Insurance Companies’ Merger Poses Oligopoly Risks
17 May, 2012
Insurance Companies’ Merger Poses Oligopoly Risks

Inadequate management of hospital sector led Imedi L International, number three top Georgian insurance company, to sell 85% of its share to Aldagi BCI, the top insurance company. As a result, the biggest market player with 33% of market share, turned out to boost further consolidation of Georgian insurance market and create monopolization risks.



Aldagi BCI and Imedi L with 17.1% and 16% market share respectively signed a deal on May 4, 2012 on acquisition 85% of Imedi L International

shares by Aldagi BCI paying GEL 8 million in the transaction and assuming all financial obligations of Imedi L. Negotiations on acquisition of minority stakeholders’ shares are on, Aldagi inform so as to acquire 100% of Imedi L ultimately.
According to Nika Gamkrelidze, General Director of Aldagi BCI, the merger process is already on however both companies continue their activity on their own way at the initial phase. Whether or not the new merger company will keep operation under both company brands is not decided as of yet. Aldagi BCI does not rule out to optimize management of the new company to some extent on the expense of both merged companies not only Imedi L alone.
As a consequence of the merger the biggest insurance company emerged supposed to cover about 33% of market, with pooled capital exceeding GEL 77 million [the biggest at the market], 420 thousand retail consumers and 26 hospitals [including more than 1200 beds] in its ownership. Sector pundits expect that emergence of the biggest company with enhanced competitive power at the market to boost other players getting larger.
Experts of the USAID supported Economic Prosperity Initiative (EPI), do not rule out creation of two oligopolies at the market for prior to this merger GPI Holding and Irao, another couple of leading insurance companies, have already decided to manage their hospital assets through one company Geo Management. They go ahead with operation as separate companies in other that hospitals aspects however EPI experts presume that joining the hospital assets management is a step toward further merger.
“Very likely in insurance sector similar to banking sector two leading companies are supposed to emerge. This presumably will facilitate to further consolidation of petty companies and 5 comparatively valuable companies out of the currently active 15 insurance companies will remain at the market ultimately,” team of EPI experts commented to Georgian Journal.
Consolidation of insurance market has been predicted by the National Bank of Georgia (NBG) in October of 2011 when the insurance sector faced 27% loss based on six months statistics and two small companies Vesti and Mobius went bankrupt. NBG expected rather filtering of petty fry with 10-20 person staff rather than merger of big fishes. But big hospital sector undertaking affected even big ones. 
Neither Aldagi nor Imedi L discloses details of the merger motivation but insurance sector pundits presume two reasons that crushed Imedi L [with reputable shareholders like European Bank for Reconstruction and Development (EBRD) holding 34% in the company as well as the international Meta with 51%]: an inadequate management of expenses related to the hospital assets, and a big share of health insurance particularly presences of social insurance in the company’s portfolio.
To cut down the state insurance-related budgetary expenditures [supporting socially vulnerable people including people below poverty level, pedagogues, as well as infants and aged people] and tackle the lingering problem of hospitals rehabilitation government decided via insurance companies. In 2010 the state announced a tender for regional lots for both hospital deployment and service provision to the state-supported social groups through GEL 11 monthly payment per package. Companies reckoned the price unreasonable and hesitated. To entice insurance companies to the tender government put out the tender term that the insured beneficiaries had no right to change provider insurance companies for 3 years. Companies were reluctant nevertheless but after a certain governmental pressure they agreed. As a result, the share of health-insurance in the total portfolio of the sector increased to 70%, GEL 180 million was invested in hospital development alone and 900 thousand socially vulnerable are insured for unreasonable market price.
Besides, awareness of population increased and if only 50% of the state insured beneficiaries appealed for health insurance to provider companies in 2010, the figure hit 90% in 2011, that coupled with hospital infrastructure investment requiring at least USD 15-20 thousand per bed burdened companies a lot, Giorgi Gigolashvili, Head of Georgian Insurance Institute, said.
“GEL 11 per package is much below the market prices, meantime 90% of attracted premiums were spent on financing of services for social insurance policies, plus investments in hospital development and all these affected insurance companies,” He said in the interview with GJ.
According to Devi Khechinashvili, Head of Association of Georgian Insurance Companies, the initially estimated investment USD 15-20 thousand per beds increased to USD 75-100 thousand in fact and Imedi L spent even more as targeted on the high class standards.
“That’s why its expenses were by 30% more than others, and Imedi L needed about USD 42-43 million for hospital investments that was not adequate to Georgian reality regrettably and led to GEL 30 million credits that the company could not handle with, I think,” Khechinashvili said.  
Final financial data of the 2011 are not available as of yet but even data of 2010 show that Imedi L enjoyed quite a low profit.  Although premium attracted by the company exceeded GEL 77 million the profit before taxation stood at about GEL 2 million and the net profit made GEL 1. 648 million ultimately.
“Not a big profit really,” Gigolashvili said.  “And very likely Imedi L with quite big obligations against the backdrop of dwindling profit could not handle with the expenses.”
According to the EPI experts, the merger was the best way out for lowered solvency potential of Imedi L having a big share in the state insurance included serious social risks. On the other hand, bankruptcy of number three top insurance company might take a big blow on the yet weak Georgian insurance sector.
Now emergence of the biggest and more powerful company is expected to boost other players to improve their management and service skills as well as think of further consolidation to keep floating at the market, Gigolashvili said.
Khechinashvili believes the enhanced capacities should trigger Aldagi BCI to think of enlisting at international stock exchanges and does not rule out placement of Initial Publish Offering (IPO) at Warsaw for example.
“Big companies have their advantages-the competitive power increases if management is implemented properly, and if Aldagi will handle with the management and cut down administration costs I would not rule it out to place IPO ultimately,” he said.
The EPI experts approve the possible consolidation trend if it will be based on companies’ will and not the pressure on the regulatory body’s side, however they beware of the oligopoly risks.
“Merger of Aldagi and Imedi L does not oppose the NBG standpoint at the moment. The key concern is however that the two biggest companies would not continue strengthening of their oligopoly position on the expense of swallowing other companies. That is a long time reality at Georgia banking sector, and it should not duplicate at insurance market, otherwise it will negatively affect the service quality and price,” EPI experts said.

 

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