EARTHQUAKES, floods, hurricanes and typhoons: nature can be cruel, and when it is, the insurance companies foot the bill.
According to figures compiled by Bahrainbased Arab Insurance Group (Arig), the largest insurance company in the Middle East, 1999 was a spectacularly bad year. Nine catastrophes induced losses on the global reinsurance market of more than $1,000 million each, compared to an average of two a year over the previous 12 years. With reinsurance Arig’s core activity, it is unsurprising that the company’s performance was also devastated.
After a disappointing 1998, in which Arig struggled to break even, the bottom fell out of its income statement for 1999, and losses of $98 million were recorded. It reported that global disasters had a net impact of $75.1 million, up from $54.6 million in the previous year, and the claims ratio of Arig Re, its wholly-owned reinsurance subsidiary, rose to 147.8 per cent from 90.9 per cent in 1998.
The tale of woe was underwritten by a share price in freefall, and the apparent inability of Arig’s board to find a suitable candidate willing to take up position as group chief executive officer. As Arig was buffeted by the storms, no hand had been on the tiller since the June 1999 retirement of Abdul Wahhab.
But now there are fewer dark clouds in view. A solid first-quarter performance has been turned in, a new chief executive has his feet under the desk and, perhaps most importantly, mother nature has been more benign.
‘When you’ve worked in insurance for as long as I have, you wait until midnight on 31 December before you start having a view on how the year is going, ‘ says Udo Krueger, Arig’s recently-appointed group chief executive. ‘All the shock last year came in the final few months.’ The quarterly figures published by Arig last year make interesting reading. Profits of $8.1 million for the first half of 1999 were turned into losses of $17 million after nine months, and then collapsed to the full-year loss of $98 million.
‘The losses were weather and natural disaster-related, ‘ says Krueger. ‘The bad sectors for us – and everyone else operating in the reinsurance markets – were marine, aviation and marine energy.’ Remedial action was taken last December, with Arig’s Londonbased subsidiary, Arig Insurance Company, effectively closed down. ‘The London operation contributed $68 million of the group’s losses last year, ‘ says Krueger. ‘No decision has yet been taken over whether the company will start operating again at a later date, but it is unlikely to do so in the near future.’
The decision is, in some ways, a response to the attacks from Arig’s critics that the company expanded too rapidly and without coherent control.
‘We are in the process of carefully pruning our portfolio, ‘ says Krueger. ‘Some of the underwriting that was done in London has migrated to our Bahraini operations, but our overall writing of marine, aviation and marine energy business is being downsized.’
But Arig was not alone in finding 1999 a difficult year. Most reinsurance companies were confronted with heavy claims burdens, massive oversupply and soft rates. ‘We have a weak cycle in the reinsurance sector, but perhaps it might be bottoming out, ‘ says Krueger. ‘The industry is undergoing a process of consolidation and there are signs that the big reinsurance companies are beginning to raise their rates.’ He says the whole concept of risk management is in flux and that corporates are beginning to examine ways of taking a greater proportion of operational risk onto their own books. ‘The process of consolidation has only just started, but it is safe to say that there will always be a role for the regional players, ‘ says Krueger.
‘The issue for Arig is to examine its core competencies and decide which direction it’s going to go in.’
He answers his own question: ‘Reinsurance on a regional level has always been, and will remain, our core competence. It is the dominant pillar of the business. But there is no conflict between this and the development of direct insurance products. Arig has the most advanced systems in the region for product development and distribution.’
The shift towards direct insurance has been clearly evident since Arig’s initial public offering (IPO) in November 1997. It now holds majority stakes in Morocco’s Compagnie Nord-Africaine & Intercontinental d’Assurance (67 per cent), Arab Lebanese Insurance Group (59 per cent), Arab Jordanian Group (59 per cent) and Egypt’s Allied Investors Insurance Group (54 per cent). It also holds a strong minority position in Arab Tunisian Insurance Group (49 per cent).
‘The region is changing and there is a growing inability of governments to provide social security services as they have done in the past, ‘ says Krueger. ‘The onus is increasingly on the individual to take responsibility for life and medical planning. We are looking to meet this demand with new products and lines of business. Direct insurance in the Arab world is still in its infancy but there is very good medium-term potential: populations are growing fast, and buying power within some sectors of society is growing fast too.’ While Morocco, Egypt and Lebanon remain the most attractive markets, others, such as highly-regulated Saudi Arabia, also hold considerable promise.
It is clear that Arig is prepared to be innovative in developing new lines of business.
Its wholly-owned subsidiary, Arig Life & General Insurance Company (ArigCare), in mid-June launched a new internet platform that allows customers to examine its range of life insurance and savings products and receive free quotations. Coinciding with this was the launch of two new products, LifeCare and WealthCare. ‘We are trying to understand the needs of our clients and offer products that they understand and want, ‘ says Krueger.
But there are likely to be limits to how far Arig will develop its direct insurance operations. ‘One possible direction the company could take would be to downsize its holdings in the regional subsidiaries and become a strategic partner, ‘ says Krueger. ‘We could then seek access to other markets using the same strategy.’
Having only taken up office at the start of June, Krueger is quick to stress that a definitive plan of action is yet to be drawn up. ‘We are in the process of looking closely at all our activities, and when we’ve done this we’ll know exactly where we are, and can decide where we should be going, ‘ says Krueger.
Slip-sliding stock Not only will the insurance companies in the Arab world be watching closely, Arig’s longsuffering shareholders will be looking for reasons to keep the faith. Quoted on the stock markets of Bahrain, Kuwait, Oman and Egypt, and with global depositary receipts (GDRs) listed in London, Arig is one of the few truly regional stocks. Since its IPO in late 1997, Arig’s shares have declined almost unchecked. Launched at $1.60 a share, the stock briefly surged to a historic high of $1.88 before unwinding. A plateau was reached last spring at the $0.80-1.00 band when the company announced a share buy-back scheme, but the mounting losses soon saw support kicked away. On 22 June, Arig’s shares closed at $0.57, only $0.01 off an all-time low.
‘At these levels, the shares are not doing justice to the pure asset value of the company, they are about 40 per cent below book value, ‘ says Krueger. ‘In the past, one of the problems has been uncertainty over the company’s strategy. It has not been communicated well to the market, and this is one of the things we’ll have to remedy in the coming months, once our plans have been approved by the board.’
There are some signs that the market is prepared to listen. Securities & Investment Company (Sico), the dominant brokerage on the Bahrain Stock Exchange, has raised its recommendation on Arig’s stock to ‘hold’ from ‘sell’ and there is a growing conviction in the market that while the stock’s downside is limited, there is a potentially strong upside.
‘At the moment, we’re looking at Arig as a long-term recovery play, ‘ says an equity analyst at Sico, which is forecasting losses at the company for at least the next two years. ‘But we could become bullish if a new coherent strategy is developed.’
For the moment, Arig remains vulnerable to the vagaries of a cut-throat global reinsurance sector, and a regional direct insurance market still in its infancy. Of course, it also has to keep one eye on the weather.