The GCC takaful market has delivered a robust performance amid a challenging operating environment, with both growth rates for net profit and gross written contributions turning positive in 2019 – and even outpacing those of conventional insurance.
The GCC takaful market saw its aggregate net profit surged by 74.3% y-o-y to $414m in 2019, largely driven by a significant increase in profitability in Saudi Arabia and double-digit growth rates in Qatar, Oman and Bahrain, according to the full-year 2019 results announced by the 47 publicly listed takaful operators across the region.
Their combined gross written contributions (GWC) expanded by 8.3% y-o-y to $11.4bn in 2019, despite the region’s relatively muted economic growth.
More impressively, the growth rates of both net profit and GWC even outpaced those of conventional insurance last year. Conventional insurance in the GCC posted a 6% y-o-y growth in total premiums to around $10.5bn, while its overall profitability jumped by 2.2% y-o-y to $671.9m.
Takaful’s strong performance in profitability and GWC in 2019 represented a big improvement on the previous year’s dismal performance, a result of the challenging operating environment characterised by the lack of sufficient differentiation, intense competition, low customer awareness and limited distribution capabilities. As a result, the GCC takaful market reported lower contributions and profits in 2018, down 0.7% and 34% to $10.6bn and $232.5m, respectively.
Net profit: Triple-digit growth in Saudi Arabia
The profitability of GCC takaful operators declined between 2016 and 2018, primarily due to pricing pressure, volatility in investment returns due to low interest rates and a stagnant real estate market. In 2018, the takaful sector generated a net profit of about $238.1m, compared to $383m in 2017, and $674m in 2016.
The weak results in the Saudi market, which contributes around 70%-80% of total net profit of all Islamic insurers in the GCC, have been the main source of earnings volatility in the GCC takaful sector in recent years. Slow economic activity and higher competition in the Saudi market, where all the insurers operate on Islamic principles, led to the sharp decline in profitability in 2018, falling by 45.8% to $153.9m.
But in a significant business turnaround, the 30 listed Saudi insurers delivered a triple-digit growth of 108.1% in net profit before zakat to $331.1m last year. The improvement in profitability was due to the introduction of additional benefits under the unified medical policy from July 2018, as well as the ongoing efforts of authorities to improve the operating environment by addressing the issue of uninsured drivers, for instance. The improvement was also likely to be spurred by better investment returns.
Three other GCC takaful markets also registered strong profit growth, in the double-digit range: Qatar (+21.9% y-o-y to $27.9m), Oman (+21.7% y-o-y to $9.6m) and Bahrain (+11.4% y-o-y to $9.6m).
The UAE is the second biggest market in terms of GWC and net profit after Saudi Arabia. The nine UAE listed takaful operators – six on the Dubai Financial Market (DFM) and three on the Abu Dhabi Securities Exchange (ADX) – posted a 10.7% drop in net profit to $31.4m last year. This was despite the DFM-listed SALAMA achieving a huge increase in net profit by 2,599.3% y-o-y to $15m.
SALAMA’s profit growth rate was the highest in the GCC takaful market last year, which was way ahead of Dubai Islamic Insurance & Reinsurance Company’s 494.6% and Tawuniya’s 288.5%. In 2019, the shareholders of SALAMA elected a new board that implemented a multifaceted strategy focused on increased profitability, consolidation and improvement of the investment portfolio, and enhanced corporate governance aimed at the company’s long-term and sustainable growth.
In 2019, four UAE takaful operators reported negative profit growth, with Takaful Emarat suffering the largest losses during the year. It posted a net loss of $10.3m last year, compared to a net profit of $3.8m in 2018. Similarly, Arabian Scandinavian Insurance – Takaful posted a net loss of $1.7m against a net profit of $5.7m in 2018.
In Kuwait, the smallest takaful market in the GCC, the full-year net profit shrank by almost 17% to $2.4m in 2019, due largely to the lacklustre results posted by Wethaq Takaful. The company swung from a net profit of $279,450 in 2018 to a net loss of $281,622 in 2019.
GWC: Oman posted highest growth rate
The six GCC takaful markets all managed to register growth in GWC, led by Oman with 19.8% to $166.9m in 2019, followed by Saudi Arabia (+8.6% y-o-y to $9.8bn) and Qatar (+8% y-o-y to $192.8m). On the whole, 31 out of 47 takaful entities posted growth in GWC while 16 operators witnessed a fall in gross contributions.
In Oman, the growth was driven by Al Madina whose GWC rose 27.7% to $101.2m last year, and is now the third largest company in the sultanate’s insurance market in terms of written premiums. The other operator, Takaful Oman, also posted a healthy growth of 9.3% to $65.7m.
In Saudi Arabia, the growth in GWC last year could largely be attributed to the increase in the prices of insurance products, especially medical, which has been an area of severe competition. The growth in the kingdom was led by Amana (+80.5% y-o-y to $66.1m), Gulf Union (+70.4% y-o-y to $149m) and Solidarity (+59% y-o-y to $104.3m). In fact, the GWC growth rates from these three Saudi insurers are also the highest among its takaful peers within the GCC.
The market leader in terms of GWC is Bupa Arabia, whose gross contributions grew by 21.5% to $2.8bn – claiming a market share of 28.6% in 2019. Tawuniya came a close second with GWC of $2.2bn, and secured a market share of almost 22.5%. With a combined GWC of $5bn, Bupa Arabia and Tawuniya have a market share of 51%, while the remaining 49% of premiums was generated by 28 insurance companies.
In the UAE, the nine listed takaful operators generated a total GWC of $1.05bn in 2019, up 5.2% y-o-y.
SALAMA, the biggest takaful player in the UAE by GWC, saw its gross contributions grow 6.3% to $301.2m last year. DFM-listed Takaful Emarat and ADX-listed Abu Dhabi National Takaful took the second and third spots with GWC of $165.1m (+1.2% y-o-y) and $127.3m (+21.9% y-o-y), respectively. Dar Al Takaful, ranked fourth in the UAE by GWC, generated the largest increase in GWC of 38.5% to $109.5m.
Outlook: The dual threat
In terms of outlook and prospects, market conditions will remain challenging for the GCC insurance industry this year, as the MENA region is currently experiencing a dual shock: the COVID-19 pandemic and lower oil prices.
The GCC insurance market will feel the effect of lower oil prices and a COVID-19-driven reduction in economic activity on both underwriting and assets, said rating agency AM Best in a commentary titled ‘Impact of Low Oil Price and COVID-19 on GCC and Russian Insurers’.
Lower oil prices will impact the fiscal spending plans of governments in the GCC region, which is likely to translate into reductions in infrastructure spending, the agency said. A substantial proportion of underwriting in the region is linked to government-backed infrastructure projects that governments incept, notably property and engineering contracts.
When there was last a significant fall in the price of oil, several GCC countries froze government spending. This impacted the top lines of some local insurers, particularly those with large engineering and construction books.
The investment portfolios of GCC insurers are expected to be affected by lower oil prices as well as COVID-19-driven financial market volatility as they are weighted towards equities and real estate, said AM Best. GCC equities in particular have shown a historically strong correlation to oil prices.
The GCC takaful sector, which made up 52% of the total GCC insurance market in 2019, will not be immune to these pressures as their investment portfolios are weighted towards equities and real estate.
While it is still early to assess the full financial impact that COVID-19 will have on the insurance sector in the GCC given that the situation is still evolving, takaful operators will need to take decisive measures as well as devise strategies to thrive and survive in such a challenging business climate. M