3. Other investments and unit-linked and index-linked life insurance investments

The classification and measurement of financial assets under IFRS 9 is based on the business model and the SPPI criterion (“Solely Payments of Principal and Interest”).

At UNIQA, financial assets are classified into the following categories:

A reclassification of financial assets is only possible if the business model in which a financial asset is held has changed. Such changes of the business model are expected by UNIQA only in very rare cases. Reclassifications are to be performed prospectively in these cases.

Financial assets at fair value through profit or loss (mandatory):

Financial assets must be measured at fair value through profit or loss if they

• are held within the framework of an “other” business model in accordance with IFRS 9; or
• the contractual cash flows of the asset do not represent solely payments of principal and interest on the outstanding principal (“SPPI criterion” is not met).

All unit-linked and index-linked life insurance investments are assigned to an “other” business model and are therefore required to be classified and measured at fair value through profit or loss.

All value changes are recorded in profit/(loss) for the period.

Financial assets (required to be) measured at fair value through other comprehensive income

Financial assets are required to be recognised at fair value through other comprehensive income if they are

• held as part of a “hold-and-sell” business model in accordance with IFRS 9, and
• the contractual cash flows of the asset represent solely payments of principal and interest on the outstanding principal (“SPPI criterion” is met).

Financial assets at fair value through other comprehensive income are initially measured at fair value plus directly attributable transaction costs. The subsequent measurement takes place at fair value. Changes in market value are generally recognised in other comprehensive income. Changes resulting from the effective interest method and foreign currency translation differences are recognised in profit/(loss) for the period. Expenses and income from impairments of the model for expected credit losses are recognised both in profit/(loss) for the period and in other comprehensive income. In the case of derecognition of financial assets, the accumulated other comprehensive income is reclassified to profit/(loss) for the period.

Financial assets at fair value through other comprehensive income (designated)

For equity instruments, an irrevocable option exists at the date of addition to reclassify them as at fair value through other comprehensive income (“FVOCI option”). This option can be exercised individually for each equity instrument.

UNIQA applies the FVOCI option for selected strategic participations and equity investments.

All value changes are recorded in other comprehensive income. A reclassification of value changes recorded in other comprehensive income to profit/(loss) for the period is not permitted upon derecognition.

Financial assets at amortised cost

Financial assets are measured at amortised cost if they

• are held as part of a “hold” business model in accordance with IFRS 9, and
• the contractual cash flows of the asset represent solely payments of principal and interest on the outstanding principal (“SPPI criterion” is met).

Financial assets at amortised cost are initially recognised at acquisition cost plus directly attributable transaction costs. Changes resulting from the effective interest method, currency translation differences and impairments are recorded in profit/(loss) for the period.

Business model criterion

To assess the relevant business models, UNIQA focuses in particular on the strategic management of the investments. As an insurance company, UNIQA holds financial assets mainly to finance liabilities from insurance contracts.

Under other investments, UNIQA divides the business models into “hold-and-sell” and “hold”. Financial assets under other investments are mainly allocated to the “hold-and-sell” business model. Only other investments without the intention to sell, such as time deposits and loans, are allocated to the “hold” business model.

SPPI criterion

When the SPPI criterion is reviewed, the characteristics of the contractual cash flows are analysed. To analyse the cash flows, UNIQA uses both the specific contracts (such as securities prospectuses) and (semi-)automated IT support from external information systems. External information systems are usually relied upon for exchange-traded securities such as government bonds and corporate bonds because these exchanges record the characteristics of the contractual cash flows in standardised databases.

Determination of fair value – significant estimates

A range of accounting policies and disclosures requires the determination of the fair value of financial and non-financial assets and liabilities. UNIQA has defined a control framework with regard to the determination of fair value. This includes a measurement team, which bears general responsibility for monitoring all major measurements of fair value, including Level 3 fair values, and reports directly to the responsible member of the Management Board.

A review of the major unobservable inputs and the measurement adjustments is carried out regularly. If information from third parties (e.g. price quotations from brokers or price information services) is used to determine fair values, the evidence obtained from third parties is examined in order to determine whether it meets the requirements of IFRSs. The level in the fair value hierarchy to which these measurements are attributable is also tested. Major items in the measurement are reported to the Investment Committee.

As far as possible, UNIQA uses data that are observable on the market when determining the fair value of an asset or a liability. Based on the inputs used in the valuation techniques, the fair values are assigned to different levels in the fair value hierarchy:

• Level 1: quoted prices (unadjusted) on active markets for identical assets and liabilities. At UNIQA, these primarily involve quoted shares, quoted bonds and quoted investment funds.
• Level 2: measurement parameters that are not quoted prices included in Level 1 but which can be observed for the asset or liability either directly (i.e. as a price) or indirectly (i.e. derived from prices), or are based on prices from markets that have been classified as inactive. The parameters that can be observed here include, for example, exchange rates, yield curves and volatilities. At UNIQA, these include in particular quoted bonds that do not fulfil the conditions under Level 1, along with structured products.
• Level 3: measurement parameters for assets or liabilities that are not based or are only partly based on observable market data. The measurement here primarily involves application of the discounted cash flow method, comparative procedures with instruments for which there are observable prices and other procedures. As there are no observable parameters here in many cases, the estimates used can have a significant impact on the result of the measurement. At UNIQA, it is primarily other equity investments, private equity and hedge funds as well as structured products that do not fulfil the conditions under Level 2 that are assigned to Level 3.

If the inputs used to determine the fair value of an asset or a liability can be assigned to different levels of the fair value hierarchy, the entire fair value measurement is assigned to the respective level of the fair value hierarchy that corresponds to the lowest input significant for the measurement overall.

UNIQA recognises reclassifications between different levels of the fair value hierarchy at the end of the reporting period in which the change occurred.

The measurement processes and methods are as follows:

Financial instruments measured at fair value

For the measurement of investments, the procedures best suited for the establishment of the corresponding value are applied. The following standard valuation techniques are applied for financial instruments which come under Levels 2 and 3:

• Market approach
  The measurement method in the market approach is based on prices or other applicable information from market transactions which involve identical or comparable assets and liabilities.
• Income approach
  The income approach corresponds to the method whereby the future (expected) payment flows or earnings are inferred on a current amount.

Valuation techniques and inputs in the determination of fair values

Measurement hierarchy

Assets and liabilities measured at fair value

Fair values of assets and liabilities measured at amortised cost

Transfers between Levels 1 and 2

In the reporting period transfers from Level 1 to Level 2 were made in the amount of € 535,582 thousand
(2022: € 2,061,673 thousand) and from Level 2 to Level 1 in the amount of € 951,190 thousand (2022: € 170,531 thousand). These are attributable primarily to changes in trading frequency and trading activity.

Measurement hierarchy in unit-linked and index-linked life insurance investments

Assets and liabilities measured at fair value

Level 3 financial instruments

The following table shows the changes to the fair values of financial instruments whose valuation techniques are not based on observable inputs.

Sensitivities

Fixed-income securities

The main unobservable input in the measurement of fixed-income securities is the specific credit spread. In order to be able to measure these securities in a discounted cash flow model, the spreads are determined using a selection of reference securities with comparable characteristics. For the fixed-income securities in Level 3, an increase in the discount rate by 100 basis points results in a 4.6 per cent reduction in value (2022: 9.7 per cent). A reduction in the discount rate by 100 basis points results in a 3.6 per cent increase in value (2022: 8.5 per cent).

Other

Other securities under Level 3 mainly comprise private equity funds and other equity investments. Private equity funds are measured based on the net asset values which are determined by the fund manager using specific un-observable inputs for all underlying portfolio positions. This is done in accordance with the International Private Equity and Venture Capital Valuation (IPEV) Guidelines.

Securities lending transactions

Securities loaned within the framework of securities lending continue to be recognised in the statement of financial position, as the significant opportunities and risks are not transferred through the lending. In return, UNIQA receives collateral in the form of securities, which are accordingly not recognised in the statement of financial position. As at the reporting date, the carrying amount of the financial assets lent in the category “Fixed-income securities measured at fair value through other comprehensive income” from securities lending transactions amounted to € 526,158 thousand (2022: € 530,299 thousand). The equivalent value of the collateral received is € 571,583 thousand (2022: € 591,932 thousand). The components of these transactions recognised in profit or loss are reported under “Net investment income”.

Changes in value recognised based on the impairment model in accordance with IFRS 9 for expected credit losses for loans and other investments in the category “Financial assets at amortised cost” amount to €– 32 thousand (2022: – 16 thousand).

The measurement is based on the creditworthiness of the debtors. The carrying amounts for bank deposits correspond to the fair values due to their short-term nature.