Hungarian insurer Cig Pannonia Nyrt., which lists Lehman Brothers as one of its founders, lost as much as a quarter of its value in two days after Italian reinsurance contracts at one of its units turned out to be counterfeit.
Cig’s Emabit unit was trying to activate purported contracts with African Reinsurance Corp., or Africa Re, which it believed would cover claims in Italy, but which it said the reinsurer confirmed to be bogus. This caused the insurer an estimated 525 million forint ($1.8 million) in losses, according to a statement Thursday. Cig dropped as much as 15% for a second day on Friday, before paring losses to trade down 9.9% at 10:28 a.m. in Budapest.
While the expected damage is smaller than earlier indicated, Cig’s stock plunged as Opus Global Nyrt., a Hungarian conglomerate controlled by an ally of Prime Minister Viktor Orban that holds a 25% stake, ruled out taking part in a capital increase. Cig flagged Thursday that its Italian unit would need additional funding following the fraud case.
Cig said that Emabit has pressed charges connected to the fraud.
“The above events will affect the adequacy of the subsidiary’s own funds and will require a capital increase in Emabit,” Cig said in the statement. Cig declined to answer emailed questions citing the ongoing regulatory investigation. Africa Re didn’t respond to an email seeking to confirm the Hungarian insurer’s account of the events.
Opus, controlled by Lorinc Meszaros, a boyhood friend of Orban’s and former mayor of the premier’s home town of Felcsut, said its investment in Cig isn’t strategic and it won’t provide any additional capital or financial injection to either the parent company or its unit, according to a statement.
In addition to Lehman, the Hungarian insurer’s founders included a who’s-who of the business and political elite from the period around 1998-2002, Orban’s first term in office. Zsigmond Jarai, who served as finance minister and then central bank governor in that period, was among the most prominent. Other participants included former Foreign Minister Janos Martonyi and business leaders.
Cig’s shares dropped to a three-year low 173 forint a share on Friday before paring some its losses. The stock is the worst performer among the 15-member benchmark BUX Index year-to-date. The traded volume on Friday was more than 11 times the daily average over the past three months. Opus shares dropped 2.2% on Thursday and 0.5% more on Friday.
Hungary’s central bank barred Cig from entering further similar contracts like the ones it signed in Italy and ordered the group to improve its risk management and controls.
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