Poland still an unfinished growth story

After a decade of remarkable
growth Poland’s life insurance market suffered its first setback
last year. However, a number of insurers continued to make solid
progress, while the promise of a Polish economy set to be among
Europe’s best performers holds out significant potential for the
years ahead.

Having shrugged off
deteriorating economic conditions in 2008 to produce record premium
income growth, Poland’s life market succumbed to global economic
woes in 2009. Ending a decade of uninterrupted, robust growth,
premium income in Central and Eastern Europe’s largest insurance
market fell 22.3% compared with 2008 to PLN30.28bn ($8.95bn),
reveals data published by the Polish Financial Supervisory
Authority (PFSA).

With the decline in premium income
in 2009, Poland’s life market moved strongly against the trend in
the European Union (EU) as a whole. Preliminary data from insurance
industry organisation the Comité Européen des Assurances reflects
premium income in the EU in 2009 of €647bn ($784bn), an increase of
5% compared with 2008.

Out of top 15 of Poland’s 30 life
insurers – 23 of which are foreign controlled – only three recorded
premium increases in 2009. The most impressive performance was put
in by Italian insurer Generali’s unit Generali Zycie which
increased gross written premium income by almost 53% to
PLN1.21bn.

Generali Zycie performance in 2009
propelled its market share to 4%, compared with levels that ranged
from 2.9% in 2005 to 2% in 2008.

Together with its Polish general
insurance unit, Generali distributes through 1,600 agents, 70
offices and 2,200 insurance agencies and banks.

Also putting in a strong showing
amongst foreign insurers in 2009 was Allianz’s life unit Allianz
Zycie Polska, which recorded a 24% increase in gross written
premium income to PLN1.86bn. This boosted the insurer’s market
share to 6.1% from 3.9% in 2008 and its market ranking from eighth
to fourth.

Home-grown
success

Among Polish-owned insurers, TUnZ
Europa again put in a solid showing in 2009, increasing the gross
written premium income of its life business, TU na Zycie Europa
(TUE Life), by 1.4% compared with 2008 to PLN2.69bn. This gave TUE
Life a market share of 8.9%, ranking it second only to
state-controlled PZU Group’s life unit PZU Zycie.

Established in 2002, TUE Life has
enjoyed rapid growth, increasing premium income from PLN170m in its
first year of operation and its market share – from 2.4% in 2005
when it ranked tenth and 6.8% in 2008 when it ranked third. In
2009, TUE Life was ranked as Poland’s 10th-largest financial
institution by Polish financial publication Gazeta
Finansowa, up from 13th in 2008.

In 2009, TUnZ Europa’s general
insurance unit TU Ubezpieczen Europa reported premium income of
PLN349m, up 38% compared with 2008 and giving it a 1.66% market
share. The unit was established in 1995.

Commenting on 2009’s performance,
TUnZ Europa’s board president Jacek Podoba said net profit had
increased by 11% to PLN120.4m and that a hefty 38.6% return on
equity had been achieved. Since 2004 the insurer’s net profit has
reflected a CAGR of 40.8%.

TUnZ Europa, Podoba continued,
achieved its solid results in the face of “exceptionally difficult”
market conditions.

For example, he noted that in the
first three quarters of 2009 claims paid by the Polish life
industry increased by 87% while claims paid by general insurers
rose by 24%.

Podoba also noted that TUnZ Europa
is working on the development of its distribution channels other
than the banking channel which has so far been its key focus.

As part of its distribution
diversification move, TUnZ Europa has established what Podoba
termed “investment boutique insurance,” a platform dedicated to
financial intermediaries, multi-service agencies and insurance
brokers.

Under the new model TUnZ Europa is
already working with 92 partners, said Podoba.

The strategy appears to be bearing
fruit, with TUnZ Europa reporting record results in the first
quarter of 2010.

Notably, TUE Life achieved average
gross premium income of some PLN500m, which exceeded the total of
PLN439m written during the entire first quarter of 2009. The
insurer’s general insurance sales in the first quarter of 2010 were
up 95% compared with the first quarter of 2009.

TUnZ Europa has been listed on the
Warsaw Stock Exchange since June 1999 and is one of only three
Polish insurers listed on the exchange. TUnZ Europa has a market
capitalisation of just under PLN1bn.

Total equity at the end of March
2010 stood at PLN427m while total assets were PLN5.72bn, up from
PLN133m at the end of 2005.

TUnZ Europa’s major shareholder is
Getin Holding, which has an 80% stake. One of Poland’s most dynamic
entrepreneurs, Leszek Czarnecki has a 56% stake in Getin which also
has interests in banking, investment management and leasing.

PZU Group
lists

Marking a major change in the
Polish insurance market’s landscape, the country’s largest insurer,
PZU Group (PZU), completed an initial public offer (IPO) and listed
on the Warsaw Stock Exchange on 12 May this year.

The IPO saw the sale of 29.9% of
PZU’s share capital, which reduced state ownership of the insurer
from 77% to 57.1% and Dutch insurer Eureko’s stake from 23% to
13%.

The IPO followed resolution of a
long-running dispute between Eureko and the Polish government.
Eureko acquired an initial stake in composite insurer PZU in 1999
and two years later a dispute arose over the Polish government’s
refusal to honour an agreement to sell Eureko an additional 21%
stake in PZU.

The dispute was settled in October
2009 when Eureko agreed to accept as compensation €1.9bn ($2.3bn)
in the form of an ordinary and special dividend from PZU. In
addition, Eureko received a further PLN1.22bn from the Polish
treasury following PZU’s IPO. Eureko has indicated that following
the IPO it plans a complete, gradual disinvestment of its remaining
stake in PZU.

In its first year reporting as a
listed company, PZU’s total premium income fell by 5.2% compared
with 2008 to PLN7.79bn.

The decline in premium income was
attributable to its life unit, PZU Zycie, which recorded a 24.2%
fall to PLN9.92bn. From a profit perspective, however, PZU
performed well, reporting a net profit of PLN3.76bn, up 61%
compared with 2008 and its highest net profit ever.

According to PZU, the decline in
PZU Zycie’s premium income was the result of a strategy to limit
asset concentration risk mainly involved in bancassurance.

This saw premium income through the
bancassurance channel fall 55.3%, from PLN6.38bn in 2008 to
PLN2.85bn in 2009.

Offsetting this decline to an
extent were increases of 5% and 6% respectively in group insurance
premium income and individual insurance other through non-bank
channels. Group life is traditionally PZU Zycie strongest area.

Overall, the decline in PZU Zycie’s
premium income lowered its share of Poland’s life market
marginally, from 33.56% in 2008 to 32.75% in 2009. PZU Zycie had
performed exceptionally well in 2008, increasing premium income by
80% compared with 2007 in an overall market that grew by 33%.

PZUZycie’s strong showing in 2008
ended a prolonged period of underperformance that had seen its
market share fall from 50% in 2002 to 28.5% in 2007.

Notably, bancassurance played a
significant role in PZU Zycie market share recovery.

Indicatively, sales through the
bank channel accounted for only 21.5% of PZU Zycie premium income
of PLN7.59bn in 2006, rising to 48.8% of premium income of
PLN13.08bn in 2008.

PZU’s decision to reduce bank
channel sales in 2009 represented an about-turn from its earlier
strategy of expanding the importance of bancassurance.

This strategy was spearheaded by
then PZU director Krzysztof Rosinski, who in 2004 was tasked with
aggressively expanding the insurer’s bancassurance channel.
Rosinski is now an executive director of TUnZ Europa.

Signaling a change in strategy, in
December 2008 PZU unveiled a plan covering the period from 2009 to
2012.

Among key objectives of the
strategy is to service PZU’s substantial customer base more
effectively and take greater advantage of the group’s extensive
branch network and high brand recognition. According to PZU, it has
5.7m customers, 750 branches and a 93% brand recognition rate
amongst Polish consumers.

PZU began 2010 on a mixed note with
PZU Zycie’s life premium income increasing by 3.7% compared with
the same quarter in 2009 to PLN1.61bn while general insurance
premium income fell 4.9% to PLN2.32bn. PZU reported a return on
equity of PLN12.1bn of 28.7% in the first quarter of 2010.

Foreign insurers on the
backfoot

In general, foreign insurers
experienced significant declines in premium income in 2009. One of
the most significant setbacks was recorded by UK insurer Aviva’s
Aviva Poland unit (until recently branded Commercial Union Poland),
which reported that premium income from its life insurance
business, Aviva TUnZ, had slumped 58%, from PLN3.99bn in 2008 to
PLN1.67bn in 2009.

This saw Aviva TUnZ’s market share
fall from 10.2% in 2008 to 5.5% and its market position from second
to sixth. Aviva’s market share peaked at 12.4% in 2005.

Aviva Poland, which also operates a
general insurance business, relies heavily on the tied agency
distribution channel in Poland where it reported having 4,200
agents in 2009.

In 2008, Aviva Poland made a
significant move into the bank channel with the formation of joint
life and general insurance ventures with Allied Irish Bank’s
subsidiary Bank Zachodni, which has some 500 branches in
Poland.

Premium income through the
bancassurance joint ventures totalled PLN169.9m in 2009.

Commenting on Aviva Poland’s 2009
results, its president Maciej Jankowski said the lower premium was
primarily the result of withdrawing the company’s investment
policies from 1 August 2008 onwards. He explained that the reason
this decision was taken was the low profitability of these products
and the credit risk.

“As with the entire sector, Aviva
has also recorded lower sales of investment insurance products with
a one-off premium payment,” said Jankowski.

He stressed that 2009 was a year of
uncertainty as regards the scale of the economic slowdown financial
market slump.

“It was hard to foresee how our
insurance and investment customers would act in this situation,”
Jankowski said.

“We were able to maintain our level
of premiums in our most important line of business – life insurance
with a regular contribution, which must be seen as a success in
these conditions.

“We increased our share in the
property insurance market in spite of significant competition. We
also maintained our cost discipline and improved our
profitability.”

Aviva Poland reported a net profit
of PLN462m in 2009, up from PLN397.4m in 2008.

In 2010, Aviva Poland is
concentrating on the sale of its basic products, including its new
life insurance product New Perspective, said Jankowski.

The product features options of
health and accident insurance for the whole family and group
insurance policies with a wide range of additional agreements and
regular saving programmes.

Solid outlook

Despite the setback of 2009,
Poland’s life industry still offers significant growth potential,
indicates a review of the country’s economic prospects published by
the Organisation for Economic Cooperation and Development
(OECD).

The OECD highlighted that Poland’s
response to the global economic crisis was “largely appropriate”
and that resilient consumer demand and the solidity of the
financial system helped to contain the contagion of the economic
crisis which hit some other Eastern European countries harshly.

As a result, continued the OECD,
Poland was less affected by the global recession than other OECD
countries, especially in Eastern Europe. The OECD noted that Poland
recorded the highest real GDP growth in the OECD in 2009, at 1.7%,
with its GDP growth expected to recover steadily towards 3% in
2011.

Looking further ahead, the OECD
believes Poland could actually face an economic boom situation.
This, said the OECD, could be driven by significant inflows of
foreign direct investment funds and European Union (EU) cohesion
funds, transfers of which set to reach an annual average of 3.3% of
Poland’s GDP in the coming years.

Cohesion funds are allocated by the
EU to poorer regions of Europe to support integration into the EU.
A total of €70bn is budgeted by the EU for the Cohesion Fund
between 2007 and 2013.

But as positive as capital inflows
are for Poland, the OECD warned that it will require careful fiscal
and monetary management to avoid the creation of serious economic
structural imbalances.

Overall, however, the prospects of
solid economic growth appears to hold significant benefits for
insurance market growth in Poland.

This is particularly so given low
levels of penetration which, according to Swiss Re, stood life and
general insurance were 2.7% of GDP for life insurance and 1.9% for
general insurance.

This ranked Poland 12th for life insurance and 22nd for general
and health insurance in Europe where the average for life insurance
was 4.5% and the average for general and health insurance was
2.9%.

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