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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.”
Back in late April the Financial Times noted that “Southeast Asia’s insurance sector [would] likely see an uptick in M&A as major foreign players clamor[ed] to make acquisitions in the region.” Vietnam and Cambodia, the piece argues, stand out as especially attractive targets:
“Vietnam, the most vibrant economy in the Indochina region, has already attracted lots of international insurers’ capital, thanks largely to its big youth population and government policy to encourage people to buy insurances, continued the Indochina source. Vietnam has a life insurance penetration rate of just 0.7%, and a population of 88.1 million.”
Although the market share of Vietnam for life insurance is dominated by three main players–Prudential (40 percent), Bao Viet (34 percent) and Manulife (10 percent) per the Vietnam Insurance Association– smaller sized insurers are becoming increasingly relevant: ACE Life, AIA Life, Dai-ichi Life Vietnam, Previor, Cathay Life, Great Eastern, and Korea Life, for example, all showed marked growth in 2009.
Per Cambodia, FT wrote that “there is no foreign ownership cap in the country’s financial services sector, and thus “banking and insurance businesses are combined into one license, meaning that if an entity secures a license, it can provide both services at the same time.” Cambodia’s non-life insurance market is more developed than its life one, as the majority of its citizens still cannot afford the personal life insurance products. While Cambodia’s economy has grown between 6%-10% in recent years, the increases have been driven by construction, garment and tourism rather than the agriculture sector–the defacto foundation for roughly 85% of the population’s livelihood which nonetheless suffers from habitually shoddy infrastructure, low productivity, a lack of access to markets and poorly developed rural financial services. The results in tow have been persistent rural poverty and food shortages. Cambodia’s government claims to be aggressively targeting the situation, and points to international backed schemes to alleviate its chronic, urban-rural income disparity. Last December, for instance, the Asian Development Bank’s (ADB) Board of Directors approved a loan and grant totaling $30.7 million (joining the International Fund for Agricultural Development (IFAD) and the Government of Finland’s combined $19.1 million) targeted to increase crop productivity and output, improve post-harvest management, increase market access and price transparency, offer greater access to rural financial services, and foster knowledge of agriculture technologies.
According to Youk Chamroeunrith, general manager and director of Forte, the largest domestic insurer in terms of premium revenues, the fundamental issue holding back life insurance growth in Cambodia is the lack of both a proper regulatory framework as well as overall general awareness of the products, despite the fact that the World Bank identified life insurance as a vital sector to encourage public savings and drive productive investment. Moreover, foreign investment schemes, he says, are crucial to the industry’s growth. To that extent, the World Bank noted in April that foreign direct investment in Cambodia would reach $725 million this year, up from an estimated $515 million in 2009.
Non-life is already a rapidly growing sector and is driven chiefly by property, fire, motor and medical business lines. Premium revenue for the entire industry grew 19 percent in the first two months of 2010 and is still forecast to grow approximately 20 percent for the year, per figures released from the General Insurance Association of Cambodia (GIAC) in the spring. This coincides with 1Q results from Forte which reported premium-derived income growth of nearly 20 percent.
GCC insurance markets are still underdeveloped despite the relatively recent rise of takaful, a type of Islamic insurance wherein members contribute money into a pooling system in order to guarantee each other against loss or damage. Conventional insurance is incompatible with Islamic law because of Sharia’s prohibitions on transactions inherently founded on uncertainty/elements of luck. Moreover, conventional insurers store money in interest-bearing investments, which are similarly prohibited. In the face of increased wealth–Accenture, a consultancy, forecasts that household Islamic savings will amount to $24bn a year by 2020–analysts posit that the global takaful industry will grow by 20% and reach US$10-15 billion within the next decade, led mainly by the GCC countries and Malaysia. Per Ernst & Young’s inaugural World Takaful Report 2008, accepted contributions are expected to rise to more than $4.3 billion in 2010.
Two further developments should provide a catalyst to the industry. One, a proposed law to mandate the use of the still nascent “re-takaful market” should help fuel its development, in turn boosting the underlying takaful industry as well. Second, the expected passage of a GCC-wide insurance law will ensure compliance with international standards through the automation of underwriting, per consultancy A.T. Kearney, a practice it argues would improve insurers’ loss ratios, and also decrease the intermediation costs–thus making processes cost effective:
“In the UAE insurers cede more than 50% of their insured premiums to reinsurers with an obvious impact on their bottom line, as risk and profit is shared with the reinsurer. In comparison international benchmarks show that reinsurance is only 5-15% for global leaders with state of the art in-house underwriting operations. The companies that get underwriting right can hence look at exactly which segments require reinsurance and which are better kept within the company. It is however vital to get the underwriting process in place first so risk/premium profiles are optimized. Currently some segments (corporate mainly) have premiums which vary up to three times for the same risk. This can negatively impact competitiveness of insurers if premiums are above market evaluation or negatively impact bottom-line and risk profile of the insurer if too much risk is attracted at too low premiums.”
Continued Cyril Garbois, Principal, A.T. Kearney Middle East, “the [insurance] market is currently underpenetrated and the size of the prize remains significant – we estimate that insurance companies regionally can improve profitability with 20-30% while at the same time increasing market share if they get underwriting right. I believe the use of international best practices in underwriting along with the required level of sophistication in distribution is a key to driving future growth of the insurance market regionally.”
Such a move could bolster insurers’ balance sheets even in the event of prolonged economic slowdown reverberating from the credit crisis, which causes a reduction in new policies and also a larger cancellation of existing ones. It’s perhaps with this relatively rosy future in mind that insurance stocks in Kuwait, for instance, showed resilience in November by dropping only 1% while the broader market shed 5.48% during a one-week span that saw the country’s broad index fall to a seven-month low on the 15th.
The Swan Group, one of the market leaders in the insurance sector in Mauritius, announced last month that its performance during the first quarter of the year “was not affected” despite the global slowdown. Rather, executives noted that the firm realized a substantial increase in its excess collateral. And while revenue life insurance premiums predictably slowed, this loss was offset by “good performance of the activities of pension.” Moreover, citing its short-term investments, the firm stated that its investment income has “behaved fairly well” in the face of lower interest rates.