Deloitte’s recent projection that “the number of mergers and acquisitions in the Middle East [should] double in 2011 as regional economies expand and governments spend on infrastructure” may mean that merger arbitrage–in which a given target company’s stock price should eventually rise to reflect the agreed per-share acquisition price, while the acquirer’s price should fall to reflect what it is paying for the deal–could become an effective short-term, regional and/or sector-based strategy in the coming years.  “Merge-arb” may also seek to capitalize on the spread at a moment in time based on a perceived probability of a given deal being approved, and/or how long it will take the deal to close, versus market perceptions.

As always, the devil is in the timing of it all.  The Saudi insurance market, for instance, is “ripe for M&A” but “awaits a nod from the central bank,” according to Ali Al-Subaihin, chief executive of the kingdom’s biggest insurance firm, Tawuniya.  “Consolidation is bound to happen, if it does not happen this year, it will happen next year or the year after.  The catalyst would be for the regulator to intervene and suggest that some firms merge or for some firms to seek the regulator’s approval to merge,” he told a recent summit.  Takeovers would be a welcome market response to the government’s overly aggressive push to license new firms amidst surging demand for protection & savings and health insurance (with the country’s population projected to reach 45 million by 2020, analysts opine that the demand for insurance products, especially medical and motor insurance, will only escalate further; to that end, per capita expenditure on insurance is rose 31 percent last year).  Per a Reuters piece, “the pace of licensing may have been too abrupt to allow the new players to become quickly profitable, industry analysts say, forcing many to consider mergers or become acquisition targets.”

Health insurance accounts for over 40% of the overall market and is expected to grow, according to a report by RNCOS, an industry researcher, “as the increasing involvement of private companies develops the scope for insurance cover, and as foreign nationals and foreign pilgrims are obliged to take out insurance.  In addition to this, the most recent introduction of compulsory health insurance for private employees, irrespective of the size of the company they are working with, will further boost the health insurance market in the country.”  General insurance, which accounts for the majority of insurance premiums, is expected to grow at 13 percent annually until 2013 on the back of rising motor, property, engineering, energy, liability and aviation insurance. 

Looking broadly across the entire region, premiums in the GCC rose by 28 percent in 2009 to $10.6 bn, though penetration rates still have room to converge.  “Insurance penetration–aggregate insurance premiums over GDP–stands at 1 percent for the GCC countries.  In contrast, the developed insurance markets in the US and Europe register penetration rates in the range of 5-15 percent,” per one consultant.  “[And] Saudi Arabia’s penetration rate is a tiny 0.6 percent, which is dwarfed by that of the UAE at two percent.”