Performance Trends - Non-Life Insurance in France, Germany, Italy, Spain by Sutherland Global Services

Performance Trends: Non-Life Insurance in Key European Countries December 2012

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Performance Trends: Non-Life Insurance in Key European Countries Client • The client, a leading U.S. based Insurance provider, was looking at developing a geographic diversification strategy, and thereby sought a quick overview of performance trends in the non-life insurance market of four key European geographies – France, Germany, Italy and Spain

Project Scope • Key objectives of the study were to: • Get an overview of the overall insurance market in each of these 4 geographies, in terms of performance & growth • Identify key trends and provide strategic insights, and

Sutherland’s Solution • SGS conducted quick but detailed secondary research to understand the top-line and bottom-line performance of insurance industry in each of these geographies • Financial and qualitative databases to which SGS holds subscription, were used to identify key players in the insurance industry across these geographies, and rank them based on certain financial parameters, and growth/change in them • In addition, strategic insights were also provided about the market in these geographies

• Benefits to the Client • The project was a instrumental in giving the client strategic insights about these 4 geographies, so that they could decide if they wanted to get a deeper analysis done for these geographies • This fitted into the overall vision of devising a geographic expansion strategy

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Break-up of insurance premium by country

80% of the total European market

Break-up of insurance premium by Insurance Segment, 2011 Total = â&#x201A;Ź billion

27.6%

France

29.7%

Germany

31.8%

Italy

30.9%

Netherlands

20.8%

% of European Market (%)

206.0

18.9

190.0

17.4

178.1

16.2

110.2

10.1

80.2

7.4

Spain

39.3%

60.6

5.5

Switzerland

28.6%

45.3

4.2

29.7

2.7

29.2

2.7

23.3

2.1

18.1

1.7

16.5

1.5

15.1

1.4

13.9

1.3

11.7

1.1

1,089.0

100%

Sweden

19.7%

Belgium

31.7%

Denmark

31.0%

Finland

19.1%

Austria

47.2%

Norway

37.7%

Poland

43.7%

Portugal

30.4%

Europe

58.6% 0%

10%

Life

20%

30%

31.2% 40%

50%

60%

Property, casualty and accident

70%

10.2% 80%

90%

100%

Health

Source: Insurance Europe

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The Italian non-life insurance market faces changes as the sector … Insurance Penetration in Italy, 2007-11 (%)

Insurance Premium Written in Italy, 2007-11 ( € bn)

7.75% 6.38%

6.98% 5.84% 5.34%

117.8

5.80% 4.67%

3.95%

37.7

3.46% 2.42%

2007

2.38%

2008 Total

99.1

92.0

110.2 35.6 36.4

37.5

2.41%

2.29%

2.30%

61.4

54.6

2009 Life

2010

2011

2007

2008

Non-Life

36.7

125.7

Life

81.1

90.1

2009

2010

Non-life

73.9

2011 Total

_________________________________________________________________________ Italy’s Non-life insurance sector faces shifting landscape • In Italy, insurers are focusing on achieving technical profitability after some challenging years and an increasingly volatile investment environment – In 2011, rate rises continued for motor third-party liability (MTPL) risks, although a sharp decline in new car registrations has offset strong growth in motor premiums – The Italian non-life insurance market returned to growth in 2011, with premium income rising 2.2% to €36.4 billion • The insurance sector was exposed to high levels of suspected fraud and claims even before Italy’s economic downturn, and these continue to impact loss ratios – However, the recently passed law Cresci Italia (Grow Italy) in March 2012 aims to help reduce fraud, as well as increase transparency and competition in the insurance industry • Italian insurers have significant investments in Italian government bonds, which have suffered from rising yields on the back of concerns about the government deficit Source: Associazione Nazionale fra le Imprese Assicuratrici (ANIA) , A.M. Best research , News articles

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… is subject to new legislation and industry consolidation, … Italy Non-Life Insurance by Segment, 2011 (€ bn)

Italy’s Non-Life Insurance Distribution Channel, 2011 (%)

100% = €36.4 bn Others 7.0% Motor Physical Damage

48.9%

8.0%

100% = €36.4 bn Motor & Third Party Liability (MTPL)

Others 0.1% Banks Direct Selling 3.5% (Phone, Internet) 4.7% Company Staff 2.1%

Tied Agents 81.6%

8.0%

General 8.1% Liability

Brokers

14.3% Accident & Health

13.7% Property & Fire

_________________________________________________________________________ Key Observations • The motor segment, which accounted for 57% of non-life premiums in 2011, was the key contributor to renewed growth for the non-life sector, as premiums for MTPL and motor physical damage increased by 4.1% – Rates in MTPL segment have been lifted by as much as 30% since 2010, and insurers have been attempting to increase prices in 2012, although to a lesser extent than in previous years • Other non-life risks, including medical malpractice, which has suffered from poor technical performance, have also been subject to major rate increases. GWP for general liability decreased in 2011 due to increased competition from the Italian branches of foreign insurers • Agencies are the most important distribution channel, handling 81.6% of premiums, followed by brokers (8.0%) specialized in commercial risk • The direct channel, which features much lower administrative costs, continued to improve its performance, rising from 4.1% in 2010 to 4.7% in 2011 and reaching almost 7% of total business if we consider compulsory third party vehicle insurance (5% in 2010) – The share of the banking channel, which mainly deals with non-motor insurance products, also continued to grow, albeit very slowly (3.5% in 2011 as compared to 3.4% in 2010) Source: Associazione Nazionale fra le Imprese Assicuratrici (ANIA) , A.M. Best research , News articles

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… while the country’s ongoing economic challenges constrain demand for coverage Italy Non-Life Combined Ratio, 2011 (%)

Italy Non-Life Combined Ratio by line, 2011 (%)

103.8%

100.2%

97.9%

24.7%

24.4%

24.1%

94.7%

98.7%

24.4%

24.5%

70.3%

74.2%

79.1%

75.8%

73.8%

2007

2008

2009

2010

2011

Loss Ratio

Expense Ratio

Combined Ratio

90.2% 92.4% 92.5% 94.5% 103.7% 104.0% 122.2% 121.5% 89.8% 89.8% 103.5% 106.3%

Other Accident & Health Property & Fire General Liability Motor Physical Damage Motor third party liability 2011

2010

_________________________________________________________________________ Key Observations • According to ANIA, the Italian Non-Life insurance sector had a solvency margin of 269% in 2011, down marginally from 288% in 2010 – Non- Life insurers collectively posted an improved combined ratio in 2011 at 97.9%, compared with more than 100% in 2009 and 2010. This was a consequence of an improvement in the claims ratio, driven by motor rate increases, while expense ratios have broadly remained stable at between 24.1% and 24.7% during the past five years • MTPL segment has been unprofitable from a technical perspective, although the combined ratio improved from 106% in 2010 to 103% in 2011, having been as high as 108% in 2009 – Even General Liability business (including medical malpractice, professional liability, directors and officers, and employers liability) has been unprofitable, with the combined ratio for this class of risk reaching 122% in 2011 • Property rates were broadly flat in 2011, although these are expected to increase for commercial property covers after the earthquake activity and aftershocks in the Emilia-Romagna region of Italy in May 2012, which significantly damaged manufacturing faciities and consumer goods inventories. Catastrophe modelling firm EQECAT has estimated insured losses could reach €700 million Source: Associazione Nazionale fra le Imprese Assicuratrici (ANIA) , A.M. Best research , News articles

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The French insurance market has experienced significant volatility during the past few years, … Insurance Penetration in France, 2007-11 (%) 10.36%

10.57% 9.48%

10.69% 9.52%

Insurance Premium Written in France, 2007-11 ( € bn) 195.6 43.6

8.05% 2.31%

2007

7.17% 2.31%

2008 Total

8.19% 2.38%

2009 Life & Health

8.32%

2.37%

2010

183.1

44.7

199.7

206.4

45.0

45.8

154.7

160.6

142.1

2010 Non-life

2011

190.0 47.9

7.12%

2.40%

2011 Non-Life

152.0

138.4

2007

2008 2009 Life & Health

_________________________________________________________________________ France’s Non-life sector resilient despite economic difficulties • The French insurance market has experienced significant volatility during the past few years, although the non-life sector continues to grow – While the life market contracted in 2011, gross premium written (GPW) for non- life insurers continued to increase. The non-life sector benefited from a harder market, with rates for motor lines in particular lifted to improve profitability – A benign year for natural catastrophes in 2011, compared with 2010, also supported the non-life market. The sector posted improved profitability levels in 2011 and is maintaining a solvency margin well above the regulatory required amount • GPW for the non-life segment increased 4.6% to an estimated €47.9 billion in 2011. This is a record level for the non-life market, with rate increases mainly accounting for the increased premiums+ • The sector has shown good underwriting discipline in what has been a challenging investment environment, which is unlikely to improve in the foreseeable future – Any deterioration in Euro zone macroeconomic fundamentals is likely to have a negative effect on the market’s overall capitalization. However, as in other European countries, the slowdown may result in an overall reduction in claims as a result of reduced economic activity Source: Fédération Française des Sociétés d’ Assurance , A.M. Best research , News articles

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… although the non-life sector continues to grow France Non-Life insurance by Segment, 2011 (€ bn)

France Non-Life Combined Ratio, 2009-11 (%)

100% = €47.9 bn 100.9%

98.4%

94.5%

2009

2010

2011

Other 18.0%

Motor

Construction 39.7%

5.0% Liability

7.3% 12.5%

Commercial

17.5% Property

_________________________________________________________________________ Key Observations • Almost every line of business (with the exception of commercial property which remained stagnant) contributed to non-life growth. Motor, the largest line of business at 40% of non-life GPW experienced a near 4% increase in premium to €19 billion – The second-largest class of business, household property, enjoyed a 6.3% uplift in GWP to €8.4 billion – The increases in non-life GPW are, in part, a result of higher rates. Insurers are exercising greater underwriting discipline, as the continued uncertainty in the Euro zone has resulted in historically low government bond yields • The French non-life insurance sector has improved its underwriting profitability in the past two years – However, natural catastrophes remain among the most significant threats to this trend. Notable events have included severe flooding in Var in the summer of 2010. In December 2011, windstorm Joachim struck the north of France and was followed by windstorm Andrea, which caused damage in various areas of the country in January 2012 • A combination of rate increases in 2011 and a more benign claims environment has driven the large improvement in technical profitability and rate increases is expected to continue in 2012 and 2013, albeit at lower levels than those achieved in 2010 and 2011 Source: Fédération Française des Sociétés d’ Assurance , A.M. Best research, News articles

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The German non-life insurance market has proved to be resilient, … Insurance Penetration in Germany, 2007-11 (%) 6.71%

6.65%

7.22%

Insurance Premium Written in German, 2007-11 ( € bn)

100% = €56.6 bn

7.22% 7.22% 162.9

3.25% 2.24% 1.21%

2007

3.22% 2.21% 1.23%

3.59%

3.65% 3.38%

2.30% 2.23% 1.33%

Non-Life insurance by Segment in Germany, 2011 (€ bn)

1.34%

2008 2009 2010 Total Life Health

164.5

171.4

178.8

178.1

Others 2.7%

56.6 34.7

Marine 3.1% Legal 5.9% Expenses

54.5

54.6

54.7

55.2

29.5

30.3

31.5

33.3

79.0

79.6

85.3

2.20%

90.4

86.8

12.5% 2007

2008 Life

2009 Health

2010

Motor

Private 11.7% Accident

1.35%

2011 Non-Life

36.7%

2011

Non-life

General liability

27.4% Property

_________________________________________________________________________ German Non-life insurer’s focus on rates improves profitability • In 2011, the Non-Life sector recorded its strongest annual percentage increase in premiums since 2003. The primary contributor to such growth was motor business, with motor GWP increasing by an estimated 3.6% in 2011 as rates were lifted after years of inadequate pricing – Insurers have also been able to increase rates for liability insurance. After the global financial crisis, it appears that insurers are evaluating risks more closely before underwriting. Pricing for most other Property/Casualty risks has been stable • The Non-Life insurance sector is conservatively invested, with the current weak investment environment forcing insurers to focus on profitable underwriting as the yields on German government bonds remain at historic lows – Non-life insurers are increasingly focusing on underwriting profitability as the low interest rate environment in Germany continues to suppress investment income

– Additionally, insurers are adjusting their investment portfolios to take account of this new reality, concentrating on sectors that offer higher yields. Some of the larger insurers are investing more actively in corporate bonds and commercial real estate financing projects as they seek better yields

Source: Gesamtverband der Deutschen Versicherungswirtschaft (GDV), A.M. Best research, News articles

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… as it continued to enjoy growth in 2011 and is expected to remain robust in 2012 Germany Non-Life Claims Ratio by line, 2009-11 (%) 79% 80%

Total Accident

80% 81%

Accident 98% 100%

Motor Non-Private Property

107% 107%

Motor Non-Private Property

78% 78%

99% 100%

Private Property

68% 70%

2011

98% 98%

Total

60% 60%

Private Property

Germany Non-Life Combined Ratio by Line, 2009-11 (%)

2010

96% 99%

2011

2010

_________________________________________________________________________ Key Observations • Motor insurance underpinned the growth in non-life premiums in 2011 as the sector strengthened rates. Rates for motor fleets were also increased, while some insurers cancelled policies that were attracting high losses. – Motor rate rises are expected to continue throughout 2012, although claims remain high. Despite rate increases, motor business remains unprofitable, and in 2011 this class of business incurred the greatest losses – The motor market remains very competitive, and motor physical damage claims were high in 2011 • Property which is the second largest line of business accounting for 27.3% of non-life premium in 2011, experienced 2.1% growth in GWP. Although rates for private home insurance remain under pressure, particularly for non-catastrophe exposed risks, insurers are attempting to reduce limits and increase rates for catastrophe-exposed commercial property risks. – Combined ratios for both private property insurance and commercial business improved by 2.6 and 1.2 percentage points respectively

• The German non-life insurance market posted an improved total combined ratio of 97.9% in 2011 as compared to 2010’s combined ratio of 98.2%, although this was a particularly a poor year for losses, with freezing weather conditions at both the beginning and end of the year resulting in increased attritional claims, as well as claims resulting from windstorm Xynthia Source: Gesamtverband der Deutschen Versicherungswirtschaft (GDV), A.M. Best research, News articles

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The Spanish non-life insurance sector remained profitable in 2011, … Insurance Penetration in Italy, 2007-11 (%)

Insurance Premium Written in Italy, 2007-11 ( € bn)

Non-Life insurance by Segment in Italy, 2011 (€ bn) Other

5.2%

5.4%

3.0%

2.2%

2.4%

2007

2008 Total

5.7%

5.5%

5.6%

3.0%

2.7%

2.5%

2.6%

2009 Life

2010 2011 Non-Life

54.9

59.2

59.9

60.6

58.2

100% = €31.7 bn 11.0%

Liability

Motor

5.0% 32.6

31.8

31.7

23.1

26.6

28.1

26.4

28.9

2007

2008

2009

2010

2011

31.8

Life

Non-life

Funeral

Total

36.0%

6.0%

21.0%

Health

21.0% Property (includes Multi-peril, industrial, homeowners

_________________________________________________________________________ Spanish Non-life insurance sector profitable, but challenges lie ahead • Non-life insurance premiums decreased in 2011 €31,724 million mainly due to weaker industrial activity led by economic crisis, slacker demand and intense competition in most lines of insurance

• Non-life insurers continue to benefit from solid distribution networks that encourage customer loyalty and ensure that the market continues to make underwriting profits – However, Spanish insurers could face deteriorating technical results as they compete on pricing. Insurers are under pressure to offer competitive rates, as the country’s troubled economic position suppresses demand for cover and household spending remains under strain • While Spain’s non-life insurance market is profitable, the sector faces significant challenges in the event of further erosion of Spain’s sovereign creditworthiness and continued negative developments regarding the Eurozone sovereign debt crisis • In Non-Life prospects for 2012 are also very challenging due to the weakness of the economy, with a high jobless rate, a high level of household and business debt, and serious problems in gaining access to financing Source: ICEA , A.M. Best research, FUNDACION MAPFRE , News articles

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… but growth remains challenging as it continues to face one of the bleakest economic environments since the 1930s Spain Non-Life Combined Ratio, 2011 (%)

Spain Non-Life Combined Ratio by line, 2011 (%)

93.9%

93.8%

92.0%

Health

21.1%

21.7%

21.5%

Personal Accident

95.6% 96.5%

76.9% 72.2% 96.9% 97.3% 90.2% 99.2% 90.3% 98.8% 89.3% 97.5%

Motor 72.8%

72.1%

70.5%

Homeowners Industrial

2009 Loss Ratio

2010 Expense Ratio

2011

Property Multiperil

Combined Ratio

2011

2010

_________________________________________________________________________ Key Observations • Gross and net claims improved in 2011 as a result of a slowdown in economic activity which has helped the Spanish non-life insurance market to improve its profitability with combined ratios falling from 93.8% in 2010 to 92% in 2011

• Combined ratios for property multiperil risks improved by 8 percentage points as a result of better claims experience during the year • There was a slight drop in the combined ratio for motor risks, which is the largest line of business, accounting for more than a third (36%) of nonlife premium in 2011 – The sluggish economy has driven new car sales to a 20-year low and reduced the number of insured vehicles, while policy holder have switched to more basic coverage. Furthermore, usage of vehicles has been constrained in recent years, resulting in lower claims

• However, other lines of business are coming under pressure, notably liability which has been impacted by softer pricing as well as new entrants into the market. With the market still remaining very profitable, this pricing trend is expected to continue Source: ICEA , A.M. Best research, FUNDACION MAPFRE , News articles

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