INSURANCE MARKET IN POLAND, 2016–2018CEE INSURANCE SERIES

by Inteliace ResearchJune 2016

Version: 2016.04

Selected pages from the original report

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SUMMARY

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• Poland has the largest insurance sector in the CEE with over € 13 billion in premium

written p.a. and a 41 % regional GWP share.

• Despite recent stagnation, total insurance premium is expected to rebound and

increase at ~4% p.a. through 2018.

• The non-life insurance segment is likely to grow thanks to increasing tariffs in car

insurance. Also the improving situation of enterprises is expected to drive demand

for specialized insurance products in the corporate sector including credit and liability

insurance.

• In the life business, a better economic situation and improved sentiment in

households sector will be offset by increasingly tight regulatory regime and low

interest rate environment which will negatively impact new sales and premium

income.

• Considering the extremely high competition among insurers, their profitability is likely

to fall further and remain low in 2016-2017. As a consequence, a further industry

consolidation and M&A activity seem to be inevitable.

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TABLE OF CONTENTS (1/3)

Slide 1: Executive summary

1. Macroeconomic overviewSlide 2: Poland - General overviewSlide 3: Poland in Europe: Number of households vs. wealth, 2014Slide 4: Key macroeconomic indicators, 2010-2015Slide 5: Foreign trade statistics, C/A, FDI, 2010-2015Slide 6: Unemployment and salaries/wages, 2010-2015Slide 7: Disposable income in households and income distribution, 2010-2015; Income distribution 2014Slide 8: Consumer confidence index evolution, 2011-Feb. 2016Slide 9: Warsaw Stock Exchange - Turnover, Market cap. and indexes, 2010-2015Slide 10: Top 12 foreign investors in banking sector and their subsidiaries, 2015Slide 11: Banking assets evolution, 2010-2015

2. Insurance marketSlide 12: Insurance Markets in CEE – Size vs. growth matrix, 2013-2015Slide 13: Insurance premiums per capita & premiums/GDP penetration – CEE comparison, 2015Slide 14: Insurance gross premiums - Local insurers (life/non-life, in EUR), 2011-2015 Slide 15: Insurance gross premiums - Local insurers (life/non-life, in PLN), 2011-2015 Slide 16: Number of locally registered insurance companies, foreign insurers, 2007-2015Slide 17: Top 12 insurance groups in Poland by total premium written, 2015Slide 18: Insurance market concentration and Herfindahl-Hirschman Index (life/non-life), 2015 vs. 2014Slide 19: Solvency margin , own funds for life and non-life insurers, 2011-2015Slide 20: Number of insurance agents by type and number of sales reps (OFWCA), 2011-2014Slide 21: Insurance – Regulatory institutions, 2015Slide 22: Insurance market – Key tax and regulatory initiatives affecting the sector, 2015/2016Slide 23: Private health Insurance – Opportunity for insurers

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TABLE OF CONTENTS (2/3)

3. Non-life insuranceSlide 24: Non-life insurance markets in CEE – Size vs. growth matrix, 2013-2015Slide 25: Non-life premiums per capita & premiums/GDP penetration – CEE comparison, 2015Slide 26: Non-life insurance gross and net premium evolution, 2011-2015 Slide 27: Top 10 non-life insurance players in Poland, 2015Slide 28: Market shares of top non-life players evolution, 2012-2015Slide 29: Non-life premium by client type, 2015 Slide 30: Non-life premium by risk class, 2012-2015Slide 31: Sales channels of non-life insurance, 2011-2014Slide 32: Direct insurance – market overview, key players, 2010-2015 Slide 33: Link4 – Leader in direct sales in Poland - company profile, 2003-2015Slide 34: Liberty Insurance – a “premium” direct player Slide 35: Non-life insurers results, technical and P&L accounts, 2015Slide 36: Non-life insurance - profitability tree, 2011-2015 Slide 37: Non-life insurance - claims and expense ratio evolution, 2011-2015 Slide 38: Non-life insurance - combined ratio and its elements, 2011-2015 Slide 39: Non-life insurance - acquisition costs evolution, 2013-2015, acquisition costs for top non-life insurers comparison, 2014Slide 40: Network multi-agents: Consultia, CUK, Unilink etc.Slide 41: Car insurance - premium and no. policies evolution, MTPL, Casco, 2011-2015 Slide 42: Car insurance - top players in MTPL and in Casco, 2013-2015Slide 43: Car insurance - combined ratio and its elements, MTPL and in Casco, 2013-2015Slide 44: Car insurance - average premium per policy for Casco and TPL, 1Q2012-4Q2015Slide 45: Channels/product innovations: ERGO Hestia “You can drive”

4. Life insuranceSlide 46: Life insurance markets in CEE – Size vs. growth matrix, 2013-2015Slide 47: Life premiums per capita & premiums/GDP penetration – CEE comparison, 2015Slide 48: Life insurance gross and net premiums evolution, 2011-2015 Slide 49: Top 10 life insurance players in Poland, 2015Slide 50: Market shares of top life players evolution, 2013-2015Slide 51: Life premium by risk class evolution, 2014-2015

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TABLE OF CONTENTS (3/3)

Slide 52: Life insurance technical reserves evolution and structure, 2011-2015 Slide 53: Sales channels of life insurance, separately for individual life and group life, 2011-2014Slide 54: Life insurers results, Technical and P&L accounts, 2015Slide 55: Life insurance - profitability tree, 2011-2015Slide 56: Life insurance - acquisition costs evolution, 2013-2015, acquisition costs for top life insurers comparison, 2014

5. Bancassurance & alternative sales channelsSlide 57: Bancassurance: Premium written by bank channel (life/non-life), 2012-2014 – data by KNF vs. data by PIUSlide 58: Bancassurance: Product/class split in bank channel (life/non-life), 2015Slide 59: Bancassurance: Sales of investment type life products other than unit-linked, 2012-2015Slide 60: Banking (operated by 3rd party) sales platform: „db Market Ubezpieczeniowy”Slide 61: Bancassurance: Comparison websites and online sales sites of banks - overviewSlide 62: Comparison websites: „UBEA”Slide 63: Comparison websites: „Rankomat”

6. Top players' profilesSlide 64: Non-life insurance: PZU, 2013-2015Slide 65: Non-life insurance: Ergo Hestia, 2013-2015Slide 66: Non-life insurance: Warta, 2013-2015Slide 67: Life Insurance: PZU Życie, 2013-2015Slide 68: Life Insurance: Aviva, 2013-2015Slide 69: Life Insurance: MetLife, 2013-2015

7. ForecastSlide 70: Non-life insurance premiums forecast, 2016-2018Slide 71: Life Insurance premiums forecast, 2016-2018Slide 72: Notes on Methodology

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13.10

5.62

2.75

2.02

1.98

1.97

1.14

1.000.68

0.650.38

0.36

0.300

100

200

300

400

500

600

700

800

900

1,000

-5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0%

5

Czech Republic

Hungary

Slovenia

Bulgaria

Romania

Estonia

Latvia

BiH

CroatiaAlbaniaSerbiaLithuania

Mat

uri

ng

Dev

elo

pin

g

Slovakia

CEE14* insurance markets - Size vs. growth matrix, 2013-2015

COMBINEDLIFE & NON-LIFE

x.xTotal 2015 premium(in billion EUR)

An

nu

al p

rem

ium

per

ca

pit

a, 2

01

5, i

n E

UR

Average annual premium growth (in EUR terms), 2013-2015, percent

*Major 14 CEE countries. Russia, Ukraine, Belarus and FYR Macedonia not includedSource: National supervision authorities, IMF, Inteliace Research

Falling Growing

POLAND HAS THE LARGEST INSURANCE MARKET IN CEE14*. HOWEVER, IT HAS BEEN SHRINKING RECENTLY

Poland

30.0%

0.10

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CONCENTRATION RATIOS INCREASED IN 2015 BOTH IN THE LIFE AND NON-LIFE INSURANCE SEGMENTS

Share of top insurers by GWPpercent

Herfindahl-Hirschman* Index, 2014-2015GWP concentrationnonlinear scale

*Markets in which the HHI is between 1000 and 1800 points are considered to be moderately concentrated, and those in whichthe HHI is in excess of 1800 points are considered to be concentrated.

Source: KNF, Inteliace Research

LifeInsurance

Non-LifeInsurance

20142015

10 0001 8001 000highlow medium

Concentration level

1214(2015)

1178(2014)

10 0001 8001 000highlow medium

Concentration level

1536(2015)

1463(2014)

TOP10

TOP5

TOP3

44.0

56.7

80.6

44.3

56.7

81.3

TOP10

TOP5

TOP3

57.3

68.2

85.1

59.3

69.9

84.4

Growing concentration

Growing concentration

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* Based on premium earned (gross premium written less change in gross unearned premium provisions)** Based on gross premium written Source: Inteliace Research, KNF

Combined ratio, non-life business total, 2011-2015In percent

THE COMBINED RATIO IN NON-LIFE WENT UP AGAIN BY 3.2 PP TO OVER 97% IN 2015

Combined ratio (gross)

Expense ratio (gross)**

Acquisition cost ratio** Claims ratio (gross)*

Administrative expense ratio**

CAGR

Combined ratio was up by 3.2 pp in 2015

Increasing acquisition costs

NON-LIFE INSURANCE

93.7 96.4 90.8 94.2 97.4

2011 2012 2013 2014 2015

64.9 67.0 61.6 63.7 66.8

2011 2012 2013 2014 2015

28.8 29.5 29.2 30.5 30.6

2011 2012 2013 2014 2015

21.3 21.6 22.4 23.7 23.8

2011 2012 2013 2014 2015

7.5 7.9 6.8 6.9 6.7

2011 2012 2013 2014 2015

7

Growing claims

-3

+3

+1

+2

+5

0

+1

+3

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NON-LIFE INSURANCE PLAYERS - PZU

*Non-life insurance share by gross premium written**Compound Annual Growth Rate*** Pro forma calculation based on figures derived from PZU Group financial statements. Source: Company, Press, Inteliace Research

• PZU is the largest traditional and local incumbent insurer with extremely high brand awareness (93%) in Poland .

• PZU’s previously dominant position in the insurance market has been gradually eroding over time but this process has been reversed in 2014.

History

Shareholders, 1Q 2016 (share in %)

Background

• 1991: State-owned insurer PZU converted to public joint-stock company.

• 1999: Partial privatization of PZU holding – 30% share in PZU SA sold to Eureko & Big Bank Gdański.

• 2003: Claims handling centralization.

• 2004: Launch of repair-shops network.

• 2009: Shareholder conflict resolved.

• 2010: IPO on the WSE.

• 2010/2011 Cost /employment restructuring.

• 2012 New Strategy: „PZU 2.0” adopted.

• 2012/2013 Entry into Latvia & Estonia.

• 2014 Acquisition of insurance businesses of RSA in Baltics and in Poland (Link4).

• 2014 Direct claims processing introduced.

• 2015 Stake in Alior bank acquired.

Products

Customers

Channels

• PZU offers ~80 various products in the non-life retail business. Products offered cover all 18 non-life insurance classes.

• Car insurance (MTPL+Casco) is dominating within non-life business with >60% share in the total GWP.

• „PZU Pomoc” – proprietary assistance service company is rounding up the traditional product offer.

• Own network: In total 414 branches.

• Exclusive agents: 9 k of which ~6 k in non-life.

• Multi-agents: 3.1k agents (all business lines).

• Brokers: 1000 brokers

• Employees: 800 employees dedicated to sales -mainly in the corporate segment.

• Bancassurance: cooperation with 10 banks and 6 strategic partners including telecoms and airlines.

• Cooperation with ~ 1.4 thousand repair shops.

• PZU traditionally serves mass-market clients in retail business (mostly car and property) and all segments in corporate business.

• Total number of clients in the whole PZU Group (life + nonlife) exceeds 16 million of which 12 million use life insurance.

Results

Gross Premium WrittenPLN billion

Market share*(percent)

Net profitPLN million

Return on Average Equity (ROAE)Percent

Growing market share

CAGR**

31.5 32.531.1

8.27 8.26 8.86

2013 2014 2015

1263706 701

2013 2014 2015

11.78.6 7.1

2013 2014 2015

NON-LIFE INSURANCE

***

-26

***

-22

+3

Falling profitability in non-life business

34.2

5.0

60.8

Poland's Treasury

OtherAviva

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NOTES ON METHODOLOGY

FX rates:

• For the purpose of conversion from local currency (PLN) into EUR for most values presented in this report, including premium written, annual results, etc., average exchange rates have been used

• Exchange rates used in the report:

Estimates and Forecasts:

• In some cases, recent or verified data was not available. Therefore, necessary short-term estimates have been calculated to fill the gaps. Estimates are always indicated with the letter “E”

• When preparing forecasts/estimates, we have built models using latest observed trends, available forecasts of main economic indicators, seasonal changes observed in the past and other specific factors considered important.

Multiple sources:

• In some cases, multiple sources of similar data exist. In this situation we always try to select the most appropriate one in our view. The source is indicated in the footer area of each slide. Nevertheless, in specific cases, before interpreting the data, it is recommended to get a good understanding on the methodology of data collection.

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EUR / PLN 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average 4.03 3.90 3.78 3.52 4.33 3.99 4.12 4.19 4.20 4.19 4.18

End of period 3.86 3.83 3.58 4.17 4.11 3.96 4.42 4.09 4.15 4.26 4.26

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About this report

This report has been prepared using Inteliace

Research proprietary research and publicly available

sources, including: financial reports, press

publications, industry magazines, directories,

financial databases and expert opinions.

Views presented in this report reflect solely the

independent and unbiased opinion of Inteliace

Research and authors.

All due care has been taken in the production of this

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Research clients only. In case of any doubt please

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About Inteliace Research

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BANK OUTLETS DENSITY IN POLAND (1/3)GĘSTOŚĆ SIECI PLACÓWEK BANKOWYCH W POLSCE (1/3)

37

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Number of bank outlets per 1000 sq km, by region, 2011Liczba placówek na 1000 km2 powierzchni wg. województw, 2011r.

The Southern and Central Poland have the largest density of bank outlets

Południowa oraz centralna Polska są najgęściej pokryte siecią placówek bankowych na km2

Źródło/Source: Inteliace Research

Średnia / Average= 58

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BANK OUTLETS DENSITY IN POLAND (3/3)GĘSTOŚĆ SIECI PLACÓWEK BANKOWYCH W POLSCE (3/3)

Źródło/Source : Inteliace Research

Number of outlets per 1 million inhabitants, by county „powiat”, 2011Liczba placówek bankowych na 1 milion mieszkańców, wg. powiatów, 2011r.

Minimum: 126

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MedianaMedian (443) Number of bank outlets per 1 million

inhabitants varies a lot on county level

Na poziomie powiatów gęstość placówekjest bardzo zróżnicowana

100 200 300 400 500 600 700 800 900 1000

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Non-life GWPIn EUR billion

Life GWPIn EUR billion

TOTAL INSURANCE PREMIUM WRITTEN HAS STAGNATED SINCE 2010 IN EUR TERMS

CAGR*

Total GWPIn EUR billion

*Compound Annual Growth RateSource: KNF, Inteliace Research

+178 171201 226 193

Per capita(EUR)

163 169159 163 165Per capita (EUR)

341360 389 358

Per capita (EUR)

IN EURLocal insurers: Evolution of gross premium written in Poland (GWP), 2011-2015

4.19 4.184.12 4.19 4.20FX rates (EUR/PLN)annual average

7.7 8.77.4 6.8 6.6

2011 2012 2013 2014 2015

6.1 6.3 6.3 6.3 6.5

2011 2012 2013 2014 2015

13.915.0

13.8 13.1 13.1

2011 2012 2013 2014 2015

-4

0

-4

+2

+4

-1

341

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