In scope of the expansion strategy PZU Group PZU acquired majority shares in the companies in Lithuania, Latvia and Estonia. PZU Group activity in the Baltic countries is growing steadily strengthening its position in these countries.
The Lithuanian market
According to the Bank of Lithuania, the written premium of non-life insurance companies amounted to EUR 387.2 million, 1.3% higher than in the previous year.
The main generator of the market’s gross written premium was property insurance (premium growth of 4.2%). Motor insurance recorded a decline with motor own damage lower by 1.4% and MTPL by 0.1%. The negative dynamics were caused mainly by the lowered policy prices (by approximately 10-15%) and the started price war. The recovering new car market failed to compensate for this decline.
The structure of non-life insurance in 2014 was dominated by motor insurance, which accounted for 57.6% of the gross written premiums, whereby the share of MTPL insurance was 35.0%.
Eleven companies were operating in Lithuania in the non-life insurance sector at the end of 2014 (including 9 branches of insurance companies registered in another EU member state). The largest insurance company in Lithuania in terms of total gross written premiums from non-life insurance remains Lietuvos Draudimas. The 2014 market share of this company was 30.9%. BTA was second with 14.0% and PZU Lithuania third with 13.8%.
According to the data of the Bank of Lithuania, the gross written premium of life insurance companies was EUR 215.0 million which constituted a growth of 18.6% compared to 2013. The positive dynamics concerned both the single premium (40.0%) and the regular premium (15.0%).
The structure of life insurance was dominated by insurance with investment funds representing 70.5% of the premiums. Traditional life insurance accounted for 22.8% of the premiums.
Nine companies were operating in the life insurance sector at the end of 2014 (including 4 branches of insurance companies registered in another EU member state). The Lithuanian life insurance market is highly concentrated. At the end of December 2014, the share of total gross written premiums of the three largest life insurance companies amounted to 60.7%.
The Latvian market
The non-life insurance market in Latvia grew by approximately EUR 14 million in 2014 and reached the total volume of EUR 240.1 million. The following forms of insurance had the greatest impact on the growth of this revenue: health by EUR 4.2 million (growth by 11,9%), property by EUR 3.3 million (7,1%), motor own damage by EUR 2.6 million (4.4%).
In 2014, 13 insurance companies were operating on the Latvian non-life insurance market, 5 of which held an approximate share of 75%.
The Estonian market
In 2014, the non-life insurance companies and branches of foreign companies of this insurance sector operating in Estonia collected the total premiums of EUR 261.4 million, EUR 62.7 million i.e. 24.0% of which were acquired by the branches of
foreign insurance companies operating in Estonia.
Considering the product structure, motor own damage insurance (35.3%) and MTPL insurance (25.4%), as well as individual property insurance (15.4%) had the highest market shares.
Ten companies were operating in the non-life insurance sector at the end of 2014 (including 4 branches of insurance companies registered in another EU member state).
Capital changes of PZU Group in the Baltic States
In scope of the expansion strategy and pursuant to the agreements dated 17th April 2014, PZU and PZU Lietuva acquired the following entities from Royal & Sun Alliance plc (RSA) for EUR 258 million:
- ASS Balta, the leader of the Latvian market.
The transaction covering the purchase of 99.995% of the company’s equity was closed on 30th June 2014 after approval of the Latvian supervisory authority and antimonopoly offices. The final purchase price was EUR 48.4 million for the net assets in amount of EUR 39.4 million. As a result of the transaction intangible assets in the amount of EUR 30,1 million and the goodwill in the amount of EUR 9 million have been recognized.
- Lietuvos Draudimas, the leader of the Lithuanian market.
PZU paid the total price of EUR 191.0 million for the majority bundle representing 99.97% of shares in PZU capital. The transaction has not been ultimately settled. Asa result of the transaction intangible assets in the amountof EUR 58.7 million and the goodwill in the amount of EUR 84.5 million have been recognized. The transaction covering the purchase of Lietuvos Draudimas was closed on 31st October 2014 with the reservation resulting from the decision of the anti-monopoly office of the Bank of Lithuania. The decision was conditioned by the reduction of PZU’s share in the Lithuanian motor own damage and property insurance. This decision is carried out through thesale of PZU Lietuva, which is discussed below.
- The Estonian branch of Codan Forsikring A/S.
The acquisition of the branch was closed on 31st October2014. As the purchaser, PZU Lietuva paid the total price of EUR 21.4 million. The transaction has not been ultimately settled. As a result of transaction intangible assets in the amount of EUR 7.4 million and the goodwill in the amountof EUR 26.4 million have been recognized.
According to the agreement concluded on 2 February 2015, PZU Group sold 1,761,941 common shares of PZU Lithuania to the Norwegian insurance company Gjensidige Forsikring ASA. The transaction will be completed after the fulfilment of the following conditions:
- lack of objection of the Bank of Lithuania;
- approval from the Latvian, Estonian, and Lithuanian antimonopoly authorities;
- completion of the process of separating assets and receivables of PZU Lithuania related to the operations carried out by the company’s branches in Latvia and Estonia to PZU Group;
- consent of the Bank of Lithuania concerning the early repayment of the subordinated loan granted to PZU Lithuania by PZU and the repayment of the subordinated loan by PZU Lithuania;
- approval from the Norwegian FSA for the purchase of the shares in PZU Lithuania by Gjensidige Forsikring ASA;
- waiver of the preemptive right by the minority shareholder of PZU Lithuania in relation to the shares;
- approval of the Lithuanian government commission for the purchase of the shares in PZU Lithuania by the Norwegian insurance company.
The price of the shares will amount to EUR 54 million adjusted by the differences in the net assets. The conditions precedent should be fulfilled until 30th November 2015.
Activities of PZU companies in the Baltic States
In 2014, PZU Lietuva recorded a growth of the gross written premium of 2.5% compared to 2013 and reached the level of EUR 53.3 million.
Lietuvos Draudimas remains the Latvian leader with a share of 30.9% (31% last year).
During this time, Lietuvos Draudimas (the leader of the Lithuanian market) collected the gross written premiums of EUR 119.5 million, 0.8% higher than in 2013. The growth of the written premiums resulted mainly from increased insurance sales in the individual client segment (by 3.7% compared to the previous year), specifically in non-life insurance. From the time it joined PZU Group, Lietuvos Draudimas generated the written premium of EUR 19.7 million.
The premium acquired by UAB PZU Lietuva Gyvybës Draudimas – “PZU Lithuania Life” was EUR 8.9 million, which was 17.4% more than in 2013. The highest sales growth was recorded in endowment insurance, which increased by 34.3% compared with the previous year, as well as unit-linked life insurance (increase of 4.6%).
In 2014, PZU Lithuania occupied third place on the non-life insurance market with a market share of 13.8% (13.6% in 2013). Lietuvos Draudimas remains the Latvian leader with a share of 30.9% (31% last year).
However, PZU Lithuania Life’s share of the life insurance market was 4.1% (compared with 4.2% in 2013).
In 2014, PZU Group operated in Latvia through the PZU Lithuania branch, which was opened in 2012, and AAS Balta, the market’s leader, which entered the Group in June of 2014. The share of AAS Balta in the Latvian market was 22.9%, the total gross written premium of both entities was EUR 61.2 million, and since it entered PZU Group, AAS Balta generated the written premium of EUR 28.9 million.
PZU Group operates in Estonia through the PZU Lithuania branch, which was created from the merger of two entities:
the Lithuanian PZU branch, which was registered in 2012, and the Estonian branch, which was purchased in 2014 and previously operated under the Codan brand. The total share of the gross written premiums of both entities in the Estonian market amounted to 14.5%. The written premium collected by the newly acquired branch from the time of its acquisition is EUR 5.3 million.
The Ukrainian market
The Ukrainian insurance market recorded a considerable decline in 2014. The gross written premiums on the non-life insurance market in three quarters of 2014 was UAH 15.6 billion and was lower by 20.7% than in the corresponding period of the previous year. This decline resulted mainly from the lower non-motor premium. Financial risk insurance (-33.6%), voluntary property insurance (-26.6%), voluntary other TPL insurance (-34.8%), and credit insurance (-40.3%) recorded lower sales. The decline resulted from the lower premium for active reinsurance obtained from resident companies (from UAH 5.1 billion to UAH 3.4 billion). In scope of motor insurance, there was recorded growth in the Green Card product (31.3%) with lower motor own damage (-14.7%) and MTPL (-2.8%) premiums. As a result of these trends, motor premiums accounted for 30% of the value of the premium actually obtained by insurers during three quarters of 2014 (i.e. 4.4 p.p. more than in the corresponding period of the previous year).
Life insurance companies collected UAH 1.5 billion gross written premiums in three quarters of 2014, which was 12% less than in the corresponding period of 2013.
Within the written premium structure, 87.7% came from individual clients (18% less than in the corresponding period of 2013) with a 10% decline of the total number of insured individual clients compared to the previous year, which resulted from the unstable political, financial, and economic situation of Ukraine over the discussed period.
On one hand, the Ukrainian insurance market is fragmented as it was composed of 389 insurance companies as at September 2014 (of which 58 were providing life insurance). On the other hand, the TOP 100 non-life insurance companies generated 92.9% of the entire market’s gross written premium and the TOP 20 life insurance companies generated 98.8% of the written premium.
In 2014, the Ukrainian insurance market experienced difficult conditions associated with the state’s weakened economy, the annexation of Crimea, the armed conflict in the east, low client activeness, devaluation processes, and the decline of bank system liquidity. The market continued to present a high level of acquisition costs, problems with preservation of current liquidity of some insurance companies, and the reduced confidence among individual clients, which entailed the problems associated with the liquidity of a part of the banking system. In 2014, due to the aforementioned events, the Ukrainian clients often decided to purchase insurance and investment products from companies holding the western capital share. The previous determinant of the insurance company was the price but in 2014 it was moved aside by credibility and solvency.
On the Ukrainian market, PZU Group conducts its insurance business through two companies: PZU Ukraine (in terms of non-life insurance) – “PZU Ukraine” and PrJSC IC PZU Ukraine Life (life insurance) – “PZU Ukraine Life”. In addition, LLC SOS Services Ukraine performs assistance functions.
In 2014, the total gross value of PZU Group’s gross written premiums in non-life insurance in the Ukraine amounted to UAH 503.9 million, i.e. it was 24.7% higher than in the previous year. This increase arose from both the increase in the premium obtained through external entities (banks, travel agencies), as well as through its own distribution channels. Travel insurance, Green Card insurance, corporate non-life insurance and motor insurance played a particularly important role in the growth in written premiums.
During three quarters of 2014, PZU Ukraine had obtained 4.2% (growth of 0.9 p.p. in relation to three quarters of 2013) of the gross written premium on the Ukrainian non-life insurance sector, which gave it a ninth place on the market.
Meanwhile, the leader’s share was 6.6%.
The written premium collected by PZU Ukraine Life in 2014 amounted to UAH 154.3 million and was 28.7% higher than in 2013. This growth was mainly achieved in the bancassurance channel as a result of sales of endowment policies.
On the life insurance market, PZU Ukraine Life held sixth place after three quarters of 2014, with a market share of 7.3% (2.5 p.p. growth in comparison to the previous year). The leader’s share was 19.4%.
It should also be noted that the written premium in the reporting currency for both companies was lower than last year under the conditions of strong currency depreciation. In 2014, the premium of PZU Group was PLN 173.6 million and was lower by 14,8%.
During 2014 Ukraine’s political and economic situation has deteriorated significantly. Social unrest combined with rising regional tensions has deepened the ongoing economic crisis and has resulted in a widening of the state budget deficit, a depletion of the National Bank of Ukraine’s foreign currency reserves, a further downgrading of the Ukrainian sovereign debt credit ratings and significant depreciation of Ukrainian hryvnia.
In connection with this volatile situation the management boards of PZU Ukraine and PZU Ukraine Life Insurance (hereinafter collectively referred to as the “Ukrainian Companies”) have made the following decisions in order to mitigate the risk:
- in the scope of insurance activity, apart from standard exceptions (war, terrorism, etc.), insurance coverage does not apply to third party operations performed in violation of the law. In addition, it has been decided to temporarily suspend conclusion and renewal of non-life insurance contracts with natural and legal persons, including property that is subject to a lien or mortgage, if the contract is executed in the territory of Donetsk and Luhansk regions.
The same applies to forwarding agent and carrier liability insurance, as well as cargo insurance, if the freight lane passes through the territory of the above mentionedregions;
- the regional office of PZU Ukraine in Simferopol and its customer service centre in Sevastopol are closed. In addition, four sales offices and two agencies were closed in the Donetsk and Luhansk regions;
- actions have been taken to transfer part of the assets, such as cash at current accounts and bank deposits owned by the Ukrainian Companies, to selected banks operating in Ukraine. The main criterion applied when making the above selection is whether a given institution has a trustworthyforeign majority shareholder.
Both in 2014 and early 2015, the Ukrainian Companies realised their sales plans approved by the Supervisory Board.
The Management Board of PZU, in cooperation with the management boards of the Ukrainian Companies, constantly monitors the situation in Ukraine. As at the date of this consolidated financial statements, the Management Board of PZU assumes that the Ukrainian Companies will continue their business activity in accordance with the approved objectives. Nevertheless, a continuation of the current unstable business environment could negatively affect in the future the Ukrainian Companies’ results and financial position in a manner not currently determinable. These consolidated financial statements reflects the current assessment of the Management Board of PZU in this respect.