A quarter of a century has been kind to Middle Eastern insurer Arig. Nick Thorpe looks at its recent foray into the takaful reinsurance market.

2005 was a tough financial year for the reinsurance industry to ride out. A devastating hurricane season - Hurricanes Katrina, Rita and Wilma in particular - rendered exceptional losses throughout the industry and saw several established companies, including Rosemont Re and Alea, enter run-off. But on the whole the industry managed to absorb the losses and there were even some success stories. One of these was the Arab Insurance Group (Arig), which not only experienced a 32% growth in reinsurance premiums but also launched a new Islamic reinsurance company, Takaful Re, in partnership with a number of established financial institutions.

The company's 25th anniversary saw Arig reporting a record net profit of $48.2m, an 82% increase on 2004's $26.5m. The profit for 2005 represented a 19.5% return on average shareholders' equity, which increased to $272.4m from $223.1m in 2004. These results were supported by underwriting profits from core reinsurance operations of $7.8m, up $1.6m on the previous year.

The 2005 results also included capital gains and operating profit of $28.9m from the sale of CNIA Assurance which completed the company's divestment from direct insurance subsidiaries. "This sale enables Arig to focus on core reinsurance and related activities," commented Udo Krueger, Arig's outgoing CEO at the time (Arig confirmed in early 2006 that Krueger, CEO of six years with the company, would be replaced by Yassir Albaharna, at the time general manager of reinsurance, as of 1 April 2006).

25 years young

This recent performance continues a positive trend of results for the company. Arig is one of the largest Arab-owned reinsurance organisations in the Middle East and North Africa. The organisation is a Bahraini shareholding company that was incorporated in 1980 by the governments of the United Arab Emirates, Kuwait and Libya. In 1997, the founding shareholders restructured its capital and diversified the ownership structure of the group by issuing further shares. This exercise was repeated in 2002 and again in 2004, and today Arig is jointly owned by around 6,000 private and institutional investors. Standard & Poor's has assigned Arig its "BBB" long-term counterparty credit and insurer financial strength rating with a stable outlook.

Arig's gross premiums from its reinsurance business in 2005 increased to $173.7m from $131.3m in 2004. This growth was mainly driven by the treaty business which contributed $145m, up from $108.1m in 2004. Premiums from the Asian markets increased substantially by 49% from $34.9m in 2004 to $52m in 2005. Evidence of the company's confidence in this market was supported by the announcement at the end of 2005 that an Arig office would be opened in Singapore. The branch, licensed by the Monetary Authority of Singapore, is concentrating on establishing a regional presence in the Far East and will be active throughout the region. "We are convinced that as a consequence of the significant growth potential in these markets the level of international reinsurance support can and should be enhanced further," said Krueger.

Core reinsurance operations registered another successful year with the general insurance business recording an underwriting profit of $6.9m, up from $5.8m in 2004. Gross premiums increased in all lines, with non-life lines performing particularly well. Property, the company's largest business area, recorded a rise of $4.2m to $62.8m while accident saw a leap from $18m in 2004 to $29.1m. The life insurance business remained fairly steady, showing minimal growth in premiums and an underwriting profit of just $0.9m. Khalid Ali Al Bustani, Arig's chairman, revealed that underwriting profits as a whole were depressed "by the incidence of several large claims during the year" which increased the claims loss ratio to 69.4% from 64.2% the previous year. Despite this, the company managed to improve its combined ratio to 105.5% from 106% in 2004.

So far in 2006 Arig has recorded a strong set of Q2 results, registering a net profit increase of 34% to $8.6m from $6.4m in 2005. As part of its aim to maintain underwriting discipline in a soft market environment, gross premium writings were scaled down with several non-profitable treaty accounts not being renewed. Despite this, gross premiums were up slightly on the previous year to $107.5m. The company attributed this to strong growth in its facultative premiums and the successful start of operations in Singapore, which alone led to premiums from the ASEAN region growing by 46%. Yassir Albaharna was understandably upbeat about the company's performance. "We continue our focus on underwriting discipline and the profitable growth of our core reinsurance business which assumes critical importance, especially in soft market conditions," he said.

A new dawn

As part of its drive to focus more on reinsurance, Arig teamed up with several major regional financial institutions, including the Islamic Development Bank, the Dubai Investments and the Qatar Islamic Insurance Company, to establish Takaful Re in September 2005. The fully Shari'ah compliant reinsurance company was established with an authorised capital of $500m and a paid up capital of $125m, with the express intention of attracting lead business early on and with a view of securing a strong financial strength rating. S&P recently assigned Takaful Re its first rating, "BBB" with a stable outlook. The company was expected initially to draw heavily on its sister company's established resources. "Retakaful is a specialised venture and it is extremely challenging for any start-up company to secure the necessary competencies, resources and critical business size within a short time span," said Kruegar. "Takaful Re will however have the advantage of being able to use Arig's existing infrastructure and its well-established business relationships, whenever needed."

Takaful Re is run in such a way as to consistently ensure its products and services are in accordance with the principles of the Holy Quran and Sunnah, as recommended by its Shari'ah supervisory board. Indeed, its investment policy also follows a Shari'ah compliant process. "Takaful Re, being a retakaful company, purely invests in Shari'ah compliant instruments," confirms Chakib Abouzaid, CEO of Takaful Re. "We are dealing only with the Islamic institutions and/or in Shari'ah compliant products."

Takaful Re bases all of its contracts on the Al-Wakala model (managing the portfolio of takaful operators and Islamic insurance companies for a pre-agreed fee) and all investment operations are governed by Al-Mudaraba principles (pre-agreed ratio for profit and loss sharing). The company operates in a variety of business lines, including general retakaful (property, marine & liability, onshore energy and engineering), marine and life retakaful. Under the Al-Wakala model, the company meets the requirements of takaful and Islamic insurance companies for facultative and treaty business.

Gap in the market

The lack of retakaful capacity prompted the formation of Takaful Re and indeed the Shari'ah-compliant sector has seen tremendous growth in the last two years. In 2006 alone there was the formation of the first licensed retakaful company in Kuwait, Al Fajer Retakaful Insurance Company, in July and in September Malaysia approved retakaful licenses for Munich Re and MNRB. AIG and Converium have also both announced plans to offer retakaful solutions. And the future is looking rosy. A Moody's report released in October forecasts a 300% growth in the takaful market in the next ten years, from $2bn in 2005 to $7bn in 2015. Abouzaid is proud of the company's achievements in this growing market and is confident that Takaful Re's early launch will give it a "first mover advantage" as this business grows.

Takaful Re has been careful in its expansion policy. With 95% of the world's takaful companies situated in the Middle East, North Africa and South Asia (including Malaysia, Indonesia and Brunei) the company is focusing on establishing its business in these areas. The fact that it mainly writes life business and avoids some of the more volatile lines such as aviation and offshore energy, means the company is well poised for future expansion. But Abouzaid is particularly excited about the opportunities presented by the Middle East region, and particularly the countries of the Gulf Cooperation Council (GCC). "Because of the oil price increase and the surplus generated by it, the GCC economies are booming," he enthuses. "There is now rational investment and infrastructure development strategy." Abouzaid sees the current boom period as producing some significant developments, including an increase in the number of takaful operators and increase in demand for Shari'ah-compliant products, both of which spell further growth for Takaful Re. "These developments will naturally increase the potential insurance market premium and positively impact the market for takaful and retakaful business."

- Nick Thorpe is senior reporter of Global Reinsurance.

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ARIG - WHAT IS TAKAFUL REINSURANCE?

Takaful is an Islamic insurance concept which observes the rules and regulations of Islamic law and has been practised in various forms for over 1,400 years. It originates from the Arabic word "kafalah" which essentially means "guaranteeing each other" and theoretically takaful is cooperative insurance. Members contribute a certain sum of money to a common pool, with the purpose being cooperation amongst all policyholders for the common good. Any losses are divided and the liabilities spread across the community pooling system. Those following the most popular form of takaful reinsurance, the Mudharabah model, agree in the initial contract that any profits made will be paid according to a pre-agreed ratio.

ARIG - TAKAFUL RE CEO - CHAKIB ABOUZAID

Chakib Abouzaid has been chief executive officer of Takaful Re since its establishment in October 2005. Abouzaid became a treaty underwriter in 1991 and in 2000 he joined North African reinsurer BEST Re as Middle East and Gulf general manager, remaining there until 2005. Abouzaid has also taught reinsurance pricing to masters students at the Insurance Institute at Saint Joseph University in Beirut, Lebanon.