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Saudi Arabia: Insurance Boom

Seven of the kingdom's newly licensed insurance companies recently floated shares of their stock on the Tadawul All Share Index (TASI). All have been heavily oversubscribed, indicating the sector is gradually gaining momentum.

National Commercial Bank , also known as Al-Ahli Bank , was the lead manager for four of the initial public offerings (IPOs) for Al-Ahlia Cooperative Insurance Company , Saudi Arabian Cooperative Insurance Company , Allied Cooperative Insurance Group (ACIG) and Al-Ahli .

Many investors in the traditionally vibrant Saudi primary market were clearly keen to buy insurance stock. Al-Ahlia Cooperative Insurance Company , was 797% oversubscribed and as such the lowest, while at the top, Al-Ahli Takaful was 1118% over-subscribed, despite offering the least shares - 26.45% of the $26.7m paid-up capital.

The bank said that the four companies listed 40 million shares with a nominal value of $2.70.

Saudi Arabia's insurance sector has undergone a major revamping in recent years. In October 2006 the Council of Ministers approved 13 licenses for new companies to enter the market. Prior to this the only technically legal insurance entity was the Company for Cooperative Insurance, commonly known as NCCI. Some 70 other insurers vied with the national company for a share of what is the region's largest economy in a largely unregulated industry.

As a result, international companies such as France's AXA Group were forced to operate from off-shore bases like nearby Bahrain in what can only be described as an ambiguous position. The legal vacuum also allowed a number of local players with dubious practices to operate, which undoubtedly discouraged some locals from taking insurance.

This is no doubt part of the reason why spending on insurance in the kingdom currently accounts for less than 0.5% of GDP - one of the lowest figures globally. According to Swiss Re Economic Research & Consulting the average Saudi spent $53 on insurance in 2005. This was half of what the average Kuwaiti spent and a fifth what the average Emirati spent.

The transformation of the sector began in 2003 with the Cooperative Insurance Companies Control Law, which formally defined the industry. Under the law NCCI had to obtain an official license. The legislation also requires the new players to float at least 25% of their stock on the TASI - NCCI offered 70% of its equity to the public.

In 2005 the government made provision for companies that had already been operating in the kingdom, such as AXA and the UK's BUPA , to have a three year grace period before they have to not only list, but also convert all their products to ones that are sharia-compliant.

The liberalisation of the sector coincided with the run-up to the kingdom's accession to the World Trade Organisation and the government lifting many of the barriers to foreign investment in various sectors - including insurance. This and the new legal framework, have led to huge interest in the sector, with the Saudi Arabian Monetary Agency (SAMA - equivalent of central bank) receiving a number of applications.

The recent raft of IPOs is an indication of how keen the new licence-holders are to begin operations. Industry observers also note that the Capital Market Authority (CMA) allowed seven IPOs to take place simultaneously. The TASI has remained flat after the crash of February 2006 and is currently trading at 7359 - less than half of its peak value and well below what analysts term the psychologically important 8000 mark. Despite sentiment remaining weak, investors in this largely retail-dominated market continue to have an appetite for new stock, particularly in financial services such as insurance, which is seen a safer bet.

For its part the CMA is keen to increase the number of listed companies as a mechanism to create some much needed depth in the market, which has just under 90 listed stocks. The obligation for new companies to list is becoming increasingly common in the kingdom, particularly in licensed sectors such as telecommunications. It is hoped this will encourage more equity to remain in the kingdom and foster greater public participation.

With many insurers operating in the kingdom in the past as simply fronts for international re-insurers, it was inevitable that much of the capital was siphoned abroad. So in addition to obliging companies to list, SAMA has also stipulated that new licensees are required to reinsure a minimum of 30% in the kingdom and retain 30% of the gross written premium. However, local reinsurance capacity is low and analysts question how viable this really is.

Either way, the IPOs are a significant milestone for the new companies and bring them one step closer to fulfilling their licensing obligations.

© Oxford Business Group 2007