Erste Bank JPMorgan Merrill Lynch International

Embedded value sensitivity analysis for the life and health insurance business*
The embedded value analysis is a cash-flow analysis of life and health insurance.
The embedded value consists of two components: the adjusted net assets at market value and
the value of the insurance portfolio, which equals the cash value of the after-tax profit eligible for
distribution minus the capital commitment cost to the solvency capital. Thus, embedded value is an
actuarial quantification of the company value, assuming the continuition of current business activities
(going concern), but which explicitly excludes the value of future business activities. In addition to the
embedded value the increase in value induced by the new business recorded during the reporting
period is calculated.
The estimated trend of future profits is based on “best estimate” assumptions, e.g. a realistic
appraisal of economic and operational conditions based on future expectations and historical data,
whereby future risk is taken into account by the use of the risk discount rate and an explicit calculation
of capital commitment costs.
In order to calculate the embedded value, numerous assumptions are made about future
business, operational and economic conditions, as well as other factors, some of which lie outside of
the control of the Wiener Städtische Group. Although the Wiener Städtische Group considers these
assumptions reasonable, future developments may differ from expectations. Thus, the publication of
the embedded value is no guarantee that the expected future profits underlying this value will be
realised.
Based on historical and current practice, the shareholder margin from the net interest profit is set
at 0.5% of the mathematical after-tax reserve (plus all risk gains), minus current profit sharing and all
cost gains. There are still explicit restrictions on profit sharing in effect for certain small, mainly
regulated, parts of the portfolio; these restrictions are taken into account when calculating shareholder
earnings. Based on current practice, no profit sharing is assumed for the Austrian health insurance
business that exceeds the amount of premium reimbursement when the obligation to perform is
released. For the other sectors and markets, the amount of profit sharing assumed is based on local
practice and the regulatory rules in each instance.
The projections of future profits are based on realistic assumptions for proceeds from capital,
inflation, costs, taxes, cancellations, mortality, illness and other key figures, such as the development
of health-care costs and future increases in contributions.
The proper risk discount rate of an investor or shareholder depends on their individual requirements,
tax situation and an appraisal of the risks involved in realising future gains. In order to make a
statement on the impact of alternative risk discount rates, the embedded value as of 30 September
2005 was calculated as well as the increase in value resulting from new business in the first three
quarters of 2005 with a risk discount rate increased and reduced in each instance by 1%. The table
below shows the sensitivities.
* The embedded value calculation was checked by Tillinghast.
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