Has Bank of Cyprus missed the boat with insurance?

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 * Trust still keen to expand its business *

The new CEO of the Bank of Cyprus has nothing to be cheerful about.
Hardly a week in his new chair and Yiannis Kypri has to resolve the issue of the bonds debacle, offload the bank’s insurance subsidiaries and possibly deal with pressure for a merger with Laiki Bank, a tie-up unheard of a few years back.
On the other hand, Kypri needs to maintain good relations with the bank’s largest shareholder, Dmitry Rybolovlev, who understandably was miffed to see his 10% stake cut to half, as he opted out of the recent rights issue that was supposed to help in the bank’s recapitalisation plans.
However, Kypri’s biggest challenge will be to restore confidence among stakeholders, while trying to mend burnt bridges among board members, as a recent clash among directors left the bank undecided over whether to sell its lucrative insurance division – Eurolife and General Insurance Company – and as a result sought nearly half a billion euros in the form of a state bailout.
Had the insurance sale gone ahead, the bank would have been much closer to its recap needs, as had been claimed by BOCY’s management more than a month ago.
The deal went sour, but industry analysts want it revived, for more reasons than one.
Trust Cyprus Insurance, part of the Trust International insurance businesses of the Middle East-owned Nest Investments Group, was the main contender for the Eurolife and GIC, and probably the only party in Cyprus with the cash to pay for the takeover. The stumbling block was not the price, but what reasoning the management would have to give to its staff, associates and customers the day after.
In any case, the deal will still have to happen in order to relieve the bank from further capital needs under the stringent Solvency II requirements for insurance companies, in addition to the safety cushion of adequate funds demanded by the European Banking Authority.
Contacted by the Financial Mirror, Trust Cyprus officials would not disclose the bid price, but sufficed to say that “we are still interested to expand [our Cyprus insurance business], but it has to be a favourable deal.”
Industry experts said that in just three years of operation, Trust has built up a good reputation in the market and that the addition of Eurolife and GIC to its portfolio would be a wise move.
The economies of scale to be achieved would also trickle down in the form of benefits to the consumer, while Trust would also move up the ladder from 12th position in only the general insurance market and a 3% market share to a ‘top eight’ ranking supported by the mother company’s reinsurance business that enjoys A- and BBB+ ratings by leading agencies like S&P.
“I have been working with both Eurolife and Trust and I think my clients would be better served with the combination,” a leading insurance broker told us. “Trust has a different corporate philosophy than what we are used to in Cyprus.”
The facts also speak for themselves. Trust International has policies under management worth about 500 mln euros, while the whole of the Cyprus market is estimated to be worth 450 mln. Last year, Trust Int’l reported some 35 mln dollars in profits, a growth rate it has enjoyed steadily over the past years.

RYBOLOVLEV

The Bank of Cyprus CEO is expected to meet major shareholder Rybolovlev in person in order to give him assurances that his stake, diminished from 9.9% to 5.2%, still has worth and possibly even ask him to invest more funds in the bank.
According to Financial Mirror data, other foreign institutionals have also been hit by the writedowns and the subsequent recao plans, with the share of foreign investors now standing at 8%, compared to 30% before.
Kypri is also expected to meet with the employees’ union ETYK inorder to reauusre them that jobs will be secured as best possible with the least effect on wages.
Rybolovlev, who made his fortune from fertiliser deals in the post-Yeltsin era of liberalisations, is keen to increase his stake in the bank, according to the daily Alithia. If this happens and he exceeds the 10% threshold, he will need Central Bank approval and secure a greater say on the bank’s board.
According to the newspaper report, Russian officials informed their Cypriot counterparts that their government is ready to grant a 5 bln euro loan if Russian shareholders are allowed to increase their stakes in the bank.
Likewise, Chinese investors have reportedly told Cyprus that any investment they might make would be in the Popular Bank alone, where the state enjoys an 84% control subject to the 1.79 bln euro bailout to write off the bank’s losses incurred on Greek government bonds.

MISLED INVESTORS

Meanwhile, the CEOs of the island’s two main banks admitted in a parliamentary hearing on Monday that their staff may have misled unknowing investors to buy 1.4 bln euros worth of bonds, with the fear that these securities have lost their value and may be redeemed for far less than at their issue.
The banks have also suspended interest payments on these bonds, which for many investors was their livelihood, while for others, such as charities, the sole source of fund raising.
Even Attorney General Petros Clerides joined the arguments saying that the blame went beyond the banks.
MPs were furious that they may have been tricked into approving a government bill that did not mention any suspension of interst payments or loss of capital.
Finance Ministry officials have reiterated that parliament received due warning and that the troika of EU, ECB and IMF officials who visited Cyprus to investigate a potential bailout and subsequent reforms, had said that it should be consulted before giving the green light to any action related to securities of banks undergoing recapitalisation.
Blogger Gavin Jones wrote on the Cyprus Mail site, “If the CEOs of both Bank of Cyprus and Popular have openly admitted that "mistakes and omissions may have been committed by their banks' staff" in the the selling of 1.4 billion worth of securities, then potentially this amount may have to be repaid to investors and added to the already massive amount of money that will be required to recapitalise the banks.”
“This is turning into a real horror show: and it's the taxpayer who will yet again have foot the bill. No doubt a lot more will be revealed when the troika returns,” he added.
Another blogger, Nigel Howarth, commented: “The banks may also have misled investors by pushing Swiss Franc mortgages at them without explaining the risks.”
Earlier, lawyer Christos Clerides said that nearly 50 investors planned to sue the Popular Bank for “not revealing the whole truth” to investors regarding the risks behind the securities.