Graham Stack in Kyiv -

Kazakhstan's BTA Bank, nationalized in February by the country's sovereign wealth fund, looks like losing all influence over top Ukrainian insurer Oranta. This is despite the fact that BTA paid $100m for a stake of 25% plus one share only two years ago, and reportedly controlled 85% of Oranta as late as mid-2008.

Ukraine's competitive privatisation of a blocking stake in its top insurer Oranta in December 2007 was hailed as a landmark deal. BTA paid $100m for the stake, valuing the company at $396m. But far from being a breakthrough deal, the privatization turned out to be Ukraine's last large privatization deal to date. And it's now being overshadowed by the inauspicious end to BTA's investment in Ukraine as control over Oranta shifts murkily to Ukraine-based IMG Holding, previously affiliated with BTA as a structure managing the Kazakh bank's international assets.

As late as June 2008, according to a report authored by Renaissance Capital analyst Vladimir Dinul, BTA controlled 85% of the insurer, with companies affiliated with BTA having acquired additional stakes totalling over 45.3%. But in April of this year, following Kazakhstan's nationalization of BTA in February and the ousting of former BTA management under Mukhtar Ablyazov, Oleg Spilakh, chairman of Oranta's supervisory board, told newswires that BTA now only controlled 14% of Oranta. This means BTA's current stake is less even than the 25% stake it had bought directly in 2007. The company's website in fact still lists BTA as owning the blocking stake. The 38-year-old Spilakh said in the same interview that control over Oranta now lies not with BTA, but with IMG Holding, which he also heads. Ukraine-registered IMG Holding was established in 2008 to manage BTA's Ukrainian and other international assets.

BTA's incredible shrinking stake in Oranta contradicts statements made by former chairman Ablyazov as late as December. In an interview with Interfax, he reiterated BTA's commitment to its Ukrainian investments and was committed to its Ukrainian subsidiary bank BTA-Ukraine. However, BTA-Ukraine announced abruptly in April that its parent bank's stake had been reduced from 49.99% to 9.99%. The parent bank's new state-appointed management claims its stake remains unchanged at 49.99% and has filed criminal charges in Ukraine against the changes.

According to Renaissance analyst Milena Ivanova-Venturini, "asset stripping just before Samruk-Kazyna [Kazakhstan's sovereign wealth fund] injected capital, effectively taking over BTA, has been one of our concerns for a while. The legal complexity and the web of ownership structures across BTA subsidiaries is anything but transparent, and we may yet hear of more such 'changes'."

Ivanova-Venturini also suggests that BTA's former management might be seeking to retain control over BTA's foreign assets: just days before the February nationalisation, BTA's shareholders approved as new supervisory board members of BTA-Ukraine Roman Solodchenko, former BTA CEO, and Khalil Kamalov, former financial director of BTA.

BTA's spokesperson Valentina Vladmirskaya told bne she did not know when BTA's 25% stake had been reduced to 14%. But IMG spokesperson Alena Kulakova says BTA's stake in Oranta fell as a consequence of a rights issue in 2008. She denied that IMG Holding, now managing over 50% of Oranta shares, had links to BTA's former management.

Next steps

Ukraine's insurance sector has boomed in recent years, and Oranta along with it. However, that boom was predicated almost entirely on the cheap credit bubble, and with the bubble bursting, Oranta and the rest of the sector are in trouble.

The credit bubble boosted the insurance sector by the surge in car ownership it induced, as well as the growth in bank retail lending, which constituted a major sales channel for insurance products. Car-related products accounted for 64% of the total gross written premiums in Ukraine in 2008. Compulsory third-party liability and voluntary damage insurance grew in 2007 at an estimated 74% and 113% on year, respectively. The logic behind this growth is very clear given that growth in the volume of new car sales in 2007 was 46%.

But the crisis has seen Ukraine's car sales drop by an astonishing 70% on year in the first quarter. Accordingly, the drop in car insurance premiums exceeded 30% in the first quarter, according to an April 29 cry for help penned by the Ukrainian Insurance Federation, of which Oranta is a founder member. Overall, insurance premium collection in January to March 2009 fell by over 20% from the year before. Adding salt to the wound, payments on claims rose by 10% over the same period, due to the hike in the cost of imported spare car parts following the steep devaluation of the hryvnia.

Ukraine insurance companies were not only exposed to the credit boom through car insurance, but through reliance on banks' retail credit operations as a sales channel. "About 30% of the insurance business in Ukraine was funnelled via commercial banks, but now this source of business has dried up," says Foyil's Agshin Mirzazade.

Moreover, according to the Ukrainian Insurance Federation, insurers are also suffering from Ukraine's stricken bank sector not paying out on insurance company deposits, thus causing insurers to delay their own payments on policies.

Analysts estimate that two-thirds of Ukraine's 495 insurance companies will quit the market as a result of the crisis. Oranta's chief five competitors are all foreign-owned, including Generali Vienna Insurance Group, Allianz and Vesko Insurance, and there is speculation that Oranta will need a strategic investor to retain its position.

Oranta's shareholders decided on a rights issue at the annual general meeting on April 17 to increase shareholder equity 4.4 times and bolster the company in the face of the storm. BTA representative Pavel Prosyankin said BTA hasn't yet decided whether to participate.

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