Germany's W&W Core Entities Affirmed At 'A-' And HoldCo W&W AG At 'BBB+/A-2' On Insurance Criteria Change;Outlook Stable

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1 Research Update: Germany's W&W Core Entities Affirmed At 'A-' And HoldCo W&W AG At 'BBB+/A-2' On Insurance Criteria Change;Outlook Stable Primary Credit Analysts: Volker Kudszus, Frankfurt (49) ; Dirk Heise, Frankfurt (49) ; Secondary Contacts: Silke Longoni, Frankfurt (49) ; Anna Lozmann, Frankfurt (49) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JUNE 12,

2 Research Update: Germany's W&W Core Entities Affirmed At 'A-' And HoldCo W&W AG At 'BBB+/A-2' On Overview Following a review of Germany-based bancassurer Wuestenrot & Wuerttembergische Group under our revised insurance criteria, we are affirming our 'A-' ratings on the group's core operating subsidiaries and our 'BBB+/A-2' ratings on the holding company. The ratings reflect our view of the group's strong business risk profile and moderately strong financial risk profile, based on its diverse business and moderately strong capital and earnings. The stable outlook incorporates our forecast that W&W will be able to weather challenges from the ongoing low interest rate environment, achieve operating profit in line with our base case, and maintain its moderately strong capitalization. Rating Action On June 12, 2013, Standard & Poor's Ratings Services affirmed its 'A-' long-term counterparty credit and insurer financial strength ratings on Germany-based bancassurer Wuestenrot & Wuerttembergische Group's core subsidiaries (together, W&W) and its 'BBB+/A-2' long- and short-term counterparty credit ratings on the holding company Wuestenrot & Wuerttembergische AG. The outlooks on the long-term ratings are stable. Rationale The ratings reflect our view of the insurance subgroup's strong business risk profile and moderately strong financial risk profile, built on a strong competitive position and moderately strong capital and earnings. We combine the business risk and financial risk profiles to derive our 'a-' anchor and 'a-' stand-alone credit profile (SACP) for W&W's insurance operations. Our analysis of W&W's financial institution subsidiaries under our bank criteria results in a 'bbb+' SACP for the banking subgroup, which, combined with our assessments of its insurance activity, lead to our 'a-' group credit profile for the combined bancassurance group. We rate the holding company W&W AG one notch lower than the group's core operating entities. This reflects the structural subordination of the holding company's creditors to the group's insurance policyholders and bank JUNE 12,

3 depositors. We consider that W&W faces intermediate insurance industry and country risk because its core businesses are predominately in Germany, with exposure to German life business. The group's exposure to the German life market in our view involves asset-liability mismatch risk. We see potential risks in its policyholder guarantee exposures in the life insurance portfolio that could put pressure on its financial risk profile. Our opinion of W&W's intermediate insurance and country risk also reflects our more favorable view of the German property & casualty insurance sector, which we believe bears low risk. W&W has a strong competitive position, in our view. The group has a somewhat unique bancassurance structure as a basis for product diversification, with consolidated assets including bank customer deposits representing about 37% and insurance investments roughly 63%. The group's available funds are split at 41% from the banking subgroup and 59% from the insurance entities, including the policyholders' bonus reserves. It offers non-life insurance life insurance, asset-management services, building savings plans, and bank savings products. The non-life business' operating performance has exceeded the market average with an average combined (loss and expense) ratio of 95.9% over the past five years. We consider that the group exhibits moderately strong capital and earnings and will continue to do so. We factor in that earnings are likely to fall due to restructuring costs and low investment yields. As a result, we expect in our base-case scenario a drop in net profit to approximately 125 million- 150 million in 2013 and about 175 million in 2014, including decreasing restructuring costs, and a temporary decline in the contribution from the banking subgroup in We expect W&W's capital adequacy to remain at the higher end of our benchmark for the 'BBB' category. The non-life business remains the group's key earnings contributor, in our view, with an average combined ratio of 95.9% over the past five years and our base-case expectation of 97%-99% through the cycle. In contrast, the pressure on investment income and life new-business margins will likely prevail if interest rates stay low. In our view, low yields are a main driver for the restructuring plan "W&W 2015," and its successful execution might strengthen our base-case earnings assumptions. In our view, the risk position of W&W's insurance operations reflects intermediate risks. The group had 90% of its insurance investments in fixed-income securities in 2012, with about 80% of investments rated at least 'AA'. Three percent of its investments were speculative grade or not rated. We do not foresee any material capital or earnings volatility from insurance underwriting. W&W has adequate financial flexibility, in our view, mainly thanks to its favorable financial leverage and coverage ratios. We consider that the financial leverage ratio (debt plus hybrids to economic capital) and fixed-charge coverage are not constraints to the ratings despite the JUNE 12,

4 challenging operating environment. We regard the group's enterprise risk management (ERM) and management and governance as neutral for the ratings. Our assessment of ERM as adequate with strong risk controls incorporates our favorable view of the group's risk-management culture and key insurance risk controls. W&W AG's management and governance is satisfactory, in our opinion. The group has an established record of sound strategic planning, focusing on improving operational efficiencies, as well as conservative and sophisticated financial management. Management still has inroads to make with the further developing and leveraging of an effectively run bancassurance model with efficient processes. Signs of progress would include further increases in cross-selling and integrating back-office functions between the group's bank and insurance operations. We regard W&W's liquidity as exceptional, owing to the strength of available liquidity sources, premium income, and its asset portfolio. There are no refinancing concerns at this stage, and we believe the group capable of managing unexpectedly large claims or any potential increase in life insurance policy lapses. Our assessment of the banking subgroup has not changed. For more details please see "W&W Group," published May 3, 2013, on RatingsDirect. Outlook The stable outlook reflects our assumption that W&W's insurance and banking operations will be able to weather challenges from the ongoing low interest rate environment and achieve operating profit in line with our base case. We might lower the ratings if, contrary to our expectations, W&W was unable to: Offset unfavorable fixed-income investment conditions by maintaining margins and reducing its reliance on interest rates; Safeguard its cost of risk in its banking operations and produce a sustained risk-adjusted capital (RAC) ratio of more than 10%; and Maintain at least moderately strong capital and earnings. A positive rating action is a remote possibility during the next two years. Ratings Score Snapshot Financial Strength Rating A-/Stable Anchor a- Business Risk Profile Strong JUNE 12,

5 IICRA* Competitive Position Financial Risk Profile Capital & Earnings Risk Position Financial Flexibility Intermediate Risk Strong Moderately Strong Moderately Strong Intermediate Risk Adequate Modifiers 0 ERM and Management 0 Enterprise Risk Management Adequate With Strong Risk Controls Management & Governance Satisfactory Holistic Analysis 0 Liquidity Exceptional Support 0 Group Support 0 Government Support 0 *Insurance Industry And Country Risk Assessment. Related Criteria And Research Related criteria Insurers: Rating Methodology, May 7, 2013 Group Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Principles Of Credit Ratings, Feb. 16, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Related research List Of Issuers With Ratings Under Criteria Observation Due To S&P's New Insurers Rating Methodology, May 7, 2013 Standard & Poor's Assigns Insurance Industry And Country Risk Assessments, May 7, JUNE 12,

6 Ratings List Ratings Affirmed Wuestenrot & Wuerttembergische AG Counterparty Credit Rating Financial Strength Rating Wuerttembergische Lebensversicherung AG Wuerttembergische Versicherung AG Counterparty Credit Rating Financial Strength Rating Wuestenrot Bank AG Pfandbriefbank Wuestenrot Bausparkasse AG Counterparty Credit Rating Wuerttembergische Lebensversicherung AG Subordinated Wuerttembergische Versicherung AG Subordinated BBB+/Stable/A-2 BBB+/Stable A-/Stable/-- A-/Stable A-/Stable/A-2 BBB BBB Additional Contact: Insurance Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JUNE 12,

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