The review of insurers and pension funds finds no significant problems

The review of insurers and pension funds finds no significant problems

The issue of related party investments is noted by the regulator but is not addressed head on

© Nadezhda Chipeva


The balance sheet review of the Bulgarian insurance sector, supervised by the European Insurance and Occupational Pensions Authority, ended in January without finding any significant failures.

Thirteen companies out of 49 examined didn't meet the solvency indicators. Their combined capital shortage was estimated at between €9 mn and €11.5 mn. Armeets, which ranks the third biggest insurer by market share, the fifth one Bul Ins and Euroins group were among those 13 entities. Most of them had already taken measures to meet the regulatory standards and were compliant at the time of the announcement. The main problem identified in the sector was the valuation of assets on an inactive market like the Bulgarian Stock Exchange which raises doubts about their true value. The review points to the re-insurance contracts which have a positive effect on the company's solvency position but may fail to reveal the real risks the insurance company faces.

Two of the insurance groups - Armeets and Eurohold, did not disclose all the necessary information to their external auditors and the checks for them remain in progress.

Minor problems were found in the course of the pension funds' assets review which was held simultaneously. Due to different valuation approaches, financial corrections worth €16.9 mn were imposed which equals just 0.3% of the industry's €5.1 billion assets. Right after the review compliance checks were carried out to ensure that the companies had implemented the prescribed measures.

The reported minor discrepancies in the valuations of some investments, paints a bit rosy picture of the industry. Pension companies hold many properties that were bought during the real estate boom in 2004-2008 which market prices now are probably fraction of what their sale price back then. At the same time the Bulgarian Stock Exchange is not liquid enough to test the market price of some of the pension funds' assets. The main problem with related party investments was not addressed by the reviewers in a thorough manner.

The report of the Bulgarian financial regulator concludes that almost all pension funds lack procedures to identify such trades, but it didn't point to the transgressors. Capital's own calculations show that the universal pension funds run by Saglasie and CKB-Sila ( (close to Himimport group) at the end of 2016 had related investments of around 15-20% of their assets, or over €166 mn. In Badeshte the ratio of the related investments is nearly 45%, or nearly €46 mn levs invested in companies close to Eurohold, its parental company. In voluntary pension funds, where investment restrictions are a more liberal, these percentages are even higher.

This is not difficult to find out in a thorough review and the European Commission rightly criticized Bulgaria in its Economic Imbalance report for is negligence. The chairperson of the Financial Supervision Commission Karina Karaivanova noted during the presentation of the report that although no problems with related parties were found, there is a need for legislative change in the definition itself. Under the Bulgarian regulations shareholders with less than 20% are not classified as related parties. As a result there are many shareholders in pension funds with 19.95% shares. This is obvious circumvention of the rules, but Bulgarian regulators have always followed formalistic approach in their oversight,which haven't require their intervention. As a result, massive frauds like the Corporate Commercial Bank ration were noticed by the wider public and media, but the regulators went blind.

Players to watch

Karina Karaivaniova needs to be a watchdog that bites

Bulgaria's non-banking sector badly needs tougher regulation and oversight

Hopes are running high for Karina Karaivanova's term at the helm of the Financial Supervision Commission (FSC) which started some eight months ago. After years of weak governance the regulator needs to strengthen its own capacity and tighten the discipline in the non-banking financial sector. The latter became even more obvious with the results of the balance sheet review of insurance companies and pension funds.

Karaivanova also has a chance to revive the Bulgarian Stock Exchange and already works on a strategy for bringing back investor interest. Even though her first steps in the job are encouraging, the real test for her is still to come. The problem with related investments in the pension funds is only alluded to by the FSC, but it is a significant long-term hazard for the public finances and the retirees' incomes.

It is probably difficult to tackle all the problems at once but the mess Karaivanova inherited from FSC's previous vengeance-prone chairman Stoyan Mavrodiev calls for urgent action.

The balance sheet review of the Bulgarian insurance sector, supervised by the European Insurance and Occupational Pensions Authority, ended in January without finding any significant failures.

Thirteen companies out of 49 examined didn't meet the solvency indicators. Their combined capital shortage was estimated at between €9 mn and €11.5 mn. Armeets, which ranks the third biggest insurer by market share, the fifth one Bul Ins and Euroins group were among those 13 entities. Most of them had already taken measures to meet the regulatory standards and were compliant at the time of the announcement. The main problem identified in the sector was the valuation of assets on an inactive market like the Bulgarian Stock Exchange which raises doubts about their true value. The review points to the re-insurance contracts which have a positive effect on the company's solvency position but may fail to reveal the real risks the insurance company faces.

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