Consolidation of the insurance sector
I have been involved in the Saudi insurance sector since BMG received its CMA’s license almost 15 years ago. In addition to taking a dozen companies public and listing them on Tadawul, I have been involved in merger and acquisition discussions with several companies.
The Kingdom’s insurance market has experienced a certain degree of instability over the past few years. Saudi-listed insurance companies have accumulated losses ranging from 5 percent to as much as 174 percent. Due to the instability of these companies, they started to explore the merger and acquisition route as a survival solution.
The insurance sector regulator, the Saudi Arabian Monetary Authority (SAMA), has been urging insurance companies to strengthen their financial position and seek consolidation. Also, SAMA has been studying a new law which will encourage insurance companies to raise capital. Once it is in force, this new directive will automatically push small companies to merge in order to meet this requirement or maybe invite global companies to acquire small local ones.
In the investment banking arena, consolidation in any sector should offer benefits and a positive impact on the bottom line after mergers. During the course of last year, we have seen announcements by some insurance companies including Walaa Cooperative Insurance Co. to merge with MetLife AIG ANB Cooperative Insurance Co., Aljazira Takaful Taawuni Co. to merge with Solidarity Saudi Takaful Co., and Gulf Union Cooperative Insurance Co., for the second time, to merge with Al Ahlia for Cooperative Insurance Co. On the other hand, Malath Cooperative Insurance and Allied Cooperative Insurance Group announced they were not continuing with their merger talks.
On a related development, and to provide stability in the insurance sector, SAMA is preventing the combining of insurance and reinsurance brokerage activities in one company. SAMA clarified that the decision came out of its responsibility to consolidate and develop the stability of the insurance sector and raise its contribution to local economic growth.
The potential growth of the Saudi insurance sector is known to most stakeholders. The big differential in Saudi Arabia is the demographic factor. It has a young population and one of the largest ones in the Middle East. Furthermore, the Saudi insurance market was, and still is, considered to be one of the lowest penetrated ones with growth potential in the region.
In line with the Vision 2030 reform plan, where the insurance sector is an important pillar of the financial system in the Kingdom, in my opinion, there is still a list of investment opportunities in this sector. As a priority, consolidation tops this list. Once we see the successful consolidation of these companies listed above, I believe others will follow suit.
Basil M.K. Al-Ghalayini is the chairman and CEO of BMG Financial Group.