Still Waiting

Economic News

22 Jul 2010
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While most Bulgarian insurance companies are waiting to see if the 2005 budget will include some much-awaited legislative change on taxation, the spotlight recently has been on Bulstrad, the country's leading general insurer. Some 13% of Bulstrad's shares were being sold on the Bulgarian Stock Exchange (BSE) last week, a welcome piece of news for the bourse, which is suffering from a lack of liquidity and limited capitalisation.



In last week's sale, the Dutch-based TBIH Financial Services Group, the current majority stakeholder in Bulstrad, bought a further 9.99% of the company through its brokerage arm, leaving the remaining 3.62% stake for sale on September 23. Most expect the Dutch investors to take this share as well. According to some media sources, Bulstrad will then most likely be de-listed from the stock exchange.



This forecast was reinforced last week when Rumen Yanchev, Bulstrad's board chairman and chief executive, told local business daily Pari that Bulstrad's management did not think the firm had to be public now and that the majority owner does not envisage trading Bulstrad shares on the stock exchange. However, Yanchev told the OBG on September 8 that listing on the stock exchange made sense for the state, because the state could get the best price in an open and transparent auction.



Yet some analysts were not all that impressed by the Lv3.8m (1.9m euros) Bulstrad fetched for its 9.99% stake. However, Intellinews South-east Europe commented on September 15, "Although the price looks disappointing for the country's largest insurer, it is a fair reflection of the small insurance market, which manages assets roughly 20 times below the level in the banking system."



Financial analysts point out that although the sector keeps expanding, the rate is quite low considering that it is starting from a humble base. Bulstrad, which had a 16% share of the market last year, forecasts a 3.1% year-on-year increase in gross premium income to Lv105.2m for 2004. According to Yanchev, expansion continues to be led by the motor insurance segment, with disappointing results in life and other non-life business lines. Motor insurance also benefited recently from an amendment of the insurance act, which stipulates that car insurers can sign one-month third-party contracts, as opposed to annual contracts, which were formerly the only contracts available. Motor insurance now accounts for one-third of Bulgaria's insurance market and is expected to continue this dominant position.



Life insurance's share of the market, which was 10% in 2003, remains small. This is partly due to artificial booms in the past, which have given life insurance a reputation as something mainly used to exploit tax loopholes. Low purchasing power and a lack of awareness about life insurance among consumers have also kept demand down.



Another source of complaint for insurers is the lack of a satisfactory regulatory and legislative framework, and in particular the special tax arrangements introduced in 1998 to get rid of shady insurance companies. According to this, a base taxation figure is calculated from a company's total revenue, minus costs for re-insurance. Non-life companies are charged 7%, while life companies pay 2% of the total revenue, regardless of profits. According to insurance companies, this translates into an 80-90% profit tax, when applied to normal companies.



Despite significant lobbying efforts and even a move to challenge current legislation in front of the Constitutional Court, the law has still not been amended. Yanchev remains sceptical about the prospects for change, too.



"Because we have been disappointed so many times before... my impression is that at best the government does not understand, or in the worst case scenario that they don't care," he told the OBG.



However, Kosta Tcholakov, executive director of the Dutch-based Interamerican insurance group, remains slightly more upbeat. "The government has promised to include amendments in the 2005 budget," Tcholakov said.



According to Tcholakov, the authorities are getting better at monitoring the insurance sector, despite a lack of supervisory experience in comparison to, for instance, the banking sector.



Everyone in the sector agrees that amending the regulatory framework is a must for the insurance market to take off, even though many still think it remains at the bottom of the government's list of priorities.

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