Greece Insurance Report Q2 2009

Greek GDP growth decelerated for the second consecutive quarter during the October-December period showing that, despite having fared relatively well up until now, the economy is not immune to the ongoing credit crisis. Conditions are severe enough that we are projecting economic growth to contract in 2009, making it increasingly difficult for the government to solve its twin deficit problem.

One of the biggest questions raised in the past year has been the extent to which Greece would be affected by the financial crisis, and with each passing month we seem to be getting a clearer answer. While the Greek banking system has been affected less than others in the region, a crisis of confidence has put the brakes on credit expansion, which decelerated sharply at the end of 2008. The credit supply is frozen, credit standards are tighter than ever before, and demand for credit has weakened as consumers and businesses shrug off the benefits of aggressive European Central Bank (ECB) rate cuts, instead shunning further debt obligations.

A growing budget deficit and burdensome public debt pile are severe threats to the Greek economy. They are also a major constraint on the government as it attempts to tackle the coming recession. We expect the budget deficit to remain above the 3.0% Maastricht Treaty threshold until 2013, with further debt accumulation weighing on the sovereign's creditworthiness.

Our forecasts for both growth and inflation in Greece remain above the eurozone average. We have revised our average inflation target for 2009 down to 1.0%, rising to 2.3% in 2010. While we acknowledge the downside risk to these projections, they highlight our concerns about a lack of competitiveness relative to regional countries sharing the same currency. For a while now, we have questioned whether the ECB's one-size-fits-all policy is appropriate for the Greek economy, and these doubts will remain during the crisis and beyond. Indeed, we remain watchful of the potential for resurgent inflation as the economy recovers in the medium term. This risk would become more severe should political troubles lead to the election of a new government with a populist mandate. Given the structural flaws in the local economy, a large fiscal expansion, combined with the ECB's monetary loosening, could have severe consequences for the price level going forward. Furthermore, a strong rebound in commodity prices would exacerbate the problem.

In Central and Eastern Europe (CEE), we profile 22 multi-national insurance companies. In alphabetical order, these are AEGON, AIG, Allianz, Aviva, AXA, Cardif, ERGO, Eureko, Fortis, Generali, GRAWE, Groupama, HDI-Gerling, HSBC Insurance, ING, MetLife, Prudential Financial, QBE, RSA, UNIQA, Vienna Insurance Group and Zurich Financial Services. We also discuss the regional presence of Belgium's KBC and Austria's Erste Bank through a number of insurance subsidiaries and explain the importance, for each of the various countries, of purely domestic firms.

Over the course of 2008, estimated total premiums in Greece rose by 8% to EUR4,920mn. Non-life premiums rose by 8% to EUR2,294mn, while life premiums rose by 8% to EUR2,626mn.

Between now and the end of the forecast period, we expect that annual non-life premiums will rise by EUR780mn, while annual life premiums should rise by EUR1,784mn.

Growth in non-life premiums should be driven by the general growth in nominal GDP: we are assuming that non-life penetration remains constant at the current level of around 1.0%.