Internet of Things – Volume 4 Smart technology and the future of …pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/9/24/8d4f3a4c-11... · 2014-09-25 · September 24, 2014 Internet of

September 24, 2014

Internet of Things – Volume 4

Smart technology and the

future of insurance

Equity Research

As cars and homes get smarter, so too will insurance companies

The Internet of Things, insurance style

In the fourth report on the “Internet of Things (IoT),” we examine the

impact of IoT on the property & casualty insurance market. Although the

relevance of “connectivity” for consumers in insurance today is within auto

devices that capture driving data, the pervasiveness of technology in

insurance is only just starting. We expect insurers to follow the recent flow

of technology into cars and homes and look to leverage these new

technologies to collect better data and improve their ability to evaluate and

price risk. The opportunity for insurers is to more accurately determine the

best (and worst) risks and price accordingly, which should lead to better

and less volatile margins. For those that are slow to adapt or choose not to,

the risks range from adverse selection to disintermediation, implying a

future with lower margins, lower premiums, or both.

The new school of auto insurance: Telematics

In the United States, the leader in UBI (usage-based insurance) is

Progressive with nearly a half-decade and a few billion mile head start. In

Europe, Unipol is the leader with half of European telematic policies and

over 15% penetration within its own book.

The home is the next frontier

When it comes to innovation, it is no surprise that until now property

insurers have focused on using “big data” to mitigate risk associated with

large catastrophic events. We believe the next opportunity is for insurers to

better price individual risks based on more granular sensor data.

For insurers, sharing is not always a good thing

Looking beyond pure IoT, the sharing economy is another example of

technology encroaching on the business of insurance. Companies like Uber

and AirBnB have product offerings that present risks many insurers had

not previously contemplated but are likely to see more attention now.

Key beneficiaries and stock ideas

We believe the larger, primary insurers that invest in technology to better

evaluate risk will be best positioned to benefit from evolution of these

trends. Across our global insurance coverage, we highlight CL-Buy ALL,

Buy-rated PGR, and Buy-rated Unipol.

Michael Nannizzi (917) 343-2726 [email protected] Goldman, Sachs & Co.

William Elderkin +44(20)7552-9356 [email protected] Goldman Sachs International

Ravi Tanna +44(20)7774-2948 [email protected] Goldman Sachs International

Michael Kovac (212) 902-2303 [email protected] Goldman, Sachs & Co.

Ketan Bordia, CFA (212) 934-9872 [email protected] Goldman Sachs India SPL

Clare Tokheim (801) 741-5694 [email protected] Goldman, Sachs & Co.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

September 24, 2014 Global: Insurance

Goldman Sachs Global Investment Research 2

Table of Contents

PM Summary: Widespread automation will change risk perception 3

Timeline: From telematics today to driverless cars tomorrow 4

Innovation in auto insurance is an opportunity for early adopters 5

A quick historical capsule of the development of UBI 6

Pure underwriting vs. value-added services 7

Smart phones vs. plug-in devices 8

Potential barriers to adoption 11

The Connected Home is an untapped loss-prevention opportunity 13

Sensor data could change the way homeowners’ policies are written 15

Several companies are entering the connected home space 16

Smart home technology has not been a focus for insurers…yet 17

“Sharing” economy is not precisely IoT but is relevant, disruptive 18

The risk of the unknown: the growth of part-time drivers 18

Seller beware: AirBnB creates potentially unanticipated risks 19

The driverless car remains a concept, not a product (yet) 21

Global stocks with top exposure to insurance telematics 23

Disclosure Appendix 25

The prices in the body of this report are based on the market close of September 22, 2014.



PM Summary: Widespread automation will change risk perception

As we discussed in Version 3 of the IoT series in July (Internet of Things - Vol. 3: The next

industrial revolution: Moving from B-R-I-C-K-S to B-I-T-S - Understanding the Industrial

Internet of Things, with a deep dive into home automation, July 16, 2014), the new frontier

in the IoT landscape is mostly personal – at home and in the car. As technology continues

to encroach further onto our daily lives, there will be greater opportunity to generate and

analyze data around individual behavior. This trend will have a meaningful impact on the

insurance industry as we are likely to see an expanded ability to use data to evaluate risk in

ways that were previously unavailable.

1. Telematics: Progressive is the first mover in UBI (usage-based insurance) in which it

uses temporarily installed device to determine optimal premiums based on actual

driving patterns. Concerns about privacy continue to hamper adoption but the appeal

of potential discounts for good drivers may overcome these concerns.

2. “Sensor-matic”: As home security and automation continue to penetrate the

residential market, more data are being accumulated that would be of interest to

insurance companies. Thus far, we have not identified any significant involvement by

insurance companies in capturing this data and attempting to adopt a UBI-type model

for pricing homeowners’ insurance, but we expect the opportunity is not far away.

Whether by choice or by force, insurers are going to move from the old model of pricing

risk based on either “top-down” risk (e.g., proximity to water) or backward-looking

information (i.e., claims experience, tickets, or accidents) to a predictive model where

insurance premiums are based on individual behaviors. On the one hand this presents risk

for insurance companies as uncertainty around losses will decline and likely pressure

underwriting margins. However, the opportunity for market share shifts based on more

proactive (and likely better) pricing and increased penetration of the “best” risks could

provide an offset, resulting in better and more stable returns. In addition, for insurers that

play a more active role in bringing technology to the consumer, there is an opportunity for

such insurers to assume a more integrated role in the lives of their insured, resulting in

greater differentiation and thus an opportunity to increase policyholder lifetime value.

More closely at hand and more a risk than an opportunity in the near term is the “sharing

economy” and the ability for individuals to derive commercial value from their homes or

cars for ultra-short periods of time; a trend not historically contemplated by insurance

policies. For services like Uber-X and Lyft that have had considerable impact on the for-hire

driver industry, insurance companies that provide personal coverage to part-time drivers

could be taking unforeseen risks. On the homeowners’ side, services like AirBnB that allow

homeowners to rent their homes out for periods as short as a night could expose not only

the insurance company but the homeowner to additional risk as well.

In our view, companies that do not accept the “new world order” of technology and

information within both their underwriting process and product development are placing

the future of their franchises in jeopardy. But even insurance companies that espouse the

new paradigm will have their hands full as more granular data may make those outside of

insurance willing to “take on” risk where loss exposure can be more easily defined. The

opportunity will be for insurance companies to offset potential longer-term margin

pressure with market share gains in the most profitable pockets of business, and doing so

in a way that, as much as possible, keeps the business of insurance within the domain of

the insurers.



Timeline: From telematics today to driverless cars tomorrow

Although the future will likely bring significant change to the way insurance is bought, sold,

and priced, not all the change will come immediately. The ultimate impact of these

changes on the insurance industry presents both risks and opportunities.

o Telematics or UBI (usage-based insurance) are offered in the auto

insurance market today. We expect that over the next 5-10 years insurance

companies will look to leverage more real-time information to calibrate

their pricing, and the use of telematics is the most promising tool to get

there. We expect UBI will eventually become the auto insurance standard.

o Sharing economy: Services like AirBnB and Uber-X are changing the

dynamic of insuring personal items that owners can now use to extract

commercial value. In the near term, the impact on the insurance industry

is more of a risk as insurers may be assuming unknown risks.

o Connected home: We believe that sensor data can provide a wealth of

information for insurers to better price risk. Home technology remains

disparate and there is no single standard, which makes harvesting the

data for insurance purposes complicated.

o Connected auto: Telematics devices are likely to give way to more

integrated auto technology either through mobile devices or via “black

boxes” that become part of the cars themselves. The opportunity here is

to provide value-added services in addition to a narrow insurance focus.

o Driverless cars: Much like the insurers, auto manufacturers will accept

change either by choice or by force. Tesla has become a disruptive force

in the auto industry, while Google and other technology companies are

actively engaged in the development of driverless cars. But even as

technology continues to advance we expect that widespread adoption of

driverless cars is beyond the scope of this report. For insurance

companies, if accidents decline in frequency or become more predictable,

the risk of driving and thus the need for auto insurance could decline.

Exhibit 1: The IoT exposes the insurance industry to both risks and opportunities

Source: Goldman Sachs Global Investment Research

. Timeline

Potential Opportunity

Potential Threat Comments

Telematics Near term X X

Early adopters could see market share gains of 'best' risks which could be offset somewhat if they target their retained books and dilute existing margins. For late adopters, the biggest risk is adverse selection.

Sharing economy Near term X

In the near term we expect insurers to look to reduce exposure to risks that arise from commercial use of personal property. However, without adequate monitoring, this may be difficult to police.

Connected home Medium term X

Insurers can look to harvest the data collected by home technology devices and use it to better price risk.

Connected auto Medium term X

An opportunity for insurers is to become more proactive in auto technology and use real-time data collection to help prevent loss events

Driverless car Long term X

A world with limited auto accidents could potentially damage the auto insurance market, but mass market roll out is likely more than a decade away.

Near term

Medium term

Long term



Innovation in auto insurance is an opportunity for early adopters

Auto insurance is the single-largest category of insurance premiums in the United States

and as a product line has been among the best performing and least volatile lines of

business within insurance (we note Exhibit 3 excludes investment income). As a result,

insurers spend substantially on advertising in order to attract customers and work hard to

keep them from switching once they move.

Exhibit 2: Auto is 35% of total insurance premiums…

Exhibit 3: …with relatively stable underwriting returns

Source: Goldman Sachs Global Investment Research, SNL


When we think about innovation within the domestic auto insurance industry, we think of

Progressive and its plug-in device, Snapshot. Progressive released Snapshot in 2011 with

the purpose of monitoring driving for a finite period of time and based on the data offers

good drivers a discount of up to 30%. Snapshot falls into the category of usage-based

insurance (UBI, also referred to as telematics), an innovation that could change the way

insurers price risk. Today most insurers estimate risk using demographic and claim data,

but innovations like Snapshot could help insurers price risk at a more granular level by

using actual data instead of estimating risk based on demographic or historical information.

If Progressive is successful, it will attract better drivers away from peers that are unable to

price as efficiently, while worse drivers would be more likely to move to less sophisticated

competitors that are more likely to underprice elevated risk.

Through Snapshot, Progressive has built a database of billions of miles driven and some

industry insiders estimate that Snapshot has captured three-quarters of total industrywide

mileage data in existence today.

However, there are other considerations which make Connected Car a much broader

concept than Snapshot, and those considerations could change the way insurance

companies look to develop products that attempt to close in on Snapshot’s early and

substantial lead.

Auto$182bn

Homeowners$86bn

Other$278bn

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Pure underwriting vs. value-added services

Snapshot gives customers no visibility into their driving score, but offers potentially large

discounts for good driving. Because Snapshot is a “temporary” plug-in device, driving data

are analyzed during a six-month monitoring period only, and customers then unplug the

device and send it back. In addition, Snapshot captures only miles driven and driving times

throughout the day, interpolating all other behaviors (speed, braking behavior, acceleration,

location, etc.).

Allstate released its version of telematics, Drivewise, in 2012. Drivewise is a much more

early-stage offering than Snapshot, but has a wider scope of data collection and has both a

plug-in and smartphone version. See Exhibit 5.

Exhibit 5: A comparison of two current policyholder offerings

Source: Goldman Sachs Global Investment Research, company data

There is a growing industry debate on data collection, and along with that debate are the

ever-present concerns about privacy. Snapshot is uniquely simple and straightforward:

plug it in, send it back, and (maybe) get a discount. But despite this, concerns about privacy

and monitoring (i.e., “Big Brother”) have kept adoption from growing more rapidly. For

Allstate and others that might pursue this route, the leave-in format could create

heightened concerns around privacy, but also could provide the opportunity for other value

added services. It is unclear at this point, in our view, that the additional data collected by

leave-in devices provide further value from an insurance perspective on top of miles driven.

However there are important potential benefits:

1) The ability to evaluate risk and communicate in real time: Assume a policyholder is

constantly commuting through a dangerous intersection. As technology continues to

advance we can foresee a time when devices can alert drivers to risks and give them

other route options, or at a minimum inform them of the elevated risk. If insurance

companies can help policyholders avoid accidents, both parties win, and if

policyholders are rewarded with lower premiums as a result of lower-risk driving and

fewer accidents, we would expect them to be less likely to change insurance providers.

2) Identifying driver behavior proactively. Is a driver intoxicated, falling asleep, or

potentially experiencing a serious medical condition? A monitored car could convey

this information and both inform the insurance company and reach out proactively. Is

it possible that a driver could also be warned of unsafe driving etiquette in real time?

With monitored cars, much like we will suggest later in this report with connected

homes, insurers could determine which behaviors are most associated with claims and

deploy that information proactively.

3) Service and maintenance: Sensors on a vehicle can alert a driver when a car needs

routine service or if a part or mechanism is close to failure. By proactively monitoring a

vehicle’s diagnostics, problems can be fixed or investigated before they become more

costly to repair, or more importantly, could help to avoid a potential accident due to

part failure during operation. For example, a brake sensor can tell the driver or an

insurance company that brake pads are wearing thin and avoid an incident or claim

that results from worn-out brake pads.

Strategy Progressive's Snapshot Allstate's Drivewise

Data Collected Mileage, driving time of dayMileage, driving time of day, braking activity, speeds at or above 80 mph

Hardware OBD device OBD device, mobile application

Execution Temporary (6 months tracking) Permanent tracking



4) Social media: In addition to using discounts, insurers can appeal to consumers by

making driving a way to stay connected with family and friends. For example, insurers

could sponsor a “gamification” environment where friends and family with the same

insurance company can compete based on their driving behavior and share the results

on social media sites. Not only could this encourage more use of telematics devices,

but it could also boost retention if consumers find “fun” value in these games.

In this sense, the concept of the Connected Car is more than just about underwriting, it is

about collecting data to help mitigate future losses while also providing the opportunity to

deliver value to consumers at a time when that information is useful to them.

Smart phones vs. plug-in devices

There continues to be debate around which is the best way to collect the data, via mobile

phones or devices that plug into the OBD II port. According to Statista, there were 144.5mn

smartphone users in the United States in 2013 and that number is expected to reach 220mn

in 2018, making it increasingly more practical and cost efficient for companies to collect

driving behavior data via a smart phone. With the OBD devices, the additional step of

installing the device could deter some users. Advocates of OBD devices assert that the data

collection is more accurate and reliable for a variety of reasons including the fact that a

mobile phone may not know the difference between travel on a bike, car, bus, or train.

Another possibility is that car manufacturers will embed their own technology that will be

superior to either smartphones or OBD interfaces, as neither of these was designed for this

type of data collection. Although the idea is attractive, the potential for such an innovation

from car manufacturers is likely not imminent as they too will have both practical and

competitive considerations that could delay implementation. See Exhibits 6-11.

Exhibit 6: Smartphones vs. OBD II port devices: Cost and data quality are relevant factors


Comparison Smartphone Application OBD Device

Ease of use:Download an app to a mobile phone and start tracking

Install device into OBD port in car and start tracking

Regulatory considerations:May require additional or different regulatory filings

May require additional or different regulatory filings

Practical issues:Battery life, sensitivity, GPS errors, miscalibration, and phone turnover

Installation process, issues with car compatibility

Hardware costs:

Most consumers have a smartphone so margin cost is insignificant; also can leverage wireless/connectivity of phone

Annual cost of device, connectivity, and data transmission estimated in the $200-$300 range

Reliability:Identity of vehicle and driver must be self-reported because device is not permanent

Identity of vehicle is given, identity of driver is assumed



Exhibit 7: A closer look at existing telematics offerings in the United States

Source: Goldman Sachs Global Investment Research, Mintel Comperemedia

Exhibit 8: A closer look at existing telematics offerings in Europe


Program Device Description Behaviors tracked Notes

Allstate Drivewise Small box – attaches to steering columnMileage, driving time of day, braking activity, speeds at or above 80 mph

Premium doesn’t increase if driving behavior is unfavorable. Mileage is the most important factor in Performance Rating

American Family Teen Safe Driver/mySafety Valet

In car camera for Teen Safe Driver, device that plugs into diagnostics port for mySafetyValet Acceleration, speed, braking and cornering behavior

Premium doesn’t increase if driving behavior is unfavorable.

The Hartford Small box plugs into diagnostics port Speed, location, time of day.Premium doesn’t increase if driving behavior is unfavorable.

MetroMile Small box plugs into diagnostics port Mileage, optional maps/location featureOnly available in California, Illinois, Oregon, and Washington

National General Insurance Low-Mileage Discount Requires existing OnStar system

Progressive Snapshot Small box plugs into diagnostics port Mileage, driving time of dayPremium doesn’t increase if driving behavior is unfavorable.

Safeco Rewind Small box plugs into diagnostics portMileage, speed, acceleration, time of day, date, VIN, location. Can lose low mileage discount if drive too much

State Farm Drive Safe & Save Requires existing OnStar or SYNC system Mileage and speedData won’t be used to raise rates unless driver speeds or has at-fault accident during evaluation period

Travelers Insurance Intellidrive Small box plugs into diagnostics portMileage, location, time of day, speed, braking and acceleration behavior Available in 8 states

Esurance Drivesense Device plugs into OBD port Mileage, braking behavior

Program Device Description Behaviours tracked Notes

Direct Line DrivePlus Black BoxSmall box plugs into the diagnostics port

Initial discount of 15-25%. High driving score will result in a discount on renewal

Direct Line DrivePlus App Smartphone app 200 miles trial. May result in a discounted premium

Admiral Group LittleBoxSmall black box fitted under the dashboard

Includes cover up to 15,000 miles per year. Initial discount only

Admiral Group AppyDriver App Smartphone app

250 miles trial. Offers up to a 20% discount, given a high driving score. £5 app download fee. Actual cost per sale is £235

RSA More Than Smart WheelsSmall black box plugs under the dashboard Measures the smoothness, speed and usage

Rewards for good driving are given via a Smart Wheels pre-paid Visa card, as opposed to premium discounts

Aviva Drive Smartphone app Acceleration, braking and cornering behaviour200 miles trial. Up to 20% discounts are applicable on standard policies

Axa Drivesafe Smartphone app Braking, acceleration, cornering and speeding

A significant up-front discount, with a further ‘cash-back’ discount for good driving. It also offers an ‘Autometrica’ pay-as-you-drive system in Italy

Unipol Unibox Small black boxLocation, driving behaviour and the background to any accidents

A 20% discount is offered to new customers with a further 3-30% renewal discount depending on mileage. Large focus on reducing the fire & theft aspect of policies

Generali Genertel's Quality Driver Small black boxMonitors mileage, driving style, adherence to speed limits and protection satellite features

Premiums will be discounted given favourable behaviour

Allianz SestoSenso Small black box

Mapfre YCAR Small black box Mileage and driving stylePremium discounts on sign-up and regarding mileage and driving behaviour

Catlin (InsuretheBox) Clear BoxSmall black box fitted behind the dashboard

Time of travel, speed, braking, distance of individual journeys, mileage

Rewards in the form of bonus miles in excess of the basic quota, up to 1,200 miles per year. Reduced premiums on renewal. Also incorporates a theft tracking and accident device

Talanx HDI-Gerling Maintenance planning, usage statistics and a theft warning system

UK-only telematics product for motor fleets of at least 250 vehicles over a three year programme

Esure Model Driver Box Small black boxSpeed, braking, acceleration, night-time driving, total mileage and the type of journeys made

Offered to slightly higher risk customers who can see their premiums rise or fall

The AA Drivesafe Small black box Time of day, speed, cornering, braking and acceleration behaviour

Premiums will increase or decrease based on driver performance after the 3 month stage

Zurich Fleet Intelligence Professionally installed hardware

Driving behaviour and vehicle performance data such as harsh braking, acceleration, cornering, speeding and lane changing

A logistical management solution on a case to case basis as opposed to telematics insurance cover. Aims to improve operational performance and reduce fuel usage.

When the car is used, how far it travels and its location, speed, acceleration and braking

Braking, accelerating, cornering, location, distance and route travelled



Exhibit 9: More than half of survey respondents would

consider allowing their driving behavior to be tracked

Exhibit 10: Consumers’ interest in UBI devices in their car

has grown at lower required discount amounts

Source: Goldman Sachs Global Investment Research, Deloitte

Source: Goldman Sachs Global Investment Research, LexisNexis

Exhibit 11: PGR has shown that auto telematics

programs can help boost retention for insurers

Exhibit 12: PGR estimates that 25% of US premiums will

be generated via telematics by 2020

Source: Goldman Sachs Global Investment Research, Progressive

Source: Goldman Sachs Global Investment Research, Towers Watson

Exhibit 13: Italian insurer, Cattolica, shows evidence that

telematics can benefit loss ratios, but overall profitability

remains constrained due to cost of technology Technical profitability on motor business

Exhibit 14: Italy and the UK are a couple of the markets

outside the US with significant scope for growth in

telematics uptake Telematics policies (mn)

Source: Cattolica Group

Source: Zurich Insurance Group

26%

27%

47%

Allow tracking without a minimum discount

Allow tracking given a minimum discount

No interest under any circumstance

27%

52%

23%

50%

62%

30%

54%

63%

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10%

20%

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60%

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5% Discount 10% Discount 15% Discount

2010 2013 2014

Interest in UBI is rising at lower discount levels

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Telematics Non-telematics motor

Loss Ratio COR

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Potential barriers to adoption

1. Privacy concerns: One main area of pushback from consumers is a discomfort of

being actively monitored. Ironically, Progressive has noted this as an area of pushback

despite the fact that their device is only installed temporarily and the fact it only

collects mileage data (not location). These concerns have receded a bit recently, but

could surface again as the next generation of UBI will likely include geo-location and

could allow for monitoring of other activities (like browsing history and texting activity

on smart phones, for example). European drivers also cite discomfort at having their

driving behavior monitored and worries relating to data ownership as some of their

key concerns relating to telematics insurance (Exhibit 16).

2. Government regulation: Each state sets its own laws and rules for UBI devices and

regulators remain focused on maintaining consumer privacy and determining who

owns the data. Allen Greenberg, senior policy analyst for the Federal Highway

Administration within the US Department of Transportation, suggests that UBI

programs can encourage safer driving only if drivers fully understand how their driving

behavior affects their rates. This may be mitigated somewhat by the fact that currently

US insurance companies can use UBI data only to discount policyholders and not

surcharge them. By contrast, in Europe, customers can receive either discounts or may

alternatively be charged, depending on the standard of their driving. Regulation on

these issues is still, however, in its nascent stages, with no harmonized set of laws

across Europe yet to be agreed upon.

3. Data collection/analysis of raw data: With the creation of programs and devices to

collect substantial amounts of data, insurance companies will have to demonstrate the

ability to leverage the data within their businesses. Although this may seem like an

obvious point, the use of UBI data for underwriting represents a departure from the

way the industry has priced risk historically. Therefore, insurers have to make sure

they have the infrastructure and expertise internally to leverage the new data they

collect.

Exhibit 15: Startup companies proliferate in the connected car space


Progressive announced earlier this month that they would be teaming up with Zubie, a leading

startup in the connected car space. Zubie’s plug-in device collects customer’s driving data and with

the PGR partnership, their customers will potentially quality for safe-driver discount from

Progressive. Another company, Car Connection, provides quotes from up to three insurance

carriers who receive driving data. Both Zubie and Car Connection provide an OBD II device for a

charge ($100-$140 before discounts) and are primarily focused on providing drivers with real time

data and value added services based on their driving patterns, with insurance as an ancillary

benefit.

A few other startups targeting the connected car are Automatic, Carvoyant, CarMD, Torque, and

Car Doctor. These companies each use a combination of OBD II and smartphone technology in

order to provide real-time vehicle information to drivers.



Exhibit 16: US and European consumers are most concerned about potential misuse of their personal driving data What concerns drivers most about telematics insurance? (%)

Source: Towers Watson

0%

10%

20%

30%

40%

50%

60%

Dislike beingmonitored

Premium mayincrease

Insurer may sharedata

Insurer may use datato invalidate claim

Premiums mayfluctuate

Device may damagecar

Indifferent to potentialsavings

Dislike othersknowing driving

behaviour

France Germany Italy Netherlands Spain UK US



The Connected Home is an untapped loss-prevention opportunity

Homeowners’ insurance is a substantial business in the United States. Because of volatility

driven by natural disasters, homeowners’ insurance has a much less impressive track

record of profitability than auto insurance.

Exhibit 17: Homeowners is 16% of total P&C premiums…

Exhibit 18: …but profitability has been extremely volatile



Today insurance companies are leveraging the trend towards connected homes primarily

by providing a discount for security coverage. However, in our view, the more interesting

opportunity for insurance companies from connected homes comes in the form of sensor

data.

Although discounts and partnerships provide benefits to insurance companies from both a

loss prevention and risk selection perspective, neither provides access to sensor data. We

believe insurance companies could harvest sensor data to better predict individual losses

or, at a minimum, assess more accurately the potential for loss based on actual behavior.

Homeowners’ insurers do not specifically account for the behavior of the individual

homeowner when they price risk. An insurance company should be able to better price risk

if they know whether policyholders are taking steps to mitigate losses; e.g., not only

installing an alarm but using it regularly, locking doors and securing windows, controlling

home temperatures during extreme cold. Instead of only offering discounts to

homeowners who install security and preventive devices, insurance companies can

proactively reward policyholders that actively look to reduce or avoid potential for claims

by charging them less for insurance coverage.

The opportunities could be substantial for insurance companies that investigate this market

and are at the early end of the adoption curve. According to State Farm, the average cost of

a fire claim to a home is $52,789. Home sensors and monitoring could potentially alleviate

or reduce some of these costly claims – saving themselves and their customers a

substantial amount of money in the long run.

Auto$182bn

Homeowners$86bn

Other$278bn

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Exhibit 19: A sample of insurance companies that offer home security incentives


If insurance companies can use these data to learn how to mitigate risk of loss, they could

price insurance more effectively and both increase retention of their best policyholders,

and compete more effectively for similar new business. In addition, we believe early

adopters could have a significant opportunity to build an important relationship with

customers that hinges on trust and the shared vision that controlling losses is a desirable

outcome. If the data prove to be valuable, the benefit to the early adopting insurers could

not only come from more predictable margins, but also through longer retention and

higher lifetime value.

Company Discount Notes

Allstate Up to 15% if you install protective devices

Liberty Mutual Not specifiedPartnership with Vivint allows policyholders to save on home insurance by installing protective devices

Nationwide Insurance Up to 15% with protective devices

State FarmUp to 10% on homeowners; up to 15% on renters insurance with security system

Receive discounts on installation from ADT and Lowe's plus discount on insurance premium

The Hartford Up to 20% with protective devices

Travelers Not specified Save on home insurance by installing protective devices

USAA Not specified

Partnership with ADT allows policyholders to save on installation of home security system and receive a discount on homeowners insurance premium



Sensor data could change the way homeowners’ policies are

written

As we have discussed in previous IoT Volumes I, 2 and 3, the Connected Home is an

important frontier for the Internet of Things as consumers embrace new devices and

technology to more conveniently manage their households. The smart home industry is

expected to see considerable growth in the medium term as we show in Exhibit 20.

There are three primary areas of opportunity, in our view, for insurance companies to

capitalize on Connected Home technology:

1) Using real-time event data to mitigate or prevent individual loss:

a. Flood sensors, heat sensors, smoke alarms, carbon monoxide alarms.

b. Example: using sensor data to proactively determine risk of loss before an

event occurs.

2) Leveraging local information to mitigate loss exposure:

a. Inform customers of neighborhood threats.

b. Example: specifically target homeowners whose sensor data show they do not

lock doors or close windows when there are reports of local burglaries.

3) Using ”big data” to better calibrate risk profile:

a. Analyze sensor event data following severe weather or loss events to

anticipate where problems are most likely to occur based on not only most

prominent risks (like tornados, excessive rain, or hurricanes), but also to

evaluate risks like ground-water levels and erosion following large-scale

events.

b. Either manage geographic exposure more granularly, adjust premiums based

on experienced risk of loss following events, or invest to mitigate loss in the

future. Also insurers can leverage analysis to have more resources available

after events to respond quickly to mitigate losses.

Exhibit 20: Smart home industry expected to reach $71bn by 2018

Source: Goldman Sachs Global Investment Research, Juniper Research

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Several companies are entering the connected home space

Currently there are several companies developing consumer products to tap into the

connected home. For example, Nest, which was recently acquired by Google, created

“smart” thermostats that allow consumers to remotely program the temperature in their

homes. Other companies like Control4 have focused on building a platform for “smart”

technologies. However, some more traditional service providers like ADT are looking to

enhance their technology offerings to provide monitoring and remote control services as

well. Most of these companies sell devices or partner with hardware companies that

actively use sensor data to increase the amount of information they provide and in many

cases allow consumers to interact with these devices as well.

To our knowledge, insurance companies have not actively looked to collect the sensor data

for use in their underwriting. Instead, these data remain with the manufacturers of devices

or security companies. By comparison, in the auto space we have seen companies like

Progressive look to gather and leverage this information directly. The reason for the

difference is, in our view, likely due to the fact that the linkage between sensor data and

homeowners’ claims is not as obvious as the link between driving behavior and auto

claims. Insurers that invest in this technology before they can demonstrate a clear causal

pattern face the risk that their investments do not pay off. However, if the incremental data

are useful and valuable, the early movers will have developed a competitive advantage that

peers will struggle to emulate.

Exhibit 21: Examples of companies investing in smart home space

The home automation market is expected to reach $14.1bn by 2018 according to ABI Research

Source: Goldman Sachs Global Investment Research, ABI Research, company data

As with all emerging technologies, there remain potential barriers to adoption:

1. Privacy concerns: We expect some consumers to exhibit concerns about the type of

information being monitored, shared, and utilized. Behavior patterns such as when a

consumer is not home could be tracked and potentially hacked, which creates risk. In

addition, connected devices could convey information homeowners do not want to

share – e.g., how many hours they are watching TV, how often they cook, etc.

2. Practicality: The cost of installing connected home technology is likely to be relatively

high especially during early roll out periods as these companies look to build scale and

thus would tilt towards the high-end homeowners’ market (e.g., Chubb).

3. Demographic trends: We would expect penetration of these systems to be highest in

the high and ultra-high-end demographic either looking to protect a primary home or

monitor a second home. For mainstream consumers, the most plausible option is likely

a DIY approach which would likely only appeal to a much smaller sub-group of tech-

savvy users willing to invest the time.

Company Product What it does? Notes

Apple Homekit, a home automation project

Will allow producers of smart home products to more efficiently integrate their products by integrating it with Apple's Siri Expected to debut with iOS8

AT&TDigital Life, home automation for security and convenience

Indoor camera;remotely lock and unlock doors; remotely adjust lighting, thermostats and small appliances; water and temperature sensors; shut off waster remotely

Can send alerts via text or email if any water or temperature issues are detected

Control424/7 home monitoring and control system that is controlled by a movile device

Control lights with use of smartphone, "smart" thermostat, lock all doors and arm the alarm over the use of a smartphone, receive a text alert when system senses trouble at home (water leaks)

Nest (acquired by Google)"Smart" thermostats and smoke alarms for homes

Learns the temperature preferences of its users. It will learn users' schedule, program itself, and can also be controlled from a phone.

At the end of 2013, Nest thermostats were estimated to be in 1% of U.S. homes.Claims to lower heating and cooling bills by 20%

SmartThings (acquired by Samsung)A "smart" hub connecting a user's home to their smartphone

Monitors movement, temperature, and acitivity throughout your home. Can also notify user of when family members arrive and leave home and allows users the ability to check if they closed the garage, windows or front door

Can also receive alerts when HVAC, electricity, or other important systems break down.

WinkApp connecting various smart home devices

Provides a central system to control all of a user's various smart devices

Recently launched display booths in Home Depot and Staples stores. In partnership with GE.



Smart home technology has not been a focus for insurers…yet

Why have insurance companies not yet leveraged preventive technology in homeowners’

via sensor data? In our view, insurance companies have focused their investments in both

technology and response on areas where the “ROI” is clearer: risk selection and pricing,

underwriting efficiency, and triage.

1) Risk selection and pricing: With more sophisticated data and analytics, insurance

companies have dramatically improved their ability to accurately price and select risk.

For example, most insurance companies now age-rate roofs of homes in order to

provide value that is commensurate with the current state of the roof (i.e., not

providing full replacement for a roof that may be obsolete). In addition, insurance

companies have become more adept at pricing in a much more granular fashion. For

example, insurance companies can price based not only on more accurate replacement

cost and more granular geographic data, but can also overlay more accurate risk

exposure as it relates to severe weather based on their own models and experience.

These activities have helped the more proactive insurance companies enhance their

risk-adjusted returns.

2) Underwriting efficiency: Led by companies like Travelers with its Select offering that

targets smaller commercial risks, insurers are using automated underwriting models to

make the underwriting process more efficient. As results for these areas continue to

improve, insurers have shown success in using data and analytics to more efficiently

incorporate live underwriter judgment in underwriting decisions as certain risks are

non-renewed if certain screens are met, requiring underwriter involvement.

3) Post-event loss mitigation: Travelers also shows up as a leader in this area. Over the

past several years, TRV has devoted considerable energy to loss mitigation post-event.

For example, TRV has cross-trained many of its administrative personnel as field claim

adjusters. Once large events occur, TRV sends out its backup roster of claims adjusters

into the field where they will assess losses immediately, disburse funds, and look to

take measures to mitigate further loss where possible. Using tarps to cover exposed

homes following wind events but before rain events is an example of this activity.

Exhibit 22: How the connected life could impact other areas of insurance Personal technology could have relevance for both health and life insurance


Wearable devices allow consumers to monitor several aspects of their health, but primarily they

are used by active people to track physical exercise. Some health insurers already reward

employees that regularly use exercise facilities on the premise that physical fitness improves

overall health. Wearable technology can provide even better information as it tracks actual

physical exercise and not just whether someone enters a facility.

For life insurers, the incremental data is likely less relevant as life insurers tend to price policies up

front and after a full medical examination. Since premium levels are determined upon initial

underwriting, incremental information gleaned after the initial underwriting is not relevant to the

pricing decision. In addition, much of the risk that life insurers price for is due to genetic factors,

and monitoring physical activity today does not impact this aspect of a person's risk profile. Over

time this information could impact the mortality tables insurers use to price risk, but given the

duration of life policies the true question is not whether exercise improves health, but whether

today's activity is a predictor of an insured's health and wellness in the future.



“Sharing” economy is not precisely IoT but is relevant, disruptive

Although we believe that much of the near- and medium-term risk and opportunity from

IoT comes to the insurance industry via connected devices on the personal lines side, there

is an evolving dynamic in the commercial space that may have even broader implications

in the near term. Today, disruptive technology companies are finding ways to allow

individuals to extract commercial value from their homes and cars, and this creates

potentially more risk for insurance companies. The two areas of exposure related to

“sharing economies” that we see today are in vehicles (i.e., Uber-X and Lyft) where

individuals accept fares to provide part-time livery services, and in homes (i.e., AirBnB)

where individuals rent out their property for short periods of time.

The risk of the unknown: the growth of part-time drivers

Over the past two years, new services have come to market which allow individuals who

are not commercial drivers to collect a fee for picking up passengers. These services have

expanded rapidly and entered the mainstream, joining the ranks of more traditional livery

services. Many of these “part-time” drivers do not carry commercial policies, which could

be several times more expensive than typical personal auto policies they likely rely on for

insurance coverage. Both Uber-X and Lyft offer insurance policies for their drivers that

come into play when they receive a ride request and remain in place through the end of the

customer’s ride. But there are aspects of the insurance dynamic that remain unclear and

that lack of clarity results in the potential for unanticipated risk for insurance companies

that unknowingly provide the primary coverage for these part-time livery drivers.

State regulators are also carefully monitoring these services to ensure that riders are

appropriately covered during ride periods. But many primary insurers may be unaware that

the policyholder they insure is using their car for commercial purposes, exposing them to

more risk. For example, Lyft provides maximum insurance coverage of $1 mn to its drivers,

but in a large or serious accident losses could easily exceed that threshold. In that event,

we would expect that despite policy language that many insurance companies have

adopted (like a livery exclusion, for example), any ambiguity could create risk for the

insurance company as well as the driver. Therefore, in the near term insurance companies

need to take steps to mitigate the chance they unknowingly expose themselves to risk

without appropriate compensation. See Exhibit 23.

Exhibit 23: Evaluating coverage and risk from insurer perspective




Over the longer term there is likely to be a better solution enabled by technology and

product development. For an insurance company, it is plausible to build a product that

allows for policies for individual rides, especially if the car is equipped with a plug-in device

that is already able to collect driving information. With the right technology, insurance

companies could set an appropriate price that compensates them for the risk. But in the

near term we expect insurance companies to look to eschew this risk rather than embrace

it, at least until there is more definition around the risks they are assuming and those they

can legally avoid. There have been several reports of cases in which insurance companies

have dropped policyholders once they learned that policyholders are driving for one of

these services. We also note media mentions of cases where drivers find it difficult to get

proper insurance coverage after insurance companies learn they drive for one of these

services. We suspect that as these services continue to grow, insurance companies will

need to create a product to incorporate this growing trend or risk losing premiums.

Otherwise these part-time drivers will try to obscure their driving behavior from insurance

companies, exposing insurers to additional risk.

Exhibit 24: New Year’s Eve event triggers insurance concerns for Uber-X


Seller beware: AirBnB creates potentially unanticipated risks

AirBnB and other services that allow for rentals of primary homes for micro periods – a day

or a week – have exploded in popularity recently. Much like we discussed with shared cars,

these types of arrangements provide challenges for insurance companies that are not

accustomed to such short policy terms and in particular situations that straddle the line

between personal and commercial coverage.

The issue as it relates to insurance, in our view, is equally as relevant for AirBnB

“landlords” as it is for the insurance companies themselves. AirBnB has an insurance

program with Lloyds of London which provides up to $1 mn of coverage for personal items.

In addition, AirBnB incorporates into its agreement that any damage that results from an

AirBnB rental and is not resolved will be charged to the renter’s credit card.

But a closer look implies there may be some gaps in coverage. For example, the AirBnB

insurance program makes no mention of compensation for damage to the property itself.

So if a house is destroyed during an AirBnB rental (e.g., a fire), it is unlikely that a credit

card limit is large enough to allow the “renter” to absorb the potential cost of replacing a

home. In addition, it is unclear that an insurance company that provides traditional

homeowners’ insurance would respond for a loss that manifests through what is clearly a

commercial application, and our guess is that insurance companies would fight such losses

aggressively if they can prove that the property was damaged during a period where it was

being used for commercial purpose.

In addition, the AirBnB insurance program does not specifically mention personal liability

coverage. AirBnb’s terms and conditions explicitly state they are not responsible for and

disclaim any and all liability related to any and all listings and accommodations. If

someone is injured on the property during a short-term rental, the primary insurance

In San Francisco, a 6-year old girl was hit and killed by an Uber-X driver. Uber denied liability

because the driver was not carrying a fare at the time, even though he was logged into the

application. Uber stated it would have been different had the driver been part of their Uber Black

program, as UberX drivers are deemed contractors rather than employees. Chris Dolan, a San

Francisco lawyer who represented the girl’s family stated, “There is a wide gulf between the

$15,000 in personal liability insurance a driver must carry and the million dollar commercial policy

required for ride-sharing vehicles.”



company may choose not to respond given a difference in usage than the personal

coverage contemplated, and if the AirBnB policy is silent to liability coverage, the

homeowners might have liability for injuries as well.

Much like we discuss with part-time drivers, the ability to write policies for short episodes

of risk within the home space could also present an opportunity. But in the near term these

potential uses create risk for insurance companies they should understand.

Exhibit 25: Illustration depicting our understanding of AirBnB coverage

AirBnB coverage vs. the four main coverages provided by homeowners’ policies


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The driverless car remains a concept, not a product (yet)

The technology to bring driverless cars to the road has been under-way for quite some

time with companies such as Google already in testing stages. Once driverless cars

outnumber mainstream vehicles, it is likely that the entire environment for vehicle safety

will change as accident frequency is likely to decline. An estimated 1.2mn people are killed

worldwide each year in traffic accidents, a number that can decrease substantially as

advocates of the driverless car expect that 90% of accidents are based on human error. But

the path to full market penetration of driverless cars is long and uncertain, in our view. The

phases we anticipate along with rough timeline expectations are as follows (see Exhibit

26):

1) Product development/prototype phase (beginning now).

2) Early implementation phase (5-10 years).

3) Market entry phase (10-15 years).

4) Mass market (20+ years).

In phase 1, we expect that cars will begin to incorporate features that provide early

convergence to driverless cars (e.g., lane stabilization, automated parking, automated

cruise control). Over this period we expect product development and testing to become

extremely competitive among car manufacturers as they look to provide “best in class”

technology and convenience in each model year.

During the early implementation phase, we expect companies to attempt to introduce

niche models of fully integrated automated cars that will likely carry high price points and

appeal to early adopters that can afford the technology. During this phase we expect

vehicles to be expensive given the cost to develop and produce sensors that will likely

envelop the exterior of the car, the R&D costs that will go into production, and the fact that

production is likely to be relatively inefficient given relatively limited output.

During the market entry phase (phase 3), we expect that efficiencies will improve and costs

will decline as manufacturers consider “taking the plunge” with fully integrated offerings,

attempting to be the first legitimate player to market (but not being too early, “buggy”).

From an insurance perspective we expect this is where driverless cars become more

relevant but may not result in lower losses right away. We expect during phase 3 accident

severity could actually rise as might frequency, as humans and machines learn to share the

road together and likely experience some (expensive) bumps along the way.

Phase 4 is where accident frequency is likely to fall meaningfully, and if mass production of

cars and components allows for costs to decline, then the notion of fewer accidents really

becomes a reality. However, for this to occur car owners need to cycle through their

current vehicles and into driverless ones, which will not happen simultaneously with the

beginning of the mass market phase. In addition, for full-scale implementation cars will

need to meet targeted levels of energy efficiency and other thresholds in order for

governments to get fully behind driverless cars.

The risk to insurance companies from a profitability perspective, in our view, is in the mass

market phase. However we expect that in the near-term telematics and other technological

advances are likely to have a more material impact on their business.



Exhibit 26: Automated car implementation stages


Exhibit 27: Google is so far the leading pioneer of the automated car market


• Cars will begin to incorporate features to provide early convergence to driverless cars

• Ex: lane stabilization, automated parking, etc.

Phase 1

beginning now

• Niche, fully integreated cars are likely to be introduced at high price points.

• Appeal to early adopters

Phase 2

5-10 years

• Costs of fully autonomous vehicles starts to decline as cost efficiencies improve

Phase 3

10-15 years

• Mass market phase; accidents begin to decline as autonomous vehicles became the majority on the road

Phase 4

20+ years

Google expects to release their fully autonomous vehicle in 2017 and their ultimate goal is to

decrease the number of cars on the road and they believe a driverless car will encourage more car

sharing in the economy. Google recently passed the 700,000 miles of accident free driving in April

2014 as dozens of these autonomous vehicles are currently driving the roads of California and

Nevada with the ability to react to railroad crossing, busy intersections, large stationary objects,

road construction signs and cyclists. The cars feature 360-degree computer vision and about

$150,000 worth of equipment performing real-time LIDAR, so it is likely that the equipment cost

each car is equipped with must come down substantially before it becomes main stream and the

average person can afford it. However it remains unclear whether how potentially adverse road or

travel conditions can impact driverless cars ability to navigate safely.



Global stocks with top exposure to insurance telematics

Exhibit 28: US stocks with top exposure to insurance telematics


Company Ticker Rating Analyst Company Profile Exposure

The Allstate Corp. ALL CL-BuyMichael Nannizzi, Non-life Insurance Analyst

Allstate is the nation’s largest publicly held personal lines insurer providing insurance services in the United States and Canada.

Exposure to insurance telematics:

Allstate introduced Drivewise, its telematics offering, in 2012. Allstate is the second-largest auto insurer and homeowners’ insurer in the United States behind State Farm.

The Progressive Corp. PGR BuyMichael Nannizzi, Non-life Insurance Analyst

Progressive is the nation’s fourth largest auto insurer.

Exposure to auto telematics:

Progressive was one of the first to break into the insurance telematics market for automobiles when it introduced its Snapshot program in 2010. Snapshot tracks customers’ driving behavior by a device that plugs into the dashboards of their cars, and users are offered a rate based on their performance.

Chubb Corp. CB NeutralMichael Nannizzi, Non-life Insurance Analyst

Chubb is a leading global P&C insurer with a focus on high net worth individuals within its personal lines book of business.

Exposure to the smart home:

Chubb insures a lot of high-dollar homes, making their customer base more likely to invest in smart home technology. However to the extent that insurance companies need to invest in technology in order to benefit from connected home technology, we expect that other insurers will make the leap before Chubb does.

The Travelers Corp. TRV NeutralMichael Nannizzi, Non-life Insurance Analyst

Travelers is a leading provider of P&C insurance for auto, home and businesses with operations in the United States and select international markets.

Exposure to auto and homeowners’ telematics:

Auto: Travelers’ policyholders can qualify for the IntelliDrive program, a plug-in device inserted into a car’s dashboard that tracks where and when a car is driven, average speed, braking activity and acceleration.

Homeowners’: Travelers currently offer discounts for policy holders who have protective devices such as smoke detectors, alarms, interior sprinkler systems and home security systems. Although we expect Travelers to be among the leading innovators within the insurance space, Travelers’ customer demographic profiles may mean slower penetration of these trends through their business.



Exhibit 29: European stocks with top exposure to insurance telematics


Rating and pricing information

Admiral Group Plc (N/N, 1,250.00p), Allianz SE (B/N, €138.35), The Allstate Corp. (B/C,

$61.84), Assicurazioni Generali (N/N, €16.38), Aviva plc (N/N, 534.00p), AXA (B/N, €19.98),

Catlin Group (N/N, 520.50p), Chubb Corp. (N/C, $91.80), Direct Line Group (N/N, 300.10p),

Mapfre S.A. (N/N, €2.90), The Progressive Corporation (B/C, $25.31), RSA Insurance Group

(N/N, 480.40p), The Travelers Companies, Inc. (N/C, $94.60) and UnipolSai SpA (B/N, €2.37).

Company Ticker Rating Analyst Company Profile Exposure

ALLIANZ SE ALVG.DE BuyVinit Malhotra, Europe Insurance Analyst

Allianz is a significant provider of life, non-life and investment management services (Pimco), not only in Germany but on a worldwide basis.


Auto: Allianz has long been one of the pioneers of the telematics industry in Europe, with its own large offering in Italy through its SestoSenso product, where it is marketed as a services/breakdown cover product. Interestingly, it is not focusing on telematics in the UK, as it sees products as only targeting young drivers for whom premiums are prohibitively expensive.

AXA AXAF.PA BuyWilliam Elderkin, Europe Insurance Analyst

AXA is a French multi-line insurer with motor, home, health and life insurance offerings within their portfolio with international operations primarily in Western Europe, North America, Asia Pacific and in the Middle East.


Auto: Axa ‘Drivesafe’ is a free app that rewards driving for those under the age of 25. Elements such as braking, acceleration, cornering and speeding are monitored. Customers can receive a significant up-front discount, with a further ‘cash-back’ discount for good driving. It also offers an ‘Autometrica’ pay-as-you-drive system in Italy.

Homeowners': Discounts are offered for approved intruder alarms and window locks smoke alarms.

UnipolSai SpA US.MI BuyWilliam Elderkin, Europe Insurance Analyst

Unipol Sai is an Italian insurer with both life, and non-life offerings with international operations in select European countries.


Auto: Unipol is the European leader in telematics, with its black box Unibox accounting for roughly 50% of all telematics policies with 1.6mn policies. A 20% discount is offered to new customers with a further 3-30% renewal discount depending on mileage.

Admiral Group ADML.L NeutralRavi Tanna, Europe Insurance Analyst

Admiral is a leading provider of motor insurance and price comparison websites with operations in both the UK and select international markets.


Auto: Admiral operates both an ‘AppyDriver App’ trial system which offers a discount based on driving performance over a period of up to 250 miles. Its black-box technology ‘LittleBox’ monitors timing, location, speed, acceleration and braking and offers rewards for driver performance, for those driving up to 15,000 miles per year.

Homeowners': Some policies insist on various security devices such as a burglar system, with discounts offered for NSI or SSAIB installed alarm systems.

Assicurazioni Generali GASI.MI NeutralWilliam Elderkin, Europe Insurance Analyst

Generali is the largest Italian insurer with non-lie and life operations. It also has a significant presence internationally.


Auto: Its telematics offerings dates back some 4 years. Through Genertel it offers a ‘Quality Driver’ program which emphasizes not only monitoring driver style but also protection satellite features. With further discounts accredited to mileage and adherence to speed limits accruing to its professionally installed black box. It also offers a policy in Spain.

Aviva plc AV.L NeutralWilliam Elderkin, Europe Insurance Analyst

Aviva is a UK multi-line insurer with motor, home, health and life insurance offerings within their portfolio with international operations in Europe, Asia and Canada.


Auto: ‘Aviva Drive’ app offers policyholders where discounts are available after driving 200 miles on the app. Up to 20% discounts are applicable on standard policies.

Catlin Group CGL.L NeutralRavi Tanna, Europe Insurance Analyst

Catlin, the Lloyd’s syndicate is a specialty insurance and reinsurance company with a large stake and current underwriter of the UK leading ‘Insure the Box’ platform.


Auto: Catlin offers providers a ‘Clear Box’ which measure both how you drive and how far you drive. Safe driving is rewarded in the form of bonus miles in excess of the basic quota. This information is then fed to the policyholders’ online account. The technology incorporates both a theft tracking and accident device.

Direct Line Group DLGD.L NeutralRavi Tanna, Europe Insurance Analyst

Direct Line is a leading provider for motor, home, commercial and personal lines with operations in the UK and select international markets.


Auto: Direct Line policyholders can take a trial using the ‘DrivePlus’ App For permanent policies, Direct Line operates a self-install black box ‘DrivePlus’ Plug-in which monitors the key elements of smooth driving, acceleration and braking.

Homeowners': Direct Line offers an additional ID Fraud Detection and Assistance policy with its Home Insurance Plus offering as to prevent the theft or loss of online data.

Mapfre S.A. MAP.MC NeutralVinit Malhotra, Europe Insurance Analyst

Mapfre is a Spanish provider of life and non-life operations. It has a significant offering internationally especially in Latin America.


Auto: Mapfre is the clear leader in the Spanish telematics market with its ‘YCAR’ black box platform geared towards the 18-30 group which offers premium discounts on sign-up and according to mileage and driver style.

RSA Insurance Group RSA.L NeutralRavi Tanna, Europe Insurance Analyst

RSA is a global provider of motor, home, commercial and personal lines insurance, with its main operations being in the UK.


Auto: RSA’s More Than ‘Smart Wheels’ telematics black box gives an overall score based on usage(additional miles can be purchased), speed and smoothness which can be monitored on the dashboard. Rewards for good driving scores are given via a ‘Smart Wheels’ pre-paid VISA card, as opposed to insurance discounts.



Disclosure Appendix

Reg AC

We, Michael Nannizzi, William Elderkin, Ravi Tanna, Michael Kovac, Ketan Bordia, CFA and Clare Tokheim, hereby certify that all of the views

expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that

no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for

in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and

superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate

performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Michael Nannizzi: America-Insurance Brokers, America-NonLifeInsurance. William Elderkin: Europe-Insurance. Ravi Tanna: Europe-Insurance.

America-Insurance Brokers: Aon Plc., Arthur J. Gallagher & Co., Brown & Brown, Inc., Marsh & McLennan Companies, Willis Group Holdings Plc..

America-NonLifeInsurance: ACE Limited, Allied World Assurance Co. Hldgs. Ltd., American International Group, Inc., Arch Capital Group Ltd., AXIS

Capital Holdings Limited, Chubb Corp., Everest Re Group Limited, HCC Insurance Holdings, Inc., PartnerRe Ltd., RenaissanceRe Holdings Ltd., The

Allstate Corp., The Progressive Corporation, The Travelers Companies, Inc., Validus Holdings, Ltd., W. R. Berkley Corp., XL Group Plc.

Europe-Insurance: Admiral Group Plc, Aegon N.V., Ageas SA/NV, Allianz SE, Amlin, Assicurazioni Generali, Aviva plc, AXA, Baloise, Catlin Group,

CNP Assurances, Delta Lloyd, Direct Line Group, Euler Hermes, Friends Life Group Ltd, Gjensidige Forsikring ASA, Hannover Ruckversicherung,

Helvetia Holding AG, Hiscox, Legal & General Group, Mapfre S.A., Munich Re (reg), NN Group, Old Mutual plc, Powszechny Zaklad Ubezpieczen,

Prudential Plc, RSA Insurance Group, Sampo, SCOR, St. James's Place plc, Standard Life Plc, Swiss Life Holding, Swiss Re, Talanx AG, Topdanmark

A/S, Tryg A/S, Unipol (Ordinary Shares), UnipolSai SpA, Vienna Insurance Group, Zurich Insurance Group.

Company-specific regulatory disclosures

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this

compendium can be found in the latest relevant published research

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 42% 36% 30%

As of July 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,697 equity securities. Goldman Sachs assigns stocks as

Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for

the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this

compendium can be found in the latest relevant published research

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager

or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-

managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a

market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,

professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of



coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking

revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their

households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE

Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in

prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs

website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws

and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in

the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any

access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman

Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and

other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part

or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to

the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at

http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this

research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at

the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company

specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for,

this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs

(Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs

(India) Securities Private Limited. Japan: See below. Korea: Further information on the subject company or companies referred to in this research

may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither

"registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it,

is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research

reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having

product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal

activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore)

Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should

carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who

would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this

research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that

have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report,

are available from Goldman Sachs International on request.

European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available

at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with

Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho

69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms

Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific

disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese

Securities Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy

or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as

a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a

global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage

group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment

recommendations focused on either the size of the potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated

with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each

report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at

http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook

on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12

months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the

following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over

the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an

advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman

Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for

determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and

price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended

coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The

information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.



Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global

basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on

macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd

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Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs

New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in

the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in

the United Kingdom and European Union.

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and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;

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This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we

consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as

appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large

majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have

investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research

Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our

proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our

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The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may

discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity

securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any

such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's

return potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,

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The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do

not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in

the products mentioned that are inconsistent with the views expressed by analysts named in this report.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be

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