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Mar 2023

Takaful M&A boosted by growth prospects

Source: Middle East Insurance Review | Jan 2023

The GCC takaful industry recorded a surge in M&A activity last year. S&P Global RatingsMr Emir Mujkic expects the momentum to continue as ongoing pressure on earnings, intense competition and higher capital requirements will result in further consolidation in the region.
By Cynthia Ang
The GCC’s ongoing economic recovery from the COVID-19 pandemic, spurred by higher hydrocarbon prices, government spending on infrastructure projects and increasing activity in the non-oil sector, will support Islamic insurers’ growth prospects in 2022 and 2023, according to an S&P Global Ratings report.
The growth prospects of takaful operators will also be supported by new mandatory coverage and overall higher insurance demand, said S&P Global Ratings director and lead analyst, insurance ratings Emir Mujkic.
In S&P’s view, higher hydrocarbon prices, with the assumption of an average Brent price of $100 per barrel (/bbl) for the rest of 2022 and $85/bbl in 2023, will fuel accelerated economic growth in the oil-exporting region. This should feed through to the takaful sector where gross written contributions are expected to grow around 10% in 2022 and 5%-10% in 2023.
Individual market performance In terms of individual market performance, “the picture for takaful players is a little complicated, since performance metrics vary quite substantially from country to country in the region”, said Mr Mujkic.
The full-year results for 2021 showed that it was profitable overall for the takaful sector, but earnings were not evenly distributed. “While Qatar’s relatively small takaful sector remained the region’s most profitable, with insurers reporting combined ratios of around 80% or better, the sector in Saudi Arabia continues to report relatively weak underwriting results, with about two-thirds of insurers recording underwriting losses,” he said.
The largest takaful market, Saudi Arabia, recorded the worst year for profitability in 2021, with profits after zakat and tax plummeting by 106% from SAR1.4bn ($373.3m) in 2020 to a loss of SAR47m in 2021. The UAE takaful sector, the second largest in the region, also posted a substantial drop in net profit in 2021, down by 45.5% to AED185.3m ($50.5m).
Mr Mujkic said, “Generally speaking, high competition, volatility in capital markets and an increase in operating costs are weighing on earnings in the industry as insurers are preparing to adopt new accounting standards (IFRS17).”
He noted that the biggest issue for many takaful players is the lack of size, diversification and differentiation. “There are currently too many conventional and takaful insurers in most of the GCC markets, which operate in the same lines of business (motor and medical) and consequently compete for the same business.
“The more profitable players operate in other P&C lines covering energy or liability risks, which are often highly reinsured and see insurers receiving substantial reinsurance commission, and the family takaful segment. However, many players do not have the capacity and expertise to operate in these lines,” said Mr Mujkic.
He added, “Overall, we anticipate that intense competition and an increase in claims frequency will continue to weigh on Islamic insurers’ earnings in 2022, before we can see a modest recovery in 2023, driven by anticipated rate adjustments in loss-making lines and higher interest rates, which should boost investment returns.”
Impacts of Inflation
Inflation is expected to remain in the double digits in the Middle East region in 2023, for the third consecutive year, according to IMF’s projection. Unlike the other Middle Eastern nations, the inflationary pressure is expected to remain lower in oil-rich GCC countries as majority are beneficiaries of high energy prices and are expected to run large budget surpluses in 2022. 
Depending on the country, Mr Mujkic said, “We project consumer price inflation to be between about 2.3% in Saudi Arabia and just below 5% in the UAE in 2022. This is still relatively modest compared with inflation in some more developed markets in Europe and the US.”
For the insurance industry, the main inflation impact will show in rising claims costs. He said, “Claims inflation for medical business will continue to grow by 5%-7% per year but the impact of higher inflation in other lines has been relatively modest so far. However, we expect a modest uptick in claims inflation, which may result in some reserve strengthening and price increases in motor and other P&C lines.”
M&A boom to continue
The GCC takaful industry recorded a surge in M&A activity as the region’s regulators continue to tighten their supervision regime for the market as a whole, particularly around capitalisation and solvency.
In December 2022 alone, two separate non-binding MoUs were signed to evaluate potential mergers between Saudi Enaya Cooperative Insurance and United Cooperative Assurance, and Alinma Tokio Marine and Arabian Shield Cooperative Insurance. Earlier in October, Walaa Insurance and SABB Takaful announced that their merger transaction became effective and subsequently SABB Takaful was delisted from the Saudi Exchange.
In the UAE, SALAMA announced in October 2022 that it had obtained initial regulatory approval for a merger with Takaful Emarat and had also initiated negotiations with Dubai Islamic Insurance and Reinsurance to acquire part of its general, medical and family takaful portfolios.
These recent deals are reflective of a growing trend of consolidation in the takaful market in the first half, with the others being the merger of Dubai-based Dar Al Takaful and Abu Dhabi-based Watania in July, and T’azur’s merger with Solidarity Bahrain in January.
Commenting on the prospect of growing M&A trend, Mr Mujkic said, “Intense competition and higher capital requirements will result in further capital raising and consolidation, in our view. This will particularly be the case in Saudi Arabia, where a large portion of insurers remain loss-making. The Saudi central bank’s new minimum capital requirement of SAR300m, up from SAR100m, over the next three years is designed to encourage consolidation and result in fewer but stronger companies to meet the country’s Vision 2030 objectives.
“That said, merger only makes sense if there are some synergies and benefits like improvement in capitalisation and additional diversification for example in terms of products and geographies. Like with every merger, the integration process can be a challenge. We also expect further capital raising and consolidation will support capital buffers.” M 

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