Peter Szopo of Erste Asset Management -
The private insurance sector in Central and Eastern Europe has been a growth sector. Since 2000, gross premiums written (GPW) in CEE plus Turkey have been growing more than twice as fast on average as in Europe’s developed insurance markets. However, with GPW of less than €40bn, the sector’s total size is still small, corresponding, for example, to less than a quarter of the German or the French insurance markets. After the financial crisis, growth has turned choppy, with total premium volumes occasionally shrinking in recent years.
The investment case for insurance in the transition countries – as it was perceived 15-20 years ago – was pretty straightforward: The insurance sector in the region was massively underdeveloped; economic growth was likely to exceed growth in mature Europe; and insurance had been globally a growth sector for decades. The forecast, therefore, that the private insurance business in CEE would emerge as a growth sector was not a particularly bold proposition – and it turned out right.
Not fully recovered
After the financial crisis, however, the private insurance sector in CEE has struggled to regain momentum. In almost all transition countries, total GPW in 2014 was below previous highs. Exceptions were Slovakia and – outside the circle of transition countries – Turkey, with the latter benefitting from stronger economic growth in general and better demographic trends.
The reasons for the slowdown, and in some cases growth reversal, were manifold. First, across Europe the financial sector including insurance has not fully recovered from the 2008 crisis. Also in Western Europe many insurance markets declined in recent years, including the British, Dutch and Swedish markets as well as – less surprisingly – insurance markets in the southern periphery. Second, like their more developed peers, insurance markets in CEE suffered from low interest rates and sluggish economic growth. Third, in some markets – eg. Hungary, Czech Republic and Turkey – premium growth expressed in hard currency simply slowed due to currency weakness. Finally, also tax issues and poor regulation in places like Romania put a lid on growth.
CEE insurance stocks lag Western peers
The sector’s weakness in recent years is also reflected in the performance of insurance stocks exposed to the region or major markets in the region. While the European insurance index (Bloomberg: SXIP) doubled over the past five years, the key insurance plays in the CEE region posted a more pedestrian performance. Only PZU, the Polish incumbent, showed a gain over the past five years, although it was modest (4.5% pa) compared with the European sector index. Moreover, recently the stock came under pressure as the management signalled a switch to a more acquisitive growth strategy.
Turkish insurers, on average, posted moderate gains in local currency, which were eaten up by the lira’s weakness against the euro, though. The two Austrian insurers, with operations across the region, performed differently. VIG, the leading player across the entire region in terms of GPW, moved sideways after being hit by problems in its Italian and Romanian operations. (Disclosure: Erste, the owner of Erste Asset Management, is the main distribution partner of VIG in Austria and CEE). Uniqa Group, majority owned by Raiffeisen, lost 40% over five years, reflecting an unstable management history and a lack of focus, and only recently has managed to turn around. The stock’s recent outperformance may also have been supported by sell-side speculation that the company could be a takeover target. This might not be without substance. Currently only two of the European majors have a meaningful presence in the region – Allianz with GPW of €4.2bn including Russia and Turkey, and Generali (€3.3bn excluding Turkey and Russia) – and, in addition, Raiffeisen, Uniqa’s majority owner, may want to bolster its own capital base.
Despite its recent softness, fast growth will eventually return to the insurance sector in CEE. The gap between insurance penetration and insurance intensity – to focus on the two most widely used metrics – in Western Europe and in CEE plus Turkey is simply too big to be sustainable going forward. For example, GPW to GDP is well above 7% in Europe, on average, which is twice as high as in Poland and the Czech Republic, and five times as high as in Turkey and Romania. Cyclical factors can delay the process of catching up, but with growing income and wealth in CEE and Turkey, and a rising middle-class, the structural trend will continue regardless.
That said, the fragmented nature of the insurance business in the region limits its attraction for the big players. Presently only three markets – Poland, Turkey and the Czech Republic – achieve an annual premium income of more than €5bn. At the same time, in the Balkans and Baltics size as well as regulatory and other local particularities make it difficult for international operators to reach an efficient scale.
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