European Embedded Value takes into account all relevant risks relating to business activities.

A Group Chief Investment Officer (CIO) was appointed in 2007 as part of the ongoing integration of Group companies. From the perspective of risk management, increasing integration also increases the transparency, control and structure of investments.

The global reduction of key interest rates in 2000 and 2001 made it easier and easier for borrowers to obtain “cheap” loans. In the US in particular, loans were granted to borrowers with poor credit ratings (sub-prime loans). In most cases, the loans were secured by overvalued property. International investment banks securitised these mortgages and bundled them into portfolios (tranches), which were given very high ratings (in some cases AAA) based on the collateral and securitisation. Under these circumstances, active trading developed in derivatives of these asset-backed securities.

Once key interest rates started rising again in 2003, loan defaults rose rapidly due to increasing costs. Increased loan costs led to a drop in the demand for housing and foreclosures due to loan defaults. The consequence was a collapse in the US real estate market, resulting primarily in a need for high write-offs in the global financial industry (2007: USD 130 billion). Great uncertainty about whether and to what extent a bank would be affected by write-offs led to a loss of confidence in banks as a whole, a global lending crisis and a significant downturn in equity markets.

Due to its conservative investment guidelines and strict limit system, the Vienna Insurance Group was early to recognise and avoid the excessively high risk of poor quality mortgage-backed securities and their derivatives. The Vienna Insurance Group’s optimised asset allocation reduced the negative effects of the capital market crisis.

The development of Solvency II and related measures and models will be an important factor for 2008. FMA and CEIOPS will carry out the fourth Quantitative Impact Study (QIS). The Vienna Insurance Group stands out for its active participation in these direction-setting surveys, which ensures that the Group is optimally prepared for future solvency requirements.

Ongoing development of the ALM model is one of the top priorities for 2008. The ALM model deals with asset and liabilities simultaneously in great detail to ensure the long-term security of our customers.

The detailed risk report for the Vienna Insurance Group appears in the notes to the consolidated financial statements.


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