Insurance woes continue

Emirates Insurance reported a 20 per cent fall in profits Monday as the sector struggles to overcome the malaise in local equity markets. The company, based in Abu Dhabi, joined Oman Insurance and National Insurance in reporting declining earnings this week. Emirates Insurance said net income for the second quarter fell to Dh23 million (US$6.2m) from Dh28.6m for the same period last year.

"There is no catastrophic news to reflect such losses," said Aymen el Saheb, the head of operations at Drahem Financial Brokerage in Dubai. "They simply suggest the firms have taken a beating on their investments." Gulf insurers have been among the largest investors in regional stock markets and have suffered declines in their share portfolios, where they invest the premium income earned from their customers.

The retreat of regional stock markets since last August is forcing insurers to seek a new home for their investments. Robert McKinnon, the head of research at Al Mal Capital, said: "In the near term, the insurance companies could perhaps look towards the fixed deposits as a quick solution for earnings, but in the longer term they need to think about stable cash flow investments, such as bonds and sukuks.

"The reason for them to invest in property and capital markets was they wanted high yields. However, it's time they gradually diversify from speculative investments, as there are not enough signs for a capital and property market recovery soon." Oman Insurance, one of the largest insurers in the UAE, said this week that its second-quarter profit fell 73 per cent because of investment losses, while Al Wathba National Insurance announced a 74 per cent per drop in net profit.

Wadah al Taha, an independent analyst in Dubai, said: "The capital structure of all 58 insurers licensed to operate in the country is under question. Most of the companies are capitalised between Dh60m and Dh200m, while the largest is capitalised at Dh1 billion. Even the highest capitalised firm is way too small compared with international firms or regional operators in the West." Previously, insurers have been able to exploit differences between equity market and property cycles to adjust their investments accordingly, but the global recession has caused declines across many sectors.

"Traditionally, stock markets and property markets had different cycles of ups and downs which had encouraged insurers to expose themselves to both investments. However, since last fall, both markets have fallen in tandem," Mr al Taha said. [e-mail]