An agreement entered into by two of
Austria’s largest financial services groups, composite insurer
Vienna Insurance Group (VIG) and Erste Bank, is set to radically
alter the market share profile of the fast-growing Central and
Eastern Europe (CEE) insurance industry. Under the agreement VIG
will acquire control of Erste Bank’s life and general insurance
units in the Czech Republic, Slovakia, Hungary, Croatia, Romania
and Austria, a move that will see it overtake Allianz as the
largest foreign insurer in CEE and entrench its leading position in

Elaborating on the €1.4 billion ($2.2 billion) cash deal, VIG’s
CEO Günter Geyer termed it “a unique opportunity” to further
implement VIG’s growth strategy in CEE. “This transaction makes us
the number one insurance company among the international insurers
operating in CEE and, importantly, we also become a leading player
in the life insurance segment, which we see as our future growth
engine in Austria and CEE,” said Geyer.

Overall, the deal adds €1.29 billion in gross written premium
income of which the bulk – €1.12 billion – is derived from life
insurance. Life insurance premium income will increase from 42.5
percent of VIG’s total premium income in 2007 to just below 50

Prior to the deal with Erste Bank, VIG ranked second overall in the
combined CEE life and general insurance market, behind Allianz.
Following the deal, which is expected to close in the third quarter
of 2008, VIG will shift into the leading position in the CEE
insurance market, holding, according to VIG, a market share of 14
percent based on total premium income of €3.64 billion in the third
quarter of 2007. This puts VIG ahead of Allianz, which held a 12.8
percent market share, and Italian insurer Generali, which held an
11.3 percent market share.

In the CEE life insurance market, where VIG has units in Bulgaria,
Croatia, Czech Republic, Hungary, Poland, Romania, Serbia and
Slovakia, its market share gain is more significant. Based on third
quarter 2007 premium income, VIG’s market share improves from 7.4
percent to 10 percent, lifting it from sixth position into second
position behind Netherlands bancassurer ING, which held a 10.8
percent market share.

In Austria the addition of the €791.7 million in life insurance
premium income Erste Bank generated in 2007 will take VIG’s total
in that country to €2.7 billion. Based on 2007 figures, this will
lift VIG’s market share from 22.9 percent to around 33 percent,
well ahead of its closest rival UNIQA which has a market share of
around 22 percent.

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The deal with Erste Bank involves the acquisition of two of its
units. The largest is s Versicherung Group, which in 2007 generated
total premium income of €1.11 billion, all but €18.8 million of
which was derived from life insurance. VIG already has small
minority stakes in s Versicherung and post-transaction will own 95
percent, with the remaining 5 percent of the life insurance
operations owned by Erste Bank and its subsidiaries.

The second unit in the deal, BCR Asigurari Group, is a Romanian
composite insurer that in 2007 generated €155.1 million in non-life
and €24.8 million and life insurance premium income respectively.
Post-transaction VIG will own 88.5 percent of BCR Asigurari with
the remainder owned by existing minority shareholders.

Another significant aspect of the deal is a 15-year preferred
mutual distribution partnership between VIG and Erste Bank, in all
countries in which the groups operate. The agreement will be
renewed for a further 10 years unless terminated by one of the
parties 12 months prior to the initial expiry date.

This agreement provides VIG with access to Erste Bank’s more than
2,900 branches and 16.3 million customers, and gives it a strong
position in bancassurance that VIG believes “is poised to become
the most important distribution channel for life insurance
policies”. VIG has 10 million customers and more than 2,000
branches in markets in which it and Erste Bank are to

Of Erste Bank’s total customer base, 2.8 million are in Austria
where Erste Bank has 993 branches and holds a market share of 19.3
percent based on retail deposits. In CEE Erste Bank has a total of
13.5 million customers and 1,915 branches, including 71 in Ukraine
where VIG has three non-life and one life insurance units. Erste
Bank’s major markets in CEE are the Czech Republic (5.3 million
customers; 31.9 percent market share), Romania (4 million; 31.3
percent), Slovakia (2.5 million; 27.7 percent), Hungary (800,000;
6.1 percent) and Croatia (700,000; 12 percent).

CEE life insurance market

CEE expected to play catch-up

Underlying its CEE expansion strategy is VIG’s firm belief that
life insurance penetration in the region will “catch up rapidly”
with its counterparts in the 15 major European Union countries
(EU-15). In the EU-15 life insurance penetration averaged 6.2
percent of GDP in 2006, according to reinsurer Swiss Re. This
compared with penetration levels ranging from a low of 0.34 percent
in Romania to highs of just over 7 percent in Hungary and

VIG also views the Austrian market as having strong growth
potential. One of the EU-15 laggards, Austria’s life insurance
penetration in 2006 was only 2.8 percent. Underpinning Austria’s
life insurance market’s potential, believes VIG, are ongoing
reforms of the social security system that will generate strong
demand for life, savings and pension products. Notably, VIG’s life
insurance premium income in Austria recorded a CAGR of 13.6 percent
between 2003 and 2007, well above the market average CAGR of 6

Aggressive acquisition strategy

The deal with Erste Bank is the largest of 19 acquisitions in 14
countries undertaken by VIG since 2004. In total VIG is now present
in 23 countries, with all but Germany, Italy and Austria being
developing markets. Among the most recent developing markets
entered by VIG are Albania, Turkey and the Baltic states of Latvia,
Estonia and Lithuania.

In CEE, VIG’s largest market is the Czech Republic where in 2007 it
garnered total gross premium income of €1.13 billion, up 7.9
percent compared with 2007. Life insurance premium income, which
rose 12.6 percent, contributed €292.3 million. In its second
largest CEE market, Poland, VIG recorded a 62.1 percent increase in
gross premium income to €543.1 million, of which life insurance
contributed €218.8 million, up 83.3 percent.

In Slovakia, VIG’s third largest CEE market, it recorded a 40
percent increase in life premium income to €296.7 million and a
20.4 percent increase in non-life premium income to €197.7 million.
Slovakia was followed by Romania where VIG recorded a 77.9 percent
increase in premium income in 2007 to €413.5 million. However, in
Romania life insurance premium income played a minor role,
increasing 12.5 percent to €13.6 million.

Off its significantly expanded base VIG forecasts that its gross
premium income will reach €12 billion in 2011 and that profit
before tax will achieve a CAGR of 25 percent between 2008 and 2011,
reaching €1.05 billion in 2011, 140 percent higher than the €437
million reported in 2007. In addition, VIG anticipates that return
on equity before tax will rise from 18 percent in 2007 to 20
percent in 2011.

Ambitious targets, but given VIG’s past record, well within its
reach. Between 2004 and 2007 VIG grew its profit before tax at an
impressive CAGR of 36.2 percent and gross written premium income at
a CAGR of 17.5 percent.

Notably, rating agency Standard & Poor’s (S&P) has given
the deal with Erste Bank its stamp of approval by confirming VIG’s
A+ rating and improving its outlook from stable to positive.
S&P expressed an expectation that because of VIG’s focus on
strong growth markets in CEE it will surpass its competitors with
regards to profitability growth and premium volume.

In addition, S&P also expressed the view that VIG’s forecast
that its units located outside of its home market will contribute
about half of total group premium income by 2011 is

Vienna insurance group