The sale of Al Ittihad al-Watani Insurance evolved over several years and was rumored in the Lebanese market to involve a number of valuation issues before culminating in an acquisition by NASCO Insurance Group. NASCO, whose founding purpose was brokerage activity and whose main focus is insurance broking, pursued the deal on the grounds that underwriting is becoming more and more heavily regulated and capital intensive.

Not all that much was publicly known about the negotiations for the sale of Al Ittihad before NASCO came to the table. According to a document issued in August 2015, Colina Holding, a Mauritius-based subsidiary of Morocco’s Saham Holding – which controlled 81 percent of Lebanon-based LIA Insurance in 2012 – was seeking a $30 million loan from Saham under the rules of the Mauritian stock exchange. The loan’s intended use was for the purchase of the 94 percent stake in Al Ittihad recently taken over by NASCO.

This fits with the fact that talk about the negotiations between NASCO and Al Ittihad was present in the Lebanese market for several years. According to Marc Abi Aad, the Beirut-based manager of group corporate development at NASCO Insurance Group, the process of due diligence was lengthy, but this was because of the complexity of the transaction rather than other factors. He said the duration of negotiations was not caused by diverging views on the purchase price, which he declared to have been fair to all parties, but the amount of which he was not authorized to disclose to Executive. “The due diligence was a complex process of analyzing the company; it was purely a technical challenge. The amount of data that we needed to process and the amount of preparatory work that needed to take place took a long time,” Abi Aad said.

The reason why the group stayed with the process is clear from the numbers related to Al Ittihad’s operations in Dubai and the United Arab Emirates. NASCO’s insurance broking operation made close to $500 million in transactions globally in 2016. In the UAE it acted as an agent for two local insurance companies, Abu Dhabi-based Al Wathba National Insurance Company (AWNIC) and Emirates Insurance Company (EIC). NASCO wrote about $45 million last year in business as agents of the two insurers.

Eyeing the Emirati market

In the UAE, NASCO has achieved good annual rates of growth over the past few years – as have NASCO units in most GCC countries and certain other markets – but it could not address the local market directly or obtain a new license due to restrictive licensing practices in the Emirates. Al Ittihad’s UAE operation showed impressive annual growth in its underwriting and, according to Abi Aad, grew from $33.7 million in premiums to $43.8 million in five years.

This has very positive implications for the group’s market position after the acquisition. “The immediate potential we have for Al Ittihad by injecting the NASCO portfolio would propel the insurer to rank between 15th and 16th position in the UAE market, by doubling its premium volume to $88 million. This process will start in 2017, and it will be expected to reach full integration in 2018,” said Abi Aad.

He further explained that besides a boost of about 10 places in its market position compared with listed UAE insurers, the acquisition will open the door to synergies, because NASCO has a regional platform as a broker and underwriter through Beirut-based Bankers Insurance. He confirmed that “having Al Ittihad on board will definitely open new opportunities for NASCO,” adding that the portfolio of Al Ittihad will benefit from access to NASCO’s regional platform for inter-company business referrals. “The volume of referrals within the group is high and picking up [further],” he noted.

In all this, NASCO does not harbor an expectation to lasso the moon above Dubai or Abu Dhabi. “We know our place as underwriters and will not compete even for a position in the top-ten insurance companies in the UAE market, but we want to exploit the consolidation potential between our portfolio and the Al Ittihad portfolio to the maximum,” he said, adding that the acquisition would probably translate into a sustained or accelerated growth rate for the resulting entity. “At this stage, it is hard to quantify [the growth going forward], but it is going to accelerate. Double-digit growth is achievable, and I would say more than 10 percent [growth per annum] is plausible,” he opined.

No favorites

However, the contrast between the upbeat expectations for NASCO’s newly consolidated UAE operation and the outlook for Al Ittihad in the Lebanese market could hardly be more pronounced. “For us, it does not make sense to have two insurance companies that are competing in the same market with redundant costs in both companies. We have already stopped production at Al Ittihad Lebanon and unfortunately we have had to dismiss most of the workforce,” Abi Aad admitted.

In recent years, the portfolio of Al Ittihad in Lebanon has weakened considerably – also because of inquietude in the market over the potential sale of the company – shrinking  to less than $6 million; a level, which Abi Aad said, did not justify keeping the operation running. However, he noted that of the remaining workforce of Al Ittihad – the company had already gone through two rounds of severances from employees he said – “some employees will be invited to fill positions within NASCO.”

As to the fate of the portfolio, he did not see it being automatically merged into the portfolio of Bankers Insurance. “It would be unfair and unjustified to give producers of Al Ittihad portfolios preferential treatment, and [take them] directly into Bankers. Of course, we are open to negotiations if any producer of Al Ittihad wants to roll over their portfolio to Bankers, but [this producer or broker] will have to abide by standards that Bankers has in place.”

Here the story appears to return to the UAE. “Bankers is the leading underwriter for NASCO Insurance Group and has developed a set of best practices over the years since 1972, which translated into Bankers being consistently ranked among the top three companies of [non-life insurance] in the Lebanese market. All these best practices are going to benefit Al Ittihad UAE, such as enterprise management and enterprise risk management frameworks, internal audit [skills] etc.,” Abi Aad said.

Despite the consolidation, a wholesale merger is not imminent. “For the coming two years, NASCO is planning to keep Bankers and Al Ittihad separate. During these two years, there is a long checklist that needs to be executed before the group can take any decision on how to eventually merge the two entities. Right now, a merger is not on the table, but in the future, anything can happen.”

As the tide of transformation in the insurance industry makes its way across geographies and business lines, it not only floods the field’s core players with uncertainty, but it also affects business models in auxiliary ventures affiliated with insurance. One important auxiliary area consists of enterprises that engage in the management of medical insurance claims. Called third-party administrators or TPAs, enterprises in this specialty services industry bundle the handling of medical claims for a variety of payers – insurers, mutual healthcare mutual schemes and self-insured organizations or corporations.

The TPA business model historically has added value to insurance by providing a layer of efficiency through managerial skills and bargaining power vis-à-vis healthcare providers due to the economies of scale involved. While many insurers locally and regionally might run their medical claims department under the title of TPA, the role of genuine “third-party” organization that is independently serving numerous payers has for more than two decades most strongly associated in Lebanon with the TPA GlobeMed (formerly MedNet).

However, what was a strident growth business in the 1990s and early 2000s (GlobeMed celebrated its 25th anniversary in Beirut in May 2016) currently faces pressures that require serious innovation, concedes Walid Hallassou, the general manager of GlobeMed Lebanon. “The medical insurance business is becoming less of an insurance story and more of a management one. We realized that opportunities in terms of healthy growth in the portfolio through new insurance companies or self-funded schemes were not very visible,” he tells Executive.

As he describes the situation, tidal pressures and crosswinds buffer the TPA business model from different directions. One factor is medical inflation through new medicines and improved treatment methods. Like inflation, which has become understood as a good thing for the economy when it occurs in moderation, the rate of innovation in medical treatments is on the whole regarded as beneficial to the patient. However, it is also associated with increases in costs for patients and their coverage providers. In any case, this rise in costs cannot be stopped and a TPA’s capability to mitigate impacts of medical innovation through control of treatments and hospital admission procedures is limited.

Also completely outside of the control of a TPA is the boost factor in medical treatment costs that is related to changing demographics. Populations in the Middle East are ageing, and the shift of countries characterized by high populations under 30 to societies with growing populations over 60 is, well, only a matter of time. Whether their needs are for treatments or long-term caregiving, older populations have higher medical requirements that are also associated with higher costs. With these two driving elements, medical inflation has become a fact of life for TPAs.   

On the other side of this equation, however, stand restraints on their ability to pass on higher costs to the insured population through increased premiums. As TPA clients, commercial insurers face a trade-off where higher medical insurance premiums translate into lower numbers of an insured clientele. Under either scenario of stable premiums and contracting margins, or of higher premiums and shrinking client numbers, the potential for organic business growth from managing medical claims appears to be much lower than in the past.

Talking and walking wellness

In response to these realities, GlobeMed has developed a strategy of encouraging and assisting people to stay healthy, Hallassou tells Executive. He explains that the TPA can only avert having to pay hospital bills for its insurance clients by promoting health and wellness among its healthy clients and by providing disease management to clients with known ailments or vulnerabilities tokeep them out of hospital as much as possible.

“We told ourselves that it is better if we can stop people from being admitted to hospital. [The idea is] to tell them them, ‘stay healthy, go see your doctor and do the tests, [and] prevent your diseases. Let us manage you outside the hospital.’ There are so many ways for health to be managed. This is where we try to push, and we have developed wellness programs, prevention programs and disease management programs,” Hallassou says.

A first practice under the new strategy was initiated in 2016 with a disease management program for diabetes sufferers. The program includes encouraging patients to take tests such as HbA1c, which shows long-term average blood sugar levels – and making insurance providers accept to pay for these tests. The economic rationale for offering the test to the insured is based on global evidence, which indicates that lowering HbA1c average blood sugar levels by one percentage point can exponentially lower the number of complications that require hospitalizations, or emergency room admissions.

According to Hallassou, patients in the pilot program for managing diabetes with assistance from GlobeMed have now received alerts for their health exams for almost a year. “We call them and send them an SMS that it is time for their test, we help them get the results, and we recommend action. All of this is going in the direction of improving the health of the population,” Hallassou says.

While it is still too early to assess the financial benefits of reducing treatment needs under the campaign, there has been a reduction of 10 and 12 percent in in-patient admissions and emergency room visits in a test population during 2016 under the GlobeMed diabetes disease management program, according to affiliated wellness partner GoodCare Clinics.

In further development of disease management programs, the TPA plans to roll out to assist in disease management of cardiovascular and pulmonary sufferers. Other measures under the health-focused strategy are to promote wellness and preventive activities to insured populations. As a digital tool for these measures, GlobeMed intends to release a mobile application in the near future, which Hallassou describes as “a wellness app” and “not an insurance app.”

Functionalities will include established ones like counting steps and calories burnt by walking, but the app will also contain country-specific databases of available foods, allowing users in Lebanon, Saudi Arabia or Egypt to enter information about the food they are about to consume and receive information on what eating this food means in terms of intake of calories, sugar, fat or the health-boosting mineral potassium. Hallassou says that the app will enable GlobeMed to alert people if they eat something they shouldn’t indulge in for the sake of their health. It can also give reminders on when to take medications, alerts of interactions between medicines, store medical records and test results and – having an insurance related function after all – support and track insurance applications and reimbursements.   

The new app also fits into an industry scenario, whereby digital technology and consolidation in insurance represent further crosswinds in the path of GlobeMed and the TPA model. On the digital front, the environment in which TPAs operate is changing because newfangled apps and digital gadgets lead to customer behavior modifications and changed expectations in the companies that take care of insured populations, with an overall increase in the importance of digital tools and country-specific systems that an insurer can operate online.

Consolidation challenges

As to the other crosswind, consolidation in the regional insurance industry is a necessity but also mixed blessing for the TPA business. Today, the Middle East houses a large number of insurance providers, over 100 of which have contracts with GlobeMed to use the TPA. These are all small companies by international comparison, and they are not capable of managing their claims in-house, hiring an actuary or having a digital transformation, explains Ziad Kharma, GlobeMed group’s vice-president for business development, actuarial and international health services.

Consolidation with a field of so many players is necessary and desirable, he tells Executive, but it also means that the needs of health insurance providers will change. “We recognize that these companies are going to get bigger, and a lot of them are already getting larger, to the point where they won’t need a TPA anymore. This is why our strategy is not just to have a TPA franchise, as we do, but to add a vendor line where we sell our system so that insurance companies, for example, can manage their own,” Kharma says.

While he acknowledges that software systems designed for the administration of health management processes and medical insurance claims handling are available from many large international software firms, he emphasizes that GlobeMed has developed its own systems over the past 25 years and that these systems are customized and localized for their markets. “We have developed our system from our experience as a TPA, and this is something that we are packaging and selling now as a solution on its own,” he says.

The logic behind this pivot from being a TPA into offering systems is to capture the potential for doing business with insurance companies, which grow to a scale where they have enough clout in price negotiations with health providers and can reap the profits of effective medical claims management through their own claims department. “When insurers are getting bigger, they are not in need of a TPA, they need a system, and this system will include digital platforms to manage healthcare,” Kharma explains. According to him, GlobeMed is venturing into the provision of systems with a multipronged approach. We have the option of on-premises setup and offer business process outsourcing; we are very flexible,” he says. 

Noteworthy in regards to the group’s corporate structure is that the GlobeMed brand is not operated by a monolithic company, but by a twin set or corporations consisting of GlobeMed Limited – a company registered in the British Virgin Islands – and of local entities in different countries. “GlobeMed Limited is the holding and the owner of the IT and the know-how and brand,” explains Hallassou. “Our model is a franchise model, so each of our operations is a franchise, and we transfer to them our know-how – how to manage a claim, how to do underwriting, how to set up a network,” adds Kharma, who notes that GlobeMed Ltd could engage in a country franchise without holding any equity.

In most countries, the two entities are akin to fraternal corporate twins that share a brand identity but have genetic (ownership) differences from each other. In some jurisdictions, GlobeMed Limited participates with as little as 5 percent in the equity in the local franchisee that operates the TPA, and in some, such as Syria, GlobeMed Ltd. holds all the equity. In Lebanon, the two companies are more like identical corporate twins under shareholding structures, where the same basic investors own GlobeMed Lebanon through a company called Murex Holding and the BVI company, GlobeMed Ltd.    

Rising competition

An adverse force in the company’s path, for GlobeMed unavoidable – and in business terms not unusual but rather expected – is rising competition. Whereas the Lebanese company once could claim undisputedly to be the largest TPA in the Middle East, it has in recent years been challenged in regional market leadership by Dubai-based NEXtCare. This TPA, whose corporate parent is the multinational insurance carrier Allianz of Germany, claimed last month on its website to have 3 million “managed lives,” meaning individuals with medical covers provided by commercial insurers, corporates, and public sector entities that are handled through the company. NEXtCare, moreover, said on its website that it had a provider network in 14 countries with a total of 11,000 practitioners, clinics and hospitals around the region.

Kharma claims that the regional presence of NEXtCare is not as wide as GlobeMed’s but admits that “NEXtCare is the primary competitor for us, and I think we both drive each other to stay ahead of the other.” Judging from other information available from the corporate website and sources in insurance companies, NEXtCare is strongest in Dubai. It is pursuing growth in regional expansion, which took it to establish offices in other GCC countries, the Levant, and recently Egypt. According to sources, the company will be a sponsor of an insurance conference in Lebanon next month, and it is reputed to employ competition on price in its growth strategy.

Unfortunately, however, NEXtCare declined to be interviewed on journalistic terms by Executive last month or respond to a list of questions after having requested this list from the magazine through its public relations company. After being contacted by Executive, the “key numbers” information on the NEXtCare corporate website was revised to say the company has over 4 million managed lives and a partner network of over 13,000 providers in 12 countries. Not having been able to interview a decision-maker in the company, Executive cannot confirm if these were 2016 NEXtCare numbers, report on the company’s current strategies or compare its corporate structure and position in GCC or Levant markets with that of GlobeMed.

According to Kharma, GlobeMed has more than 1,200 employees regionally, works with over 100 payers, has over 17,000 health providers under contract, and serves between 4 and 5 million people – when one includes those who obtain services through the Ministry of Public Health in Lebanon. In conclusion, it may be a moot question which TPA is currently the size leader in the Middle East in terms of managed lives and network. As only a small portion of the regional population is covered by any managed healthcare scheme, it seems clear that the need for evolving the administration of health and medical services to more inclusivity is greater than the potential for commercial providers to do so profitably.

There is no shortage of challenges present or overdue reforms absent in the insurance sector in Lebanon. The backlog of unsolved issues begins with the need to renew the insurance law that was adopted about the time the Chevrolet Camaro was a new automotive design. It has – albeit once facelifted in the 1990s – stayed in power since. Problems do not end there, of course, stretching to absent corporate governance and transparency in sector companies, to underperformance of insurers as institutional investors in the context of Lebanon’s largely dysfunctional capital markets. The legal framework lacks provisions for the proper supervision of mutual societies, for support of life insurance as savings instrument for the masses, and for regulation of distribution channels (such as bancassurance) that were innovative some 30 years ago. The industry faces a future that will be bubbling with new realities, new risks and new distribution channels, but it is still stuck in the past in terms of capital structures and requirements and corporate cultures in many organizations, and  is crowded with inefficient actors.

The insufficiencies of the Lebanese insurance industry cannot be blamed on anyone in particular. As with so many other things in this country, they have resulted from conflicting historic trajectories where the ingenuity of local minds clashed with encrusted structures in politics and society. Even if it were possible to point an accusatory finger at one group of persons or institutions, it would do nothing to solve any problems. The question again coming to the fore is: can consolidation transform the insurance industry?

Observers and insiders of Lebanese insurance have, during the past 20 years, said time and again that the market has too many insurance companies and would benefit from cutting that number down by about half: from 50 to 60 existing insurers to 20 or 30 players. The latest idea, which has been discussed in insurance industry circles and by the regulator, the Insurance Control Commission, is to convince the central bank of Lebanon to provide soft loans as incentives for mergers and acquisitions.

Posing the question about the value of financial merger incentives to a number of industry members put the issue into perspective. No insurance manager told Executive that a push for mergers would be detrimental or that provision of soft loans would be anything but good. However, sector members pointed out a wide range of priorities and factors that would feature more prominently than financial incentives in any M&A. And while the recently finalized acquisition of Lebanese insurance company Al Ittihad al-Watani might stoke new interest in the consolidation topic, it hardly seems able to serve as a model for successful consolidation among local insurers.

Acquirer NASCO Holding initiated the negotiations for the takeover of Al Ittihad, but not under a rationale of promoting synergies between its Bankers Insurance and Al Ittihad in the Lebanese market. Instead, the move was driven by the potential that NASCO saw for boosting business in the United Arab Emirates, confirms Marc Abi Aad, manager for group corporate development at NASCO. “The acquisition of Al Ittihad al-Watani in Lebanon, which has a branch in the UAE, will enable us to consolidate NASCO’s existing book of business in the UAE at the level of this new vehicle. Instead of fronting it with two third parties, [we can] now capture the whole profitability of the portfolio by underwriting profits in the UAE instead of earning commissions on these premiums. That is one of the main motivations and [an important] driver behind the acquisition,” he tells Executive (see story).

Acquisition rationales

The case of a Lebanese insurer that is attractive for a takeover in the context of an international player’s regional strategy because of its operations outside of Lebanon has been something of a standard scenario in recent years. The existence of licensed branches in GCC countries is presumed to have been the main driver behind the less-than-perfect acquisition of Compagnie Libanaise D’Assurances (CLA) by Zurich Insurance in 2010, which spawned a court confrontation between acquirer and acquiree. Zurich Middle East, according to the annual report of Lebanon’s ICC for 2015, had only a minuscule share of premiums in the local market and did not seem to have an active presence in Beirut. Regional strategy and the aim to leverage a Lebanese insurer human capital for expansion in the Gulf region was also an element in the acquisition of 81 percent of Bank Audi’s LIA Insurance by Casablanca-based Saham Finances in 2012, as the Moroccan company’s CEO told Executive at the time.

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Money and financial incentivization are not the top considerations when thinking about M&A possibilities

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Even if crowned with success, opportunities to push regional expansion by way of aquiring a Lebanese insurer’s acquisition are rare, and cannot define a pattern for consolidation among local companies in Lebanon’s insurance sector. It may thus be more fruitful to gauge acquisition opportunities on the basis of best practices in corporate behavior as experienced by decision makers who have undergone the exercise in the financial industries of emerging markets. For example, in the experience of regional insurance holding Chedid Capital, which in only the past three years has facilitated the creation of an African insurance joint venture and the acquisition of two broking units (one in Mauritius and one in the UAE), money and financial incentivization is not the top consideration when thinking about M&A possibilities and looking at an acquisition candidate.

Money does not come first

“First and foremost, as rule one, we look at ethics and integrity of owners and managers in the company. Rule number two is that we look at the potential to grow not only its business but also to enhance its systems, processes and corporate governance. We want to make sure that the company will adhere to our level of corporate governance and risk management, and to our standard of internal controls and ethics,” says Farid Chedid, the chairman of Chedid Capital and general manager of multi-country reinsurance brokerage Chedid Re.

When it comes to the acquisition process, money is not Chedid’s first concern. His priority is to have a well-structured framework of detailed merger rules. These should then be accompanied by incentives, he adds, saying, “Soft loans are one aspect. What is required is a clear set of rules to protect both the buyer and the seller during an M&A. Once they are protected by rules, you also need to give incentives. Any M&A has constraints, one of these could be financial. There needs to be a set of rules with duties and obligations for each party [to a merger] and incentives that will push investors to buy or existing shareholders to sell.”

For Chedid, the specificities of the insurance industry in terms of reserves, provisions and regulatory capital requirements warrant special care when it comes to a merger or acquisition. Buying an insurance firm is not like buying any other company, where gaining an understanding of its assets would be the main task. “Assets are easy to figure out in an insurer but reserves are difficult. The difficulty is to assess the reserves and their quality, to see if all data is in the system or if some has been withheld from a potential buyer. One of the worst situations would be that a buyer comes in and finds out later that they were misled or that information was withheld,” he explains.

Therefore, a new insurance law in Lebanon, if it gets adopted, needs to include rules on corporate governance and internal controls, he emphasizes. “Within the law’s rule on corporate governance there needs to be a section on change of control, how it has to be managed, e.g. can sellers sell and be free of [any further] obligation even if they have misled [the buyer in the transaction]? Can buyers withdraw even if they did not perform proper due diligence? Lacking clarity in such rules and subsequent court battles affect the reputation of the Lebanese insurance industry,” he warns, with an unspoken nod to the problems and court arguments which have followed opaque mergers in the recent past.

The problem with the Lebanese governance culture

Indeed, the trajectory of developments in the Lebanese insurance industry in recent years does not bode well for mergers and acquisitions, says Antoine Issa, the MENA CEO and chairman of Allianz SNA (the Lebanese unit of the German insurance multinational and leader by overall written gross premiums in the Lebanese insurance sector). In his view, the infrastructure for successful M&As in Lebanon, in terms of regulation and governance, is “probably the lowest in the Middle East today,” because many other countries in the region have developed stronger frameworks for governance in the past decade, with Saudi Arabia having led the advance. “So far we have not seen real mergers and acquisitions, but [only] changes of shareholding because small companies are reluctant to open their capital. This is a little strange. We [Lebanese] participated in the development of all these markets in the Middle East but today we are lagging behind in terms of governance, risk management and regulation, capital and solvency, etc.,” he tells Executive in an interview to be published online at a later date. To the question of how mergers and acquisitions in Lebanon could be encouraged most effectively, he responds that, in his view, this is very difficult because best governance structures result from the listing of companies, but the appetite for listing companies is lacking in Lebanon, even in the banking sector. “In a listed company, governance is creating transparency for the public and shareholders,” he explains. He advocates that all banks and all insurance companies in Lebanon should be listed and traded on the stock market, but that this cannot be achieved without first instituting a culture of capital markets and transparency in the public sector.

“Capital markets in Lebanon are very weak; we don’t have real capital markets and I think this is bad. We definitely need strong capital markets if we want to develop the economy. To grow a successful family business into an institution, you need capital markets that give access to funding other than having a loan. Unfortunately, we don’t have this culture in Lebanon and this cultural lack begins with  the public sector. If the government does not have governance in its institutions and if we don’t promote governance in public institutions and then in private institutions, nothing will happen,” reasons Issa.

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We [Lebanese] participated in the development of all these markets in the Middle East, but today, we are lagging behind

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Need for risk-based capital requirements

It seems that the more one asks about M&A prospects in the Lebanese insurance industry, the more alerts to missing requirements one gets. Bernard Sfeir and Charbel Chaanine, heads of the finance and marketing departments at bank-affiliated Lebanese insurance company ADIR, chuckle mysteriously when telling Executive, “We know which insurance companies might be potential acquisitions for us in future.” The two managers confirm that ADIR – thought to be among the top10 in terms of consolidated premiums position in life and non-life in 2016 and the fifth most profitable insurer in Lebanon in 2015 by the bottom-line figures shown in the ICC’s annual report – would by its financial strength be able take its pick among any of 40 smaller insurers for an acquisition, but concede that the number of healthy and realistic takeover candidates would be much smaller.

In the perspective of ADIR’s head of finance Sfeir, an acquisition of a small insurer’s portfolio could be more interesting than an outright corporate takeover. “Why [would you agree to] have the headache of acquiring a whole company and go through the due diligence process and seek if there are any synergies between your company as a well-built organization and another organization that may be smaller or weaker?” he asks rhetorically. In his view, any of the top insurance companies in the Lebanese market would probably benefit more from acquiring a portfolio and could on its own solicit agents or brokers associated with the portfolio, without going through the trouble of assimilating another company with all its possibly hidden skeletons.

Acquisition of a portfolio would be contingent on its quality, its synergies with ADIR’s portfolio and on its acceptance by ADIR’s primary reinsurers, and also necessitate a due diligence process on the technical side as well as an assessment of human resources that might be taken over together with the portfolio, Sfeir adds. The central element in his list of merger incentives would, however, be an increase in minimum capital requirements for insurance companies, preferably in combination with a risk-based capital approach. He thinks Lebanon in this regard should learn from European experiences, for example, the long process of drafting and implementing the Solvency II regulation.

As he sees it, any generic, large hike of minimum capital requirements would promote consolidation but might disproportionately benefit large insurers and hurt small ones. It also would not be as fair and as effective as the implementation of a package emulating the Solvency II evaluation approach, entailing risk-based capital, market conduct, corporate governance and a host of detailed parameters. “A whole concept should be applied to encourage mergers and acquisitions, not only subsidized loans. [Offering] subsidized loans is a good step but only one step. Other steps would be to impose the law, update it when there is a possibility, and most importantly, adopt a risk-based capital approach,” Sfeir explains, elaborating further, “Basically, if [Lebanese regulators] want consolidation through M&A in insurance, they should start by imposing minimum capital requirements that are based on a minimum solvency capital requirement. If there is no risk-based approach, we will not get anywhere with just subsidized loans.”    

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Any generic large hike of minimum capital requirements would promote consolidation but might disproportionately benefit large insurers and hurt small ones

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Under the ideologies of shareholder value and financial market efficiency, modern concepts of mergers and acquisitions – up to mega-mergers, hostile takeovers or leveraged buyouts – are about as far from the anti-trust and anti-merger concepts of the early 20th century’s as a Tesla Model S or Google’s autonomous Waymo car is from the American muscle cars of old. M&As nonetheless require great care to be able to restructure and redeploy assets and deliver competitive efficiency in an industry that is rife with contenders of varying quality while simultaneously preserving consumer choice in the face of the markets’ perennial gravitation toward economic concentration.

As Lebanon has no real track record of successful M&As in the insurance industry, it seems a valid point raised by some insurance managers such as Allianz SNA’s Issa that the soft infrastructure for such transactions, not only in terms of adequate legislation, but also in term of expert lawyers and investment banks with skill in insurance mergers, has yet to be massively improved. Then there is the need for functioning capital markets, corporate governance structures, and transparency of insurance company balance sheets as the foundation for building a consolidated industry that consists of healthy companies.

On top of all that, the sector’s consolidation may require egos to become more deeply grounded in reality and readiness to realize the benefits of being immersed in a crowd of capable minds. Insurance in Lebanon today does not appear to sport Napoleon or  any other great leader – but that is all the better if one assumes that the task of taking the industry into growth and consolidation needs not bosses but serious group efforts and teamwork. Still, one should not hold their breath waiting to see a wave of successful consolidation moves in Lebanese insurance.