Vienna Insurance Group still on course for success: Increased attention to efficiency.

Dear Shareholders,
Dear Madam/Sir,

Dr. Günter Geyer (photo)

At the start of 2009, we experienced an extraordinary development. Unusually negative sentiment about further economic growth in the major economic regions of the world, including in particular the CEE region, spread through the capital markets, making itself apparent through changes in currency prices and bond spreads, and decreasing share prices. As the Vienna Insurance Group is particularly heavily involved in the CEE region, its share price fell to a low not seen for many years in the first quarter of 2009. This was due to the fact that investors did not clearly distinguish between markets inside and outside of the European Union. It is precisely this distinction, however, which is of great importance for us, since our largest markets have been part of the EU for a long time and therefore reveal greater stability.

This is also shown by the growth rates recorded by our business. In 2009, the Vienna Insurance Group recorded a slight increase of 1.5% in insurance premiums. This was due to two main factors. First, volume was impacted by major changes in currency relationships in the CEE markets relative to 2008. Second, our Group benefited from the premiums contributed by the companies in the s Versicherung Group that we acquired in 2008. The growth rates shown by the Romanian life insurance company BCR, which increased its premiums written by around 60% on a local basis, and the Czech company PČS, which recorded growth of more than 4% in spite of the difficult environment for single-premium policies, are examples of how correct it was to take this step. The strength of the s Versicherung companies is shown by the fact that they grew more strongly than the market in their countries.

Consequently, the Vienna Insurance Group increased its life insurance premiums written by almost 6%, while non-life insurance recorded a decrease of just under 1.7% owing to currency effects. On a local basis, however, premium volume experienced respectable increases in most countries, including both Austria and the CEE region. This was what we had expected. Our many years of experience in the CEE region have shown us that the convergence process in these countries results in a demand for insurance products that is more stable than in Western Europe, even in economically challenging times.

The Vienna Insurance Group also offers stability in terms of Group profit. Due to extraordinary income earned in the year just ended, a comparison with 2008 is not meaningful. One can, however, compare the 2009 profit before taxes of EUR 441.25 million to the record profit earned in 2007. The profit in the year just ended exceeded the profit of EUR 437.30 million earned in 2007, the last year before the economic crisis, thereby continuing the successful profit development of the Vienna Insurance Group. We also achieved one of our central objectives in 2009, namely continued expansion of the Vienna Insurance Group’s business base and profitability without high volatility.

In accordance with the policy we have followed for many years of distributing at least 30% of our Group profit after taxes, the Vienna Insurance Group plans to pay a dividend of EUR 0.90 per share for the year 2009. This gives our shareholders a satisfying total return on investment of about 50% for the year just ended.

The decision to introduce a Group-wide efficiency enhancement programme was an important factor leading to the Vienna Insurance Group’s success in achieving this result. We have set ourselves the goal of reducing expenses by around EUR 100 million by the end of 2010. This is done primarily by streamlining processes and centralising administrative tasks in our Group companies. In addition, while maintaining our highly successful multi-brand policy, we repeatedly examine the effectiveness of individual brands and their distribution channels. In some cases, we have therefore decided to combine companies, in particular in Poland, Slovakia and Croatia. We sold a small life insurance company in Romania because we could cover the market better with our major brands. In this way, we already achieved savings of EUR 60 million in 2009.

With respect to increased efficiency, I would like to mention a step that the Vienna Insurance Group has been preparing for some time that is extremely important for the future of our company. During the course of its determined expansion in Austria and the CEE region, the Vienna Insurance Group has grown to become a family of about 50 insurance companies in recent years. Successful growth requires adjustments in the organisational structure of the Group, especially in key management areas like our controlling, actuarial, personnel and reinsurance departments.

In order to better address these challenges, we feel that the next logical step is to establish a listed Group holding company whose shares would continue to be held by our shareholders by spinning off the insurance operations in Austria. Subject to a General Meeting resolution to this effect and official approval, the Group holding company would receive the name Vienna Insurance Group AG Wiener Versicherung Gruppe. The Wiener Städtische insurance company, the largest single company in the Group and the leading insurance company in Austria, will
continue its insurance business operations in Austria. The reorganisation of our Group will improve the clarity of processes and the ability of Group operating companies to focus on customer relationships. We have already taken key steps for reorganisation at the highest level of our Group by appointing younger members of the Managing Board with experience in the CEE region. Doing so accentuates the Vienna Insurance Group’s international profile in this region, one that the Group has developed over many years.

Successful implementation of these comprehensive measures, the efficiency programme and the new Group organisational structure will present a great challenge for the Group and its employees. The Vienna Insurance Group has achieved its recent successes thanks to the people who deal with our customers every day or those in supporting areas who are motivated in pursuit of their goals. The new changes in our company will require additional efforts of our employees. I therefore feel that much prouder when I speak with our employees and encounter an entrepreneurial spirit that fills me with optimism about achieving the tasks that we have set for ourselves.

To express our thanks and appreciation for this commitment, I and my fellow members of the Managing Board have decided to waive the variable remuneration we are entitled to in 2009, as we did the year before. We see this as an expression of our solidarity with our employees as they perform their duties during these especially difficult times.

I would here also like to thank our customers and business partners, who continue to give us their trust, and our shareholders, who have stayed with us through the ups and downs of the capital market.

When I look ahead to the near future, I see that the crisis which previously mostly affected the financial markets has arrived in the real economy. It can be assumed that the expiration of the broad government economic stimulus plans will be followed by an increase in unemployment, causing uncertainty and reduced optimism among some of our customers. We nevertheless see a need in the market for well structured products that offer people security, and for that reason are realistically estimating a single-digit increase in premiums written, and an increase of about 10% in our profit before taxes. The Vienna Insurance Group thus continues down its path of profitable growth in 2010 as well.

Sincerely yours,

Signature General Manager Dr. Günter Geyer (handwriting)

Günter Geyer