Gulf Insurance Funds Look West After Stock Slump

DUBAI, 11 April 2006 — Insurance companies in the Gulf Arab region are moving cash out of local stock markets, which have fared poorly this year, and are eyeing bond markets in the United States and Europe.

Gulf insurers had roughly $6 billion in invested assets by the end of 2005, according to ratings agency Standard & Poor’s. That figure is expected to grow rapidly in a region where per capita premiums are about 2 percent of those in Europe.

Insurers have more than 70 percent of their assets in cash and equities, and saw their profits surge last year as regional stock markets gained an average of 92 percent. Investment income accounted for the bulk of the profits. But most Gulf bourses are in the red this year. A steep dive that began in late February slashed more than a third off the capitalization of the Saudi bourse, and Dubai’s index dropped 18 percent in three days in March.

Gulf insurance executives say they are looking to diversify away from local equity markets, with some considering bonds in the United States and Europe as well as European equities. “Gulf insurance companies are looking at ways to reduce their focus on equity markets,” said Kevin Willis, director of financial services ratings at Standard & Poor’s. “The quality of underwriting earnings has been hidden by gains they are making from the equity markets. It’s been a giant cushion over the past couple of years.”

The performance of Oman Insurance in Dubai is fairly typical. The company posted a 272 percent rise in 2005 net profit, driven mainly by portfolio gains.

The firm has a portfolio of more than 2.6 billion dirhams ($707.9 million) of which 2.2 billion is invested in equities, mostly in the region. With the Gulf having few liquid debt markets, Oman Insurance is looking to the West. “This year we may see some diversification of investment and maybe we can go partially to the bond market in Europe or the US,” Abdul Muttalib Al-Jaidi, the company’s general manager, told Reuters.

Insurers traditionally invest heavily in bonds. But Gulf insurance companies had in 2004 approximately 30 percent of their investment portfolios in cash and 45 percent in equities, compared to some 10 percent in cash and 25 percent in equities for European firms, according to Standard & Poor’s. Insurance in the Gulf region is poised for rapid growth. More countries are making insurance mandatory and Islamic insurance, or takaful, is overcoming religious objections to the industry.

Standard & Poors estimates that gross premiums are growing by 18 percent a year in the United Arab Emirates and 17 percent in Saudi Arabia. But because insurance companies in the region are more comfortable in their local environment, analysts said, they were not likely to transfer substantial amounts of assets abroad immediately.

Wadah Al-Taha, head of strategy at Dubai-based Emaar Financial Services, said much of the diversification would focus on local real estate, which is surging as countries open their markets to foreign investment. “Some of them have already tried to diversify into real estate,” he said. “Some of them were trading in the international market before but the returns they were getting were not much compared with the rewards generated through the stock markets here.” But with stock markets going sour, more Gulf insurers say they have few options in which to invest their growing portfolios.

An investment manager at one of Bahrain’s insurance firms said he shifted 50 percent of his firm’s $2 million portfolio out of equity and into fixed income, mostly in Saudi Arabia, at the beginning of 2006.