BCG The Boston Consulting Group

N o v e m b e r2 0 0 3 The European Insurance Landscape

Back to the Future

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CH-8008 Zür ich

Back to the Future

The European Insurance Landscape

November 2003

Thomas Luippold

Matthias Naumann

Gunther Schwarz

Elmar Wiederin

Lukas Ziewer

A Discussion Paper by The Boston Consult ing Groupwww.bcg.com

3

ABLE OF CONTENTST

PREFACE 5

SUMMARY OF KEY FINDINGS 9

THE GOLDEN NINETIES 13

THE RULES HAVE CHANGED 19

KEY SUCCESS INITIATIVES: BACK TO THE FUTURE 25

Focus on attractive markets 25

Build local leadership positions 29

Exit marginal activities 32

Achieve operational excellence 36

Realize group advantages 37

Develop a performance culture 40

A RESHAPED LANDSCAPE WILL EMERGE 43

HOW TO DESIGN CHANGE 47

APPENDICES 51

Top Insurance Groups 51

Local insurance landscapes 52

Steeply declining stock prices and lingering low bond yields have driven the European insurance industry intoa deep state of crisis. Recent capital market developments have revealed structural weaknesses in the industrythat the "extraordinary" investment returns of the past once covered up. Many insurance groups are feeling theeffects of the high financial risks they took during the booming nineties, and of underestimating the com-plexities of multidimensional business expansion.

A consequence of these conditions is that the rules for profitability in the industry have fundamentallychanged. The solvency of more than a few major players is in jeopardy. In order to clean up balance sheets andgenerate adequate returns on capital, many insurers must dramatically improve technical performance in theircore businesses.

How companies go about pursuing this goal will shape the European insurance landscape for years to come.Management teams that quickly understand the new rules, set the right targets, and persistently address the keyinitiatives for future success will emerge as winners. Companies that wait too long before they act will lose out,or at worst disappear.

This Discussion Paper addresses the management of international and local European insurance groupsaround five core issues:

1. How did the "Golden Nineties" transform the European insurance landscape?

2. How did the recent capital market developments change the rules for profitability?

3. What are the six key success initiatives for building a healthy future for the industry?

4. What are the principal characteristics of the emerging new landscape?

5. What questions must senior managers answer in order to design change proactively?

"Back to the Future: The European Insurance Landscape" is the first integrated publication based on compre-hensive research activities by The Boston Consulting Group's Insurance Landscape team. It draws on a system-atic analysis of all major European insurance markets and insurers, as well as on our experience in advisingmany industry leaders. The report covers:

5

REFACEP

■ the nine principal Western European insurance markets: Austria, Belgium, France, Germany, Italy, theNetherlands, Spain, Switzerland, and the United Kingdom. Together, these markets account for about90% of total European premium volume.

■ the top fifty European insurance groups in terms of each life, non-life, and total premiums.

■ the leading insurers in each country, representing more than 80% of local life and non-life market vol-ume.

This Discussion Paper is representing an overall framework for existing as well as planned publications thatelaborate key success initiatives and answers to core management questions in more depth.

We hope this Discussion Paper will prove both informative and thought provoking in these extremely chal-lenging times for the industry. We also welcome your comments and suggestions.

6

AcknowledgementsThe authors would like to thank the many colleagues at The Boston Consulting Group who contributed to thisDiscussion Paper: in particular, Philip Crawford and Ellen Treml, for their help in preparing and editing thepaper, and numerous other colleagues for their insights, critical thoughts and helpful discussions.

7

Dr. Thomas L. Luippold, Vice President The Boston Consulting Group, Zurich

Matthias Naumann, ManagerThe Boston Consulting Group, Zurich

Dr. Gunther Schwarz, Vice PresidentThe Boston Consulting Group, Cologne

Dr. Elmar Wiederin, Senior Vice PresidentThe Boston Consulting Group, Zurich

Lukas Ziewer, Insurance Analyst The Boston Consulting Group, Zurich

The Nineties will be remembered as banner years for the European insurance industry.

■ After initial pressure caused by deregulation, insurers were able to significantly expand their equity base,increase profits, and generate great shareholder value.

■ Throughout the decade, players followed aggressive growth strategies along multiple dimensions."Extraordinary" investment returns were the great enabler, masking structural flaws in the industry.

Now, at the beginning of the new millennium, the industry has fallen into a state of crisis. The rules for suc-cess have fundamentally changed.

■ Most insurers were not prepared for the precipitous decline of stock markets and the continuation oflow bond yields.

■ Many groups suffered large losses in equity holdings and reserves. Major players have been forced toslash dividends and turn to investors to raise money. Rating agencies have downgraded the financialstrength of most of the industry.

■ Layoffs have been common, and senior managers have been fired. Confidence in the industry, frominside and out, is waning.

■ The likelihood of far lower levels of investment return in the future means that insurers must vastlyimprove technical results. More fundamentally, insurers have to radically change the way they run theirbusinesses.

The next decade will require a broader set of skills. Six key initiatives should be on top of senior managementagendas:

■ Focus on attractive markets. Earning potential is highly dependent on the attractiveness of individualinsurance markets.

■ Build local leadership positions. Scale and focus create competitive advantage and serve as a base forsuperior profitability.

■ Exit marginal activities. Too much capital and management attention is still devoted to areas in whichcompetitive advantage will likely never be achieved.

9

UMMARY OF KEY FINDINGS S

■ Achieve operational excellence. Assuring productivity along all elements of the value chain is critical inorder to compensate for lower investment returns.

■ Realize group advantages. Adding value across countries requires a common logic across businesses andclear core competencies at the group level.

■ Develop a performance culture. Making the right decisions and motivating management requires a rig-orous financial framework and consequent performance steering.

A reshaped European insurance landscape will emerge within the next decade

■ Insurers will increasingly focus on areas where they can achieve competitive advantage.

■ Managements will have to decide whether they want to compete in life, non-life, or both. They must alsochoose their countries of principle focus, and determine which functions should be outsourced.

■ Large groups that are not yet clearly positioned—about half the total—will have to redefine their busi-ness portfolios.

■ Life and non-life entities in various countries that are subscale—about two thirds of the total—will haveto be either grown by acquisition, merged, or sold.

Senior managers must position their companies in the new landscape before the actions of competitors do itfor them.

■ For most groups, significant change can no longer be a gradual process or an option. It has becomemandatory if companies want to return to adequate solvency and profitability.

■ Raising essential questions and developing company-specific answers is a basis from which to proactive-ly design the future of each organization, and initiate change.

10

The Nineties were very attractive years for the European insurance industry. The decade will be rememberedas one of significant growth for all stakeholders: more premiums, more commissions, higher bonuses, greaterpolicyholder benefits, and higher shareholder returns. After initial pressures caused by deregulation, mostinsurers were able to appreciably increase their equity base, lift profits, and create significant shareholder value(Exhibit 1). Several basic trends contributed to a very positive environment:

Booming Investment Markets. Insurers strongly benefited from extremely attractive investment returns. At thebeginning of the decade, high interest rates generated a stable cash flow on fixed income assets. Then, as inter-est rates went down, stock markets provided "extraordinary" gains. Most insurers continuously adjusted theirasset allocation, sharply increasing their share of equities. Investment results became the essential lever foroverall performance, with insurers able to pay high returns to life policyholders, reduce non-life prices, and stillgenerate high returns on equity.

13

HE GOLDEN NINETIEST

THE NINETIES WERE EXCELLENT YEARSSample of 10 Major European Insurance Groups

(1) Market capitalization at year endSource: BCG Insurance Database

Equity (index)

Equity and net income Profitability and market value

1990

100

1×

1995 2000

160

605

2.5× 10.5×Net income (index)

Market valueEquity

(1)

Return on equity

3.5

3.0

2.5

2.0

1.5

1.0

0.5 5 10 15 20

2000

1995

1990

Exhibit 1

Increasing Long-Term Savings. In light of projected demographic developments, the financial crisis of publicretirement schemes became a hotly debated and politically sensitive subject in many European countries. Lifeinsurers benefited greatly from increased demand for their products, which was often supported by tax incen-tives. European life insurance premiums grew by 12%–14% per annum during the late nineties.

Greater Consolidation. Mergers and acquisitions became an essential tool for growth among many insurancegroups. Specific opportunities arose from a wave of demutualizations1 and large privatizations.2 By the end ofthe decade, it was almost impossible to find viable acquisition targets. Even operations with low profitability andmarginal market share were not for sale, or only at very high valuations.

Pressure From Analysts and Investors. Financial analysts gained significant influence on business strategy andthe setting of performance expectations. Without an inspiring growth story, it was all but impossible for sharesto be rated a promising "buy" candidate. Senior managers adjusted their strategies, projections and activitiesaccordingly, in order to please the markets.

Amid this environment, most insurance groups followed ambitious expansion strategies, often along the fol-lowing multiple dimensions:

■ Home market penetration. Many firms increased local market share through price competition, attrac-tive policyholder promises, new distribution platforms, and acquisitions. The leveraging of local skillsand the pursuit of scale advantages were underlying rationales.

■ International expansion. Premium volume was generated across many foreign markets by investing insubsidiaries or acquisitions. A strong belief in achieving cross-border scale and synergies drove interna-tional growth strategies.

■ Bancassurance. Companies built asset gathering and asset management capabilities that went beyondtraditional insurance activities. Achieving synergies between the (life) insurance sector and the bankingsector, both in distribution and in asset management, was the goal.

Between 1990 and 2000, Europe's top insurance groups achieved annual growth rates between 10% and 30%(Exhibit 2). The Swedish insurer Skandia, for example, increased its life insurance volume 11-fold through itslong-term savings strategy. The French group AXA evolved from a local mutual insurer into a global group,increasing its premium volume by a factor of 10 and buying into several demutualizations and into the privati-zation of UAP. The Dutch groups AEGON and ING strongly expanded their life businesses through acquisi-tions in the United States and the United Kingdom, and Allianz and Generali built strong positions throughacquisitions in selected European countries.

14

1 Examples: UK (Scottish Mutual and Scottish Provident Institution, acquired by Abbey National; Scottish Equitable, acquired by AEGON; London Life and NPI, acquired by AMP;Clerical Medical, acquired by Halifax; United Assurance Group and Scottish Life, acquired by Royal London Mutual; Scottish Widows, acquired by Lloyds TSB; National MutualLife, acquired by GE Capital; Scottish Amicable, acquired by Prudential; Norwich Union, merged into Aviva); Switzerland (Patria, merged into Helvetia Patria); Austria (Austria-Collegialität, merged into Uniqa).

2 Examples: France (AGF, acquired by Allianz; UAP, acquired by AXA; GAN, acquired by Groupama), Italy (INA, acquired by Generali).

Insurance groups created significant shareholder value (Exhibit 3). The market capitalization of public groupsincreased by an average of 25% per year between 1990 and 2000. Leading international life insurers increasedtheir market value by more than 30% per year.

1,100

1,000

900

800

700

600

500

400

300

200

100

INSURANCE GROUPS ACHIEVED HIGH GROWTH

(1) Premium growth in original currency(2) Life insurance business, onlySource: Annual Reports; BCG Insurance Database

Premium index(1)

1990 2000

Skandia(2)

Group

AXA

AEGON

Generali

ING

Allianz

ZFS

Winterthur

27%

Annual growth1990–2000

26%

20%

20%

15%

14%

13%

11%

The Equitable (US), Abeille Re (F), National Mutual (AUS), Victoire (B),UAP (F), Guardian Royal Exchange (UK), Nippon Dantai (J)

Állami Biztosító (HU), Scottish Equitable (UK), Providian (UK),Cj. de Previsión (E), Guardian Life (UK), Transamerica (US)

Familia (CH), Interunfall (A), La Estrella (E), Vitalicio (E), Fortuna (CH),La France (F), AMB (D), Migdal (IL), Athéna (F), INA (I), Assitalia (I)

Equitable Iowa (US), Penn Life (US), Reliastar (US), Aethna (US)

Fireman's (US), Vereinte (D), Elvia (CH), Lloyd Adriatico (I), MMI (AUS),Hermes (D), Berner (CH), AGF (F), Royal Nederland (NL), Athéna (F),Life USA (US), Zwolsche (NL)

Genevoise (CH), Saltiel (F), La Chilena (CL), MMI (UK),Fidelity & Deposit (US), Trygg-Hansa (US), Protector (N), BAT FS (UK)

General Casualty (US), Rhodia (F), DBV (D), Schweiz Vers. (E, I),Equitativa (E), Josi (B), CS Life (CH), Nicos Life (J), Colonial (UK), NIG (UK)

Major mergers and acquisitions

Exhibit 2

Market capitalization 2000 (B )€ (1)

10 20 30 40

MARKET VALUES ROSE APPRECIABLY

(1) Year end values(2) 1991–2000(3) 1997–2000Source: BCG Insurance Database

Annual market capitalization growth (1990–2000)(1)

50%

50 60 70 80 90 100

40%

30%

20%

10%

0%

Average = 25%

AEGONING(2)

Allianz

AXA

Generali

Aviva

Prudential

Fortis

Skandia

Bâloise

ERGOL&G

SwissLife(3)

RSA

Helvetia Patria(3)

W&WFondaria

ZFS

Exhibit 315

The strategies of the nineties clearly transformed the European insurance landscape, with most players grow-ing their life as well as international business. Many players increased their number of foreign markets, andsome even expanded their brand positioning. Corporate visions and strategic thrusts reached far beyond tra-ditional core markets to the pursuit of leading positions in international (or even global) financial services(Exhibit 4). Consider the following statements of purpose that were adopted:

■ AXA: "Aims to be the world leader in financial protection and wealth management"

■ ZFS: "A leading financial services organization providing financial protection and wealth accumula-tion solutions"

■ AEGON: "A global financial institution in the field of banking, insurance and asset management".

Meanwhile, several strategic plays started to become apparent (Exhibit 5). Many insurers grew both their lifeand non-life businesses internationally. Four (AXA, Generali, Allianz and ZFS) strove for global leadership.Some life insurance groups leveraged their skills internationally, while many (local) life insurers operated aspart of a bank. Three players focused on industrial insurance. Only a few of the larger groups stayed exclusivelywithin their home markets. Growth aspirations and international strategies were financed both by high profitsin home markets and by high investment results.

16

Global insurers Life groups

International business (%)(2)

10 20 30 40

STRATEGIES OF THE NINETIES CHANGED THE PORTFOLIO MIXES

(1) Life insurance as percent of total premium(2) Premiums outside home market as percent of total premiumSource: Annual reports; BCG Insurance Database

Life insurance(1)

50 60 70 80 90 100

AEGON

ING

Allianz

AXA

Skandia

ZFS

100%

80%

60%

40%

20%

0%

70%

50%

30%

10%

90%

Generali

1990 2000

10 20 30 40

Life insurance(1)

50 60 70 80 90 100

100%

80%

60%

40%

20%

0%

70%

50%

30%

10%

90%

International business (%)(2)

Exhibit 4

By the end of the decade, however, it was clear that many insurance groups had allowed themselves to be exces-sively exposed to financial risks. Many had also underestimated the challenges of multidimensional expansion.

17

SEVERAL STRATEGIC PLAYS EMERGED

(1) Life insurance as percent of total premiumSource: Annual reports; Company information; BCG Insurance Database

Life i

nsur

ance

(1)

10 20 30 40 50

AEGONING

Allianz

AXA

Skandia

ZFS

100%

80%

60%

40%

20%

0%

70%

50%

30%

10%

90%

Generali

Number of country positions1

RSAGerling

HDI

MapfreGroupama

Winterthur

Aviva

ERGO

Prudential

If...BUPA

MMA/MAAF

WienerStädtische

UniquaFortis

RBoSBâloise

Helv. Patria

R+V

BBVASwiss Life

Santander

MAIF

MACIFAzur/GMF

BNPCNP

Signal Iduna

Societé GénéraleStandard Life

Abbey Nat.

CéditAgricole

NordeaRoyal London

L&G

IL&P

La Mondiale

SanPaolo

AlectaPoste Italiane

Banca Monte dei PaschiFriends Provident

Banques Populaires

HBOS

GothaerUnipol

Toro

CLLloyds TSB

CéditMutuel

Rabobank

DEVK

Reale MutuaHUKCoburg

Bancassurance

Home market

Internationalinsurance

International life

Industrial insurance

Globalleadership

Eureko

SampoW&W

Exhibit 5

Interest rates declined steadily during the nineties, falling from 12% to 5% in the United Kingdom, 9% to 5%in Germany, and 6% to 3% in Switzerland. As a consequence, keeping promises to policyholders and compen-sating for technical losses by investing in bonds became more and more difficult for insurers. Conversely, equi-ties (including private equity) seemed to offer the required performance. Bullish stock markets were stronglydriven by optimistic economic outlooks and a continuing net inflow of money, much of which came from insur-ers (Exhibit 6).

But the precipitous decline in stock prices that began in the late nineties and the sheer persistence of low bondyields caught most European insurers by surprise. The industry began a tailspin, plummeting into the highlydistressed state that it finds itself in today (Exhibits 7 and 8).

19

THE DEVELOPMENT OF INVESTMENT RETURNS

Year

+25% p.a.(2)

FTSE(1) STOXX(2) SMI(3) DAX

-19% p.a.(2)

75%

50%

25%

0%

-25%

-50% 020100989796959493929190 99

15%

12%

9%

6%

3%

0% 020100989796959493929190 99

UK

D

CH

(1) FTSE All Share(2) STOXX 600(3) 1990–1993: SBC 100Source: BCG analysis

Ten year government bond yields in % Stock market performance in %

Year

Exhibit 6

HE RULES HAVE CHANGEDT

20

A DRAMATICALLY HIT INDUSTRY

(1) Sample of 14 major insurance groupsSource: Annual reports; BCG Insurance Database

Reserves and equity(1) S&P Financial Strength Rating

120AAA

AAA-

AA+

AA

AA-

A+

A

A-

BBB

BBB-

BB+

80

9074

92

100

90

78

64 64

87

Revaluationreserves

67

29

100

110

70

60

50

200220012000199919981997 Allianz ERGO ZFS RSA SwissLife

WienerStädtische

SAI Gerling

Shareholders' equity100 07/01 12/02

03/03

10/01

09/02

11/01

08/0211/02

12/0204/03

10/02

03/03

10/02

02/03

10/02

2000 = Index 100^

Exhibit 7

Reported net loss 2002 (B )€

MANY LEADING GROUPS ARE DISTRESSEDExamples

Source: Annual reports; Company information

Capital increase (B )€

Allianz: 4.4

ZFS: 2.6

Winterthur: 1.4

L&G: 1.3

Swiss Life: 0.8

Failures

Equitable Life (UK)

Independent (UK)

Mannheimer Leben (D)

ZFS: (3.2)

Winterthur: (1.6)

RSA: (1.4)

Swiss Life: (1.2)

Allianz: (1.2)

ERGO: (1.1)

Aviva: (0.8)

Generali: (0.8)

Skandia: (0.5)

Bâloise: (0.4)

L&G: (0.3)

Exhibit 8

Its current condition can be described thusly:

■ Most insurance groups have incurred huge losses

■ Reserves and equity positions have fallen drastically

■ Various groups have had to cut dividends or raise capital

■ Rating agencies have downgraded most insurers' financial strength

■ Life insurers have faced solvency issues

■ Some life insurers have stopped writing guarantees

■ Authorities, legislators and associations have had to define supportive measures1

■ Massive layoffs have been announced

■ Many CEOs and top managers have been forced to resign their positions

Clients and shareholders, accordingly, have suffered greatly. Policyholder dividends have been slashed, and theshare prices of many insurance groups have collapsed (Exhibit 9). Major public groups have lost almost twothirds of their market capitalization.

21

1 Examples: Guarantee pool "Protektor Lebensversicherung" (Germany) or "Auffanggesellschaft BVG" (Switzerland); legislative changes that allow deferring recognition of assetimpairments (Germany); increased recognition of future profits as "solvency credit" (UK).

(1) Sample of 23 major insurance groupsSource: BCG analysis

INSURANCE VALUATIONS HAVE COLLAPSED

Market capitalization in B€(1) Change in market capitalization (2000–2002)

1999

450

2000

580

-64%

2001

402

2002

206

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

-60%

-70%

-80%

-90%

Uniqa

Wien

er St

ädtis

che

Unipo

lFo

rtis

CNP

Irish

Life

& Pe

rman

ent

Catto

lica

ERGO

L&G

Fond

iaria/

SAI

W&W

Gene

rali

Prud

entia

lAv

ivaIN

GHe

lvetia

-Patr

iaAX

AB

loise

â AEGO

NAll

ianz

ZFS

RSA

Swiss

Life

Skan

dia

Samp

o27

%

2%-6

%-1

4%-1

7%-2

5%-2

7%-3

0%-3

7%-4

6%-4

6%-5

3%-6

0%-6

1%-6

1%-6

2%-6

5%-6

8%-7

1%-7

6%-7

6%-7

9%-8

5%-8

5%

19%

+29%

Exhibit 9

Indeed, margin dynamics, and therefore the rules for profitability in the industry, have fundamentally changed(Exhibit 10). Low interest rates and reduced risk-taking capacities—leading to low equity exposures—com-bined with generally lower stock-market performance will result in significantly reduced investment returns inthe near and mid-term.

These conditions are a far cry from those of the nineties, when many life insurers operated in effect as "lever-aged hedge funds". With up to 20 times their own equity as policyholders' assets and a typical allocation in somecountries of 25% in stocks, they were leveraging their own equity at a ratio of 1:5. Although they shared theupside with policyholders, the downside was fully borne by shareholders. Once investment returns got belowthe guarantees, insurers started to burn significant amounts of equity.

Non-life insurers made up for technical losses and high costs with superb financial gains. With a 10% invest-ment return, a typical insurer could operate at a combined ratio of 115% and still achieve a 15% ROE. For thesame ROE with a 5% or 3% investment return, the combined ratio must be improved to 100% or 95% respec-tively.

Today, however, the shortfall in investment returns must be compensated for by massively improved technicalresults, and by adjusted policyholder participation models in life insurance. More fundamentally, insurers musteliminate historic weaknesses and radically change the way they run their businesses. There are specific stepsthat can, and must, be taken.

22

MARGIN DYNAMICS HAVE CHANGED

(1) Illustrative exampleSource: BCG analysis

Non-life(1)Life(1)

115%

110%

105%

100%

95%

90%0% 1% 2% 3% 4% 5% 6% 7%

Combined ratio

Investment return

Return on equity5% 10%

++

0

Investment margin

Investment return

Policyholderguarantee

+ ++

+

0

-

Insurer

8% 10%9%

15%

Policyholder

Exhibit 10

Most insurers face huge challenges in their quests to conquer the crisis and generate the kind of returns thatwill enable them to prosper under the new rules of the game. In our view, six strategic initiatives should be atopthe agendas of senior managers who wish to build successful futures for their organizations:

■ Focus on Attractive Markets

■ Build Local Leadership Positions

■ Exit Marginal Activities

■ Achieve Operational Excellence

■ Realize Group Advantages

■ Develop a Performance Culture

These endeavors are relevant to all European insurers, whether they are trying to maintain market leadershipor rescue themselves from looming insolvency.

Focus on Attractive Markets

The earnings potential of insurance groups clearly depends, to a large extent, on the attractiveness of their mar-kets. European markets differ widely in size and growth rates, but also—and more importantly—in terms ofproduct mix, distribution networks, consolidation level, competitive price pressures, policyholder expectations,and regulatory environment. These factors have a significant influence on the profit level that can be achievedin a specific market, and on the skills that are needed to be successful. Management must thus develop a thor-ough understanding of market characteristics, dynamics and own capabilities in order to successfully refocustheir portfolios. Circumstances also differ depending on whether the company is primarily focused on non-life,life, or both types of businesses.

25

EY SUCCESS INITIATIVES: BACK TO THE FUTUREK

Non-Life Insurance Overall, across Europe, market characteristics and profitability in non-life businesses have varied widely bycountry (Exhibit 11 and 12).

Germany is the largest European non-life market. It is characterized by relatively low historic growth, but has avery attractive price/loss profile. It is also a highly fragmented market, with few players having truly efficientoperations. Achieving necessary cost reductions will be particularly difficult for smaller German insurers, whilelarger players can create sizable value with a "market consolidator" strategy.

The small Swiss non-life market has also experienced low growth, and has an attractive price/loss profile. Butalthough the market is highly consolidated, its insurers are even less efficient than those in Germany. Marketleaders should leverage their competitive advantage and set new benchmarks for operational excellence, whilesmall insurers might join forces or become part of a market leader.

Spain, meanwhile, shows a very different picture. It has comparatively high growth rates, an extreme level offragmentation, and unattractive loss ratios. But it has the lowest cost ratios in Europe. The Spanish marketleader Mapfre, and smaller mutuals, have converted their structural advantages into comparatively low distri-bution costs. Despite recent premium increases in the market, foreign players that lack such advantages mayneed to reconsider whether doing business in Spain is viable.

26

REGIONAL CHARACTERISTICS IN NON-LIFE

(1) Premium (B , 2001)(2) Annual premium growth (1998–2001)(3) Average 1998–2001(4) Cumulative market share of top 5 local insurance groupsSource: ISIS; Swiss Re sigma; BCG Insurance Database

€

D

F

I

ENLCHBA

77.2

43.6

31.2

19.417.813.4

9.66.7

E

I

NLUK

CHF

8.3%

5.1%

3.6%3.2%

1.4%0.8%

D

NLIE

F

74.7%

82.2%

86.1%

EFNL

A

22.9%23.5%23.8%

36.6%

A

I

BUKF

NL

D

E

72%

64%

59%59%57%

49%

43%

38%

I 25.3%

D 26.8%

B 33.6%

81.4%81.0%

CH 29.5%UK 30.1%

B 79.2%

UK 77.5%A 76.8%

CH 74.8%

B 2.5%

D 0.4%A -0.2%

UK 74.5 CH 72%

Size(1) Growth(2) Loss ratio(3) Cost ratio(3) Consolidation(4)

Exhibit 11

Life InsuranceNational market characteristics and profitability patterns are markedly different in life businesses (Exhibit 13and 14).

The United Kingdom is by far the largest market, for example, while the small Belgian market has achievedone of the highest growth rates and the most attractive technical margins. Belgium is also highly consolidatedand efficient, and its market leaders will continue to use their advantaged cost position to penetrate clients andexpand distribution channels. Smaller players will have a hard time staying profitable.

In Spain, profitable growth has been captured almost exclusively by bancassurance players, which have lever-aged their distribution advantages. Further consolidation in Spain will likely be driven by the banking industry.

German and Swiss life insurers have long found it difficult to generate adequate returns. Contributing factorshave been high payout ratios to policyholders (driven both by competitive pressures and by regulation), as wellas high cost ratios. Insurers in these countries will need to adjust participation models and reduce costs signif-icantly in order to regain profitability. Insurers without multi-channel distribution will be at a distinct disad-vantage.

Overall, there is a wide range of market attractiveness and required skills in life insurance across Europe.

27

Combined ratio=110%

Average loss ratio75%

NON-LIFE PROFITABILITY HAS VARIED WIDELY1998–2001

Source: ISIS; Annual reports; National regulators/associations; BCG Insurance Database

Average cost ratio

40%

35%

30%

25%

20%

Austria

80% 85% 90%

Belgium

France

Italy

UK

Netherlands

Spain

Germany

Switzerland

Combined ratio=105%

Combined ratio=100%

Exhibit 12

70%

28

REGIONAL CHARACTERISTICS IN LIFE

(1) Premium (B , 2001)(2) Annual premium growth (1998–2001)(3) (Result life technical account/technical provisions), average 1998–2001(4) (Technical expenses/technical provisions), average 1998–2001(5) Cumulative market share of top 5 local insurance groupsSource: ISIS; Swiss Re sigma; BCG Insurance Database

€

Size(1) Growth(2) Technical margin(3) Cost ratio(4) Consolidation(5)

UK

F

D

INLCHEBA

173.3

85.3

63.1

47.124.422.322.013.6

5.9

IB

E

UKA

NL

D

CHF

22.2%21.0%

15.7%

10.2%10.0%

5.9%

3.9%

1.0%

B

NLIE

ADUKFCH

1.8%

1.0%0.9%0.8%

0.5%0.4%

0.2%0.1%

F

UKE

A

1.1%

1.3%1.4%

3.0%

CH

B

NLA

IF

UKED

79%

74%

67%66%

57%54%

46%43%41%

B 1.5%CH 1.6%

NLD 1.8%

I 2.4%

Exhibit 13

Circle size is proportional to premiumAverage technical margin(1)

A BROAD RANGE OF MARKET ATTRACTIVENESS IN LIFE INSURANCE1998–2001

(1) Result life technical account/technical provisionsSource: ISIS; Swiss Re sigma; BCG Insurance Database

Annual premium growth

25%

20%

10%

0%

Austria

1.0% 2.0%

Belgium

France

Italy

UK

Netherlands

Spain

Germany

Switzerland

15%

5%

1.5%0.5%0%

€25B

Exhibit 14

Build Local Leadership Positions

Virtually all European insurers need to increase profitability. Empirical evidence shows that sufficient scale andclear focus raise profit potential. Moreover, our research suggests that critical size for either a life or non-lifeoperation is about 5% in market share, or €1 billion in premiums in any given country. We have observed thatbuilding local leadership positions creates competitive advantage and enables superior profitability. Based onscale and focus, three distinct positions can be pursued and achieved (Exhibit 15):

■ Market Leader, with a dominant position in both life and non-life insurance

■ Life Producer, which exploits multiple distribution channels

■ Non-Life Mutual, which places its focus on pursuing attractive client segments

Market LeaderMarket leaders hold a dominant position of more than 5% market share in both the local life and non-life mar-kets. Their competitive advantage is based on superiority in marketing and pricing, a broad product range thatsupports sales force effectiveness as well as customer bonding, and economies of scale across products, distri-bution channels and clients.

29

THREE LOCAL LEADERSHIP POSITIONSBasic Strategies and Sources of Competitive Advantage

(1) Minimal share depends on respective market size and structure

Market sharelife

Market share non-life

2. Life producer 1. Market leader

3. Non-life mutual

~5%(1)

Product designMultichanneldistributionEconomies of scale

Market dominanceBroad product rangeEconomies of scaleand scope

Client focus

Low complexity/costAttractive products

High

Low

Low High

Exhibit 15

~5%(1)

Market leaders also achieve high brand awareness. They are attractive partners for banks and other distributionchannels,1 and preferred employers for top talent in management and staff. Market leaders typically converttheir advantages into lower combined ratios (Exhibit 16).

In the nine Western European countries we analyzed, 29 local insurers qualify as market leaders. They gener-ate about 30% of the total life and non-life premium volume, and belong to 19 different insurance groups.2

Life ProducerLeading life insurers are often "pure plays." They base their competitive advantage on several attributes: sleekproduct design for the benefit of policyholders and shareholders, access to efficient third-party distributionchannels (often banks), and economies of scale in operations, IT and investment management. They are high-ly focused and therefore achieve better transparency regarding true product profitability. These characteristicstypically translate into lower costs (Exhibit 17).

30

Marketaverage

MARKET LEADERS CAN ACHIEVE SUPERIOR RESULTS

(1) Excluding non-life mutuals in D, F, ASource: ISIS; Annual reports; National regulators/associations; BCG Insurance Database

Rabo-bank(NL)

KBC(B)

Fortis(B)ERGO

(D)

Mapfre(E)

Bâloise(CH)

Unipol(I)

Allianz(I)

Exhibit 16

Non-life combined ratio relative to "local peers" (2001)(1)

WienerStädti-

sche (A)

Generali(I)

Allianz(D)

SMAP/OMOB

(B)

Toro-Capitalia

(I)

Allianz(A)

Uniqa(A)

Axa(F)

Generali(D)

Allianz(CH)

Aviva(NL)

Aviva(UK)

Fortis(NL)

0%

-5%

-10%

1 Examples: ERGO and Hypovereinsbank (Germany), AMB Generali and Commerzbank (Germany), Bâloise and TCS/UBS (Switzerland), Winterthur and Swiss Post (Switzerland),Aviva and Royal Bank of Scotland (UK), AXA and BNP Paribas (France), Unipol and Banca Monte dei Paschi (Italy), Mapfre and Caja Madrid (Spain).

2 See also Exhibit 26.

Currently, 22 life insurers across Europe have more than a 5% share in a local market, and they generate 29%of Europe's life insurance premiums. Roughly two thirds (15) of them belong to a bank.

Non-Life MutualNon-life insurers have often grown their businesses within specific population groups, and are still organizedas mutuals1. Their competitive advantage is based on narrow client focus (typically residents of rural areas, orcivil servants that provide better risk profiles and easier retention), low costs due to restricted overhead, andfocused distribution. The lure of their offerings often stems from lower prices, which are based on cost and riskadvantages (Exhibit 18). Although their prices sometimes lead to higher loss ratios, mutuals can more thancompensate for this through their low cost base and absence of dividend payments to investors.

Currently, 69 major insurers are organized as mutuals, generating 20% of Europe's non-life premiums.

31

1 The legal form "Mutual" varies across markets. Typical examples are "Versicherungsverein auf Gegenseitigkeit" (Germany), "Mutuelle" (France), "Mutua" (Spain) and"Genossenschaft" (Switzerland).

Marketaverage

Spar-kassen

(A)

BBVA(E)

AEGON(NL)

Bansabadel(E)

SanPaolo

(I)

Caifor(E)

SociétéGénérale

(F)

CréditMutuel

(F)

BNPParibas

(F)

CréditAgricole

(F)

Santander(E)

CNP(F)

HBOS(UK)

L&G(UK)

LIFE PRODUCERS ACHIEVE LOWER COST RATIOS

Exhibit 17

Competitive advantage in cost ratio (2001)(1)

(1) Cost ratio defined as technical expenses as percent of technical provisions compared to market averageSource: ISIS; Annual reports; Local authorities; BCG Insurance Database

0%

-0.5%

-1.0%

In summary, it is safe to say that not all local leaders have yet exploited their potential competitive advantages.Most insurers do not even possess any structural advantage. Only one third of Europe's local life and non-lifeentities command sound positions as market leaders, life producers or non-life mutuals that allow them toachieve superior results.

Simply put, this means that two thirds of all local insurance entities in Europe need to expend extra effort inorder to generate adequate returns. Otherwise, they will destroy value. These companies are either subsidiariesof international insurance groups or independent local players. Senior managers of such organizations mustreview their positions and decide whether they can compensate for structural handicaps. Pressure from poli-cyholders for operational excellence, and from shareholders for adequate returns, will influence their deci-sions and likely lead to further consolidation.

Exit Marginal Activities

The history of the insurance industry shows clearly that synergies from multidimensional expansion effortsrarely materialize. Achieving scale or added value across countries and/or different businesses is usually just avision that rarely becomes reality. Among the reasons are that portfolios typically involve a broad set of opera-tions that encompass different cultures and legal systems, and include a high proportion of sub-critical units.

32

Higher combined ratiothan market

Loss ratio relative to market average

-5% 0% 5% 10%

NON-LIFE MUTUALS ACHIEVE LOWER COST RATIOS

Source: ISIS; Annual reports; Local authorities; BCG Insurance Database

Cost ratio relative to market average (2001)

0%

15%

-5%

-10%

-15%

-20%

Provinzial Rhein (D)Cattolica (I)Oberöster-

reichische (A)

Grazer (A)VGH (D)

Matmut (F)

Macif (F)

Westfälische Provinzial (D)

LVM (D)

DEVK (D)

VKB (D)

NFU (UK)

Univé (NL)

VereinigteHaftpflicht (D)

MAIF (F)

HUK-Coburg (D)Higher loss ratioovercompensated by cost

Lower cost- and lossratio

Exhibit 18

In addition, most insurers run fully integrated business models in which virtually everything is done in-house.This creates enormous complexity, which is both difficult to manage and costly.

Therefore, it is only when companies focus their attention and capital on specific countries, businesses or activ-ities in which they already have competitive advantage (or in which they possess deep knowledge and experi-ence that can create advantage quickly) that they will be able to grow profitably and generate value for theirshareholders. Each link in the value chain must be challenged, even for core units. A fundamental question,one that is already posed frequently in many other industries, must be asked: Could an outside provider per-form this activity better or at lower cost?

Let us examine some of the ways in which insurers might refocus their businesses:

Exiting CountriesMost European insurance groups have international or even global portfolios. Most are also highly fragment-ed, consisting of many sub-critical country units that have severe structural disadvantages. Only six groups—Allianz, AXA, ING, Aviva, AEGON and Fortis—achieve more than €1 billion (combined life and non-life) inannual premiums per foreign market. And even these portfolios are significantly influenced by a few very largeoperations. Many groups such as Mapfre, ERGO, BNP, Groupama, Wiener Städtische and Uniqa operate in upto 20 foreign countries with below €100 million in premiums and local market shares under 1%. It is almostimpossible to manage such positions profitably, and the complexity they impose on corporate centers is enor-mous (Exhibit 19).

33

AEGON

ING

Allianz

AXAAviva

Prudential

Fortis

SkandiaBâloise

Swiss Life

RSA

ZFS

Number of foreign countries

10 20 30 40

FOREIGN PORTFOLIOS ARE HIGHLY FRAGMENTED

(1) Per country unit, life and non-life premiums combined, 2001Source: Annual reports; BCG Insurance Database

Average premium ( million)€(1)

2,000

50

1,500

1,000

500

05 15 25 35 45

Generali

GerlingERGOMapfreBNP

GroupamaWiener St.Uniqa

Toro Eureko

San Paolo

Santander

Winterthur

HDI

Standard Life

If....

100

Exhibit 19

In most cases, foreign operations have been significantly less profitable than home-market activities, or haveeven recorded losses. In 2001, for example, AXA generated 76% of its premiums outside France, but only 41%of its profits. ERGO's foreign business (about 19% of its total) accounted for a mere 2% of its overall profit.And Allianz's foreign activities (about 68% of its total) lost money and reduced the company's overall profit by27%.

Ironically, now that many insurers have decided to sell their subscale subsidiaries, very few buyers have the cap-ital to acquire them. Some operations cannot be sold because the resulting write-off on book value would fur-ther deteriorate the capital outlook for the seller. Alternative ways to solve this dilemma may be mergers ofinternational groups or swaps of complementary portfolios to eliminate sub-critical positions and create newlocal leaders. In general, however, more players need to adopt strategies that concentrate on their core coun-tries (Exhibit 20).

Exiting BusinessesSimilarly, some companies have started to question whether they want to keep all existing businesses in theirportfolios. The main trigger points for these decisions are capital requirements, strategic fit, minimum size, andof course, profitability. For example, reinsurance and industrial insurance require considerable capital, andsubscale life operations have become a challenge for non-life insurers (just as subscale non-life activities areburdening some life players). Banking and third-party asset management require different skills and cultures.Many companies have begun to divest themselves of unprofitable, non-core businesses (Exhibit 21)

34

PLACING FOCUS ON CORE COUNTRIESSelected Strategies

Source: Annual reports; Company information

Aviva

ZFS

Winterthur

RSA

Fortis

Swiss Life

"We will ... concentrate on markets where Aviva can achieve a leading position"

"... is now focusing on core profitable markets in the US, Switzerland, Germany, Italy and Spain, and has dropped its plan for globaldominance"

"Focus on home market Switzerland and selected European countries ..."

"Our primary markets will be those where we already have a significant capability, presence, scale and solid reputation"

"Fortis' strategy is ... to develop growth platforms in Europe in selected activities in order to acquire leading market positions"

"Focus on core life units Switzerland, France, Germany, Netherlands, Belgium/Lux. Non core are ..."

Bâloise"...Bâloise will focus on the core markets Switzerland, Germany, Austria, and Belgium/Lux."

Exhibit 20

Outsourcing/Insourcing ActivitiesLocal market leaders achieve critical size and synergies across lines of business, client segments and distribu-tion channels to build competitive advantage along the entire value chain. They can benefit by offering theiroperational systems to other insurers through insourcing agreements. Players without scale or scope advantagesshould focus their attention on core activities and gradually start outsourcing in non-core areas.

Large life insurers, for example, can gain by focusing on their factory, utilizing the third-party distributionchannels provided by banks, brokers and other sales organizations. They can also produce "white label" prod-ucts that other players brand. Access to efficient distribution may require elements of control through part-nerships, joint ventures or ownership. Mutuals, for their part, should continue to produce their own non-lifeproducts, but increasingly insource offerings from life producers. They can also outsource their (typically sub-scale) asset management activities to banks or reinsurers. All of these scenarios concern a critical initiative intoday's climate: concentrating on core competencies (Exhibit 22).

Moreover, a set of new market participants will likely emerge that focus on only a small part of the value chain.Banks will increasingly sell (life) insurance products using their branch networks as (open) distribution plat-forms, or by leveraging their own insurance companies. Focused distribution organizations such as AWD(Germany), Mediolanum (Italy) or St. James's Place (UK) can gain significant market share based on theirbroad choice of products and marketing skills. Retailers such as Marks & Spencer (UK), Carrefour (France),Migros (Switzerland) and Tchibo (Germany) can use their regular contact with customers to distribute insur-ance products produced by cooperative partners. Asset managers that specialize in insurance assets can offerasset/liability management capabilities, as well as a full set of investment services tailored to the insuranceindustry.

35

EXITING NON-CORE BUSINESSESSelected (Planned) Divestments

Exhibit 21

ZFS

GENERALI

WINTERTHUR

GROUPAMA

BALOISE

W&W

ZFS:In Netherlands, CEE, Canada, France,United Kingdom, and United States(partly)

RSA:In United Kingdom (group life), Italyand Offshore

AVIVA:In Belgium, Spain, Portugal, Australiaand the United States

ZFS:In Baltics, CEE (personal lines),Scandinavia, Netherlands and France

PRUDENTIAL:In United Kingdom

SWISS LIFE:In Switzerland, France and Belgium

SKANDIA:In Scandinavia and United Kingdom

AXA:Donaldson, Lufkin & Jenrette

ZFS:Scudder, Gresham, Threadneedle,Rüd, Blass & Cie., Zurich Invest Bank

RSA:UK investment funds, Tyndall

SWISS LIFE:STG, Banca del Gottardo

SKANDIA:Asset management

Banking and third partyasset managementNon-life insuranceLife insuranceReinsurance or

industrial insurance

Source: Annual reports; Company information

Achieve Operational Excellence

Focusing on attractive markets, building local leadership positions, and exiting marginal activities are becom-ing prerequisites for success in the European insurance industry. But these initiatives are not all that is need-ed. The insurance sector must also become more efficient, and in certain aspects more professional. In orderto reduce dependency on capital markets and reach a technical break-even point, most insurers need to sig-nificantly reduce costs and adjust their pricing structures. This picture is shaded differently in each of the twomajor insurance categories: non-life and life.

Non-Life InsuranceAchieving a technical break-even point (a combined ratio of below 100%) typically requires cost ratios between20% and 25%. In 2001, average cost ratios in many countries were significantly higher: 28% in Germany andSwitzerland, 29% in the United Kingdom, 33% in Belgium, and 34% in Austria. The total cost saving neededto reach an average ratio between 20% and 25% for all players across Europe's core markets amounts to morethan €9 billion.

A few leading insurers, in fact, are well below the 20%–25% benchmark. Such players enjoy high profitabilityin today's high-price environment. But institutions above the benchmark—and there is a wide range of cost per-formance among players—risk becoming unprofitable if they do not reduce costs significantly (See Exhibit 23).

36

Core competence

CONCENTRATING ON CORE COMPETENCIES

Generali

"Market leader"

Deutsche Bank Skandia AWD MACIF Fidelity

Bank "Life producer" Distributor "Non-life mutual" Asset managerValue chain

Outsourcing/partner

Life

Non-life

Life

Non-life

Life

Life

Non-life

Distribution

Product/oparations

Assetmanagement

Example

Exhibit 22

Life InsuranceBetween 1998 and 2001, the average return on equity in European life markets was 10%, based on a profit mar-gin of 0.6% at an assumed solvency margin of 6%1. Profitability in some markets—Belgium, the Netherlands,Italy, and Spain —was much higher. For the markets that performed less admirably, the cost saving required toachieve an average return on equity of 10 % amounts to about €6 billion (assuming investment returns andpolicyholder participation at the 2001 level).

A few leading insurers have adjusted their products, organized their distribution channels and shaped theirprocesses to achieve adequate returns. But as in the non-life segment, the majority of companies still have along way to go to reach a sufficient level of performance.

Realize Group Advantages

Despite European harmonization efforts, local insurance markets are still very diverse. Insurance is, for themost part, still a local business. And having many small positions in various markets does not usually add up to

37

45%

40%

35%

30%

25%

20%

15%

10%

5%

SIGNIFICANT DIFFERENCES IN NON-LIFE EXCELLENCENon-Life Cost Ratios of Local Insurers (2001)(1)

(1) Cost ratio defined as technical expenses/premiums written for local business unitsSource: ISIS; Annual reports; Local authorities; BCG Insurance Database

A

Uniqa

Market average

B UK CH D I NL F E

Dexia

AXA Vaudoise ERGO

Aviva

Allianz ZFS

Generali

Fortis

KBC

AXA

SMAP/OMOB

Aviva

ZFSCooperativeChurchill

Helvetia Patria

ZFSBâloise

AXAGenerali

Allianz

HUK-Coburg

Fondiaria/SAI

Unipol

Fortis

ING

Univé

Eureko

GroupamaAXA

MACIF

MAIF

Allianz

Mapfre

Wiener

AllianzGrazer

AXAGenerali

Allianz

AXAGenerali

Städtische

Exhibit 23

Generali

1 i.e., 1.5 times the minimum margin of 4% of technical reserves for traditional business

a sizeable group. There are few synergies in having, say, a property and casualty insurer in one country and alife insurer in another.

The fact is that most corporate centers today act as "financial holding companies" for their business units, andthere is little value added across countries. Accordingly, some head-office functions are finding it increasinglydifficult to justify their costs. Creating value across countries requires a common logic across businesses andfunctions as well as clear group competencies along the management of performance, risk, assets, processesand people. Today, many international groups seem to be unclearly positioned (Exhibit 24).

In our view, there are three strategic paths to creating value across country markets (Exhibit 25). One is tobecome a Multi-Market Leader, replicating in other core markets the life and non-life dominance that hasalready been achieved in the home market. Another is to become an International Life Group, leveraging keycompetencies across core life markets. A third path is that of the Industrial Insurer, serving corporate clients inseveral markets and achieving geographic diversification of risk.

Multi-Market LeaderOnly two insurance groups today have successfully realized the strategy of a true multi-market leader across theprincipal Western European markets: Allianz with five local market leader positions (and a significant presence

38

INTERNATIONALLY MANY GROUPS SEEM TO BE UNCLEARLY POSITIONED

(1) Life insurance as percent of total premium(2) Premiums outside home market as percent of total premium(3) Share of life insurance includes permanent health insuranceSource: BCG Insurance Database (2001 as basis)

Life i

nsur

ance

(1)

20 40 60 80 100

AEGON ING

Allianz(3)

AXA

Skandia100%

80%

60%

40%

20%

0%

70%

50%

30%

10%

90%

Generali

International business(2)

0

RSAGerling

HDI

MapfreGroupama

Winterthur

Aviva

ERGO(3)

Prudential

BUPA

MMA/MAAF

WienerStädtische

Fortis

RBoSBâloise

Helvetia PatriaR+V

BBVA

Santander

MAIFMACIF

Azur/GMF

Signal Iduna(3)

SocietéGénérale

Standard Life

Abbey Nat.

Cédit Agricole

Nordea

Royal London

L&G

IL&P

La Mondiale

San Paolo

AlectaPoste Italiane

Banca Monte dei PaschiBanques Populaires

HBOS

GothaerUnipol Toro

Cédit Lyonnais

Lloyds TSBCédit Mutuel

Rabobank

DEVKReale MutuaFondiaria-SAI

10 30 50 70 90

Swiss Life

Eureko

HUK Coburg(3)

W&WFolksamUniqa

LVM(3)NFU

BNP ParibasCNP

Friends Provident

Sampo

Cooperative

VHVUnivé

Agis

VKBCattolica

Mobiliar

Life producer

Non-life mutual

International life group

Multi market leader

Industrial insurer

Exhibit 24

If...

GjensidigeZFS

in all other markets), and Generali, with four market leader positions and two further significant country units(Exhibit 26).

A few other groups have a reasonably good base from which to grow into a multi-market leader: AXA, with twomarket leader positions and strong positions in three other countries, and the Swiss groups ZFS andWinterthur, with leadership positions in their home market and significant presences in some other countries.Aviva and Fortis, each with two market leader positions, will most likely focus only on life insurance acrossEurope.

International Life GroupsThree insurance groups focused on life products currently generate the majority of their premiums outsidetheir home markets: the Dutch insurers ING and AEGON, with strong subsidiaries in Europe, the UnitedStates, and other overseas markets; and Skandia of Sweden, which has numerous integrated international units.

Aviva and Fortis could potentially join this group if they exit international non-life activities. A few other lifegroups generate a significant share of their premiums outside their home markets: Prudential (UK), whichoperates in Asia and the United States; Swiss Life, which focuses on five European markets; and the Spanishbanks BBVA and Grupo Santander, which participate in Latin American bancassurance.

The majority of international life insurers operate small foreign subsidiaries or branches without significantcross-border added value, but typically with high management complexity.

39

THREE BASIC STRATEGIES TO GO INTERNATIONAL

Home market

Life producer

Non-life mutual

Home marketleader

2.International

life group

1.Multi market leader

3.Industrial insurer

International expansion

Integrated international life units

High brand awarenessEfficient operations/scaleSuperior asset management skills

Leader in several markets

Focus on multinational clients

Superior underwriting know-howLarge capacityDiversification across countries

Local cost advantagesAttractive for employees/partnersFinancial strength/know-how

Sources of advantage

Exhibit 25

Industrial InsurersTraditionally, most non-life insurers have offered industrial insurance as one of their business segments. Butvery few have achieved the capability and international reach to be a preferred underwriter for large corpora-tions and brokers, which is necessary in order to be profitable in soft markets.

At present, a broad reassessment and consolidation is taking place in this segment. The leading groups, Allianzand AXA, are centralizing service to international clients in specialized units such as "Allianz Global Risks" and"AXA Corporate Solutions."

Industrial insurers such as Gerling, HDI and RSA are facing significant performance problems, and are review-ing their portfolios and underwriting standards. Several international insurers have already exited this marketor particular parts of it.

Develop a Performance Culture

Financial planning, target setting and controlling can be very complex processes for insurers. The reasons aremyriad. First, non-life profits depend heavily on estimates of future claims payments, which of course are impos-sible to predict exactly. Large claims and natural catastrophes pose a special challenge due to their "low frequen-

40

Number of marketleader positions

Source: BCG Insurance Database

Local market leader

AllianzGeneraliAXAAvivaFortisZFSWinterthurERGOBâloiseMapfreINGWiener StädtischeUniqaToroUnipolEurekoRabobankKBCSMAP/OMOB

MARKET LEADER POSITIONS IN EUROPE

L NLUK

L L L L L L L LNL NL NL NL NL NL NL NLD F I NL CH E B A

<1% 5.0% 13.8% 5.5% 12.6% 1.6% 5.3% 4.1% 3.2% 5.9%20.3% 13.4% 15.1% 5.3% 12.7% 6.6% 6.5% 15.1

4.2%

10.3%

–

4.0%

0.6%

–

9.6%

20.9%

1.7%

8.2%

<1%

9.9%

3.7%

<1%

5.4%

2.5%

7.8%

1.1%

<1%

6.2%

12.9%

3.1%

<1%

<1%

21.4%

<1%

3.8%

1.4%

1.5%

<1%

–

8.2%

6.5%

0.7%

2.5%

7.2%

13.3%

0.8%

1.1%

–

22.1%

7.9%

9.1%

3.8%

0.3%

12.7%

25.1%

8.7%

–

4.4%

2.3%

6.8%

0.5%

2.0%

2.5%

0.1%

13.1%

1.8%

<1%

13.1%

27.7%

<1%

1.3%

0.8%

1.1%

10.1%

<1%

11.4%

8.8%

11.0%

2.3%

2.3%

<1%

16.4%

19.9%

6.0%

6.0%

–

4.3%

1.0%

5.2%

1.4%

<1%

5.6%

12.9%

2.5%

–

<1%

<1%

16.0%

3.6%

1.0%

2.9%

<1%

–

<1%

6.7%

10.8%

0.7%

3.1%

7.7%

11.5%

1.2%

0.4%

2.2%

10.2%

12.9%

6.1%

4.4%

0.9%

19.1%

20.1%

8.0%

<1%

5.7%

5.4%

–

1.0%

4.5%

4.3%

1.4%

16.2%

0.1%

2.7%

18.4%

12.8%

2.5%

8.8%

3.0%

5.2%

3.7%

<1%

9.3%

9.8%

20.5%

4.2%

<1%

<1%

18.8%

16.3%

5422211111111111111

Market share > 5% Market share < 5%

Exhibit 26

cy/high severity" nature. And life results are strongly influenced by long-term projections of future mortality,longevity and disability, which have become increasingly difficult to assess with the desired degree of accuracy.

In addition, assumptions about investment returns—which have generally become more volatile—contributegreatly to product profitability, particularly for long-tail life and non-life products. The allocation of expensesand cost of capital to products, businesses and country units is very complex, given joint infrastructures, diversedistribution channels, and ambiguity surrounding "true" capital requirements.

Yet there are few major industries in which transparency is so low, accountability so fragmented, and responsi-bility for results so diluted as in the insurance sector. Making the right decisions on the business mix, ensuringthat pricing is in line with real cost and risks, and motivating management to achieve its full potential are there-fore critically important. Such efforts require a rigorous financial framework and consequent steering of allmanagement processes (Exhibit 27). These include:

■ strategy development, based on a clear understanding of which businesses need how much capital andgenerate which level of returns

■ planning and budgeting for operational and functional units, based on key performance indicators

■ regular financial controlling and monitoring, to proactively direct the business

■ personal incentives, to encourage the desired employee behavior.

41

Level

STEERING FINANCIAL PERFORMANCE REQUIRES AN INTEGRATED FRAMEWORK

Core-competence Financial drivers

Market capitalization

ROE

RORAC

Result non-life

Value management

Portfolio management

Risk management

Margin management

Shareholder

Group

Market unit

Business segment

Exhibit 27

Loss ratioCost ratioInvestment result

Risk marginCost marginInvestment margin

DividendsExpectation premiumEmbedded value

Net asset valueReserve redundanciesSolvency requirements

Risk capitalDiversificationAsset/liability risk

Result life

The profitability and solvency of many European insurance groups is clearly in jeopardy. The dramatic invest-ment losses of the past few years have severely hurt annual results and wrought havoc on balance sheets.Although financial markets may indeed rebound to a more "normal" range of returns, the root causes of theoverall malaise in the industry run deep and need focused attention. Among them:

■ Significant parts of the capital invested in marginal businesses provide below average returns and oftenlosses

■ Low operational efficiency causes insufficient technical results in many cases

■ Processes to manage technical and financial risks are often underdeveloped, not well integrated betweendecision makers, and too slow

■ The transparency needed to optimize pricing and guide performance is often insufficient

■ The expenses of corporate centers are often higher than the value they generate

Senior managers, in order to help their companies confront this crisis, will therefore have to implement radi-cal changes. They will need to develop and communicate a strategic logic and clear performance targets fortheir group that can guide both long-term decision making and day-to-day operations. They will also need toposition their companies in a way that generates sustainable profits, based on clear competitive advantages.When this is not possible, the sell-off of non-strategic units or even a full merger with another organizationshould be considered.

Furthermore, core competencies must be identified and developed across groups to create value, with empha-sis on areas where advantages of scale are evident and outweigh the cost of complexity. Where there are no syn-ergies across countries or businesses, the corporate center must be kept to a minimum. Managers need toactively consolidate their core markets, organically or by acquisition.

Taking these actions will dramatically alter today's highly fragmented European landscape. We expect the mostsuccessful European insurers over the next five to ten years to break down into the following groups:

■ Three to five Multi-Market Leaders, with leading life and non-life positions in several European markets

■ Three to five International Life Groups, focusing on a few core markets, with clear group competencies

43

RESHAPED LANDSCAPE WILL EMERGEA

■ Three or four Industrial Insurers that will dominate this market segment, most likely as part of multi-market leaders (and reinsurers)

■ Two or three Local Market Leaders per country, with leading positions in life and non-life business, anda clear focus on their home market

■ Three or four Life Producers per country, working in close cooperation with banks and other distribu-tion partners (or non-life insurers)

■ A varying number of Non-Life Mutuals in several countries, focused on non-life business and on nichegroups in their home markets

■ Many Independent Distribution Companies offering superior advice and open-platform products, andan increasing number of Third-Party Providers offering specific parts of the insurance value chain.

This structure leaves a very long list of insurance companies and subsidiaries that will not be able to earn theircost of capital, expand their businesses, or offer attractive jobs. Many of Europe's leading insurance groups willhave to redefine their portfolios and limit the scope of countries in which they pursue competitive advantage.This process will fundamentally challenge and change the future of marginal country units, which will be eithergrown by acquisitions, merged with other operations, sold, or put into run-off.

Now is the time for senior management teams to act. Asking the right questions and making the tough deci-sions will help insurers avoid repeating the mistakes of the nineties, which the high investment returns of thatdecade succeeded so well in covering up.

44

Change is no longer an option but a must in order to return to adequate solvency and profitability. Change isthe basis for future growth and value creation. For some insurers, it has become a prerequisite for survival.

Many first steps have been taken. Some companies have raised new capital, adjusted policyholders' dividendsand agents' commissions, increased prices, reduced costs, and divested non-core units.

The senior managers of every European insurance company must define their organization's desired futureand decide on the best way to achieve their goals based on available skills and resources. Managers must posi-tion their companies within the new landscape before competitors' actions do it for them. The ongoing con-solidation process will offer many new possibilities to those with proactive strategies.

The following Management Questionnaire intends to guide senior managers in determining the path that theirown organizations should take.

47

OW TO DESIGN CHANGEH

48

MANAGEMENT QUESTIONNAIRE TO DESIGN CHANGE

What are key the characteristics and major trends in each market?What are the expected profit levels for each relevant business?What are the performance benchmarks of local leaders?What are the key requirements for executing winning strategies?What are our core skills in each market?

1.Focus on attractive markets

Do we focus on clear "core" markets/units?Do we have sustainable leadership positions?Do we have measurable competitive advantages?Do we convert advantages into superior profitability?Do we need to strengthen our "core" market positions?

Which markets and businesses are "non core" for us?Which players are better owners for our "non core" operations?Which exit strategy creates the most shareholder value?Which businesses or services should we out/insource?Which partners are best providers for "non core" services?

2.Build local leadership positions

3.Exit marginal activities

What is the return on (required) capital of each business unit?What is the relative performance compared to market peers?What are the main areas of operational strength and weakness?What are the key levers to becoming the best-practice benchmark?What is the additional value potential of being best-in-class?

4.Achieve operational excellence

What is the strategic logic for our group?What are our core competencies at the group and local level?What is our added value across core markets and businesses?What is the value of each unit belonging to our group?What is the best governance model for leveraging our core competencies?

Do we have a common understanding of performance management?Do we have clear financial targets and performance indicators?Do we have adequate planning, budgeting and controlling processes?Do we adequately ensure optimal performance orientation?Do we have effective accountability and incentive systems?

5.Realize group advantages

6.Develop a performance culture

Top Insurance Groups

51

(1) Incl. savings-type premiumsSource: ISIS; Annual reports; BCG Insurance Database

Premium (B )€

WHO'S WHOEurope's Top Groups, 2001

Univé

VHV

DEVK

Gjen

sidige

NOR

Mob

iliar

Sam

po-L

eoni

aFo

lksam

NFU

LVM

MAI

FAl

ecta

Post

e Ita

liane

Reale

Mut

uaBa

nca

Mon

te d

ei Pa

schi

Roya

l Lon

don

Mut

ual

Frien

ds P

rovid

ent

Agis

Irish

Life

& P

ensio

nBU

PAUn

iqaBa

nque

s Pop

ulair

esNo

rdea

BBVA

If...

P &

CW

iener

Stä

dtisc

heLa

Mon

diale

Helve

tia-P

atria

Co-o

pera

tive I

nsur

ance

MAC

IFCa

ttolic

aAz

ur/G

MF

HUK-

Cobu

rgW

& W

San

Paolo

Cred

it Ly

onna

isSi

gnal

Idun

aRa

boba

nkGo

thae

rVK

BSa

ntan

der

Bâloi

seUn

ipol

Socie

té G

ener

aleCr

édit

Mut

uel

Toro

-Cap

italia

MM

A/M

AAF

R+V

Roya

l Ban

k of S

cotla

ndEu

reko

Abbe

y Nat

ional

Map

freLlo

yds T

SBFo

ndiar

ia-SA

ILe

gal &

Gen

eral

BNP

Parib

asCr

édit

Agric

oleSk

andia

Gerli

ngGr

oupa

ma

GAN

HBOS

Swiss

Life

(1)

ERGO

HDI

Stan

dard

Life

CNP

AEGO

NFo

rtis

RSA

Win

terth

urPr

uden

tial

Gene

rali

Zuric

h FS

(1)

Aviva

ING

Axa

Allia

nz(1

)

80

70

60

50

40

30

20

0

10

Exhibit 28

A PPENDICES

Local Insurance Landscapes

■ UK■ Germany■ France■ Italy■ Spain■ The Netherlands■ Switzerland■ Belgium■ Austria

52

AXA

Aviva

Prudential

RSAZFS

Market share non-life (%)

10 20

UK: LOCAL INSURANCE LANDSCAPE

Market share life (%)

30

305 15 25

Standard Life

RBoS

25

20

15

10

5

0

HBOS

BUPA

Lloyds TSBL&G

Exhibit 29

Allianz

Note: UK life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 173.3 / 74.5 and 46% / 59%Source: ABI; Swiss Re sigma; BCG Insurance Database

€

53

Allianz

AXA

ZFS

Market share non-life (%)

10 20

GERMANY: LOCAL INSURANCE LANDSCAPE

Note: German life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 63.1 / 77.2 and 41% / 43%Source: Hoppenstedt; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Generali

Gerling

ERGO

HUK-Coburg

25

20

15

10

5

0

Exhibit 30

Allianz

AXA

Market share non-life (%)

10 20

FRANCE: LOCAL INSURANCE LANDSCAPE

Note: French life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 85.3 / 43.6 and 54% / 57%Source: L'Argus; Swiss Re sigma; BCG Insurance Database

€

Market share ife (%)

30

305 15 25

GroupamaMMA/MAAF

25

20

15

10

5

0

MACIF

CNP

Crédit Agricole

GeneraliCrédit MutuelBNP

Azur/GMF

SG

Exhibit 31

54

Allianz

Market share non-life (%)

10 20

ITALY: LOCAL INSURANCE LANDSCAPE

Note: Italian life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 47.1 / 31.2 and 57% / 64%Source: Giornale delle Assicurazioni; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Generali

ToroCapitalia

San Paolo

25

20

15

10

5

0

Fondiaria/SAI

Unipol

Exhibit 32

Poste Italiane

AEGON

ING

Allianz

Aviva

Fortis

Market share non-life (%)

10 20

NETHERLANDS: LOCAL INSURANCE LANDSCAPE

Note: Dutch life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 24.4 / 17.8 and 67% / 49%Source: Assurantie Magazine; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Eureko

25

20

15

10

5

0

Univé

Rabobank

Exhibit 33

55

AllianzAXA

Aviva

Market share non-life (%)

10 20

SPAIN: LOCAL INSURANCE LANDSCAPE

Note: Spanish life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 22.0 / 19.4 and 43% / 38%Source: INESE; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Generali

MapfreSantander

25

20

15

10

5

0

Caifor

BBVA

Exhibit 34

AllianzBâloise

Swiss Life

ZFS

Market share non-life (%)

10 20

SWITZERLAND: LOCAL INSURANCE LANDSCAPE

Note: Swiss life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 22.3 / 13.4 and 79% / 72%Source: BPV; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Winterthur25

20

15

10

5

0

Helvetia Patria

Mobiliar

Exhibit 35

56

ING

Bâloise

Allianz

AXA

Fortis

Market share non-life (%)

10 20

BELGIUM: LOCAL INSURANCE LANDSCAPE

Note: Belgian life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 13.6 / 9.6 and 74% / 59%Source: CDV/OCA; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Winterthur

25

20

15

10

5

0

DexiaKBC

SMAP/OMOB

Exhibit 36

Allianz

Market share non-life (%)

10 20

AUSTRIA: LOCAL INSURANCE LANDSCAPE

Note: Austrian life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 5.9 / 6.7 and 66% / 72%Source: VVÖ; Swiss Re sigma; BCG Insurance Database

€

Market share life (%)

30

305 15 25

Generali

Wiener Städtische

25

20

15

10

5

0

Uniqa

Sparkassen

Wüstenrot

Exhibit 37

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