Business development of the Group in 2016

General information

The around 50 insurance companies of Vienna Insurance Group operate in the following reporting segments: Austria (incl. the Wiener Städtische branches in Slovenia, and the Wiener Städtische and Donau Versicherung branches in Italy), Czech Republic, Slovakia, Poland (incl. the insurance business of the Compensa Non-Life branches in Lithuania and Latvia until transfer of the insurance portfolio on 31 December 2015), Romania, the Baltic states (incl. the insurance portfolio transferred from Compensa Non-Life (Poland) to Compensa Non-Life (Lithuania) starting as of 1 January 2016), Hungary, Bulgaria, Turkey/Georgia, Remaining CEE, Other Markets and Central Functions. These 12 segments are discussed in the Group report, which is broken down by lines of business.

The Remaining CEE segment includes the countries of Albania incl. Kosovo (a branch of an Albanian company is located in Kosovo), Bosnia-Herzegovina, Croatia, Macedonia, Moldova, Serbia and Ukraine.

The Montenegro and Belarus markets were not included in the Vienna Insurance Group consolidated financial statements in 2016 due to immateriality. More information on the scope of consolidation and consolidation methods is provided on page 128 of the notes to the consolidated financial statements. The notes to the consolidated financial statements provide detailed information on changes in the scope of consolidation starting on page 129.

Vienna Insurance Group operates with more than one company and brand in most of its markets. The distinct market presence of each company in a country may also be aimed at different target groups, and their product portfolios will differ accordingly. Use of this multi-brand strategy does not mean, however, that potential synergies are not exploited. Structural efficiency and the cost-effective use of resources are examined regularly. Back offices that perform administrative tasks for more than one company are already being used successfully in many countries. Specific country responsibilities also exist at the Managing Board level to ensure uniform management of each country. Mergers of Group companies are considered if the additional synergies that can be achieved outweigh the benefits of multiple market presences.

To improve readability, company names have been shortened throughout the entire report. A list of full company names is provided in the List of abbreviations.

In order to avoid duplicate information, reference will be made below to appropriate information in the notes. Changes in significant balance sheet and income statement items are presented in both the segment report and the notes to the financial statements. Additional disclosures in the management report below are intended to explain these data in more detail.

New segment reporting

Group management and the associated regular reporting to the Group Managing Board as the top decision-making body has taken place exclusively at the country level since the beginning of 2016 (except for the Baltic states and Albania incl. Kosovo). Certain countries were combined based on size according to regional or product-specific factors (Turkey/Georgia, Remaining CEE and Other Markets). The countries of Estonia, Latvia and Lithuania are combined in the Baltic states business segment, and Albania and Kosovo combined in the Albania incl. Kosovo business segment, which is allocated to the Remaining CEE reporting segment in reports to the Managing Board.

The regular reports will no longer include separate reporting by balance sheet unit (property and casualty, life and health insurance). This change took place in connection with the change in the composition of the Group Managing Board on 1 January 2016. Regular monitoring of goodwill impairment takes place solely at the country level starting as of the 1^st quarter of 2016.

Detailed information on Vienna Insurance Group’s segment reporting is provided in the consolidated financial statements starting on page 136.

Retrospective Adjustments

Adjustment for non-profit societies

The adjustment is based on a notice of 2 August 2016 from the Austrian Financial Market Authority (FMA) in accordance with § 3(1) no. 3 of the Austrian Financial Reporting Enforcement Act (Rechnungslegungs-Kontrollgesetz – RL-KG), in which the FMA finds that the interests in the non-profit societies were not reported in accordance with the IFRS. The audit was based on the consolidated financial statements of 31 December 2014 and 31 December 2015 and the half-year reports for 30 June 2014 and 30 June 2015. According to this notice, statutory restrictions on distribution and realisation of assets that apply to non-profit societies, and indirectly to their holding company, were not taken into account when determining the fair value of these companies at the time of loss of control or recognising the Group share in their profits. The effects on the Vienna Insurance Group balance sheet and income statement are as follows:

• The non-controlling interests reported during the conversion from full consolidation to at-equity consolidation for WWG Beteiligungen GmbH (formerly Neue Heimat Holding) are fully eliminated. This caused the non-controlling interests in the shareholders’ equity to fall by EUR 57,101,000 (as of 1 January 2015).
• Due to the change in consolidation on 1 January 2014, the at-equity book value of the non-profit societies decreased by EUR 501,730,000 as of 1 January 2015.
• After restatement as of 1 January 2015, only the amount of distributions received from the non-profit societies is reported as their current contribution to earnings, instead of the amount previously shown for the share in the profits of the companies.

Tax effect of the risk reserve

During the IFRS/IAS changeover, deferred taxes were recognised for the reclassified untaxed risk reserve. The statement issued in 2016 by AFRAC now concludes that no deferred differences exist. Instead, if it is probable or foreseeable that the untaxed risk reserve will be released, and that this will lead to a tax charge, a provision for current tax (re-)payments should be formed. The AFRAC statement makes it necessary for VIG to change its accounting policies.

Correction of impairment testing

During an audit by the AFREP in accordance with § 2(1) of the Austrian Financial Reporting Enforcement Act (RL-KG), it was found that the previous consolidated financial statements of VIENNA INSURANCE GROUP AG Wiener Versicherung Gruppe were incorrect for the following reasons:

As discussed in the accounting and valuation principles, a discounted cash flow method has been used to value non-financial assets since 2013, with long-term debt that was economically similar to shareholders’ equity being included in the carrying amounts. To calculate the discount rate, a modified capitalisation rate (WACC) was used, whose tier 2 components were derived from a VIG peer group. The relationship of shareholders’ equity to Tier 2 capital was also taken from the relationship in the above-mentioned peer group.

The method used to calculate the interest rate was therefore based on the financing structure of a peer group that reflected the asset-specific risk of the VIG Group as a whole and not the risk of the individual CGUs being tested. At the same time, the net assets of the CGUs were treated as dependent on VIG’s company-specific financing. As a result, neither the specific risk profile of the individual items being valued nor the independent capital structures of the companies were taken into account.

The correction was performed as a retrospective adjustment in accordance with IAS 8. To do so, Vienna Insurance Group changed over to a pure equity approach using a dividend discount model. At the same time, the modified capitalisation rate (WACC) was replaced by a cost of equity capital rate. Based on the values as of 31 December 2015, this led to a reduction in goodwill of EUR 90.6 million (31 December 2014: EUR 0.0 million) and an equal reduction in shareholders’ equity as of 31 December 2015 (31 December 2014: EUR 0.0 million). The profit before taxes for financial year 2015 also decreased by EUR 90.6 million.

Financial performance indicators

The key financial performance indicators that form the basis for assessing Vienna Insurance Group’s business development are presented below.