2.7 Value at Risk (VaR)

Evaluation of the stock of Asset-Backed Securities

The UNIQA Group has placed a 2.6% (2009: 2.7%) of its investments in asset-backed securities (ABS).

The securities held in the direct portfolio and in the fund portfolio have been valued mostly using a mark-to-model method.

The individual transactions vary with regard to structure, risk profile, interest claims, rating and other parameters.

UNIQA is of the view that it will not be possible to ascertain a fair value for these securities on the basis of market prices or market transactions for the year 2010 due to low liquidity and the crisis on the financial markets. So-called market prices, insofar as these can even be identified in individual cases, pertain only in the rarest of cases to securities that are held directly in the portfolio, or even to securities from the same issuer, but rather generally to another investment that is similar in terms of rating and securitisation category. Direct transfer of such prices does not appropriately take into account either the complexity or the heterogeneity of the different structures. For both reasons, UNIQA has decided to set the fair value of the specified papers by means of a model approach.

ABS investments are noted for being highly complex and are therefore extensively documented. Due to its longstanding activity in the area of securitisation, UNIQA has developed various models on its own or with others that permit analyses of high quality at acceptable expense.

The main parameters of the model for assessing the estimate of the future development of the (financial) economic environment are the speed of repayment, the failure frequency, the failure severity and the discount rate.

All parameters refer to the assets used to collateralise the transaction, i.e. to the corporate credits, bonds, preferential shares, etc. The future payments are calculated using external forecasts for failure rates. The modelling system of Intex Solutions, Inc., which represents a widely accepted market standard, serves as the basis for the analysis. For forecasting the failure rates of companies, UNIQA now uses the forecasts of Moody’s Investors Service. These forecasts encompass a period of five years. Other parameters besides the failure rates are calibrated with the help of the data history. Objective and predetermined values are used for the discounting.

To this extent, the losses expected by an investor on a transaction are already taken into consideration when generating the payment streams. In order to take account of the current economic crisis, a risk premium was additionally added to the applied discount rate. This premium corresponds to the surcharge originally applied on execution of the individual transaction.

The sensitivity analysis of the ABS portfolio with regard to a rise or a fall in the failure rates in the investments underlying the ABS structures is also based on the forecast values from Moody’s Investors Service.

The sensitivities for these securities subjected to model-based analysis are also determined using Moody’s failure scenarios. According to Moody’s, these failure scenarios correspond to the 10% quantile or the 90% quantile of the distribution function of the failures.

Valuation of STRABAG SE

UNIQA has a participating interest in STRABAG SE of 14.97% as at the reporting date of 31 December 2010 (31 December 2009: 21.91%). Even following the re-entry of a major investor, UNIQA retained a significant influence over the business activity of STRABAG SE. UNIQA is therefore continuing the participating interest in STRABAG SE as an associated share. In the 4th quarter of 2010, a purchase option was conceded to a strategic investor for an additional 1.4 million shares of STRABAG SE. It can be exercised between July 2012 and July 2014.

The valuation on the reporting date takes place in consideration of the option agreement and the expected proportional equity on the reporting date. The current market value of this option was determined as the difference between the current book value and the price for exercising the option.

Information about investments in the PIIGS nations

Selected government bond risks

The difference to the cost of acquisition of this investment affects mainly the revaluation reserve, reduced by the deferred profit-sharing arrangement (in life insurance) and deferred taxes.

Currently it must be assumed that government bonds from member countries will be completely paid back and the current risk reduction on bond prices in some European countries will not last.

In particular, European and international initiatives should be mentioned in this regard. Among others, in this context the European Financial Stabilisation Mechanism (EFSM), the European Financial Stability Facility (EFSF), the International Money Fund (IMF) and the European Central Bank (ECB) should be mentioned.

As early as May 2010 €110 billion were made available to Greece within the framework of the EFSM and €30 billion through the IMF. Furthermore, the placement of the first European bonds via the EFSF in January 2011 made it possible to refinance at very favourable rates (AAA rating; interest warrant: 2.75%, volume: €5 billion), thus demonstrating the availability of this venue for providing financial assistance to distressed member states. Altogether, the EFSF, EFSM and IMF can currently raise €750 billion.

Ireland also applied for and received financial aid through this mechanism in November 2010.

In an additional step, the ECB’s Security Markets Programme is contributing to the stabilisation of the secondary market for government bonds by purchasing bonds from member states that are under pressure.

These aid measures are available to all member states. In the cases of Greece and Ireland, the measures have proven their practicality. Hence, it does not currently look like we can assume there will be a long-lasting reduction in value of the affected government bonds.

Description of the most important features of the internal controlling and risk management system (RMS) with regard to the accounting process according to Section 243a paragraph 2 of the Austrian Commercial Code

The RMS of UNIQA Versicherungen AG is a well documented system covering all company activities that includes a systematic and permanent process based on the defined risk strategy with the following elements: identification, analysis, evaluation, controlling, documentation and communication of risks and monitoring of these activities. The scope and orientation of the established systems were designed based on the company-specific requirements. Despite the creation of appropriate frameworks, a certain residual risk always remains since even appropriately and functionally erected systems cannot guarantee absolute certainty in the identification and management of risks.

The goals in connection with the RMS are

• Identification and evaluation of risks that could oppose the goal of Group financial statements that conform to the rules
• Limitation of known risks, e.g. by procuring the assistance of external specialists
• Evaluation of identified risks with regard to their influence on the Group financial statements and the corresponding depiction of these risks

The goal of the accounting process internal control system is to implement controls to ensure that a proper report can be reliably produced despite the identified risks. In addition to the risks described in the risk report, the RMS also deals with additional risks as well as those in operational processes, compliance, internal reporting, etc.

Organisational structure and controlling scope

The accounting process of the UNIQA Group is standardised throughout the Group. Compliance guidelines, operational organisation manuals, balance sheet and consolidation manuals exist to ensure a reliable process. The processing is largely centralised for domestic affiliated companies. For international Group companies, the accounting process is largely decentralised.

Identification and controlling of risks

An inventory of the existing risks was taken and appropriate monitoring measures were defined for the identification of existing risks. The most important checks were defined in guidelines and instructions and coupled with an authorisation concept. The checks cover both manual coordination and reconciliation routines as well as acceptance inspections of system configurations for connected IT systems. Identified risks and weak points in monitoring the accounting process are reported quickly to management in order for corrective measures to be taken. The procedure for identification and monitoring of the risks is regularly evaluated by an independent, external consultant.

Information and communication

Deviations from expected results and analyses are monitored in monthly reports and figures and are the basis for the continuing supply of information to management.