A search for $B_{(s)}^{0} to K_{S}^{0} K^{*}(892)^{0}$ decays is performed using $pp$ collision data, corresponding to an integrated luminosity of $1.0~text{fb}^{-1}$, collected with the LHCb detector at a centre-of-mass energy of $7~text{TeV}$. The $B_{s}^{0} to K_{S}^{0} K^{*}(892)^{0}$ decay is observed for the first time, with a significance of 7.1 standard deviations. The branching fraction is measured to be begin{equation*} mathcal{B}(B_{s}^{0} to bar{K}^{0} K^{*}(892)^{0}) + mathcal{B}(B_{s}^{0} to K^{0} bar{K}^{*}(892)^{0}) = (16.4 pm 3.4 pm 2.3) times 10^{-6}, end{equation*} where the first uncertainty is statistical and the second is systematic. No evidence is found for the decay $B^{0} to K_{S}^{0} K^{*}(892)^{0}$ and an upper limit is set on the branching fraction, $mathcal{B}(B^{0} to bar{K}^{0} K^{*}(892)^{0}) + mathcal{B}(B^{0} to K^{0} bar{K}^{*}(892)^{0}) < 0.96 times 10^{-6}, $ at $90,% $ confidence level. All results are consistent with Standard Model predictions.