JEDDAH – A small number of well-established insurers are reaping the benefits of the fast-growing insurance markets in the Gulf Cooperation Council (GCC) region, Standard & Poor's rating services said Sunday. Meanwhile, inflated valuations and a reluctance to relinquish control are preventing smaller insurers from consolidating. In trying to avoid reporting losses, S&P said revenue-starved insurers could distort market pricing for all. It noted that insurance in the GCC region continues to benefit from generally robust economic growth because the considerable hydrocarbon wealth of the GCC states sustains their expanding economies. Real GDP growth in the region was nearly 6 percent in 2012, and S&P forecast this growth momentum to continue in 2013 and beyond. The GCC insurance sector grew to nearly $16 billion in terms of gross premium written, with growth rates of over 10 percent in the region's largest insurance markets in 2012. Ample capital is available within the industry to back the growth in insurance premiums, S&P further said. Both regional and international investors are looking for a slice of the business because of the growth potential. This creates a highly competitive marketplace in which all companies are contending for profitable business, the report said. The ensuing competition puts pressure on margins. S&P said that though the GCC markets are estimated to be profitable as a whole, the profits tend to be concentrated at larger and more-established entities. For example, in Saudi Arabia, the three largest companies reported 80 percent of all profits in 2012; meanwhile, nearly a third of Saudi insurers reported losses. A similar trend occurred in the United Arab Emirates, with the three largest companies reported over 80 percent of the market's profits in 2012. Excluding takaful companies, this figure is still over 50 percent. Results for UAE takaful companies were significantly skewed by losses at Salama/Islamic Arab Insurance Co. Many UAE-based insurance companies established in the past few years are struggling to deliver sustainable levels of performance, despite acceptable reported loss ratios. S&P said inadequate profitability is more pronounced at the lower end of the market because smaller companies lack economies of scale. Many of them lack the critical mass – sufficient business volumes –to cover their operating expenses. Over time, a lack of profitability erodes capital, leaving some companies with little prospect of finding a profitable niche. “It is just a matter of time before these companies start to run out of capital and face a risk of default,” S&P said. Therefore, for some companies, consolidation makes economic sense. If companies merge, it could improve their economies of scale and offer them cost efficiencies. Acquirers tend to be more successful entities, indicating that they are better-managed or that they have larger resources at their disposal. Consequently, an acquired entity may benefit from the resources, know-how, and technical expertise of its new management team. However, several factors prevent companies from consolidating, S&P said, such as public stock market valuations do not reflect economic fundamentals, causing a significant valuation gap; existing shareholders and incumbent management teams are reluctant to relinquish control because their positions and status could be diminished or eradicated within the larger entities; the risk of business churn is significant. Valuation gaps are particularly pronounced in Saudi Arabia, where nearly all insurance companies on the Riyadh-based Tadawul exchange are trading at a significant premium to their book value. – SG
