Management Reports: 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001

Our results | Our core companies | A sign of things to come | Another first | Our reputation | Hosting an honoured guest | Our people | Looking ahead

Dear shareholder,
The influential economist, John Maynard Keynes, once said that successful investing is about anticipating the anticipations of others. These words describe KIPCO’s business strategy succinctly, because over the last twenty years, your company has become very successful at looking beyond the obvious and taking bold investment decisions to create companies with great potential.

This is never an easy or risk-free process, but it is always satisfying to stand back and gauge how successful our strategy has been. 2010 was a year when our investment strategy was proven once again and we are confident that this will be the case for many years to come.

Our results
At the beginning of last year, we expected our annual profits to increase between seven and ten percent. Despite the difficult economic climate, we are happy to report that we exceeded this target by delivering a profit of KD 45 million (US$ 160.4 million) for 2010 – a 22% rise over the year. As a result, subject to approval by our General Assembly, we are intending to pay shareholders a dividend of 20 fils (20%) per share and a 5% stock dividend for 2010.

Our core companies
During 2010, our core operating companies continued to deal with difficult conditions within their respective markets. However, each company delivered a respectable performance for the year. Gulf Insurance Company’s (GIC) profit was up 52.3% to KD 7.7 million (US$27.5 million) and United Gulf Bank’s (UGB) profit was up 93.1% to KD 11.2 million (US$38.7 million).

Although Burgan Bank’s year-one year profit decreased 25% to KD 4.7 million (US$ 16.8 million), the bank had an excellent final quarter in 2010. If this trend continues into 2011, we can expect a much better performance from Burgan during the next 12 months. A major factor in Burgan’s fall in profit was the KD 71.7 million (US$ 255.5 million) in general and specific provisions it made during the year. At an operational level, in 2010 Burgan completed the first stage of its regional expansion strategy with the purchase of Tunis International Bank (TIB) from UGB.

UGB also had a satisfactory 2010. Basic earnings per share increased 91% during the year and total income before interest and expenses was up 31% to KD 47.3 million (US$ 163.3 million). With the sale of TIB to Burgan Bank, UGB has now completed its initial consolidation phase and we believe that the bank is now poised to develop its position as a leading regional merchant bank.

At GIC, 2010 was another year of expansion, as the company made major increases in its holdings of regional insurance companies. GIC increased its share of the Arab Orient Insurance Company in Jordan from 55% to 88.7% and its share of the Bahrain Kuwait Insurance Company from 51.2% to 56.1%. In the year, GIC’s subsidiary – the Gulf Life Insurance Company - also took a new 42.5% stake in the Egyptian Life Takaful Insurance Company in Egypt.

During 2010, the Orbit Showtime Network (OSN) introduced a range of new measures to improve its business and enhance customer experience. Most critically, the company introduced a new decoder system that is almost immune to piracy. By taking this measure to cut illegal viewing, the company hopes to materially increase revenues. The new system was supplied to all existing customers free of charge and the replacement programme was completed throughout the region in record time. Customer feedback on the new system has been very positive.

Another example of our growing geographical reach was a deal completed at the end of the year by the North Africa Holding Company– a member of the KIPCO Group that focuses on in the identification of investment opportunities across North Africa. The company acquired a majority stake in one of Egypt’s leading pharmaceutical distributors and healthcare product manufacturers. As one of the region’s fastest growing economies with enormous growth potential, Egypt is a key target market for many of our companies and this latest deal extends our presence there.

A sign of things to come
A major highlight of the year was our agreement to sell a portion of GIC to Fairfax Financial Holdings - a major Canadian insurance and reinsurance group that has been very successful in building market share in emerging markets such as India, China and Brazil. In our initial discussions with Fairfax, we discovered our organizations share a common vision, ambition and management culture. This made them an ideal partner in the development of GIC and we are very excited about the prospects that lie ahead. Our KD 60 million (US$ 209 million) cash deal – which gives KIPCO a 43% and Fairfax a 41% share in GIC – will allow us to use Fairfax’s international insurance and reinsurance expertise, management skills and technology infrastructure experience to develop GIC’s business at a much faster pace.

We believe the Fairfax deal is a sign of things to come because our region is becoming increasingly attractive to global investors who recognize the enormous potential of our young and growing population, extensive natural resources and largely untapped markets.

The regional insurance market is a very good example of this potential because personal and commercial insurance levels are far lower here than in Europe, parts of Asia and North America. This is due perhaps to the culture and tradition of our region which, until now, has inhibited people from insuring themselves, their property and their future income. However, this situation is changing rapidly as more people recognize the benefits of insurance and seek the type of financial products that give them peace of mind. Our partnership with Fairfax is expected to improve GIC’s product offering and management and deliver to our customers the type of products they’re looking for. As the region moves to levels of insurance seen elsewhere in the world, we expect GIC to develop its position as the region’s leading insurance company.

We also believe the agreement with Fairfax is significant for another very important reason. The deal clearly shows that KIPCO is the ‘partner of choice’ for companies in other sectors who wish to explore the opportunities in this region in the same way as Fairfax has done. Your company has been built on solid financial foundations with broad experience across a range of high growth sectors. This makes KIPCO a very attractive proposition for companies outside our region who wish to share in the growth potential that exists here. We believe our business strategy of partnering with world-class companies is only just beginning to deliver the results we think are possible.

Another first
In July, we successfully completed a ten-year US$500 million (KD 140.3 million) bond - the latest issue under our US$2 billion Euro Medium Term Note (EMTN) Programme.

The issue produced another set of firsts for KIPCO: it was the first international bond issue by a private sector corporate from the MENA region in 2010, the first ten-year deal from the GCC and the first US dollar offering from a Kuwaiti institution since 2009. The issue was 3.6 times oversubscribed with the order-book closing at US$1.8 billion. We were delighted with this response from international investors, not least because we were able to access ten year funding at a similar cost to our previous seven-year offering. The issue confirmed our leadership role among private sector corporates in the MENA region and our ability to consistently access the international debt capital market. The issue also continued our strategy of diversifying our investor base and allowed us to refinance our debt maturing this year, thereby extending our credit curve to 2020. As an added bonus, in October, the bond issue was announced as the winner of the 2010 Middle East Deals of the Year Awards organized by the Middle East Association of Corporate Treasurers.

Our reputation
Another measure of our reputation among global investors was the report released during the year by Standard Chartered Bank, which highlighted KIPCO’s transparency, low leverage and good liquidity. In its report, Standard Chartered said ‘KIPCO…has been reorganizing its structure over the last two years, which has entailed transfers of assets across subsidiaries. However, its disclosure and transparency are head and shoulders above those of other companies in the region.’ The report went on to say that ‘Kuwait’s investment companies have experienced significant turmoil over the last two years, including a number of defaults. KIPCO has successfully navigated this difficult period.’ As the first corporate in Kuwait to be the subject of credit research by Standard Chartered, we believe the report is recognition that our strategy of financial prudence, strong management and investor transparency is understood and supported by the world’s financial community. We take our role as the region’s premier holding company very seriously and will maintain international best practice by continuing our dialogue with investors, partners and shareholders.

Hosting an honoured guest
In October, KIPCO co-hosted a visit to our region by the 43rd President of the United States of America, George W. Bush. During his trip, the former President spoke at a series of private dinner and lunch events organized by KIPCO Group companies in Abu Dhabi, Kuwait and Jordan. The former President was a guest of KIPCO, Royal Capital, Jordan Kuwait Bank and our new partner, Fairfax Financial Holdings. During his visit to Kuwait, President Bush addressed an audience of over 200 guests including state dignitaries and representatives of Kuwait’s business, diplomatic and media communities.

Our people
During the year, we announced two senior appointments to KIPCO’s management team. Mr Masaud Hayat was appointed as Chief Executive Officer, Banking and Mr Tariq Abdulsalam became Chief Executive Officer, Investments. In his new role, Mr Hayat will bring many years of knowledge, experience and expertise to help develop our strategy for expanding our presence in the regional financial services sector. In the year, Mr Hayat was also elected Chairman of UGB. As UGB’s Managing Director from 1997 to 2009 and a Director of the bank since 1990, we believe Mr Hayat brings a unique perspective to UGB’s plans to develop its position as the region’s premier asset management and investment banking company. Mr Abdulsalam first joined KIPCO in 1992 and was Head of our Investment Division from 1996 to 1999. He then became the General Manager of KAMCO before joining the United Real Estate Company as CEO. He was also Chairman of Burgan Bank for three years. This experience will allow Mr Abdulsalam to drive our long-term investment strategy and to exploit opportunities within our business operations.

Looking ahead
The management and staff of our operating companies reacted to last year’s economic climate with the commitment, hard work and dedication we have come to expect. I would like to take this opportunity to thank all our employees, in all our companies, for the efforts they made in 2010 and will make in 2011.

As we look ahead to 2011, we foresee another year of difficult financial conditions which call for the same vigilance and discipline that have served us so well over the last four years. Although there are signs of slow recovery in some of our markets, it is perhaps too early to say that the worst of the financial crisis has now past. However, we look forward to 2011 with renewed confidence and a cautious belief that the local, regional and global economies are now gaining some momentum. For Kuwait, we hope that the government’s development plan will soon take effect and that this will provide the stimulus we all wish for.

But we must be realistic. Our future must not depend on plans made by others that may or may not happen; our future has always been, and must remain, in our own hands. Only by anticipating the anticipations of others, as Keynes said, will KIPCO forge its future. When we look back on the last twenty years, we have come a very long way. Our goal for the next twenty years remains the same: make our future bright by looking ahead and taking the right decisions at the right time.

Faisal Al Ayyar
Vice Chairman