Thin margins caused by several socio-political and economic factors, coupled with government incentives for mergers, could encourage the insurance sector to consolidate. There are positive signs with the market seeing its first M&A deal in decades earlier this year.
ordan’s insurance sector, with around JOD551.5 million (US$777 million) in GWP last year generated by its 24 insurance providers, is relatively small. And the common consensus is that there is a need for operators to consider merging in order to become more viable.
Mr Imad Abdel Khaleq, Chief Executive Officer and Member of the Board for Jordan Insurance Co (JIC), the country’s oldest insurer, said the tax incentives the government has provided are enticing and could encourage players to seriously consider M&A.
Last year, the Ministry of Industry, Trade and Supply (MITS) offered a three-year tax exemption for merging insurance companies in addition to waiving fees pertaining to transfer of ownership and increasing capital. “We would seriously consider acquisition if a suitable opportunity emerges. The incentives are enticing and it is in the interest of the market to have lesser number of players,” said Mr Abdel Khaleq.
Dr Rajai Sweis, CEO and Member of the Board at Middle East Insurance Co (MEICO), said his company would also be willing to consider M&A, given the right conditions. “The incentives are encouraging and clear but MEICO stresses on the importance of finding the right partner for the merger operation to add value.”
First M&A deal done in decades
Last year, Jordan’s youngest insurer, First Insurance Co (FIC), acquired 77% of Yarmouk Insurance Co (YIC). In February this year, the merger process was completed with both entities becoming officially one unit under FIC’s brand.
“The process was conducted swiftly, finalising all the regulatory and legal requirements in one year is a big accomplishment,” said Dr Ali Al Wazani, CEO of FIC.
This deal has also set the merger standards for the sector and is expected to have paved the way for similar moves in the future.
“Previously, mergers could not progress due to disagreements over the companies’ values which caused pricing differences. Now, the three-year tax exemption is impacting the cost of the deal and would be factored in the pricing procedure. Insurers pay significant tax, reaching up to 24% of profits. The sum of this over three years equals profits of one year,” added Dr Al Wazani.
Of significance is also the fact that the deal was a merger of two healthy establishments – thereby, altering the common conception that M&A is a recipe for helping troubled companies.
Profitability strains
Thinning profit margins could be another motive for companies to seek consolidation, said Dr Al Wazani.
“The market has reached a stage of saturation in several lines. Moreover, the drop in government and private sector spending on projects and investments led to contraction in profitable lines such as marine which has witnessed sluggish growth with its share of the market shrinking to only 3%.”
Some companies’ marine portfolios have dropped by more than 50%, observed Mr Abdel Khaleq. He attributed this to the soft economic conditions, with Jordan being in the heart of a troubled region with blocked borders with Iraq, and instability rife in Syria and Lebanon. As a result, the business environment in Jordan is going through tough times, he said.
Jordan continues to face enormous challenges caused by regional conflicts, with the inflow of neighbouring refugees causing its population to increase by 45% since 2011, thus placing extra pressure on the country.
Medical leading growth
Last year, medical insurance grew by over 9% to JOD155 million, accounting for 28% of total GWP. In the first quarter of 2016, medical insurance grew to assume 36% of market premiums, bettering motor which accounted for 35%.
Medical, like motor, is another cash flow generator, but also a potential source of worry. However, medical has fared well so far with combined ratio of approximately 97%, said Dr Al Wazani.
“There is competition on prices and on expanding range of coverage. Nonetheless, most companies achieve acceptable underwriting profits. The availability of a variety of proportional and non-proportional reinsurance covers for medical insurance helps keep combined ratios within acceptable range.”
According to latest statistics, 68% of Jordanians enjoy healthcare insurance, of which 12% are insured by private insurers while the remaining is borne by the state civil and military healthcare services.
“This means that one-third of the population, or 2 million people, are the target of the insurance sector. If insured at a premium of JOD250 each, they will increase the sector’s GWP by 50%,” said Dr Al Wazani.
Companies are lobbying for legislation to oblige those working in the private sector, such as entrepreneurs, self-employed professionals and private businesses, to purchase medical insurance, he revealed. “The initiative is in the discussion phase and hopefully we will see results in the near future.”
Medical insurance is increasingly becoming very important and there is a strong desire to cover as much of the population as possible with the necessary healthcare services, said Dr Sweis. “It has become the largest and fastest growing line in the Arab world in general.”
He added that the overall results for medical are satisfactory.
“Despite the varying levels of profitability among operators, the results encourage them to continue writing medical. Reinsurers, as well, continue to provide the support, which means it remains profitable.”
Would medical become problematic?
Medical insurance is seeing a drop in prices and becoming more competitive, warned Mr Abdel Khaleq. “JIC has a walk-away price policy. We have around the clock services and with this comes a price tag that some might not accept. But we are adamant to preserve the right level of services.”
Dr Al Wazani noted that companies give great importance to medical insurance because it opens doors for other lines with better profit margins.
“But with competition intensifying, along with reinsurers’ results retreating, it is possible that this line would lose its competitive advantage and enter into the tunnel of losses,” he said.
He stressed though that insurers are closely monitoring their portfolios’ performances in order to take corrective measures at an early stage.
Little cross-subsidy for motor’s woes
Motor third party liability (MTPL) insurance has been the main cause behind companies’ deteriorating financial performance for many years. In 2014, MTPL losses were estimated to have reached JOD15 million, thereby bringing motor losses to JOD150 million since 2001.
The MITS has previously promised to float motor insurance prices as insurers currently sell MTPL cover at a fixed price of less than JOD100 and have no say in rejecting certain vehicles or drivers. Mr Abdel Khaleq said nothing has changed with the MTPL regulation and the loss ratio has climbed to over 130%.
“This is getting worse because there is cut-throat competition in every class of business. Rates are becoming very low. Previously other lines used to cover up for motor losses but now with profitability fading, it is getting worse.”
He said his company is not targeting motor as a main line – accounting for less than 30% of the group’s protfolio – compared to the industry average of more than 40%.
Insurers who have been writing motor as as a main business for years should be more wary these days, said Dr Sweis
“They should be cautious because it would be challenging to make up for the motor losses from other lines’ profits. MTPL is a losing line and is sought mainly to generate cash. Liberalising prices could help but eventually it is up to each company’s underwriting strategy.”
Boost from new regulatory set-up
Last February, the Cabinet issued a decision for the Central Bank of Jordan (CBJ) to be in charge of monitoring the insurance sector within a year. Mr Abdel Khaleq considers it a positive move that would improve the sector’s standards and give credibility to insurance companies.
“CBJ is one of the best financial institutions in MENA in terms of standards and governance. Hopefully this move will be reflected positively on the operators’ performance.”
He noted how a single bank in Jordan achieves profits more than the whole insurance sector.
Thus, insurers are desperate for a turn-around in their sector given the numerous challenges. “In addition to the tough business environment, investment market is also lagging, stock markets are underperforming leading to unsatisfactory investment returns. Now, technical profits are supporting the investment side.”
Looking ahead
Given the uncertain macro environment, it remains unclear what new projects will be launched in the country in the coming period, said Dr Sweis.
“Companies need to see new investments and projects to expand businesses and survive.”
To revive fortunes in the short-term, he suggested activating liability covers for segments such as small-sized contractors or commercial buildings to be insured against any possible damage they could cause to others. Reflecting on how MEICO has been making profits since inception in 1962, he said: “This is rare in the region. Our technical profits and premium growth are satisfactory and we will continue with the same pattern. We have been focusing on properties and marine more than motor and medical, which can be gained easily by reducing prices. Our policy is to give proper service, coverage and explain to clients all details.”
As for JIC, there is no option but to continue focusing on the right technical standards.
“A main priority for us now is to maintain our clients’ satisfaction, protect our achievements in terms of top-and-bottom-lines, and remain in a leading position. Growing business in a healthy manner is very challenging nowadays,” said Mr Abdel Khaleq.
Cautious optimism
The Jordanian insurance sector still faces an uphill task to improve its performance, after recording its slowest rate of growth since 2010 at 4.9% last year. Analyst reports suggest that 19 out of the 24 market providers have seen their profits decrease in 2015.
Successful companies continue to upgrade their standards, improve their business tools and address new market niches to find better means to cope with the tough macro and micro economic environment.
The next step may be to pursue M&A for the benefit of all players. As it stands, the market is more receptive than at any other time in recent history.