Manuel BAUER, Member of the Management Board, ALLIANZ SE

26 June 2014 —
manuel_bauer1XPRIMM: How would you characterize the CEE's insurance market evolution, as a whole, in 2013?
Manuel BAUER:
The situation in Central and Eastern Europe remains persistently difficult. Most economies in the region are relatively stagnant, so there is little room for growth. The region as a whole saw almost two decades of growth, which is now in jeopardy. Retrospective changes in structures and increasing tensions could jeopardize the well-being of the region as a whole.

XPRIMM: ALLIANZ has a strong presence in the region, being an important player in most of the CEE markets. From this perspective, which are the most challenging aspects of doing business in the CEE markets?
The Central and Eastern European countries are a diverse region with different market developments.

Due to our broad product portfolio we are uniquely positioned to adapt our business to all of these diverse markets. Our strong presence in the region gives us a considerable competitive advantage. We offer insurance solutions that help improve the standard of living for large parts of the population.

But there is a huge need to inform the population on risks that can be covered by P&C insurance, risks like natural catastrophes. Many people are not aware that they could easily prevent financial losses from damage to their property by buying insurance against floods or storms. People usually affected the most live in rural areas and are not easy to reach out to.

The same could be said for life insurance and retirement planning. Societies in CEE are aging and the more people learn about pension systems, the clearer they understand the need for private old age provision. State pension systems have come to a stage where one cannot just rely on money being paid out by the state. This process of insight and learning should be supported by governments, their official bodies and private companies alike. Eventually, a great growth potential could be unlocked.

Another challenge is arising from growing economies. Corporate insurance will be sought after as economies develop and infrastructure projects lie ahead. Engineering insurance, transport and property insurance are key areas of growth for corporate insurance.

XPRIMM: The CEE markets have been seen for many years as a growth reservoir for the Western insurers, due to their double digit growth rates in terms of GWP. However, from the profitability point of view, the CEE markets proved more challenging. What is your opinion?
Several insurance companies decided to withdraw from certain markets, a clear indicator that doing business in CEE remains challenging, with not only margins under pressure, but additionally downward adjusted growth expectations. The times of double-digit growth rates are probably a thing of the past. Still, ALLIANZ is looking to further expand its insurance activities in the region. Most important for us is that our underlying business remains solid. This implies we have to follow a selective approach in underwriting business; and in some cases it might even mean foregoing a business. We are not willing to take risks that can affect our profitability. But some markets are in the grip of severe price competition. The pricing issue is our biggest concern in some of the CEE market. In countries like Romania or Hungary we noticed a price squeeze, especially in the motor lines.

XPRIMM: How would you characterize the evolution of your business in Russia?
Russia is the largest market in the region by far, so for us it is a must. In recent years, we have strengthened our presence by consolidating our activities there under a single company under the ALLIANZ brand. This has enabled us to both leverage the ALLIANZ name and to unify our way of doing business in the company.

Across the board, the market is seeing severely accelerating motor claims cost in the Russian market, mainly driven by recently introduced changes in regulation. In addition, as the ruble declines against the euro the replacement parts for non-Russian brands of cars become more expensive. The biggest share of our business in Russia is in the P&C segment and here in the motor lines. But people are buying more and more insurance products that cover for the loss of salary or wage following a car accident. We take this as an indicator that people are getting more aware of the fact that they can protect themselves against certain situations by buying insurance.

XPRIMM: Which is your assessment with regard to the future development of the CEE markets, in the short and middle term?
In the long run, and this is the timeframe we have to think in, this region will continue to grow - moderately. For 2014 we still expect to see growth as well but on a lower level. We have been operating in the CEE region for decades and we are here to stay. When it comes to strategy, we follow a certain steadiness in our strategy for each market.

Insurance penetration in CEE is still on a low level compared to many countries in the rest of Europe. With rising income people will want to protect what they have achieved, also during old age. This will help us offer/sell our insurance and old age provision solutions.

That said, we will have to address challenges in some of our markets. I have earlier mentioned the pricing issue in countries like Hungary and Romania. In Russia, for example, there are many different market players, both international and local, and not all of them follow a long-term strategy. This makes it more difficult to create trust among our (potential) customers. The market for life insurance is underdeveloped, and, as life insurance is a long-term business, it is even more important to create trust among our customers. After all, they invest their money today and have to be sure that they get it back at a later stage, often after 20 or 25 years, with a nice profit on top.

We are optimistic about the region as a whole, even though it might take some time for the insurance markets in the region to fully take off.

XPRIMM: Would you say that the promising potential shown by these markets two decades ago proved real? How far/close are the CEE markets from fulfilling their potential from the insurance business perspective?
20 years ago the situation was different. There was a lot of enthusiasm concerning the vast market potential, but the challenges that came along were often underestimated. That said, we have indeed managed to establish flourishing businesses in many markets, and the CEE region is an important part of our overall presence in Europe.

Over the years, we have learned a lot. Now we continue to focus our businesses on profitable growth.

XPRIMM: What changes do you think would be the most important for the CEE markets in order to provide a better environment for the insurance business' growth and profitability?
The business of insurance companies is a long-term business. We work with forecasts and rely on assumptions that might or might not become true in the future. To help us make sound business decisions a stable political and regulatory environment is essential. People buy P&C insurance today to prevent a potential loss in the future. The business of life insurance is a business where one makes a decision today that will pay off only in 20 or 30 years. The nature of this business makes it even more important to base today's decisions on reliable assumptions for the future.

In order to make it easier for us to reach out to our customers and to make sure that our customers can get in touch with us, technical infrastructure is important. Infrastructure investments, for instance into broadband cable, would surely help many companies and customers in Central and Eastern European countries.

A good example is our internet-based calculation tool to be launched soon in Croatia. People will be able to insert their personal data including the length of their working life, prospected retirement age, etc. The tool calculates how much money needs to be saved on top of their state pension in order to secure an adequate life-style during retirement age.

XPRIMM: What are your Groups' development plans in the region? Would the Group be interested to further extend its activity in the former soviet countries, beside its presence in the Russian insurance market?
ALLIANZ is one of the biggest insurance companies in the region. We offer insurance and financial solutions across nine countries: Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovak Republic, and the Ukraine. We are one of the few insurance companies in the region that offer a wide array of insurance solutions to different customers, from individuals to large corporations.

Apart from personal P&C, life and health insurance we are present with our global lines that serve international travellers, investors and corporations. These include ALLIANZ Global Assistance which provide support and insurance for people with a variety of individual needs. Then of course there is ALLIANZ Global Investors that helps people realize their financial goals. Our unit ALLIANZ Global Automotive works with car manufacturers to provide motor insurance through their car dealers. And then, of course, there is ALLIANZ Global Corporate & Specialty that insures major corporations and transport around the world. This is a clear USP for ALLIANZ.

We are looking to grow our business and intend to grow profitably. We would like to maintain our strong market position in the P&C business and to further build our life insurance business as well as our asset management business.

With respect to other CIS markets: if opportunities become available, we are always prepared to thoroughly assess them and decide in the best interest of the shareholders.

For our customers, we would like to be their partner of choice by providing outstanding products and services. We are optimistic about the region as a whole, even though it might take some time for the insurance markets to fully take off.

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