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State Insurers Set To Merge
BY AMENA BAKR
If economic sectors were family members, insurance would be the eccentric overweight uncle that nobody talks about. The sector’s byzantine operations, bloated work force and unfathomable balance sheets have stymied privatization attempts for years. Three public sector companies dominate the market: Misr Insurance, Al-Chark Insurance and Al-Ahlia Insurance. Together they hold a 75-percent stake in the domestic market while a fourth large state insurer, Egyptian Reinsurance Company (Egypt Re), specializes in reinsurance.
In late August, investment minister Mahmoud Mohieldin quelled long-running rumors that one of the big four insurers would be put up for sale to a strategic investor. Instead, he announced plans to merge three of the floundering insurers, then offer a stake in the giant company through an initial public offering (IPO) on the stock exchange. “We chose the IPO instead of the strategic investor approach because, financially, we don’t need an injection of capital, and we already have enough Egyptian expertise,” he told the local press.
According to Moawad Hassanein, chairman of Misr Insurance, the plan as it stands is to merge Al-Chark and Egypt Re into Misr Insurance, while Al-Ahlia will remain an independent entity. “The reason we decided to leave Al-Ahlia Insurance out is because we want it to specialize in medical and army insurance, while Al-Chark and Misr already work in the same field. And since Misr was already working as a reinsurance company there is no need for two companies to have duplicate functions,” says Hassanein, who will head the new entity.
With liberalization of the insurance sector in full swing, and 21 private and public insurers now in the market, having three separate state insurance companies is no longer an economically viable situation, says Hassanein. “Over the past few years, these insurance companies were losing between LE 300 and LE 400 million every year and this deficit had to be covered by the government,” he told Business Monthly.
The merger will create one of the five largest insurers in the Middle East and North Africa (MENA) region, with a combined book value of LE 1.9 billion and asset base of LE 18 billion that is expected to grow to LE 45 billion by 2013. “By increasing the company’s capital we will be able to increase the level of operations and this will lead to a better categorization by international rating companies,” Hassanein explains.
The decision to merge followed an 18-month study by local and foreign consultants hired to evaluate the sector. The merger aims at increasing the overall profitability of the merged public companies by reducing the overlap between them. The restructuring, including the aggregation of their extensive real estate and investment portfolios, is expected to take six months with the IPO to follow.
The Nazif government has found itself caught between two conflicting forces. On one side, reformers and international agencies are calling for the privatization and liberalization of the sector; on the other, a large number of Egyptians fear the state is recklessly selling off its most valuable assets to foreign capitalists.
The local press has attacked Mohieldin, accusing him of merging the three state insurers as part of a clandestine plot to sell the new conglomerate to private foreign investors.
Ibrahim dismisses the allegation. “We are not going to privatize [the ownership of] this company. This has never been our intention,” he says. The company will not be sold to or managed by private investors; only a partial stake will be offered through an IPO, he clarified. The government also intends to introduce an employee stock ownership plan.
Hisham Ibrahim, insurance specialist at the Ministry of Investment, points out that this is in full compliance with Egypt’s commitments to the General Agreement on Trade and Services (GATS), which calls for WTO member countries to liberalize their financial, transport, tourism and insurance sectors. “The market is already compliant with the GATS agreement since we are allowing any foreign insurance company to enter Egypt,” he says. “We already have more than a dozen big foreign names in the market and the door is open for many more, so it doesn’t make sense to say that the insurance sector is not liberalized.”
But liberalization has been a slow process, taking almost as long as processing claims, jaded observers joke. The first chinks in the public sector monopoly appeared in 1995 when the government agreed to permit foreign private insurers to enter into joint ventures as part of an agreement with the International Monetary Fund (IMF) to liberalize the sector. Full foreign ownership was permitted three years later, but arcane government regulations restricted the activities of private insurers. For instance, a company could sell life insurance, or property insurance, but not both.
That’s no longer the case. Reforms introduced under the Nazif government have helped create a more level playing field for private firms and are attracting new investment into the sector. Fifteen local and foreign insurance firms, including AIG, Royal & Sun Alliance and CIL offer a full range of products. “The [reforms] have had a great impact on the financial rating given to Egypt by international agencies worldwide, which really started putting Egypt back on the insurance map,” says Bashar Sawas, general manager of Allianz, which holds an 11-percent share in the market.
Sawas appears unfazed by the prospect of a state colossus. He believes, initially at least, its competitiveness will be limited by the challenges of restructuring the overstaffed state companies. “I think the biggest challenge at this point is bringing the human resources of these companies together to have coherent collaboration and communication among them,” he says.
And with leaner, more efficient players in the market, the government’s days as the country’s primary insurer may be numbered. “Experience tells us the private sector is usually more successful at handling insurance than the government and I think eventually this is where most emerging markets are heading,” he says.Hassanein strongly disagrees. “If the private sector’s management was all that good they would have dominated the market by now, but the truth is that our companies still stand above them,” he says.
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