“We want to continue growing faster than the overall market”

2014 was another difficult year for the European economy. How well did VIG perform?

Hagen: Very well in my opinion. We further developed Vienna Insurance Group’s leading position, grew faster than the overall market – and our market share of 19% makes us number 1 in our core markets. In addition to continuing important strategic projects, we also achieved good results from an operational point of view, maintaining premiums at a stable level of EUR 9.1 billion. This was in spite of negative exchange rate effects, necessary optimisation measures in Italy and an intentional reduction in low-margin short-term single-premium business in Poland. Overall, that is a very respectable performance in my view.

Specifically: In which markets did VIG achieve excellent performance in 2014?

Höfinger: I would like to emphasise that our employees did excellent work in all our markets in 2014. This commitment had a particularly great effect on premium growth in the Remaining Markets. The increase of 8.9% truly deserves our wholehearted recognition. In the CEE countries, this was primarily due to rapid growth in regular premiums, and in the single-premium business in the Baltic States, Bulgaria and Hungary. In Georgia and Albania we achieved growth of 50.8% and 40.4%, respectively, in local currency terms in the property and casualty area. These are major successes, and the people responsible can be proud of them. Our employees also showed in 2014 that a “hands-on” mentality is truly part of our day-to-day life here. Everyone pitches in to help in extreme situations – like the floods in the Balkans. Our colleagues there automatically provided unbureaucratic assistance and rapid claims processing.

Is this commitment essentially an “added value” that sets VIG apart?

Höfinger: Yes. That is exactly how I see it. Economic success combined with a well-developed awareness of responsibility is what sets us apart.

Let’s take a look at the Austrian market …

Hagen: In Austria, which continues to be our largest single market, we increased our premium income slightly over the previous year to EUR 4,077.0 million. Wiener Städtische fortunately achieved above-average growth, which compensated for the decline suffered by Donau Versicherung in Italy. This is a real achievement for a mature market like Austria. s Versicherung once again continued the good performance achieved in the previous year.

To what extent is this performance also reflected in earnings growth?

Simhandl: Premiums written naturally represent the starting point for our earnings calculations. A look at the income statement, however, quickly shows the major effect that expenses for claims and insurance benefits, and acquisition and administrative expenses have on earnings growth. Our underwriting result in the non-life area improved, and our pre-tax profit rose 46.0% over the previous year to EUR 518.4 million, in spite of a generally lower level of interest rates.

What is your opinion of the result achieved in 2014?

Simhandl: Given a number of negative effects, such as the write-down of Hypo Alpe Adria bonds of EUR 79 million, the result achieved is satisfactory.

Hagen: For the first time since 2011 (annually compared), all VIG lines of business and regions once again provided positive contributions to profit before taxes in 2014. This also shows that our efforts to increase efficiency in previous years have truly paid off. Our administrative expenses, for example, have fallen by around 7.4% in the last six years in spite of a larger volume of business.

What effect do these measures have on the combined ratio?

Simhandl: It is 96.7% and, unlike the previous year, is therefore significantly below the 100% mark. A further reason for satisfaction with this figure is that a positive underwriting result reduces our dependence on investment income. Due to these favourable changes, we will be recommending a dividend of EUR 1.40 per share for financial year 2014 at the Annual General Meeting. Last year it was EUR 1.30.

Have the unfavourable developments in Romania and Italy been corrected yet?

Fuchs: For the most part, yes. In Romania we decided to reduce the size of our motor vehicle insurance portfolio as soon as some of our competitors adopted irrational business practices. Looking back, this decision was absolutely correct. This is also shown by the positive result achieved in 2014. In Italy, we consciously accepted the loss in business resulting from optimisation measures that were required based on our loss experience. Effective management of claims processing was introduced at the same time. Even though the resulting costs and large decrease in premiums are having a negative effect on earnings, we think we are on the right path.

To what extent was business development affected by the crisis in Ukraine?

Hagen: The situation in Ukraine is extremely difficult for the people there, and we can only hope that tensions will soon be relieved. VIG has almost no representation in Crimea and the conflict areas in Eastern Ukraine, which means there were no significant effects from a purely business point of view. Local management has the situation perfectly under control, and a 16.3% increase in premium volume was generated in local currency terms – thereby demonstrating the value of the VIG principle of local entrepreneurship. We see this achievement as proof that our customers continue to place their confidence in the stability of our Ukrainian VIG companies, particularly in times of crisis.

What is your overall assessment of the economic situation in Central and Eastern Europe?

Hagen: A question that is frequently asked – and my answer always remains the same: very good in the long run. And the leading indicators also currently show positive trends for the CEE region – at least better than those for Western Europe. In my view, whether a potential economic recovery would also increase the demand for insurance depends on the degree it affects the real income of broad sections of the population and whether a solid middle class can form. Over the past 25 years, instead of an exponential curve, a graph of the demand for insurance over time looks more like a staircase. We are taking advantage of the current calm phase to further strengthen distribution and optimise our organisational structure, to put us in the best possible position for future growth periods. The importance of our CEE markets is already shown today by the 50.9% of total premiums and around 63.9% of profit before taxes that they generate.

Fuchs: Poland also provides a good example of structural optimisation. The merger of our two life insurance companies Compensa and Benefia successfully strengthened our market presence. We always consider mergers of this type when the resulting synergy effects outweigh the benefits of multiple market presences.

New topic: How are VIG’s preparations for Solvency II progressing?

Hagen: The work is very extensive – the current provisions for Solvency I cover close to 200 pages, the basic documents for Solvency II cover 3,000. In spite of the work required, we are well on schedule across the Group. This is partly because we made an early start and set up effective project management. We have regular consultations with the competent authorities concerning approval of the partial internal model we want to use, so that we will be well-prepared when the new rules take effect.

How will Solvency II affect VIG’s strategy?

Simhandl: One concern is that insurance companies must have capital resources that are appropriate for their risk exposure. VIG has followed a conservative approach in this respect in the past that led to significant excess cover above and beyond the required solvency ratio. I therefore do not expect any major changes to be needed, particularly given that our solvency ratio under Solvency I was more than 200% at the end of 2014, which means we have excellent capital resources. This is also confirmed by our Standard & Poor’s rating of A+ with a stable outlook. We will have to wait, however, to see how the provisions affect the detailed design of our products, particularly in the area of life insurance.

What role does the new bond play?

Simhandl: The EUR 400 million subordinated bond that we successfully placed in February 2015 satisfies the Solvency II requirements for Tier 2 capital. We particularly wanted to take advantage of the current low level of interest rates in our overall funding strategy. The coupon will be 3.75% for the first eleven years and a variable rate thereafter. The bond was placed with both private and institutional investors, mainly in Austria.

What is your outlook for 2015?

Hagen: Growing faster than the overall market is once again our clear objective for 2015. We will be concentrating on the CEE region again. Even though we are currently in a period of market calm, we aim to expand our market share by means of organic growth. And if we encounter a potential acquisition that would be a good strategic addition to VIG’s portfolio at a reasonable price, we will be quick to respond. Based on current expectations, the low interest rate environment will cause our ordinary financial result to decline. We do not expect a further increase in our underwriting result to overcompensate for this decrease. We will remain true to our conservative investment policy in the future – we have no intention of increasing our investment income by making riskier investments. This fundamental attitude is also reflected in the title of this paper – VIG remains on “The Safe Side” – in the interests of and for the benefit of all our stakeholders.