INSURANCE MARKET IN POLAND, 2016–2018 CEE INSURANCE SERIES Selected pages from the original report

by Inteliace Research June 2016

Version: 2016.04

SUMMARY

• 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. Insurance Market in Poland, 2016-2018

• 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

Insurance Market in Poland, 2016-2018

1. Macroeconomic overview Slide 2: Poland - General overview Slide 3: Poland in Europe: Number of households vs. wealth, 2014 Slide 4: Key macroeconomic indicators, 2010-2015 Slide 5: Foreign trade statistics, C/A, FDI, 2010-2015 Slide 6: Unemployment and salaries/wages, 2010-2015 Slide 7: Disposable income in households and income distribution, 2010-2015; Income distribution 2014 Slide 8: Consumer confidence index evolution, 2011-Feb. 2016 Slide 9: Warsaw Stock Exchange - Turnover, Market cap. and indexes, 2010-2015 Slide 10: Top 12 foreign investors in banking sector and their subsidiaries, 2015 Slide 11: Banking assets evolution, 2010-2015 2. Insurance market Slide 12: Insurance Markets in CEE – Size vs. growth matrix, 2013-2015 Slide 13: Insurance premiums per capita & premiums/GDP penetration – CEE comparison, 2015 Slide 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, 2007-2015 Slide 17: Top 12 insurance groups in Poland by total premium written, 2015 Slide 18: Insurance market concentration and Herfindahl-Hirschman Index (life/non-life), 2015 vs. 2014 Slide 19: Solvency margin , own funds for life and non-life insurers, 2011-2015 Slide 20: Number of insurance agents by type and number of sales reps (OFWCA), 2011-2014 Slide 21: Insurance – Regulatory institutions, 2015 Slide 22: Insurance market – Key tax and regulatory initiatives affecting the sector, 2015/2016 Slide 23: Private health Insurance – Opportunity for insurers

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TABLE OF CONTENTS (2/3)

Insurance Market in Poland, 2016-2018

3. Non-life insurance Slide 24: Non-life insurance markets in CEE – Size vs. growth matrix, 2013-2015 Slide 25: Non-life premiums per capita & premiums/GDP penetration – CEE comparison, 2015 Slide 26: Non-life insurance gross and net premium evolution, 2011-2015 Slide 27: Top 10 non-life insurance players in Poland, 2015 Slide 28: Market shares of top non-life players evolution, 2012-2015 Slide 29: Non-life premium by client type, 2015 Slide 30: Non-life premium by risk class, 2012-2015 Slide 31: Sales channels of non-life insurance, 2011-2014 Slide 32: Direct insurance – market overview, key players, 2010-2015 Slide 33: Link4 – Leader in direct sales in Poland - company profile, 2003-2015 Slide 34: Liberty Insurance – a “premium” direct player Slide 35: Non-life insurers results, technical and P&L accounts, 2015 Slide 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, 2014 Slide 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, 2013-2015 Slide 43: Car insurance - combined ratio and its elements, MTPL and in Casco, 2013-2015 Slide 44: Car insurance - average premium per policy for Casco and TPL, 1Q2012-4Q2015 Slide 45: Channels/product innovations: ERGO Hestia “You can drive” 4. Life insurance Slide 46: Life insurance markets in CEE – Size vs. growth matrix, 2013-2015 Slide 47: Life premiums per capita & premiums/GDP penetration – CEE comparison, 2015 Slide 48: Life insurance gross and net premiums evolution, 2011-2015 Slide 49: Top 10 life insurance players in Poland, 2015 Slide 50: Market shares of top life players evolution, 2013-2015 Slide 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, 2011-2014 Slide 54: Life insurers results, Technical and P&L accounts, 2015 Slide 55: Life insurance - profitability tree, 2011-2015 Slide 56: Life insurance - acquisition costs evolution, 2013-2015, acquisition costs for top life insurers comparison, 2014

Insurance Market in Poland, 2016-2018

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

6. Top players' profiles Slide 64: Non-life insurance: PZU, 2013-2015 Slide 65: Non-life insurance: Ergo Hestia, 2013-2015 Slide 66: Non-life insurance: Warta, 2013-2015 Slide 67: Life Insurance: PZU Życie, 2013-2015 Slide 68: Life Insurance: Aviva, 2013-2015 Slide 69: Life Insurance: MetLife, 2013-2015 7. Forecast Slide 70: Non-life insurance premiums forecast, 2016-2018 Slide 71: Life Insurance premiums forecast, 2016-2018 Slide 72: Notes on Methodology

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POLAND HAS THE LARGEST INSURANCE MARKET IN CEE14*. HOWEVER, IT HAS BEEN SHRINKING RECENTLY Total 2015 premium

x.x

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

(in billion EUR)

Falling

Growing

Slovenia

1.98

Maturing

COMBINED LIFE & NON-LIFE

1,000

700

600

5.62

Slovakia

13.10

Poland

500

400

2.02

300

1.14

Hungary 2.75

200

Estonia

0.38

Romania

Croatia

-3.0%

-2.0%

0.65

1.97

BiH

0

-4.0%

Lithuania

Serbia

1.00 100

-5.0%

0.36

Latvia

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Albania

0.68

Bulgaria

0.10

0.30 6.0%

7.0%

8.0%

9.0%

10.0%

30.0% 11.0%

Average annual premium growth (in EUR terms), 2013-2015, percent *Major 14 CEE countries. Russia, Ukraine, Belarus and FYR Macedonia not included Source: National supervision authorities, IMF, Inteliace Research Inteliace Research

5

Insurance Market in Poland, 2016-2018

Czech Republic

Developing

800

Annual premium per capita, 2015, in EUR

900

CONCENTRATION RATIOS INCREASED IN 2015 BOTH IN THE LIFE AND NON-LIFE INSURANCE SEGMENTS Herfindahl-Hirschman* Index, 2014-2015 GWP concentration nonlinear scale

Share of top insurers by GWP percent 2015

2014

TOP 10

TOP 5

56.7

80.6

TOP 10

Non-Life Insurance

TOP 5

TOP 3

Growing concentration

56.7 low

TOP 3

1214 (2015)

44.3

44.0

84.4

69.9

59.3

1 000

1 800

medium

high

10 000

Concentration level

85.1

1463

1536

(2014)

(2015)

Growing concentration

68.2

57.3

low

1 000

medium

1 800

high

10 000

Concentration level *Markets in which the HHI is between 1000 and 1800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 points are considered to be concentrated. Source: KNF, Inteliace Research Inteliace Research

6

Insurance Market in Poland, 2016-2018

Life Insurance

81.3

1178 (2014)

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

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

Growing claims

Acquisition cost ratio**

Claims ratio (gross)*

Increasing acquisition costs

+1

64.9

67.0

61.6

66.8

63.7

+5

Combined ratio (gross) +1

93.7

96.4

90.8

2011

2012

2013

2014

2015

97.4

94.2

Expense ratio (gross)**

21.3

21.6

22.4

23.7

23.8

2011

2012

2013

2014

2015

Insurance Market in Poland, 2016-2018

+3

Administrative expense ratio**

+3 +2 2011

2012

2013

2014

2015

28.8

29.5

29.2

0

Combined ratio was up by 3.2 pp in 2015 2011

2012

2013

2014

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

-3

30.6

30.5

2015

7.5

7.9

6.8

6.9

6.7

2011

2012

2013

2014

2015

7

NON-LIFE INSURANCE PLAYERS - PZU NON-LIFE INSURANCE

CAGR**

Background

Products

• 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.

• PZU offers ~80 various products in the nonlife 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.

History

Shareholders, 1Q 2016 (share in %) 34.2

Other

Poland's Treasury

60.8 5.0

Aviva

Channels • • • • •

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.

Customers

Gross Premium Written PLN billion

Market share* (percent)

+3

8.27

8.26

8.86

2013

2014

2015

31.1

31.5

32.5

Insurance Market in Poland, 2016-2018

• 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.

Results

Growing market share

Net profit *** PLN million

-26 1263

2013

706

701

2014

2015

Return on Average Equity (ROAE) *** Percent

-22

• 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.

*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

Inteliace Research

11.7

2013

8.6

7.1

2014

2015

Falling profitability in non-life business

8

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: 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 Insurance Market in Poland, 2016-2018

Estimates and Forecasts:

EUR / PLN

• 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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About this report

About Inteliace Research

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.

Inteliace Research is an independent and privately owned research firm based in the heart of Eastern Europe in Warsaw / Poland. Our company specializes in value-added research services and tailored business intelligence solutions.

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 report. However, Inteliace Research does not accept any responsibility or liability for any omissions or inaccuracies of the information contained in this publication.

Insurance Market in Poland, 2016-2018

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35

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

>60 40-60 < 40

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

Minimum: 126 Źródło/Source: Inteliace Research

Mediana Median (443)

BAZA PLACÓWEK BANKOWYCH W POLSCE I STATYSTYKA POWIATÓW, 2011

Inteliace Research

379 powiatów

Number of bank outlets per 1 million inhabitants varies a lot on county level

Na poziomie powiatów gęstość placówek jest bardzo zróżnicowana

TOTAL INSURANCE PREMIUM WRITTEN HAS STAGNATED SINCE 2010 IN EUR TERMS CAGR*

and many other ...

IN EUR

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

Maximum: 947

Life GWP In EUR billion 100

-4 7.7

8.7

7.4

In EUR billion

6.6

300

Źródło/Source : Inteliace Research

400

500

600

700

800

900

1000

1

Inteliace Research

-1

-4

2011

2012

2013

2014

2015

201

226

193

178

171

15.0

13.8

13.1

+

Non-life GWP

13.1

0

Insurance Market in Poland, 2016-2018

13.9 Per capita (EUR)

200

Total GWP 6.8

In EUR billion +2 6.1

6.3

6.3

6.5

6.3

2011

2012

2013

2014

2015

360

389

358

341

341

4.19

4.18

+4 Per capita (EUR)

Per capita (EUR)

2011

2012

2013

2014

2015

159

163

165

163

169

FX rates (EUR/PLN) annual average

*Compound Annual Growth Rate Source: KNF, Inteliace Research

4.12

4.19

4.20

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Insurance Market in Poland, 2016-2018

BAZA PLACÓWEK BANKOWYCH W POLSCE I STATYSTYKA POWIATÓW, 2011

Średnia / Average = 58

59 37

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Insurance Market in Poland, 2016-2018

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