The Saudi Arabian insurance market is likely to experience consolidation this year as lacklustre industry growth on account of a flailing economy leads to M&A, according to S&P Global Ratings.
“The Saudi insurance market is likely to see only modest growth at best in 2017, largely fuelled by the authorities’ pursuit of motorists and employers that have so far not taken out the cover required under Saudi law,” said Mr David Anthony, a London-based Credit Analyst at S&P. “We think 2017 may be defined by mergers and acquisitions, as the sector finally starts to consolidate.”
Domestic GWP written in Saudi Arabia for 2016 is estimated at SAR35.8 billion (US$9.5 billion), up 0.5% y-o-y, the rating agency said.
Like many other businesses, insurers have had their growth plans thwarted by the massive drop in oil prices that began in the summer of 2014. Oil has lost 60% of its value since then.
Saudi Arabia, the world’s biggest oil exporter, relies on sales of crude to fund more than 75% of its budget, and the deficit was understood to be between at least $80 billion in 2016. The Saudi budget deficit widened to 14.8% of GDP in 2015 from 2.3% in 2014, according to rating agencies.
On the brighter side, since last November, oil prices have been on the rebound and the IMF, cheered by the Saudi government’s measures to rectify its economy, expects the country to experience economic growth of 2% in 2017 from 1.2% in 2016.
Merger moves
In early March, Malath Cooperative Insurance & Reinsurance Company and Allied Cooperative Insurance Group announced a preliminary understanding to initiate the necessary due diligence in preparation for a merger. The two companies announced in a joint press release that within the next 12 months, they will sign an unbinding MoU to conduct and schedule the necessary technical, financial and legal analyses for a merger. They will then present the merger proposal to their respective boards.
Prior to this, Gulf Union for Cooperative Insurance and Ahlia Cooperative Insurance also announced their intention to conduct due diligence necessary for a merger. A statement on Tadawul revealed that both companies intend to sign an unbinding MoU within the next 12 months to carry out the necessary analysis.
SAR1 = US$0.27