It all seemed to be going so well for Lebanese wine. Once the sole preserve of Musar, Ksara and Kefraya, the sector has, since the late 90s, seen the emergence of new wineries, producing exciting wines in eye-catching bottles. The UVL (Union Vinicole du Liban), established in 1997, showed it could function as a genuine association. It was serious about establishing a regulatory national wine institute and there was even a spirited initiative to sell Lebanon as a wine tourism destination. Its members even demonstrated rare ESPRIT DE CORPS by exhibiting on the same stand at the two major international wine fairs in London and Bordeaux in 2003. Lebanese wine was moving.

This momentum had been inspired by the knowledge that Lebanon was hosting the annual OIV (OFFICE INTERNATIONAL DE LA VIGNE ET DU VIN) congress in Beirut in June 2005. The event would enhance the country’s brand equity, strengthening its export potential and boosting its quality to price ratio. It would create a new image of Lebanon, one driven by wine and culture, rather than war and mayhem. Finally, UVL president, Serge Hochar, co-owner of Chateau Musar and for so long the darling of the wine world, the man who risked life and limb to make wine during the dark days of the war, would welcome the OIV to his country. It was to be a truly vintage year for Lebanese wine. And then, last month came the awkward admission from UVL members that the OIV had changed its mind. So far no official explanation has been given by the OIV for the seemingly sudden VOLTE-FACE and at the time of going to print, Frederico Castelluci, director general of the OIV has not replied to EXECUTIVE’s requests for clarification. “It is a huge loss to Lebanon,” said Charles Ghostine, managing director of Ksara, Lebanon’s biggest producer. “We have not yet received official notification; this will be sent to the Lebanese government. However, I do not hold much hope of the congress being held in Beirut next year.” Ghostine has more reason to be disappointed than most. In June of last year, he gave a speech at the OIV congress in Paris, in which he outlined Lebanon’s plans for 2005. “All 45 countries, including Israel, gave me a standing ovation,” he said. “We were meant to go to Vienna this summer to present our final itinerary. Then I get the call from Frederico Castelluci, telling me that there was a change of plan.”

Ghostine said Castelluci had told him that the reason for the change of venue stemmed from the organization’s doubt that Lebanon had the “technical ability” to manage some of the more scientific and linguistic aspects of the congress. “They need translators in five languages. This is not a problem. We can translate in six,” said Ghostine. Privately, wine producers believe pressure from the Israeli delegation was the main driving force behind the decision. “The OIV is a non-political body and therefore they cannot cite a non-political reason,” said one. “What can we do? We need them more than they need us.”

Ghostine’s frustration is evident when he talks of missed opportunities, especially in the export markets. “The recognition the congress would have bestowed upon us would have been priceless. To be honest we are still not fully established as a wine making force even though we have be doing it for 6,000 years,” he said. “The congress would have given up priceless exposure. Export markets are very important to us. Lebanon is exporting 40% of its wine.” UVL president, Serge Hochar was equally uncomfortable with the turn of events. “Until we have an official notification from the OIV, I prefer not to comment.” The demise of Beirut 2005 came as a surprise to many of those who had worked hard within the government to ensure it happened. “It’s the first I have heard of it,” said Basil Fuleihan, ex-economy minister and now the chairman of the Parliamentary Committee on Economic Affairs, Trade, Industry and Planning. “Quite frankly if it turns out to be true, it is very disappointing news for Lebanon and Lebanese wine.” While in office, Fuleihan lobbied hard for the congress and is a firm believer in the potential of the sector. “Lebanese wine needs to be supported. It is good for general prosperity; it’s good for exports and it’s good for the image of Lebanon.”

Teething problems

The news came at a time when the UVL has been experiencing delayed teething problems. In January, Massaya, one of the most energetic of the new generation of wine producers, resigned after it claimed the association was dragging its heels on an initiative to establish a wine marketing board and launch a national advertising campaign. A statement issued by Massaya, which had vigorously lobbied for the move, said that it was obvious that the interests of Massaya and the UVL were irreconcilable and that the winery had no option but to go it alone.

Elsewhere plans to establish a national wine institute (to be responsible for implementing the 2000 wine law and oversee and regulate all areas of grape growing and wine production) seem to be caught in a bureaucratic bottleneck. “We have prepared our draft constitution,” said Ghostine. “Now we are just waiting for government approval. We are confident our file is in order.” According to Hochar, its establishment is crucial to the evolutionary progress of the sector. Speaking in November of last year he announced: “We have joined the OIV and we have passed a wine law. Now we just need an institute to implement it,” he said. “We cannot move forward without it.” UVL members are energetic exhibition-goers, although last month only three producers – Musar, Ksara and Kefraya – made it to the London Wine Fair. The energy of 2003 appears to have waned. “The reason we all went to London last year was that we got money from the EU,” explained Massaya’s Ramzi Ghosn. “All this needs intensive lobbying on behalf of the UVL and this in turn requires time and effort. Nothing will come of nothing.”

Still, Lebanon’s $26 million wine industry is essentially filled with promise. The good news is that exports have doubled in six years and producers continue to consolidate proven international markets, while seeking out new ones. Ksara alone has doubled its exports and is consolidating its position in the UK, a market pioneered by Chateau Musar in the 70s and one that also proved successful for Kefraya, Massaya and Clos St Thomas. The future

The good news is there is room for further growth. “There is huge potential. Any collaboration with the wine growers has been done with the best interests of the sector at heart. I have not sensed any official reluctance,” said Fuleihan, stressing the government’s faith in the industry. “All the grievances have been addressed such as tariffs and taxation. Yes, the government has not yet developed a viable agro or industrial strategy but we cannot satisfy the entire spectrum of demands because of the existing financial constraint.”

What is certain is that the land is there for further planting, although many within the industry prefer to exercise caution. “We just cannot plant without a strategy,” said Paulette Chlela, Ksara’s Chef de Culture. “We have already seen grape prices drop by 10% in the last year because of a dip in demand.”

But the overriding belief is one of an opportunity that needs to be seized. “Wine is the only hope for the Bekaa,” believes Ghosn. “In some areas this reality is taking shape while in others it will take a bit more time. New grape plantations have changed the lives of many of the Bekaa’s struggling farmers, who have been forced to grow illegal hashish and opium, or produce that was severely undercut by those from neighboring countries. The landscape of many towns is changing as the demand for good TERROIR increases.”

Ghosn also believes that to best demonstrate the value-added Lebanon has to offer the wine world, more producers should improve viticulture methods, moving away from high to lower, more concentrated yields and use better quality grapes. “To do this, there will have to be significant replanting or restructuring of existing vineyards, the adoption of more up-to-date working methods, and new vineyards. This will mean further exploration of Lebanon’s different regions and TERROIR, including a formal study of the various soil types and viticultural potential.” However, as the sector grows, the incidence of malpractice will undoubtedly increase. The UVL must snuff out those producers tempted to push the ethical envelope and clamp down on the importation of foreign wine in bulk quantities, over-harvesting, medal sticker abuse, diluting and misrepresentation. “It has already started,” shrugged Dargham Touma, owner of the Heritage winery, alluding the increasing number of Syrian-made “Lebanese” wines that are reportedly finding their way into Lebanese and North African restaurants in France. The national institute cannot come soon enough.

Nor can a national marketing campaign, one that would emphasize the quality of Lebanese wine as well as educating the drinker on the health benefits of drinking and stress the economic importance of buying Lebanese. Already, the wines are facing an epic struggle in an evolved and viciously competitive drinks sector. “Whisky and Vodka are king,” exclaimed Touma. “External budgets are dictating consumer budgets. They are telling people what to drink and what not to drink.” Given many of the mediocre brands that are being pushed in the local market, it is sad that many of Lebanon’s best wines are unknown to local drinkers, who in a misguided exercise in snobbery often perceive foreign wines as better. Oz Clarke, the English wine guru has rated Clos St Thomas’ “Chateau” as “stunning”, while only last month Jancis Robinson, arguably an even bigger hitter than Clarke, raved about Massaya at a tasting in London.

Tell that to the OIV.
 

If you think that soldiers of fortune went out with Frederick Forsythe and the last colonial war in Africa, think again. The dogs of war are back big time, compliments of the US occupation of Iraq. Except in our more politically correct world, the word “mercenary” has been dropped from our vocabulary and replaced with the more acceptable term: “civilian contractor.” It is difficult to say exactly how much their presence is netting the US private sector – the firms employing them are mum – but it is safe to assume that the US government is saving a great deal on costs that would otherwise be incurred if they used regular troops.

The brutal slaying of four unfortunate Americans in Fallujah made front-page news the world over, as did the prisoner abuse in the Abu Ghraib prison, where civilian guards were said to be involved. But just who are these mysterious “contractors,” what exactly do they do, why are they there, and who are they answerable to? Let’s start at the beginning. Ever since there were wars, there have been men – and sometimes women – who tag along with the military to carry out chores that soldiers do not want to do. For logistical reasons the military high command finds it easier, better, cheaper, and less complicated to have civilians do those odd jobs instead. But like everything else, there are both advantages and disadvantages in hiring outside help.

But to understand the current phenomenon that has drawn anywhere from 20,000 to 40,000 civilian contractors to Iraq, making them the second-largest military force in the country after the US, we need to understand first why such a large number of civilians has been “drafted” into a war zone.

Under the leadership of Donald Rumsfeld, and against the better judgment of some of his generals, the American secretary of defense took the decision to reduce the size of the US military around the world. The Cold War was over, and Rumsfled argued, there were no pressing needs to maintain large numbers of troops and bases around the world. Rumsfeld believed that modern warfare could be fought effectively with superior air power, good, solid intelligence – mostly electronic – and far fewer “boots on the ground.”

His rationale was proven during the Afghanistan war, which started shortly after the attacks of September 2001. The US quite simply dominated the skies with its air force and precise computer-guided missiles. American spy satellites could spot enemy movement from outer space and direct elite troops on the ground to take appropriate action as needed. They could listen to enemy communications and preempt their moves. Unmanned drones could spy on enemy troop movements and relay live data, including television images to frontline commanders for quick reaction by Special Forces.

The invasion of Afghanistan to oust the Taliban and attempt to capture Osama bin Laden required limited troops on the ground. Smaller tactical units of Special Forces, Army Rangers, Green Berets and Navy Seals supported from the air, indeed proved to be most effective. Rumsfeld’s idea of a smaller, leaner, military seemed to have worked; in theory, at least.

In Iraq a very different battle plan was needed with the generals calling for at least 350,000 troops in order to do the job properly. Certainly the United States could blitzkrieg, as it did, in record time, taking barely three weeks to occupy the entire country. Maintaining the occupation has been harder.

Rumsfeld insisted the occupation of Iraq could be properly maintained with roughly 130,000 troops. But what he did not tell the American people was that to sustain those troop numbers, he would need the support of another 40,000 civilians to back up the military.

Enter the civilian contractors, who can be broken down into two distinct categories. The first is the genuine civilians, such as truck drivers, cooks, cleaners, mechanics and builders. They drive supply trucks, repair tanks and provide housing for the troops. Their pay is significantly superior roughly ten time what they would make in the US, given the discomfort of living in a war zone and the dangers involved. Of those, there are roughly 20,000 working in Iraq today. Or at least there were, until Westerners became the target of kidnappers and many took fright and left.

The second group of civilian contractors – of which there were also about 20,000 – is armed. Some even use helicopters with mounted guns for protection. These are mainly former military Special Forces types, who enlist their services in exchange for money, much as a mercenary would. They provide security to government buildings where American employees work and live.

Almost all US agencies – the State Department and the US Agency for International Development, the Commerce Department, the Defense Department and the US army – all have contractors working for them, or are administering contracts that have contractors working for them. They are also tasked to provide security for the civilian contractors and to protect their convoys or their work and housing sites. The four contractors who were brutally killed and had their body parts hung over a bridge in Fallujah, were former US Navy Seals on irresistible contracts.

Some of these contractors have been involved in firefights with Iraqi insurgents, and others had to fight their way out of tense situations. But more stunning was the recent discovery, when the Abu Ghraib prisoner abuse scandal broke last month, that civilian contractors were used in the interrogation of prisoners, tactics previously unheard of in military annals.
It is important to note that we are not talking about civilians in the employment of the government, such as the CIA or FBI, but of truly just civilians, hired specifically for that purpose.

A number of US companies, such as Virginia-based CACI, have advertised for interrogators, among other positions that require US government security clearance. As a rule, those are usually people with prior experience in their field – like former intelligence officers who worked for the CIA, DIA or the FBI. Still, it remains highly unusual to bring in civilians to perform such tasks as interrogating prisoner.

Why is this happening? Well, in the case of the first category, the civilian-civilian contractors, as mentioned above, the US military has been reduced in size. To make up the deficit in manpower, the defense department is forced to turn to outside help. To enlist more troops would not solve the problem, as it’s also a matter of economics. It’s the bottom line that Rumsfeld is watching for.

In simple terms: it’s true that a civilian hired to drive a truck loaded with gas, ammunition or MREs (meals ready to eat) from Basra to Baghdad will on average earn 10 times more than a soldier doing the same job. However, consider this: the contractor gets a lump sum of money and that’s the end of the story. There is no insurance for the government to pay. If he gets hit, there are no medical costs involved. Most likely his employer, the one that contracted him, would cover insurance costs, or he would do so himself.

A wounded soldier, besides costing the government medical expenses, necessitates the support of doctors, nurses, medical technicians and staff. It takes an entire team to care for every wounded GI. All this requires resources and costs money.

Additionally, if the soldier is disabled, the government will have to pay him compensation and cover long-term hospitalization, if required, and the military would then have to replace him in the field. Not so with a contractor; he gets hit, he leaves, the government hires another one. End of story. Total savings for Uncle Sam are roughly in the thousands of dollars per man, while it remains difficult to pin down exact numbers, because no study was released by the Pentagon on this subject.

Another advantage is if contractors get killed. They don’t figure in the “official” US death toll. No one really knows how many contractors have been killed in Iraq. Nor, for that matter, does anyone really know how many are operating in Iraq. Not even the Pentagon has figures for them. The closest one gets is an estimate of “about 20,000.”

The second category, the armed civilian contractors, are more aptly described as ‘mercenaries.’ They are ready to kill and even be killed, not for God and country, but for financial reward.

Again, there are no published figures, nor casualty reports concerning armed contractors. The Pentagon only reports military dead and wounded and offers no insight into losses – if any – from the ranks of armed contractors. And their employers, usually firms who try to avoid publicity, tend to shy away from the press.

One frightening fact to emerge from the Iraqi prisoners abuse scandal was that no one was able to identify a proper chain of command concerning civilian contractors involved in the interrogations. The US military commanders in charge of the Abu Ghraib prison did not know who the civilian interrogators in the jail reported to, and who answered for them.

Strange times, indeed.

Did the Audi-Saradar merger hint at a possible consolidation trend in the Lebanese banking sector, or was it a one off? The sector has seen a number of waves of mergers and acquisitions in recent years, especially in the beginning of the post-war era, as some larger banks capitalized on the difficult situation in the early and mid-1990s to eat up smaller ones. Many large banks looked to expand their branch networks, and realized the most efficient way to achieve this was through the acquisition of smaller ones.

Since then however, branch network expansion is no longer the primary goal of leading banks in the country, and can therefore no longer trigger significant mergers and acquisitions. Nevertheless, other drivers that can inspire consolidation in the global banking industry are present in the market and are likely to ignite a similar wave locally.

The gap between the top Lebanese banks and the smaller ones is constantly widening, with a marked concentration of deposits and loans among the top 20 banks. Top banks are constantly seeking to fend off competition from large regional banks by achieving a larger scale and striving for higher quality services. By targeting certain specialized institutions through ‘horizontal’ consolidation, these banks can achieve critical mass in terms of the financial resources, skill, and geographical diversification needed for competing on a regional scale (amply demonstrated by Audi’s acquisition of Saradar, which gave it a private banking unit and access to the Gulf market). Furthermore, Lebanese banks face sizeable overhead costs, and as such, they would substantially benefit from spreading such costs over a wider asset base. Another driver for consolidation is the access to distribution channels and new markets. Regional and international banks, such as NBK, Gulf Bank, HSBC and Standard Chartered, have established a presence in almost every major city in the Middle East. As the region is becoming more economically cohesive, businesses require “fully regional banks.” Lebanese banks should attempt to establish a widespread presence if they are to retain a role. Currently, a number of medium and large Lebanese banks do have branches in certain neighboring markets. Consolidating such banks under one institutional roof with a regional presence would certainly provide competitive advantages to the overall sector. The highly competitive domestic banking environment in Lebanon, coupled with the threat brought on by regional banks, is already forcing Lebanese institutions to look to nearby markets to expand into. As such, many banks are making distinct efforts to plow into the GCC market (Audi-Saradar, BEMO Bank), the African market (Byblos), and the Levant (SGBL, BEMO-Saudi Fransi, BLOM, Fransabank).

EXECUTIVE has identified 10 banks (from the “gamma ” and “delta ” groups of banks) that it believes offer attractive merger and acquisition opportunities. The order in which the following banks are listed is by no means an indicator of preference, and their inclusion in no way indicates a willingness of the existing shareholders of those banks to entertain the possibility of consolidation.

Al Mawarid Bank SAL

Al Mawarid Bank, ranked number 21 in the banking sector, was established in 1980. Following some limited growth during and immediately following the war, the bank’s management, led by general manager Marwan Kheireddine, undertook a major revamp of the bank’s operations. The bank is currently perceived as one of the few with high standards of efficiency, customer service and reliability, and its network of 12 branches focuses on Beirut’s southeastern suburbs, an area weakly catered for by other banks. Furthermore, the bank’s personalized approach to banking has earned it a favorable word-of-mouth reputation with the middleclass and has a strong Druze customer-base, especially in the Chouf. From a financial standpoint, the bank enjoys a healthy balance sheet. Liquidity levels are high, with cash balances around 35% of total assets, and only 11% invested in Lebanese government treasury bills. Customer loans account for just under 50% of total assets and benefit from a doubtful loans ratio of only 4.5%. The bank has also managed to diversify its income, with interest income accounting for around 56% of the total, and income generated from transactional services (commissions) at around 42%.

Al Mawarid Bank thus comes forward as a bank with modern management systems led by a well-educated management team, a good reputation, attractive geographical presence, healthy financials, high liquidity levels and strong growth.

Jammal Trust Bank

Jammal Trust Bank, ranked number 33 in the banking sector, was established in 1963. The bank was originally established as Investment Bank SAL, and was renamed Jammal Trust Bank in 1971 following its acquisition by Ali Jammal.

The bank is reasonably well established in Lebanon and has four branches in Egypt, a representative office in London, and owns local subsidiaries in real estate investments, trusts, and insurance. It has 20 branches domestically, including in Tripoli, Bint Jbeil and Baalbeck. From a financial standpoint, the bank has a diversified balance sheet, with cash balances of around 25% of total assets. The bank does, however, have a little more exposure to government debt, with Lebanese T-Bills accounting for 35% of total assets. Loans account for around 30% of total assets, with doubtful loans at 7.5% of total facilities. Interest income accounts for around 80% of total income, while commissions account for only 16%. Jammal Trust Bank, therefore, offers an opportunity for institutions looking for new product lines and markets to expand into.

Banque Misr Liban SAL

Banque Misr Liban is one of the oldest banks in Lebanon, registering third on the central bank’s list of banks. The bank, which currently ranks 24th in the sector, was established in 1929, and is majority held by Bank Misr Cairo. While the bank currently has no foreign presence in Egypt, it remains associated with Bank Misr-Cairo, which maintains control of the bank’s management. The bank currently operates a network of 16 branches, evenly spread out throughout the country. The bank’s growth has been stalled in recent years, with little banking activity. Nevertheless, the bank benefits from a high level of liquidity, as cash positions represent in excess of 37% of total assets, while investments in Lebanese government T-Bills account for 48%, with a small loan portfolio. The bank’s sources of funds consist almost exclusively of customer deposits and shareholder equity, with almost no other liabilities whatsoever.

As such, the bank presents to interested parties a clean and liquid balance sheet, which can be leveraged upon to re-launch the institution and use the available funds to transform it into a full-fledged national bank.

Near East Commercial Bank SAL

Near East Commercial Bank seems to be another “dormant” bank in Lebanon. Established in 1979 and currently ranked 41st in the sector, the bank has not witnessed any significant growth in the past few years, despite having many of the characteristics that would allow it to prosper.

The bank also benefits from high levels of liquidity, with cash balances at almost a third of total assets, and investments in short-term Lebanese government T-Bills at 37%. While loans constitute around 29% of total assets, they comprise to a great extent short-term overdraft facilities, while doubtful loans do not exceed 5% of total loans. On the other hand, the bank’s source of funds consists primarily of customer deposits, which are to almost 75% locked in long-term saving accounts, thus providing the bank with a healthy match of assets and liabilities.

As such, the bank is highly liquid, with well-managed assets and liabilities, and consequently an adequate platform to grow both locally and regionally. Interested institutions may also benefit from cooperating with the bank’s existing majority shareholder, Al Wafa Holding, in jointly developing the bank. Societe Nouvelle de la Banque de Syrie et du Liban SAL

After undergoing a wave of restructuring over the past years, which has also included a change of the bank’s corporate identity, and a marketing effort to reposition the bank on the market, the bank’s balance sheet looks improved, with ample liquidity. Cash balances account for almost 30% of the bank’s total assets, in addition to around 53% in short-term liquid government T-Bills. The bank’s loan portfolio accounts for only around 15% of total assets, with doubtful loans at around 13% of the total. Sources of funds consist mostly of long-term customer deposits in saving accounts, in addition to the bank’s equity. While the bank is not witnessing any marked growth, its liquid balance sheet, long-term sources of funds and domestic branch network of 18 branches – provides an adequate platform for expansion. As such, the bank would seem attractive to institutions seeking an already established network, coupled with enough liquidity to aggressively tackle the market.

Creditbank

Creditbank is the result of the merger of Credit Bancaire and Credit Lyonnais-Liban, in 2002. The new bank, ranked at number 26 by total assets, inherited the assets of both banks, along with a team of professionals from Credit Lyonnais-Liban and Credit Lyonnais-France’s operation in Beirut. The bank has been achieving significant growth since its establishment in 2002, not really suffering from any post-merger gap.

Creditbank benefits from a highly liquid balance sheet, with more than 30% of assets held in cash, and another 33% in short-term liquid T-Bills. While the bank’s loan portfolio also constitutes around a third of total assets, doubtful loans do not exceed 6% of total loans, and are adequately provisioned for. The bank’s sources of funds are mainly long-term customer deposits held in savings accounts.

As such, the bank presents potential investors with a clean and liquid balance sheet, a decent branch network, a professional management team, attractive growth, and a clean reputation in the banking sector in Lebanon.

Lebanese Swiss Bank

Lebanese Swiss Bank is a 100% Lebanese bank. Ranked number 28 by total assets, the bank has been undergoing steady growth in the past few years, building upon an evenly distributed branch network of six branches nationwide.

The bank’s balance sheet is highly liquid, with cash balances at almost 40% of total assets and Lebanese T-Bills just over 31%. The bank’s loan portfolio constitutes less than 30% of total assets, of which half is in short-term overdraft accounts. Doubtful loans do not exceed 7%, and are well provisioned for.

Lebanese Swiss Bank presents interested investors with a liquid and clean balance sheet, with a good platform for branch network expansion, and room for growth in the private banking field, in which the bank enjoys a good name.

Middle East & Africa Bank

Middle East and Africa Bank, also a 100% Lebanese bank, is owned by the Hejeij family, which founded the bank following the end of the war in 1991. The bank developed into a decent financial institution, which has continued to undergo growth in recent years. The bank, ranked number 32 by total assets, focuses on Beirut and the southern suburbs, providing corporate and private banking services to its clientele.

The bank enjoys a high level of liquidity, with cash balances at more than 40% of total assets, and short-term Lebanese T-Bills at around 30%. With a loan portfolio of around 20% of total assets, doubtful loans are at less than 6% of total loans, and are almost fully provisioned for consistently. The bank also has a diversified income base, including interest income at 57% of total income, commissions at 25%, and other service-related income at 18%.

The bank provides interested buyers with a good name, a liquid balance sheet and a clean loan portfolio, in addition to a wide range of services that constitutes a platform for development into any specialized type of financial institution.

Federal Bank of Lebanon

Federal Bank of Lebanon is one of the smallest and oldest banks in the country, ranked at number 40 by total assets. Established in 1952, it remains owned and run by the Saab family, covering Beirut and some suburbs with eight branches.

The bank’s balance sheet enjoys a decent level of liquidity, with cash balances at 25% of total assets, and T-Bills at 27%. Loans represent 39% of total assets, but suffer from a doubtful loans ratio of over 26%.

The advantages to a potential buyer would be the family aspect of the bank, which would facilitate potential acquisitions, a decent branch network that can be potentially expanded, and a good level of liquidity on its balance sheet. However, potential buyers should be cautious when reviewing the bank’s loan portfolio.

Banque Lati

Banque Lati has been operational in Lebanon for more than 80 years, and is still held by the Lati family, the bank’s original founders. Nevertheless, the bank was not able to achieve scale, and remains a two-branch bank.

On the other hand, the bank’s balance sheet presents attractive opportunities to potential buyers. Cash and T-Bills represent around 35% of total assets, providing decent levels of liquidity. In addition, the bank’s balance sheet holds a large portfolio of real-estate assets, and one can certainly capitalize on them given the high growth in the real-estate market in Lebanon. In addition, the bank’s doubtful loans remain at less than 8% of the total portfolio, and are fully provisioned for. The bank also has a diversified income base. As such, Banque Lati provides potential investors with a name that has been present in the market for more than 80 years, an attractive balance sheet structure with liquidity and real-estate properties, and a diversified income base.

Nevertheless, it takes much more than a display of attractive features in the sector to entice either local or foreign institutions from undertaking the numerous efforts to invest in or buy out local banks. Large Lebanese banks, which have already completed a number of acquisitions in the past 10 years, are likely to be too busy digesting, or rather integrating, their acquisitions. If a new wave of consolidation is to take place in the market, it is likely to involve banks other than the top five in the country – perhaps the bottom 10 of the alpha and top five of the beta groups. It remains to be seen whether such banks are likely to entertain the possibility of seeking organic growth through acquisitions. Chances are that all bankers are eyeing the market and recent developments – such as the Audi-Saradar merger – are increasing the level of concentration of the industry to previously unseen levels. According to central bank figures, 80% of the sector’s assets are distributed among the top 16 banks. Such a trend would threaten medium-sized banks, which will ultimately seek ways to gain mass to ensure their presence among the giants.

1 Gamma Group: Deposits between $100 million and $300 million

4 Beta Group: Deposits between US$300 million and US$ 1 billion
 

THE BOTTOM END

While Lebanon’s lowest ten banks may look like bargains to potential buyers, they offer little to no investment opportunities, only unwanted baggage

To the untrained eye, the best bargains for those seeking to acquire banks in Lebanon may lie in perhaps the 10 smallest banks in the sector. Such may be the case in other markets, where even the 10 smallest banks may be operational, and may present potential buyers with some value-added in return for the price paid to acquire them. In fact, Lebanon’s bottom 10 banks offer little or no opportunities.

Only three – Banque Pharaon et Chiha, Finance Bank, and Banque Lati – are Lebanese. Only the latter could provide potential buyers with an opportunity, given a clean and liquid balance sheet. As such, a potential buyer would benefit from a banking license without any associated burdens. On the other hand, banks like Finance Bank and Pharaon et Chiha carry unwanted baggage, which would have to be borne by any incoming investor. Banque Pharaon et Chiha’s loan portfolio accounts for more than 30% of total assets. Doubtful loans, however, stand at around 10% of the bank’s total portfolio, while bad loans account for another 10%. In addition, of the bank’s total loan portfolio, more than 88% are in the relatively less liquid commercial loans. Such a ratio does not compare favorably to the Delta group of bank’s loan portfolio composition, where around 50% of total loans are in short-term overdraft accounts, and only 21% in longer-term commercial loans.

The same can be said for Finance Bank, the loan portfolio of which accounts for almost 30% of total assets. In parallel, doubtful loans stand at almost 13% of total loans, while provisions for doubtful loans cover roughly only half that amount. In addition, the bank’s income base is not at all diversified, with more than 95% of the bank’s income coming from interest revenues.

Of the seven foreign banks in the bottom 10, many, like Standard Chartered, Banca di Roma, the Saudi National Commercial Bank, and Bank Saderat Iran are making attempts to make inroads into the domestic market, and as such are not likely to present acquisition opportunities. Others, like Pakistan-based Habib Bank and Iraq-based Rafidain Bank, while not aggressively attempting to increase their market share, have been present in the country as semi-dormant banks since the early 1960s, weathering the war days, and are not likely to bail out now. Arab African International Bank, owned in almost equal shares by the ministry of finance in Kuwait and the central bank of Egypt, is also somewhat of a dormant bank, with neither institution likely to give up their presence in the Lebanese banking market.

Finally, for those who aspire to owning a bank, central bank governor Riad Salameh seldom misses the opportunity to emphasize his support for consolidation in the banking sector, to the extent that the central bank is prepared to extend subsidized credit facilities for banks wanting to acquire others. In yet another effort to improve the consistency and efficiency in the sector, the central bank has been reluctant to issue new banking licenses, having not done so for over 10 years. As such, new entrants to the banking sector in Lebanon must acquire one of the existing licenses, whether local or foreign. Nevertheless, the sale and purchase of such licenses is closely monitored by the central bank. One of the conditions to be met by potential purchasers of banking licenses in Lebanon is a close personal and professional profile of all of the individuals making the purchasing party. Through such a screening process, the central bank ensures that those acquiring a banking license in Lebanon are of a certain caliber, have the proper banking background, and professional expertise to positively contribute to the sector as a whole. Through such control, the central bank was able to conserve the image of the banking sector, at a time when a large number of high net worth individuals are returning to the country with enough funds to cover the price of a banking license.

Tony Hchaime is an investment banker at the Middle East Capital group (MECG)
 

Arab Re

Sourcing of regional reinsurance is an issue of growing importance to primary insurance providers across the region, be they established companies or newcomers. For reinsurance company Arab Re, this translates directly into a substantial increase in perceived business opportunities. “I can confirm that our board has taken the decision to double our capital. This issue is now on the front burner,” deputy general manager of Arab Re and current ranking executive, Tayseer Treky, tells EXECUTIVE. He expects the capital increase to be completed before the end of the year.

Established in 1972 upon direct recommendation by the General Arab Insurance Federation, Arab Re’s capital had last been increased in 1998, from $12.3 million to the current $25 million. From its inception, the firm’s mission was directed specifically at assisting insurers in markets across the region and run Arab reinsurance pools. With greater integration of Arab markets on the horizon, the firm feels that it is time to assume a bigger role. “We are the Pan-Arab reinsurance company par excellence,” Treky claims. “We are an ambitious company but we are also aware of the limitations of our size and from market conditions. Our policy has always been gradualist.”

In terms of immediate expectations, the firm’s outlook actually projects rather steep growth. After gross premium income rose from $17.9 million in 2002 to $20.7 million in 2003, Arab Re’s anticipation for 2004 is a near 50% increase in premiums, to $30 million. For 2005, the company expects a further increase to $35 million.

Arab Re’s premium income originates to 92% from the region, with the remainder generated in Asia and Africa. Lebanon is the number one market for the Beirut-based firm, accounting for 16% of premium income, followed by Egypt (13%), Libya (12%) and the United Arab Emirates (10.5%). “The degree of our presence in different Arab insurance markets is determined by our marketing orientation and also by the existence of our shareholders in different markets,” says Treky, “We tend to be stronger where we have shareholders.” The company’s shareholder base includes 55 entities from 16 countries, mainly insurance and reinsurance companies but also some public and private sector banks. The largest equity stake by a single shareholder does not exceed 12%. Following a three-year period where the company saw its premium income drop annually between 1997 and 2000, Arab Re benefited from the changed reinsurance world, post the September 11 terror attacks. Some European and international reinsurers lost parts or all of their enthusiasm for doing business in Arab countries. And like many in the hardening global market, insurers from across the region encountered harsher conditions and stricter limits from their international reinsurance partners. While acknowledging that September 11 triggered a wave of changes in the relations between regional insurers and international reinsurance firms, Treky sees the changes as rooted in factors that came into play considerably before the fateful day. “Arab Re anticipated well ahead of 9/11 that smaller Arab companies would one day face difficulties with their reinsurers, due to economies of scale. The concentration and mergers in the global insurance industry in the 1990s made the average sized Arab company probably less attractive,” he says. “We have long been telling our clients not to put all their eggs into the basket of international reinsurers, because a day would come when the need for regional reinsurance would be greater.”

With WTO membership impending for an increasing number of Arab countries and liberalization of – thus far – closed insurance markets looming, the managers in Arab Re’s executive offices in downtown Beirut see not challenges but substantial new opportunities in the opening of more Arab markets to more players. In Libya, for example, where two new insurance companies are under formation, the persons driving the process of establishing these firms are, in Treky’s words, “old good friends of Arab Re.” Because of its low insurance density and penetration, Syria would be a promising market even if the insurance regime were to prevail as it is, Treky says. “If, however, the Syrian insurance market opens up and more opportunities come into the picture, the pace will be much faster and growth will be greater.” Also in Iraq, once the country returns to normalcy and security, the insurance market is, in his opinion, bound to grow very quickly and perhaps recover its grandeur as the Arab world’s biggest and best developed one. Arab Re has major shareholders in these two countries, which leads the manager to expect that in the hoped for business growth there, the company “will enjoy the support of many friends we have.” As good connections, vital as the are, cannot substitute crucial skills, Arab Re is focusing in practical preparations for its future on developing their human resources in a two-pronged approach of training their existing employees and seeking to hire new additional staff with significant experience in reinsurance from within the region.

The future of Arab insurance markets may at last favor the fulfilling of the vision that guided the creation of Arab Re over three decades back but that was blocked for the longest time by regional strife. Today, Arab Re believes that after the hard school of corporate survival under the worst circumstances imaginable, future business obstacles could not cause more than a light hiccup for this reinsurance company.

Medgulf

He who wants to play in the big leagues has to live by big-league rules and must be willing to compete on every ground. The Mediterranean & Gulf Insurance and Reinsurance Company – known in the market as Medgulf – abides by these terms. It employs the business logic that permanent growth is an absolute obligation for a company that aspires to reach market leadership and stay in that coveted position.

“In life and business, you never want to stop, because if you do, you don’t expand anymore,” says Michel Abou Jamra, Medgulf’s executive vice president. “And if you don’t expand, somebody else will.” The company’s ascendance over the past decade and their long-term plans match this disposition. Although displaying a single corporate identity, Medgulf actually is a group comprising two separate companies, an anonymous shareholding company (sal) in Lebanon and an offshore exempt company (ec) in Bahrain, which was established in 1995 for conducting business in Saudi Arabia. Both companies achieved rapid growth and are today holding claims to being the largest private sector insurance operator working in Saudi Arabia and the leading non-life insurer in Lebanon. After receiving license approval by the Bahraini central bank, Medgulf earlier this year entered Bahrain directly as their third market. And having every intent to acquire the stature of true regional insurer, Medgulf executive management confesses as their strategic aim to establish a presence in the majority of Arab countries.

However, the company does not rush in implementation of the far-reaching ambitions by seeking a fast geographical rollout. “It is not important to pretend being a regional player but it is important to do things needed to become effective as regional player,” Abou Jamra says.

“We are looking to expand quite soon into the UAE and have further expansion projects. But we do it in phases, digesting every move before making the next one,” elaborates Faysal Malak, the company’s executive in charge of bancassurance and communications. According to the company’s annual report, Kuwait and Oman are further targets for expansion in the near to mid term. Medgulf can certainly be expected to have the staying power for regional deployment, thanks to being backed by two of the strongest financial private sector groups in the region, Prince Walid Bin Talal’s Kingdom Holding and the Saudi Oger/Groupe Méditerranée of Lebanese tycoon Rafik Hariri. Medgulf chairman Lutfi Zein is the third main shareholder. The group’s financial acumen is reflected in multiple capital increases that the shareholders injected into the two companies over the past three years, bringing capital in Lebanon from $8.5 million in 2000 to over $13 million in 2002, and raising it from $15 million in 2001 to $ 33.3 million in 2003 for the Saudi arm.

Results for 2003 were good in both markets, Abou Jamra tells EXECUTIVE. Premium income for the group reached around $135 million, up from $120 million in the previous year. Shareholder equity climbed to $57 million. Through subsidiary company Addison-Bradley, Medgulf is also active in Jordan, the UAE and UK.

Although the operation in Saudi Arabia achieved the higher premium income between the two group companies, the number of individual policies written in Lebanon was six to seven times larger, according to Abou Jamra. “The market structures are not the same. In Saudi Arabia, we have much more corporate business and fewer private clients. Driving license insurance is the single main retail product with premium turnover there,” says Malak. “However, after new regulations come into force in Saudi Arabia and the GCC [Gulf Cooperation Council] countries, the situation might change and offer better prospects for individual sales.” Economic conditions in the Gulf countries are definitely influencing residents and nationals to view insurance with greater interest, agrees Abou Jamra. “In earlier years, employers in GCC countries provided ample packages to their expatriate workforce but under a more competitive labor market today, nationals and foreign employees alike seek out insurance companies for the benefits they offer,” he says.

The increasing adaptation of Gulf economies to international business and banking practices – such as requiring insurance as precondition for issuing a letter of credit – also help in widening the reach of insurance in the region, and the emergence of regional enterprises with employees in numerous Arab countries is creating new demand for services of insurers that are present across markets, say the two executives. Seeing this new Arab insurance environment taking shape, the Medgulf Insurance Group is enforced in their perspective that continued growth into a major international player is the way to secure their ambitions for Arab market leadership. The firm’s management culture is geared toward accommodating this. “We are working in a team with a diversified cultural background of people living in different Arab countries. All our management and middle management are ready to move to any market, and task forces can be formed wherever needed,” says Abou Jamra, adding that in the creation of this unified culture, the Medgulf main base in Lebanon plays a crucial role.

Arabia

Their name is tradition in the Middle Eastern insurance business. Commemorating their 60th anniversary this year, Arabia Insurance has sold policies in Arab countries already before some of them had gained their independence. The firm’s fortunes since its establishment in mandate-era Jerusalem in 1944 read as a corporate diary of exposure to changing political conditions and ideological risks, and of sustaining business throughout. With operations in seven markets – Kuwait, Bahrain, Qatar, Oman, the UAE, Saudi Arabia, and home base Lebanon – Arabia Insurance remains active in a larger number of Arab countries than most competitors. The company’s strategic growth focus for the foreseeable future, however, is on two markets where Arabia is active today and two others to which the firm wants to return after a long enforced absence. “We are shooting for market share in Saudi Arabia and Lebanon, and ultimately in Syria and Iraq,” the general manager of Arabia Insurance, Fady Shammas, tells EXECUTIVE. With the news of the release of Saudi Arabia’s insurance law just out, Shammas leaves no doubt that the kingdom is the most titillating market for the company at this point. “It tops the list in terms of our involvement in the region. We will consolidate and create a joint company in Saudi Arabia,” he says. “If medical and some other insurance covers are made compulsory, market potential could go from $1 billion in annual premiums to $5 billion within the next few years.” Arabia’s plan is to form a company involving several partners, probably including other insurance operators and a major bank. If negotiations among the prospective partners work out, the firm would enter the Saudi market as an insurance and reinsurance firm, with a mandatory minimum capital of $53.33 million. The business vision would entail competing for all public tenders – especially the energy and airline ones – and, for acceleration of retail business, engage in bancassurance as a distribution channel from day one of operations. Arabia’s confidence of being able to rise high in the kingdom’s insurance market is based, in good part, on the company’s knowledge of the Saudi market. By 2003, it had generated 19% of their business in the kingdom, although it had to operate their seven branches under the same hand knit setup as other private sector insurers, necessitated by the impossibility to register and run a regular insurance company in Saudi Arabia until the passing of the country’s new insurance law.

For their corporate structure, this meant the firm established an offshore Bahraini company as operator of the Saudi business called, Arabia Insurance International, while Beirut headquartered Arabia Insurance Company coordinated activities in the firm’s five other GCC markets, including Bahrain, and Lebanon. Consolidated unaudited figures for the two entities in the Arabia Insurance group for 2003 showed total assets of 260 billion LL, continuing a steady increase since a new management team took the reigns in 1999. Capital is an unchanged LL51 billion, and total equity without provisions reached $75 million. From non-life business alone, the company expects to realize a net profit of $8 million for 2003, an increase of 40% over 2002. The life division, in which Arabia launched a new concept in 2002 with aggressive ambitions for growth across its geographical markets, also realized good results for 2003 and improved its share in Arabia’s total gross premiums from 6% to 8%. As one of the first companies to participate in interactive ratings with regional ratings agency, i.e. Muhanna, Arabia was rated A for 2001, and the rating was confirmed for 2002. The largest shareholder in Arabia Insurance is leading regional banking group, Arab Bank. In line with a policy to close branches that have not been profitable for seven consecutive years and show no sign of better prospects, Arabia last year shut down one branch in the UAE and one in Saudi Arabia, out of its total network of over 30 branches and agencies. Reconfirming the company’s strategic commitment to Lebanon through opening two new branches, Arabia is raising the count to five active branches nationwide this year, plus five life agencies and one general agency. Syria and Iraq are the markets where Arabia has intense long-term ambitions in a combination of historic affinity, sense of mission, and business expectations. “We are very attached to these countries,” Shammas says, “and it is in our mission statement to export insurance knowledge to these markets.” The proper timing to emerge on the Iraqi market is still difficult to determine for now, but as to Syria, Arabia already conducted a proprietary feasibility study, which the company holds under close wraps. As soon as the legal path is cleared, the insurer intends to move full speed ahead, Shammas confirms. “Hopefully, we will be the first private sector insurance company to newly incorporate in Syria.”

Commercial

There are myths to be dispelled also when it comes to working in several Arab markets, and the most notable of these myths may well be the assumption that cross border activities are only for big companies. For Commercial Insurance, a seasoned Lebanese operator with over four decades of accumulated expertise, the decisive factors for regional activities by an insurer are having the requisite skills and finding the right partners. “There is no minimum size needed for being able to venture into new markets,” says Max Zaccar, the chairman of Commercial. “To be a good insurer, you first need a good team, which we are proven to have and are improving upon. Then you need the professional approach, for which we have been recognized for the last 42 years by our clients, by our market, and by our reinsurers.”

For not counting among the country’s market-dominant top ten insurers, Commercial – which achieved an income of just under $6 million in gross premiums in 2002 – has a track record of versatility and wide competency. Medical and motor covers provided the primary sources of income, but the firm is also regarded as specialist in marine insurance and has a small portfolio in term life policies. Strong client orientation motivated the insurer to be a by local industry standards very early implementer of a round-the-clock customer help line and develop group insurance solutions offering schools easy term life covers that safeguard the education of children in case of parental death. Despite losing a prominent corporate account in 2003, Commercial achieved a 25% increase in profits. “To us, this is confirmation of the way we do our business. It allows us to think that we can invest,” says Zaccar. Market conditions permitting, management harbors strong expectations to realize much growth in Lebanon over the coming years – but the company does not wait for “better days” to arrive before making new moves. Management took on 10 new trainees, equivalent to a quarter of their workforce; it partnered with a university, NDU, in a research and instruction project; and it offered staff members options of continued training at the company’s expense. These measures create a noticeable cost burden, which Zaccar accepts as a price for better productivity. “We are in a period of investing and saying to the market and our people that we are committed to the future,” he says. “Since the end of 2003, the entire company is changing attitudes. We are becoming more aggressive, more aware and more present.” It seems natural that a company engaged in an internal renewal cycle would not treat geographic expansion into new countries as a main concern. But Commercial has indeed made contacts with Iraq, from where it is awaiting feedback, and also explored possibilities in an African country. While Gulf and North African insurance markets are in his view heavily covered, Zaccar would see opportunities in these countries as well as in Libya and Syria. The trigger to make Commercial pursue new opportunities abroad would be interest from potential partners in a target country or from an international insurer seeking after a Lebanese partner for establishing a platform to enter this and regional markets. It would be an attractive proposition to Zaccar. “If partners from an Arab country would seek our professional partnership, we would be most interested, and also if we happen to be approached by an international player” he says and would not be deterred by questions over majority or minority shareholding. “We could be the leaven in any partnership. We are professional insurers. If we are thrown into a market, whatever the shareholding, we can produce results.”

The people of Commercial Insurance appear to believe in themselves, and accept challenges. They’d better. After all, the company just designed a new motto to express their corporate identity: ‘live boldly.’

Centering on Islamic ethics, the concept of takaful insurance reaches out to clients who value transparent policies and financial practices, which steer clear of investments which are morally less-than-pristine. As financial security scheme, the takaful approach by its very name implies mutual protection and solidarity among policyholders. While the term relates to the entire range of Islamic insurance, some operators associate it in particularity with the Islamic alternative to conventional life products. Present for over three decades in some markets, beginning with Sudan, and gaining strength in the Islamic countries in Southeast Asia, Malaysia and Indonesia, TAKAFUL has lately attracted growing attention in European countries with significant Muslim populations, such as the United Kingdom. In Lebanon, insurance firm Al Aman Takaful Insurance (ATI) began operations as the country’s first Islamic insurance operator in 2002 and is expanding. “We are the first takaful insurance provider in the Lebanese market and deal with all classes of insurance, where we aim to reach $4 million in premiums by 2008,” Jihad Faytrouni, ATI’s general manager, told EXECUTIVE. An important factor for computing the new company’s growth prospects is the affiliation with Al Baraka Bank, a 70% shareholder in ATI and linked to the gulf-based, financially capacious Dalla Al Baraka Group. After recently completing a restructuring, Lebanon’s Al Baraka bank has aggressive expansion aims in the domestic market, in which ATI plays an integral role. In its first full year of doing business, ATI wrote 1,040 contracts with new clients in 2003, a large portion of whom were referred by Al Baraka Bank. At a production in the $200,000 range, this result amounts to small fries even by the comparatively minor scale of the Lebanese insurance market. It must be seen in context of ATI’s careful product rollout, which began with general products in October 2002, added life-related takaful in April of last year, and is currently developing a medical line. “It is new but it is growing,” said Safaa Farroukh, underwriter at ATI. “Clients like it that we emphasize transparency. There is no small print in our contracts, no vague statements. Members of our Sharia board supervise all conditions and the wording of contracts.” These experts are versed in both Islam and finance, she explains, and investments of the takaful fund maintain a line of compliance with Islamic standards that prohibit financial participation in certain interest-earning investments or business ventures involved in, among others, arms, alcoholic beverages, and gambling. Another specific of Islamic insurance, which ATI adheres to, is the structural requirement under which the insurance operator is a managing entity for client contributions. “Our job is to manage funds, investing in Islamic investments, and manage insurance for our clients,” said Faytrouni.

The takaful operation is structured into two funds, a shareholder fund which acts as capital and a policyholders’ fund where all payments by participants are managed and from which appropriate disbursements are allocated in claims cases. A portion of the takaful contributions in the policyholders’ fund is allocated to compensating the operator for its expenses. The operator also participates in the gains achieved from managing and investing the money in the policyholders’ fund. At ATI, this share is set at 20%. As a central stipulation under the TAKAFUL principle of mutuality, the insured participate in the fund‘s surplus retained after deduction of technical reserves and provisions. In its SHARIA-driven aspects, the takaful concept is still subject to discussions over fine points of Koranic interpretation, which are best left to Islamic scholars. While these discussions can be expected to lead to further evolutions of specific rulings in areas such as defining the exact nature of financial contributions under a takaful agreement, experts widely contend that on the technical side of actuarial design and compliance with established insurance regulations, takaful is easily reconciled with proven best conventional practices.

For the discussion of evolving insurance paradigms, the growing interest in takaful serves as reminder that the term ‘life insurance’ is a radical misnomer under the perspective of what insurance can achieve. Although the assumption of protecting one’s life against existential vagaries has a proven appeal to large numbers of people, no insurance can accomplish thus.

In the spring weeks leading up to the 2004 GAIF conference, Lebanese insurers engaged in a flurry of new product releases. Each of three fancy launch events presented results of collaboration between local insurers and partner firms, from a leading multinational insurer and an international finance firm, to well-known domestic players in banking and trade. AXA Middle East, the Beirut-based affiliate of insurance multinational AXA and the fifth-largest sector company here, used the opportunity to unveil Viva, a new life insurance plan. Buyers of the plan can benefit from participating in fixed-income and equity-based funds managed by the asset arm of the AXA group. The insurers celebrated by inviting friends over for lunch – over 250 of them.

UFA Insurance, a provider ranked in the upper third of the market, teamed up with payment card company, Visa International, and Lebanese financial institution Fransabank, in co-branding a credit card that offers buyers of insurance policies extended payment facilities and discounts on policies. The combination of credit card and insurance branding marked the first product of this kind in the Middle East, according to a regional Visa Card executive. After introducing the new card with brief fanfare, the occasion called for obligatory management photos, and a buffet with quality snacks.

Horizon Insurance, a smaller operator and niche specialist in motor insurance, entered a partnership with First National Bank (FNB) and the Lebanese distributor for Hyundai cars. The launch of the company’s latest product, TriPlan, was recently celebrated at the InterContinental Phoenicial hotel. The plan presents as a rather complicated arrangement aimed at wooing customers with steep discounts on the purchase price of a new Hyundai car and a cash bonus in financing it with FNB, after they commit to purchasing a full comprehensive motor insurance with Horizon.

The Lebanese market, long regarded as under-insured, can no doubt do with as many innovative approaches as possible. Life and retirement products are still direly needed in greater variety and more effective distribution. But while assorted product creations and accompanying launches well demonstrate the combination of inventiveness and savoir vivre – the hallmark of Lebanon’s enticing business environment – all marketing strategies are fundamentally aimed at bypassing the prolonged economic stagnation that has consequently infiltrated the insurance market.

In 2003, the country’s only annual survey of insurance industry results – published by a sector magazine on the basis of unchecked company figures – offered a picture of encouraging double-digit sector growth for both general and life insurance for the first time in several years. But industry members questioned strongly whether last year’s sector performance was worth a celebration.

“In 2003, the insurance industry achieved only very slight improvements. As a result of the stagnating economy, plus political disturbances, the situation does not allow for the possibility to improve the premium volume,” said Abraham Matossian, president of Lebanon’s insurance association ACAL. Insurance leaders in the country’s still highly crowded field of providers regarded 2003 improvements in life premiums as continued genuine progress. They were widely concerned, however, over the role of motor insurance in last year’s premium income growth in general insurance. Lebanon began to enforce mandatory third-party liability (TPL) insurance for motor vehicles in 2003 – but the low minimum premiums decreed by the government and substantial upward changes in claims judgments made many experts and insurers fear that the motor business could flood the sector with losses in the near future. These concerns were accentuated even more on account of widely reported undercutting of the already low premiums by a number of unsavory providers, who have generated much negative publicity on the sector. Overall, most industry insiders and analysts consider the sector to suffer from excessive competition and still in great need of consolidation by mergers or company closures. The troubles are not to suggest that Lebanon’s insurance industry was void of progress over the past few years. The sector made impressive steps forward in increasing professional capabilities. The introduction of mandatory motor insurance in itself was highly positive. Bancassurance developed well, opening new paths to spread insurance awareness. Many companies refined their technical skills and streamlined their operations. The organized insurance brokers undertook substantial efforts to shape up the unfavorable image caused by shady practices of unqualified operators in war and immediate post-conflict years. In the matter of regulatory frameworks, the 1999 revision of the country’s old insurance law mandated higher capital requirements and more prudent financial practices. The country’s insurance control commission at the ministry of economy and trade stepped up their role.

This spring, the commission received the results of the first-ever field audits of insurance companies, carried out last year by international auditing firms contracted by the ministry. With these findings, the supervisory authorities expect to gain an unprecedented full and timely assessment of the industry’s state. The regulators at the ministry now hope that a just written entire new proposal for a national insurance law would be adopted and propel the insurance sector to another, much advanced state.

Insurance law upgraded

Canadian experts draft a new insurance law for Lebanon, championed by the World Bank

Lebanon’s insurance regime underwent measurable upgrades in the course of phasing in revisions of the dated insurance law augmented by flanking ministerial decrees between 1999 and 2003. But the revised old law was a makeshift solution that could not address all needs of a 21st century society. The new Lebanese insurance draft law is a piece of work supported by World Bank funding and authored by two Canadian experts intensely familiar with insurance issues in developing countries and with Canada’s insurance law, which is supposed to rate among the world’s best. Drafting of the law was authorized in September 2003 by Lebanon’s minister of economy and trade, Marwan Hamade, who last month hailed completion of the effort as a milestone. “The proposed legal framework draws on cutting-edge concepts from developed countries but does so in a form that recognizes the size of the industry and the nature of the Lebanese insurance environment,” Hamade said during a press conference on April 16. Among other things, the draft newly defines the structure and supervisory competencies of the Insurance Control Commission (ICC), calls for stricter separation of life insurance and general insurance activities as distinct corporate entities, and for increasing minimum capital requirements in several stages. At $3.5 million, the heightened capital requirements would be still far lower than those of comparable countries in the Middle East, said proponents of the new law, who described it as a document capturing the essence of advanced insurance legislation in a condensed and highly practical form on only 70 pages.

In the austere ICC offices at the ministry of economy and trade, the release of the draft created near euphoric vibes. ICC head Walid Genadry had the document and a synthesis distributed to all Lebanese insurance companies before the end of April, in hopes that stakeholders would rapidly register their comments, suggestions and modification requests. First comments from major insurance industry representatives were cautiously positive, but not without undercurrents. “We can only congratulate the head of the Insurance Control Commission on the good job they were performing last year,” said Elie Ziadeh, president of the Lebanese Insurance Brokers’ Syndicate. “However, we fear that at the ICC they do not understand the need to work with the people in the industry. We have the impression that they think they have an important project, work hard, and move forward with it. That is not enough. They should work with us.”

“The draft needs to be studied very carefully. It will be our challenge to look at the new law in a spirit of cooperation, give our recommendations and comments in a scientific approach and seek changes that we believe could improve the law,” said Fady Shammas, general manager of Arabia Insurance and recently elected new member on the board of insurance association ACAL. Other board members of the association voiced similar comments. When agreeing to sponsor the drafting of the law, the World Bank made it a specific aim for the project to create a law that would not only aid Lebanon but serve as a model for a large number of developing countries in all parts of the world. And the World Bank was so convinced of the quality of their final product that their experts already started presenting the document as a model insurance law in other countries. There can be no arguing against the point that being known as a country where a world-class exemplary insurance law was implemented first would serve Lebanon extremely well in heightening its reputation to becoming an international reference. Becoming that reference, however, would need a reasonably fast adaptation of the draft – and fast action on insurance legislation is not a matter of record in a country where implementation of a law on mandatory motor insurance broke all records for procrastination. But it may be that the past does not have to repeat itself. “It is our duty to assist in the progress of the new law. I call upon all colleagues that this law should be entering into effect in 2005,” said Shammas. “There is no reason why it shouldn‘t. Eight months would be enough.”

The General Arab Insurance Federation (GAIF) is the umbrella organization for the insurance industry in Arab countries. Based in Cairo, Egypt, GAIF biannually convenes the regional sector’s landmark conferences. This year, the event is taking place in Beirut from May 10 to 12, and prepared by a committee chaired by Abraham Matossian, president of the Lebanese insurance association, ACAL. The Secretary General of GAIF, Abdul Khaleq Raouf Khalil, gave EXECUTIVE an interview explaining the role and positions of the Federation.

How many companies are members in the GAIF?

A: The Federation is an international Arab body, comprising 237 insurance and reinsurance companies, associations and national insurance unions. GAIF essentially aims to support relations among Arab insurance bodies and markets in order to promote cooperation among them and coordinate their various activities, with the aims of protecting member interests and developing the insurance sector in the Arab region.

By what methods are you pursuing those aims?

A: We concentrate our activities on four areas and main objectives. These areas are a) achieving economic integration among insurance markets in Arab countries; b) developing the insurance sector in the Arab region; c) supporting and developing business opportunities and activities of Federation members; and d) enhancing cooperation between the Federation and other Arab and international organizations and bodies. For each of these areas, we have identified a set of measures that we view as instrumental in furthering our aims.

Could you give us some examples of specific activities?

A: In seeking to achieve economic integration among Arab insurance markets, our activities include examining insurance legislations and systems in Arab countries, cooperation with Federation members in establishment of joint insurance companies, as well as cooperation in matters that could promote investment policies in insurance and reinsurance. We also strive to promote the Arab insurance market as a unified entity on the international scene. For developing our region’s insurance sector and dealing with the issues pertaining to Arab insurance activities, we are, among other things, engaged in forming both permanent and temporary expert technical committees and in establishing service and GAIF-affiliated consultancy centers that offer members technical, legal, and investment consultancy.

You are also committed to the education of Human Resources in the region?

A: Yes. We regard it as important to improve the technical and educational levels of employees in Arab insurance markets by exchanging expertise and information. To this end, we support the establishment of specialized insurance centers and institutes, along with the implementation of training programs and the organization of insurance conferences and seminars.

What role does Arabicizing of insurance language play in your efforts to integrate the sector?

A: Human and general resources available in Arab insurance markets must be employed to the greatest benefit. Arabicizing the insurance language means creating a unified terminology in Arabic and setting unified templates for insurance contracts, reinsurance agreements and other documents. This would help greatly to coordinate work among insurance companies in Arab countries.

How does GAIF contribute to the creation of new business opportunities for member companies?

A: Possibilities in this area begin with the publication of magazines and books that contribute to spreading awareness and integrated scientific thought in the insurance community and range to provision of arbitration and conflict mediation services for members. Conducting studies on the sector’s problems, collection and dissemination of statistics and information and regular expert meetings also are tools in developing the environment for new business growth for Federation members.

And what do you do to further the cooperation between GAIF and other Arab and international bodies?

A: We participate in international conferences and seminars related to insurance where we also coordinate the presence of Federation members by organizing exhibition involvement and stands. We extend a standing invitation to Arab organizations and bodies that are interested in insurance to attend our Federation’s conferences.

GAIF members will hold their 25th general conference this month in Beirut. Do you expect the event to mark a turning point for Arab insurance companies?

A: Beirut is preparing to host the 25th GAIF conference under the theme of “Arab Insurance: A Future Outlook.” We hope the conference will issue resolutions and recommendations that can be applied and would positively reflect on the Arab insurance sector.

What is the GAIF position on the role of insurance in developing Arab societies?

A: The Arab insurance industry plays an important role in supporting our national economies by providing insurance protection to individuals and institutions. This industry is also a main pillar of society as it gathers capital collected from insurance premiums and invests that capital in various economic areas, which reflects positively on the socio-economic level.

Mr. Khalil graciously granted this interview to EXECUTIVE via electronic transmission in Arabic, from which editorial staff extracted the English translation.
 

Toward the end of last month, insurance managers from the Middle East and North Africa crowded onto the website of Saudi Arabia’s Monetary Agency (SAMA) to download the final version of the kingdom’s new insurance law. Many an executive surrounded himself during the following days with the new Lebanese insurance draft law and the Saudi law.

Years in the making, the Saudi law defines a new insurance regime that provides sector companies with a window to a potential boom in what is currently the region’s most interesting insurance market, with a per capita expenditure of merely $46 in 2002 and an insurance penetration of 0.35%. According to statistics published by Middle Eastern ratings agency i.e., this makes Saudi Arabia the lowest ranking oil economy in terms of insurance penetration.

The law’s announcement also points to an issue at the heart of the Arab world’s insurance industry concerns: the disparate regulatory environment. Observers and industry members widely agree that regulations have been, and still often are, either insufficient or damaging to insurance development – the latter occurring mostly in countries where protectionism eliminated competition on government projects. A paper analyzing strengths, weaknesses, opportunities and threats (SWOT) for the Middle East insurance sector in the year 2000 by then vice-chairman of Arab Reinsurance and Insurance Group (ARIG), Ali Al Bahar, stated “laws governing the insurance industry across the Middle East are not uniform. This hinders cross border activity.” He went on to note that the practice of protected markets “hindered many companies from enhancing their products and services.” Self-defeating underwriting practices in some ruinously over-competitive markets, under capitalization of many insurers, one-sided portfolios and lack of internal transparency were other weaknesses listed in Bahar’s paper, juxtaposed by a smaller number of strengths, including the absence of natural disasters, high returns on shareholder equity, and wide availability of products. Promoting harmonization of regional insurance laws is one of the core aims of the General Arab Insurance Federation (GAIF), said the secretary general, Abdul Khaleq Raouf Khalil, in remarks to EXECUTIVE outlining the Federation’s principles and policies. In Khalil’s views on regional industry concerns, the era of economic globalization created new challenges to Arab insurers by opening these “promising markets to international companies, which made giant companies flock toward them.” As a result, established companies in Arab countries faced the challenge of “confronting weak insurance awareness comprehensively by unifying efforts among institutions.” Khalil named insurance education in schools and insurance promotion through the media as desirable means to increase awareness but specifically called upon governments to aid the sector by reducing taxes on insurance and offer incentives for policy buyers.

In context of larger demographic and cultural changes, societal provisions for retirement plans and pension funds are issues of monumental dimension in the Arab world. According to recently published research by Lebanese financial firm Saradar Investhouse, the share of life insurance premiums out of total premiums is remarkably low in nearly all Arab countries. Ranging from 31% in Egypt down to 4% in Saudi Arabia and 1% in Syria, life insurance ratios are in stark contrast to developed markets, where life insurance and wealth creation through insurance products dominate. Also in global averages for developed and developing countries, life premiums outweigh general insurance, said the report.

Executives from Arab insurance companies point to a number of reasons for the Middle East’s low acceptance rate of life products. Throughout most of the period following the eruption of their national wealth (which in some countries coincided with their independence), oil economies in the Gulf region provided their citizens with extensive free welfare assistance. In a few countries, selling of life policies was simply outlawed. Population growth and experiences of economic and cultural transformation have begun directing these societies towards appreciation of the tools that life insurance offers. However, communal and religious identities in Arab countries run strong, and carry an element of rejection to life insurance on account of dual factors. On the one hand, many Muslims abstain from buying standard life insurance products because risk concepts and investment structures of conventional plans are forbidden under the Islamic legal canon. On the other hand, the notion of ‘life insurance’ also carries emotional messages that can be interpreted as attempts to outwit the creator and deny the sole divine authority over life and death.

Arab advocates of the benefits of life insurance thus have been emphasizing that the real character of a life plan lies in financial safeguarding of people’s loved ones and in preparing for the future. And in course of the overall trend to evolve Islamic finance, insurance companies in Muslim countries are working towards a stronger presence of TAKAFUL insurance, that is insurance where policies and investment methods are in compliance with SHARI’A rules, satisfying both Islamic religious and secular supervisory standards.

Insurers involved in TAKAFUL, including subsidiaries of global financial player HSBC, speak of a great potential. However, provider experiences do not yet suggest that sales growth of either Islamic or conventional life policies would suffice to meet the region’s needs for wide spread wealth creation and building of pensions. “Some insurance and reinsurance companies are building experience with TAKAFUL, but it is yet premature to pass judgment on the feasibility and relevance of these concepts,” opined the deputy general manager of regional reinsurance firm Arab Re, Tayseer Treky. Given the youth-heavy demographic structures of the large and populous Arab countries – from Algeria and Egypt to Iraq, Saudi Arabia and Syria, as well as smaller countries such as Lebanon – in conjunction with severely underpowered public sector social nets, planning for ageing populations appears as a need that will only increase in importance and urgency for decades to come.

In relation to this massive socioeconomic issue, concerns over intra-regional reinsurance capacities may be of lesser long-term consequence, but they have been weighing on the minds of Arab insurers for many years, and attracted a massive increase in attention after global reinsurance markets began to harden four years ago – and more so in the aftermath of September 11. Numerous Arab insurance companies felt hard pressed by the sudden drop in reinsurance availability, and industry members renewed calls for strengthening regional reinsurance pools. For the region’s reinsurance providers, the development offered a welcome opportunity. Nonetheless, managers do not dream of replacing the international firms in the market. “We do not look to international reinsurers as a threat. Reinsurance is international per se,” said Treky.

All deliberations of economics and business concerns in the Arab world are void without paying reference to regional security and political issues. Every Middle Eastern war, from 1948 until the 2003 Iraq invasion, dented the economic stance of the insurance industry to at least some extent. The abrupt decline of the Lebanese standing as the region’s avant-garde location for insurers after 1975 and the downturn of the Iraqi market after 1990 were both directly conflict-caused. And fundamentally, the regional insurance outlook will not be completely positive in the absence of peace.

Future prospects of individual markets with the greatest development potential thus are subject to the two key influences of political stability and improvement and liberalization of regulatory regimes. Iraq shows the strongest current promise of a yet to be realized huge peace dividend for insurance operators. Saudi Arabia is the encouraging example of market opening and regulation for the day, Libya is also en course, Syria another candidate for opening up. Countries that have a history of a strong private sector insurance market and countries that have successfully established and implemented advanced insurance legislation have the best prospects to serve as centers for Arab insurance development. Bahrain, where authorities adopted ambitious aims of establishing a major financial hub, is the noted example for the latter scenario, Lebanon the indisputable representative of the former. Veterans of the Lebanese insurance industry do not tire to declare that the Human Resources, experience and expertise concentrated in this country create a fertile ground suited like no other country in the region for fulfilling the role of insurance center. In view of the benefits of multi-polar structures and respectful competition, the Middle Eastern insurance industry would be extremely well served if these two and eventually additional countries were to evolve into centers of insurance excellence. Sound domestic markets with healthy, well-governed companies and exemplary supervisory regimes are required as ingredients for achieving such functionality for either country. In the opinion of Abraham Matossian, president of Lebanon’s insurance association, ACAL, and head of the event’s preparatory committee, the 25th GAIF conference represents a good omen for developing Lebanon’s role in the Arab insurance world. ”This is not one of many conferences,” he said. “More than 1000 participants have registered, which is an unprecedented number. Our topic is the future of Arab insurance. The fact that the GAIF is convening here this time is unusual because the conference never before assembled twice in the same country within a twelve-year period, and what further adds to its importance is the fact that this is the Federation’s silver jubilee conference.”