In the middle of January, Solidere

• Lebanon’s real-estate giant –
  released a list of projects that it
  had been pursuing throughout the
  past year. The firm confirmed
  that it had completed the final
  Jun-99 Aug-99 Oct-99 Dec-99 Feb-00 phase of infrastructure work and
  finished the renovation of 90% of
  ancient buildings in the downtown area. Solidere also confirmed
  continued advanced work on the Saifi residential project, as well
  as the initiation of environmental work by the US firm Radian
  International on the Normandy landfill. Solidere’s GDR witnessed
  much fluctuation in January, whereby its price varied
  between a low of $8.7 and a high of $8.8.

BLC      

    

                                                                                                                                 

Banque Libanaise pour le
Commerce enjoyed a rather rocky
month that saw it subdued by negative
sentiments following its declaration
of 1998 profits of a loss of
$4.3 million.

The bank attributed the loss to a
$16.5 million increase in provisions
and doubtful loans, which
amounted to $24.1 million.

The Bank’s GDR suffered throughout the month, whereby its price
spiraled downwards, dropping consistently from $13 on January 17,
2000, to a low of $10.85 on January 16, 2000, representing a 19.8%
drop in the GDR’s price.

BLOM

Lebanon’s largest bank in terms of
assets and customer deposits,
Banque du Liban et d’Outre Mer
SAL, declared net profits of
$70.43 million for 1999, a 20%
rise over 1998 results. Return on
Average Equity stood at 28.6%
while return on average assets was
1.46%. Total assets reached $5.08
billion, up 10.9% from 1998. Customer deposits amounted to $4.33
billion, a 12.2% rise year-on-year, while loans rose 12.49% to
$1.107 billion. BLOM announced that the results were due to a conservative
lending policy, cost containment and the launch of retail
products and services. Merrill Lynch reaffirmed its long-term “Buy”
recommendation for the stock and it also announced that it expects
the bank’s income from retail products to grow significantly in 2000
compared to fees generated from loans and trade finance.

AUDI

Bank Audi SAL, one of Lebanon’s
top five banks, declared consolidated
net profits of $38.1 million in
1999, an 11.3% decrease from 1998
adjusted figures. Return on average
equity stood at 17.1% while return
on average assets was 1.23%. Total
assets reached $3.246 billion, up
9.88% from 1998. Customer
deposits reached $2.69 billion, an
11.07**%** rise year-on-year and loans rose 0.27% to $862.2.

The Bank attributed the decrease in results to the prevailing economic
recession as well as to the cost of expansion and development.

Following the Bank’s annual earnings results, Merrill
Lynch raised its medium-term opinion on Bank Audi’s GDR from
Neutral to Accumulate, and recommended the stock as a long-term

“Buy”.

MOROCCO

A surge in turnover, led by block deals, failed to pull the
Casablanca Stock Exchange (CSE) out of negative territory
last month with year-to-date losses totaling 4.8%.

The bourse was occasionally led higher by gains posted
by the subsidiaries of the conglomerate ONA Group.
However, these gains were short-lived as the market
succumbed, driven by losses in major stocks including
Ciment du Maroc, Samir, and SMI. Although the surge in
trading activity indicates potential signs of recovery, the
market is still in need of more liquidity to be injected by
large local and foreign institutional investors to pull it out
of the doldrums.

EGYPT

Strength in the cement sector and renewed interest in a
score of blue-chip issues, along with news of falling inter-bank
rates, consolidation and privatization in certain sectors, propelled
the Cairo Stock Exchange (CSE) into positive territory.

Several reports pointing to the privatization of Telecom
Egypt with an initial tranche of 10% slated for the second half
of 2000 also added positive sentiment to the market. The stabilization
in inter-bank rates at around 15% alleviated concerns
of a rising interest rate environment following the US
Federal Reserve’s decision to hike the overnight borrowing
rate by 25 basis points in early February.

JORDAN

The Amman stock exschange recorded substantial losses
on the back of steep declines in leading industrial and
banking blue chips. The banking sector led the decline as
the heavyweight Arab Bank share lost ground after
announcing a marginal rise of 0.9% in 1999 net profit to
$225.6 million, triggering a selling spree among foreign
funds. In the industrial sector, the Jordan Phosphate
Mines Co. dropped steeply dragging the whole sector with
it. However, trading activity was strong thanks to the government’s
continued divestiture of its holdings in Arab
International Hotels as part of its privatization drive.

It wasn’t all that bad for Lebanon’s listed
banks last year. Caught in the middle
of the country’s worst recession since the
war, falling interest rates that put a squeeze
on spreads and competition heating up, it is
estimated that the banking sector’s overall
earnings fell about 15% in 1999. There was
a mixed bag of results among listed banks.
One showed a poor performance, others
were resilient to the harsh conditions, while
some surged ahead in profit growth.

Investment firms local and abroad have
come out with their scorecards. And just like
the financial institutions’ mixed performances,
the analysts’ recommendations and
projections for the future are divided on some banks, as well as being cautious, linking
the sector to a potential peace agreement
and economic recovery.

The banks getting the most attention are                                         
Banque du Liban et d’ Outre Mer (BLOM)
and Banque Audi, which have shares traded
on the GDR market. Everybody’s favorite is
BLOM. Rightfully so. BLOM has been, and
will probably continue, to weather the economic
storm and produce healthy returns.

Last year, Lebanon’s largest bank in assets,
deposits and profit volume plowed ahead in
earnings, up 20%, from $58.7 million to
$70.4 million. Return on average equity
(RoAE) stood at 31.9%, far above Byblos
Bank (20.3%) and Audi (20%).

Its net interest income jumped 23%. This is
partly due to BLOM taking advantage of its
image of being one of Lebanon’s safest
banks, allowing deposit rates to be lower than
most of its peers, and having little effect from
interest in arrears. Still focusing mostly on high
net worth corporate clients for lending, its nonperforming
loans (NPLs) to gross loans
u 13
12.8 12.4 ….,. 1.9 472
18.7 13.1 2.4 237
72.3 12116 a7 8.7 1.8 1.2 435
Ill& N/A 17.8 t&.11 NIA UI
dropped from 6.7% in I998 to 6.4% last year.

BLOM’s net interest spread grew from
1.97% to 2.12% year-on-year, while Byblos’
and Audi’s shrank from 4.01% to 3.50% and
3.39% to 3.09% respectively.

Another strength is BLOM’s persistence in keeping
costs low. Its cost-to-income ratio came
down from 45.5% in 1998 to 41.5% in
1999, according to HSBC Investment Bank
in London. “This is the result of our internal
team that for almost four years has been
studying all activities in the bank, both in
branches and administration,” says Samer
Azhari, BLOM’s general manager. “But it’s
long term, a never-ending process.”

There is an ongoing debate, however,
about what will happen to BLOM when the
economy recovers and interest rates fall,
putting serious pressure on margins.
According to HSBC, BLOM will not perform
as well as some of its peers when there is
strong economic growth, as it’s not putting
enough energy into developing retail banking.

Azhari begs to differ. He asserts that the bank has taken the necessary steps to build
the infrastructure to move more aggressively
into retail banking when the time is ripe.
“It is part of our preparation: be aggressive
on products and services that aren’t risky to
the bank,” says Azhari. “The results have
shown that we are quite successful in terms
of the products and services we have
launched so far.” In 1999 BLOM’s products
contributed to non-interest income, which
grew 23%. Philip Khoury, vice president of
Merrill Lynch’s London branch, believes
that the bank’s income from retail products
will grow strongly in 2000. Recently,
BLOM got itself into retail lending, targeting
existing clients to do it cautiously. Last year
loans increased 12.5%.

There is also a difference in projected
earnings. Khoury sees the tightening of the
spreads, for example, beating down on
BLOM’s profit growth in the next two
years, up only 7% and 6%. Spiro
Youakim, senior manager of corporate and
project finance at Schroders, comes out
with different projections: “It has the elements
to support 11.5% average annual
earnings growth over the next five years.”

Regardless, analysts agree on one thing:
“Buy.” Khoury’s valuation targets the
bank’s GDR price at $44 over the next 12
months, a 62% upside to the current price at
$27.10. It’s P/E ratio is 7.1 (’99), one of the
lowest in the local banking sector and the
lowest on the Merrill Lynch Emerging
Europe Universe list of 35 banks.

Unlike BLOM playing it safe, Audi is
aiming to be the leading retail bank. It has
been rolling out unique products (first on the
block bringing out its Net Account, which
has already brought in over 10,000 customers),
has the best capital markets division
in the sector and is expanding its branch network
rapidly, from 42 branches to 55 last
year and aiming at 68 by the end of 2000.

But being aggressive to be a retailer
makes Audi vulnerable to the tough times:
Its profits dropped 11% in 1999. Freddie
Baz, advisor to the bank’s chairman, places
the blame on the squeeze on spreads and flat
growth on non-interest income.

Net interest income increased 0.5%. Its
NPLs to gross loans jumped from 7.4% in
1998 to 10.9% last year, and interest in
arrears (that grew from $6 million to $12 million)
put pressure on margins. For fees and
commissions, the stagnant Lebanese equities
took a toll on Audi’s capital markets division,
trade finance was pulled down and loan fees
didn’t help either. Its strategy can be costly.
Audi’s cost-to-income ratio increased from
50.8% to 52.3%, according to Merrill Lynch.

“What we are paying today is much lower
than what other leading banks will have to pay
without sufficient preparation for the postpeace
era in terms of regional and international
competition,” says Baz. There is little
doubt that Audi is preparing itself. Its capital
markets division will profit handsomely
when Lebanese stocks come back to life.
That department hooked up with Lebanon
Invest in a cooperation agreement between the
two institutions. Audi also plans to buy its two
sister banks abroad this year. The Paris
branch focuses mostly on commercial and
retail lending, while the outlet in Geneva is
involved in private banking and asset management.

To be more regional, “We will be
supported by the European branches,” says
Baz. “A large potential customer base in the
Middle East is related to Europe, doing business
activities in Europe.” And its products
and services should eventually pay off. ‘The
broad range of retail products that came out
in 1999 has started to generate significant
commissions,” says Baz. “After starting last
year, figures will be much higher in 2000.”

But Audi is in a precarious situation.
Boldly going forward to be the first in retail banking links its results a great deal to
peace and economic recovery, which worries
some analysts. ABN AMRO and HSBC
have placed a hold on its shares traded in
Luxembourg. “The future of Lebanon is
speculative. The economy is sluggish and
fiscal adjustments are unsure. It needs a
remedy,” says Ghassan Medawar, the
financial analyst for MENA (Middle East
and North Africa) banks at ABN AMRO.

Khoury, on the other hand, has changed his
recommendation from neutral to accumulate
and a long-term buy. “I don’t expect great
earnings this year, but I do expect good
profit growth in 2001,” says Khoury, who
targets the GDR price at $25, up 22% from
its current price. His forecast on Audi’s
earnings is a 4% increase in 2000, followed
by a 29% jump next year, which is quite different
from Medawar’s: 4%, 12% and 15%
from 2000 through 2002.

Audi is not alone in trying to be the premiere
retail bank. The pioneer was Byblos,
who was the first to offer retail lending in the
early 1990s. But going out to be different
has left Byblos exposed to harsh economic
conditions. It’s profits were flat in 1999,
standing at $49.8 million.

Byblos’ fee-based income, expected to
increase in retailing, didn’t increase in
1999. Its net interest income dropped
0.3%, stemming from margins tightening
affected by unearned interest and deposit
rates not retreating fast enough.

Interestingly, Byblos started pulling back
on some of its aggressive tactics last year to
cope with the slowdown: Loan growth
inched up only 0.86%. It also controlled
NPLs, up slightly from 11.2% to 11.9%. The
bank increased investments in T-bills, from
40.2% to 46% of assets, which took up
50% of its interest earning assets, an
increase from 43.1% in 1998. Byblos can
also be seen as a highly liquid bank.

According to HSBC, its liquid assets stood
at 67% of total assets, below BLOM
(71%), but 14% higher than Audi’s.

Though it appears that Byblos has begun
digging in with a more conservative stance, it’s
making moves this year to improve on earnings.
First, it will be concentrating more on
efficiency. It invested heavily in IT last year.
“We see great potential for efficiency in the
bank. We are now in the process of implementing
our new software,” says Seeman
Bassil, general manager of Byblos. It will
also be funneling its energy into cross-selling
products. “We have a large customer base that
we have not sold more than two products on
average to each customer,” says Bassil.

Byblos has also found markets to tap into. It’s
aiming at small- to medium-sized businesses.
“We found 30% of small businesses that do not
deal with banks,” he says. It will also branch
out into areas not being fully banked, such as
the Bekaa Valley, north and south Lebanon.

But implementing its plans to increase
profits won’t happen overnight. “The kind
of improvements they’re trying to develop
are longer-term in nature,” says Nicolas
Sawan, head of trading at Lebanon Invest.
“This year is too early to predict whether it
will improve profits.” Sawan suggests a
hold on Byblos shares, considering it a
long-term buy. HSBC agrees, predicting
5% earnings increase this year, followed by
a better 10% rise in 2001.

Some analysts say they haven’t been following
Banque Europeenne pour le
Moyen-Orient (BEMO), due to its size
($381.5 million in assets) and expensive
share price (its P/E ratio stood at 16.8 on
February 18, the highest among bank
shares traded on the BSE and GDR market).

But being a very conservative bank,
BEMO is well positioned to withstand
recessionary pressure. Ninety percent of
its balance sheet is made up of foreign currency,
while just 5% of its assets are in T-bills,
well below the sector’s average.

BEMO is into lending, its loan-to-deposit
ratio at 35.6%, and caters only to high net
worth corporate clients (just like BLOM).
This has led to a phenomenal 0.01% of
NPLs to gross loans in the last two years.

Its unique strategy brought in a 6.3%
profit growth in 1999, which isn’t bad in
current conditions. But that’s down considerably compared to 1998’s figure of
79%. Non-interest income moved down a
bit, and interest spread dropped from
1.94% to 1.3%, mostly from competition
that pushed deposit rates up from 5.21% to
5.94%. It also had a cost control problem,
cost-to-income ratio jumped from 58.7% to
62.9%, according to MECG.

Its conservative policy, including not
expanding branches beyond the current
five, may work against it if an economic upswing occurs. But senior associate at
Middle East Capital Group (MECG) Talal
Ghali sees pluses in the bank. He admires its
core banking activities, and because
BEMO has a very large client base in Syria,
it will be able to capitalize on that if peace
comes around and Syria opens up. “I like
BEMO a lot,” says Youakim. “It’s a good
bank, conservative and will do fine during a
recession. Add BEMO to your Lebanon
stock portfolio.” He calculates over a 10%
average increase in earnings over the next
few years and holds a fair market value of its
shares at 10% over the current price.

Bank of Beirut (BoB) is a comer. Starting
out of nowhere in 1993, its rapid growth has
already placed itself in the banking sector’s
top ten. Last year it completed its merger with
Transorient Bank and had the best profit
performance among listed banks, up 27%.

Comparing the unconsolidated income
statement in 1998 and the consolidated
income statement last year shows that net
interest income increased 59.7% and non-
interest income sky-rocketed 138.7%.

This year BoB is planning to concentrate
on profit growth (see ‘Shooting higher,’
February 2000). It is developing private banking, expanding on products and
strengthening income through an alliance
with Emirates Bank International. That
may just be a start as BoB has its eyes on
going more regional in the near future.

Its P/E ratio compared to other banks
implies that its share price is not cheap. And
even though BoB’s growth rate has been very
impressive, it isn’t clear if the recession will
catch up with the bank. The general consensus
among local analysts is that BoB will
probably continue to grow.

The bank that analysts have the least
amount of interest in is Banque Libanaise pour
le Commerce (BLC). Not long after Byblos
and BLC had a bloody break up that left
BLC limping away, the latter merged with
United Bank of Lebanon (UBL). Analysts
were already wary: They wanted to see these
two move in together and settle in before making
a judgment call. They also complain
about BLC’s transparency. BLC is also tardy
on opening its books. Recently BLC
revealed its 1998 results, which showed $4.3
million in losses.

But this is just the start of analysts shying
away from BLC shares. Safi Harb, chairman
of the merged entity, was forced to step
down in late February, due apparently to the
bank lending money to members of Harb’s
family and board members.

Its GDRs have tumbled since rumors of
something fishy happening at UBL (BLC)
first surfaced early last month. And though
the prices are cheap (BSE P/E is 6.8 and
GDR P/E is 5.4), analysts want to stay
clear of the bank.

But not all doubts are focused on BLC.
Brokers grumble that it is difficult to predict
when the down-time in trading Lebanese
stocks, which has lasted more than a year-
and-a-half, will finally come to an end.

Analysts say that if there is a peace agreement,
Lebanese stocks, especially Solidere,
and the banks, will take off and there’s a
chance that the economy will get a boost
(see ‘What will happen after the party’s
over?’ February 2000). On the other hand,
peace talks have stalled, again. Without
peace, Lebanon must get its act together and
reshape its economy. Unfortunately, that
means betting on peace and the government
rather than the fundamentals and performances
of the banks.

Top of Form

Bottom of Form

The Eagle ~

has landed

The first real estate investment company
in Lebanon, Eagle One, has been set up
by The Property House, a subsidiary of local
finance firm The Investment House. The ten-
year,
closed-end fund, pays dividends
derived from rental income and capital gains.

The firm’s focus is on commercial properties
rather than residential units. “The purpose of
the project is to purchase income-producing
real estate,” says Karim Salameh, project
manager. “With the market at a standstill,
now is the time to buy. We can buy at a discount,
pay dividends from rental income,
then when the property values appreciate,
we’ll sell at a profit.”

The firm has already identified $20 million
worth of prime commercial properties in
Beirut that can offer annual yields of 12.5%.
Income from the properties would cover
management fees, taxes and expenses, and the
balance would be paid as dividends twice a
year. Structured like American real estate
investment trusts (REITs), Eagle One offers
investors long-term income from both dividends
and capital gains. It also provides foreign
investors, currently restricted from complete
ownership of local real estate, indirect access
to the Lebanese market. There are plans to list
Eagle One on the Beirut Stock Exchange this
spring and to issue global depository receipts.

The firm has already targeted corporate
investors interested in the Lebanese property
market and it has conducted a pre-marketing
tour of the Gulf and Europe.

FNB looking

to buy

First National Bank SAL (FNB) has
expanded its shareholder base as a
forerunner to a possible acquisition of
another local bank. Among the new shareholders, who now have a 62% share of the
financial institution, are Lebanon
Holdings, Promotion des Investissements
SAL, Abdo Kassir, Salah-El-Din Osseiran, Elias Pierre Sabbagh, Darar Kanaan, and Kabalan Yammine. The sale of shares raised the bank’s capital from $5.33 million to $24 million. “Some banks are now being considered for acquisition,” says Mounir Freiha, operations manager at FNB’s Hamra branch. “Although some appear to be likely candidates, nothing has yet been finalized.“

“These investors didn’t come in to wait for the bank to grow,” says Nicole Gebara, assistant manager for corporate
finance at Lebanon Holdings. “The
bank is now looking to acquire another
bank through which it can expand its
coverage. But, for the time being, we
can’t disclose any names.”

Wedding’s Oli?

There was talk on the street in February
that Bank of Beirut (BoB) was getting
close to acquiring Allied Business Bank
(ABB) for between $30 million and $35 million.

BoB, one of the top ten banks with $1.8
billion in total assets and $1.3 billion in customer
deposits at the end of 1999, had
already proven itself capable of marriage by
smoothly merging with Transorient Bank
last year. The acquisition of a medium-size
bank would have catapulted BoB’s branch
network from 30 outlets to 47.

Both BoB and ABB officials have denied
the rumor. But it looks like ABB is still interested
in merging. Last December, Habib
Abu Fadil, the bank**’**s managing director,
announced that the bank was interested in
consolidating with several other banks. But
it is not clear if that means ABB is off the auction
block. Jordan’s Al-Ahli Bank and local
First National Bank have shown interest in
scooping up ABB.

Whether ABB merges or not, it looks as
though consolidation in the banking sector is
heating up. Analysts believe that now is the
time. If there is a peace agreement in the near
future and Lebanon opens up to the international
market, there is fear that large foreign
heavies will start buying out local banks.

“The time has come to consolidate to be
ready when the environment changes quickly,”
says Freddie Baz, an advisor to Banque
Audi’s chairman. Are the banks showing more interest in mergers and acquisitions?
“Banks have become interested. Three years ago it was a taboo. Today there is a lot of talk.
It is a clear perception among the major players that someday we’ll have to join efforts,” says Baz.

World Bank is

open tor business

The World Bank opened an office in
Lebanon at the end of January in a
move that may help speed up the implementation
of projects funded by the organization.

The bank has approved allocations totaling
$135 million this year to support ten projects,
some still in the pipeline. Should
there be a greater need, the bank can
increase its support to $200 or $300 million,
according to Hari Prasad, the resident representative
of the World Bank in Lebanon.

Over the years, the bank has disbursed
$600 million in loans to Lebanon. But so far
only about $350 million of the allocated
funds have actually been used.

Bureaucratic inefficiencies within the government
administration have been the
main barriers to the implementation of projects.
The problems are not new to the
bank according to Prasad who was stationed
in Colombia from 1986 to I994. In
his opinion, “the essence is to modernize”
and to “reach the stage where loans can be
disbursed more rapidly.” Apart from the
thorny issue of administrative reform, the
bank may provide technical assistance to the
government if it decides to go ahead with its
plans for privatization.

The bank’s complement of 12 staff
members will also be available to offer
consultation to other countries in the
region that do not have representation on the
ground. The bank has offices in Egypt,
Morocco, Yemen and the West Bank/Gaza.

Passive about

privatization

There will be no privatization of the
country’s telecommunications sector
before the middle of 2001, Issam Naaman,
minister of post and telecommunications
recently announced. Even partial privatization,
he says, must wait for parliament’s
passage of a law restructuring the
telecommunications sector. The government’s
five-year plan, proposed last year,
included projects to raise $5 billion,
including $1.4 billion this year, through
privatization of everything from the country’s
utilities to Middle East Airlines. The
revenue was to be used to reduce the public
debt, currently 130% of GDP. But, so
far, very few steps have been taken
towards selling off state-run entities.

Naaman hopes that a law restructuring the
telecom sector will be passed by the end of
April. That will be followed by the ministry
replacing the two cellular operators’ BOT
contracts with licenses and issuing a third
license, most likely to the state-run telephone
company Ogero. Naaman has indicated
that granting Ogero a license would
increase the value of the telecommunications
company, thereby making it more
attractive to buyers.

But according to one economist, the
more the government waits, the less benefit
privatization will bring. The debt will
only be growing larger in the meantime.
“We will be back to where we were in
1998,” he says.

Money under

the mattress

InfoPro, a local market research firm,
has released some disheartening news
about the country’s banks. Even though
Lebanon’s banking industry is the
strongest sector in the country, making up
around 15% of the country’s GDP last
year, in the first quarter of 1999 only 30%
of individuals surveyed had bank
accounts, down from 37% in 1997. A further
28% of people questioned said that, while
they previously had a bank account, they no
longer did. On the service side, 72%
claimed that they never applied for a loan,
while 54% of those who had applied had
been turned down.

Nicolas Photiades, senior vice president
at Thomson Financial BankWatch, gave
several reasons for the study’s results. He
says that the economic slowdown, which
started in 1996, has increased the number of
people below the poverty line. Another cause was the steady flow of Lebanese
leaving the country. But Photiades felt the
main explanation for why people were not
banking is due to a waning confidence in
Lebanon. A rise in political and economic
uncertainty, he says, may be prompting
people to put their savings outside the
country. There is proof of a link between
political uncertainty and money flows.

According to Merrill Lynch, the majority of
deposit growth in 1999 came in the fourth
quarter, partly due to the re-activation of the
peace process between Israel and Syria.

Some banks consider the high number of
people without bank accounts to be an
untapped market. Banque Audi is aggressively
expanding its network of branches. It
opened 13 new branches last year, up to 55
outlets, and has plans to open 12 more this
year. Byblos Bank is aiming at areas that are
considered untapped, such as the Bekaa
Valley as well as north and south Lebanon. But
if the government doesn’t do more to bring the
economy out of the doldrums and peace
remains a dream, the uncertainties may make
it difficult to get a better flow of deposits.

Shape up or ship out. Those were the
words of warning given to insurance
companies when the new insurance
law was finally passed last May, though
the original draft legislation was prepared in
1993. It was about time that something was
done to restrain the chaotic sector. The ministry
of economy and trade had finally
taken the first real step since the 1968 law to
get Lebanese insurance companies back in
line (see ‘Corporate medicine’, September
1999). The new law is expected to shake up
the market, bringing consolidation and
pushing out the slackers, if the authorities
actually come through on enforcement.
Insurers will now have to juggle tougher
government requirements and the pressures
of a competitive insurance market.

The law requires insurance companies to raise their capital to a minimum of $1.5 million,
as opposed to the previous $200,000.
The first installment, 50% of the increase on
their existing capital, is due on June 28,
2000, while the payment of the remaining
50% is to be paid by June 28, 2001.
A company must also secure deposits for
each type of insurance it writes; the minimum
is about $500,000. A deposit of
$800,000 is required for each life and credit
insurance, $500,000 for agricultural and
$233,000 for each fire and transport. A
firm wishing to write all classes of insurance
would be required to secure deposits of
about $3.4 million, on top of the minimum
$1.5 million in capital. These deposits are
due in the same two installments.

But how serious is the ministry really?
Lebanese United Insurance (LUI), which was licensed at the end of 1998 and began
operations in March 1999, months before
the law was passed, wasn’t granted a grace
period. It had to come up with the minimum
capital and required deposits from the get-go
(see ‘Getting tough’, January, 2000).

Companies are also required to have a
realistic solvency ratio. Now the maximum
volume of premiums a company can write is
set at ten times its capital and reserves, with
$15 million being the limit for a company
with no more than the minimum capital.
These requirements are meant to give insurers
the financial credibility to honor claims.

With the weak economy, purchasing
power has been reduced dramatically so
consumers are likely to hunt for the lowest
prices available and the most lenient credit
terms. The insurer expects to face claims from just a small portion of his portfolio and
calculates rates accordingly. But if that
means cash flowing in isn’t sufficient to
honor claims, the company will have to tap
into any available assets. Mesir was forced
to close down in 1999 when its gamble of
undercutting prices failed. It was faced with
millions of dollars in claims and only a few
hundred thousand in the cash box.

Mesir also had its fair share of collection
problems. Insurers can’t afford to be too
lenient in collecting premiums, otherwise
they’ll face serious liquidity problems. In
medical insurance, for example, the probability
of receiving claims is much higher and
less predictable than for car insurance. When
premiums are collected slowly, claims are also
paid slowly, giving the company a bad reputation.
And if premiums are collected too
slowly, the insurer runs the risk of bankruptcy.

LUI doesn’t tolerate long collection periods;
it gives two months at the most with 35%
up front. “I collect premiums up front so
when it’s time to pay claims, the funds are
there,” says Hassan Harb, managing director
of LUI. Middle East Assurance and
Reinsurance Co (MEARCO) is strictly cash and carry with no credit allowed except in rare
cases. Al-Mashrek bases its collection period
on the risk involved, with 45 days for hospitalization
and a maximum of 90 days on the
whole portfolio.

Insurers are faced with a dilemma.
Lowering rates to meet market demand
jeopardizes the firm’s solvency. But opting
for solvency by raising prices, discourages
potential clients. “Often we have to turn
clients away because we don’t allow credit
facilities,” says Rached Rached,
MEARCO’s chairman. “But we have no
outstanding claims as a result of our policy
to remain liquid.” Companies aren’t finding
it easy to strike a balance between competitive
business moves and caution.

Unless, like Arab Lebanese Insurance
Group (ALIG), you have the financial
backing of Arab Reinsurance and
Insurance Group (ARIO), one of the Arab
world’s largest reinsurers with assets of
over $1.7 billion, cutting prices to get market
share is a sure ticket to disaster (see
‘New kid on the block,’ July/August,
1999). Had Mesir’s portfolios been adequately
reinsured, the company probably
wouldn’t have gone bankrupt.

The credibility or risk rating of a reinsurer
makes a big difference when it’s time to pay,
as does the amount of retained risk. The
greater the risk retained by the insurance
company, the more profits-or losses – it can
make. The reinsurer may be less expensive
and allow the insurance company to offer
lower rates, but when it’s time to pay claims,
will it? Ask Mesir. Such decisions should be
based on the risk involved, the firm’s solvency
ratio and its collection period. The law now
requires that a reinsurer be rated B or better.

The maximum risk the local insurance firm
is allowed to shoulder is 5% of its shareholders’
equity, but even at that its assets are
highly involved and may need to be liquidated
quickly if the company’s retention is hit too
many times. Insurers need to calculate the
amount of risk it retains so that it doesn’t need
to liquidate assets to pay liabilities. The higher
a reinsurer’s rating, the better its support to
insurance firms. But it will also require that
the insurer charge higher premiums.

Again, back to the fine line. “Although it’s
a competitive industry with each company trying
to get more business, it’s also a dangerous game,” says Abraham Matossian, chairman of
Al-Mashrek and president of the Association
of Lebanese Insurance Companies (ACAL).
Finding the right combination of prices and
credit terms isn’t so easy. Simply writing a lot
of business and competing to be number one
or two means nothing. “Tomorrow you can
decide to undercut your premiums and be
very free in your collections, absorbing half of
the market, but how long you can continue
being number one is another story,” says
Matossian. “You cannot tell clients when it’s
time to pay that they’ll have to wait until you
collect your dues.” Income, Phoenix and
Mesir tried to get market share by undercutting
prices and allowing extended credit
terms. All were forced to close their doors.

There’s also the matter of what classes of
insurance one operates in. Can a company
decide not to go into medical because of the
risk and headache involved? Some do.
MEARCO has a ‘you want medical insurance,
go somewhere else’ policy. But that
might mean the insurer loses out on the
chance to insure the same person’s car,
house, business or life. Medical makes up
about 12% of LUI’s business – low by
industry standards. Despite offering medical
insurance, LUI is careful about whom they
accept. Mesir went heavily into medical
and lost just as heavily, while its other portfolios
weren’t enough to compensate for
that. For some, it’s just not worth the risk.

Insurers are finding their livelihood
threatened elsewhere as well. Banks, which
contributed 15% to the GDP in 1999, are also
playing the insurance game. Try applying for a loan at a bank. The credit officer will
probably direct you to a particular insurance
company. For a personal loan you will need
life or disability insurance covering about
110% of the loan. Housing loan? Add property
insurance to that life policy. Car loan?
Take out all-risk insurance. It might be difficult
to disregard the suggestion if you
really want the loan.

Though far behind the world trend that
has seen a convergence of banking and
insurance, a grow-ing number of Lebanese banks are either setting up
their own subsidiaries
or buying
shares in already
established insurance
firms. Banque du Liban et d’Outre Mer
(BLOM) has Arope Insurance, Banque Audi
now owns Libano Arabe and part of Societe
Nationale d’ Assurance (SNA), Bank of
Beirut owns 10% of ALIG, UBL has ties with
LUI, Byblos Bank owns ADIR, Fransabank
owns a chunk of Sofrace.

For the banks it’s all pretty profitable,
though it doesn’t leave too many choices for
the consumer. The question for insurance
firms is what it leaves for them. Can they
come up with the funds needed to increase
their capital or will they stop writing business? Can they meet the market
demands? Can they
remain standing in
the face of greater competition? Insurance
firms say they can. MEARCO, which currently
has a capital of $400,000 (see ‘A sure
thing?’ February, 2000), intends to come up
with the funds itself. “We will not bring in
new investors,” says Rached. “The present
shareholders will provide the amounts
required as each due date comes around.”
That’s $550,000 this June, and another
$550,000 a year after that. But there’s still the
matter of coming up with the required deposits. For those
lacking the financial
strength, one
alternative is to
bring in new
investors to increase their capital. Another is to merge.

But that’s not an easy prospect in
Lebanon. While some companies see new
investors as less control and a smaller
share of profits, others see mergers as a sure
way of losing their identity. “They keep
meeting with each other in order to reach
some form of agreement, but the meetings
always break up when it’s time to decide
who will run the company,” says Aline
Kamakian, general manager of Insurance &
Investment Consultant (IIC). “Those who
already have the funds have nothing to
worry about. American Underwriters
Group (AUG), is capitalized at $4 million
and has assets of about $12 million. ALIG
has $7 million in capital.

These might just face less competition, as
it is generally believed that many undercapitalized
companies will not be able to
come up with the funds and will have to close
down. But the question is whether the ministry
will have the guts to be as tough as it is
on start-ups when it comes to pulling the plug
on existing firms that don’t make the grade.
“Only about two thirds of the companies in
the market will probably remain,” says Naji
Habiss, deputy general manager of Al**-**Mashrek,
“with about eight or ten major
players holding the majority of the market.”

Lebanon is a small market. There are
more than 70 insurance companies fighting
over a few hundred million dollars in premiums.
Consolidation would reduce that
number, while solving the capital and solvency
dilemma. Does it really matter who’s
running the show, if the other alternative is
being forced to close down. Remember
Strikers insurance. It was in trouble due to
price competition and was acquired by
Medgulf, which now holds the number one
position in the non-life market with total premiums
of $29 million from the Lebanese
market in I999 (see graph). Large foreign
insurance companies are entering the
Lebanese market. Societe Libano
Francaise (SLF) sold 51 % of the company
to AXA while 51 % of Societe Nationale
d’ Assurance(SNA) is now owned by
Assurance Generale du France. Vulnerable
companies have no chance of surviving in
such an aggressive industry, especially in the
face of international giants. The only way
they can survive is to merge.