Rising costs spur Saudi insurance duo to merge

Reuters/Faisal Al Nasser

• Arabian Shield to buy Alinma Tokio through share swap
• Merger subject to shareholder approval
• Premiums increased last year but profitability declined

Two Saudi Arabian insurance companies have signed a binding agreement to merge as increased claims and rising regulatory costs spur industry consolidation within the kingdom.

Arabian Shield Cooperative Insurance Company will acquire Alinma Tokio Marine Co through a share swap agreement that will lead the latter firm to delist from Saudi’s bourse, the duo announced on Wednesday,

Arabian Shield will issue 0.53 new shares to replace each share held in Alinma Tokio.

These shares will represent one-fifth of Arabian Shield’s new, total share capital.

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Traders appear to believe the arrangement favours Arabian Shield shareholders, which at Wednesday’s close had a market capitalisation of SAR1.27 billion ($338.7 million), while Alinma Tokio’s was SAR531.6 million.

As of 0822 GMT, shares in Arabian Shield were up 6.1 percent, while Alinma Tokio was down 7.1 percent.

The deal is subject to shareholder approval, with both companies to hold extraordinary meetings to ratify the agreement.

In March S&P Global Ratings forecast gross written premiums – the value of insurance contracts that insurers sell minus costs – in Saudi Arabia would rise around 11 percent in 2023. That compares with an increase of 25 percent last year.

Despite last year’s increase in premiums, profitability declined, S&P wrote, predicting small and mid-sized insurers could struggle financially due to increased claims and rising regulatory costs.

These difficulties may require them to raise capital and spur further consolidation in the sector, the ratings agency said.

Arabian Shield made an annual net profit of SAR27.9 million in 2022, up slightly on 2021 as a near-doubling of its revenue was offset by a similar rise in underwriting costs and expenses.

Alinma Tokio’s 2002 annual net profit was SAR7.4 million. That compares with a loss of SAR14.4 million a year earlier as its revenue grew faster than costs.