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DANCED WITH BEARS
Fact and fiction
in Russian insurance
By John Helmer
MOSCOW - It is rare for a local investment bank
to expose an entire commercial market as a compound of
tax avoidance schemes, phony revenue statements, paper
transfers and intentionally misleading valuations. But
that is what the United Financial Group (UFG) manages to
do for the Russian insurance market with a new report
entitled "Russia's Insurance Industry: Enter the Man
from Ru."
Starting with an initial estimate of
US$9.5 billion in insurance premiums officially reported
as paid in Russia in 2001, roughly half ($4.7 billion)
should be disregarded as insurance at all, UFG
concludes, because they represent one to five-year
policies paid out as tax-free annuities that are, in
reality, tax-free income. This pseudo-life insurance is
a well-known feature of the Russian market. It is
expected to dwindle from next year, when the annuities
will be taxed as income for the first time.
Of
the $4.8 billion in insurance premiums that remain,
genuine life insurance is a minuscule fraction - just
$48 million. As we shall see, there is an enormous
opportunity there. But according to the UFG calculation,
insurance premiums paid by consumers to insurance
companies at arm's length total no more than $820
million. The arm's length qualification is necessary,
because of the large volume of premiums recorded as paid
between companies that are directly related to one
another by shareholding and other ties. These insurers
are known as captives, which the author of the UFG
report, Ilan Rubin, describes as "pocket insurance
companies of major Russian corporates. Insuring property
with yourself is not insurance. Rather, it is a means of
writing off expenses in order to avoid taxes."
Most major Russian corporations operate such
insurance units. Some, like Sogaz of Gazprom, claim to
be moving beyond their chains. Others, like Ingosstrakh
after its acquisition by a group of shareholders linked
to Russian Aluminum and Sibneft, have been moving in the
opposite direction.
Because it's next to
impossible to quantify how much insurance coverage paid
for by Russian corporations to their captive insurers
would have to be bought in the marketplace, if that
existed, Rubin deducts just $800 million from last
year's official non-life premium total of $4.7 billion.
Thus, somewhere between a minimum of $820 million and a
maximum of $3.9 billion is what the genuine insurance
market is worth at the moment. By international
standards, that is somewhere between nothing and almost
nothing.
What it may be worth in the future is
more promising, but not in the way the insurers
themselves like to claim. For example, the UFG report
argues against the widespread conviction among Russian
insurers that the terms set by the World Trade
Organization (WTO) represent a major threat to the
domestic insurance industry.
In recent weeks, it
has become clear that the WTO members are demanding the
dismantling of barriers to entry for foreign insurance
companies. But according to Rubin, whether the industry
resists or accepts is irrelevant. "We do not consider
WTO entry in 2006-07 to be a major problem for [Russian]
insurance. First, by the time WTO entry actually
happens, the vast majority of unviable companies will
already have disappeared. Secondly, the appearance of
foreign companies in the life sector will not threaten
domestic companies, as the life sector does not exist
currently, and will never be serviced by domestic
companies anyway, due to the unwillingness of the
population to trust Russian private financial
institutions."
While the report accepts that
some Russian insurers have developed sound reputations
and brand names with which to compete in the compulsory
insurance sector, Rubin also predicts that the 20 to 30
Russian companies he expects to survive will be able to
do so only by finding Western capital and Western
expertise.
Life insurance, the report forecasts,
will come to be dominated by foreign insurers, and after
the disappearance of "the vast majority of insurance
companies, those with the best chances of survival are
the ones that will seek foreign partners".
The
report is especially sanguine about American
International Group (AIG) in the Russian market. After
describing the rise in the Polish insurance market of
AIG, Rubin claims that AIG "would be one of the
best-positioned companies to milk the real insurance
sector in Russia, once it grows".
One reason for
that, argues Rubin, is that the Russian government has
already dismantled the potential competition that a
state-owned insurer could provide in the life sector,
comparable to Poland's PZU, thereby allowing foreign
companies like AIG to capture most of the profit for
themselves. You will search in vain through the
accumulated statements of the All-Russia Insurance
Association, the industry lobby group, and never find a
statement as blunt as that.
Through its US
government contacts, as well as directly, and through a
number of well-known Russian insurance figures, AIG has
been one of the most active lobbyists in Moscow for
deregulating the insurance sector rules that limit
foreign ownership, as well as the right of foreign
insurers to write long-term life insurance policies. On
the surface, you might judge this effort to have been
relatively unavailing.
However, as calculations
in the UFG report reveal for the first time, the price
for foreign entry into the Russian insurance market has
been exceptionally cheap - so cheap that it is tempting
to infer that the Finance Ministry, which regulates the
industry, a handful of Russian investors, and the major
foreign insurers, have quietly rigged it.
By
projecting the premium data and sales margins of 10
major Russian insurers, applying a 20 percent discount,
together with a conservative share price to sales ratio,
Rubin estimates a value of $159 million for ROSNO.
Accordingly, he reports that the $30 million price paid
by Allianz of Germany to acquire a 45 percent stake in
the company two years ago was "very low" - less than
half the $72 million valuation estimated by UFG.
The report also suggests that Rosgosstrakh, the
big state insurer which is in the process of
privatization, was undervalued before a consortium of
still undisclosed buyers led by the Troika Dialog of
Moscow acquired a 49 percent stake for $40 million. UFG
values the stake at $83 million.
The
government-ordered valuation of Rosgosstrakh was done a
year ago by the Moscow office of KPMG, which recommended
a price of $78 million. Early this year, Reuben
Vardanyan, the Troika Dialog executive who has since
become chief executive of Rosgosstrakh, claimed that was
too high. "While the new shareholders of Rosgosstrakh
paid $40 million for 49 percent of shares of the
company, and the official valuation was $78 million, the
real value of the company is lower than that," Vardanyan
said.
According to UFG's calculation, the
capital value of the entire non-life Russian insurance
market as a whole is just $3.3 billion. Projecting what
Russians will spend on non-life insurance on the growth
of Gross Domestic Product, it is predicted that non-life
premiums will jump in 10 years to $21.3 billion. Life
insurance spending will rise to $14.2 billion, an even
more dramatic increase fueled by the development of
private pension funds. These figures promise a huge
profit for the handful of foreign insurers who can
afford to wait for the takeoff - and on the few Russian
insurers, or their shareholders, who see the opportunity
in capturing assets cheap, and selling dear.
Capturing opportunity is risky business, because
government statistics are worthless, and corporate
accounts no better. According to Rubin, published
balance sheet data for Russian insurers identify only
about 63 percent of their assets. The remainder, he
claims, "may not be invested in stable, low-risk assets
that insurance companies require in order to ensure that
they can protect their customers from default." He
believes that Russian insurers are either placing their
funds in high-risk investments that could trigger
defaults; or else the missing money does not exist at
all, because "large sums of premiums 'paid' do not
really exist, being no more than paper figures used in
salary and captive schemes".
(©2002 Asia Times
Online Co Ltd. All rights reserved. Please contactcontent@atimes.com for
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