New capital rules to trigger more M&As in Saudi insurance sector: Moody’s

Respondents in a Moody’s survey of the chief financial officers (CFOs) of 12 leading GCC insurance companies expect an uptick in M&A in Saudi Arabia, given the proposed changes to minimum capital levels in the country.

The respondents in the survey also expect to face regulatory capital hurdles if a proposed increase in the minimum capital level to SAR 500 million ($130 million) from the current SAR 100 million is adopted, according to the annual released on Wednesday.

“Our 2019 survey also showed that the proportion CFOs expecting industry consolidation in response to stricter capital requirements has risen to 33 percent from 25 percent in 2018,” Moody’s survey noted.

Other respondents in the survey expect insurers to adapt to the new rules by raising new capital, or by retreating from some market segments. This is in line with Moody’s expectation that the first response of insurers facing pressure from stricter capital regulations will be to strengthen their capital base, or exit certain business lines.

Noting that intense competition is the main concern for insurers in the GCC, the report said, “The proportion of CFOs declaring themselves open to M&A as buyers almost doubled to 33 percent, up from 17 percent last year.”

“M&A in the GCC insurance sector has historically been rare, as larger insurers have been unwilling to expose themselves to weaker balance sheets, while the boards of targeted insurers have been unwilling to cede control,” Moody’s survey said.

“We believe some consolidation may still occur, given the pressure of regulatory compliance on smaller insurers, and in view of renewed investor interest in the sector following recent profitability improvements,” it added.