PRIVATISATION: Wide Interest in Croatian Insurance Company (CO)

The following 9 companies have presently expressed initial interest in the privatisation of the state-owned Croatia Osiguranje (CO), which is the insurance market leader in Croatia: American AIG, Austrian VIG and Erste Bank, German Ergo, Polish PZU, Slovenian Triglav, Hungarian OTP, the European Bank for Reconstruction and Development (EBRD), who is more likely to be interested as a minority investor, and the local tobacco & tourism company Adris Group. The deadline for declaring interest to participate in the process expired on 31 August, while the deadline to deliver non-binding offers is 20 September.

In July, the government announced that it will sell up to 50% of its 80.23% stake in CO, followed by a capital increase which should additionally lower its stake to a maximum of 30% and a minimum of 25%+1 share.

The privatisation package is valued at estimates up to €261 million. Explaining the sale proposal, the government stated that CO is a relatively small insurance company operating in a region fiercely hit by the economic recession and with consequently limited growth potentials. The company has consistently lost market share, while Croatia’s recent EU accession should bring additional pressure on the third party liability (TPL) insurance market, currently the most profitable segment in CO’s portfolio, whose market is still not fully liberalised.

American International Group (AIG) is a multinational insurance corporation and the fifth largest insurance company in the USA, with a market capitalisation amounting to over €53 billion. AIG’s entry into Croatia’s insurance market would certainly bring diversification within the financial and insurance sector, as opposed to the present German-Austrian dominant market position.

PZU and Triglav had already confirmed their interest in the CO privatisation before the official deadline (31 August). In August, Andrej Slapar, CEO of the state-owned Slovenian insurer Triglav, informed the Croatian government about Triglav’s interest in submitting a non-binding offer for CO by 20 September. However, the bid also has to be approved by the Slovenian government, which is still deciding on whether to privatise Triglav and other state-owned companies in Slovenia.

State-owned PZU recently declared that it intends to invest €1.2 billion on acquisitions in the region. CEO Andrzej Klesyk said the Poland’s top insurer is interested in buying controlling stakes in CO and Triglav once they have been put up for sale by their respective governments. Media insiders have stated that the government does not favour state-owned bidders, such as PZU and Triglav  Klesyk sees these takeovers as a stepping stone for PZU to a wider presence in the region, especially since the Polish insurer is limited from expanding within the Polish market, due to competition and market concentration issues.

These potential strategic investors are quality bidders. However, one has to dig a little deeper in order to understand the investors’ incentives. First, CO has a 34.2% market share on the domestic insurance market (with €225 million in market cap) and also conducts business through 23 companies in the region (in which it has a majority stake). Thus, acquiring managerial rights would enable the future investor to also expand its business to other Southeast-European insurance markets. Second, the Croatian insurer has real state valued at approximately €261 million, including four locations in Croatia’s capital Zagreb worth €90 million. The international interest in CO is a reflection of an interest in the wider Southeast Europe market share…

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