IPO of Hungary-based life insurer CIG Pannonia Life Insurance Plc. in mid-October was a major event for Hungary, where it became the biggest one in the last 15 years. Analysts compare its results to those of another regional insurance company that went public, PZU. Csaba Gaal, CIG’s CEO, revealed for The Insurer details of the IPO and his group’s ambitious development plans.
- Csaba, how do you assess the outcome of your company’s IPO?- It was quite successful from many points of view. We floated about 11 million new shares at the Budapest Stock Exchange (BSE), and the whole issue was bought out by retail investors. Our clients bought approximately 1/3 of the new share issue, with the rest going to new retail investors. We are quite happy with the figure, as from the very beginning CIG aimed to be a mutual insurance company, with clients acting as shareholders. Of course, we would also like to attract institutional investors. We expect to become a member of the BUX (Budapest Stock Index) by next March or April. If this happens institutional investors, which operate on the BSE through their own Hungarian equity funds and follow the BUX, will be bound to buy our shares. Clearly, institutional investors already have an opportunity to buy our shares at the stock exchange.
At the same time, going public was a challenge for us. CIG is the first insurance company listed at the Budapes Stock Exchange, so our business was completely new for equity analysts. They had little idea of what the nature of insurance business is. Besides, CIG is a unique company compared to other Hungarian insurers. Our insurance market includes 18 life companies, and most of them are in a stable phase. They started out in the early 1990s, now they have a stable portfolio. We, on the opposite, are just beginning: we are building up the capital, the reserves, the client base. Due to our business model, we won’t be able to make profit within the next three or four years, and this is something we had to deal with during roadshows.
- When did your company come up with the idea to go public?
- We had it from the moment CIG was established. As I have said, the idea was to implement the mutual principle that is popular in the Western market. Clients of most world-famous insurance companies are at the same time their shareholders. The advantage of the model is full transparency of the life insurer, clients have the opportunity to know exactly what is going on in the company. So that was the original idea also in our case. In May 2008 we announced that as soon as we go to the stock exchange we’d offer our clients the opportunity to buy shares with a 20% discount, and that’s what we did at the IPO.
- How about existing shareholders? Have many of them increased their interest in CIG?
- Some of them have, but not substantially. In the last three years, almost all existing shareholders continuously invested money in the company. Initially, a CIG share was priced at EUR0.5, then we had internal capital increases, at a price of EUR1 and later EUR1.5 per share. That’s why at the IPO, we focused on attracting investors from the outside.
However, more than 50% of CIG shares belongs to the management, and it has always been so. We would like to remain a management-driven company in the future, as well.
- Around a year ago, you got a new investor, a Japanese firm. What attracted them to your business and did they increase or decreased their interest in CIG at the IPO?
- The investors you are talking about is the venture capital investment fund SBI. For them, CIG was the first investment outside Asia. SBI is jointly run by the Japanese and a Hungarian investment fund. That’s how they learned about us. The original shareholders signed a lock-up agreement, they could not sell more than 15% of their shares at the IPO, or in the first year after the IPO, not more than 30% in the second year – so basically, they can cash out only in the third year after the IPO. This condition concerns of course, also SBI.
- How was the value of CIG estimated?
- There are two ways to estimate the value of an insurer. One, traditional, is to discount future profits of the company into the present. Another one, is to use a multiplier on the gross written premium. For example, in the case of PZU the multiplier was around 2.5, in our case just over 2. So, clearly, we used the second approach. However, we also created a model according to the traditional way just to make sure that our estimations are realistic enough. Under that model, the value was HUF 60 billion, but we agreed to a lower figure as in the next several years our shareholders will not be receiving any dividends.
- How much money was raised at the IPO?
- The capital increase reached HUF9.3 billion, the size of the IPO was approximately HUF11 billion. The difference accounts for the shares that were offered by existing shareholders. However, only 3.8% of such shares were offered, so the whole the IPO was not about cash-out, but about the capital increase. As a result, our current capital is enough to support our Hungarian operations, as well as our Slovak business and a subsidiary in Romania. We also have other ideas how to support our business, for example developing non-life insurance. We already have a fully equipped non-life unit but it’s currently in the sleeping mode. We are also thinking about entering new regional markets. CIG stands for Central European Insurance Group, since we have operations in three countries, we can rightly call ourselves a group – but according to our plans, this is only the beginning.
- What countries are in the pipeline for you?
- We will first of all look at other countries of the region, EU member-states, we can operate under the freedom of services. In Romania, we launched a branch, in Slovakia we do cross-border business, without opening a unit. All sales are made through brokers, we don’t have our own sales workforce in these countries, although we have opened a Slovak customer service facility. Currently, for us operating under the freedom of services is the easiest way to expand, and we’ll use the model in the future. At the same time, we don’t at all exclude expanding into non-EU states, or even into other continents.
- Is Russia among your target markets?
- The core line of business for CIG is unit-linked, we focus on this products in Hungary, Romania and Slovakia. I believe, this is a good choice, as unit-linked basically drives all three life markets. For example, in Hungary around 75% of new life business is generated in the unit-linked segment. Your life conference has demonstrated that the Russian market is ready for introduction of this product family. Once the law on unit-linked is adopted, we’ll start looking closely into Russian opportunities.
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