Report on the Consolidated Financial Statements
We have audited the consolidated financial statements of
VIENNA INSURANCE GROUP AG
Wiener Versicherung Gruppe, Vienna, Austria,
and its subsidiaries (“the Group”), which comprise the Consolidated Balance Sheet as at 31 December 2019, 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.
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2019, 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, the additional requirements pursuant to § 245a UGB (Austrian Commercial Code) as well as other legal or regulatory requirements.
Basis for our Opinion
We conducted our audit in accordance with the EU Regulation 537/2014 (“AP Regulation”) and Austrian Standards on Auditing. These standards require the audit to be conducted in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the “Auditor’s Responsibilities” section of our report. We are independent of the audited Group in accordance with Austrian company law and professional regulations, and we 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. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, however, we do not provide a separate opinion thereon.
We have identified the following key audit matters:
- Recoverability of goodwill
- Treatment of non-profit housing societies
- Liability Adequacy Test – “LAT”
Recoverability of goodwill
Refer to consolidated financial statements pages 93, 96 to 98
Risk for the Consolidated Financial Statements
The recoverability of goodwill recognized in the Consolidated Financial Statements of the Vienna Insurance Group amounting to EUR 1,382.5 million, is monitored separately at country level. 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.
Together 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 reconciled the assumptions regarding the market development with general and sector-specific market expectations. We have analysed the consistency of planning data using information from prior periods.
Given that minor changes in the applied cost of capital rate significantly impact the recoverable amount of the cash generating units, we have compared the parameters used for derivation of the applied cost of capital with those used by a group of comparable companies (peer group).
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 are appropriate.
Treatment of non-profit housing societies
Refer to consolidated financial statements pages 115 and 116
Risk for the Consolidated Financial Statements
Since the third quarter 2016 the non-profit housing societies have been fully consolidated in the Consolidated Financial Statements of Vienna Insurance Group. Due to the amendment of the Austrian non-profit housing act (Wohnungsgemeinnützigkeitsgesetz – “WGG”) during financial year 2019, changes came into effect, which materially impaired the possibilities of control over these societies. After analysing the changed legal position, the managing board decided, that in an overall view, the control over the non-profit housing societies according to IFRS can no longer be assumed.
Consequently, the non-profit housing societies were deconsolidated as of 31 July 2019 and their accounting treatment was changed to the at equity method.
The evaluation whether, due to the legal changes, there is a loss of control and a reduction in co-determination to an extent that represents significant influence, is complex and requires the assessment of the managing board. There is a risk for the consolidated financial statements that the consolidation method used is not in line with the relevant standards.
Together with our specialists we have examined the changes to the WGG and its implications to the matters of control.
We have evaluated the assessment of the managing board, that the WGG amendment 2019 resulted in a loss of control over the non-profit housing societies and that from then on only significant influence can be exerted on these companies.
Furthermore, we examined the accounting and the disclosure of the change in consolidation method in the consolidated financial statements.
Liability adequacy test – “LAT”
Refer to consolidated financial statements pages 108, 139 to 140
Risk for the Consolidated Financial Statements
With life and health insurance, Vienna Insurance Group holds a significant amount of long-term contracts for which premiums have been calculated using a high discount rate. As these interest rates are also used to measure the liabilities from insurance contracts, there is – due to the persistently low interest rates in the market – a risk that the 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 June 2008 and last amended in April 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 analysed 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 June 2008 and last amended in April 2016. In addition, we assessed the appropriateness of the implementation of the methodology within the models, analysed 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.
Responsibilities of Management and the Audit Committee for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, the additional requirements pursuant to § 245a UGB (Austrian Commercial Code) as well as other legal or regulatory requirements and for such internal controls as management determines are 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, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless management either intents to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The audit committee is responsible for overseeing the Group’s financial reporting process.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement – whether due to fraud or error – and to issue an auditor’s report that includes our audit opinion. Reasonable assurance represents a high level of assurance but provides no guarantee that an audit conducted in accordance with the AP Regulation and Austrian Standards on Auditing (and therefore ISAs), will always detect a material misstatement, if any. Misstatements may result from fraud or error and are considered material if, individually or in aggregate, they could 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 the AP Regulation and Austrian Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit.
- We identify and assess the risks of material misstatement in the consolidated financial statements, whether due to fraud or error, we design and perform audit procedures responsive to those risks and obtain sufficient and appropriate audit evidence to serve as a basis for our audit opinion. The risk of not detecting material misstatements resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations 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 Group's internal control.
- We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
- We conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our audit report to the respective note in the consolidated financial statements. If such disclosures are not appropriate, we will modify our audit opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
- We evaluate the overall presentation, structure and content of the consolidated financial statements, including the notes, 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, amongst 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 during our audit.
- We communicate to the audit committee that we have complied with the relevant professional requirements in respect of our independence, that we will report any relationships and other events that could reasonably affect our independence and, where appropriate, the related safeguards.
- From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit i.e. key audit matters. We describe these key audit matters in our auditor’s report unless laws or other legal regulations preclude public disclosure about the matter or when in very rare cases, we determine that a matter should not be included in our audit report because the negative consequences of doing so would reasonably be expected to outweigh the public benefits of such communication.
Report on Other Legal Requirements
Group Management Report
In accordance with Austrian company law, the group management report is to be audited as to whether it is consistent with the consolidated financial statements and prepared in accordance with legal requirements.
Management is responsible for the preparation of the group management report in accordance with Austrian company law 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 is consistent with the consolidated financial statements and has been prepared in accordance with legal requirements. The disclosures pursuant to § 243a UGB (Austrian Commercial Code) are appropriate.
Based on our knowledge gained in the course of the audit of the consolidated financial statements and our understanding of the Group and its environment, we did not note any material misstatements in the group management report.
Management is responsible for other information. Other information is all information provided in the annual report, other than the consolidated financial statements, the group management report and the auditor’s report.
Our opinion on the consolidated financial statements does not cover other information and we do not provide any kind of assurance thereon.
In conjunction with our audit, it is our responsibility to read this other information and to assess whether, based on knowledge gained during our audit, it contains any material inconsistencies with the consolidated financial statements or any apparent material misstatement of fact. If we conclude that there is a material misstatement of fact in other information, we must report that fact. We have nothing to report in this regard.
Additional Information in accordance with Article 10 AP Regulation
At the Annual General Meeting dated 25 May 2018, we were elected as group auditors. We were appointed by the Supervisory Board on 18 June 2018.
In addition, we have already been elected as group auditors for the following financial year by the Annual General Meeting dated 24 May 2019 and appointed by the Supervisory Board on 24 June 2019.
We have been the Group’s auditors from the year ended 31 December 2013 without interruption.
We declare that our opinion expressed in the "Report on the Consolidated Financial Statements" section of our report is consistent with our additional report to the Audit Committee, in accordance with Article 11 AP Regulation.
We declare that we have not provided any prohibited non-audit services (Article 5 Paragraph 1 AP Regulation) and that we have ensured our independence throughout the course of the audit, from the audited Group.
The engagement partner is Mr Michael Schlenk.
Vienna, 23 March 2020
KPMG Austria GmbH
Wirtschaftsprüfungs- und Steuerberatungsgesellschaft
Michael Schlenk Wirtschaftsprüfer (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. § 281 Paragraph 2 UGB (Austrian Commercial Code) applies.