Thinking about tomorrow today

Dear Mrs Stadler, I am now sitting in front of a newly formed Managing Board team. What are its strengths?

Elisabeth Stadler: In one word: diversity. The diversity of the Group is also reflected in the Managing Board team. The Managing Board consists of men and women in equal proportions; while half of its members have long careers within the Group, the other half come from outside. This allows us to combine in-depth knowledge of insurance with internal and external expertise. Liane Hirner and Peter Thirring are new members appointed to the Managing Board in 2018. Both have many years of experience in the insurance industry and their individual areas of focus and different perspectives that will be highly beneficial for VIG’s future development. Liane Hirner is trained as an auditor and has ideal qualifications for her new position as CFO. Peter Thirring has in-depth knowledge of the industry and has moved from Group company Donau Versicherung to the Managing Board of VIG Holding. Our work in the Managing Board benefits from the diversity of the people involved and the enthusiasm for the insurance industry that unites us all.

How satisfied are you with the financial year 2018?

Stadler: Overall, we are very satisfied. On one hand, the fact that the Agenda 2020 initiatives have already been implemented, makes me optimistic. On the other hand, our business results give us a good reason to be happy.

Liane Hirner: We managed to increase not only the premium volume again, but also the result before taxes. And we are passing on part of this success to our shareholders, who can expect the dividend to increase by around 11% to EUR 1.00 per share. Under its new dividend policy, VIG distributes between 30 to 50% of net Group profit to shareholders.

You mentioned the achivements of Agenda 2020 over the past year. What do the interim results look like?

Stadler: Very good. We made significant progress and are working hard to bring the positive interim results to a satisfactory completion at the end of 2020. The results (see information box) speak for themselves and show that we are on the right track.

Franz Fuchs: We are successively rolling out our initiatives in the area of claims management. The same applies to the “digital transformation”, “assistance” and “pricing” areas. And our measures for expanding business activities with growth potential are also now in the implementation phase.

Let’s start with the last point. What were the milestones with respect to bank distribution, reinsurance, etc.?

Stadler: Bank distribution kept us busy in a number of ways last year. First, in the form of mergers between our local composite insurers and life insurance companies specialising in bank distribution. Mergers took place in Croatia, Slovakia, Hungary and Austria during the course of the year, and the merger in the Czech Republic took effect on 1 January 2019. In total, we created five strong local insurance companies whose combined resources and expertise will allow the opportunities provided by bank distribution to be further exploited, also by other lines of business. Bank distribution was also an important topic because of the extension of our cooperation agreement with Erste Group until the end of 2033.

Judit Havasi: Extension of the agreement creates security and predictability for our future business development and acts as a signal to stakeholders that they can rely on us as a partner. And we want to expand this cooperation further.

Peter Thirring: For reinsurance, 2018 was dominated by implementation of the planned expansion, including geographical expansion. Our two new branch offices in Frankfurt and Paris provide us with direct access to our customers in the German-speaking region as well as the region of France, Belgium and Luxembourg.

What progress has VIG achieved with the digital transformation?

Stadler: We developed a digital vision under Agenda 2020 that provides a guideline for the digital transformation of Group companies and their business models. The focus in 2018 was on supporting the local companies with their digital inventory based on the general vision. Initial transformation plans were also prepared and approved for implementation.

Havasi: 19 companies in 11 countries have already worked hard to define their individual areas of focus based on the digital vision. VIG has an IT investment budget of around EUR 100 million and is devoting around half of this to digitalisation. Part of this will be used to fund various projects in the Group companies. Let me mention two examples. The Polish Group company Compensa is working on the “Genesis” project aimed at using artificial intelligence to optimise business processes and robot technology to automate them. This will allow insurance companies to be integrated directly into the digital world of the customer in the future via the “Internet of things”. The second example is our internal VIG Xelerate initiative, which invites all Group companies to pitch their innovative digitalisation ideas to VIG Holding. The VIG Managing Board then selects the projects that will receive financial support for implementation. VIG also awards special prizes for outstanding projects in its VIG Xelerate programme.

Peter Höfinger: In order to win a prize, the projects must provide a potential future benefit for the respective market and for the Group and achieve a clear improvement in key figures such as premium volume, expenses, market share or operational results. The five projects selected in the first round will receive a total of around EUR 1 million. The second round of pitches started in the autumn of 2018.

What effects do technological and social changes in the area of mobility have on VIG as a major provider of motor insurance?

Fuchs: The entire automobile industry is undergoing radical change and is even trying to reinvent itself in some areas. For example, the drive system itself – such as electric cars and the resulting reorientation of vehicle sales – as well as vehicle networking and automation. The rapid growth of car sharing is another example. We are following all of these areas and monitor the automobile industry closely in order to be able to help shape future changes. We brought the “Motor Strategy Lab” initiative to life for this purpose, where we develop strategies for specific occurrence scenarios and examine potential cooperations. Because one thing is clear to us: you have to start now in order to be prepared for the future.

Are you worried about technological change as an insurer?

Stadler: Digitalisation has the potential to completely rewrite the rules of the game in the insurance industry. There is no question about that. Major technological changes like this always bring uncertainty. However, they also offer an opportunity to take on a greater role as a service provider using new business models. It is therefore essential to deal with such changes. I view this as a positive, however, since it creates a tremendous “drive” within VIG whenever it happens. This is also because our decentralised management approach brings us close to our customers, so we know what they want. Creative local concepts can be quickly implemented at VIG and this spurs employee innovation and enjoyment at helping to shape these changes. This freedom allows us to find innovative answers from many levels to the challenges facing our industry. With this in mind, no, I am not worried about technological change. I see it as an opportunity for further development.

You spoke of insurers as service providers. What role do assistance services play in this regard?

Höfinger: Service has many faces, such as the change from a claims adjustor to an advisor for matters concerning future provisions or risk, and also, of course, assistance. This is one of the priorities of Agenda 2020 and we have further intensified our efforts again in 2018. Our Group companies handled around 200,000 assistance cases in 2017 and this rose to around 300,000 cases in the reporting period. We recently established “Global Assistance Polska” in Poland, so we could also offer our services to third parties. We always start with pilot projects, such as the current cyber assistance project in the Czech Republic. If the results are good, we quickly expand the business, always with the goal of also offering services to third parties. And this strategy is bearing fruit.

In your view, what were the biggest challenges in the year just ended?

Stadler: We completed six mergers last year and one at the beginning of 2019. These also included mergers of very large Group companies. This requires enormous commitment from all parties concerned and I was pleased to watch VIG employees grow closer and excel when faced with such challenges. In terms of business development, the situation was unfortunately less positive in Romania and Poland in 2018.

Fuchs: In both countries, regulatory changes are the main factor depressing local business results. In Romania, the government capped premiums in our motor line of business for several months during the reporting period. The caps apply to all insurers operating in Romania, but we hope the situation will improve in 2019. In Poland, we had to form new provisions in the life insurance area in connection with the cancellation terms for a certain product line.

Romania is currently one of the most difficult countries. Why doesn’t VIG simply leave such a market?

Stadler: The markets in Romania and some of the other countries mentioned have a great potential and we are confident that this potential will be realised. We enter countries with the intention of staying and take a long-term perspective. We feel it is part of our social responsibility as an employer and a company to help shape the markets where we operate.

Hirner: This point of view is also shared by our principal shareholder, Wiener Städtische Versicherungsverein, which engages in local cultural and social activities. We feel an obligation to our employees, partners and policy holders, and promise our customers to protect what matters, including across generations when possible and reasonable. A commitment like this is not consistent with hasty decisions and short-term thinking. Naturally, it also has to make economic sense in the end. Our broad risk diversification across many countries ensures that individual losses have no significant effect on our earnings power and allows us to make prudent decisions and avoid wasting opportunities carelessly.

Does your strategy continue to focus on the CEE region and are you looking for potential acquisitions there?

Stadler: The CEE region continues to be a growth market. And as the number 1 company in this region, we are ideally positioned to benefit from its great potential. Our acquisitions of the Gothaer insurance company in Poland and Seesam Insurance in the Baltic states significantly expanded our market presence again in 2018. We have implemented around 45 mergers and acquisitions since 2010, including eleven in the past three years alone. And we are continuously checking the market for further acquisitions, since a glance at the insurance density already shows that the markets are far from being saturated. But not everything we see meets our requirements. The company being acquired must be a good fit, and the price also has to be right. VIG has excellent capital resources that we would like to use mainly for growth. The focus is on complementary acquisitions, like those we performed in previous years.

How does the capital market feel about your strategy and activities?

Hirner: Completely positive, as shown by our investor survey during the reporting period (see p. 24). Our focus on the CEE region was also received favourably, as were our efforts to streamline our cost structure. VIG’s particular management and control approach has proven successful in our highly diverse markets and continues to attract interest as a result. We will continue to satisfy the desire that was expressed for management visibility and active communication as good as we can.

You have mentioned VIG’s decentralised management approach a number of times. What is special about this approach and how does VIG manage in practice?

Stadler: We have clearly specified VIG Holding’s responsibilities and those of local management. VIG Holding manages, controls and supports the Group companies. Guidelines, frameworks and clear rules exist.

Höfinger: In practice, this means, above all, exchanging a great deal of information. We maintain close contact with our colleagues on the managing boards of the local Group companies, frequently phoning them several times a week and also meeting personally. Every member of the VIG Managing Board is responsible for at least one country and is regularly informed of important developments taking place there. The VIG Managing Board and Controlling unit closely supervise the planning process performed by each Group company. We believe, however, that only decentralised management provides the flexibility needed to achieve success in a diverse region like the CEE. Local management and our multi-brand strategy are two important features that set us apart from the competition and contribute to our success.

Stadler: We analysed how VIG Holding could implement its management agenda more effectively in 2018 and are currently evaluating the results. Regulatory requirements, such as the EU solvency regime, apply across the Group. New international accounting standards, in particular IFRS 9 and 17, continue to require a high degree of centralisation in the areas concerned.

Ms Hirner, as CFO, IFRS 17 falls into your area of responsibility. What do you think about the deferral that was recently announced?

Hirner: We think the one-year deferral is good, since too many issues still need to be clarified in the industry. A longer preparation and validation period gives listed insurance groups like VIG that are affected by application of the IFRS more planning certainty. We are, of course, still working intensively across the Group on implementing the new highly complex valuation model for insurance policies. This requires new IT systems – some of which are still in development – and extensive changes to the existing IT systems. Based on the current version of the IFRS 17 standard announced in May 2017, the cost of implementing IFRS 17 will be significantly higher than for the introduction of Solvency II. The new accounting standard has come under extensive criticism worldwide due to the high level of complexity and cost of implementation and appropriate changes are therefore being evaluated.

We have already talked a great deal about future scenarios. What goals has VIG set for the near future?

Stadler: For 2019, we plan to achieve a premium volume of EUR 9.9 billion and a result before taxes of EUR 500 to 520 million. We aim to steadily increase our premium volume to EUR 10.2 billion and our result before taxes to between EUR 530 and 550 million by 2020. Our goal for the combined ratio is a sustainable improvement to around 95% by 2020.