4.2.1. Market risk
Market risk is powerfully influenced by the risk of changing interest rates, particularly in the life insurance line. The risk of changing interest rates results from the “duration gap” between assets and liabilities. The revision of the current ALM strategy should bring significant improvements to this situation in the medium term.
Another major risk is the spread risk, which also affects comparable peer companies. In this category, very high capital requirements for credit structures (ABS) in the calculation methodology for future equity requirements under Solvency II are particularly important. Moreover, portfolio components such as emerging markets bonds or poorly rated state bonds are a risk driver.
The share risk of the UNIQA Group is driven especially by alternative investments such as hedge funds and private equity.
About 10 per cent of market risk comes from risks associated with land and buildings.
Other market risks, such as concentration and currency risks, play a minimal role in the UNIQA Group at this time.
There were no major year-on-year changes in terms of the methods and processes for managing and measuring these risks. Adjustments with regard to Solvency II are in the draft stage.
Description of market risk categories:
Interest risk: due to the investment structure and the high proportion of interest-bearing titles, the interest rate risk forms a very important component of the financial risks. The following table shows the interest-bearing securities and the average interest coupons arranged by the most important investment categories and their average coupon interest rate on the reporting date.
Average interest coupon |
€ |
USD |
Other | |||
% |
2011 |
2010 |
2011 |
2010 |
2011 |
2010 |
Fixed-interest securities |
|
|
|
|
|
|
High-grade bonds |
3.76 |
3.89 |
3.55 |
3.90 |
5.34 |
5.18 |
Bank/company bonds |
3.89 |
3.91 |
4.28 |
5.26 |
4.14 |
4.13 |
Emerging markets bonds |
5.13 |
5.71 |
7.49 |
9.67 |
8.39 |
10.06 |
High-yield bonds |
8.74 |
7.63 |
9.48 |
10.07 |
4.45 |
5.44 |
Other investments |
3.36 |
3.48 |
0.00 |
0.00 |
0.00 |
0.00 |
|
|
|
|
|
|
|
Fixed-interest liabilities |
|
|
|
|
|
|
Subordinated liabilities |
5.34 |
5.34 |
|
|
|
|
Guaranteed interest life insurance |
2.66 |
2.71 |
|
|
|
|
Long-term policies and life insurance policies with guaranteed interest and profit sharing
Insurance policies with guaranteed interest and additional profit sharing contain the risk that the guaranteed interest rate will not be achieved over a sustained period of time. Capital income produced over and above the guaranteed interest rate will be shared between the policyholder and the insurance company, with the policyholder receiving an appropriate share of the profit. The following table shows the comparison of assets and debts for such insurance policies.
Investments for long-term life insurance policies with guaranteed interest and profit sharing |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Annuities |
9,278,517 |
9,440,828 |
Shares |
479,685 |
642,456 |
Alternatives |
636,199 |
708,594 |
Holdings |
399,464 |
411,382 |
Loans |
1,019,325 |
1,267,004 |
Real estate |
1,198,798 |
1,107,667 |
Liquidity |
769,018 |
743,515 |
Deposits receivable |
127,334 |
123,284 |
Total |
13,908,340 |
14,444,730 |
Difference between book value and market value |
|
|
Real estate |
478,042 |
264,055 |
Loans |
–96,541 |
–27,812 |
Provisions and liabilities from long-term life insurance policies with guaranteed interest and profit sharing |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
13,521,141 |
13,459,510 | |
Provision for profit-unrelated premium refunds |
2,084 |
1,869 |
Provision for profit-related premium refunds, i.e. policyholder profit sharing |
–62,826 |
112,060 |
Other technical provisions |
23,516 |
23,858 |
108,152 |
108,309 | |
Deposits payable |
441,620 |
436,200 |
Total |
14,033,687 |
14,141,806 |
The following table shows the structure of the remaining terms of interest-bearing securities and loans.
Remaining term |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Up to 1 year |
689,448 |
810,676 |
Of more than 1 year up to 3 years |
1,067,439 |
1,052,770 |
Of more than 3 years up to 5 years |
1,932,150 |
1,792,639 |
Of more than 5 years up to 7 years |
2,159,205 |
2,192,915 |
Of more than 7 years up to 10 years |
2,289,454 |
2,208,519 |
Of more than 10 years up to 15 years |
859,164 |
1,361,612 |
More than 15 years |
1,300,982 |
1,288,702 |
Total |
10,297,842 |
10,707,832 |
The capital-weighted average remaining term of technical liabilities is around 9.0 years (2010: 8.0 years).
Long-term unit-linked and index-linked life insurance policies
In the segment of unit-linked and index-linked life insurance, the interest income and all fluctuations in value of the dedicated investments are reflected in the technical provisions. There is therefore no financial risk from the point of view of the insurer. The following table shows the investment structure of financial investments that are used to cover the technical provisions arising from unit-linked and index-linked life insurance policies.
Investments in unit-linked and index-linked life insurance policies |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Share-based funds |
951,241 |
988,689 |
Bond funds |
3,274,938 |
3,044,113 |
Liquidity |
89,318 |
81,107 |
Other investments |
80,519 |
78,821 |
Total |
4,396,016 |
4,192,730 |
Long-term health insurance policies
The actuarial interest rate for the actuarial provision in health insurance lines, which is selected depending on the type of life insurance, is 3 per cent. However, this interest rate is not guaranteed and can, upon presentation of proof to the insurance supervisory authority, be reduced to any lower capital income that may be expected. The following table shows the investment structure available to cover insurance liabilities.
Investments for long-term health insurance policies |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Annuities |
1,094,340 |
1,238,629 |
Shares |
85,793 |
53,963 |
Alternatives |
88,812 |
93,450 |
Holdings |
207,349 |
199,705 |
Loans |
732,758 |
710,918 |
Real estate |
331,258 |
318,529 |
Liquidity |
387,256 |
169,333 |
Total |
2,927,567 |
2,784,528 |
Difference between book value and market value |
|
|
Real estate |
119,825 |
144,441 |
Loans |
–9,931 |
3,828 |
Provisions and liabilities from long-term health insurance policies |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Actuarial provision |
2,693,400 |
2,533,728 |
Provision for profit-unrelated premium refunds |
17,264 |
16,578 |
Provision for profit-related premium refunds, i.e. policyholder profit sharing |
63,495 |
50,092 |
Other technical provisions |
574 |
548 |
Provision for unearned premiums |
16,338 |
15,914 |
Provision for outstanding claims |
177,139 |
172,279 |
Deposits payable |
1,204 |
1,323 |
Total |
2,969,414 |
2,790,463 |
Property and casualty insurance policies
Most property and casualty insurance policies are short-term. The technical provisions are not discounted, meaning that no interest is calculated for the short-term investment. The average terms of interest-bearing securities and loans invested to cover technical provisions are shown in the following table.
Remaining term |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Up to 1 year |
89,885 |
102,103 |
Of more than 1 year up to 3 years |
248,730 |
182,759 |
Of more than 3 years up to 5 years |
337,581 |
325,941 |
Of more than 5 years up to 7 years |
428,767 |
358,017 |
Of more than 7 years up to 10 years |
507,654 |
570,630 |
Of more than 10 years up to 15 years |
192,734 |
186,249 |
More than 15 years |
21,748 |
223,849 |
Total |
1,827,098 |
1,949,547 |
Credit risk: when investing in securities, we invest in debt securities of varying quality, taking into consideration the yield prospects and risks. The following table shows the quality structure of fixed-interest investments.
Rating |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
AAA |
3,516,927 |
3,317,270 |
AA |
1,826,334 |
3,062,155 |
A |
3,156,654 |
2,979,241 |
BBB |
2,722,147 |
2,655,684 |
BB |
875,010 |
874,895 |
B |
461,888 |
577,764 |
CCC |
262,460 |
168,868 |
Not rated |
227,397 |
30,047 |
Total |
13,048,817 |
13,665,924 |
The values as at 31 December 2011 also include the securities reclassified to the category of loans in the 3rd quarter with a value of € 1,089,093 thousand (2010: € 1,379,806 thousand).
The leading ratings agencies revised and reclassified their state ratings in 2011, which also led to changes in the distribution of inventories by rating. Furthermore, the internal maintenance of ratings began to implement Solvency II methodologies in 2011.
Share risk: when investing in stock markets, the risk is diversified by using various management styles (total return approach, benchmark-oriented approach, value growth approach and industry- and region-specific and fundamental title selection). For the purpose of securing the investment, the effective investment ratio is controlled through the use of derivative financial instruments. The following table shows the investment structure of the share portfolios by asset classes:
Share portfolio composition |
31 Dec. 2011 |
31 Dec. 2010 | ||||
Figures in € thousand |
|
| ||||
| ||||||
Shares in Europe |
475,699 |
438,554 | ||||
Shares in America |
32,778 |
48,112 | ||||
Shares in Asia |
11,051 |
26,802 | ||||
Shares international1) |
22,153 |
4,932 | ||||
Shares in emerging markets |
12,485 |
32,149 | ||||
Shares total return2) |
217,840 |
158,228 | ||||
Other shares |
21,313 |
208,872 | ||||
Total |
793,319 |
917,648 |
Currency risk: the UNIQA Group invests in securities in a wide range of currencies. Although the insurance business is operated in different countries, the foreign currency risks of the investments do not always correspond to the currency risks of the technical provisions and liabilities. The most significant currency risk is in US dollars. The following table shows a breakdown of assets and debts by currency.
31 Dec. 2011 |
€ |
USD |
Other |
Total |
Figures in € thousand |
|
|
|
|
Assets |
|
|
|
|
Investments |
21,923,947 |
791,089 |
1,886,053 |
24,601,090 |
Other tangible assets |
108,794 |
|
22,467 |
131,261 |
Intangible assets |
1,370,121 |
|
130,210 |
1,500,331 |
Share of reinsurance in the technical provisions |
1,022,996 |
|
66,663 |
1,089,658 |
Other assets |
1,009,404 |
|
235,913 |
1,245,318 |
Total |
25,435,263 |
791,089 |
2,341,306 |
28,567,658 |
|
|
|
|
|
Provisions and liabilities |
|
|
|
|
Subordinated liabilities |
575,000 |
|
0 |
575,000 |
Technical provisions |
22,654,008 |
|
1,552,434 |
24,206,442 |
Other provisions |
761,816 |
|
26,294 |
788,109 |
Liabilities |
1,751,991 |
|
150,531 |
1,902,522 |
Total |
25,742,815 |
0 |
1,729,259 |
27,472,074 |
31 Dec. 2010 |
€ |
USD |
Other |
Total |
Figures in € thousand |
|
|
|
|
Assets |
|
|
|
|
Investments |
22,304,559 |
466,618 |
2,007,505 |
24,778,682 |
Other tangible assets |
116,976 |
|
21,681 |
138,657 |
Intangible assets |
1,413,996 |
|
107,881 |
1,521,877 |
Share of reinsurance in the technical provisions |
1,030,609 |
|
79,892 |
1,110,501 |
Other assets |
884,477 |
|
269,519 |
1,153,996 |
Total |
25,750,618 |
466,618 |
2,486,478 |
28,703,713 |
|
|
|
|
|
Provisions and liabilities |
|
|
|
|
Subordinated liabilities |
575,000 |
|
0 |
575,000 |
Technical provisions |
22,250,871 |
|
1,629,686 |
23,880,557 |
Other provisions |
709,230 |
|
23,536 |
732,766 |
Liabilities |
1,852,190 |
|
141,747 |
1,993,936 |
Total |
25,387,290 |
0 |
1,794,969 |
27,182,259 |
The fair value of securities investments in US dollars amounted to € 1,766 million as at 31 December 2011 (2010: € 1,625 million). The exchange rate risk decreased through derivative financial instruments to € 791 million (2010: € 467 million), and the safeguard ratio was 71.1 per cent (2010: 71.0 per cent). The safeguard was maintained in a range of between 55 per cent and 80 per cent (2010: 56 per cent and 81 per cent) during the financial year.
Additional market risks that are being handled in the context of the ORSA process:
Liquidity risk: the UNIQA Group must satisfy its payment obligations on a daily basis. For this reason, a precise liquidity schedule for the immediately following months is used, and a minimum liquidity holding is defined by the Management Board and is available as a cash reserve on a daily basis. In addition, a majority of the securities portfolio is listed on liquid stock exchanges and can be sold quickly in the case of liquidity burdens. When the remaining maturities stipulated by contract for investing fixed-interest securities (see Notes number 9) are chosen, the existing remaining contractual maturities (see 4.2.1 interest rate risk) are taken into consideration in the various business segments.
Additional underwriting obligations exist for private equity investments in the amount of € 72 million (2010: € 102 million).
Sensitivities: risk management for investments takes place in a structured investment process, in which the various market risks are controlled at the levels of the selection of a strategic asset allocation, the tactical weighting of the individual asset classes depending on market opinion and in the form of timing and selection decisions. In particular, stress tests and sensitivity analyses are used as key figures for measuring, observing and actively controlling the risk.
The table below shows the most important market risks in the form of key sensitivity figures; the information is presented as available on the reporting date, meaning that only rough figures can be offered for future losses of fair value. Depending on the assessment principle to be applied, if there are any future fair value losses, they can lead to different fluctuations in equity that are with or without an effect on the income statement. The key figures are calculated theoretically on the basis of actuarial principles and do not take into consideration any diversification effects between the individual market risks or counter-controlled measures taken in the various market scenarios.
Interest rate risk |
31 Dec. 2011 |
31 Dec. 2010 | ||
Figures in € thousand |
+100 basis points |
–100 basis points |
+100 basis points |
–100 basis points |
High-grade bonds |
–350,679 |
375,014 |
–382,196 |
410,964 |
Bank/company bonds |
–64,335 |
68,799 |
–55,312 |
59,475 |
Emerging markets bonds |
–42,649 |
45,609 |
–71,990 |
77,408 |
High-yield bonds |
–372 |
397 |
–912 |
981 |
Total |
–458,034 |
489,819 |
–510,410 |
548,828 |
Equity risk |
31 Dec. 2011 |
31 Dec. 2010 | ||
Figures in € thousand |
+10 % |
–10 % |
+10 % |
–10 % |
Shares in Europe |
31,158 |
–31,158 |
38,221 |
–37,744 |
Shares in America |
4,526 |
–4,526 |
6,117 |
–6,117 |
Shares in Asia |
1,587 |
–1,587 |
2,053 |
–2,053 |
Shares international |
2,288 |
–2,288 |
2,175 |
–2,175 |
Shares in emerging markets |
1,404 |
–1,404 |
3,403 |
–3,403 |
Shares total return |
16,128 |
–16,128 |
16,663 |
–16,663 |
Derivative financial instruments and other shares |
2,195 |
–2,210 |
3,448 |
–3,448 |
Total |
59,286 |
–59,300 |
72,080 |
–71,603 |
Currency risk |
31 Dec. 2011 |
31 Dec. 2010 | ||
Figures in € thousand |
+10 % |
–10 % |
+10 % |
–10 % |
€ |
0 |
0 |
0 |
0 |
USD |
83,052 |
–83,052 |
45,924 |
–45,924 |
Other |
123,712 |
–123,712 |
161,797 |
–161,797 |
Total |
206,765 |
–206,765 |
207,721 |
–207,721 |
Credit risk |
|
31 Dec. 2011 |
31 Dec. 2010 | ||
Figures in € thousand |
|
+ |
– |
+ |
– |
AAA |
0 basis points |
0 |
0 |
0 |
0 |
AA |
25 basis points |
–71,134 |
71,134 |
–38,313 |
38,313 |
A |
50 basis points |
–125,820 |
125,820 |
–53,030 |
53,030 |
BAA |
75 basis points |
–103,462 |
103,462 |
–70,948 |
70,948 |
BA |
100 basis points |
–34,066 |
34,066 |
–34,735 |
34,735 |
B |
125 basis points |
–17,494 |
17,494 |
–30,641 |
30,641 |
CAA |
150 basis points |
–6,575 |
6,575 |
–7,453 |
7,453 |
Not rated |
100 basis points |
–9,085 |
9,085 |
–13,098 |
13,098 |
Total |
|
–367,635 |
367,635 |
–248,219 |
248,219 |
Value at Risk (VaR): the overall market risk of the investment portfolio is determined on the basis of the value-at-risk approach. The key figure is calculated for a confidence interval of 95 per cent and a holding term of one year. The basic data is in the form of historical figures from the last calendar year with a balancing of the individual values (decay factor of 1).
The following table shows the key value-at-risk figures for the last financial year as reporting date values, annual average and maxima/minima for the year.
Value at Risk |
Total value at risk |
Equity risk |
Currency risk |
Interest rate risk |
Diversification |
Figures in € thousand |
|
|
|
|
|
31 Dec. 2011 |
1,026,235 |
389,567 |
282,699 |
751,008 |
–397,039 |
31 Dec. 2010 |
676,337 |
342,165 |
116,127 |
713,066 |
–495,021 |
Lowest |
715,474 |
169,249 |
121,059 |
643,602 |
–251,122 |
Average |
864,041 |
323,642 |
227,616 |
756,543 |
–375,962 |
Highest |
1,026,235 |
403,376 |
311,141 |
802,930 |
–746,111 |
Evaluation of the stock of Asset-Backed Securities
The UNIQA Group held 2.5 per cent (2010: 2.6 per cent) of its investments in Asset-Backed Securities (ABS). Model risks are associated with the valuation of ABS securities.
The securities held in the direct portfolio and fund portfolio are mostly valued 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 2011 due to low liquidity. 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 paper 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 these reasons, UNIQA has decided to set the fair value of the specified papers by means of a model approach.
ABS papers 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 high-quality analyses at acceptable expense.
The main parameters of the model for assessing the value of ABS are estimates of the future development of the (financial) economic environment, especially 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. UNIQA now uses the forecasts of Moody’s Investors Service for forecasting the failure rates of companies. These forecasts encompass a period of five years each. 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 the payment streams are generated. In order to represent an additional risk discount, a risk premium above the pure interest rate was 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 per cent quantile or the 90 per cent quantile of the distribution function of the failures.
Sensitivity analysis |
Upside |
Downside |
Figures in € million |
|
|
Total profit/loss |
8.1 |
–105.1 |
on P&L |
0.5 |
–74.7 |
on equity |
7.5 |
–30.4 |
Valuation of STRABAG SE
UNIQA has a participating interest in STRABAG SE of 14.97 per cent as at the reporting date of 31 December 2011 (31 December 2010: 14.97 per cent). 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 fourth quarter of 2010, a purchase option was conceded to a strategic investor for an additional 1.4 million individual 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 the option was determined as the difference between the current book value and the price for exercising the option.
Book value STRABAG SE |
2011 | ||
Figures in € thousand |
| ||
| |||
As at 1 Jan. |
453,079 | ||
Disposal |
0 | ||
Updating affecting income1) |
23,168 | ||
Updating not affecting income |
–5,338 | ||
Dividends |
–9,389 | ||
As at 31 Dec. |
461,521 | ||
Value in € per share |
27.04 |
Information about investments in the PIIGS nations
Issuer |
Current market value 31 Dec. 2011 |
Figures in € thousand | |
Spain |
155,040 |
Greece |
105,265 |
Ireland |
279,554 |
Italy |
789,803 |
Portugal |
56,214 |
Total |
1,385,876 |
The EU accompanying measures by euro zone countries for Greece also anticipates participation from private investors. This is why devaluations of Greek bonds took place at the market exchange rate as at 31 December 2011. This led to depreciation of € 387,622 thousand. Currently it must be assumed that government bonds from other member countries will be completely paid back and the current risk reduction on bond prices in some European countries will not last.
The difference to the cost of acquisition of this investment (excluding Greece) affects mainly the revaluation reserve, reduced by the deferred profit-sharing arrangement (in life insurance) and deferred taxes.
ALM
The financial risks have different weightings and various degrees of seriousness, depending on the investment structure. However, the effects of the financial risks on the value of the investments also influence the level of technical liabilities to some extent. A partial dependence therefore exists between the growth of assets and debts from insurance policies. UNIQA monitors the income expectations and risks of assets and liabilities arising from insurance policies as part of an Asset-Liability Management (ALM) process. The aim is to achieve a return on capital that is sustainably higher than the updating of the technical liabilities while retaining the greatest possible security. Here, assets and debts are allocated to different accounting groups. The following table shows the main accounting groups generated by the various product categories.
Investments |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Long-term life insurance policies with guaranteed interest and profit sharing |
13,908,340 |
14,444,730 |
Long-term unit-linked and index-linked life insurance policies |
4,397,379 |
4,192,730 |
Long-term health insurance policies |
2,927,567 |
2,784,528 |
Short-term property and casualty insurance policies |
3,367,805 |
3,356,695 |
Total |
24,601,090 |
24,778,682 |
These values refer to the following balance sheet items:
A.I. Self-used land and buildings
B. Land and buildings held as financial investments
D. Shares in associated companies
E. Investments
F. Investments in unit-linked and index-linked life insurance policies
L. Liquid funds
Technical provisions and liabilities (retained) |
31 Dec. 2011 |
31 Dec. 2010 |
Figures in € thousand |
|
|
Long-term life insurance policies with guaranteed interest and profit sharing |
14,033,687 |
14,141,806 |
Long-term unit-linked and index-linked life insurance policies |
4,318,331 |
4,142,636 |
Long-term health insurance policies |
2,969,414 |
2,790,463 |
Short-term property and casualty insurance policies |
2,655,562 |
2,540,917 |
Total |
23,976,994 |
23,615,822 |
These values refer to the following balance sheet items:
C. Technical provisions
D. Technical provisions for unit-linked and index-linked life insurance
G.I. Reinsurance liabilities (only deposit liabilities held under reinsurance business ceded)
G. Share of reinsurance in the technical provisions
H. Share of reinsurance in technical provisions for unit-linked and index-linked life insurance