VIS Anualreport

Annual Report 2009

Index

Key figures… …………………………………………………………… 3 Statement by the Chairman of the Board…………………………… 4 Statement by the CEO… ……………………………………………… 4 Organisational Structure and Management Board… …………… 5 Operations 2009… …………………………………………………… 6 Financial Statements… ……………………………………………… 15 Endorsement by the Board of Directors and CEO………………… 16 Independent Auditor’s Report………………………………………… 17 Income Statement……………………………………………………… 18 Balance Sheet … ……………………………………………………… 19 Statement of Changes in Equity……………………………………… 20 Statement of Cash Flows……………………………………………… 21 Notes……………………………………………………………………… 22 Glossary… ……………………………………………………………… 41 VÍS over 20 years… …………………………………………………… 42

Editorship and supervision: Ingimar Sigurðsson Design and layout: Þorgeir Valur Ellertsson English translation: Róbert Mellk Printing: Svansprent 2

Key figures 2009

2008

2007

2006

2005

Premiums, written …………………………

14.498

13.146

11.504

9.495

7.809

Premiums earned … ………………………

14.265

12.367

10.831

8.956

7.806

1.536

2.029

1.744

1.649

1.524

91

182

32

0

0

Claims incurred… ………………………… -12.274

-10.941

-8.745

-7.586

-6.297

Investment income from insurance operations Other income from insurance operations…

Operating expenses ………………………

-2.753

-2.463

-2.080

-2.244

-2.142

Reinsurance expenses… …………………

-261

-339

-510

-508

-651

Profit from insurance operations … ……

604

836

1.272

267

240

Profit (loss) from financial operations…

668

-468

5.839

5.334

9.782

Other income… ……………………………

0

0

0

51

46

Taxes… ………………………………………

-108

-126

3.881

-566

-1.672

Profit after taxes … ………………………

1.164

242

10.992

5.086

8.396

Equity … ……………………………………

10.942

9.678

10.236

20.298

26.981

Technical provision … ……………………

21.696

20.720

19.667

18.714

17.708

Other liabilities … …………………………

1.039

1.581

1.347

6.620

6.461

Equity and liabilities total … ……………

33.677

31.979

31.250

45.632

51.150

Claims ratio… ………………………………

86,1%

88,5%

80,7%

84,7%

80,7%

Cost ratio ……………………………………

19,3%

19,9%

19,2%

25,1%

27,4%

Reinsurance cost ratio… …………………

1,8%

2,7%

4,7%

5,7%

8,3%

Combined ratio … ………………………… 107,3%

111,1%

104,7%

115,4%

116,4%

Investment income and other income…

11,4%

17,9%

16,4%

18,4%

19,5%

Operating ratio… …………………………

96,3%

94,2%

89,9%

97,5%

97,4%

Own technical provision / Retained premiums 154,8%

169,2%

186,3%

236,9%

258,7%

Equity ratio …………………………………

32,5%

30,3%

32,8%

44,5%

52,7%

Return on equity ……………………………

11,2%

2,3%

55,3%

28,8%

39,4%

Equity … ……………………………………

10.942

9.678

10.236

20.298

26.981

Solvency … …………………………………

10.942

9.678

10.236

18.798

26.331

Minimum solvency… ………………………

2.595

2.200

1.862

1.559

1.408

Solvency ratio ………………………………

4,20

4,40

5,50

12,06

18,70

Key figures

Note: International Financial Reporting Standards (IFRS) were implemented in 2005.

Comparison figures from older years have been changed to conform to the presentation of the financial statements for 2009.

Amounts in ISK Millions.

3

Statement by the Chairman of the Board and the CEO Lydur Gudmundsson

Statement

Chairman of the Board

The year 2009, unfortunately, was not kind to individuals or companies in an economic sense. Scores of financial institutions lost enormous sums when the world financial crisis struck and banks collapsed. Many of them have closed their doors, are on the brink of closing or are on government life-support. Competition among insurance companies was considerable, as usual, but now also unequal after one company received a lavish contribution from the government.

Lydur Gudmundsson

In light of the above-mentioned, VÍS´s position is particularly gratifying. The company rests on a solid footing regarding its assets on the one hand and daily operations on the other. Both of these areas are yielding results based on concepts of forethought and vigilance. When Exista gained full ownership of the company in 2006, steps were immediately taken to replace its portfolio of equity securities with government-backed securities and bank deposits.

Simultaneously, all efforts were made to diversify risk and maximise the portfolio of assets’ security, while implementing stringent cost controls. An outstanding employee team has achieved major results in reorganising company operations, and improving performance, by careful deliberation and implementing disciplined working procedures in all facets of operations.

I would like to thank employees at VÍS for their exceptional performance on behalf of the company, as well as thank our customers for the trust and loyalty they have shown VÍS over the years.

Gudmundur Örn Gunnarsson CEO

The nation’s economic environment has changed, making it both natural and inevitable for VÍS to adjust its operational emphasis. Stepped-up demands need to be made for self-sufficiency performance in insurance operations, and to find the right balance between favourable and competitive premiums on the one hand, and acceptable returns from daily operations on the other. The key word in this matter is rationalisation, and here VÍS employees have achieved significant results through a united effort.

Gudmundur Örn Gunnarsson

The largest factor in improving an insurance company’s performance, however, is reducing claims incurred. Apart from important prevention efforts, an insurance company has little impact on the number or size of claims made by its customers, regardless of whether damage was caused by them or others. Arson is of particular concern at the moment. During the year, there were several major fires among the company’s customers due to arson, and in addition, accident claims have increased considerably.

In light of the previously mentioned, the company’s net profit for the year – almost ISK 1.2 billion – is quite satisfactory. Moreover, the increase in premiums year on year despite the economic recession shows that the company enjoys a position of trust and performs with good results. This knowledge will certainly be advantageous in the economic climate that appears to loom on the horizon.

VÍS’s operation and portfolio stand on solid ground. Just as valuable to the company are its employees and customers. Within the 220-person workforce is a wellspring of knowledge and experience that matter greatly to operations and quality of service. In addition, the company has a broad-based customer group.

VÍS does not need to fear the future. With operational prudence, a strong portfolio, highly experienced and dedicated employees and a large customer base, we will successfully navigate our way through this contractionary phase.

4

Organisational structure and management board

Structure

CEO Guðmundur Örn Gunnarsson

Legal and Compliance

Risk Management

Internal Auditing

Insurance Division

Claims Division

Friðrik Bragason

Agnar Óskarsson

Sales and Services Division

Investment

Finance Division

IT Division

Kolbrún Jónsdóttir

Þórir Már Einarsson

Auður Björk Guðmundsdóttir

Human Resources Division Anna Rós Ívarsdóttir

The Insurance Division is responsible for insurance operations of VÍS and Lífís. This includes providing comprehensive risk assessment, suitable pricing, administration and product development. The Insurance Division is also responsible for the company’s overseas operations. Division Manager is Fridrik Bragason.

The Claims Division is responsible for loss assessment, determination of compensation and settlement of losses, and monitors claims development of insurance sectors. Division Manager is Agnar Óskarsson.

The Sales and Services Division is responsible for sales and services of life and non-life insurance to individuals, companies, municipalities and institutions. The Division also manages the company’s service network and is responsible for marketing and public relations. Division Manager is Audur Björk Gudmundsdottir.

The Finance Division is responsible for accounts, collections, settlements, bookkeeping, planning, and operational matters. Division Manager is Kolbrun Jonsdottir.

The IT Division is responsible for implementing and providing services relating to information technology, telecommunications technology and software that provide support for company operations, employees and customers. This involves installing and servicing technical equipment and software, project management and consulting regarding information technology projects, development of IT systems and the operation of communications systems.

Division Manager is Thorir Mar Einarsson.

The Human Resources Division is responsible for all staff issues, career development, educational matters and hiring, as well as providing consultation services to employees and management. Moreover, all salaries processing is handled in this sector. Division Manager is Anna Ros Ivarsdóttir.

5

2 0 2006

2005

2007

2006

2008

2007

2009

2008

2009

ðgjöld ársins á móti Iðgjöld tjónum ársins ársins á móti tjónum ársins 16 14

Premiums and losses retained

12 10

Operations 2009

Eigin iðgjöld og eigin tjón

8

16 bn

6

14 14

4

12 12

2

10 10

Premium

Premiums

Losses

Premiums earned totalled ISK 14,265 million, which is a 15.3% increase from 2008. Retained premiums totalled ISK 13,651 million, an increase of about 15.2% from the previous year.

0 Eigin iðgjöld og Eigintjón iðgjöld og eigin tjón 88eigin

2006 16

2005

2007 66

2006

2008

2007

2009

2008

2009

Claims

44 Gjaldþol og lágmarksgjaldþol Gjaldþol og lágmarksgjaldþol 14

12 30

22

10 25 8

00 16

20 6

14

4 15

12 16

2 10 0

10 14

2006 5

2005

8 12 2007 6 10

Eigin iðgjöld og eigin tjón 2006 2007 2008 2006 2007 2008

2005 2005

2009 2009

Iðgjöld ársins á móti tjónum ársins

2006

2008

2007

2009

2008

2005

14

2007 2 6 0 4

12 2

2006

2008

Operating expenses relating to insurance operations at VÍS totalled ISK 2,752 million, an increase of about ISK 289 million from the year before or about 11.7%.

2009

16 bn 14 14

4

12 12 30

2

10 10

0 2006

2005

Gjaldþol og

25 88 2007 20 66

2008

2009

Iðgjöld ársins á móti tjónum ársins

0

6

2009

Premiums earned and claims 2005 2006 2007 2008 2009 incurred

10 8

2007

2005

2006

Premium

2007

2008

Losses

2009

Gjaldþol og lágmarksgjaldþol

2006

2008

2007

2009

2008

25

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

5 20

Gjaldþol og lágmarksgjaldþol

0 15

30

10

25

5

20

0

16 15

2006

2005

2007

14

2005

2006

2007

2008

2009

Þróun eigin iðgjalda 2006

2008

10

bn 12

At year-end 2009, VÍS’s investment portfolio totalled ISK 27,916 million, a slight increase of about 1.2% from the previous year.

Þróun hagnaðar fyrir skatta

108 10 0 2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

88

4

66

2

40 4 22 00 14

2006 2006

2007 2007

2008 2008

2009 2009

12

Hagnaður eftir skatta

10 12 8 10 6

Equity in VÍS at the end of 2009 was ISK 10,942 million, an increase of about 13.1% from the year before. Equity ratio at year-end 2009 was 32.5% compared with 30.3% in 2008.

VÍS’s total liabilities at year-end 2009 totalled ISK 22,735 million compared with ISK 22,301 million in 2008, an increase of about 1.9%. Insurance liabilities at the end of 2009 were ISK 21,696 million, an increase of about 4.7% from the previous year.

Cash flow

48 26 0 4

Equity

Liabilities

Þróun eigin tjóna

2005 2005

Profit from insurance operations amounted to ISK 604 million compared to ISK 836 million in 2008. Profit from financial operations totalled ISK 668 million compared to a loss of ISK 468 million the year before. Profit after taxes totalled ISK 1,164 million, which is considerably more than in 2008 when profit after taxes was ISK 242 million. The main reason for the increased profit can be traced to fewer write-downs of financial assets.

Investments

2007 2009 2008 2009 Profit after taxes

125 12 10

6

Income and expenses of financial operations totalled ISK 2,204 million, an increase of about 41.2% from the previous year. The company’s operating revenue declined during 2009 from ISK 6,109 million to ISK 3,284 million.

Revenue from value adjustments of investments were ISK 114 million, but were negative by about ISK 2,490 million from the year before. Write-down on financial assets was ISK 905 million, compared to ISK 1,812 million in 2008.

Net earnings

22 10 00

Financial operations

2009

44 lágmarksgjaldþol 15Gjaldþol og lágmarksgjaldþol

30

Claims incurred totalled ISK 12,274 million, which is an increase of 12.2% from the year before. Claims retained amounted to ISK 11,937 million, an increase of about 10.8% from the previous year.

Operating expenses

4 tjónum ðgjöld0 ársins á móti Iðgjöld ársins ársins á móti tjónum ársins 8 162006

Operations 2009

2005

2006

2007 Equity

2008

2009

Net cash from operating activities was negative by about ISK 264 million, but was ISK 1,514 million in 2008. Investment activities were negative by about ISK 2,573 million, but were positive by about ISK 6,524 million in 2008.

2

bn 300 30

Þróun eigin fjár 2005-2009 2005

2006

2007

2008

2009

25 25

Þróun iðgjalda ársins 2005-2009

20 20 16

14 15 15 12

10 10 10 55 8 060 4

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

2005

2006

2007

2008

2009

2

6

0

Net cash from operating activities

Net cash from operating activities at year-end was ISK 6,161 million compared with ISK 8,898 million the previous year.

7% Ökutækjatr.

44%

Operating profit of insurance segments

Sjótr.

5%

Ökutækjatr.

44% Premiums earned by branches Reinsurance 4%

Premiums earned totalled ISK 3,675 million, a 20.0% increase from 2008.This increase is mostly attributed to price-index increases, as well as changes in premiums for homeowner insurance and comprehensive contents insurance. Performance was negative by about ISK 138 million, which was due to several factors, including an excessively high claim-ratio in homeowners and family insurance policies, and excessive losses in casualty and fire insurance policies for companies. Moreover, increases in costs of materials led to increases in claims incurred.

Marine insurance

Premiums earned totalled ISK 517 million, a 13.7% increase from 2008.

Performance was negative by about ISK 220 million. The loss stemmed primarily from two major claims in the company’s international operations.

Domestic marine insurance returned a profit.

Mandatory motor insurance

Premiums earned amounted to ISK 4,924 million, an increase of 6.5% from the year before. Profit from this segment was ISK 1,320 million, in line with the company’s expectations. Good weather conditions in the country contributed to a lower claims ratio during the year. Fewer vehicles on the roads was also a factor.

Accidental and Health 10%

Premiums earned totalled ISK 2.230 million, an increase of 11.8% from 2008. Increases in premiums were reflected in this sector. Although performance has been negative in recent years, it was positive in 2009, in part because of the decreasing claims ratio. Good weather conditions in the last months of the year were important in this regard. This sector showed a profit of ISK 123 million.

Property 26%

Liability 6%

Marine 4%

MotorÞróun tjóna ársins 2005-2009 50%

14 12 10 8

Losses incurred by Branches

6 4

Reinsurance 5%

2 0

Accidental and Health 2005 13% 2006

2007

2008

Property 24% 2009

Þróun heildareigna 2005-2009 Liability 9%

60

Other motor insurance

Operations 2009

Property insurance

Marine 5%

50 40

Motor 44%

30 20 10 0

Liability insurance

Premiums earned totalled ISK 823 million, a 14.8% increase from the year before. As in the previous year, there was an unusual amount of liability claims, in both general liability insurance and professional liability insurance.

This sector lost ISK 71 million.

Personal accident insurance

Premiums earned from personal accident insurance totalled ISK 1,482 million, an increase of 11.1% from 2008. The increase is mostly related to growth in international personal accident insurance. Claims proved to be considerable during the year, resulting in performance being negative by about ISK 307 million. Areas experiencing negativity in this sector include family insurance, seamen’s accident insurance, international personal accident insurance and medical expenses abroad pertaining to this sector.

International reinsurance

Premiums earned from international reinsurance were about ISK 615 million, an increase of 239% from 2008, which was mostly derived from international marine insurance. International reinsurance recorded a loss of ISK 104 million, the result of two major claims events during the year.

Result from insurance operation

2005

2006

bn

2007

2008

2009

Afkoma af vátryggingarekstri

1,4 1,40000 1,2 1,20000 1,0 1,0000

Þróun tjóna ársins 2005-2009

0,8 ,80000 14

0,6 ,60000 12

0,4 ,40000 10 0,2 ,20000 8 ,000060 4

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

2005

2006

2007

2008

2009

2 0

bn

Total assets

Þróun heildareigna 2005-2009

60 60 50 50 40 40 30 30 20 20 10 10 00

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

Afkoma af vátryggingarekstri 1,40000 1,20000 1,0000 ,80000 ,60000 ,40000 ,20000

7

Operations 2009

Composition of assets at year-end 2009 Reinsurance assets Other loans 2% and assets 6% Government bonds 37%

Bank deposit 18%

Accounts receivable 12% Secured loans and other loans 6%

Investments securities bond 19%

Composition of assets matching technical provisions Ma 30 30

Samsetning eigna á móti vátryggingaskuld

ma.kr. Önnur verðbréf Other assets Fasteignir Real Estate Hlutur endurtr share Reinsurers’

25 25

Preventative measures strategy

VÍS operated in line with its new prevention strategy in 2009, which states, “All VÍS employees are prevention consultants to customers. Prevention is part of VÍS’s company culture and a key component in operations. Prevention is an intrinsic aspect of operations, and has the objective of reducing accidents and loss among customers as well as the community at large.”

The company organised numerous preventative activities during the year, for example a traffic safety campaign to reduce serious accidents in collaboration with the Road Traffic Directorate that was advertised on TV, radio and the Net. Moreover, the company promoted various accident prevention discussions in the media on drink driving, seatbelt use, safety at home and water and fire damage. For the 15th year, VÍS held traffic-safety meetings in many higher secondary schools, a program that was taken over by the Road Traffic Directorate at year-end.

Wide-ranging preventative measures were put into action with the participation of various companies. Emphasis for companies in the fisheries industry focused on developing a culture of safety at sea. This was organised in association with the Maritime Safety and Survival Training Centre. Other safety efforts were implemented in cooperation with the Administration of Occupational Safety and Health in Iceland. Rio Tinto Alcan was specially awarded for achieving outstanding results in safety matters over recent years at its aluminium smelter in Straumsvík.

Skráð verðbréf

20 20

Market bonds

15 15

Innlándeposits Bank

Iðgjaldaskuld Premium reserves

Skuldabréf

Municipal bonds sveitarfélaga

10 10 Tjónaskuld

Loss reserves

Goverment Ríkistryggð bréf bonds

55 00

Eignir Assets

Vátryggingaskuld Technical provisions

As part of its new prevention strategy for companies, VÍS visited over 300 businesses during the year to conduct a “performance evaluation” checklist.

This evaluation gives companies specific indications as to where they stand regarding preventative measures, safety issues and fire prevention. Feedback from company management to these visits has been particularly positive, which further strengthens VÍS’s position in the area.

VÍS’s vision in accident prevention is becoming an ever-growing feature of the company’s operations and services.

Income 2009

Product development

Product development during the year primarily involved implementing necessary changes to existing insurance sectors in areas of claims, rate structure and own risk.

Other income 1% Investment income 20%

Retained premiums 79%

Changes were made to terms of credit cards’ insurance. Heavy equipment insurance was changed whereby the company assumes increased protection due to natural disasters. Construction management insurance was thoroughly reviewed because of increased claims. Two new professional liability insurance policies were introduced.

Expenses 2009 Operational cost 17%

Investment expenses 8%

International markets

Retained losses 75%

8

Terms for F plus insurance and houseowners insurance were changed, a move to improve insurance performance. In mid-year, H plus insurance for individuals was introduced. H plus manages insurance policies relating to home assets, i.e. mandatory fire insurance, houseowners insurance and supplementary fire insurance. Because of these changes, houseowners insurance was removed from F plus family insurance policies. F plus and H plus now work well together on the market, creating a safety net beneficial to all Icelandic families. H plus insures the home and various related elements, while F plus insures the family and related assets.

VÍS’s operations in international markets in 2009 can be characterised as being defensive, as well as showing poor claims performance, particularly in the marine insurance sector. As previously, the company bases its participation in foreign markets on strong connections with established partners rather than maintaining offices in the respective countries. Following the collapse of the banks in the fall of 2008, the primary focus has been to

Eigin iðgjöld og eigin tjón

4

12

Gjaldþolshlutfall 2005-2009

10 20 20,00

18 18,00 8

16 Eigin Eigin iðgjöld 16,00 og eigin tjón og eigin tjón 6 iðgjöld 14,00 14 4

16 In March 2009, the contract with a Norwegian insurance company regarding 14 14 participation by VÍS in their reinsurance was renewed. Premiums written 12 12 because of this agreement amounted to about ISK 285 million. There was 10 10 also continued growth in international accident insurance: premiums earned 8 8 rose from ISK 136 million to ISK 210 million.

6 6 16

Solvency ratio

14

4

12,00 12 2

10,00 10 0

8,008

2005

2006

2007

2008

2009

6,006 4,004

Iðgjöld ársins á móti tjónum ársins

16 2,00 2

0,00 0 14

2005 2006 2007 2008 2005 2006 2007 2008 Premiums written relating to international business in 20092 totalled2 about 12 0 0 ISK 695 million, a decrease of about ISK 78 million from the year before.

10 2009 2005 20062005 20072006 20082007 20092008 8 Endurtryggingakostnaðarhlutfall 2009 However, premiums earned increased somewhat from the year before, from 9,00 á móti tjónum ársins ársins Iðgjöld á móti tjónum 6ársins ársins ISK 389 million to almost ISK 930 million. This is mostly the result ofIðgjöld a credit 8,00 16 16 4 entry from contracts that were concluded in 2008 and 2009, as well as the 7,00 14 14 2 previously mentioned increase in accident insurance premiums.

6,00 12 12

Risk assessment

10

8

8

25

25

20

20

2009 2009

Solvency and Minimum 2005 2006 2007 2008solvency 2009

0

10

Operations 2009

maintain the business contacts and business contracts that the company has developed over the years. Despite unfavourable conditions abroad, this work has exceeded expectations, which is evident by the increase in year-on-year premiums.

16

5,00

4,00bn

Solvency solvency Gjaldþol ogMinimum lágmarksgjaldþol

3,00 6 In light of slumping performance in insurance sectors, additional emphasis 6 30 30 2,00 4 4 has been placed on risk assessment of new insurance policies, primarily 1,0025 25 2 2 personal insurance, property insurance and mandatory professional liability 0,00 0 20 20 0 insurance. In addition to tightening risk assessment, current2005insurance 2005 2006 2007 2008 2009 2009 20062005 20072006 20082007 20092008 Gjaldþolshlutfall 2005-2009 15 15 agreements are under scrutiny. This is in connection with upcoming solvency 20,00 Gjaldþol og lágmarksgjaldþol Gjaldþol Markaðshlutdeild VÍS 2009, innlend starfsemi 18,00 directives, “Solvency 2,” where considerable emphasis is placed on riskog lágmarksgjaldþol 10 10 30 30 16,00 45,00 analysis in insurance operations.

5

Claims

14,00 5

40,00

12,00

VÍS paid ISK 12 billion in claims during 2009, an average15of about15ISK 1 billion a month.

10 10 Claims reported to VÍS over the past four years have averaged 36,400 per 0 0 year, equivalent to about 100 per day year-round. Breaking and entering and 2005 20062005 theft were much-discussed topics during 2009, which proved to be a record year for VÍS in paying out burglary and theft claims.

5

5

The number of automobiles burglarised in recent years has been relatively constant. From 2006 to 2008, VÍS paid claims resulting from 50 to 60 burglaries in locked cars annually, but in 2009, this number tripled to 165.

Most break-ins were in May and June, 20 per month, while there were 17 in November. This occurred despite the police repeatedly warning the public not to leave valuables in plain sight in their cars, i.e. wallets, GPS devices, computers, etc.

VÍS has paid many claims over the years related to burglaries of homes and companies, but never as many as in 2009. On average, there were 1.24 forced entries per day in 2006 that VÍS compensated, 1.13 in 2007, 1.56 in 2008 and almost 2 per day during 2009.

35,00 00 10,00

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

2007

2008

2009

30,00

8,00

25,00 6,00 20,00 4,00 15,00 2,00 0,00 10,00

5,002006 2007

,00 % 9,009

2005

2006

20082007

20092008

2009

Reinsurance cost ratio

Eignatr. Ökutækjatr. Ábyrgðartr.

Endurtryggingakostnaðarhlutfall 2009

8,008Afkoma

af vátryggingarekstri 2009 eftir greinum

7,007 6,006 5,005 4,004 3,003 2,002 1,001 0,000

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

Markaðshlutdeild VÍS 2009, innlend starfsemi 45,00 40,00 35,00

VÍS celebrates 20th anniversary

VÍS celebrated its 20th anniversary in 2009. There were various festivities, for example branch offices invited customers for coffee, cakes and other delectables. Current and past employees were invited to an anniversary reception where VÍS’s 20 years were recounted via a multimedia show.

30,00 25,00 20,00 15,00 10,00 5,00 ,00

Enhanced logo

VÍS unveiled its updated logo, and its new look, in March. The old logo was created in 1989, and is one of the oldest in the country. It was designed

by Fanney Valgarðsdóttir and redesigned by Fíton advertising agency with permission from Fanney. The logo’s colour was changed from gray to blue and the outline made smoother to give it a contemporary look. Most of the company’s promotional materials were renewed during the year, and the new logo was put up in all company offices.

Eignatr.

Ökutækjatr.

Ábyrgðartr.

Afkoma af vátryggingarekstri 2009 eftir greinum

9

Operations 2009

International business, premiums earned by insurance sectors Accident and health 23%

Property 5%

Marine 72%

VÍS service strategy

VÍS’s new service strategy was introduced in September, and a workshop was held for all employees and agents.

Insurance revolves around people, and outstanding service is the key to VÍS’s competitive advantage. Service strategy is a tool to instil the company’s values – initiative, dependability, care – in daily operations. The service strategy is viewed as the framework within which VÍS interacts with its customers as well as its employees.

A service strategy handbook was published along with an overview of the company’s organisational structure. It includes photos of all employees and agents that illustrate who works where, as well as information about their responsibilities.

Customer demands for efficiency, simplicity, security and personal service never cease to grow. It is therefore important for VÍS employees to adapt to these ever-changing needs. Company employees are resolved to ensure that VÍS services continue to provide the company with a competitive advantage

Competition

Competition on the Icelandic insurance market was challenging during the year, as it has been in the past. Two non-life insurance companies, Sjóvá insurance and Vörður insurance, did not fulfil minimum solvency requirements for insurance companies and therefore operated on an exemption from the Financial Supervisory Authority. Føroya Banki acquired 51% in Vörður by increasing its equity capital, but a new company was established around Sjóvá with a financial contribution of ISK 16 billion from the Treasury to reinforce the company’s capital base.

When Sjóvá’s portfolio was transferred into a new company, their insurance policies became open in October. There was considerable instability on the market, and a significant flow of customers between companies.

The insurance market in Iceland has contracted somewhat due to the difficult economic situation. According to Statistics Iceland, the number of company bankruptcies during the first 11 months of 2009 was 823, an increase of 23% from the previous year. There are fewer automobiles in the country, unemployment has grown and people are leaving the country in record numbers. Through a concerted effort by VÍS employees, and strong emphasis on providing quality service, VÍS was able to maintain its position as the largest insurance company on the Icelandic market.

Dynamic service network

VÍS places great emphasis on providing best-quality, efficient services and decision-making based on knowledge of local communities. This is accomplished through a service network of 42 branch offices located throughout the country, each providing individual services. Services at VÍS call centres have also been increased, which have longer opening hours than the head offices. The company website was given a major overhaul during the year, and customers can access a wealth of information in addition to send queries and comments.

Collaboration with banks and savings banks

VÍS continues to have good working relations with various banks and savings banks in Iceland. The company’s primary bank is Arion Bank, where VÍS provides customers who are members of the bank’s ‘premium service’ with special insurance terms. VÍS’s other cooperative partners are Keflavik savings bank, Afl savings bank, Vestmannaeyjar savings bank, Svarfdæla savings bank and Thorshöfn savings bank. Customers of these savings banks who are members of their ‘premium services’ also receive special insurance terms at VÍS.

10

Operations 2009

Branch offices in Borgarnes and Saudarkrokur, which had been operated by VÍS, were changed into agencies during the year. Arion Bank now operates the agency office in Borgarnes, and Afl savings bank the agency office in Saudarkrokur.

Corporate social responsibility

VÍS endorses and supports projects that are beneficial for the Icelandic community. In this way the company exhibits its responsibility to its customers and Icelandic society at large. VÍS actively sponsors charities, cultural activities and athletics, in addition to supporting numerous organisations.

The company supported various aid organisations, for example a substantial grant was made to the Institute of Spinal Cord Injury. This institute works towards cures of spinal cord injuries through all possible avenues. VÍS also supported “Red Nose Day,” a UNICEF project to raise money by selling “red noses.” In addition, the company supported the campaign, “On everyone’s lips’,” a project organised by the Aid Society for Childhood Cancer.

VÍS is one of the sponsors of the Eco-Driving campaign launched by the Icelandic Environment Association, as well as the Icelandic Automobile Association’s Eurorap project, which has the objective of ensuring road design reduces the likelihood of accidents.

VÍS was the main sponsor of the Handball Federation of Iceland and the Football Association of Iceland. The contract with the latter expired at yearend and was not renewed. The company also supports many athletic clubs throughout Iceland.

VÍS is concerned about the welfare of animals and offers excellent insurance protection for them. In this connection VÍS is a main sponsor the Icelandic Horse-Clubs Federation, the National Equestrian Team, the VÍS Masters Division in Horse Sports, the Icelandic Kennel Club and the Icelandic Cat Breeding Association.

VÍS child car seats

The popularity of child car seats from VÍS continues unabated, as the company provides safe, quality child car seats at an economical price. The seats are highly popular among customers of VÍS and others. An average of about 5,500 seats was being leased during the year.

VÍS receives advertising award from ÍMARK

VÍS ran new advertisements during the year. There were campaigns for F plus family insurance, accident prevention and image. These advertising and marketing efforts proved fruitful. ÍMARK, the Association of Icelandic Marketing People, nominated VÍS for five advertising awards in 2009. The nominations were for an F plus TV commercial, a direct mail campaign for the VÍS Golf Tournament (both in association with Fíton advertising agency), an environmental advert, Web banners and a road-safety commercial for TV. That campaign was a cooperative effort with the White House in Iceland advertising agency. VÍS won two awards: best direct mail campaign and best Web banner.

VÍS advertisements win FÍT design award

VÍS’s advertising campaign “Good friends are priceless,” the work of Fíton advertising agency, won four acknowledgements at the FÍT (Association of Icelandic Designers) Design Awards: the main award in the Net media category, a prize in the TV category, and acknowledgements in the animation category and the advertising-campaign category.

The road-safety commercial “Always wear your seatbelt,” which VÍS made in collaboration with the Road Traffic Directorate and White House advertising agency, won the main prize in the Web advertising category.

11

Operations 2009

F plus advertisements, made by Fíton advertising, won two acknowledgements: in the TV category and for animation. Other acknowledgements were for illustrations in connection with VÍS’s anniversary celebration advertisements, and for Gay Pride advertisements in the print media.

Investments

VÍS has an investment strategy that was initially approved in 2007 and is reviewed regularly. It was formed in collaboration with two independent parties who conducted an appraisal of the company’s commitments, and determined how best to integrate investments with those commitments.

Investment in assets that offset the company’s insurance liabilities is based on regulation no. 646/1995 with later amendments. Over the past four years, the amount of total assets compared to insurance liabilities has been significant. The company’s solvency at year-end was 4.2.

Asset management over the year was in many ways different than it has been for two main reasons: currency exchange restrictions and a smaller selection of domestic securities. There were major fluctuations on the price of securities early in the year, but since spring they have held rather steady.

Foreign stock exchanges also picked up in the spring and rose steadily through year-end. The policy interest rate dropped from 18% to 10% and the deposit rate even more. VÍS kept the asset composition of its securities portfolio in less risky investments as in the previous two years. About ISK 2,000 million was changed from foreign assets over to domestic during the year, and the ISK began strengthening at year-end.

Operating revenue and value adjustments of investments amounted to ISK 3,109 million. Write-down on financial assets totalled ISK 905 million.

Revenue from financial operations was ISK 2,204 million. Of this, ISK 1,536 million was transferred to insurance operations, resulting in a profit from financial operations of ISK 668 million.

Economic activity

The year 2009 can be characterised by economic recession after the financial collapse in the fall of 2008. This was accompanied by a reduction in private consumption and increased unemployment.

The exchange rate of the Icelandic króna remained rather high throughout 2009: it was around 180 against the EUR and 130 against the USD. Currency restrictions imposed in November 2008 were still in effect, but have been slightly relaxed.

Companies and homes in Iceland have been openly exposed to this economic upheaval. Leverage taken on by individuals and companies is significantly more than it has ever been. Payment default has increased resulting in many more companies being on the Defaulters’ List. It can be said that the prevailing condition for this group in 2009 has been one of waiting, as many loans were frozen while the wait began for an overall solution for this large group of individuals and companies.

At year-end a tax hike was placed on companies and individuals to meet the Treasury’s budget deficit. Taxes have therefore increased somewhat from previous years.

Since the economic collapse in the fall of 2008, VÍS has focused on rationalising operations. Stringent cost controls have returned results, making it unnecessary to resort to layoffs or wage cuts. Although 2009 was an acceptable operating year, the company has not been immune to the declining economic activity. Write-downs of investment activities are still considerable, and in addition the ratio of outstanding premiums is somewhat worse than in previous years.

12

Meðaltal íslenskra fyrirtækja 4,21 Fjármála og tryggingaþjónusta 4,34 Topp 30% íslenskra 4,33 fyrirtækja Topp 10% íslenskra fyrirtækja 4,5

20-29 30-39 40-49 50-59 60-67

The strategy for 2010 is to maintain stringent operational cost controls, and there is some uncertainty regarding investment income and the outlook for economic activity in Iceland.

VÍS has always had the objective of being Iceland’s leading insurance company.

Satisfied employees and customers are key factors in the company’s success.

VÍS has an outstanding group of employees that work together as a dynamic team. Management at VÍS assigns employees appropriate responsibilities, thereby enabling them to utilise their talents and initiative in carrying out interesting and challenging work.

VÍS had 223 employees at year-end, although the average number of fulltime equivalent employees during the year was 218. VÍS employees possess broad-based experience in their fields of activity. Average length of service is 10 years. Almost 40% of employees have a university education. The average age of employees is 45 years. The company has implemented an egalitarian policy, and in recent years management has followed an equality plan in operations. The gender ratio is not far apart: 125 men and 98 women work at the company. The gender ratio in the management board is equal, and about one-third of middle managers are women.

Job satisfaction

4,5 4,5 4,4 4,4 4,3 4,3 4,2 4,2 4,1 4,1

es s

Ic

el an d

ic

bu

sin

es s sin bu ic To p

50

10 %

Ic 30 % To p

60

el an d

an d e Fi n

e

Ic

80

an c

el an d

ic

in

bu

su

sin

ra nc

es s

S VÍ 90

70

e

4,0 4

40 30 20 10 0

6-10 ár 11-15 ár Age distribution

0-5 ár

yfir 15 ár

70 70 60 60 50 50 40 40 30 30 20 20 10 10 00

VÍS - Role Model Company 2009

VR (The Commercial Workers’ Union) holds an annual survey among its members on the internal working environment of companies. The companies ranked high on the list receive special recognition, the title Role Model Company 2009, for a great result. In 2009, VÍS was one of the role model companies chosen by VR.

86 46 24 62 218

4,6 4,6

Av er ag

Human resource strategy and the environment

Operations 2009

The strategy is to strengthen VÍS’s Self-service Internet Insurance Services, a website where customers have access to information about their insurance policies, insurance coverage, premiums, etc., and have the capability of conducting personal business with the company. During the year a new financial accounting and collection system from SAP was set up, which was integrated into VÍS’s insurance-, claims- and network systems.

12 54 64 61 27 218

0-5 ár 6-10 ár 11-15 ár yfir 15 ár

IT division

Organisational changes were implemented in the IT division with the objective of better managing projects relating to VÍS’s infrastructure, thereby strengthening elements regarding Net utilisation and Net solutions. These changes involved dividing the computer department into two units: Business systems and Net solutions. After the changes were made, efforts have been concentrated on achieving procedural efficiency, increasing electronic data interchange and reducing the use of paper.

ára ára ára ára ára

Number

20-29 20-29 árayr

30-39 30-39 árayr

40-49 40-49 árayr

50-59 50-59 árayr

60-67 60-67 árayr

Period of employment

90 80 80 70 60 60 50

At year-end 2009, an employee survey, Gallup Workplace Audit, was conducted in collaboration with Capacent Iceland, the 11th time this survey was taken by VÍS employees. Overall employee satisfaction was the most important aspect of the survey and has never measured higher, and the conclusions were some the best ever by an Icelandic company.

40 40 30 20 20 10

00

0-5 yr 0-5 ár

6-10 6-10 áryr

11-15 11-15 áryr

Over 15 yfir 15 ár yr

70

Employees at VÍS have a myriad of opportunities for life-long education and continuing education. During the year, emphasis was placed on matters relating to service in education activities to support implementation of the company’s new service strategy. Moreover, there were numerous performance workshops relating to company activities. With the support of VÍS, many employees are enrolled in university studies while maintaining work responsibilities. Eight employees were enrolled in studies at the Insurance School operated by Reykjavík University, and a large group completed a Dale Carnegie course. In addition, all VÍS management teams took Dale Carnegie management training seminars where emphasis focused on applied management and presentation techniques.

60 50 40 30 20 10 0 20-29 ára

30-39 ára

40-49 ára

50-59 ára

60-67 ára

13

Reinsurance

Operations 2009

Reinsurers’ rating 2009 A 6%

A8%

AAA 7%

VÍS’s reinsurance strategy requires that all reinsurers for VÍS have a Standard & Poor‘s security rating of A- or higher. This minimises reinsurance risk for VÍS, i.e. that the reinsurer does not uphold his obligations. Operating profit of reinsurers was good during 2009. VÍS’s reinsurer terms are good, as few claims having fallen on reinsurers for VÍS in recent years. Expenses relating to reinsurance are about 1.8% of premiums earned.

AA 1%

AA41% A+ 37%

Markaðshlutdeild iðgjöld ársins 2009 Vörður 9%

VÍS 37%

TM 26%

Sjóvá 28%

Risk management

Risk management is a growing segment of operations at VÍS, and has been given more weight within the company’s organisational structure. This development goes hand-in-hand with the changes appearing in the new solvency directives being discussed by the EU, which will include Icelandic insurance companies. These new solvency requirements, called Solvency II, shall become part of Icelandic law no later than October 2012. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has, in cooperation with insurance companies in the EU zone, conducted Quantitative Impact Studies (QIS) to determine the impact that various implementations of solvency requirements have on the calculated solvency of insurance companies. Four such studies were conducted during the years 2005-2008, and a fifth will take place in 2010. VÍS has always participated. The conclusion demonstrates the strong position held by VÍS according to the pending solvency directives. Risk management is a fundamental element in insurance operations. Performance of the various insurance segments are closely monitored, all endeavours are made to ensure that premiums coincide with the risk assigned to the insurance contracts, major risks are specially examined and assessed, and efforts are made to strengthen claims protection. Financial claim limits have been set on the loss risk that the company is prepared to carry on its own, and a policy has been demarcated regarding how the company reinsures itself. The company’s reinsurance policy stipulates limits on own risk, type of reinsurance contract, requirements regarding the reinsurer’s security rating, maximum risk placed on each reinsurer, and limitations on the number of reinsurers on reinsurance contracts.

Heightened emphasis is placed on risk management in the company’s financial operations. The company has an investment strategy that places great importance on secure and diversified assets and risk spreading. The company’s portfolio of assets has been changed to conform to the investment strategy.

The company intends to increase risk spreading in insurance operations by accepting insurance policies from abroad, albeit in limited quantity. As part of this move the company intends to receive a security rating from credit rating company Standard & Poor‘s. That process stopped when conditions changed on the financial markets, which created uncertainty regarding the financial position of the Icelandic State. There is now a wait until conditions change so that it will be possible to conclude the evaluation process.

14

Financial Statements

Financial Statements 2009

15

Financial Statements

Endorsement by the Board of Directors and CEO The financial statements for the year ended 31 December 2009, have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. Profit for the year, according to the Income Statement, amounted to ISK 1.164 million. According to the Balance Sheet total assets amounted to ISK 33.677 million and total equity amounted to ISK 10.942 million at the end of the year.

At year end the number of shareholders were 2. At the beginning of the year there were also 2 shareholders. At year end one shareholder holds more than 10% of the shares, Exista hf. with 99,99% of the shares.

The objective of risk management is to ensure the safety of the company‘s assets. The company has approved an investment strategy with an objective to ensure rate of return and safety of assets. The Board of Directors approves the investment strategy on a regular basis.

The Board of Directors recommend that no dividend will be paid to shareholders in the year 2010, but otherwise refers to the financial statements regarding changes in the Company’s equity and disposal of profits.

The Board of Directors and the CEO of Vátryggingafélag Íslands hf. are of the opinion that the financial statements for the year 2009 contain all the information necessary to form a clear picture of the Company’s standing at year end, the year’s operating results and the year’s financial development.

The Board of Directors and the CEO of Vátryggingafélag Íslands hf. hereby confirm the financial statements for the year 2009 with their signature.

Reykjavík 15th March 2010

Board of Directors

Lydur Gudmundsson Chairman

Sigurdur Valtysson

Sveinn Thor Stefansson

Erlendur Hjaltason

Asgeir Thoroddsen

Hildur Arnadottir

CEO

Gudmundur Örn Gunnarsson

16

Independent Auditor´s Report Financial Statements

To the Board of Directors and shareholders of Vátryggingafélag Íslands hf.

We have audited the accompanying financial statements of Vátryggingafélag Íslands hf., which comprise the balance sheet as at December 31, 2009, the income statement and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with generally accepted accounting principles in Iceland. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements give a true and fair view of the financial position of Vátryggingafélag Íslands hf. as of December 31, 2009, and of its financial performance and its cash flows for the year then ended in accordance with generally accepted accounting principles in Iceland applied on a consistent basis.

Deloitte hf.

Kópavogur 15th March 2010

Hilmar A. Alfredsson State Authorized Public Accountant

17

Financial Statements

Income Statement for the year 2009

Notes

2009

2008

Premiums earned … …………………………………………………………

14.265.293

12.367.239

Premiums earned, reinsurers´share ………………………………………

(614.414)

(519.956)

13.650.879

11.847.283

Other income from insurance operations … ……………………………

91.203

182.182

Investment income from insurance operations … ………………………

1.535.838

2.028.760

Income from insurance operations total … ………………………………

15.277.920

14.058.225

Claims incurred … ……………………………………………………………

(12.274.148)

(10.940.582)

Claims incurred, reinsurers´share…………………………………………

336.597

169.627

(11.937.551)

(10.770.955)

Operating expenses …………………………………………………………

(2.752.775)

(2.463.221)

Commission and net gains from reinsurers ………………………………

16.712

11.758

Expense from insurance operations total … ……………………………

(14.673.614)

(13.222.418)

Profit from insurance operations… ………………………………………

604.307

835.807

3.284.493

6.109.125

Net gain on investments at fair value … …………………………………

114.119

(2.489.735)

Operating expenses… ………………………………………………………

(282.991)

(243.256)

Allowances for doubtful financial assets …………………………………

(905.392)

(1.811.640)

(6.174)

(3.876)

Investment income total… …………………………………………………

2.204.056

1.560.618

Transferred investment income to insurance operations … …………

(1.535.838)

(2.028.760)

Profit (loss) from investment operations… ………………………………

668.218

(468.142)

Profit before taxes ……………………………………………………………

1.272.525

367.665

(108.430)

(125.701)

1.164.095

241.964

0,45

0,16

Income from insurance operation:

Premiums earned, net of reinsurance … …………………………………

6

Expenses from insurance operation:

Claims incurred, net of reinsurance … ……………………………………

7

Income and expenses from investments: Investment income … ………………………………………………………

Investment expenses … ……………………………………………………

Income tax expense … ………………………………………………………

9

10

11

Total Profit… …………………………………………………………………

Earnings per share……………………………………………………………

Amounts in ISK 000

18

12

Balance Sheet at 31 December 2009 Notes

31.12.2009

31.12.2008

Financial Statements

Assets Property, plant and equipment… …………………………………………

13

503.174

361.186

Financial assets measured at fair value … ………………………………

14

18.702.819

14.254.112

Secured loans and other loans … …………………………………………

14

2.165.897

3.838.054

Deferred tax asset …………………………………………………………

11

382.507

222.724

Accounts receivables … ……………………………………………………

15

4.198.700

3.467.284

Reinsurance assets … ………………………………………………………

16

602.200

683.917

960.643

253.664

6.160.941

8.898.024

33.676.880

31.978.964

2.602.481

2.502.481

Capital reserves ………………………………………………………………

445.923

387.718

Retained earnings ……………………………………………………………

7.893.670

6.787.780

Total equity… …………………………………………………………………

10.942.074

9.677.978

Other receivables … …………………………………………………………

Cash and cash equivalents …………………………………………………

17

Total assets… …………………………………………………………………

Equity Share capital … ………………………………………………………………

18

Liabilities Technical provision … ………………………………………………………

20

21.695.896

20.719.759

Accounts payable … …………………………………………………………

21

631.751

419.334

Other liabilites … ……………………………………………………………

21

407.160

1.161.892

Total liabilities…………………………………………………………………

22.734.806

22.300.986

Total equity and liabilities……………………………………………………

33.676.880

31.978.964

Amounts in ISK 000

19

Financial Statements

Statement of Changes in Equity for the year 2009

Share capital

Capital reserves

Retained earnings

Total

Equity 1.1.2008 … ………………………

1.502.481

375.620

8.357.583

10.235.683

New share capital … ………………………

1.000.000

1.000.000

Dividends, paid … …………………………

(1.799.669)

(1.799.669)

Total profit … ………………………………

241.964

241.964

12.098

(12.098)

0

387.718

6.787.780

9.677.978

100.000

100.000

Statutory reserve … ………………………

Equity 1.1.2009 … ………………………

New share capital … ………………………

2.502.481

Total profit … ………………………………

Statutory reserve … ………………………

Equity 31.12.2009 ………………………

Amounts in ISK 000

20

2.602.481

1.164.095

1.164.095

58.205

(58.205)

0

445.923

7.893.670

10.942.074

Statement of Cash Flow for the year 2009 Notes

2009

2008

Profit for the year … …………………………………………………………

1.164.095

241.964

Investment income and expenses …………………………………………

(2.487.047)

(1.803.875)

Depreciation and impairment of assets … ………………………………

69.615

35.601

Gain on sale of property and equipment … ………………………………

2.087

0

Technical provision net of reinsurance, changes … ……………………

1.087.499

1.186.659

Obligation, changes … ………………………………………………………

(159.783)

(570.519)

Operating cash flow before movement in working capital… …………

(323.534)

(910.169)

Other operating assets (increase) decrease … …………………………

(906.966)

(280.286)

Operating liabilites increase (decrease) … ………………………………

(274.103)

582.036

Cash generated (to) operations… …………………………………………

(1.504.603)

(608.419)

Dividend and interest revenue … …………………………………………

1.247.116

2.126.383

Paid interest … ………………………………………………………………

(6.174)

(3.876)

Net cash (to) from operating activities… …………………………………

(263.660)

1.514.088

Property and equipment … …………………………………………………

(213.690)

(115.443)

Investment in financial assets … …………………………………………

(1.092.799)

4.466.840

Investment in other securities … …………………………………………

(1.266.933)

2.172.646

(2.573.422)

6.524.043

Dividend paid … ………………………………………………………………

0

(1.799.669)

Proceeds from issues of equity shares … ………………………………

100.000

1.000.000

100.000

(799.669)

(Decrease) increase in cash and cash equivalents … …………………

(2.737.082)

7.238.461

Cash and cash equivalents at beginning of the year …………………

8.898.024

1.659.562

Cash and cash equivalents at year-end … ………………………………

6.160.941

8.898.024

917.409

1.212.337

Financial Statements

Operating activities

Investing activities

Financial acitivies

Other information Working capital from operation ……………………………………………

Amounts in ISK 000

21

Notes 1.

General information

Notes

Vátryggingafélag Íslands hf. (the Company) is a limited company and operates subject to law no. 60/1994 concerning insurance operations and law no. 2/1995 concerning limited companies.

Vátryggingafélag Íslands hf. operates in the field of insurance and finance.

2.

Adoption of new and revised Standards

2.1 New Standards and Interpretations

The following new and revised Standards (IFRS/IAS) and Interpretations (IFRIC) adopted in the current period: IFRS 2 (revised) - Share-based Payment IFRS 7 (revised) - Financial Instruments: Disclosures IFRS 8 - Operating segments IAS 1 (revised) - Presentation of Financial Statements IAS 23 (revised) - Borrowing Costs IAS 32 (revised) - Financial Instruments: Presentation IFRIC 13 - Customer Loyalty Programs IFRIC 15 - Agreements for the Construction of Real Estate IFRIC 16 - Hedges of a Net Investment in a Foreign Operation The above Standards and Interpretations have not lead to changes of the financial statements.

2.2 Standards and Interpretations not yet adopted

By confirmation of the Financial Statements following new and revised standars and interpretations have been issued but not yet adopted: IFRS 1 (revised) - Adoption of International Financial Reporting Standards (effective for accounting periods beginning on or after July 1, 2009); IFRS 2 (revised) -Share-based Payment (effective for accounting periods beginning on or after January 1, 2010); IFRS 3 (revised) - Buisness Combination (effective for accounting periods beginning on or after July 1, 2009), IFRS 9 - Financial Instruments (effective for accounting periods beginning on or after January 1, 2013); IAS 24 - Related Party Disclosures (effective for accounting periods beginning on or after January 1, 2011); IAS 27 (revised) - Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after July 1, 2009); IAS 32 (revised) - Financial Instruments: Disclosures (effective for accounting periods beginning on or after February 1, 2010); IAS 39 (revised) - Financial Instruments: Recognition and Measurement (effective for accounting periods beginning on or after July 1, 2009); IFRIC 14 (revised) - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for accounting periods beginning on or after July 1, 2009); IFRIC 17 - Distributions of Non-cash Assets to Owners (effective for accounting periods beginning on or after July 1, 2009); IFRIC 18 - Transfers of Assets from Customers (effective for accounting periods beginning on or after July 1, 2009); IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments (effective for accounting periods beginning on or after July 1, 2010); It is the management´s assessment that in general, the adoption of those new and revised standards and interpretations will have no material impact on the financial statements.

3.

Significant accounting policies

3.1 Statement of compliance

The financial statements have been prepared in accordance with International Financial Standards (IFRS - International Financial Reporting Standars) as adopted by the EU.

22

3.2 Basis of preparation

The financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets and financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The financial statements are presented in Icelandic Krona (ISK), rounded to nearest thousand.

The principal accounting policies are set out below.

Notes

3.3 Income from insurance operations

Premiums Premiums entered as income comprise the premiums contracted during the fiscal year including premiums transferred from last year but excluding next years premiums, which are entered as unearned premiums. Unearned premiums in the Balance Sheet forms the part of premiums due to insurance risk during the period which belongs to unexpired insurance policies at year end.

Dividend and interest revenue Dividend revenue from investments is recognised when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably).

Interest revenue is recognised when it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial assets to that asset´s net carrying amount on initial recognition.

3.4 Expenses from insurance operations

Claims stated in the Income Statement are the claims incurred in the year including increases or decreases due to development of claims from previous fiscal years. Claims reserved in the Balance Sheet are the total amount of reported outstanding claims as well as provision for claims incurred but not reported.

3.5 Insurance contracts

The Company issues contracts that transfer both financial and insurance risk from the customer to the Company.

Insurance contracts - definition Insurance contracts are contracts under wich the insurer accepts significant insurance risk from policyholders by agreeing to compensate the policyholders if a specified uncertain future event would occur.

The insured event is uncertain, it is not known if it occures or when and in general the financial concequences are not known in advance.

Non-life insurance - classification Non-life insurance contracts are classified as general third party liability contracts, personal accidents contracts, property insurance contracts and marine insurance contracts.

Third party liability contracts protect the costumer for the risk of causing harm to third parties as a result of their legitimate activities.

Personal accident insurance contracts compensates the insured own bodily injuries in terms of the insurance contracts.

Property insurance contracts mainly compensate the Company’s customers for damage suffered to their properties or for the value of property lost. Customers in business could also receive compensation for the loss of earnings caused by the inability to use the insured properties in their business.

Technical provisions The company assesses, at the end of the fiscal year, whether the recorded insurance liability can carry out the Company’s estimated obligations by assessing future cash flows of the insurance liability. All changes in the insurance liability are recognized in the Income Statement. In performing these assessments statistical methods are used to estimate future cash flows related to the claims.

Reinsurance contracts Reinsurance contracts are made in order to reduce the Company’s risks. Reinsurance contracts can be either proportional or carry the entire risk in the case of a damage exceeding a fixed damage cost.

Claims on reinsurers due to premiums and claims are recognized as reinsurance assets. The claims concern the reinsurers share in losses according to reinsured insurance contracts and share in unearned premiums. Obligations due to reinsurance 23

are the reinsurers´ share in premiums for reinsurance contracts which are recognized in the Income Statement at the time of the renewal of the reinsurance contracts.

3.6 Foreign currencies

Notes

The individual financial statements of the Company are presented in ISK, the currency of the primary economic environment in which the entity operates (its functional currency).

Exchange differences are recognised in profit or loss in the period in which they arise except for: · exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; · exchange differences on transactions entered into in order to hedge certain foreign currency risks and · exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur.

3.7 Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

3.8 Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company´s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority.

Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss whether in other comprehensive income or directly in equity.

3.9 Property, plant and equipment

Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of the reporting period.

24

Any revaluation increase arising on the revaluation of such land and buildings is recognised in other comprehensive income, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such land and buildings is recognised in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset.

Notes

Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.

Depreciation is recognised so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

3.10 Impairment of tangible and intangible assets excluding goodwill

At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

3.11 Provisions

Provisions are recognised when the Company has a present obligation as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Onerous contracts An onerous contract is considered to exist where the Company has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

Restructurings A restructuring provision is recognised when the Company has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring.

Amounts in ISK 000

25

Warranties Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the relevant products, at the directors’ best estimate of the expenditure required to settle the Company’s obligation.

Notes

Contingent liabilities acquired in a business combination Contingent liabilities acquired in a business combination are initially measured at fair value at the date of acquisition. At the end of subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognised in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation recognised in accordance with IAS 18 Revenue.

3.12 Financial assets

Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or ( where appropriate) a shorter period, to the net carrying amount on initial recognition.

Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. Financial assets at FVTPL Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: - it has been acquired principally for the purpose of selling it in the near term; or - on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or - it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: - such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or - the financial asset forms part of a company of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or - it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. Held-to-maturity investments Bills of exchange and debentures with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment, with revenue recognised on an effective yield basis.

AFS financial assets Listed shares and listed redeemable notes held by the Company that are traded in an active market are classified as AFS and are stated at fair value. The Company also has investments in unlisted shares that are not traded in an active market but that are also classified as AFS financial assets and stated at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method, and foreign exchange gains and losses on monetary assets, which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

Dividends on AFS equity instruments are recognised in profit or loss when the Company’s right to receive the dividends is established.

Amounts in ISK 000

26

Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for shortterm receivables when the recognition of interest would be immaterial.

Notes

Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period.

In respect of AFS equity securities, impairment losses previously recognised in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income.

Reclassification of financial assets The Company has reclassified certain non-derivative financial assets out of held for trading (part of the FVTPL category) to AFS financial assets. Reclassification is only permitted in rare circumstances and where the asset is no longer held for the purpose of selling in the short-term. In all cases, reclassifications of financial assets are limited to debt instruments.

Reclassifications are accounted for at the fair value of the financial asset at the date of reclassification.

Derecognition of financial assets The Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

3.13 Financial liabilities and equity instruments issued by the Company

Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognised at the proceeds received, net of direct issue costs.

Compound instruments The component parts of compound instruments (convertible bonds) issued by the Company are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument.

This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished upon conversion or at the instrument’s maturity date. The equity component is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognised and included in equity, net of income tax effects, and is not subsequently remeasured.

Financial guarantee contract liabilities Financial guarantee contract liabilities are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of: - the amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and - the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with the revenue recognition policies.

Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.

Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: - it has been acquired principally for the purpose of repurchasing it in the near term; or - on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or Amounts in ISK 000

27

- it is a derivative that is not designated and effective as a hedging instrument.

Notes

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: - such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or - the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or - it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

Derecognition of financial liabilities The Company derecognises financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire.

4.

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The Board of Directors have made assumptions and evalutations on the following items that have significant effect on the financial statement: - Financial assets and allowances for doubtful financial assets - Technical provision

5.

Segment reporting

The following are the Company´s segments of operation: Insurance operation and Financial operation.

Results of operations of segments for 2009 is as following:

Premiums earned… …………………………………………………

Reinsurers´ share… …………………………………………………

Other income… ………………………………………………………

Investment income … ………………………………………………

Total income……………………………………………………………

Claims incurred … ……………………………………………………

Claims incurred, reinsurers´ share … ……………………………

Operating expenses …………………………………………………

Investment expenses … ……………………………………………

Allowance for doubtful financial assets … ………………………

Operating profit of Segment… ……………………………………

Insurance Investment operation operation 14.265.293 (614.414) 91.203 1.535.838 1.862.774 15.277.920 1.862.774

Total 14.265.293 (614.414) 91.203 3.398.612 17.140.694

(12.274.148)

336.597

(2.736.062) (282.990)

(6.174)

(905.392)

604.307 668.218

(12.274.148) 336.597 (3.019.052) (6.174) (905.392) 1.272.525

Income tax … ……………………………………………………………………………………………………………

(108.430) Net earnings for the year… ……………………………………………………………………………………………

1.164.095 Depreciation in the insurance segment amounted to 67.5 million during 2009. Depreciation in the financial segment amounted to 2.2 million. Investments in the insurance segment amounted to 214 million during 2009.

Amounts in ISK 000

28

Assets and liabilities of Segments December 31, 2009 is as following: Insurance operation

Investment operation

Total

19.208.021 1.660.695 602.200 8.558.685 3.647.279 28.368.906 5.307.974

20.868.716 602.200 12.205.964 33.676.880

Liabilities Technical provisons… ………………………………………………

Other liabilities… ……………………………………………………

Segments´ liabilities … ……………………………………………

21.695.896 1.038.911 22.734.807 0

21.695.896 1.038.911 22.734.807

Insurance Investment operation operation 12.367.239 (519.956) 182.182 2.028.760 1.590.630 14.058.225 1.590.630

Total 12.367.239 (519.956) 182.182 3.619.390 15.648.855

(10.940.582)

169.627

(2.451.463) (243.256)

(3.876)

(1.811.640)

835.807 (468.142)

(10.940.582) 169.627 (2.694.719) (3.876) (1.811.640) 367.665

Income tax … ……………………………………………………………………………………………………………

Net earnings for the year… ……………………………………………………………………………………………

(125.701) 241.964

Notes

Assets Loans and other investments ………………………………………

Reinsurance assets … ………………………………………………

Other assets … ………………………………………………………

Segments´assets… …………………………………………………

Results of operations of segments for 2008 is as following:

Premiums earned … …………………………………………………

Reinsurers´ share ……………………………………………………

Other income … ………………………………………………………

Investment income … ………………………………………………

Total income……………………………………………………………

Claims incurred … ……………………………………………………

Claims incurred, reinsurers´ share … ……………………………

Operating expenses …………………………………………………

Investment expenses … ……………………………………………

Allowance for doubtful financial assets … ………………………

Operating profit of Segment … ……………………………………

Depreciation in the insurance segment amounted to 33.3 million during 2008. Depreciation in the financial segment amounted to 2.3 million. Investments in the insurance segment amounted to 130 million during 2008.

Assets and liabilities of Segments December 31, 2008 is as following:

Assets Loans and other investments… ……………………………………

Reinsurance assets … ………………………………………………

Other assets … ………………………………………………………

Segments´ assets … ………………………………………………

Insurance operation

Investment operation

Total

16.347.669 1.744.497 683.917 9.892.564 3.310.317 26.924.150 5.054.814

18.092.166 683.917 13.202.881 31.978.964

Liabilities Technical provisons … ………………………………………………

Other liabilities … ……………………………………………………

Segments´ liabilities … ……………………………………………

20.719.759 1.581.227 22.300.986 0

20.719.759 1.581.227 22.300.986

Amounts in ISK 000

29

Summary of insurance classes 2009:

Notes

Premiums earned… ……………

Claims incurred … ………………

Operating expenses… …………

Reinsurance cost, net… ………

Investment income………………

Other income… …………………

Profit (loss) from insurance.… …

Property insurance 3.674.562 (2.941.864) (712.773) (379.875) 169.087 53.155 (137.708)

Marine Mandatory motor insurance insurance 516.584 4.923.977 (556.229) (3.611.795) (115.095) (895.900) (90.233) 63.462 25.213 802.408 0 38.048 (219.760) 1.320.200

Accident and

Health insurance Premiums earned … …………………………………

1.482.300 Claims incurred … ……………………………………

(1.647.204) Operating expenses… ………………………………

(370.126) Reinsurance cost, net … ……………………………

(1.797) Investment income … ………………………………

229.366 Other income … ………………………………………

0 Profit (loss) from insurance …………………………

(307.461)

Total direct insurance 13.650.344 (11.608.175) (2.657.295) (259.556) 1.491.366 91.203 707.887

Other motor General liability insurance insurance 2.230.074 822.847 (1.770.168) (1.080.915) (412.220) (151.181) (1.428) 150.315 76.995 188.297 0 0 123.253 (70.637) Total reinsurance 614.950 (665.972) (95.482) (1.548) 44.472 0 (103.580)

Total 14.265.294 (12.274.147) (2.752.777) (261.104) 1.535.838 91.203 604.307

Summary of insurance classes 2008:

Premiums earned… ……………

Claims incurred… ………………

Operating expenses… …………

Reinsurance cost, net… ………

Investment income………………

Other income… …………………

Profit (loss) from insurance… …

Property insurance 3.062.101 (2.813.773) (666.693) (186.777) 202.540 136.248 (266.354)

Marine Mandatory motor insurance insurance 454.533 4.623.879 (271.584) (3.419.227) (86.409) (878.997) (69.934) (79.444) 28.490 1.170.290 298 25.681 55.394 1.442.182

Accident and Health insurance Premiums earned… …………………………………

1.334.560 Claims incurred … ……………………………………

(1.520.546) Operating expenses… ………………………………

(290.955) Reinsurance cost, net … ……………………………

62.401 Investment income … ………………………………

259.680 Other income … ………………………………………

5.367 Profit (loss) from insurance …………………………

(149.493)

6.

Total direct Total insurance reinsurance 12.185.608 181.632 (10.866.266) (74.317) (2.434.536) (28.686) (335.014) (3.556) 1.997.650 31.110 182.182 729.624 106.183

2009 14.497.708 (619.151) (232.415) 4.737 13.650.879

2008 13.146.189 (486.994) (778.950) (32.962) 11.847.283

2009 (11.530.426) 452.697 (743.721) (116.100) (11.937.551)

2008 (10.628.720) 270.812 (311.862) (101.185) (10.770.955)

Claims incurred

Claims paid ……………………………………………………………………………………

Claims paid, reinsurers’ share ………………………………………………………………

Change in claims provision …………………………………………………………………

Change in claims provision, reinsures’ share… …………………………………………

Amounts in ISK 000

30

Total 12.367.240 (10.940.583) (2.463.222) (338.570) 2.028.760 182.182 835.807

Premiums earned

Premiums written… …………………………………………………………………………

Premius witten, reinsurers’ share… ………………………………………………………

Change in unearned premiums … …………………………………………………………

Change in unearned premiums, reinsurers’ share ………………………………………

7.

Other motor General liability insurance insurance 1.993.966 716.569 (1.993.139) (847.997) (391.647) (119.835) (1.461) (59.799) 131.950 204.700 12.259 2.329 (248.072) (104.033)

8.

Salaries and related expenses 2009 1.161.334 207.138 1.368.472

2008 1.131.043 189.965 1.321.008

Average number of full time equivalent employees… …………………………………

218

210

Salaries and benefits to the CEO and Board of Directors.

Guðmundur Örn Gunnarsson … ……………………………………………………………

Board of Directors ……………………………………………………………………………

2009

2008

19.789 2.100

19.106 1.540

2009 611.802 1.792.315 10.571 448.681 421.124 3.284.493

2008 508.971 4.411.956 117.887 525.813 544.498 6.109.125

2009 (6.174) (6.174)

2008 (3.876) (3.876)

Notes

Salaries…………………………………………………………………………………………

Salaries related expenses … ………………………………………………………………

Total salaries and commission to executives in the year 2009 is ISK 90,5 million.

9.

Investment income

Interest income from deposits … …………………………………………………………

Interest income from bonds … ……………………………………………………………

Dividends from shares… ……………………………………………………………………

Exchange rate difference……………………………………………………………………

Other interest income … ……………………………………………………………………

10.

Investment expenses

Interest expenses on short term liabilities … ……………………………………………

11.

Income tax

11.1 Current tax

Income tax is recognised in the income statement and the charged amount is ISK 108 million. No income tax is payable in 2010 for 2009 activities because of joint taxation with Exista hf.

Legislation changing tax rates from 15%-18% was confirmed at December 21, 2009 and is effective from January 1 st 2010. The effect of higher tax rate on deferred tax assets at year end is 63.8 million. The change is charged to Income Statement.

The total charge for the year can be reconciled to the accounting profit as follows:

2009

Amount % Profit before taxes ……………………………………………… 1.272.525

2008 Amount 367.665

Tax rate ……………………………………………………………

Change in tax rate ………………………………………………

Change in tax liability due to stocks …………………………

Dividend, gained…………………………………………………

Change in fair value of financial assets … …………………

Other items ………………………………………………………

Income tax according to the Income Statement……………

55.150 (54.879) (226.151) (17.683) 373.523 (4.259) 125.701

190.879 (63.751) 0 (1.586) (17.118) 6 108.430

15,0% -5,0% 0,0% -0,1% -1,3% 0,0% 8,5%

%

15,0% -14,9% -61,5% -4,8% 101,6% -1,2% 34,2%

Amounts in ISK 000

31

Notes

11.2 Deferred tax

Deferred tax liability at January 1, 2008……………………………………………………………………………

Income tax for the period 2008………………………………………………………………………………………

Joint taxation with parent company… ………………………………………………………………………………

Deferred tax assets at January 1, 2009……………………………………………………………………………

Income tax for the period 2009………………………………………………………………………………………

Joint taxation with parent company… ………………………………………………………………………………

Deferred tax assets at December 31, 2009… ……………………………………………………………………

Deferred tax (329.272) (125.701) 677.696 222.724 (108.430) 268.213 382.507

Deferred tax assets is as following:

Property and equipment… …………………………………………………………………

Allowance for doubtful financial assets… ………………………………………………

Other……………………………………………………………………………………………

31.12.2009 (40.734) 254.084 169.157 382.507

31.12.2008 (24.201) 188.227 58.698 222.724

2009 1.164.095 2.577.275 0,45

2008 241.964 1.524.398 0,16

12.

Earnings per share

Earnings per share is calculated as following:

Net earnings … ………………………………………………………………………………

Average number of shares during the year ………………………………………………

Earnings per share … ………………………………………………………………………

No convertible bonds were issued and no share-based payments to employees were in the year 2009. Therefore diluted earnings per share is the same as earnings per share.

13.

Property, equipment and depreciation

Cost of assets Balance at January 1, 2009 … ……………………………………

Additions ………………………………………………………………

Disposals… ……………………………………………………………

Balance at December 31, 2009 … ………………………………

Buildings and land

Furniture, equipm. and vehicle

Total

122.365 0 0 122.365

363.208 213.690 (2.752) 574.146

485.573 213.690 (2.752) 696.511

76.372 2.150 0 78.522

48.016 67.465 (665) 114.816

124.388 69.615 (665) 193.338

Book value Balance at January 1, 2009 … ……………………………………

Balance at December 31, 2009 … ………………………………

45.993 43.843

315.193 459.331

361.186 503.174

Buildings and land… …………………………………………………………………………

Real estate valuation 71.065

Fire insurance valuation 192.900

Depreciation Balance at January 1, 2009 … ……………………………………

Depriciation expense … ……………………………………………

Disposals ………………………………………………………………

Balance at December 31, 2009… ………………………………

The following useful lives are used in the calculation of depreciation.

Buildings … …………… 33 years Equipment … ………… 3 - 4 years Vehicle … ……………… 7 years Real estate and insurance valuation 31.12.2009 specifies as following:

Amounts in ISK 000

32

14.

Financial assets 31.12.2009

31.12.2008

1.321.447 17.381.372 18.702.819

712.731 13.541.381 14.254.112

2.165.897 2.165.897 20.868.716

3.838.054 3.838.054 18.092.166

31.12.2009

31.12.2008

22.353 370.949 928.145 1.321.447

23.385 312.078 377.269 712.731

Financial assets measured at fair value

Shares in other companies Listed on the Icelandic stock exchange… ………………………………………………

Listed in foreign stock exhanges … ………………………………………………………

Other companies … …………………………………………………………………………

Market securities Listed government securities… ……………………………………………………………

Other listed securities … ……………………………………………………………………

Unlisted government securities ……………………………………………………………

Other unlisted securities ……………………………………………………………………

Secured loans and other loans Mortgage loans… ……………………………………………………………………………

Secured loans …………………………………………………………………………………

Other loans ……………………………………………………………………………………

Total financial assets

12.139.094 2.790.539 184.164 2.267.575 17.381.372

10.340.658 2.297.435 205.424 697.864 13.541.381

383.248 143.094 1.639.554 2.165.897 20.868.716

407.012 255.455 3.175.587 3.838.054 18.092.166

Reserves for financial assets

Balance at the beginning of the year………………………………………………………

Allowance for doubtful financial assets and other long term assets … ……………

Bankrupt and uncollectable…………………………………………………………………

Balance at the end of the year………………………………………………………………

31.12.2009 1.873.206 942.754 (44.617) 2.771.342

31.12.2008 87.343 1.809.068 (23.206) 1.873.206

Debtors arising out of insurance operations … …………………………………………

Other account receivables … ………………………………………………………………

31.12.2009 4.145.141 53.559 4.198.700

31.12.2008 3.424.655 42.629 3.467.284

Reserves for bad debt

Balance at the beginning of the year………………………………………………………

Allowance for doubtful debt………………………………………………………………

Bankrupt and uncollectable…………………………………………………………………

Balance at the end of the year………………………………………………………………

31.12.2009 233.562 181.899 (115.385) 300.076

31.12.2008 180.712 84.856 (32.006) 233.562

31.12.2009 100.451 463.129 38.619 602.200

31.12.2008 95.714 579.229 8.974 683.917

15.

16.

Notes

Financial assets measured at fair value Shares in other companies …………………………………………………………………

Other financial assets… ……………………………………………………………………

Secured loans and other loans Securities … …………………………………………………………………………………

Total financial assets

Accounts receivable

Reinsurance assets

Reinsurers’ share in unearned premiums… ………………………………………………

Reinsurers’ share in claims provision………………………………………………………

Debtors arising out of reinsurance operations… ………………………………………

Amounts in ISK 000

33

17.

Cash and cash equivalent

Notes

Cash and cash equivalent specifies as cash at bank in hand and short-term bank deposits.

31.12.2009 Cash… …………………………………………………………………………………………

2.394 Bank deposits in Icelandic krona … ………………………………………………………

4.003.363 Bank deposits in foreign currency …………………………………………………………

2.155.184

6.160.941

18.

31.12.2008 7.698 6.590.395 2.299.931 8.898.024

Share Capital

Share Capital is devided into two categories, A and B

Share Capital in category A…………………………………………………………………

Share Capital in category B…………………………………………………………………

Authorised Share Capital … ………………………………………………………………

Own shares ……………………………………………………………………………………

Share Capital according to annual report … ……………………………………………

Shares 2.502.757 100.000 2.602.757 (277) 2.602.481

Ratio 96,16% 3,84% 100% -0,01% 99,99%

Changes in Share Capital is as following:

At January 1, 2008… ………………………………………………………………………

Paid-in Capital…………………………………………………………………………………

At January 1, 2009… ………………………………………………………………………

Paid-in Capital - category B…………………………………………………………………

At December 31, 2009… …………………………………………………………………

Share Capital 1.502.481 1.000.000 2.502.481 100.000 2.602.481

Shares 1.502.481 1.000.000 2.502.481 100.000 2.602.481

Shareholders in category B will always have 75% votes in stockholders meetings in proportion to their shares in the category. Both categories have the same entitlement in divident and other rights.

19.

Solvency

According the Act on Insurance Activities, the minimum solvency of the Company at the year-end was ISK 2.595 million and calculated solvency ISK 10.942 million. Difference on calculated solvency and book value of equity specifies as follows:

Equity according to Balance Sheet… ……………………………………………………

Dividend paid… ………………………………………………………………………………

Solvency… ……………………………………………………………………………………

31.12.2009 10.942.074 0 10.942.074

31.12.2008 9.677.978 0 9.677.978

The minimum solvency… ……………………………………………………………………

Solvency ratio…………………………………………………………………………………

2.595.290 4,2

2.198.646 4,4

31.12.2009

31.12.2008

13.655.030 2.712.500 16.367.530 5.328.365 21.695.895

13.142.709 2.481.100 15.623.809 5.095.950 20.719.759

398.107 65.022 463.129 100.451 563.580

518.451 60.778 579.229 95.714 674.943

20.

Technical provisions

Technical provisions: Claims reported… ……………………………………………………………………………

Claims incurred but not reported … ………………………………………………………

Claims outstanding… ………………………………………………………………………

Unearned premiums …………………………………………………………………………

Technical provisions total……………………………………………………………………

Reinsurers’ share: Claims reported ………………………………………………………………………………

Claims incurred but not reported… ………………………………………………………

Claims outstanding … ………………………………………………………………………

Unearned premiums… ………………………………………………………………………

Reinsurers’ share total… ……………………………………………………………………

Amounts in ISK 000

34

Technical provisions net of reinsurance: Claims reported ………………………………………………………………………………

Claims incurred but not reported… ………………………………………………………

Claims outstanding … ………………………………………………………………………

Unearned premiums… ………………………………………………………………………

Technical provision net of reinsurance total……………………………………………

13.256.923 2.647.478 15.904.401 5.227.914 21.132.315

12.624.258 2.420.322 15.044.580 5.000.236 20.044.816

Notes

Estimated reported claims, loss adjustment expenses and claims incurred but not reported are reported as claims outstanding less estimated salvage value of the assets that were damaged. The total salvage value amount at year-end 2009 and 2008 is immaterial.

Movements in technical provisions during the year:

Total Claims outstanding: Reported claims… …… 13.142.709 IBNR… ………………… 2.481.100 Total at beginning of year… 15.623.809

2009 Reinsurers’ share

For own account Total

2008 Reinsurers’ share

For own account

(518.451) (60.778) (579.229)

12.624.258 2.420.322 15.044.580

12.936.947 2.375.000 15.311.947

(611.296) (69.118) (680.414)

12.325.651 2.305.882 14.631.533

Claims paid during the year arising from prior years… (6.196.133)

444.296

(5.751.837)

(5.204.107)

242.358

(4.961.749)

Increase in liabilities: arising from current year 6.377.257 arising from prior year…

562.597 Total at the end of year… 16.367.530

(18.064) (310.132) (463.129)

6.359.193 252.465 15.904.401

5.891.082 (375.113) 15.623.809

(40.241) (100.932) (579.229)

5.850.841 (476.045) 15.044.580

Total Reported claims ……… 13.655.030 IBNR …………………… 2.712.500 At beginning of year…… 16.367.530

2009 Reinsurers’ share (398.107) (65.022) (463.129)

For own account Total 13.256.923 13.142.709 2.647.478 2.481.100 15.904.401 15.623.809

2008 Reinsurers’ share (518.451) (60.778) (579.229)

For own account 12.624.258 2.420.322 15.044.580

Provision for unearned premiums: At beginning of year… 5.095.950 Changes during the year 232.415 End of the year… …… 5.328.365

(95.714) (4.827) (100.541)

(128.676) 32.962 (95.714)

4.188.324 811.912 5.000.236

5.000.236 227.588 5.227.824

4.317.000 778.950 5.095.950

Risk related to Non-life insurance, especially accident insurance, depend on many variables which complicate sensitivity analysis. The Company uses statistical methods based on assumptions during risk assessment, in order to estimate the ultimate cost of claims.

Basic claims outstanding, is an estimate on reported claims to the Company. The claims department prepares an estimate for each claim based on the information on the damage occurrence at hand. If sufficient information is not available an average claim value in respective sectors is used but then later revalued with regards to the information received.

21.

Accounts payable and other liabilities

Accounts payable

Payables arising out of reinsurance operations …………………………………………

Reinsurance, debt… …………………………………………………………………………

Associates, debt … …………………………………………………………………………

31.12.2009 489.668 106.052 36.030 631.751

31.12.2008 242.625 109.713 66.996 419.334

Amounts in ISK 000

35

Other liabilities

Notes

Accounts, unpaid … …………………………………………………………………………

Salaries and related expenses, unpaid … ………………………………………………

Other liabilities … ……………………………………………………………………………

22.

31.12.2009 96.072 240.077 71.011 407.160

31.12.2008 249.158 185.297 727.438 1.161.892

31.12.2009 6.160.941 18.702.819 7.593.453

31.12.2008 8.898.024 14.254.112 7.559.002

31.12.2009 1.038.911

31.12.2008 1.581.226

Financial Instruments

22.1 The categories of financial instruments

The categories of financial assets and financial liabilities are as following:

Financial assets

Cash and cash equivalent … ………………………………………………………………

Financial assets at fair value through P/L … ……………………………………………

Loans and receivables… ……………………………………………………………………

Financial liabilities

Other financial liabilities … …………………………………………………………………

22.2 Financial risk management

The Company operates a risk management, focusing on the financial risk attached to the Company’s operations. These risk factors are interest rate risk, foreign exchange risk, equity price risk, credit risk, liquidity risk and underwriting risk.

22.3 Interest rate risk

Interest rate risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The company has both fixed and floating rate interest bearing assets. Interest bearing assets with fixed rate are accounted for at amortised cost. Changes in interest rates which will effect the assets fair value will therefore not result in a change in the books. The interest rate risk is only attached to interest bearing assets, since the company has no interest bearing borrowings. Interest rate changes effect expected cash flow relating to floating rate assets. The Company hasn’t entered into interest rate swaps to reduce the risk relating to changes in interest rates, but the Company is constantly monitoring the interest rate development.

Sensitivity analysis

The sensitivity analysis below have been determined based on the exposure to interest rates at the balance sheet date. The analysis is prepared assuming the amount outstanding at the balance sheet date was outstanding for the whole year. The analysis assume that all other variables, than basis points, are held constant. The sensitivity analysis takes into account tax effects.

The effects on P/L and equity are the same since change in fair value of financial investments are not under any circumstances through equity account. Positive amount stands for increase in the profit of the year and net assets. Decline in interest would have the same effects but in opposite direction.

Effects on P/L and equity…………………

31.12 2009 50 bps 27.786

100 bps 55.572

31.12 2008 50 bps 38.716

100 bps 77.431

22.4 Foreign exchange risk

Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Foreign exchange risk arises when there is a difference in the balance between assets and liabilities in foreign currency.

A dominant part of the Company’s assets and liabilities are in ISK the domestic currency, but the Company holds some foreign currency financial assets. The Company has entered into foreign currency derivatives to reduce the foreign exchange risk. Below, the foreign currencies that mainly affect the Company’s operations are stated. Rates reflect buying rate, but annual volatility is calculated based on mid rate.

Amounts in ISK 000

36

Volatility 2009 12,9% 16,9% 12,9% 15,0% 17,8% 15,4%

Foreign currency exposure 31.12.2009

EUR … …………………………………………………………………

GBP … …………………………………………………………………

DKK … …………………………………………………………………

NOK … …………………………………………………………………

SEK … …………………………………………………………………

USD … …………………………………………………………………

Assets 2.578.885 376.047 798.314 1.243.601 11.678 1.627.792

Liabilities 348.111 33.487 0 0 57.918 836.831

Net balance 2.230.774 342.561 798.314 1.243.601 (46.240) 790.961

Foreign currency exposure 31.12.2008

EUR … …………………………………………………………………

GBP … …………………………………………………………………

DKK … …………………………………………………………………

NOK … …………………………………………………………………

SEK … …………………………………………………………………

USD … …………………………………………………………………

Assets 1.804.752 554.196 729.296 41.150 2.628 2.426.171

Liabilities 451.139 14.158 3.598 0 110 533.226

Net balance 1.353.613 540.037 725.698 41.150 2.518 1.892.945

Notes

Closing rate Average rate

2009 2008 2009 2008 Currency EUR … ………………………

179,88 169,97 172,67 127,46 GBP … ………………………

201,60 175,43 193,89 159,35 DKK … ………………………

24,17 22,81 23,19 17,09 NOK … ………………………

21,67 17,30 19,80 15,41 SEK … ………………………

17,52 15,56 16,30 13,20 USD … ………………………

124,90 120,87 123,59 88,07

Sensitivity analysis

The table below shows the effects that 5% and 10% increase of the relevant foreign currency rate against the ISK would have on income statement and equity at balance sheet date. The table above shows the effects of sensitivity analysis in foreign assets and liabilities but it are mainly foreign securities. The sensitivity analysis assumes that all other variables, than the relevant foreign currency rate, are held constant taken into account tax effects. The sensitivity analysis takes into account foreign currency which involve high foreign exchange risk. Because changes in fair value of foreign financial instruments are not through equity the effects on P/L and equity are the same. A positive number below indicates an increase in profit and other equity. A decrease of the relevant foreign currency rate against the ISK would have an opposite impact on income statement and equity.

Effects on income statement and equity from an ISK depreciation 31.12.2009 31.12.2008

5% 10% 5% 10% EUR … ………………………………………

94.808 189.616 57.529 115.057 GBP … ………………………………………

14.559 29.118 22.952 45.903 DKK … ………………………………………

31.467 62.934 30.842 61.684 NOK … ………………………………………

17.288 34.575 1.749 3.498 SEK … ………………………………………

496 993 107 214 USD … ………………………………………

69.181 138.362 80.450 160.900

22.5 Equity price risk

The Company holds material balances in equity investments. The Company is therefore exposed to changes in the market price of the equity investments. A significant part of the equity investments is held to match against the insurance liability.

The Company’s equity investments are mainly in registered entities, but the Company also holds a small portion of investment in unregistered entities. Equity investments are measured at fair value through P/L (FVTPL).

Shares in other companies at fair value through P/L … ………………………………

Listed securities at fair value through P/L … ……………………………………………

31.12.2009 2.247.930 16.454.889

31.12.2008 1.598.965 12.655.148

The effects of 5% and 10% increase in the fair value of equity investments are stated below. The changes do not take into account income tax effects. 5% and 10% decline in fair value would have the same effects but in opposite direction.

Amounts in ISK 000

37

Notes

Shares in other companies - effects on P/L and equity … ………………

Listed securities - effects on P/L… ……

31.12.2009 5% 112.397 822.744

10%

224.793 1.645.489

31.12.2008 5% 79.948 632.757

10%

159.897 1.265.515

22.6 Credit risk

Underwriting risk is the risk that premiums collected from the insured are not sufficient to meet the liabilities arising from underwriting insurance policies.

Reconciliation of maximum credit risk:

Market securities … …………………………………………………………………………

Secured loans and other loans … …………………………………………………………

Trade receivables… …………………………………………………………………………

Reinsurance assets… ………………………………………………………………………

Other receivables … …………………………………………………………………………

Cash and cash equivalents …………………………………………………………………

Carrying amount 31.12.2009 31.12.2008 16.454.889 12.655.148 2.702.710 3.838.054 4.198.700 3.467.284 602.200 683.917 960.643 253.664 6.160.941 8.898.024 31.080.083 29.796.091

The maximum credit risk consists of the carrying amounts above.

22.7 Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities.

On a regular basis the management is monitoring liquidity, the development, effects of market environment and expectations.

Special attention is given to maintain an adequate level of liquid assets to cover repayments of borrowings and expected payments relating to the insurance liability. The Company’s liquid assets are well adequate to cover expected short term cash outflow. The Company operates under rules and regulations of supervisory authorities in Iceland. According to these rules the Company is required to provide certain breakdowns to the relevant authority, amongst others is a breakdown of liquid assets and liabilities.

Expected cash flows of Claims provision as follows:

Within one year 31.12.2009 Claims provision ……………………………

7.381.756

31.12.2008 Claims provision ……………………………

2011

2012+

Total

4.435.601

4.550.173

16.367.530

Within one year

2010

2011+

Total

7.046.338

4.234.052

4.343.419

15.623.809

22.8 Underwriting Risk

Underwriting risk is the risk that premiums collected from the insured are not sufficient to meet the liabilities arising from underwriting insurance policies.

The main elements of underwriting risk are loss-frequency risk, loss-size risk, reinsurers’ risk and technical provision risk.

Following is a short explanation and some key figures describing the risk.

22.9 Loss frequency risk

Loss frequency risk is the risk that losses or a certain type of losses becomes more frequent than expected and the insurance tariffs are based on.

The Company conducts close and constant examination of the loss frequencies of the various insurance branches, especially in private insurance such as motor vehicle insurance, house owner’s insurance and homeowner’s insurance, where there are many policies and relatively high loss frequency. It is important for the insurer to discover any trend in loss frequencies as soon as possible in order to take necessary measures. One of the most effective ways to deal with loss frequency risk is to diversify the insurance portfolio. The Company is a multiline insurance company with significant risk diversification between insurance branches. It has a wide spread and efficient distribution network all over Iceland and has some minor operation outside Iceland. The following table shows the diversification between insurance segments by premiums earned.

Amounts in ISK 000

38

25,8% 3,6% 34,5% 15,6% 5,8% 10,4% 4,3% 100,0%

Notes

Insurance classes - Premiums earned Property insurance………………………………………………………………………………………………………

Marine hull and cargo insurance………………………………………………………………………………………

Compulsory motor insurance …………………………………………………………………………………………

Other motor insurance …………………………………………………………………………………………………

General liability insurance … …………………………………………………………………………………………

Accident and sickness insurance… …………………………………………………………………………………

Reinsurance………………………………………………………………………………………………………………

22.10 Loss-size risk

Loss-size risk is the risk of misjudging the average amount of losses or the likelihood of a severe loss event.

Most of the losses are small losses or so-called frequency losses. The density of the losses decreases as loss amounts increase up to medium-sized losses, severe losses and catastrophic losses. To limit the impact of severe loss events and to protect the balance sheet against severe fluctuations, the Company devises a reinsurance program for each branch of the business and for the Company as a whole. The amount of risk that the Company carries for its own account is determined with respect to the financial strength of the Company and the nature of the risk. By implementing the reinsurance program the Company reduces the loss size risk significantly but by doing so, another risk arises, so-called reinsurers’ risk.

22.11 Reinsurers´risk

Reinsurers’ risk is the risk that a reinsurer will not be able to pay his share of a loss event. In severe loss events, the settlement can take many years. In that period the financial strength of a reinsurer can deteriorate so that a reinsurer is unable to fulfil its liabilities. In order to limit counterparty risk regarding the Company’s reinsurers the reinsurance policy stipulates minimum rating from an international rating agency for the reinsurers participating in the reinsurance programs, maximum risk in one event reinsured with one reinsurer and guidelines for number of reinsurers in one reinsurance treaty. Following table shows reinsurers’ rating as percentage of ceded premiums for 2009 and estimated figures for 2010.

AAA … …………………………………………………………………………………………

AA+ … …………………………………………………………………………………………

AA… ……………………………………………………………………………………………

AA- ………………………………………………………………………………………………

A+ … ……………………………………………………………………………………………

A …………………………………………………………………………………………………

A-… ……………………………………………………………………………………………

2010 1,3% 7,1% 0,0% 32,4% 49,0% 5,3% 4,9% 100,0%

2009 7,3% 0,0% 1,2% 40,9% 36,6% 6,0% 8,0% 100,0%

22.12 Technical provision risk

Technical provision risk is the risk that the incurred losses or the underlying risk related to insurance portfolio are underestimated.

Technical provisions consist of unearned premiums and loss reserves. Unearned premiums are the estimated amount of insurance liabilities of unexpired policies. Loss reserves are the amount of unsettled losses, both reported losses and losses that are incurred but not reported to the insurer. The strength of technical reserves is examined by a set of statistical methods that makes it possible to estimate the outstanding losses and the risk margin.

22.13 Combined ratio and operating ratio

Combined ratio is the sum of the incurred losses, operating expenses and net reinsurance cost as a proportion of earned premiums. Operating ratio is the same as combined ratio but as a proportion of earned premiums and investment return from insurance operation.

The Company has a policy to lower combined ratio and the aim is that it will become lower than 100%. Improved ratio makes it possible for the company to meet lower return on its investments in the future.

Amounts in ISK 000

39

Following table shows the combined ratio and other key ratios for the insurance activity over the last five years:

Notes

Loss ratio ……………………………………

Operating expenses ratio…………………

Reinsurance cost ratio… …………………

Combined ratio … …………………………

Investment income ratio… ………………

Other income ratio …………………………

Operating ratio… …………………………

23.

2009 86,1% 19,3% 1,8% 107,2% 10,8% 0,6% 96,2%

2008 88,5% 19,9% 2,7% 111,1% 16,4% 1,5% 94,2%

2007 80,7% 19,2% 4,7% 104,6% 16,1% 0,3% 89,9%

2006 87,6% 22,1% 5,7% 115,4% 18,4% - 97,5%

2005 83,6% 24,5% 8,3% 116,4% 19,5% 97,4%

Related party transactions

Related parties are those parties which have considerable influence over the Company, directly or indirectly, including parent company, owners or their families, large investors, key employees and their families and parties that are controlled or dependent on the Company, i.e. affiliates and joint ventures. Business with related parties has been done on a similar basis as business with unrelated parties.

Related parties transaticions in the year 2009:

Exista hf. and related parties ……………

Purchases of goods/servicies 24.575 24.575

Sales of goods/services 163.128 163.128

Premiums earned 56.737 56.737

Claims 8.821 8.821

Exista hf. and related parties… ……………………………………………………………

Receivables 3.144.982 3.144.982

Liabilities 36.030 36.030

Sales of goods/services 124.188 124.188

Premiums earned 47.480 47.480

Claims 12.048 12.048

Exista hf. and related parties ………………………………………………………………

Receivables 3.096.989 3.096.989

Liabilities 66.996 66.996

Related parties transaticions in the year 2009:

Related parties transaticions in the year 2008:

Exista hf. and related parties ……………

Purchases of goods/servicies 146.869 146.869

Related parties transaticions in the year 2008:

24.

Events after the Balance Sheet date

No events have occurred since the the balance sheet date, which would change the financial position of the Company and which would require adjustment of or disclosure in the annual accounts now presented.

25.

Approval of the Financial Statements

The Financial Statements were approved by the Board of Directors and authorised for issue on March 15, 2010.

Amounts in ISK 000

40

Glossary of terms Profit as a ratio of owner‘s equity Premiums written during year Assets in excess of debts Own claims in comparison with own premiums Premiums earned less reinsurers‘ share Premiums entered less reinsurers’ share Retained premiums less reinsurers’ share Own equity in comparison with total assets Reinsurers’ share in claims outstanding and provision for unearned premiums along with debts arising out of reinsurance operations Reinsurance expense ratio Reinsurance expense as a ratio of premiums earned Reinsurance expenses Premiums to reinsurers less the reinsurers’ share in claims and received commissions from reinsurers Investment income from insuranceoperations Calculated return on own technical provision Solvency Owner’s equity less prospective dividend payment, intangible assets and foreseeable impairment of own equity Solvency ratio Solvency as a ratio of minimum solvency Net cash from operating activities Funds and bank deposits Provision for unearned premiums Premiums from risk that has not expired Premiums earned Premiums from risk pertaining to year under review Cost ratio Cost as a ratio of premiums earned Minimum solvency Minimum solvency requirement according to law regarding insurance activities Retained earnings Accumulated profits from previous years Operating ratio Operating costs as a ratio of premiums earned Combined ratio Claims, reinsurance expenses and operating costs from insurance activities as a ratio of premiums earned Claims paid Paid claims with appendant changes to claims outstanding Claims ratio Claims paid compared to premiums earned Claims outstanding Calculated unpaid claims at end of accounting period Technical provision Total liabilities from of insurance contracts, i.e. claims outstanding along with provisions for unearned premiums

Glossary

Return on owners’ equity Premiums entered Own equity Claim‘s ratio Earned premiums Claims incurred Own technical provision Equity ratio Reinsurers’ assets

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VÍS over 20 years

2003 VIS day; a united group

VIS doesn’t forget the children

VIS hosted the first environmental liability conference in Iceland

Signature of a contract with a Pension Fund 2007

2008 Christmas friends game; some enjoyed better friends than others…

Safe driving project “Take five”.

Gudmundur Gunnarsson CEO VIS insures the pets.

Cats exhibition 2007

Gudmundur Gunnarsson appointed CEO 2008

Opening of a motor claims survey station in Akueyri

1991 1991

VIS supported the fund raising “The red nose” VIS appointed as a “Role Model Company” in 2009 by VR Fire rescue training at headquarters in Armuli 3

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2001

1991 VÍS over 20 years

2000 All alone…

The 2000 annual festival

A weekend staff trip to Thorsmork 2006

2002

2007

Axel Gislason CEO and Ingi R. Helgason Chairman of the Board 1989

Fyrsti forstjóri – Axel Gíslason VIS’s indoor soccer team 2007

VIS day 2002; of course there was line dancing…

2006 - Forstjóraskipti

Axel Gislason CEO from foundation until 2002

Axel Gislson steps aside and Finnur Ingolfsson becomes CEO 2002

Agreement signed to merge Samvinnutryggingar and Brunabotafelagid 1989

Asgeir Baldurs CEO from 2006 to 2008

Client’s golf tournament in Reykjavik 2008

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Vátryggingafélag Íslands hf – vis@vis.is – vis.is