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MENAFN - Oxford Business Group - 10/06/2009

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(MENAFN - Oxford Business Group) Kuwait's insurance sector, along with much of the country's economy, looks set for a period of consolidation, with larger and more diverse operators best placed to weather the downturn in the local market.

From late April to mid-May, Kuwait's insurance firms lodged their first-quarter results with the Kuwait Stock Exchange (KSE), with most recording sharp falls in profits compared to the same period in 2008 and some posting losses as the global economic crisis continued to affect the sector.

The decline in the KSE, specifically between last October through to March, had a major impact on the balance sheets of Kuwaiti insurance companies as most were heavily invested in local equity, said Khaled Saoud Al Hassan, the managing director and CEO of the Gulf Insurance Company (GIC). Though the insurance market achieved excellent results in the first three quarters of 2008, most of that success was negated in the fourth quarter, he said in an interview with OBG.

GIC's first quarter results showed a decline in returns, with the company posting profits of 7.9m, less than half the 16.4m for Q1 last year. However, the firm was also able to maintain constant growth rates in production size, operating revenue and technical reserve.

"The impact of the crisis on GIC was not as severe as on our local competitors," said Al Hassan. "We are somewhat more diversified and were able to achieve decent results, both on the investment side and the technical side, through our six subsidiaries operating in markets across the Middle East & North Africa region."

According to Al Hassan, 2009 will be a year in which not only insurance companies, but investment firms as well, attempt to restructure their portfolio through diversification as a means to minimise risk.

The issue of risk was one raised by the IMF in a report released on May 13, following consultations with officials. According to the report, Kuwait's GDP is likely to contract by 1.2% this year, a result of lower oil production and a decline in non-oil growth, a reflection of weak activity in the financial sector in particular.

While saying that the country's financial system, which included the insurance sector, was overall strong and resilient, the IMF did say that, "The oversight of risk management practices should be strengthened by ensuring adequate policies and procedures for identifying, monitoring, and controlling systemic risk in the financial system."

Strong and resilient though most of Kuwait's insurers may be, many expect that the sector could see a shake up in the long term. Looking to the immediate future, Al Hassan said that, with many of the sector's smaller firms suffering losses on both the investment and technical side, some may be considering mergers or acquisitions to strengthen their position, though he said that "it might be difficult to find suitors".

This process of consolidation may be forced on those companies that were not sufficiently capitalised at the time of the crisis, says Nasser Sulaiman Al Omar, the vice-chairman and managing director of Gulf Takaful.

"Most insurers will attempt to maintain their current levels and possibly capture additional market share as other less capitalised companies exit the market," he told OBG, with conventional insurers being more adversely affected by the crisis than Takaful companies.

Increasing numbers of private citizens and companies are seeking to invest in sharia-compliant instruments, with Takaful insurance now estimated to have seized around 20% of the Kuwaiti market, a solid performance since its launch in 2000.

Even with the sector expanding, Takaful firms now outnumber conventional insurance providers in the domestic market, says Tariq M bin Ghaith, the secretary-general of Kuwait's Union of Insurance Companies.

"Many new insurance companies, especially Takaful companies, have started in Kuwait. Out of 19 local insurance companies, 11 are Takaful and the rest are traditional insurance companies," he told an insurance conference in early May, though he added there was the possibility of mergers and takeovers in the future.

Though Kuwait's insurance companies may currently be operating under less than favourable economic conditions, with experts predicting that premium growth and return on investments will be flat for much of the year, there is cause for optimism.

"There is potential for tremendous growth in the region for pension-related products," says Al Hassan. "With the population mix getting younger, they recognise that social security programmes may not be adequate to meet their needs in the future."

With a growing awareness of insurance products, especially those not property related, as well as the increasing take up of Takaful, at least the larger players in Kuwait's insurance sector can look to a future that is solidly underwritten.


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