Consolidation

Scope of consolidation

In addition to the annual financial statement of UNIQA Versicherungen AG, the Group financial statements include the financial statements of all subsidiaries at home and abroad. 37 affiliated companies did not form part of the consolidated Group. They were only of minor significance, even if taken together, for the presentation of a true and fair view of the Group's assets, financial position and income. Therefore the scope of consolidation contains – in addition to UNIQA Versicherungen AG – 47 domestic and 82 foreign subsidiaries in which UNIQA Versicherungen AG held the majority of voting rights.

The scope of consolidation was extended in the reporting period by the following companies:

In the 1st quarter the Romanian company UNIQA Asigurari de Viata SA with its headquarters in Bucharest was merged with the Romanian life insurance UNIQA Life S.A. With the acquisition of Soureva Ltd., Limassol, the remaining 50% of the AVE-PLAZA LLC were brought into the Group.

In the 4th quarter the Albanian SIGAL Holding Sh.A. with its headquarters in Tirana was merged with the SIGAL UNIQA Group AUSTRIA Sh.A. 25% of Raiffeisen Life Insurance Company LLC was sold to ZAO Raiffeisen Bank Moscow. In addition, because of the intention to sell the Romanian property and casualty insurer Astra S.A. with its headquarters in Bucharest in 2011, it was transferred from the balance sheet item “shares in associated companies” to the item “variable yield securities available for sale”.

The effects of the change to the scope of consolidation on the main asset and debt positions can be seen under no. 5 of the notes to the consolidated financial statements.

The associated companies refer to ten domestic companies consolidated at equity; 15 companies were of minor significance and were listed at current market value.

In applying IAS 39 and in terms of the present interpretation of this statement by the IASB (SIC 12), fully controlled investment funds will be included in the consolidation insofar as their fund volumes were not of minor importance when viewed singularly and in total.

Changes in the 1st quarter of 2011

There have been no significant changes to the scope of consolidation.

Consolidation principles

Capital consolidation follows the acquisition method. The costs of acquiring shares in the subsidiaries are written as the proportional equity of the subsidiary that was first revalued. The conditions at the time of acquiring the shares in the consolidated subsidiary are taken into consideration for the initial consolidation. To the extent other (non Group) shareholders hold shares in the subsidiary's equity at the reporting date, these are dealt with under minority interests.

If the shareholding was acquired before 1 January 1995, the differences are set off against profits carried forward in line with the applicable transitional provisions.

Negative differences from mergers consummated after 31 March 2004 must be credited with an effect on income immediately after re-appraisal.

In compliance with IFRS 3, the goodwill is not subject to any scheduled depreciation. The value of existing goodwill resultant from the acquisition of holdings is appraised in an annual impairment test. A fall in value is written off where necessary.

Impairment test

The goodwill arises from company mergers and acquisitions. It represents the difference between the acquisition costs and the proportional and current corresponding net market value of identifiable assets, debts and specific contingent liabilities. In accordance with IAS 36, the goodwill is not subject to scheduled depreciation but listed as the acquisition costs less any accrued impairments.

For the purpose of the impairment test, the UNIQA Group has apportioned the goodwill into “cash-generating units” (CGU). These CGUs are the smallest identifiable groups of assets that generate cash which is to the greatest possible extent independent from the cash generating units of other assets or other groups of assets. The impairment test implies a comparison between the realisable value that can be generated by selling or using each CGU and its book value, consisting of the stock value and goodwill and the proportional net assets. If the book value of the CGU exceeds the realisable value of the unit based on the earning power method, an impairment is performed.

The UNIQA Group has apportioned the goodwill into the following CGUs:

• Albania/Kosovo/Macedonia as sub-group (EEM)
• Austria
• Bosnia-Herzegovina (CEE)
• Bulgaria (EEM)
• Croatia (CEE)
• Czech Republic (CEE)
• Germany as sub-group (WEM)
• Hungary (CEE)
• Italy as sub-group (WEM)
• Liechtenstein (WEM)
• Poland as sub-group (CEE)
• Romania (EEM)
• Russia (EEM)
• Serbia (EEM)
• Montenegro (EEM)
• Slovakia (CEE)
• Switzerland (WEM)
• Ukraine (EEM)

Breakdown of goodwill

Cash flow forecast (multi-phase model)
Phase 1: Five-year company planning

The detailed company planning generally encompasses a period of five years. The company plans used for the calculation are the result of a structured and standardised management dialogue between the UNIQA headquarters in Vienna and the operational units in combination with the reporting and documentation process integrated into this dialogue.

Phase 2: Extended seven-year planning phase

The phases of the earning power model with no operational or strategic planning were extended to a seven-year period in order to avoid giving too much weight and influence to the perpetuity.

Phase 3: Perpetuity

The cash flows determined at the end of phase 2 were used as the basis for the perpetuity and therefore correspond to results that can be realistically achieved and sustained over the long term.

Scenarios

The earning power of the individual CGUs is determined by a weighted probability scenario. Three scenarios were calculated, whereby scenario 1 depicts the base case according to the current and strategic planning, scenario 2 the best case for expected market and company development and scenario 3 the worst case.

Scenarios 1 and 2 assume that the credit spreads as of 2014 will return to an average level as before the crisis and that a rating improvement will take place after two years and then once after five years. Scenarios 1 and 2 assume that by 2014 the credit spreads will have returned to an average level as before the crisis and that a rating improvement will take place after two years and then once again after five years. The cash value of the perpetuity was calculated in scenario 1 with a growth deduction of 1% and in scenario 2 with a growth deduction of 2%.It is assumed in the third scenario that the credit spreads also remain at the same level in the future and no rating improvement takes place relative to the current situation. A growth deduction of 1.5% was also applied here in the perpetuity in order to appropriately counteract the decline in growth in the purely negatively oriented scenario.

Expected value

The company value was calculated individually based on the discounting of the cash flow forecasts and the individual weighting of the probability of occurrence of the various scenarios based on the business development of the individual CGUs.

Uncertainty and sensitivity

Various studies and statistical analyses were used as sources to provide a basis for determining the growth rates in order to consistently and realistically reflect the market situation and macroeconomic development.

The following studies and materials served as reference sources:

• SwissRe – Insurance density CEE
• Sigma – 3/2009 Insurance density CEE
• Raiffeisen Research – Inflation rate trends
• Eurostat – GDP growth, interest rate trends
• WIIW (The Vienna Institute for International Economic Studies) – Purchasing power parities, GDP growth CEE
• Damodaran – Country risks, growth rate estimates, multiples
• Thomson Reuters, Business Climate Index, Central and Eastern Europe, III/2009
• IRZ, volume 4/2009, “Consequences of the Financial Market Crisis on Company Valuation”
• IMF, “World Economic Outlook”, April 2009
• Arthur D Little, “Global CEO Survey”, 2009
• Arthur D Little, “Global Insight, World Market Passenger Cars, February 2009,
• money.at, “Eastern Europe is, has been and will remain a region of the future”
• handelsblatt.de, Oct 2009 “Institutional investors see upward spirals”
• Presse 18 November 2010: “The biggest losers step on the gas most” – outlook for the economy in Eastern Europe

Sensitivity analyses with regard to the capitalisation interest rate and the main value drivers are performed in order to verify the results of the calculation and estimation of the realisable value.

These analyses show that sustained surpluses on the part of the individual CGUs are highly dependent on the actual development of these assumptions within the individual national economies (GDP, insurance density, purchasing power parities, particularly in the CEE markets), as well as the associated implementation of the individual profit goals. These forecasts and the related assessment of how the situation in the markets will develop in the future, under the influence of the continuing financial crisis in individual markets, are the largest uncertainties in connection with measurement results.

All the budgeted profit was calculated with the exchange rates as at 31 December 2010.

For the event that the intensity and duration of the recovery from the economic crisis turns out to be much slower than assumed in the business plans and fundamental forecasts, unscheduled depreciations may result for the individual CGUs. At this time, the current developments and the cautiously, slowly growing improvement estimates of the individual CGUs and the markets give no cause for applying unscheduled depreciations. Very tight coverage is currently being achieved in Bulgaria, Romania, Croatia and Albania. Corresponding measures for stabilisation and to promote the required upward trend in company development have already been initiated by the Group.

The table below shows the historical GDP development in the relevant markets since 2008. Viewed in conjunction with this forecast for 2010 and the subsequent years, these figures give reason to expect a sustained upward trend again in the CEE markets and make the crisis of 2008 and 2009 appear as a real but only temporary slowdown to economic growth. As such, no loss of these core markets for UNIQA is expected over the long term.

The expected global development graph of the CEE-17 countries also exhibits a positive prospective future trend in comparison with the USA and the EU.

In consideration of the data and statistical sources on which these calculations were based and trend scenarios such as GDP forecasts per CGU, insurance density development per CGU and significantly lower interest rates, no situations of insufficient coverage were identified in 2010 within the impairment test.

The general economic situation as well as the developments of the national economies continue to call for constant observation and the implementation of measures to achieve a balanced mix of stability, growth and profitability. With its ongoing profit improvement programme and with the sales focus on the profitable retail business in Eastern Europe, UNIQA took the necessary steps for accomplishing this even before the crisis years.

The purchase price allocation of the acquisition price for the sub-group of SIGAL Holding Sh.A. according to IFRS 3 was not yet completed at the time this Group annual report was written in 2009; in 2010 a purchase price adjustment of € –1,292,000 was made.

Shares in associated companies

As a general rule, shares in associated companies are valued according to the equity method using the equity held by the Group. Differences are determined according to the principles of capital consolidation, and the amounts are recorded under shares in associated companies. The updating of the development of the associated companies is based on the most recent financial statements available.

In establishing the value of shares in associated companies, an IFRS report is generally required. Where no IFRS reports are presented, the adjustment of the entries for these companies to the uniform Group valuation benchmarks must be dispensed with due to a lack of available documentation; however, this does not have any significant impact on the present Group consolidated financial statements.

Debt consolidation

For debt consolidation, the receivables from Group companies are set off against the payables to Group companies. As a rule, any differences have an effect on income. Group-internal results from supplies and services are eliminated if they are of minor significance for giving a true and fair view of the Group’s assets, financial position and income. Proceeds and other income from supplies and services within the Group are set off against the corresponding expenditures.

Presentation of balance sheet and income statement

The International Financial Reporting Standards (IFRS) allow a shortened version of the balance sheet and income statement. Summarising many individual items into units enhances the informative quality of the financial statements. Explanatory notes to these items are contained in the notes to the consolidated financial statements. Rounding differences may result from the formatting to euro thousands.

Segment reports

The primary segment reports depict the main business segments of property and casualty insurance, life insurance and health insurance. The consolidation principles are applied here to transactions within a segment. In addition, the main items of the income statement are also broken down by regional perspectives.

Foreign currency translation

The reporting currency of UNIQA Versicherungen AG is the euro. All annual financial statements of foreign subsidiaries which are not reported in euro are converted at the rate on the balance sheet closing date according to the following guidelines:

• Assets, liabilities and transition of the annual net profit/deficit at the middle rate on the balance sheet closing date
• Income statement at the average exchange rate for the year
• Equity capital (except for annual net profit/deficit) at the historic exchange rate

Resulting exchange rate differences are set off against the shareholders’ equity without affecting income.

The most important exchange rates are summarised in the following table:

Estimates

For creation of the Group consolidated financial statements according to IFRS, it is necessary to make assumptions for the future within various items. These estimates can have a considerable influence on the valuation of assets and debts on the balance sheet closing date as well as the amount of expenses and income in the financial year. The items
below carry a not insignificant level of risk that considerable adjustments to asset or debt values may be necessary in the following year:

• Deferred acquisition costs
• Goodwill
• Shares in associated companies/investments – insofar as the valuation does not take place based on stock exchange prices or other market prices
• Technical provisions
• Pensions and similar provisions