Economic environment

The economic environment for our business activities was favourable owing to continued strong global economic growth in 2006. In addition to East Asia and the USA, the Euro zone developed a special dynamic following the cautious growth of the previous year.

Growth in the Euro zone nearly doubled

Above all, as a result of continuing intensification of investment activity and the lively increase in exports, gross domestic product of the twelve European countries belonging to the monetary union grew by more than 2.5% – nearly twice the rate of 2005. The Central and Eastern European EU accession countries were, once again, one of the international centres of growth. They improved their real production performance by around 5.5%.

Inflation continued to remain above 2%, in particular, as a result of the increased price of crude oil. The European Central Bank, therefore, continued the restrictive course it set at the end of 2005, because of the sustained risk to stability and increased the key interest rate in five steps to 3.5%.

Strong recovery in Austria

Austria profited particularly well from the economic recovery in the Euro zone. Real gross domestic product grew by around 3.2% – stronger than ever since 2000. Despite timid domestic demand, real exports expanded by nearly 9% as a result of strong foreign demand – above all, from Eastern Europe. Unemployment continued to decrease with the increase in employment. With an inflation rate of around 1.5%, Austria was one of the most price stable countries in the Euro zone in 2006.

Insurance industry feeling the slowdown of business

After 2005, which boomed with a premium growth of 9.5% as a result of the explosive increase in single premium policies, the expansion of the Austrian insurance industry slowed noticeably. Total premium revenues increased in the past year around 1.9% to € 15.6 billion. Without taking the single premiums into account, the solid upward trend of the insurance industry continued – if somewhat flatter – with an increase in premiums of 4.2% in 2006. Not lastly, as a result of the significant amount of unsatisfied demand for private old age pension insurance compared to Western Europe, the insurance industry will continue to be a growth driver of the Austrian economy.

Decrease in single-premium life insurance policies

Personal injury insurance exhibited the most significant slowdown in 2006. This was, above all, attributable to the decrease in single-premium policies: Their revenues decreased by 12.2% compared to 2005. In contrast, life insurance policies with recurring premiums continued their upward trend with an increase of 6.4%.

In total, life insurance policies lost significant momentum in the past year with an increase in premiums of just over 1% compared to 2005 (+15.6%). Health insurance policies, whose premium revenues increased by only 2.8%, also suffered a slight setback. The casualty line continued its growth trend of over 4%.

Timid property insurance performance

The property insurance line was more subdued in 2006. Total premiums increased by 2.8%, which was less than in 2005 (+4.8%). As a result of strong competition, automobile liability insurance reduced its growth rate to 0.8%. Premium revenues for general liability insurance, household insurance and industrial fire insurance also lost some of their dynamics.

Financial markets under the sign of increasing interest rates

International financial markets stood under the sign of increasing interest rates in 2006. The US Federal Reserve Board increased the key interest rate in four steps to 5.25%. The Japanese Central Bank increased the key lending rate for the first time in six years >from zero to 0.25%. The European Central Bank increased the refinancing costs of banks to 3.5%.

And during the course of the year, money market interest rates also increased significantly along with the key interest rates. At first, long-term government bond yields increased sharply in both the US and the Euro zone until the middle of 2006, then retreated slightly. The flattening of the yield curve, which was already observable in 2005, continued in 2006. In total, longterm interest rates continued to remain at a historically low level. Despite the round of international key rate increases by the central banks, the economy remained quite liquid. The tight monetary policy has not yet dampened the business activity. As a result of the decreased interest rate discrepancy between the USA and the Euro zone and the interest rate advantage compared to Japan, the external value of the Euro increased significantly compared to the US dollar and yen.

Stock markets soaring despite volatility

The international stock markets were, of course, affected by losses following the peak in May. However, they continued to soar by the end of the year as a result of the recovery following the increased volatility. In particular, the DOW JONES INDUSTRIAL AVERAGE reached a new all time high and closed on the last trading day of 2006 with a profit of 16.3%. The S&P 500 increased by 13.6%, and the NASDAQ COMPOSITE by 9.5%.

Many European stock markets performed even better. Whereas the DJ EURO STOXX 50 increased by 15.1%, the DAX in Frankfurt increased by 22.0%, the ATX in Vienna by 21.7%, and the CAC 40 in Paris by 17.5%. The index of Central and Eastern European stock markets (CECE) recorded a performance of 14.7% in 2006.

Economic climate cooling somewhat in 2007

The global economy will cool slightly in the current year, but will continue to expand at only slightly reduced speed. The continued expansion in Europe and the newly emerging Asian nations continues to compensate the increasing weakness of growth in the USA which set in following the overheated development in the real estate market.

Initially, the dynamics will also decrease slightly in the Euro zone. However, the economy will remain robust in 2007. The economic region, which expanded to thirteen members after the admittance of Slovenia to the monetary union, should grow by more than 2% with a slight increase in the rate of inflation. Despite increasing tension between monetary and fiscal policy, the Eastern European EU accession countries will be able to maintain their above-average rate of growth. In 2007, wages in the Euro zone have been rising more strongly than in the previous year, increasing disposable income. Private consumption should thus become somewhat livelier than in 2006.

Slight weakening also in Austria

The somewhat slower rate of growth in the Euro zone also carried over to Austria. Despite a slight clouding of economic prospects, real production performance should increase by more than 2.6%, and thus continue to be above the Euro zone average. Economic drivers continue to be increasing exports and unchanged strong growth of financial investments. Private consumption should increase by around 2% as a result of moderate wage increases and unchanged low inflation.

Insurance industry overcomes weak phase

In 2007, the Austrian insurance industry should overcome the short period of weakness which began with the decline in single- premium policies in the previous year, and should expand stronger than the overall economy with a premium plus of more than 4%. Personal injury insurance will drive growth forward with an increase of around 4.8%.

Above all, in life insurance, which is profiting from the increasing need for private old age pension insurance, growth of more than 5% is forecast as a result of the continued dynamic of recurring premiums (+5.8%) and single-premium policies which are once again higher (+3.9%). The health and casualty insurance lines should continue their upward trend in 2007, at a nearly unchanged rate.

The property insurance business will be characterised in 2007 by continued strong pressure from competition in the industrial business area. Thus, growth prospects in the industrial insurance lines should cloud over somewhat in the coming year. Premium growth in the automobile insurance line is stabilising. In total, an increase in premium income of around 2.9% for 2007 is expected for the property insurance line.

Cautious optimism on the stock markets

Cautious optimism dominated the international stock markets in the first weeks of the new year. As a result of the slight clouding of economic prospects and the insecurity surrounding the further plans of the Federal Reserve in the USA and the central banks in Europe, subdued performance is expected in the first half of the year. At the same time, volatility will increase significantly. As a result of the overall improved future economic prospects for 2007, stock markets in the Euro zone should once again perform better than those in the USA.