Erste Bank JPMorgan Merrill Lynch International

specified in the business plans, and are included by zillmerization when calculating the actuarial
reserve. Negative actuarial reserves are set to zero (this applies primarily to the Austrian companies).
No additional policy writing costs are capitalized. For foreign companies, as a rule, the portion of the
deferred item which exceeds the mathematical reserves is reported on the asset side of the balance
sheet and included in the consolidated financial statements. In general, no capitalization of policy
writing expenses is performed for health insurance.
Underwriting provisions
The Vienna Insurance Group establishes underwriting provisions for expected future benefit
payments and associated costs related to property and casualty, and life and health insurance.
Expected claims payments are determined on a case by case basis and are based on circumstances
known to the Group at the time the provisions are established. If necessary, they are adjusted to take
into account the total expected costs of an insurance payment. In addition, the Group also establishes
so-called IBNR provisions for property and casualty insurance to take into account expected expenses
for losses which have been incurred but not yet reported to the Group. If actual insurance payments
differ from expected payments, the difference is normally reflected in the results of the period in which
the difference occurred. In any case, the establishment of underwriting provisions for the property and
casualty area is necessarily an uncertain process, based on a variety of assumptions, with factors
such as court decisions, changes in law, social and economic trends, inflation and other factors
related to the costs of proceedings also playing a role. Assumptions about demographic and social
developments are used for the life and health insurance business.
Fair value and impairment
Some of the Group’s assets and liabilities are shown at fair value in the Group’s books. This
applies in particular to a significant portion of the financial assets. The determination of the fair value
of financial assets and liabilities is generally based on an established market value or the price offered
by brokers and dealers. If a price cannot be readily established, fair value is determined either by use
of an internal valuation model or by an assessment by management as to what amounts could be
obtained by orderly realization at current market conditions. The fair value of certain financial
instruments, in particular unlisted derivative financial instruments, is determined using pricing models
taking into account factors including contract and market prices and the relationship between them,
current value, counterparty creditworthiness, yield curve volatility, and early repayment of the underlying.
The use of different pricing models and assumptions can lead to differing results for fair value.
Changes in the estimates and assumptions used to determine the fair value of assets in cases where
no market price quotations are available may require the book value of the assets to be written up or
down, with a corresponding income or expense entry in the income statement.
Financial assets are tested regularly for impairment. If valuation adjustments to fair value are
necessary, in the case of permanent value impairment, these are recognized in the income statement.
The assessment as to whether a reduction in value is permanent is based on an evaluation of market
conditions, the Issuer’s financial position, and other factors. In the case of equity instruments, the
Group (normally) assumes permanent impairment if a reduction of 20% or more relative to acquisition
value is observed over a period of more than six consecutive months.
IAS 40 Revaluation of investment property using the fair value model
The carrying cost of investment property is its cost of acquisition or construction. Revaluation
must be performed using either the fair value model or acquisition cost model. The Group performs
revaluation using the acquisition cost model. As of December 31, 2007, the book value of investment
property was EUR 2,868.7 million.
Unscheduled depreciation and amortization of assets, including goodwill amortization, not
falling under IAS 39
Under IFRS, scheduled depreciation or amortization is applied to the value of certain assets over
their useful life, such as goodwill or certain tangible assets. The Vienna Insurance Group examines
the prior depreciation or amortization method and remaining useful life at each balance sheet
reporting date. Where there are indications of a decrease in value, an impairment test is performed.
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