Gulf insurers weigh safer cash havens

Gulf insurance companies are set to plough billions of dirhams into safer asset classes after taking huge losses on stocks and properties during the crisis.

Insurance companies in the region are considering safer investments for billions of dirhams from their pool of almost Dh17 billion (US$4.62bn) after getting burned by the sharp downturns in the property sector and local stock markets in the past two years, say officials.

Jason Light, the chief executive of Emirates Insurance Company (EIC), said his company had recently placed Dh80 million with the National Bank of Abu Dhabi and Deutsche Bank to be invested in the bond market for the first time.

"We inherited an investment portfolio that had local bank shares as its bedrock," said Mr Light. "As the insurance industry develops and our company goes on its journey, we feel that our investment portfolio should start to reflect that. Lower volatility investments such as bonds will mean lower returns, but a balance is important."

While EIC was not liquidating its current assets because they are at historic lows, it was searching for a "more stable set of returns", said Mr Light.

New funds coming into insurance companies were either being held in cash or being ploughed into low-risk investments, said David Anthony, an analyst at Standard and Poor's in London.

"A lot of companies are simply holding cash right now," he said. "They are much more interested in bonds and fixed-interest investments. The question is whether this is a strategic realignment or a temporary tactical change."

If a significant portion of insurance cash was shifted toward investments such as sukuk and bonds, it could improve trading in regional markets and provide greater confidence to issuers of debt, say analysts.

Insurers' funds derived from policyholders are invested to earn a return, although a portion is paid back out to clients when a claim is made.

Last year, UAE companies had almost Dh17bn invested in property, shares and fixed deposits, according to government records. Of the total, Dh6.3bn, or 37 per cent, was invested in shares on local and foreign exchanges, and Dh4.4bn, or 26.1 per cent, was invested in land and buildings.

This is contrary to practices at insurance companies abroad, where regulators often set specific requirements for investment allocation to ensure the industry is not overly exposed to risky assets, say analysts.

But companies are beginning to rethink their strategies after taking severe hits because of the often 50 per cent decline in the price of property in Dubai, and depressed stock markets.

Both sectors were huge draws for companies with extra cash during the boom.

Property investments for Oman Insurance Company, the UAE's largest insurer, rose as high as Dh752.5m at the end of last year from Dh493.9m two years earlier.

The rising market allowed it to post large quarterly profits but, in the aftermath of the crisis, it used an accounting technique to move the investments around in such a way that it smoothed out financial results. The company still impaired hundreds of millions of dirhams of the value of these investments.

Justin Balcombe, a senior director for the insurance team at the consultancy Ernst & Young, said pressure on insurance companies was leading to strategy changes. He said consolidation could be on the horizon by the second or third quarter of next year.

While last year's downturn "was significant and indeed severe for many companies", their problems have multiplied this year because of "increased pressure from regulators and international markets", said Mr Balcombe.

"As we near the end of 2010 and move into renewal season for 2011, we see a shift by companies away from the past strategies and a fight for improved premium versus tighter underwriting versus more competition and more regulation," he said.

Standard & Poor's (S&P) has downgraded some insurance companies in the past two years as they took losses from investments and lower premium revenues.

Nigel Bond, a credit analyst at the ratings agency, said S&P did not judge investment strategies so much as analyse overall risk. Compared with Europe and other developed economies, some Gulf insurers fly close to the wind, he said.

"We have seen companies risk in excess of 100 per cent of their capital, using leverage. What that means is for every 10 per cent rise or fall in the investment valuation, you get the same impact on your capital," he said.

While many companies gained immensely from the rise in shares and property prices in the region, they took an almost equal hit in 2008 and last year.

"What we want to see from companies in the region is not necessarily changing their investment portfolio, but knowing their exposure and managing it carefully," he said.