Two trends well worth taking note of in the latest numbers available from the GCC insurance industry are subdued share price performance and signals for a massive deceleration in underwriting revenues from at least one market.
When juxtaposed with the year-to-date evolution in GCC benchmark indices, where four of seven exchanges showed clearly positive performance for the period ended July 30, the insurance indices showed gains in only two of six GCC markets that include insurance in their portfolio of sector indices.
Given the unimpressive share price developments in the majority of Gulf markets and taking into account that insurers’ net profits in the first half of 2009 have been impacted, as anticipated, by the fallout of the financial crisis through poor investment income, unfulfilled underwriting expectations cannot be good.
The first-half 2009 demand, however, is presenting at least one downward surprise, where insurance executives after the first quarter of 2009 had assumed gross premiums growth of up to 10% for this year.
Yet contrary to the trends of the past five years, the demand for insurance in Qatar has been heading for the plains in the first half of the year as cumulative gross premiums reported by listed insurers have shown even a tiny drop year on year. Cumulative gross premiums by the publicly traded Qatari insurers, which were less than 2 million Qatari Riyals shy of QAR 2 billion ($550 million) in mid 2008, have contracted QAR 23 million to QAR 1.975 billion, according to the statements posted by the five companies on the website of the Doha Securities Market.
For investors targeting insurance stocks, the index numbers suggest that their 2009 road until July 30 was fraught with potholes and gravel, but with the strong exception of the Saudi Stock Exchange. Here, both the insurance index and the initial public offerings of new insurers did dazzlingly well, moving higher with an almost mythical charisma as if the companies were stars from the latest Transformers movie. One dazzler is first-day performance of Saudi insurance stocks. It has been quite remarkable in 2009, when measured against the standardized issue price of SAR 10.
The four stocks that debuted in the six weeks since June 20 achieved an average increase of almost 484% on the first day of trade. Weqaya Takaful (Jun 20) and Axa Cooperative (Jul 27) each jumped to closing prices of over SAR 36 per share but were outdone by Al Rajhi Cooperative (Jul 13) and ACE Arabia Cooperative (Jul 29) which closed at SAR 77 and SAR 81, respectively.
Intra-day peaks for all four stocks were higher still but it is to be noted that the first-day opening prices exceeded closing prices for three of the four companies.
The overall trend of insurance IPOs performance on the SSE has been even more to the favor of investors who managed to acquire shares in the subscription periods. With 24 insurers having completed their IPOs and market launches since May 2007, the average first-day gain amounted to 497% over the issue price. Increases ranged from 105% to 997.5% per stock.
For comparison, the single Saudi banking IPO in the past two-and-a-half years saw Alimna Bank rise 60% on its debut day. On the other hand, the $2.8 billion Alimna IPO outweighed the combined offering value of the 24 insurance IPOs almost five to one.
More remarkably in view of the battering that Arab stock markets took under the impact of the global financial crisis, the average performance of Saudi insurance stocks since flotation has, at of Jul 29, 2009, been positive for every single one – in a much different picture to the performance of the Tadawul benchmark index, TASI.
When excluding the most recently listed insurers because of their short trading history, correlating the share price history of Saudi insurance companies to the TASI shows that the general index at the end of July was lower by between 17% and 41% versus the first trading day of every insurance company that debuted on the SSE between May 5, 2007 and June 21, 2008. The average drop in the TASI between trading debuts of these insurers and the last trading session in July 2009 was 28.6%.
This makes for an extremely positive performance of insurance stocks which entered the market in 2007 and 2008, their average share price gains since listing exceeding 370%. Strong gains in the insurance sector in the past six months accounted for a large portion of this exceptional gains record, which is reflected in the fact that the 55.6% increase in the insurance sector index of the SSE for the year to date was more than 20 percentage points ahead of any other sector index and more than three times the gain of the TASI in the first seven months of 2009.
Investors who are interested in Saudi insurance IPOs can look forward to October when the next batch of three insurance providers will offer stakes for subscription between October 3 and 9.
GGC Insurance Stocks Show Weaknesses in 1H 2009
Across the GCC’s other stock markets, performance of insurance indices relative to the benchmark indices in the respective securities exchanges tended generally toward underperformance.
On the Abu Dhabi Exchange, insurance trailed the general index in a slow but steady downward trend that saw insurers end the month of July 14.3% lower from the start of 2009 whereas the general index closed up 10.9%.
On Dubai’s DFM, on the other hand, insurance was among the better performers and the sector index ended the first seven months in 2009 11.5% higher while the general index was restrained to a 3.1% increase for the year to date, as computed by Zawya.
(Note: under the methodology used by Zawya for chart analytics, the reference date for the year-to-date performance is the close of the year’s first trading day, which in 2009 was Jan 5 in the UAE. Under this method, the long holiday break in trading between Dec 31 and Jan 5 has created a divergence of several percentage points for index performance on ADX and DFM from the index changes measured with the Dec 31 close as base line for ytd analysis.)
Bahrain, the weakest GCC market this year with an overall drop of 16.2%, saw the insurance index underperform the general index by slightly more than one percentage point, range-bound with the banking and investment indices. Kuwait’s insurance index ended July11.7% lower versus the start of the year, underperforming the general index 12.6 percentage points. Insurance and investments were the biggest underperformers of the KSE over the period. Also in Qatar, insurance stocks fared poorly. The insurance index carried the red lantern on the DSE with a July 30 close that was 22.1% down on the year and was separated from the general index by a downside gap of almost 19 percentage points.
The Muscat Securities Market in Oman does not track insurance sector performance in a separate index.
Gross Premiums Flat in Qatar
Underwriting figures for the first half of 2009 are not available from all that many listed insurers in the GCC but with the release of Doha Insurance’s 1H financial statements on July 29, the tally for insurance gross premiums in the emirate is now complete for all five listed insurers. These companies represent the lion’s share of the Qatari insurance market.
The five companies reporting gross premiums of cumulative QAR 1.975 billion for the six months ended June 30 were Qatar Insurance (QIC), Qatar Islamic Insurance (QIIC), Qatar General Insurance and Reinsurance (QGIRC), Al Khaleej Insurance, and Doha Insurance.
QIC and Doha Insurance reported year-on-year increases in their gross premiums by 9.2% and 2.8%; gross premiums of Al Khaleej were flat and QGIRC and QIIC reported 27.2% and 15.7% contractions in gross premiums.
Difficult Moments ahead
While the companies showed better performances in net premiums / underwriting profits, the market trend of 2009 diverges visibly from the past years in which double-digit nominal increases in gross premiums were the standard picture for Qatar’s insurance industry.
This contrasts sharply with the recent numbers where operating costs have yet to come down but lower investment returns have beaten down net results.
An analysis of premiums developments in Qatar’s insurance sector done for Zawya by insurance actuarial firm, i.e. Muhanna & co showed that from end 2004 to end 2008, total gross premiums reported by listed insurers increased by an average of 43% annually.
This average bracketed by the Doha Insurance Company registering the highest annual average increase of 56%, while Qatar Islamic Insurance Company registered the lowest annual average increase of 21%. However, the June 2009 total premiums are more than 1% lower than the June 2008 figure.
It is worth noting that by the end of June 2009 shareholders’ equity of the listed companies have lost a further 4% in value since the closing of 2008 – thus yielding to an increase in underwriting exposure.
In spite of this, the listed companies remain relatively strong due to their initial strong shareholders’ equity. “The management of those insurance companies will be under the challenge to maintain this relative strength” says Muhanna
Insurance claims may be stagnant and insurance companies may adjust their premiums calculations to make up for lower contract volumes but moral hazard makes it probable that loss ratios will move higher, commented Ibrahim Muhanna, CEO of i.e. Muhanna & co, in an exclusive view for the Zawya insurance community.
“We will anticipate an increase in loss ratios and an increase in expense ratios. We will see very poor results in the industry,” warned Muhanna.
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