Vienna Insurance Stays Out of Russia as Acquisition Targets Rare

By | June 2, 2014

Vienna Insurance Group AG (VIG), Eastern Europe’s biggest insurer, said it won’t expand into Russia even as the number of acquisition targets in other parts of the region shrink.

VIG, which is based in the Austrian capital and operates in 25 countries, ended its Russian involvement in 2012, almost two years before the Ukrainian crisis sparked limited sanctions against Russia, by selling minority stakes in three insurers.

“We’re not able to run our business model in Russia,” VIG Chief Executive Officer Peter Hagen said in an interview in Vienna. “We don’t understand the structure, the country is too big and we are not equipped for this.”

VIG is moving from a period of growth driven by more than 50 acquisitions since 2002 to tapping new business via existing operations. With Eastern European insurance density still at a fraction of Western Europe’s business, it remains focused on the region even as some markets are battling recessions.

While not ruling out smaller purchases in the next several years, “more and more markets are distributed,” Hagen said. Even if there might be some activity in Poland, Hungary or the Baltic states, “most of the big stuff is gone,” he said.

Since the Russian pullout, VIG has bought competitors in Macedonia, Hungary, Poland and Moldova, giving it an 18 percent market share in its core markets.

The company reported a net income of €118.4 million ($161.5 million) for the first quarter last week, beating analyst estimates. Its units in Romania, which had a pretax loss of almost €100 million [$135.98 million] in 2013 after one-time charges related to intense competition in the country’s motor market, posted a profit of €500,000 [$680,000].

Romanian Turnaround

Hagen, 54, said he believes the company may also be able to break even in Romania for the full year.

“What helps us now is the environment,” he said. “All the structural changes we made will need another two or three quarters to show that they’re working.”

Ukraine, embroiled in a standoff with Russia over its eastern provinces, is still a “fantastic area for our industry and I continue to be bullish on it,” Hagen said. “It’s highly probable they’ll run into a recession, but they’ll muddle through.”

The European Bank for Reconstruction and Development expects the Ukrainian economy to shrink by about 7 percent this year and stagnate in 2015 as the country works on reducing fiscal deficits and implements structural reforms.

“Life insurance will take some time to take hold in Ukraine,” Hagen said. “The problem is that you need a middle class or an upper middle class. You need the money, which is now tied to the very rich, to drizzle down, and that is still a long way to go in Ukraine.”

ECB Rates

The fact that the European Central Bank might cut interest rates further on June 5 after years of historically low rates doesn’t mean that Vienna Insurance will offer life policies without a guaranteed interest rate, Hagen said. Products of this type, introduced by Allianz SE last year, mean “giving up a unique selling proposition,” Hagen said.

“This is very much short term thinking,” Hagen said. “And I believe there’s a big discrepancy between that and selling life insurance.”

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