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More acquisition than merger

The rationale for the Al Ittihad al-Watani takeover by NASCO Insurance Group

by Thomas Schellen

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

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

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

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

Eyeing the Emirati market

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

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

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

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

No favorites

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

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

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

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

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

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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