5. Case Study Analysis and Critical Discussion
5.3 Financial Analysis and Information Systems of ATE Insurance
ATE Insurance offered coverage on assets, as well as liability insurance for accidents, injuries, and damage to others or their belongings. The organization covered a number of things, including auto insurance, home insurance, marine insurance, and professional liability insurance. The ERGO Group successfully completed the acquisition of ATE Insurance continuing its international growth strategy. This acquisition makes ERGO the largest property-casualty insurer in the Greek market. The purchase price was 90.1 million euros.
ERGO was convinced of the potential of the Greek insurance market, although the economic situation of the country was difficult in recent years. The total penetration of company in Greece was much lower than compared to other EU countries. The Greek insurance market had large profit margins for companies that would choose to pursue an expansionary strategy, especially in the property-casualty segment. ATE Insurance was sold in 2016. With its strong sales network, ATE recorded a premium income of 125 million euros in 2015, thereof 91 million euros in property-casualty insurance. Having received all necessary regulatory approvals, ATE Insurance became a member of the ERGO Group.
The capitalization of the company during 2016 was fully covered the capital solvency requirements and the minimum capital requirements, in accordance with the Solvency II directive, which entered into force in the same year. In addition, the company's capital adequacy ratio was 126.3% for capital requirements solvency, or otherwise had SCR = 68.5 million Euros, and with 265% for the minimum capital requirements. Τhe sale of the company can be interpreted as the inability of ATE Insurance to cope with its obligations, the non-existence of available cash reserves and the non-existence of profits.
The financial statement of company published in 2015, shortly before its acquisition by the ERGO Group, referred to various critical weaknesses of ATE and in particular to the negative development of its operations, highlighting the competition among the insurance companies as the main cause which led to the largest reduction in the number of insurance contracts. The competitors of ATE had increased the supplies of the insurers with the company losing a significant portion of the market from the promotion of competitive insurance packages
through the insurance offices. ATE in its effort to react to the pressure of competition had a small increase in the supplies of insurers in order to maintain its portfolio. This resulted in the stabilization of reduced production but without being able to increase its profitability.
In the following table, we present some basic financial data of ATE Insurance in 2016 in order to have a more detailed presentation of the company as well as its strengths and weaknesses that led it to merge.
Financial Data 2016 2015
Gross Registered Premiums 114 millions of euros 122 millions of euros Net Accrued Premiums 98.8 millions of euros 103.5 millions of euros
Operating Expenses 41.1 millions of euros 28.1 millions of euros
Human Resources 155 171
Underwriting profit (-31.2) millions of euros 21.6 millions of euros Profits before taxes (-2.1) millions of euros 21.7 millions of euros Profits after taxes (-4.3) millions of euros 23.3 millions of euros Capital Reserve (-840) millions of euros 18.9 millions of euros
Financial Data at 2016 - ATE Insurance
Table 5: Financial Data of ATE Insurance at 2016 Source: Data from research
The year 2016 was characterized by a highly competitive environment due to the contraction of the insurance market in Greece, as a result of the economic crisis that the country faced.
ATE Insurance showed a reduction in gross registered premiums from € 122 million in 2015 to 114 million euros (-6.6%).
We can observe from the table above that the net accrued premiums decreased from 103.5 to 98.8 million euros. Also, the operating expenses increased from 28.1 to 41.1 million euros (+
12.7%). The operating expenses include staff fees and expenses such as salaries, the compensations of those who stopped working in the company since the employees were reduced from 171 to 155, the fees of third parties, the benefits to third parties, the amortization of fixed assets, rents, taxes, forecasts and finally other expenses related to the
60 operation and management of the insurance company.
In addition, the underwriting profit of ATE Insurance was equal to minus 31.2 million euros, which means that the company presented a loss and not a profit in the year 2016 in contrast to the previous financial period in which it had managed to have a profit of 21.6 million euros.
As a result, the company chose the solution of merger because it suffered a large loss that it could not manage on its own due to a lack of capital reserves.
The company's technological infrastructure could not be described as one of the most modern in the market. However, during the last years the company had invested heavily in the development of its information systems in an effort to digitalize its operations. ATE Insurance started to consider the information systems as a foundation for conducting business and also survival. Existence can be difficult without extensive use of information technology. In order to become more competitive and efficient, ATE tried to digitalize all core business processes and relationships with customers, suppliers, and employees.
Many times the investment in information systems is not associated with optimized financial performance in the short term. It takes time for a digital transformation or an information system to yield positive results in the balance sheets of a company. ATE Ιnsurance took long to realize the shift in the economy towards digital transactions.
In the decade 2000-2010, the competing companies of ATE had invested significant funds in the development of their information systems. In the same decade, ATE's investment portfolio did not include investments in the technology sector. In the period 2010-2015, a significant effort was made by the company to digitalize and base the sale of its products through information systems. Unfortunately, as mentioned above, it takes a long time for information systems to be able to effectively simulate all the operations of the company.
Before the acquisition of the company, the following problems were observed in the technological infrastructure of the company:
✓ Network Security/Data Security: ATE did not have a complete inventory of all of the IT assets that they had tied into their network. This is a massive problem because
the company could not ensure the security of its network
✓ Data Backup Issues: Delayed recovery process due to backup tapes or disks being stored offsite
✓ Lack of IT strategic plan: The IT strategic plan of ATE insurance had not outlined how the IT strategy relates to the organization's overall business objectives.
✓ Hardware & Software Issues: Many digital resources were no longer readable because of its archaic format.
✓ Equipment: The company had acquired many over-priced softwares and hardware products that could not be incorporated into its network. As a result many of them became useless.
We cannot say that the information systems used by ATE helped the company until its acquisition by ERGO. It is important to note that ERGO withdrew all information systems of ATE, preferring to invest in its own technological infrastructure. ERGO was most interested in the insurance portfolio of ATE Insurance.
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