Erste Bank JPMorgan Merrill Lynch International

For types of life insurance policies where the policyholder participates in profits, in addition to the
sum insured, the policyholder is also entitled to receive a portion of the profits to be paid out at the
time the insurance policy becomes due (survival, surrender, and death). In accordance with the
provisions of the VAG, company business plans and policy conditions, the insurance company is
required to use an adequate portion of net income for profit participation. In 2007, the Vienna
Insurance Group guaranteed an average interest rate of just under 3% per annum in Austria. Profit
shares are reserved by means of matching profit reserves. In October 2006, a regulation relating to
the VAG was adopted requiring that a method based on the income statement be used to calculate a
base value applicable exclusively to profit-participation life insurance policies starting in fiscal year
2006. This regulation requires that expenditures for the refund of premiums related to results or the
profit participation of the policyholders plus any direct credits must equal at least 85% of the base
value in each fiscal year. Allocations in previous years, discounted according to time, can be counted
toward this minimum amount to the extent that they exceeded the minimum allocation calculated using
this new method. On the whole, this new regulation introduces a quantitative definition of the
“adequacy” of a policyholder’s profit participation.
In the business plans of Wiener Städtische AG, policy writing costs are specified as a percentage
of the sum insured or total premiums. At the time a policy is written, zillmerization is used to include
calculated policy writing costs into the mathematical calculation of the provisions described above. If
any calculations result in negative reserves, these amounts are set to zero. Setting a negative
actuarial reserve to zero represents a write-off of assets in the amount by which the capitalization
exceeds the actuarial reserve before zillmerization. This is a non-recurring expense which, as a rule,
is reversed over a period of up to three years.
Unit-linked and index-linked life insurance
In the case of unit-linked and index-linked life insurance, the risk of the capital investment is borne
by the policyholder or provider of the core investment, such as a capital guarantee for index-linked
products.
Acquisitions
A series of acquisitions has resulted in a change to the Group’s consolidated operating result, see
“Business – The Companies of the Vienna Insurance Group – The Rest of Europe”. Management
expects that these and future acquisitions will continue to have a significant effect on the future
assets, financial position and earnings of the Group.
Management believes that the acquisition of the Target Companies in 2008 in particular will have
a significant effect on the assets, financial position and earnings of the Vienna Insurance Group, see
“Acquisition of the Target Companies and Long-Term General Distribution Agreement”.
In fiscal year 2007, BA-CA Versicherung was included in the scope of consolidation for the first
time which accounted for approximately one quarter of the premium increase in life in 2007. At the
end of March 2008, the Vienna Insurance Group agreed to sell a majority of its shares in BA-CA
Versicherung to the ERGO International AG. Vienna Insurance Group will continue to hold a 10% plus
one share participation in BA-CA Versicherung. The sale will be consummated at the end of
September 2008 and is subject to regulatory approval.
Effects of currency fluctuations
A significant portion of the Vienna Insurance Group’s new business is generated outside of the
Euro zone, in particular in the CEE region. The largest contribution from this region comes from the
subsidiaries in the Czech Republic, Slovakia, Poland and Romania. In 2007, the Czech subsidiaries of
the Company contributed 16.4% of gross earned premiums under IFRS, the Slovakian subsidiaries
7.2%, the Polish subsidiaries 7.9% and the Romanian subsidiaries 6.0%. As of December 31, 2007,
the total contribution to the Group’s premiums generated by Group companies in the CEE region was
EUR 2,965.4 million.
The combination of increased foreign investments, an improved macroeconomic environment,
and the declaration of intent by many countries in the CEE region to join the EU have led to a
strengthening of these countries’ currencies relative to the Euro. The Group is unable to predict
changes in foreign exchange rates.
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