Report on the consolidated financial statements
We have audited the consolidated financial statements of
VIENNA INSURANCE GROUP AG
Wiener Versicherung Gruppe, Vienna
and its subsidiaries (the Group), which comprise the Consolidated Balance Sheet as at 31 December 2016, and the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Shareholders’ Equity, the Consolidated Cash Flow Statement for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the additional requirements pursuant to Section 245a UGB (Austrian Commercial Code) and other legal or regulatory requirements.
Basis for our Opinion
We conducted our audit in accordance with Austrian Standards on Auditing. These standards require the audit to be conducted in accordance with International Standards on Auditing (ISA). Our responsibilities pursuant to these rules and standards are described in the “Auditors’ Responsibility” section of our report. We are independent of the audited entity within the meaning of Austrian commercial law and professional regulations, and have fulfilled our other responsibilities under those relevant ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements.Our audit procedures relating to these matters were designed in the context of our audit of the consolidated financial statements as a whole. Our opinion on the consolidated financial statements is not modified with respect to any of the key audit matters described below, and we do not express an opinion on these individual matters.
Recoverability of goodwill
Refer to notes pages 104, 107 to 109, 125 to 127
Risk for the Financial Statements
The book value of goodwill recorded in the consolidated financial statements of Vienna Insurance Group, amounting to EUR 1,532.2 million, has been monitored separately at country level starting from the first quarter of 2016 onwards. At least once a year and in case of a triggering event on an ad hoc basis Vienna Insurance Group performs a recoverability test (the so-called impairment test) of the recorded goodwill amounts.
The impairment test of goodwill is complex and based on discretionary factors. Those factors include in particular the expected future cash flows of the individual countries (taking into account the development of future premiums, budgeted combined ratios and financial income), which are primarily based on past experience as well as on the management’s assessment of the expected market environment. Other factors are the assumed long-term growth rate as well as the underlying region-specific costs of capital.
Due to an error determined during a review of the IFRS group financial statements as of December 31, 2015 based on a random sample by the Austrian Financial Reporting Enforcement Panel, a retrospective adjustment according to IAS 8 had to be recorded in the IFRS group financial statements. The weighted average costs of capital used as discount rate in the impairment test have been changed to pure costs of equity. Accordingly long-term liabilities that have economically similar characteristics than equity (Tier 2 capital) have been taken out of the carrying amounts of the respective cash generating units to be tested for impairment.
- Based on the internal reporting structure we have assessed whether the changes in the allocation of goodwill are appropriate.
- In cooperation with our valuation experts we have assessed the appropriateness of key assumptions, of discretionary decisions and of the valuation method applied for the impairment testing. We have reconciled the expected future cash flows used in the calculation with the strategic business planning approved by the management. We have discussed the assumptions regarding the market development with those responsible for planning and reconciled these assumptions with general and sector-specific market expectations. We have analyzed the consistency of planning data using information from prior periods.
- Given that minor changes in the applied costs of capital rate significantly impact the recoverable amount of goodwill, we have compared the applied costs of capital with discount rates used by a group of comparable companies (Peer-Group). Further we analyzed alternative scenarios, taking into account forecast uncertainties, as well as possible changes in costs of capital and long-term growth rates.
- By means of our own sensitivity analysis we have determined whether the tested book values are still sufficiently covered by the recoverable amounts in case of possible changes in the assumptions within a realistic range.
- Additionally, we have assessed whether the disclosures in the notes with respect to the recoverability of goodwill and the retrospective adjustments are appropriate.
Recoverability of IT systems
Refer to notes page 107 to 109
Risk for the Financial Statements
The consolidated financial statements include corporate assets amounting to EUR 479,0 million, relating in particular to software components. These assets are impairment tested at least once a year. In addition an impairment test is performed when triggering events occur.
In the previous year 2015, a company-internal analysis concluded that certain IT systems and program components did not further meet (in full) future technical and economic requirements. Therefore an impairment loss on purchased software in the amount of EUR 195 million was recognised.
For the current financial year it has to be verified whether changes in market, economic or legal conditions require a reversal of the impairment or additional write downs.
The estimations of the general conditions and the market environment, and thus of the expected future cash flows as well as the individual costs of capital are highly discretionary.
- In order to assess whether indications of a reversal of impairment or further write-downs do exist, we, in cooperation with our IT specialists, have conducted interviews with management, representatives of business divisions and responsible IT project managers, have gained an understanding of the planning process, analyzing planned implementations as well as the technical framework.
- This analysis also included the impairment test, the determination of the recoverable amount and the validation of underlying parameters.
- In cooperation with our valuation experts we focused in particular on the validation of the specific costs of capital, the valuation model and the underlying planning data and estimates.
Changes in the consolidation method
Refer to notes pages 125ff
Risk for the Financial Statements
Until the interim report as of 31 March 2016, Vienna Insurance Group had included the investment in non-profit housing societies in the consolidated financial statements applying the equity method. In the interim report as of 30 June 2016, due to a legally binding notice dated 2 August 2016 from the Austrian Financial Market Authority (FMA) in accordance with § 3 (1) lit. 3 of the Austrian Financial Reporting Enforcement Act (Rechnungslegungs- Kontrollgesetz), a retrospective adjustment pursuant to IAS 8 was performed. By means of this adjustment both for the valuation of the investment in and for the recognition of profits from such non-profit housing societies the requirement of the legally binding notice to recognize the statutory restrictions for dividend payments and for realization of assets that apply to non-profit housing societies, was taken into account.
With effect from 17 August 2016 Vienna Insurance Group has regained control over the non-profit housing societies. Hence these entities are fully consolidated in the group financial statements starting from the third quarter 2016 onwards. The transaction was treated as a business combination of companies under common control.
The retrospective adjustment as well as the change in consolidation method are complex and based on estimates as well as discretionary decisions by management.
- We have verified the existence of control by examining the contractual arrangements.
- We have assessed management’s judgement that the initial consolidation of the non-profit housing societies is a business combination of companies under common control.
- We have also assessed whether the accounting for the transaction, as well as the presentation within the notes regarding the change of the consolidation method and the retrospective adjustments, are appropriate.
Liability adequacy test – “LAT”
Refer to notes page 119
Risk for the Financial Statements
Vienna Insurance Group has a considerable portfolio of policies with a guaranteed minimum interest rate. Due to the persistently low interest rates in the market, there is a risk that insurance liabilities are not adequately measured.
At each balance sheet date Vienna Insurance Group uses current estimates of future cash flows from insurance contracts to determine whether the insurance liabilities are adequately accounted for in the balance sheet.
To ensure this, future cash flows from existing policies are calculated on a best estimate basis using actuarial methods. For life and health insurance the cash flow model used for this purpose is also used to calculate the Market Consistent Embedded Value (“MCEV”). The MCEV is determined according to the “Market Consistent Embedded Value Principles” published by the CFO Forum in May 2016.
The performance of the liability adequacy test is complex and its underlying assumptions are based on a large number of estimates and discretionary factors.
We have examined the appropriateness of key assumptions and discretionary decisions as well as the calculation models and methods applied. In order to assess the appropriateness of the assumptions and methods used, we gained an understanding of the methodology in discussions with the actuaries of Vienna Insurance Group and analyzed the assumptions used as well as the resulting cash flows.
In particular, we assessed whether the applied methodology was consistent with the “Market Consistent Embedded Value Principles” published by the CFO Forum in May 2016. In addition, we assessed the appropriateness of the implementation of the methodology within the models, analyzed the consistency of assumptions used on the basis of information from prior periods, and examined the completeness of the modeled portfolio.
Furthermore, we critically dealt with the sensitivity analysis prepared by the company.
Management’s Responsibility and Responsibility of the Audit Committee for the Consolidated Financial Statements
The Company’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, and the additional requirements pursuant to Section 245a UGB (Austrian Commercial Code) and other legal or regulatory requirements and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Management is also responsible for assessing the Group’s ability to continue as a going concern, and, where appropriate, to disclose matters that are relevant to the Group’s ability to continue as a going concern and to apply the going concern assumption in its financial reporting, except in circumstances in which liquidation of the Group or closure of operations is planned or cases in which such measures appear unavoidable.
The audit committee is responsible for overseeing the Group’s financial reporting process.
Our aim is to obtain reasonable assurance about whether the consolidated financial statements as a whole are free of material misstatements, whether due to fraud or error, and to issue an audit report that includes our opinion. Reasonable assurance represents a high degree of assurance, but provides no guarantee that an audit conducted in accordance with Austrian Standards on Auditing, which require the audit to be performed in accordance with ISA, will always detect a material misstatement when it exists. Misstatements may result from fraud or error and are considered material if they could, individually or in the aggregate, reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Austrian Standards on Auditing, which require the audit to be performed in accordance with ISA, we exercise professional judgment and retain professional skepticism throughout the audit.
- We identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, we plan and perform procedures to address such risks and obtain sufficient and appropriate audit evidence to serve as a basis for our audit opinion. The risk that material misstatements due to fraud remain undetected is higher than that of material misstatements due to error, since fraud may include collusion, forgery, intentional omissions, misleading representation or override of internal control.
- We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
- We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates as well as related disclosures made by management.
- We conclude on the appropriateness of management’s use of the going concern assumption and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. In case we conclude that there is a material uncertainty about the entity’s ability to continue as a going concern, we are required to draw attention to the respective note in the financial statements in our audit report or, in case such disclosures are not appropriate, to modify our audit opinion. We conclude based on the audit evidence obtained until the date of our audit report. Future events or conditions however may result in the Company departing from the going concern assumption.
- We evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- We obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
- We communicate with the audit committee regarding, among other matters, the planned scope and timing of our audit as well as significant findings including any significant deficiencies in internal control that we identify in the course of our audit.
- We report to the audit committee that we have complied with the relevant professional requirements in respect of our independence and that we will report any relationships and other events that could reasonably affect our independence and, where appropriate, related measures taken to ensure our independence.
- From the matters communicated with the audit committee we determine those matters that required significant auditor attention in performing the audit and which are therefore key audit matters. We describe these key audit matters in our audit report except in the circumstances where laws or other legal regulations forbid publication of such matter or in very rare cases, we determine that a matter should not be included in our audit report because the negative effects of such communication are reasonably expected to outweigh its benefits for the public interest.
Report on Other Legal Requirements
Group Management Report
In accordance with the Austrian Commercial Code the group management report is to be audited as to whether it is consistent with the consolidated financial statements and as to whether it has been prepared in accordance with legal requirements.
The legal representatives of the Company are responsible for the preparation of the group management report in accordance with the Austrian Commercial Code and other legal or regulatory requirements.
We have conducted our audit in accordance with generally accepted standards on the audit of group management reports as applied in Austria.
In our opinion, the group management report has been prepared in accordance with legal requirements and is consistent with the consolidated financial statements. The disclosures pursuant to Section 243a UGB (Austrian Commercial Code) are appropriate.
Based on our knowledge gained in the course of the audit of the consolidated financial statements and the understanding of the Group and its environment, we did not note any material misstatements in the group management report.
The legal representatives of the Company are responsible for the other information. Other information comprises all information provided in the annual report, with the exception of the consolidated financial statements, the group management report, and the auditor’s report thereon.
Our opinion on the consolidated financial statements does not cover other information, and we will not provide any assurance on it.
In conjunction with our audit, it is our responsibility to read this other information and to assess whether it contains any material inconsistencies with the consolidated financial statements and our knowledge gained during our audit, or any apparent material misstatement of fact. If on the basis of our work performed, we conclude that there is a material misstatement of fact in the other information, we must report that fact. We have nothing to report with this regard.
The engagement partner is Mr. Michael Schlenk.
Vienna, 19 April 2017
KPMG Austria GmbH
Wirtschaftsprüfungs- und Steuerberatungsgesellschaft
(Austrian Chartered Accountant)
This report is a translation of the original report in German, which is solely valid.
The consolidated financial statements together with our auditor’s opinion may only be published if the consolidated financial statements and the group management report are identical with the audited version attached to this report. Section 281 Paragraph 2 UGB (Austrian Commercial Code) applies.