The financial repercussions of record-low interest rates in Europe were highlighted Wednesday as Vienna Insurance Group AG, eastern Europe’s biggest insurer, posted its worst first-quarter profit since the financial crisis.
The insurer, based in Austria’s capital, said the effect of low bond yields on investments were “substantial” after the European Central Bank embarked on a bond-buying program that had pushed rates on some government debt to negative.
BlackRock Inc.’s Laurence D. Fink, the International Monetary Fund and JPMorgan Chase & Co. have all warned of deteriorating profitability at insurers after interest rates slumped across the continent. Vienna Insurance, which has maintained its bond investments at 71 percent of total despite the lower rates, was unable to match the performance of larger competitors such as Allianz SE and France’s Axa SA, which both reported an increase in income.
Net income for the three months ended March 31 was 98.8 million euros ($109.8 million), down 18 percent from a year earlier, Vienna Insurance said in a statement. Pretax profit in the life business, which relies on returns from investments to meet claims, fell to 40 million euros from 48 million euros.
“The historically low interest rates adversely affected current income in the financial result and also made a precaution for personnel provisions in Austria necessary,” Vienna Insurance said. The company had to increase provisions for pensions and other payouts to employees because of weak investment returns, spokeswoman Silvia Polan said by phone.
Yields on Austria’s government bonds with a maturity of five years fell below zero in the first quarter.
Vienna Insurance, also active in casualty and health insurance, holds just 4.2 percent of its 32.4 billion euros of investments in stocks and 6.1 percent in real estate.
The company has said that its financial result, which comprises income from investments, may fall by “three-digit million euros” this year from 1.12 billion euros in 2014. The earnings fell one percent in the first quarter as losses from selling some investments were partially offset by income from disposing of other assets.
Chief Financial Officer Martin Simhandl said on a conference call that the insurer will keep buying property to mitigate some of the interest rate pressure, even as cheap credit pushed up real estate prices.
Profit before tax in property and casualty insurance fell 16 percent to 79 million euros. Total premiums rose 0.9 percent to 2.8 billion euros.
The shares fell as much as 2.4 percent in Vienna and traded at 36.18 euros, down 0.3 percent, at 5:15 p.m. The Stoxx 600 Insurance index rose 0.1 percent. Losses this year were 1.6 percent compared with a gain of 17 percent for the index.
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