Saudi Arabian insurers begin talks over $330m merger

Smaller insurers in the kingdom are facing pressure to merge as capital requirements are set to rise, according to Moody's

An image of Riyadh at night. Moody's has assigned national scale ratings to Saudi Aramco, Saudi Re and four lenders in the kingdom. Reuters

Saudi Enaya Cooperative Insurance and Amana Cooperative Insurance are holding talks about a potential merger.

The insurers said on Monday in separate statements to the Tadawul stock exchange, where their shares trade, that board approval had been granted to begin "initial discussions" about a merger, but this does not necessarily mean a deal will happen.

"In the event that an initial agreement is reached on the merger, a non-binding memorandum of understanding will be signed with Amana Cooperative Insurance Company to assess the feasibility of the merger of the two companies," Saudi Enaya Insurance said in its statement.

A merger between the pair would create an insurer with a market capitalisation of about 1.24 billion Saudi riyals ($330 million) as of Sunday's closing prices. Riyadh-based Amana Insurance had a market cap of about 777.6m riyals, with its share price increasing by about 166 per cent so far this year. Jeddah-based Saudi Enaya Insurance has a valuation of 462m riyals, up about 32 per cent year-to-date.

Despite some turbulence in the underlying value of their investments, insurers have benefited from fewer claims so far this year as the pandemic-related movement restrictions kept cars off the road while some customers delayed plans for non-emergency health procedures.

"The number of claims in motor and in medical lines – these two lines make up 60 per cent of business for most takaful (Islamic insurance) players – have been relatively low this year," Emir Mujkic, a lead analyst  for insurance ratings said during S&P Global's annual Islamic Finance conference last week.

In Saudi Arabia, there is also an incentive for smaller companies to merge as regulators have indicated that minimum capital requirement for primary insurance companies will increase to 500m riyals, from 100m riyals previously, although no date has been set for this to be implemented.

Accounts for the end of last year and the first six months of 2020 show that currently only seven of the kingdom's active insurers had total equity in line with the higher requirement, although a further six could easily meet the higher threshold either through retained profits or capital injections, Moody's Investors Service said in a note last week.

"However, the remainder would face significant shortfalls," the ratings agency said. It expects these smaller insurers either to consolidate through mergers or to enter run-off and eventually exit the business. A run-off is when an insurer stops taking new business but will continue to honour existing claims.

There have already been a number of mergers in Saudi Arabia's insurance sector in recent years. These include the tie-up between Gulf Union Cooperative Insurance and Al Ahlia Insurance that is in the process of completion after being approved by regulators and the merger between Walaa Cooperative Insurance Company and Metlife AIG ANB Cooperative that completed in March.

Mergers are helping to grow the Islamic finance industry in the kingdom, which is already the world's largest, Moody's said in a separate note last week. The proposed merger between National Commercial Bank and Samba is an example, with the former "continuing its shift from a conventional bank to a Shariah-compliant entity".

If successful, it would also reinforce NCB's position as the country's biggest lender with a market share of 31 per cent by assets, or 30 per cent of total deposits.

"The merged entity would also become one of the world's largest Shariah-compliant banks," Moody's said.