UNIQA Insurance Group: Capital not growing on trees (HOLD - initiation of coverage)

We initiate coverage of UNIQA with a HOLD recommendation and a price target (PT) of EUR 10/share, implying 10% upside potential. We like UNIQA for a number of reasons: i) its strong solvency position, leaving ample room for both dividends and M&A; ii) sustainable dividends; and iii) exposure to the health segment, generating stable results. However, we admit that, at current levels, the stock looks fairly valued, in our view. UNIQA trades at 2018-19E P/Es of 12.4-12.8x (13-20% premiums vs. its peers) and a P/B of 0.9x (14-16% below its peers). We would open a position if UNIQA increased its payout ratio significantly or conducted M&A that could positively affect its EPS and ROE. We see the first scenario as rather unlikely, as management has already expressed its preference to invest the capital in acquisitions. In recent years, UNIQA has improved its capital position significantly (SCR of c.250%, ECR of c.216%). Such a strong capital position makes UNIQA well-equipped to expand via acquisitions. We believe that successful M&A could efficiently exploit the excess capital, increase the EPS and, consequently, lead to a rerating. Last but not least, we like UNIQA for its dividends. We see UNIQA’s dividend yield of 5.8-6.2% as sustainable, due to its strong balance sheet. Due to a lack of details on the potential acquisitions, we see these as optionality to improve EPS and ROE in the future. At the same time, we believe that sustainable dividends limit the downside risk at the current level.