Accounting policies for specific items in the financial statements

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 was offset directly against equity. Using the option afforded by IFRS 1, no adjustments were made to this accounting.

Goodwill is valued at acquisition cost less accumulated impairment losses. In the case of ownership interests in associated companies, goodwill is included in the amortised book value of the ownership interest. If goodwill arising from reorganisations was recognised in the consolidated financial statements of previous years, the book value of these goodwill items were carried over into the IFRS accounting in accordance with IFRS 1.

PURCHASED INSURANCE PORTFOLIOS
Purchased insurance portfolios relate primarily to the policy portfolio values recognised as a result of company 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 the fair value and book value of the underwriting assets and liabilities acquired. Depending on the valuation of the underwriting provisions, amortisation of these items is performed using the declining-balance or straight-line method over a maximum of ten years.

In addition, the insurance portfolio 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 performed over a maximum of ten years.

OTHER INTANGIBLE ASSETS
Purchased intangible assets are recognised in the balance sheet at acquisition cost less accumulated amortisation and impairment losses. No intangible assets were created by the companies in the scope of consolidation. With the exception of the “Asirom” trademark, all intangible assets have a definite useful life. Amortisation of an intangible asset is therefore performed over its period of use. The useful lives of significant intangible assets are as follows:

Software is amortised using the straight-line method. Amortisation of the customer base (“value of new business”) recognised as an intangible asset from corporate acquisitions is also performed using the straight-line method.

Acquisition of the Romanian company Asigurarea Romaneasca -Asirom S.A. Vienna Insurance Group, Bucharest, led to recognition of the „Asirom“ trademark at a value of EUR 70,000,000 in the financial year just ended. The fair value of this trademark, which has an indeterminate useful life, was calculated using two methods, the relief-from-royalty method and the incremental cash flow method. The relief-from-royalty method calculates the value of a trademark from future notional royalties that the company would have to pay if the trademark were licensed from another company at standard market terms. The royalties were calculated using the Knoppe formula used in practice in the tax area. The incremental cash flow method calculates the value of a trademark using future earnings contributions generated as a result of the trademark. The cash flows resulting from the two methods above were discounted using the standard market discount rate of 11.48% for Romania. The calculations included the Romanian corporate income tax rate of 16%, as well as the tax amortisation benefit in the relief-from-royalty method. The average of the trademark values from the two methods was recognised in the balance sheet as the fair value of the trademark.

Investments

GENERAL INFORMATION ON THE ACCOUNTING FOR INVESTMENTS
In accordance with applicable 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.
• In the case of non-listed financial instruments, or if a price cannot be immediately determined, fair value is determined either through the use of generally accepted valuation models based on the discounted cash flow method or through an estimate by management as to what amounts could be realised from an orderly sale under current market conditions.
• The fair value of certain financial instruments, particularly unlisted derivative financial instruments, is determined using pricing models which take into account factors including contract and market prices and their relation to one another, current value, counterparty creditworthiness, interest rate 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 necessitate a write-up or write-down of the book value of the assets in question and recognition of the corresponding income or expense in the income statement.

Real estate appraisals are performed at regular intervals for both owner-occupied and third party-leased land and buildings, for the most part by sworn and judicially certified building construction and real estate appraisers. Market value is determined based on asset value and capitalised earnings value, predominantly prorated capitalised earnings value as of the reporting date, with the net asset value method being used in exceptional cases. If fair value is below the book value (cost less accumulated depreciation and write-downs), the asset is impaired. In this case, the book value is written down to 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 investment item is not otherwise being valued at fair value with recognition of unrealised profits and losses (financial instruments recognised at fair value through profit or loss and investments of unit-linked 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 (amortised) acquisition cost is observed over a period of more than six consecutive months. Likewise, permanent impairment is immediately assumed if a reduction of more than 50% has existed, even for a short time, as of the valuation date.

Information on the nature and extent of risks arising from financial instruments is provided in the section entitled “Risk reporting”.

LAND AND BUILDINGS
Both owner-occupied and third party-leased real estate are reported under land and buildings. Owner-occupied and third party-occupied real estate is valued at acquisition cost less accumulated depreciation and impairment losses. Acquisition cost comprises all costs incurred in putting the asset into its present location in its present condition.

For owner-occupied real estate, imputed arm’s length rental income is recognised as income from the investment, and an equivalent amount of rental expenses is recorded as operating expenses.

Acquisition costs incurred in later periods are only capitalised if they lead to a material increase in future opportunities for the use of the building (e.g. through building expansion or installation of new fixtures).

Buildings are depreciated using the straight-line method over the expected useful life of the asset. The following useful lives are assumed when determining depreciation rates:

SHARES IN AT EQUITY VALUED COMPANIES
Material 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 at equity consolidated companies were prepared in accordance with IFRS requirements.

FINANCIAL INSTRUMENTS
Financial instruments reported as investments are divided into the following categories in accordance with the requirements of IAS 39:

• Loans and other receivables
• Financial investments held to maturity
• Financial investments available for sale
• Financial investments held for trading purposes
• Financial instruments recognised at fair value in profit or loss

Upon their initial recognition, the corresponding investments are valued at acquisition cost, which equals fair value at the time of acquisition. For subsequent valuation of financial instruments, two valuation methods are used. Subsequent valuation of loans and other receivables is made at amortised cost. Amortised cost is determined using the effective interest rate of the loan in question. A write-down is recognised in profit or loss in the case of permanent impairment.

Financial investments held to maturity are subsequently valued at amortised cost. Amortised cost is determined using the effective interest rate of the financial instrument in question. A write-down is recognised in profit or loss in the case of permanent impairment.

Financial investments available for sale and financial instruments valued at fair value through profit or loss are recognised at fair value on the balance sheet. If financial investments available for sale are disposed of, the difference between amortised cost and fair value is recognised directly in other reserves (“unrealised gains and losses”). No separate calculation of amortised cost is performed for financial investments recognised at fair value through profit or loss, changes in fair value are recognised in profit or loss on the income statement. The trading portfolio is predominantly structured investments (“hybrid financial instruments”) that the Vienna Insurance Group has elected under IAS 39.11A and IAS 39.12 to assign to the category of “financial assets at fair value through profit or loss”. 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.

This item also includes shares in affiliated companies that are not material for a true and fair presentation of the net assets, financial position and results of operations of the Group and are therefore not included in consolidation. These shares are valued analogously to the valuation of financial instruments available for sale. These valuation principles are also applied to shares in associated companies that were not significant enough to be accounted for using the equity method. The interest in Wüstenrot Versicherungs-Aktiengesellschaft, as presented in the “Scope of consolidation 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 for financial instruments.

Amendments to IAS 39 and IFRS 7 – “Reclassification of financial assets”
In October, the IASB published amendments to IAS 39 and IFRS 7 under the title “Reclassification of financial assets”. The adjusted version of IAS 39 permits reclassification of non-derivative financial assets (except for financial instruments that were measured using the fair value option upon initial recognition) in the “trading portfolio” and “available-for-sale” categories if the following conditions are satisfied:

• Financial instruments in the “trading portfolio” or “available-for-sale” categories can be transferred to the “loans and other receivables” category if they would have satisfied the definition of the “loans and other receivables” category at the time of initial recognition and the company intended and was able to hold the financial instrument for the foreseeable future or until maturity.
• Financial assets in the “trading portfolio” category that would not have satisfied the definition of “loans and other receivables” at the time of initial recognition can only be transferred to the “held-to-maturity” or “available-for-sale” categories under exceptional circumstances. The IASB indicated that the development of financial markets in the 2nd half of 2008 is a possible example for exceptional circumstances.

The amendments to IAS 39 and IFRS 7 entered into effect retroactively as of 1 July 2008 and were to be applied prospectively from the time of reclassification. Reclassifications performed before 1 November 2008 could use fair value as of 1 July 2008.

Financial instruments must be measured at fair value at the time of reclassification. In the case of reclassifications of assets in the “trading portfolio” category, gains or losses recognised from previous periods may not be reversed. In the case of reclassification of assets in the “available-for-sale” category, earlier gains and losses recognised in the revaluation reserve are locked in at the time of reclassification. The revaluation reserve remains unchanged for financial instruments without a fixed maturity until derecognition and is only then recognised in profit or loss, while for financial instruments with a fixed maturity it is amortised to profit or loss over the remaining life of the financial instrument using the effective interest method. This applies analogously to deferred profit participation.

The Vienna Insurance Group performed the following reclassifications:

The reclassifications led to an increase of EUR 30,664,000 in the revaluation reserve. There was no effect on the financial result in the income statement.

The effects on cash flow are provided in the corresponding section in the Notes to the Consolidated Financial Statements.

The corresponding valuation requirements in IAS 39 are to be applied after reclassification.

Derecognition 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 for investments” further above.

Investments of unit-linked and index-linked life insurance

The investments of unit-linked and index-linked life insurance provide cover for the underwriting provisions of unit-linked and index-linked life insurance. The survival and surrender payments from these policies are linked to the performance of the associated investments of unit-linked and index-linked life insurance, with the income from these investments also credited in full to policyholders. As a result, policyholders bear the risk associated with the performance of the investments of unit-linked 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 investments of unit-linked and index-linked life insurance are associated with equal changes in value of the underwriting provisions, these investments are measured using the provisions in IAS 39.9. Investments of unit-linked and index-linked life insurance are therefore measured 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 contractual provisions.

The creditworthiness of each counterparty is taken into account when the reinsurer share is valued. As a result of the good creditworthiness of the Group’s reinsurers, no allowances were needed for reinsurer shares as of the 31 December 2008 and 31 December 2007 reporting dates.

Receivables

The receivables shown in the balance sheet primarily relate to the following receivables:

• Receivables from direct insurance business
  - with policyholders
  - with insurance brokers
  - with insurance companies
• Receivables from reinsurance business
• Other receivables

Aside from receivables from policyholders, receivables are reported at acquisition cost less impairment losses for expected uncollectible amounts. Receivables from policyholders are valued at acquisition cost. Expected impairment losses from uncollectible premium receivables are as a rule shown on the liabilities side of the balance sheet under “Other underwriting provisions” (cancellation provisions).

Other assets

Other assets are valued at acquisition cost less impairment losses.

Taxes

The income tax expense comprises actual taxes and deferred taxes. The income tax associated with transactions recognised directly in equity (unrealised gains and losses from available-for-sale financial instruments) is also recognised directly in equity.

The actual taxes for the individual companies in the Vienna Insurance Group are calculated using the company’s taxable income and the tax rate applicable in the country in question.

Deferred taxes are calculated using the balance sheet liability method for all temporary differences between the asset and liability values recognised in the IFRS consolidated financial statements and the individual company tax bases for these assets and liabilities. In accordance with IAS 12.47, deferred taxes are calculated using the tax rates that apply at the time of realisation. In addition, any probable tax benefits realisable from existing loss carryforwards 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 probable 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 in annual financial statements prepared in accordance with national requirements may be used for the presentation of figures relating to insurance policies 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 EUR 28,192,000 (EUR 29,913,000). 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 generally recognised in the same proportion as the ratio of earned premiums 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 recognised and netted with the 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 obligations (including declared and allocated profit shares and an administrative cost provision) 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 mathematical 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 policies”). 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 mathematical reserves, the provisions are increased appropriately 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 mathematical reserves resulting from zillmerisation are set to zero for Austrian insurance companies. Negative mathematical reserves are not set to zero for Group subsidiaries with registered offices outside 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 31.12.2008: 3.44%
As of 31.12.2007: 3.41%

Please see the section titled “Recognition and accounting methods for insurance policies” for information on the treatment of the mathematical reserve during initial consolidation of the s Versicherung Group.

In health insurance, mathematical reserves are also calculated using the prospective method as the difference between the actuarial present value of future insurance payments less the present value of future premiums. The claims frequencies used to calculate the mathematical 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 mathematical reserves:

As of 31.12.2008: 3.00%
As of 31.12.2007: 3.00%

PROVISION FOR OUTSTANDING INSURANCE CLAIMS
According to national insurance law and regulations in Austria (the Austrian Commercial Code (UGB) and Insurance Supervision Act (VAG)), companies of the Vienna Insurance Group are required to form provisions for outstanding insurance claims for each business segment. These provisions 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, and all related claims settlement expenses expected to be incurred after the balance sheet reporting date, and as a rule are formed at the individual policy level. These policy-level provisions are marked up by a flat-rate allowance for unexpected additional losses. Except for the provisions 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 provision (incurred but not reported claims provisions, “IBNR”). Separate provisions for claims settlement expenses are formed for internally incurred costs attributable to claims settlement under the causation principle. Collectible recourse claims are deducted from the provision. Where necessary, actuarial estimation methods are used to calculate the provisions. The methods are applied consistently, with both the methods and calculation parameters tested continuously for adequacy and adjusted if necessary. The provisions 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 provisions formed in accordance with applicable national requirements to be carried over into the consolidated financial statements.

PROVISION FOR PROFIT-INDEPENDENT PREMIUM REFUNDS
The provisions 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 provisions are formed at the individual policy level with no discounting.

PROVISION FOR PROFIT-DEPENDENT PREMIUM REFUNDS
Profit shares that were dedicated to policyholders in local policies based on business plans but have not been allocated or guaranteed to policyholders as of the balance sheet reporting date are shown in the provision for profit-dependent premium refunds (“discretionary net income participation”).

The provision 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 titled “Classification of insurance policies”.

OTHER UNDERWRITING PROVISIONS
The other underwriting provisions item primarily shows cancellation provisions. Cancellation provisions are formed for the cancellation of premiums that have been written but not yet paid by the policyholder, and therefore represent a liabilities-side allowance for receivables from policyholders. These provisions 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-linked and index-linked life insurance represent obligations to policyholders that are linked to the performance and income of corresponding investments. The valuation of these provisions corresponds to the valuation of the investments of unit-linked and index-linked life insurance, and is based on the fair value of the investment fund or index serving as a reference.

Provision for pensions and similar obligations

PENSION OBLIGATIONS
Pension obligations are based on individual contractual obligations and collective agreements. The obligations are defined benefit obligations.

These obligations are recognised in accordance with IAS 19, by determining the present value of the defined benefit obligation. Calculation of the defined benefit obligation is performed using the projected unit credit method. In this method, future payments, calculated based on realistic assumptions, are accrued linearly over the period in which the beneficiary acquires these entitlements. The necessary provision amount is calculated for each balance sheet reporting date using actuarial reports that have been provided for 31 December 2007 and 31 December 2008.

Any difference between the provision amount calculated in advance based on the underlying assumptions and the value which actually occurs (“actuarial gain/loss”) is not recognised as part of the provision while it remains within 10% of the defined benefit obligation at the beginning of the period. When the 10% limit is exceeded, the excess amount which falls outside the limit is recognised, and distributed over the average remaining working lives of all employees (“corridor method”).

The calculations for 31 December 2008 and 31 December 2007 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.

POST-EMPLOYMENT OBLIGATIONS
Vienna Insurance Group is required under the law, supplemented by collective agreements, to make a post-employment benefit payment to all employees in Austria whose employment is terminated by the 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 on the earnings at the time employment ends, and is equal to between two and 18 months’ earnings. A provision has been formed for this obligation.

The provision 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 provision amount calculated in advance based on the underlying assumptions and the value which actually occurs (“actuarial gain/loss”) is not recognised as part of the provision while it remains within 10% of the defined benefit obligationat at the beginning of the period. When the 10% limit is exceeded, the excess amount which falls outside the limit is recognised, and distributed over the average remaining working lives of all employees (“corridor method”).

The calculations for 31 December 2008 and 31 December 2007 are based on the following assumptions:

For all employment relationships in Austria which began after 31 December 2002, the Vienna Insurance Group pays 1.53% of earnings into an occupational employee pension fund in Austria each month, where the contributions are invested in an employee account and paid out or passed on to the employee as an entitlement when employment ends. The Vienna Insurance Group’s obligation in Austria is strictly limited to payment of these amounts. As a result, no provision needs to be set up for this defined contribution plan.

A portion of the post-employment benefit obligations was outsourced to an insurance company.

OTHER NON-UNDERWRITING PROVISIONS
Other non-underwriting provisions are recognised if a de jure or de facto obligation exists to a third party based on a past event, it is probable that this obligation will lead to an outflow of resources, and a reliable estimate can be made of the amount of the obligation.

The provisions are recognised at the value representing the best possible estimate of the expenditure needed to fulfil the obligation. If the present value of the provision calculated using a normal market rate of interest differs significantly from the nominal value, the present value of the obligation is recognised.

The other non-underwriting provisions item also includes personnel provisions other than the provisions for pensions and similar obligations. These relate primarily to provisions for unused vacation and anniversary bonus obligations. Anniversary bonus obligations are measured using the calculation method described for post-employment benefit obligations and the same calculation parameters. The corridor method is not used.

(Subordinated) liabilities

As a rule, liabilities are recognised at amortised cost. This also applies to liabilities arising from financial insurance policies.

Earned premiums*

As a rule, deferred premiums (unearned premiums) are determined on a pro rata basis according to time. No deferral of unit-linked and index-linked life insurance premiums is performed, since the full amount of the premiums written in the reporting period is included in the calculation of the underwriting provisions of unit-linked and index-linked life insurance. The change in the cancellation provision is also recognised in earned premiums.

* The exception rule of § 81o (6) VAG was used.

Expenses for claims and insurance benefits

All payments to policyholders arising from loss events, claims settlement expenses directly related to loss events, and internal costs attributable to claims settlement under the causation principle, are shown as expenses for insurance claims. Expenses for loss prevention are also presented in this item. Expenses for insurance claims are reduced by the income gained from using existing contractual and statutory avenues of recourse (this applies in particular to property and casualty insurance). Changes in underwriting provisions, except for the change in the cancellation provision, are also shown in the expenses for insurance claims item.

Operating expenses

The Group’s personnel and materials expenditures are assigned to the following income statement items in accordance with the causation principle:

• Expenses for insurance claims (claims settlement expenses)
• Expenses arising from investments (expenses for asset investment)
• Operating expenses