Erste Bank JPMorgan Merrill Lynch International

Business risks
The Vienna Insurance Group calculates its underwriting reserves using recognised actuarial
methods and assumptions. These assumptions include estimates of the long-term interest rate trend,
returns on capital investments, the allocation of capital investments between equities, interest rate
instruments and other categories, net income participations, mortality and morbidity rates, cancellation
rates and future costs. The Group monitors actual experience relating to these assumptions and
adjusts its long-term assumptions where changes of a long-term nature occur.
Guaranteed minimum interest rates
The Vienna Insurance Group also has a considerable portfolio of policies with guaranteed
minimum interest rates, including annuity and endowment insurance. On existing policies, Wiener
Städtische guarantees a minimum interest rate averaging just over 3% p.a. If interest rates fall below
the guaranteed average minimum rate for any length of time, the Vienna Insurance Group could find
itself forced to use its equity to subsidise reserves for these products.
Loss reserves
In accordance with normal industry practice and accounting and supervisory requirements,
Vienna Insurance Group and the individual Group companies work together with the Group actuarial
department to independently form reserves for claims and claims handling expenses arising from
property and casualty insurance business. The reserves are based on estimates of the payments that
will be made for these claims and related claims handling expenses. These estimates are made both
on a case by case basis in the light of the facts and circumstances available at the time the reserves
are formed, as well as for losses that have already occurred but which have not yet been reported to
Wiener Städtische (“IBNR”). These reserves represent the expected costs required for final settlement
of all known pending claims and IBNR losses.
Loss reserves, including IBNR reserves, may vary depending on a number of variables that affect
the total costs of a claim, such as changes in the statutory framework, the outcome of court cases,
changes in processing costs, repair costs, loss frequency, claim size and other factors such as
inflation and interest rates.
Interest rate fluctuations
The Vienna Insurance Group is exposed to market risk, that is, the risk of suffering losses as a
result of changes to market parameters. For the Vienna Insurance Group, interest rates are the most
relevant parameters for market risk. Ignoring investments held for the account of and at the risk of
policyholders, the Vienna Insurance Group’s investments consist largely of fixed-interest securities.
The majority of these securities are denominated in Euro. As a result, interest rate fluctuations in the
Euro zone have a significant effect on the value of these financial assets.
Stock price risk
The Vienna Insurance Group has an equity portfolio which, even including shares held in funds,
constitutes less than 11% of investments. Among other things, the Vienna Insurance Group equity
investments include interests in a number of Austrian companies and positions in other companies
whose shares trade primarily on the Vienna Stock Exchange or stock exchanges in the Central and
Eastern European region. Reported values might have to be adjusted if stock markets fall.
Aspects of tax law that affect the income situation
Tax law changes could reduce the attractiveness of certain Vienna Insurance Group products that
currently enjoy tax advantages. The introduction of laws reducing the tax advantages for the Group’s
old-age retirement products or other life insurance products could considerably reduce the attractiveness
of old-age retirement products and other life insurance policies.
Developments in Central and Eastern Europe
The expansion and development of business operations in the countries of Central and Eastern
Europe that are not yet EU member states is a key element of the Vienna Insurance Group’s strategy.
The Vienna Insurance Group’s goal is to have an even stronger presence in these target markets.
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