Banks creating associate insurance companies through acquisition and new flotation

Nov 19 - 25, 2007

Few years back analysts used to classify an insurance company owned by any business group as "captive" insurance. Now banks are establishing/acquiring insurance to achieve synergy.

Out of the 25 listed non-life insurance companies, entities enjoying significant market share can be conveniently termed associate companies of commercial banks. These are Adamjee, Habib, Century, New Jubilee, IGI, and Atlas, to name a few. The only exception is EFU General.

While there was sever criticism on banks having majority stake in insurance companies. This became vehement when MCB Bank acquired majority stake in Adamjee Insurance Company.

However, a closer look at the listed companies shows that insurance companies with commercial banks having majority stake are doing thriving business. The banks which have substantial stake in insurance companies are MCB Bank, PICIC, United Bank, Saudi Pak Bank and Atlas Bank. Habib Group has stake in Habib Metropolitan and Bank AL Habib. They had established Habib Insurance Company decades ago when they owned majority shares of Habib Bank.

It is necessary to understand this paradigm shift, from a captive insurance company to as associate company for achieving synergy. Business groups have established insurance companies to keep the business "within the family". Contrary to this, banks are establishing insurance companies in an attempt to widen the range of financial products being marketed by them.

There is ample evidence that the major clients of non-life insurance companies are the commercial banks. The reason being that bulk of the insurance originates from commercial banks, be it auto financing or lending against hypothecation. Insurance is often an integral element in international trade (CIF= cost, insurance and freight). Therefore, the banks have a reason to own and operate insurance companies.

In fact lately insurance companies have been using banks as alternate delivery channel for marketing of their products. The experience has been more than rewarding because banks have intensive and extensive outreach. Over the years insurance companies have been collecting billions of rupees premium from underwriting motor insurance business. This was mainly through auto finance/auto leasing.

As the banks are entering into insurance business the point to deliberate is what could be the possible impact on this paradigm shift on insurance companies which have not been sponsored by commercial banks and/or any business group.

According to sector experts baulk of insurance business is underwritten by less than half a dozen companies, most of these are also listed on the local stock exchanges and fall under the category of "associate companies". As of today out of "big five" banks only Allied Bank and National Bank of Pakistan do not have associate insurance companies. MCB Bank has lately acquired majority stake in Adamjee Insurance and the new strategic stakeholder of Habib Bank already have substantial stake in New Jubilee Insurance Company.

In the recent past Mohammad Ali Khoja, Managing Director of PCIC had been talking about making its institution "financial super market". PICIC was a DFI which acquired majority stake in a commercial bank, established an asset management company as well as an insurance company. His philosophy was "customers of financial institutions need a variety of financial products and greater synergy could be obtained if all the products could be made available under one roof.

It is believed that banks in Pakistan have been experiencing "surplus liquidity" therefore they have to explore new business ventures. At one time banks floated Modarabas in an attempt to offer financial services, which are Shariah compliant. Lately, banks also established asset management companies or provided seed money for the asset management companies. Therefore, if they venture into insurance companies, it should be accepted as diversification of the business.

At present shares of 25 non-life and 4 life assurance companies are being traded at the ready counter of local stock exchanges. The aggregate paid-up capital of these companies is over Rs 8,798 million. Along with these names of 9 insurance companies could be found on "defaulters" counter having an aggregate paid up capital of About Rs 231 million. All the companies on defaulters' counter have less than Rs 100 million paid capital.

Another encouraging point is that 4 Takaful companies have commenced there operations in Pakistan. Out of these 3 will are undertaking general Takaful and one family Takaful. Neither of these companies has been listed at local stock exchanges as yet. Since paid of capital of these companies is substantial, listing of these would be beneficial for the sponsors as well as the general public.

Sponsors would be able to mobilize capital by offering shares of these entities to general public and investors looking for Shariah compliant instruments would get a chance to earn Riba-free return.

While four Takaful companies have commenced operation in the country no Re-Takaful company has been established as yet. The prevailing situation offers opportunity to Islamic banks to provide seed capital for the establishment of one Re-Takaful company in the country, at least.

In the absence of Re-Takaful arrangement in Pakistan Takaful companies would have to either compromise by seeking Re-Takaful from any conventional reinsurance company or get the Re-Takaful from outside Pakistan.

It is suggested to the Securities and Exchange Commission of Pakistan and the three stock exchanges that insurance companies failing in meeting the minimum paid-up capital should be asked to opt for voluntary delisting. The same should also apply to those companies whose names are on the defaulters counter.