M&A in insurance - MABISZ• Premium growth stagnant at peer average • Profitability at peer...

M&A in insurance Presentation at the MABISZ conference László Juhász

8th October 2013

Mabisz presentation Laszlo Juhasz - 08Oct13_JL.pptx 1

Draft—for discussion only

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Agenda

International view: M&A remains important in insurance Hungarian reality today: The consolidation paradox



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Many European Insurance player with a Price/Book multiple <1 Investors do not believe in insurers to having a convincing strategy

P/B-multiple <1

Financial Fundamentals

Corporate Strategy

Investor Communication

• Premium growth stagnant at peer average • Profitability at peer average • Subscale positions in foreign countries • Home market in Europe limited

• No clear positioning as value or growth stock • Very scattered regional presence • Many sub-critical positions • Unclear competitive advantages

• Issues in presentation of clear strategy and facts • Unclear communication of strategy • Value of the group being questioned • No M&A transactions or movements to improve

stuck-in-the middle position

Source: BCG analysis

Clear strategy for capability build to create sustainable competitive advantage

!

!

!



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M&A activity in the insurance sector reduced in 2012

Development of number and value of deals (1990-2012)

0

20

40

60

80

0

100

200

-16%

2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990

Value of deals Number of deals

Deal value ($B)1 Number of deals2

1 Enterprise value includes net debt of target. 2 Total of 9,672 completed M&A transactions in the insurance sector with no transaction-size threshold and excluding repurchases, exchange offers, recapitalizations, and spinoffs. Source: BCG M&A Research Center; data provided by Thomson ONE Banker.

YoY (2011 vs. 2012)

Number: -12%

Value: -51%

Q2 2013



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Three basic principles for value-creating M&A deals

Assess deal against

company's capabilities

Define a clear strategic

rationale for the deal

Perform detailed

due diligence and risk

management




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Define a clear strategic rationale for the deal Four main motivations for M&A identified

Internationalization • Acquisitions outside of the home country

or base of operations • To expand operations globally

Complements

• Acquisitions of smaller players with complementary capabilities or skills

• Could be either LOB, Product expertise, channels

Scale • Primarily in home markets or those with

substantial operations • Aim to achieve scale advantages

Emergency deals • Driven by solvency position • Or forced by regulator

Motivation Examples

Acquirer Target

Integrity Life Insurance


http://www.aegon.com/default.aspx?id=3&epslanguage=en

http://www.transamerica.com/index.asp

http://images.google.com/imgres?imgurl=http://www.diversitymbamagazine.com/images/Gala Sponsor Logos/metlife.gif&imgrefurl=http://www.diversitymbamagazine.com/gala_event.html&usg=__LxXKTr31upYKTqFvzFDVyOa5NCk=&h=229&w=743&sz=29&hl=en&start=9&um=1&tbnid=gpb8evIP0oNfYM:&tbnh=43&tbnw=141&prev=/images?q=Metlife&hl=en&rls=com.microsoft:en-us&sa=N&um=1

http://en.wikipedia.org/wiki/File:150px-sttravlogo.png

http://www.axa.co.uk/index.html



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Asses the deal against the company's own capabilities Three areas of relevance identified

Financial capabilities

1

Organizational capabilities

2

Cultural capabilities

3

• Assess the availability of funding before embarking M&A – Current economic situation makes adequate and persistent deal-funding a

prerequisite – Strain of the transaction needs to be taken into account

• Spell out a clear logic and plan for integrating each function – M&A deals affect all parts of the value chain – When sales functions are integrated, retention of sales force, branding, cross

selling and the set up of sales support processes need to assessed – In life insurance, the integration of back-office and IT can take years

• Manage the cultural and change-related issues of the integration – Maintaining morale and boosting confidence in the deal is crucial – Cultivation and communication of a shared understanding on how the PMI

will work is important – Basic prerequisites such as language skills need to be clarified in advance



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Overall, value creation in M&A is a challenge Value creation of insurance M&A in total

Value creation of insurance M&A deals Conclusion

46%

Value destroying deals Value creating deals

54%

• Significant variability in value

creation potential of deals

• M&A success is not a random chance event – Several success factors exist – Isolated in our study of insurance

deals

• Value creation studied from the perspective of the shareholder of the acquirer

Note: Analyses using announcement effect of deals measured using Cumulative Abnormal Return (CAR) over seven days, centered around announcement date. Results based on analysis of deals conducted between insurers over the period of 1999-2008. Only deals where the acquirer was from North America or from Western Europe were considered Source: Thomson financial, Datastream, BCG Analsysis

Number of deals 159 188



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Downturn deals outperformed upturn deals Comparison of long-term RTSR

Downturn deals outperform upturn deals Rationale

Chances for short and long-term value creation are better during downturns

• Lower competition results in better pricing

• Scarce capital leads to higher burden of proof on benefits

• Opportunity to acquire good parts of distressed companies (emergency deals)

103,2

105,5

115,4

98,4100,0

104,6

98,9101,1

85

90

95

100

105

110

115

120

T-3 Year 1 Year 2 T+3

RTSR1

Downturn transactions

Upturn transactions

End of announcement year

1 Cumulative relative TSR performance (3 days before deal = 100) Note: Sample size = 347; values based on averages; Upturn and downturn periods defined using the movement of the MSCI world insurance Index – Periods of upturn: 01 January 1999 to 31 December 2000, 12 March 2003 to June 3 2007. Periods of downturn: 01 January 2001 to 11 March 2003, 4 June 2007 to present Source: Thomson Reuters Datastream, BCG analysis



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Small deals are more likely to create value Value creation of insurance M&A by size

Large vs. small deals Rationale

• Difficult to integrate large targets

and realize planned synergies

• Required capabilities not available in-house for most companies

• Extra caution and support required while indulging in large deals

• Smaller deals may be more prevalent in times of crisis with divestments


-1.48%

Deal Value >$1Bn

0.13%

Deal Value <$1Bn

-109%

0.0

1.0

0.5

-1.0

-1.5

-0.5

CAR %1

1. Results are statistically significant at conventional levels of confidence (at least 90 percent). Average CAR is calculated over a seven-day window centered around announcement day (-3/+3). 2. International deals are defined as those where the primary nation of operations of the target is not the same as the primary nation of operations of the acquirer Note: Results based on analysis of deals conducted between insurers over the period of 1999-2008. Only deals where the acquirer was from North America or from Western Europe were considered Source: BCG Analysis, Thomson Financial, DataStream



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This is even more true for domestic transactions Value creation of insurance M&A by region

International vs. domestic deals Rationale

• International deals difficult to

manage – Cultural, legal, regulatory hurdles

• Lack of understanding of

international markets – May lead to overestimation of

potential synergies

• Requires strong apparent logic to be successful


1. Results are statistically significant at conventional levels of confidence (at least 90 percent). Average CAR is calculated over a seven-day window centered around announcement day (-3/+3). 2. International deals are defined as those where the primary nation of operations of the target is not the same as the primary nation of operations of the acquirer Note: Results based on analysis of deals conducted between insurers over the period of 1999-2008. Only deals where the acquirer was from North America or from Western Europe were considered Source: BCG Analysis, Thomson Financial, DataStream

-0.67%

International deals

0.66%

Domestic deals

-199%

0.0

1.0

0.5

-1.0

-1.5

-0.5

CAR %1



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Solvency II adds new success factors to M&A Each success factor implies desired features of potential targets

Rationale: additional value creation driven by SII

Markets: Benefit from market-wide increase in prices / change in product features driven by SII

Desired features of potential targets

Business mix: Leverage diversification Currently low diversification, comple-mentary to buyer's

Active in severely hit markets where Solvency II will push all players to increase prices / adjust guarantees

Skills: Utilize capability advantage in asset management/ALM, capital management and SII complexity handling to increase profitability

Low degree of sophistication, potential to consolidate in-force business and improve capital management

Capital: Leverage own capital strength to increase room to maneuver

Low current capital base limiting future yields – not enough elbowroom to pull all levers

Solvency II provides only one perspective on M&A – "classical" strategic value drivers remain essential (brand, market position, etc.)

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Agenda

International view: M&A remains important in insurance Hungarian reality today: The consolidation paradox



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Paradox: situation in Hungary bad but not so bad that it would catalyze immediate action

Market is still water, front lines frozen and everyone tries to sweat it out

Situation deteriorated but still not as bad as to imply major structural changes

Clear need for consolidation in the market

No easy way forward, no clear sweet spots or clear road to success



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Hungarian insurance today: a sluggish market with negative EVA, but overall profitable

1,000

800

600

400

200

0

Gross written premiums in the Hungarian Insurance Market by main sectors (HUF bln)

-17.46%

2012

768

2011

821

2010

844

2009

825

2008

890

2007

930

2006

830

2005

687

MTPL Other Non-life Life

-9

-15

-29

33302828

34

-40

-20

0

20

40

ROE and Economic Value Added (EVA) by the insurance industry HUF bln

2012 2011 2010 2009 2008 2007 2006 2005

30% 25%

9%

23% 24% 25%

1%

7%

Note: Cost of capital calculated at 12,5% Source: PSZÁF, BCG research



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Several unfavorable developments beyond the financial services levy

Source: PSZAF, BCG Analysis

0

20

40

60

2011 2010

HUF Bln

2012

Earnings Before Tax Earnings Before Levy

Extra Levy

HUF 33B

HUF 38B

HUF 33B

Although the levy had the most prominent impact on industry performance...

... it concealed a number of mostly unfavorable developments of the last 5 years

Rise in cost ratios

Deterioration in customer trust

Outflows in life

Destruction of motor insurance

Healthy household property

X-border competition in commercial insurance



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The situation is still far from the freefall of banking sector hit by a three wave 'Tsunami'

Source: Consolidated annual reports for Erste, Budapest Bank, Raiffeisen, K&H, UniCredit, CIB, unconsolidated annual reports for OTP and MKB, MNB Report of Financial Stability, PSZÁF Quick report on the Early Repayment Scheme, Press, BCG Analysis

Significant decline in the sector's profitability Profitability of TOP 8 Hungarian banks

-15

-10

-5

0

5

10

15400

200

0

-200

-400

ROE, % P&L, HUF bln

2012

-9%

-213

2011

-11%

-252

2010

2% 37

2009

10%

221

2008

14%

274

ROE PAT

The banking 'Tsunami' and its impact 2008-12

Huge loan losses incurred from bad portfolios

Hefty regulatory burden from special taxes and other government schemes

Decreasing top-line from reduced volumes and declining margins

HUF 2,500 bln loan losses in 2008-12 with 20.3% mortgage NPL, 24.9% in RE finance and

19.1% in corp.

HUF 494 bln negative impact mainly due to banking tax and FX

mortgage law in 2010-12

HUF 300 bln decline in top-line in 2010-12 (-22%) with 4,000 bln net outflow in lending volumes and 70bps decrease in margins



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Radical changes are necessary in the post-crisis reality? Is there are way to move away from value destruction in current market structure?

Is there a disruptive approach necessary in distribution? • Are major cuts necessary in the proprietary distribution network? • Are there any shifts needed between the distribution channels as part of

strategy? • How will the role of alternative channels, mainly banks and MLMs/brokers

evolve? • What is the role of new entrants eg. telcos in the insurance market?

What are the successful product strategies going forward? • How to move away from the value destructive status quo in Non-life? (eg.

segmented approach vs standard / low cost - direct provide, pricing excellence) • What is the winning strategy in Life when completely new approach is needed

due to low customer trust, expected new capital requirements and low level of competetiveness of products vs other financial service providers?

• How to capture the Health and Pension opportunity? Will this materialize anytime soon?

How to build a customer-centric business model? • Where to invest and how to develop to ensure consistent customer experience?

Are there new, non-trivial ways to improve cost-efficiency? • What is the room for further improvement without increasing scale?

Is there are way to move away from

value destruction

to value creation?

?



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Standalone Hungary view: clear need for consolidation (I) Top 5 players capture most of the industry EVA, rest of industry with negative return

9

13

16121213

20

0

-20

10

-10

2011 2010 2009 2008 2007 2006 2012

1

-2

0

7855

-20

-10

0

10

20

2011 2010 2009 2008 2007 2006 2012

-5-8-9

-1

052

-20

-10

0

10

20

2011 2010 2009 2008 2007 2006 2012

11

0

10542

-20

-10

0

10

20

2011 2010 2009 2008 2007 2006 2012

-2

9

-9

9

-2

56

-20

-10

0

10

20

2011 2010 2009 2008 2007 2006 2012

Source: Annual reports, BCG analysis; Note: Cost of capital calculated at 12,5%

-4

-14-14-9

6

-5-2

-20

-10

0

10

20

2007 2010 2006 2011 2009 2008 2012

Rest of Industry

67,5 25 23

17 -16 -41

Total EVA

Half of the players are not making profits

http://images.google.hu/imgres?imgurl=http://www.htfsz.org/files/9/805/Generali logo.jpg&imgrefurl=http://www.htfsz.org/cikk/805/generali_logo.html&h=1363&w=1084&sz=368&hl=hu&start=1&um=1&usg=__qYi5wvOvK0gD4jjkOpvphm8cbok=&tbnid=mofOCvg2lKY5HM:&tbnh=150&tbnw=119&prev=/images?q=generali+providencia&um=1&hl=hu

http://images.google.hu/imgres?imgurl=http://www.aegonnyugdij.hu/upload/aegon2_rovat/d1_images/119/AEGON_logo_kisebb.jpg&imgrefurl=http://www.aegonnyugdij.hu/maganszemelyeknek/onkentes_nyugdijpenztarrol_tagjainknak/aegon_unicredit_rapid_kolcson/&h=394&w=1024&sz=38&hl=hu&start=1&um=1&usg=__duAyHxlO4JlK6RN_YNEfpj5EEGc=&tbnid=pJSYQ4kOJnySpM:&tbnh=58&tbnw=150&prev=/images?q=aegon+logo&um=1&hl=hu

http://images.google.hu/imgres?imgurl=http://www.mzhungary.hu/images/logo_allianz.jpg&imgrefurl=http://www.mzhungary.hu/szolgaltatas.html&h=56&w=149&sz=8&hl=hu&start=17&um=1&usg=__r7FwSyTRCr0QTPr1aXGAAv1isYc=&tbnid=BDKwYRWjzRFt4M:&tbnh=36&tbnw=95&prev=/images?q=allianz+hung%C3%A1ria+logo&um=1&hl=hu

http://www.ing.hu/



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Standalone Hungary view: clear need for consolidation (II) Lack of scale hurts small insurers under current economic conditions

0%

-20%

0

-40%

150 100 50

40%

20%

PBT / GWP %, 2012

MKB Általános

Medicover

Magyar Posta Élet

Magyar Posta K&H

ING

Groupama

Grawe

Genertel

Generali-Providencia

Gross Written Premium, Bn HUF 2012

Euler Hermes

Erste

CIG Pannónia Élet

CIG Pannónia Általános

MetLife

Allianz

Európai Utazási Bizt.

Aegon

Wáberer H.

UNIQA Union Signal

MKB Élet

AHICO

Profitable Niche Players

General small-Mid sized players with

mixed results

Scale effetive players

Profit

Loss



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Standalone Hungary view: clear need for consolidation (III) Even top players lack scale and dominance in CEE comparison resulting in costly operation

Even top players lack scale and dominance in CEE comparison

Hungary with one of the highest cost ratios in Europe

1.0

0.8

SK

PL

CZ

GWP of top-2 players EUR bln

3.7

1.1 SL

HU

RO

1.3

7.7

Ø 3

41%

Ø 51

Market share of top 2 players %

33%

54%

60%

62%

56%

IT FR AT PL SK CZ HU

40%

30

20

0

10

FR SK IT AT CZ PL HU

0

10

40%

20

30

FR AT IT PL SK CZ HU

1. Axco statistics, updated between July and October 2012 for the displayed countries Source: Supervisory Authorities and Industry Associations, AXCO Country Reports, BCG analysis

Non-Life Life

Industry-wide cost ratios, last available1





http://upload.wikimedia.org/wikipedia/commons/c/cb/Flag_of_the_Czech_Republic.svg

http://upload.wikimedia.org/wikipedia/commons/c/c1/Flag_of_Hungary.svg

http://upload.wikimedia.org/wikipedia/commons/1/12/Flag_of_Poland.svg

http://upload.wikimedia.org/wikipedia/commons/7/73/Flag_of_Romania.svg

http://upload.wikimedia.org/wikipedia/commons/e/e6/Flag_of_Slovakia.svg

http://upload.wikimedia.org/wikipedia/commons/f/f0/Flag_of_Slovenia.svg



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Reality: Front lines frozen, no structural change for a decade M&As driven by regional portfolio decisions, not resulting a decrease in number of players

Acquirer

Target

Scope (local /

regional)

Gloria-Swiss Life

Local

Fun-europa

Local

MEBIT

Local Regional (Hungarian

subsi together with AUT

operations)

Regional (aquiring

Winterthur operations from Credit

Suisse)

Local-Regional (regional

banc-assurance partnership with OTP)

Regional (additionally

banc-assurance partnership

and x-ownership)

Regional (Acquiring

ALICO from AIG)

Regional (extending to 3 countries - CZ, ROM,

HUN)

M&A timeline in Hungary 1999-2013

1999-2000 2007 2013 2002 2008 2010

37 37 36 33 36 38 37 37 37

0

20

40

2011 2010 2009 2008 2007 2006 2005 2004 2003

Number of insurance companies

Note: M&A timeline excludes capital increases, increase in ownership and forming of JVs Source: Zephyr, Press, PSZAF, BCG analysis



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There is a clear need for consolidation on regional level Only a few players with comprehensive and strong coverage

1. Countries: Russia, Poland, Czech Rep., Hungary, Romania, Slovenia, Slovakia 2. Voenno-Strakhovaya Kompaniya (VSK) Note: Top 30 insurers by total premiums in the ten largest markets Source: BCG analysis

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7 8 9 10

# of markets

Premiums 2009 (USD B)1

Croatia Insurance Alfa Group

VSK2

Agram Nordea MSK Insurance Group

Uralsib

Maribor Blagosostoyaniye

International insurers

Insurers from CEE

http://images.google.pl/imgres?imgurl=http://www.nemu.com.pl/img/seminarium/pzu_logo.gif&imgrefurl=http://www.nemu.com.pl/seminaria.html&h=129&w=124&sz=3&hl=pl&start=2&um=1&tbnid=Ir81GlmYP1RwaM:&tbnh=91&tbnw=87&prev=/images?q=pzu+logo&um=1&hl=pl&rlz=1T4GZHZ_plNO250NO250

http://www.reso.ru/

http://upload.wikimedia.org/wikipedia/de/6/66/Aegon_Logo.svg

http://upload.wikimedia.org/wikipedia/de/6/66/Aegon_Logo.svg

http://upload.wikimedia.org/wikipedia/de/1/1e/Aviva_Logo.svg



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% of group GWP

Profitability PAT/ GWP1, %

Hungary does not seem to be a separate decision factor Only major markets attract special attention (PL, UA, RUS) or where local company is mkt leader

1. Based on 2007/2009-2011 average figures; VIG is based on profit before tax applying 20% tax rate, Allianz based on operative profit after tax, Other companies are represented with Net results / GWP; Number for ING also includes Spain and Greece as these countries form part of CEE and Other Europe besides HU, PL, CZ, SK, RO, Bulgaria and Turkey 2. Net Cor is based on 2009-11 figures, NBM is based on 2010-11 figures Source: Annual reports, BCG Analysis

1.6

3.5

3.7

3.9

4.5

10

8

3

14 13,2%

5,6%

19 4,0%

4,5%

19,9%

Player 2011 GWP (€ B) # of CEE countries

Profitability PAT/ GWP1, %

GROUP

16,4

11,2

14,0

3,1

5,6%

3,9%

1,9%

0,4%

-

http://upload.wikimedia.org/wikipedia/commons/c/c1/Flag_of_Hungary.svg

M&A in insurance - MABISZ• Premium growth stagnant at peer average • Profitability at peer...

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