Business Takaful

Source: The Edge Daily, 2nd June 2008

In order to gain the edge in any business game, a company has two possible sure-hit strategies to consider. It can either become a first-mover in the industry or emerge as the biggest player among its peers.

UAE-based financial services company Dubai Group is not the first to venture into the Islamic reinsurance business but it aims to be among the biggest.

It recently tied up with Malaysian government investment arm Khazanah Nasional and Asia Capital Reinsurance Group Pte Ltd (ACR) to set up the world’s largest retakaful company, ACR ReTakaful Holdings Ltd, with a capital base of US$300 million (RM975 million).

Under the partnership, Dubai Banking Group and Khazanah will hold 40% stake each in the Islamic reinsurance company, while ACR will take the remaining stake.

Industry observers have long held the view that efforts to grow the Islamic insurance business in the region have been hampered by the lack of Islamic reinsurers.

With a reinsurer specialising in Islamic retakaful, Takaful operators can now opt to spread out their risk to Islamic reinsurers. Hence, the strategic tie-up between Dubai Group, Khazanah and ACR fills a void in the industry.

When met recently, Dubai Group executive chairman Soud Ba’alawy said: “We see a huge potential in the retakaful platform, as there are no serious retakaful players in the country currently.”

Being one of the leading foreign investors in the country, it is no surprise that the Dubai Group knows clearly about the opportunities and platforms that it has in the country.

At the moment, there are only two retakaful operators in the country, namely MNRB Retakaful Bhd and Munchener Ruckversicherungs-Gesellchaft (Munich Re Retakaful). Both these reinsurers are more into the reinsuring of risk associated with life and domestic general insurance policies.

ACR ReTakaful would be the only one concentrating on large non-life risks such as aviation, shipping and construction. Further, the tie-up will get help from Dubai Group’s deep pockets, Khazanah’s strong network as well as ACR’s expertise in the reinsurance business.

Soud told The Edge Financial Daily that although Dubai Group was not the first retakaful player in the country, it wanted to be the first to attract key industrial players here for non-life reinsurance schemes.

“We want to serve large-scale businesses in the country and in the region as well, which include companies in the shipping, airline and construction sectors respectively,” he said in an interview recently .

He said there were enough business opportunities at home and in the Asean region, to keep them busy in the near future, without the need to grab a share of the reinsurance pie in other lucrative regions, such as the European Union bloc.

Soud said “We would like to focus on growing our businesses here first as we cannot build our businesses elsewhere if we are not strong here.”

He said the amount of risks that it could take currently was relative to the capital size of US$300 million, which is small in comparison to the resources of industry giants such as Munich-Re, Swiss Reinsurance Company and British insurance market Lloyd’s of London.

“Yes, we are a small baby and we are only at the beginning. But, if you look at these reinsurance companies one hundred years ago, they, too, started as small companies,” Soud said while adding that the capital could be enlarged as the business grew.

Soud said while it was still too early to say how Dubai Group, Khazanah and ACR would execute its strategies in developing the re-takaful businesses, he expressed confidence in their ability to “grow the pie” using unorthodox method.

“It will not be a conventional scheme. We will provide alternative schemes for corporations in reinsuring their business risks,” he added.

Soud said Dubai Group was also eyeing Indonesia, Thailand, Brunei and Singapore for its investment plans and would invest more money in this region, if it could get good partners.

“We view Malaysia as a platform to grow in Southeast Asia, as it is culturally similar to ours and we are also happy with our partnerships with Khazanah and Lembaga Tabung Haji,” he said. (Dubai Banking Group is a significant shareholder in Bank Islam where Tabung Haji is the largest shareholder.)

Soud said the biggest challenge that its retakaful operations faced was getting the right people as expertise in the field was limited. It is learnt that Soud and his team would fly in to Kuala Lumpur regularly to sit at board meetings of companies that Dubai Group has interests in, including Bank Islam.

“At the end of the day, bottom line is very important to us, and we expect a minimum of 15% return on equity on all our investments,” he said.

So far, Dubai Group’s selection has been good, especially in Bank Islam, which registered RM251.29 million net profit after zakat and tax last year. The Dubai Group is expecting the bank’s net profit to increase at least 20% annually for the next five years.

“We would love to own more of Bank Islam if not for the regulatory limit on foreigners’ ownership set by the central bank,” he said, adding that Bank Islam would be Dubai Group’s long-term investment, apart from its retakaful operations tie-up with Khazanah and ACR.

However, being an investment holding company, Dubai Group has exit plans on its other investments in the country, particularly those that are acquired by its subsidiaries.

“Investments that are done by our subsidiaries are more opportunistic in nature. Therefore, we will generally relinquish these investments after three to five years,” Soud said.

Dubai Group’s unit Dubai Investment Group has a 7% and an 11% stake in property developers Bolton Bhd and Guocoland (Malaysia) Bhd respectively, via the latter’s subsidiary Dubai Ventures Ltd.

In April, Dubai Group also acquired a 30% stake in biodiesel company GBD Investment Ltd for US$49.5 million, to help boost output capacity and develop jathropa plantations in the Philippines. GBD also has a 200,000-tonne biodiesel plant in Sabah.

Soud said Dubai Group’s interests in the East, which include Asian markets, were flamed by an increasing capital flow from the West to this part of the world.

Indeed, it is with such forward thinking that Dubai Group can reap much success from its investment strategies. With so many plans intact, Dubai Group looks set to be not only a forerunner in Dubai’s financial industry, but also a trendsetter among its peers for the days ahead.