Eureko's Strategy

We are market leader in the Dutch insurance sector; the Dutch organisation, Achmea, is a household name. Achmea has a broad product offering and a full range of distribution channels to support its market-leading position. Outside the Netherlands, we have a more modest position in a number of international markets. In the past, growth in the Netherlands was often driven by mergers. As a sult, Achmea has a high level of complexity in its product range, processes and systems and a relatively high cost base in some areas. The financial crisis put real pressure on results and on our own capital position; it showed that results were strongly dependent on investments and participations. It also coincided with a general loss of customer confidence in the financial services sector. As an organisation with cooperative roots, we aim to take the lead in restoring that confidence. Our ambition is to be the most trusted insurer. This section explores the strategic shifts that have resulted from this reality.

Eureko was not immune to the turmoil of the financial crisis; it had significant effects on the Group’s capital position and solvency. Rapid and decisive action was taken to restore the business to financial health, including de-risking the investment portfolio and a capital increase from shareholders. However, the crisis coincided with a deep point in public trust in financial services providers. In combination with financial turmoil, this led to a crisis of confidence. As an organisation that started almost two centuries ago as a cooperative insurer and which remains committed to those roots, we believe we have to take the lead in regaining and restoring that trust. We have long pursued a stakeholder model. Now, customers are first among equals. One direct result is that in 2009 we began developing a so-called integrity scan for all products, testing their compliance with both regulations and social expectations and, above all, with the Group’s ambition to become the most trusted insurer. This customer-confidence priority has been an integral component in the 2009 strategic review. Restoring and building trust also requires confidence in financial strength and continuity. We have set financial targets to generate returns on capital that are in line with our risk profile, our cooperative identity and at least a single-A rating for the Group.

Strategic priorities – the Netherlands
The overall strategic objective of maintaining and growing Eureko’s dominant position in the Netherlands is sound. The Netherlands is one of the most mature insurance markets in the world; it ranks in the global top 10 for gross written premiums. This is by far our largest and original domestic market under the Dutch Achmea umbrella. All short- to medium-term indications are that the total Dutch insurance market can achieve only limited growth and even a decline in some business lines. This market reality forms Achmea’s strategic multi-brand, multi-distribution channel approach; the aim is quality rather than price leadership and retention and increase of market leadership in Health and Non-life, and at least a top-three position in Income Protection.

Strategic choices
In the past, Achmea’s growth was driven largely by merger and acquisition. This has given Achmea scale and marketleading positions in many business lines. However, it has also resulted in a significant and complex legacy, specifically in the product range, processes, systems, and a comparatively high cost base in some areas. With the cooperative identity and ambition to be the most trusted insurer as baseline, the 2009 strategic review was based on two points of departure. One is Achmea’s core competences and how these can be deployed to best effect. A second is that in a saturated market, efficiencies can be gained primarily from synergies, specifically in processes, systems and the combination of back offices, thus utilising economies of scale. Achmea aims to offer more transparent products at lower cost, improved service and real focus on innovation while maintaining financial continuity. This has led to strategic choices.

The overview shows in which product lines and distribution channels Achmea is already very strong. By identifying and defining the (innovative) action that is required for each business line, Achmea will be better equipped to pursue growth and continuity.

Non-life, Health and Income Protection, delivered through market-leading banking and direct channels, are already core competences. The strategy is to reinforce the  offering by proactively investing and innovating in these product lines and distribution channels.

Broker distribution will contribute to economies of scale in core propositions, as it will migrate to a marketing and sales organisation. In addition, it gives us access to market segments where brokers are strong. In turn, brokers have access to irst-class, standard products developed by Achmea. This should help attract the brokers that share Achmea’s ambition.

Occupational Health and Health Services must support insurance activities. These services contribute to reducing the claims ratio and increase sales.

In individual Life insurance and Pensions the aim is to develop new propositions that focus on current market developments, such as the shift from defined benefit to defined contribution and longevity. This is a highly complex business. Usually tailor-made, these products, primarily legacy, result in high costs and are not sustainable into the future. For this reason, Achmea will develop a range of standardised, simple and transparent products for this market. Those products that cannot be fitted into standardised processes will be gradually phased out.

Banking products will serve the total proposition and offering, specifically in direct distribution.

In Pension Services, Syntrus Achmea will seek further cooperation with social partners and identify economies of scale. This is driven by and is a strong fit with Achmea’s mutual heritage.

Improved efficiency and performance
Achmea is pursuing a comprehensive strategic change programme to achieve operational synergies and efficiencies aimed at improved performance and, compared to 2008, cost reductions of € 300 million at the end of 2011. The programme is based on the Lean programme that has been adapted for Achmea. This process was accelerated in 2009, not least through the development of common process optimalisation. SENS, a comprehensive set of systems, tools and behaviours, dictates a new way of working within the Dutch operations that enables us to evaluate and improve the way processes work from the client’s perspective. SENS has already been implemented successfully in Achmea’s Health business and has now been rolled out in other businesses. SENS is a long-term endeavour. A number of short-term cost reduction programmes, such as centralised procurement, and cost-awareness programmes, have also been implemented. In combination with SENS, these have already proved successful in reducing costs by € 183 million in 2009. All business entities have been active in improving performance relative to peers. At Group level, we are already seeing results. This is an ongoing process. The years 2010 and 2011 have been designated as ‘transitional years’, during which processes will be further streamlined, positioning Achmea businesses even more firmly as the trusted insurer of choice for customers.

Strategic priorities – international
The key driver behind Eureko’s long-term European strategy remains the recognition that a greater geographic and risk spread is in the interests of all stakeholders, not least because growth in these countries is greater than in the Netherlands. A significant share of value will be generated in European markets that offer opportunities for growth. Forecasts are that, in the longer term, there will be consolidation in the European insurance sector. Eureko’s strategy is to position in the new European constellation and to develop a substantial base over time. The ultimate goal is to be a significant player in a limited number of markets rather than a small player in many markets. This will be in line with our core competence strategy.

Strategic choices
A major development took place in our international presence during 2009. In the autumn of 2009, Eureko and the Polish state reached a settlement on the longrunning PZU dispute. When we first acquired a stake in PZU back in the late 1990s, the underlying strategic aim was to build a second home market. The thinking was that Poland would also act as a jumping off point for other, newly emerging markets in Central and Eastern Europe. Unfortunately, through a dispute with the Polish state, which lasted over a decade, this ambition was foiled. Ultimately, the settlement with the Polish state has enabled us to end the dispute and achieve a friendly exit. However, that exit has consequences for international strategy into the future.

Our international component is comparatively small (7% or € 1.4 billion of total Group gross written premiums). However, the same strategic focus on core competences applied in the Netherlands will be used to further develop international strategy. We have significant core competences, such as our knowledge of Non-life, Health, and banking and direct-channel distribution. All our existing international markets have been reviewed thoroughly and a choice has been made to develop those operations where value can be created and added through using expertise in core competences. Furthermore, there are opportunities for markets to reinforce each other, for example through knowledge exchange, economies of scale and risk diversification.

An international operating company must generate a return in line with its risk profile and activities must have sufficient scale or have the potential to build that scale. For our current nternational portfolio, this means:

• Strategic focus on Turkey, Russia and Greece. Eureko’s operating company in Turkey, Eureko Sigorta, meets all criteria and activities will be further developed there. Moreover, we have an option to acquire 35% of Garanti Emeklilik, partner Garanti Bank’s life and pension business. We currently hold a 15% stake. The option can be exercised from the end of June 2010 through the end of June 2012. In turn, Garanti Bank has a put option on 20% of the shares in Eureko Sigorta that can be exercised from the end of June 2010. In Greece, Interamerican is a well-known label and ranks number two in the market with strong positions in Health, Non-life and Life. This provides potential for attractive results in the future. Our Oranta operation in Russia does not yet meet all the criteria. However, it is considered an operation that should be managed for future growth, as it is active in a market where we want to be. Expectations are that developments in the market, such as changing demographics and a growing economy will contribute to meaningful results for us in the future.
   
• In the other markets the objective is to maximise financial value creation. Over the coming years, we will continue to support operating companies in that objective. The aim is for them to further develop into core operations. However, if operations do not achieve both added value through core competences and essential economies of scale, we may consider divestment. Cyprus is one example that does not meet the criteria. In February 2010, Eureko announced that Interlife will be divested through a management buyout.