The insurance sector is next on the privatisation bloc. Sherine Abdel-Razek investigates its potentials The Ministry of Investment announced recently that it is currently studying the technical proposals submitted by six groups of local and international financial consultants for the valuation and privatisation of the four state-owned insurance companies. The four companies are Misr Insurance, Al-Sharq Insurance, Al-Ahlia Insurance and Egypt's only reinsurance company, Al-Masria for Reinsurance. The insurance sector is one of those previously dubbed as "strategic". Attempts in the past to put it up for sale were always postponed. Mahmoud Mohieddin, minister of investment, said earlier this year at the Euromoney conference in London that over the course of two years the government will finish restructuring and privatising the state-owned insurers. The move has been expected ever since the government of Ahmed Nazif took office last year and put the insurance regulator, the Egyptian Insurance Regulatory Authority (EISA), under the supervision of the ministry of investment. The EISA had previously been under the supervision of the ministry of planning. The move to privatize the insurance sector comes as yet another part of a fast-paced, wide-ranging privatisation programme where some sectors were previously left untouched. During fiscal year 2004/2005, the privatisation programme realised LE5.68 billion in receipts, much higher than what the programme yielded during the last four years. The announcement of the sale of the four companies came only this last May. While the detailed plan has yet to be submitted by the six financial groups, the ministry stated that the plan should include four phases. The first phase will evaluate and assess the current status of the Egyptian insurance market. Second, the four state owned insurers will be restructured to upgrade the efficiency of their management and their portfolios to international standards. The third phase is believed to be the hardest as it will involve enhancing the conditions of the companies' real estate holdings and the assessment of their real market value. In the final phase, the ministry will decide upon the best way to sell the companies. But why are we privatising these four companies if there are already 17 private and joint venture insurance companies currently in the market together with 617 private insurance funds managed by different financial institutions? In fiscal year 2003/2004, the three major state- owned companies dominated 75 per cent of the market in terms of policy holders rights and 70 per cent of the overall investment in the sector. They hold combined assets of LE17 billion. Despite the fact that different insurance services have been recording impressive growth rates, with life insurance recording the highest, with a 15 per cent growth rate during 2003/ 2004, the sector's contribution to the GDP is minuscule compared to international standards. According to the Oxford Business Group, which publishes an annual report on the Egyptian economy under the title Emerging Egypt, life penetration (life insurance premiums as a percentage of GDP) was only 0.85 per cent in 2003/2004 and non life penetration came at 0.57 per cent. "Both penetration rates are far below the global average of five per cent in other emerging market economies such as Malaysia and India," noted the report. So it is clear that the government wants to use privatisation as a means to revitalise the economy and attract foreign investments. Yet the question remains, is the sector an attractive buy to investors? "Insurance companies are heavily burdened with problems, which makes a two-year period to divest it a bit optimistic," explained Ahmed El-Ashram, financial analyst with HC securities. Agreeing with El-Ashram, a senior official in one of the private insurance companies who asked to remain anonymous, stated that preparing the sector to be sold will be a very difficult task, or as the Oxford group put it, "the hardest nut that the government has to crack". "You need to do a total overhaul, starting with increasing awareness about insurance in society," he said. Egyptian culture still wrestles with the idea of investing money in something with no tangible returns. Insurers need to not only promote their policies but the idea of insurance itself. Compounding this problem is the fact that some people do not take well to the idea of insurance due to religious reasons. "So awareness, or lack there of, acts as an obstacle to the sector's growth and thus may undermine its potential when sold." Another obstacle for building a sound insurance industry has been the stamp duty and other related taxes on insurance policies. Taxes and duties on insurance policies reach up to 21 per cent in non-life insurance and 10 per cent for life insurance . "These taxes distort the demand for insurance products and in the case of long-term life insurance, business has led potential policy holders to save using banks or the stock market" the Oxford report noted. These taxes garner LE200 million for government coffers each year, yet lowering taxes, as argued by EISA, will make up for the loss to the budget by greater investment in the insurance sector by foreign and local companies. The outdated management of these companies, together with the sector's lack of human resource development might be an unwelcome back drop for any interested investor. The four companies have thousands of employees and insurance agents that would be a turn off for any interested investor if the government stipulated the necessity of keeping them after the company's sale. And most probably, that is exactly what the government will do. Mohamed Youssef, director of EISA has been quoted recently as saying that the employees and shareholders of the would-be privatised companies should not worry. "The role of the authority will be to preserve the rights of employees and shareholders." The anonymous insurance official also pointed out that the insurers' structure of assets might make full privatisation difficult. The three insurance companies integrated significant real estate assets in their portfolios since the nationalization movement in the fifties. These assets are concentrated in old residential buildings with units rented to families or companies for only a few pounds. "While these assets might have a good book value, but in reality they are worth nothing unless they are evacuated and sold which is impossible," he said. These obstacles would make even alternative ways to sell the companies very limited. "Selling the companies as a whole to an anchor investor is a far fetched plan considering the assets portfolio and congested payrolls. I think the best way would be to offer a 20-40 per cent stake in the form of an IPO." said El-Ashram. However, he added that "the IPO should follow a kind of management privatisation. The current management with all its legacy of outdated techniques must go."
