Three mergers in less than a year, and another one brewing on the horizon, Saudi Arabia’s insurance sector, one of the largest in the global Takaful space, is in consolidation mode. VINEETA TAN writes that this has been carefully engineered by the regulator amid smaller firms buckling under the pressures of stiff competition and unforgiving economic forces.
AlAhli Takaful Company (ATC) has entered into a 12-month exclusivity period with Arabian Shield Cooperative Insurance Company to commence reciprocal due diligence as well as negotiation on the final terms of the two combining operations under the ambit of the Arabian Shield Cooperative Insurance Company. The two insurers have reached an initial agreement that the basis of the valuation would be the adjusted equity book value in addition to the embedded value of the protection and savings portfolio of ATC.
Should the merger go ahead, shareholders of ATC will receive newly issued shares of Arabian Shield. ATC, which has engaged Falcom Financial Services Company as the financial advisor for the deal, in a bourse filing announced that the merger is expected to absorb all its employees and should not result in any involuntary redundancies.
This negotiation comes on the heels of three mergers over the last 12 months, the most recent being between AlJazira Takaful Taawuni and Solidarity Saudi Takaful; preceded by the amalgamation of Walaa Cooperative Insurance Company with MetLife, American International Group and the Arab National Bank for Cooperative Insurance; and the merger of Gulf Union Cooperative Insurance Company with Al-Ahlia Cooperative Insurance Company.
Such vibrant merger and acquisition (M&A) activities within the Saudi insurance sector is thanks to a large part to efforts by the Saudi Central Bank (SAMA) to bolster its competitive insurance market which is highly concentrated in the hands of a few despite being serviced by 30 licensed insurance operators.
To raise operational efficiency and enhance the financial strength of the smaller players, SAMA called on insurers to opt for M&A, and in fact, required insurers to review and restructure their businesses. It put in place stricter rules on minimum capital reserve to improve both qualitative and quantitative aspects of the sector regulations; the new solvency rules are expected to drive smaller insurance companies to merge. SAMA also suspended insurance operators from issuing new insurance contracts until the capital and solvency criteria are met.
Earlier this week, SAMA Governor Dr Fahd Abdullah Al-Mubarak, at an event recognizing the merger of AlJazira Takaful Taawuni and Solidarity Saudi Takaful, once again made a clarion call for insurers to merge and acquire in order to achieve Saudi’s Vision 2030. The national framework outlined measures, including M&As, to promote the growth, stability and sustainability of the insurance sector. The Saudi government, through the Financial Sector Development Program, aims to raise the contribution of its Shariah compliant cooperative insurance sector to the nation’s GDP.
Total gross written premiums in Saudi contracted by 0.4% year-on-year in the third quarter of 2020 to SAR8.8 billion (US$2.34 billion), according to latest statistics by SAMA. Post-Zakat income generated by Saudi insurance companies grew 1.9% over the same period to stand at SAR294.9 billion (US$78.53 billion).