A two-decade growth story put on hold

Twenty years ago the fall of the
Berlin Wall marked the symbolic end of communism in Central and
Eastern Europe (CEE) and also heralded a revival of what had, prior
to World War II, been significant private insurance industries in
many of the region’s constituent countries.

Leading the CEE in many respects was Hungary,
which in October 1989 effectively became a multi-party democracy.
In a review of Hungary’s economy the World Bank noted that the
country began its transition from communism with some “significant
advantages” over other CEE economies, such as higher living
standards and a “pragmatic” economic policy initiated in 1968
during the communist period.

According to the US Central Intelligence
Agency, Hungary began its transition from communism in 1989 with a
per capita income nearly two-thirds that of the then-members of the
European Union.

Soon after the change of regime, Hungary also
carried out structural reforms and economic stabilisation measures
which – together with the advantages the country had compared with
other CEE countries – immediately began attracting the attention of
foreign insurers.

Among major insurers the first mover was
Allianz, which can lay claim to being the pioneer in CEE with its
acquisition of a 49 percent stake in Hungarian general insurer
Hungária Biztosító in 1989. Allianz acquired full control of
Hungária Biztosító in 1996.

Allianz today ranks as Hungary’s fifth-largest
general insurer and in 2008 recorded premium income of HUF185.8
billion ($985 million) – giving it a market share of 20.95 percent,
according to the Association of Hungarian Insurance Companies
(AHIC). In the life insurance sector premium income of HUF45.2
billion in 2008 gave Allianz a market share of 9.8 percent and
ranked it fourth among the country’s 17 life insurers. With a
market share of 33.1 percent, Allianz ranked first among the
country’s 23 general insurers.

Hungary was also chosen by Dutch bancassurer
ING for its first foray into CEE, when in September 1991 one of the
group’s constituents, Nationale-Nederlandene, founded life insurer
Hungarian N-N Insurance. Establishing the group’s characteristic
bancassurance distribution link from the start, ING also
established a banking operation in Hungary that same year.

ING Biztosító (ING Insurance) is today
Hungary’s largest life insurer, achieving a market share of 25.26
percent in the first three quarters of 2009, according to the AHIC.
This represented a solid advance compared with 2008, when ING
Biztosító recorded premium income of HUF96.3 billion and a market
share of 20.85 percent.

ING’s future

Given ING’s drastic global
restructuring, the big question must be: what is to become of ING
Biztosító and, indeed, its insurance businesses in seven other CEE
countries?

Specifically, under an agreement reached with
the European Commission in late-October 2009 ING will dismantle its
global bancassurance edifice, leaving its banking and insurance
operations as completely separate entities.

The dismantling process is set to take four
years and will be achieved by a divestment of all insurance
operations via options including sales, initial public offerings,
or combinations thereof.

Undoubtedly, there are a number of players
already active in Hungary with aggressive expansionary strategies
in CEE that would relish the opportunity to acquire ING Biztosító’s
almost 400,000 life and pensions customers and achieve a
significant gain in market share in what is a highly competitive
life market.

Among potential acquirers of ING Biztosító
must be Italian insurer Generali, which has a history in Hungary
dating back to 1832. Already a major player in Hungary, Generali
ran a somewhat distant second to ING in terms of market share in
2008.

Generali’s Hungarian unit Generali-Providencia
Biztositó (GPB) recorded life premium income of HUF49 billion,
giving it a 10.6 percent market share in 2008. GPB also ranked as
Hungary’s second-largest general insurer in 2008, with premium
income of HUF134.1 billion giving it a market share of 15.13
percent – up from 14.86 percent in the previous two years.

The overall trend in GPB’s share of Hungary’s
life market is also rising, having improved from 10.1 percent in
2006 to 10.9 percent in 2007, and 12.7 percent in the first three
quarters of 2009.

GPB was, however, edged into third position by
Aegon, which achieved a market share of 14.5 percent in the third
quarter of 2009 and an average market share of 14.54 percent in the
first three quarters of 2009. The Dutch insurer also has a
significant presence in the general insurance sector, achieving a
9.43 percent market share in 2008 on premium income of HUF40.1
billion.

One of the early foreign entrants into
Hungary, Aegon presence in the country and CEE dates back to 1992
when it acquired Állami Biztosító, Hungary’s former state-owned
insurer. Although Aegon subsequently expanded into other CEE
countries its Hungarian unit, Aegon
Magyarország Általános Biztosító, remains its leading
business in the region.

Acquisition route

Rapid growth in Hungary’s life
insurance market saw premium income rise from HUF88.8 billion in
1998 to HUF508.7 billion in 2007 (a CAGR of 21.4 percent) and
continued to be a strong attraction during the past decade to
foreign insurers prepared to buy their way into the market.

Among them is Austrian insurer Vienna
Insurance Group (VIG), which entered the Hungarian insurance market
in 2000 with the acquisition of Union Biztosító – a then
locally-controlled company formed in 1990.

VIG expanded its presence in Hungary and four
other CEE countries significantly in March 2008 with the purchase
of Austrian bank Erste Bank’s life and general insurance units for
€1.4 billion ($2 billion).

Based on 2008 figures, Erste’s life insurance
operations in Hungary contributed HUF10.1 billion in premium income
and Union contributed HUF14.4 billion to give VIG a combined market
share of 5.31 percent. VIG also operates in Hungary’s general
insurance sector where, via Union, it held a 2.7 percent market
share in 2008.

Though VIG ranked only as eighth-largest life
insurer in Hungary and seventh-largest general insurer, the
acquisition of Erste’s five CEE units made it the number one
insurance company among the international insurers operating in
CEE.

In a notable comment at the time of the
acquisition, VIG’s CEO Günter Geyer said: “Importantly, we also
become a leading player in the [CEE] life insurance segment, which
we see as our future growth engine in Austria and CEE.”

UK insurer Aviva also followed the acquisitive
route into Hungary, when in March 2001 it paid €102 million for
Dutch bank ABN Amro’s life insurance unit, then Hungary’s
sixth-largest life insurer – a position it still held in 2008 with
a market share of 8.34 percent.

Uniqa is another Austrian insurer that has
built a significant presence in Hungary. Uniqa’s first foray into
Hungary came via a minority stake in composite insurer Signal
Biztosító which was established by German insurer Signal Iduna in
1993 and today ranks as Hungary’s 12th largest life insurer.

Uniqa sold its stake in Signal Biztosító in
2000 but returned in July 2002 via its acquisition of Agrupacion
Funeuropa Biztosító, a player in the funeral cover market. Uniqa
went on to build what was a small insurer with some 30,000
policyholders into a life insurer which in 2008 generated premium
income of HUF30.2 billion and ranked seventh with a market share of
6.54 percent. Uniqa’s Hungarian general insurance unit ranked fifth
with a market share of 8.12 percent.

More recent arrivals

Making a somewhat late entry, French
insurer Axa made its entry into Hungary in December 2006 via its
acquisition of Winterthur, which it bought with the Swiss insurer’s
65 percent stake in Hungarian insurer Winterthur Biztositó.

In December 2009 Axa announced that it had
gained full control of the Winterthur units it acquired in Czech
Republic, Hungary and Poland by way of the acquisition of the
minority stakes held by the European Bank for Reconstruction and
Development in a deal worth €147 million.

Axa’s Hungarian unit lagged well behind the
market leaders in 2008, with a market share of 3.19 percent placing
it in 11th position. Faring better in the first half of 2009, Axa
improved its market share to 3.92 percent and its ranking to
seventh.

Another recent major newcomer that has
followed an acquisitive route into Hungary is French insurer
Groupama, which in 2007 entered the market via the purchase of
composite insurer OTP Garancia Biztosító, from Hungarian bank
Orszagos Takarekpenztar es Kereskedelmi Bank for €617 million.

Renamed Groupama Garancia Biztosító (GGB) in
June 2009, the insurer reported life premium income of HUF41.1
billion in 2008 – giving it a market share of 8.92 percent, down
from 10.3 percent in 2007. GGB’s market share fell further in the
first three quarters of 2009 to 6.7 percent.

Hungary’s insurance market has also continued
to attract new entrants prepared to start insurance businesses from
scratch. One of the most recent of these initiatives came in
December 2006, when Germany’s largest public sector insurer
Versicherungskammer Bayern (VB), German bank Bayerische Landesbank
and Hungarian bank MKB Bank established MKB Life and MKB General.
VB has a 50 stake in the joint venture and the two banks 25 percent
each.

Since launching operations in 2007 MKB Life
has made sluggish headway, achieving insignificant market shares of
0.28 percent in 2008 and 0.23 percent in the first half of 2009.
MKB General recorded a 0.04 percent share of Hungary’s general
insurance market in 2008.

A far more successful new entrant has been CIG
Central European Insurance (CIG), established by a consortium of 43
Hungarian private investors in January 2008. CIG, which trades
under the name of CIG Pannónia Life Insurance, launched its first
products in May 2008 and went on to record total premium income of
HUF3.9 billion for the year. This gave it a 0.84 percent market
share, a level which improved considerably to 1.42 percent in the
first half of 2009.

With ambitions beyond its home country, CIG
has already launched a unit in Romania and has plans to expand into
other CEE countries such as Bulgaria, Serbia and Ukraine. CIG is
headed by its CEO Béla Horváth, a former CEO of a number of
Hungarian insurers. The insurer’s chairman, Zsigmond Járai, was
formerly Hungary’s minister of finance and president of the
country’s central bank.

Tough conditions

A vigorous growth market between
1997 and 2007 saw life insurance premium income grow at a CAGR of
23.1 percent and general insurance premium income grow at a CAGR of
31.9 percent, providing a strong inducement for companies to enter
the Hungarian market.

However, strong growth came to an abrupt end
in 2008 with the Hungarian insurance industry experiencing its
worst setback in more than a decade. In terms of life insurance
premium income, 2008 swung from a growth rate of 39.2 percent
recorded in 2007 to a decline of 9.2 percent to HUF461.7
billion.

For life insurers the major damage in 2008 was
caused by a slump in demand for unit-linked investment products –
which for many years had been the primary driver of premium income
growth, increasing from a mere 5.6 percent of total premium income
in 1999 to a peak of 67.2 percent in 2007.

Reversing this rising trend, in 2008 single
premium unit-linked sales fell by 42.1 percent from HUF194.8
billion in 2007 to HUF112.7 billion, while regular unit-linked
premium income fell by 17.9 percent from HUF179.3 billion to
HUF147.1 billion. Single and regular premium unit-linked products
accounted for 58.1 percent of total life premium income in
2008.

Exacerbating the situation in 2008, Hungary,
which had already been experiencing falling economic growth since
2004 as a result of fiscal austerity measures, found itself caught
in the wake of the global financial crisis. In 2008 the country’s
GDP grew by only 0.5 percent. Had it not been for a strong growth
in the agricultural sector the GDP would have fallen by 1.5
percent, noted the AHIC in its assessment of market conditions.

The AHIC added that life insurers faced
further headwinds in 2008 as a result of an 11 percent decline in
gross financial household savings and a sharp rise in household
debt. This left Hungary’s net household savings ratio at a very low
1 percent of GDP.

The recession deepened further in 2009 with
Hungary’s GDP declining on a year-on-year basis by 6.1 percent in
the first quarter, 7.4 percent in the second quarter and 7.1
percent in the third quarter, according to the country’s Central
Statistics Office. The Hungarian central bank anticipates that the
GDP will have contracted by 6.7 percent in 2009 as a whole.

Unsurprisingly, the Hungarian life insurance
industry’s woes continued into 2009 with the AHIC reporting that
total life insurance premium income in the first half of 2009
declined by 23 percent compared with the first half of 2008 income,
from HUF244.7 billion to HUF188.3 billion. Against the background
of a sharp depreciation of the Hungarian forint the picture was
even grimmer for foreign investors. For example, the Hungarian
forint depreciated by about 15 percent against the euro between
June 2008 and June 2009.

Slow recovery

Beyond the impact of the global
financial crisis, Hungary continues to face economic challenges
that have existed for many years. Of particular significance is a
high fiscal deficit which has forced the government to follow a
restrictive fiscal policy since 2004. This was already reflected in
the country’s GDP growth rate which fell from 4.7 percent in 2004
to 1.2 percent in 2007.

Other economic problems to be faced, according
to the World Bank, include a high unemployment rate, which has
increased from 7.8 percent at the end of 2008 to about 10 percent,
and an inflation rate which at 5 percent in October 2009 was well
above the central bank’s target of 3 percent until the end of the
fiscal year in March 2011.

In an attempt to address the fiscal deficit,
Hungary’s government adopted another restrictive national budget in
November 2009 aimed at reducing the deficit to one of the lowest
levels in the European Union – of which Hungary has been a member
since 2004.

However, the budget will continue to restrict
economic growth, with the Hungarian finance ministry forecasting a
further 0.6 percent fall in GDP in 2010 with growth only resuming
in 2011.

In addition to economic problems, Hungarian
life insurers also face the tough challenge of restoring consumer
confidence in the hard-hit unit-linked product segment where a
great deal of disenchantment has resulted from a perception of high
and opaque charges on unit-linked products.

Reacting to correct the situation, insurers in
conjunction with the AHIC on 4 January 2010 introduced the Teljes
Költségmutatót, or TKM, which reveals the total costs of a
unit-linked product to be deducted from the total yield.

Longer-term potential

Looking beyond immediate problems,
Hungary still represents a potentially significant growth market.
Indicating its latent potential is a still low penetration of life
insurance. Specifically, in the industry’s best year yet in terms
of total sales, 2007, premium income equaled only 2 percent of GDP,
according to Swiss Re. Penetration slipped to 1.7 percent of GDP in
2008 and in 2009 appears set to be even lower.

Within CEE life insurance penetration in
Hungary is among the highest – in 2008 ranking the country behind
Poland at 2.7 percent and equal to Slovenia. However, Hungary
compares poorly with Europe as a whole where, according to Swiss
Re, life insurance penetration in 2007 stood at 5 percent and in
2008 at 4.5 percent.

Highlighted as offering major growth potential
in Hungary’s pension and savings sectors by ING in a recent
presentation is the country’s ageing population. Driving growth,
believes ING, will be increasing longevity and a rising dependency
ratio.

Specifically, according to ING quoting data
from the World Bank, average life expectancy in Hungary will
increase from 58 in 2005 to about 66 in 2020. Based on data from
the European Union’s statistical organisation Eurostat, the
dependency ratio will increase from 24 in 2005 to about 49 percent
in 2050. The dependency ratio was defined as the number of people
over 65 years old as a percentage of the population aged between 15
and 65.

However, before the full potential of the
private sector in Hungary’s pension and savings sectors is likely
to be realised, major reform of the country’s social security
system appears to be required.

Highlighting this, Aegon commented in an
assessment of the CEE pension scene published in September 2009:
“Hungary has already been warned that its pension system is at risk
of imminent collapse because of a lack of funds. In response, the
government there has said it will lift the retirement age from 62
to 65 and index pensions to prices rather than the present
combination of prices and wages.”

Commenting on Hungary and other CEE countries,
Aegon continued that it is clear that the state cannot fund
pensions alone. The insurer stressed that if companies want to
recruit the best workers and maintain a stable, contented workforce
they will need to offer their employees a way of saving for their
retirement.

From the Hungarian government’s side Aegon
noted that it will introduce more favourable tax rules on
contributions to private pension schemes in 2010. From their side,
private pension product providers have recently halved their
management fees.