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Cover Story

Mergers and acquisitions in Pakistan cannot be ignored

Sep 27 - Oct 03, 1999

Mergers and acquisitions are taking places in all the sectors internationally and insurance sector cannot remain immune. The objective behind these mergers is to grow and become an effective player. Our own company, despite being among the top insurance companies of the UK has been takenover by the AXA Group — a multinational general insurance company from France. Therefore, mergers and acquisitions in Pakistan may be in the offing. Either, the smaller companies will have to merge with some local domestic companies or with some foreign companies. These were the remarks of Ahmed Salahuddin, Country Manager, Guardian Royal Exchange Assurance, while talking to PAGE.

Royal Exchange operates as a fully-owned branch office and has been active in Pakistan since 1952. In 1991 it took over the portfolio of Norwich Union. At present it is among the top seven insurance companies operating in the country. It offers complete range of general insurance covers which include fire, marine, theft, engineering, besides providing personal accident and health cover.

Being a fully owned branch, it enjoys extensive support from Guardian in terms of financial security and technical assistance. Guardian, after merger with AXA Group has acquired further strength in Pakistan. AXA is one of the largest insurance company in the world. Its global assets touches US$ one trillion and annual revenues touches US$ 100 billion. It is listed on almost all the leading stock exchanges around the world. AXA has been rated "AA" by Standards & Poor. The Company operates in more than 60 countries and serves over 35 million customers.

AXA has become the trend setter for its contemporaries. It has evolved an effective management style operating on the principal "Think global, act local". This has been made possible by allowing for a decentralized base giving the local management flexibility and freedom to ensure quick decision making whilst maintaining an effective control, reporting and feedback system. This enables AXA to provide prompt and efficient service to its clients.

While taking about the insurance business in Pakistan, Salahuddin said, "There are 57 local and 5 foreign companies operating in the country and competition has been intense. Due to slower pace of economic growth, the volume of business has remained around Rs 10 billion per annum. The overall premium rates have gone down considerably. Therefore, unless the economy growth rate picks up the profit margins of insurance companies are expected to remain under pressure."

More than 80 per cent of the insurance business in Pakistan is written by less than 10 companies. The law also encourages foreign companies to open their offices in Pakistan rather than operating as a non-resident company. Health insurance has a lot of business potential in Pakistan. There is need for a variety of products to suit each individual. One of the foreign companies have already identified local partner to market health productss.

The proposed Insurance Act envisages enhancing paid-up capital of general insurance companies to Rs 100 million and life insurance companies to Rs 200 million. The paid-up capital requirement is 100 million taka in Bangladesh. In India there is a proposal to raise paid-up capital to one billion rupee. While the proposed change can provide strength to the companies, some mergers and acquisitions cannot be ignored. A large number of companies have not been able to meet the previous requirement of Rs 40 million paid-up capital. The slow pace of economy and persistent bearish sentiments at the capital market were responsible for the inability of the companies to meet the requirement.

Talking about the outlook of insurance business in Pakistan, Salahuddin said, "Business prospects are largely dependent on how the economy of Pakistan takes shape. There is a need to restore the confidence of the investors. The GoP must make concerted efforts to resolve IPPs controversy amicably which has been one of the major irritants for both local and foreign investors.