UNIQA Insurance Group AG

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1 Primary Credit Analyst: Jean Paul Huby Klein, Frankfurt (49) ; Secondary Contact: Johannes Bender, Frankfurt (49) ; Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Accounting Considerations Related Criteria And Research MAY 29, 215 1

2 SACP* Assessments SACP* Support Ratings Anchor a Business Risk Strong + Modifiers ERM and Management = a Liquidity + Group Support = Financial Strength Rating A/Stable/-- Holding Company Rating Financial Risk Strong Holistic Analysis Sovereign Risk Gov't Support A-/Stable/-- *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Strong UNIQA has a strong competitive position as one of the market leaders in its domestic Austrian business. Increased insurance industry and country risk, as low interest rate environment is hampering the Austrian life insurance sector. Earnings contribution and diversification from Central and Eastern European (CEE) operations are still lacking materiality, although improving. Financial Risk Profile: Strong We expect the group's capital adequacy to remain in excess of the 'AA' level in , backed by further profit improvements. Quality of capital is somewhat lower because soft capital components as a proportion of total adjusted capital (TAC) are still significant. More conservative investment portfolio after strong asset de-risking measures. Other Factors The anchor is the starting point in assigning a counterparty credit rating. The combination of our view on the business and financial profiles leads to an anchor of either 'a' or 'a-'. We use the 'a' anchor, based on our assumption of continued strengthening of capital and earnings. MAY 29, 215 2

3 Factors Specific To The Holding Company We apply a one-notch differential between UNIQA Insurance Group AG and its operating subsidiaries, reflecting the structural subordination to UNIQA's policyholders. We do not use the standard two notch differential because the holding generates own revenues from internal reinsurance activities for the Austrian insurance subsidiaries, and as such, we regard it as an operating holding company. The holding also has some flexibility to fulfil its financial obligations through excess capital at the holding level. Outlook: Stable The stable outlook reflects Standard & Poor's Ratings Services' expectation that UNIQA Insurance Group will continue to strengthen capital and earnings by further reducing the risks in its asset portfolio and by continuing its positive trends in underwriting and bottom-line earnings, in line with its strategic goals. Downside scenario We might consider lowering the ratings over the next 24 months if capital adequacy fell below the expected 'AA' level for a prolonged period. We also could envisage a negative rating action if the group's underwriting and bottom-line earnings sustainably fell short of our base-case assumptions for Upside scenario We see a positive rating action as a remote possibility in the next two years because we do not expect, within the next two years, that the group will materially enhance its competitive position by achieving substantial earnings diversity outside of Austria. Base-Case Scenario Macroeconomic Assumptions Low unemployment rates in Austria of 5.3% in 215 and 5.4% in 216. Credit market conditions in Europe show a slight improvement on the back of stabilization in economic growth. The Austrian 1-year government yield, currently at.8%, will remain low over the next two years. Economic growth in the CEE region to remain moderate, leading to good but not excessive organic growth opportunities. Company-Specific Assumptions Capital adequacy will remain in the 'AA' range. Positive trend in underwriting and bottom-line profitability. Combined (loss and expense) ratio improving to about 98% in from 99.5% in 214. Net income exceeding 23 million annually in MAY 29, 215 3

4 Key Metrics Table 1 UNIQA Insurance Group Key Metrics --Year ending Dec f 215f Gross premiums written (bil. ) >6, >6, 6,64 5,886 5,543 Net income (mil. ) >23 > Return on shareholders' equity (%) >8 > P/C net combined ratio (%) ~98 ~ Life new business margin (%) ~2 ~ Net investment yield (%) <2.9 < Capital adequacy* Very strong Very strong Very strong Very strong Moderately strong Financial leverage <2 < *Standard & Poor's measure of capital adequacy. f--forecast. P/C--Property/casualty. Company Description UNIQA is an Austria-domiciled insurance group with leading positions in all domestic insurance market segments. Life and property and casualty (P/C) insurance (No. 2) and health insurance (No. 1) operate through the UNIQA brand as well as through the bancassurance channel under the Raiffeisen insurance brand. In 214, the group reported gross written premium (GWP) of 5.5 billion, split by life (35%), P/C (47%), and health (18%). Based on 214 figures, UNIQA business is written in Austria (61%), CEE (21%), and Western Europe (mainly Italy). In CEE, UNIQA also has a preferred bancassurance partnership with Raiffeisen Bank International. Business Risk Profile: Strong We regard UNIQA's business risk profile as strong, mainly stemming from its position as one of the market-leading insurance companies in its domestic market. Despite a sizable share of GWP written in CEE, the earnings from CEE are below critical mass for real diversifier on a group level. Insurance industry and country risk: Intermediate risk, mainly based on a heightening asset-liability mismatch risk in the Austrian life business We assess UNIQA's insurance industry and country risk as intermediate, mainly because of the group's large Austrian life and P/C exposure, even though P/C insurance business risk in Austria remains low. We assess the Austrian life business as intermediate. Our expectation of low interest rates for longer will increasingly hamper the Austrian life business, heightening asset-liability mismatch (ALM) risk, reducing investment returns, and weighing on capital and earnings. We see the Austrian P/C business more favorably, based on the sector's high barriers to entry and neutral product risk. The group also has some exposure to intermediate insurance industry and country risk in the Czech Republic and moderate insurance industry and country risk in Poland and Italy. MAY 29, 215 4

5 Table 2 UNIQA Insurance Group Insurance Industry Country Risk Assessment Country and industry Risk % Austria life Intermediate risk 36 Austria P/C Low risk 25 Czech Republic life Intermediate risk 3 Czech Republic P/C Intermediate risk 1 Italy life Moderate risk 14 Italy P/C Moderate risk 3 Poland life Moderate risk 1 Poland P&C Moderate risk 4 Russia life High risk 1 Other Moderate risk 12 IICRA outcome/score Intermediate risk 1 P/C--Property/casualty. Competitive position: Among the market leaders in Austria, with diversification potential in CEE markets UNIQA has a strong competitive position, in our view, mainly stemming from the group's position among the market leaders in its domestic business and its well diversified business mix by lines of business. In this segment, we consider that UNIQA has demonstrated competitive strength by defending its market position in recent years. Moreover, we view UNIQA's bancassurance partnership with the network of Raiffeisen cooperative banks and group shareholder Raiffeisen Zentralbank as allowing for a diverse distribution strategy, which we see as a competitive strength. In addition to UNIQA's strong domestic market position, the group has expanded into CEE, which we anticipate will become the group's main focus for growth. However, in our view, UNIQA has not yet reached critical mass in several CEE markets, nor has it demonstrated sustainable profitable growth that would improve the geographic diversity of its earnings. Table 3 UNIQA Insurance Group Competitive Position --Year ended Dec (Mil. ) Gross premiums written (GPW)* 6,64 5,886 5,543 5,534 6,224 Change in gross premiums written (%) (11.1) 8.5 Net premiums written (NPW) 5,38 4,941 4,651 4,73 5,177 Change in NPW (%) (1.1) (9.1) 8. Total assets under management 29,89 27,257 26,196 24,46 24,642 Growth in assets under management (%) (.7) 5.8 Reinsurance utilization (%) Business segment (% of GPW) Life/health P/C *Including unit-linked revenues. Excluding unit-linked revenues. Including third-party assets under management. P/C--Property/Casualty. MAY 29, 215 5

6 Financial Risk Profile: Strong We regard UNIQA's financial risk profile as strong, benefitting from capital increase in recent years and ongoing de-risking measures. Capital and earnings: Capital adequacy to remain in the 'AA' range, supported by earnings improvement and partly constrained by quality of capital In 214, the group has been able to maintain its capital adequacy at the 'AA' level thanks to significant asset de-risking measures, despite a 7% business growth and a higher ALM risk from the current low interest rates. Reliance on softer forms of capital remained stable, while the proportion of soft components (such as hybrid capital, unrealized gains on property investments, and present value of future profits) to TAC is still significant at around 5%. In line with its strategic plan, "UNIQA 2.," underwriting and bottom-line earnings slightly improved in 214. The group reported a net combined ratio of 99.5% in 214 after 99.8 in 213, leading to an after-tax profit of million compared with million in the prior year. In the first quarter of 215, the combined ratio weakened slightly to 98.8% compared with the prior year (97.9%) based on higher basic losses and reserve increases. However, bottom-line results improved by 37.5%, mainly thanks to a one-off effect from a change in the strategic asset allocation. Although we still expect low interest rates to dampen investment income over the next two years, we expect UNIQA to report at least net income of about 23 million annually for Also, we expect the P/C combined ratio to improve to 98% over this same time horizon. Table 4 UNIQA Insurance Group Capital --Year ended Dec (Mil. ) Common equity 3,12 2,785 2,3 1,96 1,521 Change in common equity (%) (28.) (2.8) Total capital (reported) 3,72 3,385 2,48 1,671 2,96 Change in total capital (reported) (%) (2.3) (6.) Table 5 UNIQA Insurance Group Earnings --Year ended Dec (Mil. ) Total revenues 6,79 5,684 5,386 5,452 5,965 EBIT adjusted Net income (244) 91 Return on shareholders' equity (reported) (%) (18.6) 5.9 P/C: Net expense ratio (%) P/C: Net loss ratio (%) P/C: Net combined ratio (%) P/C: Return on revenue (%) (.6).7 Life: Prebonus pretax earnings/total assets (%) (1.1) MAY 29, 215 6

7 Table 5 UNIQA Insurance Group Earnings (cont.) Life: Net expense ratio (%) Life: Return on embedded value (%) (25.2) (7.2) Life: Value of new business Life: New business margin (%) Operating earnings by segment: Life/health (177) 142 P/C (12) (63) (27) P/C--Property/casualty. Risk position: Intermediate risk position owing to low volatility from insurance earnings and significant asset portfolio de-risking measures UNIQA's risk position derives from its diversity of insurance earnings streams from all three insurance segments in Austria, which we see as relatively stable. We do not expect any elevated risk from natural catastrophes or any other insurance risk to lead to potential volatility in UNIQA's capital position. This was proven in 213, when a flood in Austria, Czech Republic, Slovakia, and Hungary did not have a material negative impact on UNIQA's P/C combined ratio, which improved slightly in 213 to 99.8% from 11.7% 212. In line with its strategic plan, UNIQA continued to de-risk the asset portfolio by divesting hotel participations and reducing equity exposure. However, although the average rating of UNIQA's fixed income portfolio is 'A', the exposure to 'BBB' rated bonds is a fairly high. In addition, about 13% of the fixed-income portfolio is invested in speculative grade or unrated bonds, according to first-quarter 215 reporting. Table 6 UNIQA Insurance Group Risk Position --Year ended Dec (Mil. ) Total invested assets 29,89 27,257 26,196 24,46 24,642 Net investment income Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including all gains/(losses) (%) Investment portfolio composition (%) Cash and short-term investments Bonds Equity investments Real estate Mortgages Loans Investments in affiliates Investments in partnerships, joint venture, and other alternative investments Other investments MAY 29, 215 7

8 Financial flexibility: Adequate, with proven capital market access Access to new capital was demonstrated by a 5 million capital injection by its majority shareholders in 212. UNIQA in 213 issued an 35 million hybrid issue and then successfully tapped the equity markets for a 75 million capital increase in 213. We assume that financial leverage will remain consistently below 2%. We estimate that the positive earnings trend will help the fixed-charge coverage to recover to about 1x in Table 7 UNIQA Insurance Group Financial Flexibility --Year ended Dec Fixed-charge coverage (x) (9.1) 5.5 Financial leverage (%) Dividend payout ratio (%) Other Assessments Management and governance: Satisfactory, as strategic plan conversion on track We assess UNIQA's management and governance as satisfactory. In our view, UNIQA's management has successfully implemented many measures of the group's strategic plan over the last two years. The ability and willingness to strengthen capital adequacy and de-risk investments is, in our view, accompanied by some signs of success in strengthening underwriting profitability and improving the group's cost structure. Reshaping its business model, despite the challenges from the low-yield environment and de-risking of investments, we believe UNIQA's management remains committed to its strategic plan and will be able to strengthen profitability further. Enterprise risk management: Adequate We regard UNIQA's enterprise risk management (ERM) as adequate. This assessment is based on neutral and in some cases positive risk controls for the group's main risks. Together ERM and management and governance are neutral factors to the ratings. Liquidity: Exceptional, based on improved quality of assets on diverse liquidity sources We regard UNIQA's liquidity as exceptional, thanks to its regular inflow of premium income and its highly liquid asset portfolio. There are no refinancing concerns. In our view the group is capable of managing any unexpected large claims or any unexpected increase in life insurance policy lapses. Accounting Considerations UNIQA prepares its consolidated financial statements according to International Financial Reporting Standards. We base our analysis of the group's life profitability and risk exposures mainly on market-consistent embedded-value disclosure. We base our assessment of UNIQA's capital adequacy on its reported shareholders' equity, which we adjust mainly to account for 5% of the life insurance value in force not included in the balance sheet, hybrid debt classified as equity MAY 29, 215 8

9 according to our criteria, parts of the policyholder capital available to absorb losses, and off-balance-sheet asset-value reserves. We deduct the on-balance-sheet goodwill from capital. Related Criteria And Research Group Rating Methodology, Nov. 19, 213 Insurers: Rating Methodology, May 7, 213 Enterprise Risk Management, May 7, 213 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 212 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 21 Use Of CreditWatch And Outlooks, Sept. 14, 29 Hybrid Capital Handbook: September 28 Edition, Sept. 15, 28 Ratings Detail (As Of May 29, 215) Holding Company: UNIQA Insurance Group AG Financial Strength Rating Issuer Credit Rating Subordinated Operating Companies Covered By This Report UNIQA Re AG Financial Strength Rating Counterparty Credit Rating UNIQA Oesterreich Versicherungen AG Financial Strength Rating Issuer Credit Rating UNIQA Versicherung AG Financial Strength Rating Issuer Credit Rating Domicile A-/Stable/-- A-/Stable/-- BBB A/Stable/-- A/Stable/-- A/Stable/-- A/Stable/-- A-/Stable/-- A-/Stable/-- Switzerland *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com MAY 29, 215 9

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