Merger and acquisition (M&A) activity and stakebuilding is gaining momentum in the Middle East as financially strong and profitable insurers seek to deploy surplus capital to broaden their profiles and satisfy shareholders’ expectations, according to a briefing issued by A.M. Best.
The market is ripe for consolidation as medium-size players seek to maintain their market positions, while many smaller insurers in particular struggle with profitability, owing to their high expense bases, said the briefing titled “Middle Eastern Insurance Market Conditions Set Scene for Mergers and Stakebuilding Activity.”
A.M. Best notes that in the past few months, Middle East insurers have strengthened their profiles through acquisitions and increasing their participation in selected companies, often seeking to diversify product offerings into different sectors by, for example, accessing the takaful sector or acquiring a life license.
“The Middle East region consists of many small, overcrowded insurance markets, with larger participants facing shareholder demand for better returns on equity,” said Mahesh Mistry, director, analytics.
“One of the ways to achieve this is through economies of scale by acquiring one or more of the small-to-medium size insurers operating in these markets. However, agreeing to any M&A activity can be challenging,” added Mistry. “Many insurers in the region are family-run enterprises that are loath to relinquish control of their companies. Due to the strong financial wealth of investors, owners are sometimes reluctant to merge with another company. Additionally, many direct writers are national companies, with government participation in their ownership, and are therefore unlikely targets.”
However, although there can be a reluctance to sell a stake in an insurer, A.M. Best said it considers the current fragmented markets in the Middle East to be conducive to industry consolidation. Leading companies have strong positions and brand recognition, leaving the remaining participants to compete for a small share of business. Owing to the strain on operating performance, markets will be forced to further consolidate over time as some insurers are unable to create scale.
A.M. Best also notes that most transactions have been financed through internal capital generation, with limited debt being used to finance acquisitions. Yvette Essen, director, industry research – Europe & emerging markets, and author of the briefing, added: “Leading participants’ strong balance sheets have enabled companies to absorb smaller insurers. However, the key challenge is to successfully integrate these companies and generate sufficient synergies to create a stronger platform for the insurer to further leverage its market profile.”
Source: A.M. Best Company
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