Risk Growing for Icelanders Unable to Diversify, Sjova Says

Apr 11, 2014 7:59 am ET

(Updates with Sjova share price in 12th paragraph.)

April 11 (Bloomberg) -- Iceland’s failure to remove capital controls -- imposed more than five years ago -- is beginning to jeopardize investments as risk allocation becomes harder, the head of insurer Sjova-Almennar Tryggingar hf said.

“It’s becoming ever more urgent that we create the opportunities for professional investors to invest outside the capital controls, which would allow them a better allocation of risk and greater diversification,” Chief Executive Officer Hermann Bjornsson said in an interview in Reykjavik on April 8. The insurer today becomes the 14th company on the Nasdaq OMX Iceland bourse.

Iceland is struggling to end controls put in place in 2008 after the collapse of the nation’s three biggest banks sent the economy and the krona into freefall. The central bank, which announces its next rate decision on May 21, has kept rates unchanged since November 2012 as inflation drops below the bank’s 2.5 percent goal and the krona strengthens.

The restrictions are blocking as much as $7.2 billion of offshore krona holdings from being divested, forcing them into other asset categories. That’s making Sedlabanki “very concerned” about a bubble in the equity market, according to Sigridur Benediktsdottir, head of financial stability.

Sjova was created in 1989 through the merger of Sjovatryggingarfelag Islands hf and Almennar Tryggingar hf.

‘Huge Over-Demand’

Iceland’s government took over Sjova in 2009 and injected 11.6 billion kronur ($104 million) into the insurer after it failed to meet minimum equity requirements. Another 4 billion kronur was injected by Glitnir Bank hf and Islandsbanki hf.

In 2011, SF1 slhf bought a 52.4 percent in Sjova from the north Atlantic island’s central bank for 4.9 billion kronur. Earlier this month SF1, SAT eignarhaldsfelag hf and Islandsbanki hf sold 23 percent through an initial public offering, raising 4.7 billion kronur.

“It’s apparent when you look at all the recent IPOs of Icelandic companies, that there’s a huge over-demand for investment opportunities,” said Bjornsson. “This applies to both professional investors, like the pension funds” and smaller private investors, he said.

The problems created by the capital controls can be traced back to the crisis-management policies that have helped Iceland’s $16 billion economy emerge from financial failure and outgrow most of western Europe.

‘Too Small’

Of the 14 companies on Iceland’s Nasdaq OMX exchange, eight have been listed since 2011, and another is scheduled to start trading later this year.

The nation’s key stocks gauge, the OMX Iceland 6 Index, have climbed more than 32 percent since the beginning of 2012.

Sjova is Iceland’s second-largest insurer with assets of 42.7 billion kronur as of the end of 2013. The company’s profits fell 13 percent to 1.8 billion kronur in 2013 from a year ago.

The insurer climbed to as high as 13.76 kronur on its first day trading in Reykjavik, and traded at 13.65 kronur as of 11:45 a.m. The stock sold at 11.9 kronur in Sjova’s IPO.

“It’s apparent that the Icelandic market is too small for all the money which is seeking a return,” said Bjornsson. “One hopes that we are getting closer to a point in time when it’s possible to take some steps in relieving the capital controls, incrementally. I do not foresee the capital controls being removed in one go -- it will happen in steps. The people making those decisions have to ask themselves how long we can cope.”

Unwind Controls

Iceland’s foreign debt overhang and the capital controls on the krona are among the last hurdles to be overcome before the nation can achieve a complete end to its turmoil.

The central bank has been reluctant to speed up the process of removing the controls due to concern about the krona. It has held dual currency auctions to ease the country out of the restrictions, even as it started supporting purchases of kronur a year ago.

“If it was up to me, I would move to unwind the controls on the investments of the Icelandic pension funds,” said Bjornsson. The funds, most of which are part of a fully funded pension scheme, hold assets equalling almost 150 percent of the country’s annual output, according to the central bank.

“It should not be too difficult to abolish the capital restrictions on smaller transactions of individuals and small and mid-sized companies,” Bjornsson said. “The people that control these matters have to be very careful and make sure that we don’t take any steps in haste, which can be difficult to retrace.”