National Insurance Company (Adnic) finalised the purchase of a 51 percent stake in Allianz Saudi Fransi Cooperative Insurance Company. 

Adnic is the second largest insurer in the UAE, generating AED5 billion ($1.4 billion) in gross written premiums in 2023 alongside more than AED400 million in profits, up 12 percent on the previous year.

The deal, announced during last week’s flooding, is part of a growing trend in the GCC’s insurance sector and increased merger and acquisition activity is likely in the sector this year, said Mujkic.

“A stricter enforcement of regulations could increase the pressure on less capitalised and underperforming insurers, in our view. Stricter regulations and strong competition have already led to several mergers and capital increases, which we expect will continue in 2024,” he said.

Zaid Ghoul, head of investment banking at SNB Capital, added that several other potential M&A opportunities were in progress in the Saudi insurance sector.

“Companies active in the Saudi insurance sector are investing to strengthen financial solvency, enhance operational efficiencies, and create more resilient and innovative platforms to enhance overall customer experience,” said Ghoul.

According to S&P, 2023 was an “exceptional” year for Saudi insurers. The market expanded by about 27 percent and, for the first time, all 25 insurers reported a net profit. 

In the UAE, listed insurers reported a 19 percent year-on-year increase in combined net profits to AED1.8 billion.

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