Intangible assets
Goodwill
The goodwill shown in the balance sheet is essentially the result of applying the purchase method of accounting for companies acquired since 1 January 2004 (date financial reporting was converted to IFRS). For companies acquired before 1 January 2004, the difference between the cost of acquisition and the value of the net assets acquired is deducted directly from equity. Using the option afforded by IFRS 1, no adjustments were made.
Goodwill is valued at cost of acquisition less accumulated impairment losses. In the case of ownership interests in associated companies, goodwill is included in the adjusted book value of the ownership interest. If goodwill due to reorganisations was recognised in the consolidated financial statements of previous years, the book values of these goodwill items were carried over into the IFRS accounting in accordance with IFRS 1.
Purchased insurance portfolios
Purchased insurance portfolios relate, in particular, to the values of contract holdings recognised as a result of acquisitions subsequent to 1 January 2004, using purchase price allocation under the election provided in IFRS 4.31. The values recognised correspond to the differences between fair value and book value of the underwriting assets and liabilities acquired. Depending on the value of the underwriting reserves, amortisation of these items is performed using the declining-balance or straight-line method for a maximum of 10 years.
In addition, the value arising from the acquisition of an insurance portfolio before conversion of the accounting to IFRS is also reported in this item. It was possible to carry the portfolio value over to the IFRS financial statements without change. Straight-line amortisation is being performed over a maximum of 10 years.
Other intangible assets
Purchased intangible assets are recognised in the balance sheet at the cost of acquisition less accumulated scheduled amortisation and impairment losses.
No intangible assets were created by the consolidated companies themselves.
All intangible assets have a definite useful economic life. Scheduled amortisation of an intangible asset is therefore performed over its period of use. The useful economic lives of significant intangible assets are as follows:
Investments
General information on the capitalisation and valuation of investments
In accordance with associated IFRS requirements, some Group assets and liabilities are carried at fair value in the accounts for the consolidated financial statements. This applies in particular to a significant portion of investments. Fair value is determined according to the following hierarchy:
- The determination of fair value for financial assets and liabilities is generally based on an established market value or a price offered by brokers and dealers.
- If non-listed financial investments are involved, or if a price cannot be immediately determined, fair value is established either by the use of generally accepted valuation models based on the discounted cash flow method or by an assessment by management as to what amounts could be realized from an orderly sale at current market prices.
- The fair value of certain financial instruments, particularly unlisted financial derivatives, is determined using pricing models which take into account factors including contract and market prices, their relation to one another, current value, counterparty credit-worthiness, yield curve volatility, and early repayment of the underlying instrument.
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 necessitate a write-up or write-down of the book value of the assets in question and recognition of the corresponding income or expense on the income statement.
For both owner-occupied and third party-leased land and buildings, real estate appraisals are performed at regular intervals, for the most part by sworn and judicially certified experts in construction and real estate appraisal. The market value is determined based on intrinsic and capitalised value, generally proportionally adjusted; in exceptional cases the tangible value method is used. If the fair value is below book value (cost of acquisition less cumulative scheduled depreciation and write-downs), the asset is impaired. Consequently, the book value is written down to the lower fair value and the change recognised in profit or loss.
Financial instruments shown as investments are regularly tested for impairment. If impairments to fair value are necessary, these are recognised in profit or loss if the reduction in value is permanent, and the corresponding capital asset item would not have been reported at the fair value anyway, with recognition of the unrealised profits and losses (trading securities and capital assets of unit- and index-linked life insurance). 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% in the (adjusted) cost of acquisition is observed over a period of more than six consecutive months. Likewise, permanent impairment is immediately assumed if a reduction of more than 40% has existed, even for a short time, as of the valuation date.
Information on the nature and extent of risks associated with financial investments is provided in the section entitled “Risk reporting”.
Land and buildings
Both owner-occupied and third party-leased real estate are reported in land and buildings. Owner-occupied and third party-occupied real estate is carried at cost of acquisition or construction less accumulated scheduled depreciation and impairment losses. The costs of acquisition or construction comprise all costs incurred in putting the asset in its present location and condition.
For owner-occupied real estate, imputed rental income equal to what a third-party dealing at arm’s length would normally pay is recorded as income from the capital asset; rental expenses equal to the same amount are recorded as operating expenses.
Costs incurred in later periods are only capitalised if they lead to a significant increase in future opportunities for the use of the building (e.g. through building expansion or new installation of fixtures).
Buildings are depreciated using the straight-line method over the expected useful economic life of the asset. The following useful lives are assumed when determining depreciation rates:
Shares in affiliated and associated companies
Significant holdings of shares in associated companies are valued using the equity method in accordance with IAS 28 “Investments in associates”. The annual financial statements of the companies valued at equity were prepared in accordance with IFRS requirements.
This item also includes shares in affiliated companies which are not essential for a fair presentation of the net worth, financial position and earnings of the Group and are therefore not consolidated. These shares are valued analogously to the valuation of financial instruments available for sale. These valuation policies are also applied to shares in associated companies which were not significant enough to be valued at equity. The interest in Wüstenrot Versicherungs-Aktiengesellschaft, as presented above in the “Scope and methods of consolidation” section, is also shown here. Information on the valuation of financial investments available for sale is provided in the notes below on the accounting and valuation of financial investments.
Financial investments
Financial instruments reported as capital assets are divided into the following categories in accordance with the requirements of IAS 39:
- Loans and other receivables
- Financial instruments held to maturity
- Financial instruments available for sale
- Financial instruments held for trading
- Financial instruments at fair value through profit and loss
The corresponding investments are valued upon initial recognition at the cost of acquisition, which equals fair value at the time of acquisition. Two valuation measures can be applied to financial investments for subsequent valuation. Adjusted cost acquisition is used for subsequent valuation of loans and other receivables. The adjusted cost of acquisition is determined using the effective interest rate of the loan in question. In the case of permanent impairment, a write-down is recognized reflected on the income statement.
Adjusted cost of acquisition is used for subsequent valuation of financial investments held to maturity. The adjusted cost of acquisition is determined using the effective interest rate of the financial instrument in question. In the case of permanent impairment, a write-down is recognized on the income statement.
Financial instruments available-for-sale and trading securities are recognised at fair value on the balance sheet. If available-for-sale financial instruments are sold, the difference between the adjusted cost of acquisition carried forward and fair value is directly recognised in other reserves (“unrealised gains and losses”). No separate calculation of adjusted cost of acquisition is performed for financial investments held for trading; changes in fair value are recognised as profit or loss on the income statement. The financial investments held for trading are predominantly structured investments (“hybrid financial investments”) which Vienna Insurance Group has elected under IAS 39.11A and IAS 39.12 to assign to the category of “financial assets valued at fair value reported through profit or loss”. For clarity, however, this item is referred to as “financial investments held for trading” on the balance sheet. Structured investments are assigned to this category if the derivatives embedded in the host contract (as a rule securities or loans) are not closely related to the host contract so that the requirement under IAS 39 of isolating them from the host contract and valuing them separately at fair value does not apply.
De-recognition of financial instruments is performed when the Group’s contractual rights to cash flows from the financial instruments expire.
Information on the recognition of impairment losses is provided in the section entitled “General information on the accounting and valuation of investments”.
Investments of unit- and index-linked life insurance
The investments of unit- and index-linked life insurance provide cover for the underwriting provisions of unit- and index-linked life insurance. The survival and surrender payments from these policies are linked to the performance of the associated investments of unit- and index-linked life insurance, with the income from these capital assets also fully credited to policyholders. As a result, policyholders bear the risk associated with the performance of the investments of unit- and index-linked life insurance.
These investments are held in separate cover funds, and managed separately from the other investments of the Group. Since the changes in value of the unit- and index-linked life insurance investments are equal to the changes in value of the under-writing provisions, these investments are valued using the provisions in IAS 39.9. Investments of unit- and index-linked life insurance are therefore valued at fair value, and changes in value are recognised in the income statement.
Reinsurers’ share of underwriting provisions
The reinsurers’ share of the underwriting provisions is valued in accordance with the contract provisions.
The credit quality of each contracting party is taken into account when the reinsurers’ share is valued. The credit quality of the Group’s reinsurers was such that no valuation adjustments on the reinsurers’ share were necessary on the reporting dates of 31.12.2007 and 2006.
Receivables
The receivables shown in the balance sheet relate in particular to the following receivables:
- Receivables from the direct insurance business
- from policyholders
- from insurance brokers
- from insurance companies - Receivables from reinsurance business
- Other receivables
Aside from receivables from policyholders, receivables are reported at cost of acquisition less impairment losses for expected uncollectible amounts. Receivables from policyholders are valued at the cost of acquisition. Expected impairment losses from uncollectible premium receivables are as a rule shown on the liabilities side of the balance sheet under other underwriting reserves (cancellation reserves).
Other assets
Other assets are valued at cost of acquisition less impairment losses.
Taxes
Income tax expense comprises actual taxes and deferred taxes. The income tax associated with transactions recognised directly in equity (unrealised gains and losses from financial instruments that are available for sale) is also recognised in equity, with no effect on the income statement.
The actual taxes for the individual companies of the Vienna Insurance Group are calculated using a company’s taxable income and the tax rate applying in the country of domicile.
Deferred taxes are calculated using the balance sheet liability method for all temporary differences between values recognised for assets and liabilities in the IFRS consolidated financial statements and the individual company’s tax bases for these assets and liabilities. In accordance with IAS 12.47, deferred taxes are calculated based on the tax rates that apply at the time of realisation. In addition, any probable tax benefit that could be realised from existing carried-over losses are included in the calculation. Differences arising from goodwill that is not deductible for tax purposes and quasi-permanent differences related to ownership interests are not included in the overall tax deferral calculation. Deferred tax assets are not recognised if it is not likely that the tax benefits they contain can be realised. Deferred taxes are calculated using the following tax rates:
Underwriting provisions
Unearned premiums
According to the current version of IFRS 4, figures included in annual financial statements prepared in accordance with national requirements may be used in the presentation of figures relating to insurance contracts in the consolidated financial statements. In Austria, a cost discount of 15% is used when calculating unearned premiums in the property and casualty insurance area (10% for motor vehicle liability insurance), corresponding to an amount of EUR 29.913 million (EUR 28.370 million). No acquisition costs in excess of this figure are capitalised. For foreign companies, in the property/casualty insurance area, a portion of the acquisition commissions is recognised in the same proportion as earned premiums bear to written premiums. To ensure uniform presentation within the Group, these capitalised acquisition costs are also shown in the consolidated financial statements as a reduction in unearned premiums. In the life insurance area, acquisition costs are calculated using the rates set out in the business plans and included by zillmerisation when calculating the mathematical reserve. Negative mathematical reserves are set to zero for Austrian companies. For foreign companies, negative mathematical reserves are included and netted with mathematical reserves. No additional acquisition costs are capitalised. In general, no capitalisation of acquisition costs is performed for health insurance.
Mathematical reserve
Mathematical reserves in the life insurance business segment are calculated using the prospective method as the mathematical present value of the obligations (including declared and allocated profit shares and an administrative cost reserve) less the present value of all future premiums received. The calculation is based on factors such as expected mortality, costs, and the discount rate. As a rule, the actuarial reserve and related tariff are calculated using the same basis, which is applied uniformly for the entire tariff and during the entire term of the policy. An annual adequacy test of the calculation basis is performed in accordance with IFRS 4 and applicable national accounting requirements (see section titled “Adequacy test for liabilities arising from insurance contracts”). As a rule, in life insurance the official mortality tables of each country are used. If current mortality expectations differ to the benefit of policyholders from the calculation used for the tariff, leading to a corresponding insufficiency in the actuarial reserve, the reserve is correspondingly increased as part of the adequacy test of insurance liabilities.
In life insurance, acquisition costs are included by zillmerisation as a reduction of mathematical reserves. In accordance with national requirements, negative actuarial reserves resulting from zillmerisation are set to zero for Austrian insurance companies. Negative mathematical reserves are not set to zero for Group subsidiaries domiciled outside of Austria. These negative mathematical reserves are recognised in the mathematical reserve item in the consolidated financial statements.
The following average discount rates are used to calculate mathematical reserves:
As of 31.12.2007: 3.41%
As of 31.12.2006: 3.15%
In health insurance, actuarial reserves are also calculated according to the prospective method as the difference between the actuarial present value of future policy payments less the present value of future premiums. The loss frequencies used to calculate the actuarial reserve derive primarily from analyses conducted on the Group’s own insurance portfolio. As a rule, the mortality tables used correspond to published mortality tables.
The following discount rates are used for the great majority of transactions when calculating actuarial reserves:
As of 31.12.2007: 3%
As of 31.12.2006: 3%
Reserve for outstanding claims
According to national insurance law and regulations in Austria (the Austrian Corporation Code (UGB) and Insurance Supervision Act (VAG)), Wiener Städtische AG and its operating subsidiaries are required to form reserves for outstanding insurance claims for each business segment. These reserves are calculated for payment obligations from insurance claims which have occurred up to the balance sheet reporting date but whose basis or size has not yet been established, as well as all related claims handling costs expected to be incurred after the balance sheet reporting date, and as a rule are formed at the individual policy level. These policy-level reserves are marked up by a flat-rate allowance for unexpected additional losses. Except for the reserves for pension obligations, no discounting is performed. Insurance losses that have occurred up to the balance sheet reporting date but were not known at the time that the balance sheet was prepared are included in the reserve (incurred but not reported reserves, “IBNR”). Separate reserves for claims handling expenses are formed for internally incurred costs attributable to claims handling. Collectible recourse claims are deducted from the reserve. Where necessary, actuarial estimation methods are used to calculate the reserves. The methods are applied consistently, with both the methods and calculation parameters tested continually for adequacy and adjusted if necessary. The reserves are affected by economic factors, such as the inflation rate, and by legal and regulatory developments, which are subject to change over time. The current version of IFRS 4 provides for reserves formed in accordance with applicable national requirements to be carried over into the consolidated financial statements.
Reserve for profit-independent premium refunds
The reserves for profit-independent premium refunds relate in particular to the “property and casualty insurance” and “health insurance” segments, and pertain to premium refunds in certain insurance classes that are contractually guaranteed to policyholders in the event that there are no claims or a low level of claims. These reserves are formed at the individual policy level with no discounting.
Reserve for profit-dependent premium refunds
Profit shares that are guaranteed to policyholders in local policies based on the business plans but have not been allocated or committed to policyholders as of the balance sheet reporting date are shown in the reserve for profit-dependent premium refunds (“discretionary net income participation”).
The reserve for deferred profit participation, which is recognised by analogous application of the provisions for deferred taxes, is also shown in this item. Please see the section entitled “Classification of insurance contracts”.
Other underwriting provisions
The other underwriting reserves item primarily shows cancellation reserves. Cancellation reserves are formed for the cancellation of premiums that are already billed, but not yet paid by the policyholder, and therefore represent a liabilities-side value adjustment to receivables from policyholders. These reserves are formed based on the application of certain percentage rates to overdue premium receivables.
Underwriting provisions of unit-linked and index-linked life insurance
Underwriting provisions of unit- and index-linked life insurance represent obligations to policyholders that are linked to the performance and income of the associated investments. The valuation of these provisions corresponds to the valuation of the investments of unit- and index-linked life insurance, and is based on the fair value of the investment fund or index serving as a reference value.
Reserve for pensions and similar obligations
Pension obligations
Pension obligations are based on individual contractual obligations and collective agreements. The obligations are defined benefit obligations uncovered by plan assets.
These obligations are recognised in accordance with IAS 19, by determining the present value of the defined benefit obligation (DBO). Calculation of the DBO is performed using the projected unit credit method. In this method, future payments, calculated based on realistic assumptions, are collected linearly over the period in which the beneficiary acquires these claims. Actuarial reports, which are used to calculate the necessary reserve amount for each balance sheet reporting date, are available for 31 December 2006 and 31. December 2007.
Any difference between the reserve amount which is calculated in advance based on assumptions and the value which actually occurs (“actuarial gain/loss”) is not recognised as part of the reserve while it remains within 10% of the actual value. When the 10% limit is exceeded, the excess amount which falls outside the limit is recognised, distributed over the average remaining working lives of all employees (“corridor method”).
The calculations for 31 December 2007 and 31 December 2006 are based on the following assumptions:
A portion of the direct pension obligations are administered as an occupational group insurance plan following conclusion of an insurance contract in accordance with § 18 f to 18 j VAG.
Severance allowence
Wiener Städtische is required according to the law, supplemented by collective agreements, to make a severance benefit payment to all employees in Austria whose contracts are terminated by their employer or who begin retirement, and whose employment started before 1 January 2003. The size of this payment depends on the number of years of service and earnings at the time employment ends, and is equal to between two and 18 months’ earnings. A reserve has been set up for this obligation.
The reserve is calculated using the projected unit credit method. Under this method, the sum of the present values of future payments is calculated up to the point in time when the claims reach their highest value (to a maximum of 25 years). The calculation for the balance sheet reporting date in question is based on an actuarial report.
Any difference between the reserve amount which is calculated in advance based on assumptions and the value which actually occurs (“actuarial gain/loss”) is not recognised as part of the reserve while it remains within 10% of the actual value. When the 10% limit is exceeded, the excess amount which falls outside the limit is recognised, distributed over the average remaining working lives of all employees (“corridor method”).
The calculations for 31 December 2007 and 31 December 2006 are based on the following assumptions:
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Expenses for insurance claims (claims handling expenses)
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Expenses arising from investments (expenses for asset investment)
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Operating expenses
* The exception rule of § 81 o par. 6 VAG was used.
