Opportunities and risks of VIG shares

Stable foundation. Every price is a mix of fundamental data, expectations, sentiment and technical factors. The fundamentals of the Group are as stable as they have ever been. The Group’s operating result is solid and its capitalisation is also rated excellent by Standard & Poor’s. The Solvency II ratio calculated at the level of the listed VIG group is in the area of 200% and therefore continues to be among the leaders of internationally operating insurance groups. In addition to the fact that VIG is the largest insurance group in Austria and the CEE region, the Group companies provide many positive contributions to performance and Central and Eastern Europe offers growth potential that cannot be ignored.

The downward trend in the share price during the year just ended and the painful drop to below EUR 20 at the middle of March 2016 were due to macroeconomic changes and a series of other events that generated critical sentiment among investors and analysts. Aside from the fact that international perceptions of the CEE region – VIG’s growth markets – are continually changing, the first decoupling of VIG shares from the market was triggered by the earnings report published on 14 April 2015. During this presentation, management drew attention with its statement that the negative effects of the low-interest rate environment in 2015 could not be offset even by further improvements in the underwriting result. The subsequent revisions to expected earnings by capital market analysts led to the first significant price correction, from the previous high of EUR 42.62 on 10 April 2015 to EUR 35.50 at the end of April.

Regular reviews in May and June of the composition of two important European indices, MSCI and STOXX, put further pressure on the share price. Due to too low a market capitalisation for the free float of around 30%, VIG got excluded from both of these important index families. This led to a technical price reduction. Many funds are “index trackers”, which means they replicate the composition of various stock indices. This means that fund portfolios are adjusted based on index changes, without taking the fundamental performance of companies into account. The resulting selling pressure led to another sell-off of VIG shares, which closed the 1^st half of 2015 at a price of EUR 30.775, 17% below the price at the end of 2014.

The general nervousness of the markets, due to concerns about the Chinese economy and discussions about the European Union’s ability to deal with the refugee crisis, put additional pressure on share prices in the 2^nd half of 2015. In this environment, VIG then announced a write-down of its IT systems. The resulting decrease in earnings led to initial indications and fears that this might also have an effect on the VIG dividend. Adding to this came the change of management at the end of the year that the market did not expect. On 14 December 2015, VIG shares fell to a low for the year of EUR 24.91.

Headwinds at the start of the year. Fears that the Chinese economy could encounter difficulties continued to affect the stock market at the beginning of 2016. In this environment, the price of VIG shares fell further to almost EUR 22 at the middle of January. Publication of VIG’s preliminary profit before taxes, which was reduced by negative effects of low interest rate environment and other impairments of assets, led to another significant price correction. VIG is maintaining the dividend policy it has followed for many years, namely distributing at least 30% of Group net profit after minority interests. The Managing Board will propose a dividend of 60 Cent per share for financial year 2015 to the statutory body. This corresponds to a dividend payout ratio of around 78%.

Outlook. The low interest rate environment will continue to be a major challenge for VIG in 2016. The Group nevertheless plans to at least double its 2015 pre-tax results and achieve a profit before taxes of up to EUR 400 million in 2016.

In medium terms VIG aims for an improvement of the Combined Ratio, an important profitability ratio for property and casualty insurance, towards 95%.

Communications will continue to focus on presenting the opportunities and risks of the Group’s business development, with the goal of gradually winning back market confidence.