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 amount 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, impairment is performed.
The UNIQA Group has apportioned goodwill into the following CGUs:
- Albania/Kosovo/Macedonia as sub-group (SEE)
- Bosnia and Herzegovina (SEE)
- Bulgaria (SEE)
- Germany as sub-group (WE)
- Italy as sub-group (WE)
- Croatia (SEE)
- Liechtenstein (WE)
- Montenegro (SEE)
- Austria
- Poland as sub-group (CE)
- Romania (EE)
- Russia (Russia)
- Switzerland (WE)
- Serbia (SEE)
- Slovakia (CE)
- Czech Republic (CE)
- Ukraine (EE)
- Hungary (CE)
|
Region |
31 Dec. 2011 |
|
Figures in € thousand | |
|
Austria |
59,214 |
|
Western Europe (WE) |
147,513 |
|
Central Europe (CE) |
37,552 |
|
Eastern Europe (EE) |
169,101 |
|
Southeastern Europe (SEE) |
100,331 |
|
Russia (RU) |
87 |
|
Total |
513,798 |
The UNIQA Group calculates the recoverable amount by applying generally accepted valuation principles by means of the earning power method (Discounted Cash Flow – DCF). The budget projections (based on the detailed planning phase) of the CGUs and the estimate of the long-term results achievable by the CGUs (perpetuity) are used as the starting point for determination of the earning power.
The earning power is determined through discounting of the future profits with a suitable capitalisation interest rate. The earning power values here are separated by balance sheet segments, which are then totalled to yield the value for the entire company.
Taxes on profit were set at the average effective tax rate of the past three years.
The assumptions with regard to risk-free interest rate, market risk premium and segment betas made for determination of the capitalisation interest rate are consistent with the parameters used in the UNIQA planning and controlling process and are based on the capital asset pricing model.
In order to depict the economic situation and the financial crisis in the income values as accurately as possible in consideration of the volatility on the markets, the capitalisation interest rate was calculated as follows:
- A uniform, risk-free interest rate according to the Svennson method was used (term: 30 years) as a base interest rate.
- The beta factor was based on the levered betas of European + emerging markets according to Damodaran, whereby a differentiation was made between betas for life and health insurance and betas for property insurance.
- The market risk premium was figured based on countries with AAA ratings according to Damodaran.
- The national risk premium was figured based on the country ratings of Standard & Poor’s in February 2012, and the calculation was performed as follows: starting with the rating of the respective country, the yield spread of corporate bonds with the same rating to risk-free government bonds (AAA rating) is determined and adjusted by the volatility difference between the stock and bond markets. In addition, a rating improvement by one level within four to five years is assumed.
The capitalisation interest rate is listed below for all CGUs:
|
Cash-Generating Unit |
Discount factor |
Discount factor perpetuity | ||||
|
|
Property and casualty |
Life & Health |
Property and casualty |
Life & Health | ||
| ||||||
|
Albania |
13.2 % |
16.4 % |
11.2 % |
14.0 % | ||
|
Bosnia-Herzegovina |
15.6 % |
19.5 % |
12.1 % |
15.2 % | ||
|
Bulgaria |
9.2 % |
11.1 % |
7.6 % |
9.3 % | ||
|
Germany |
6.3 % |
7.4 % |
5.3 % |
6.4 % | ||
|
Italy |
8.2 % |
9.8 % |
6.9 % |
8.3 % | ||
|
Kosovo |
12.8 % |
15.8 % |
10.1 % |
12.7 % | ||
|
Croatia |
10.0 % |
12.2 % |
8.0 % |
9.9 % | ||
|
Liechtenstein |
6.3 % |
7.4 % |
5.3 % |
6.4 % | ||
|
Macedonia |
12.8 % |
15.8 % |
10.1 % |
12.7 % | ||
|
Montenegro |
12.8 % |
15.8 % |
10.1 % |
12.7 % | ||
|
Austria |
6.3 % |
7.4 % |
5.3 % |
6.4 % | ||
|
Poland |
8.4 % |
10.1 % |
7.1 % |
8.6 % | ||
|
Romania |
11.6 % |
14.2 % |
9.4 % |
11.7 % | ||
|
Russia |
9.2 % |
11.1 % |
7.6 % |
9.3 % | ||
|
Switzerland |
6.3 % |
7.4 % |
5.3 % |
6.4 % | ||
|
Serbia |
12.8 % |
15.8 % |
10.1 % |
12.7 % | ||
|
Slovakia |
8.2 % |
9.8 % |
6.9 % |
8.3 % | ||
|
Czech Republic |
7.9 % |
9.4 % |
6.6 % |
8.0 % | ||
|
Ukraine |
13.2 % |
16.4 % |
11.2 % |
14.0 % | ||
|
Hungary |
11.6 % |
14.2 % |
9.4 % |
11.7 % | ||
The following interest rates were applied in the previous year:
|
Cash-Generating Unit |
Discount factor |
Discount factor perpetuity | ||||
|
|
Property and casualty |
Life & Health |
Property and casualty |
Life & Health | ||
| ||||||
|
Albania |
12.9 % |
15.8 % |
10.4 % |
12.9 % | ||
|
Bosnia-Herzegovina |
12.9 % |
15.8 % |
10.4 % |
12.9 % | ||
|
Bulgaria |
8.9 % |
10.6 % |
7.4 % |
9.0 % | ||
|
Germany |
6.8 % |
7.8 % |
5.8 % |
6.8 % | ||
|
Italy |
8.0 % |
9.4 % |
6.9 % |
8.2 % | ||
|
Kosovo |
11.1 % |
13.4 % |
8.3 % |
10.1 % | ||
|
Croatia |
9.6 % |
11.5 % |
7.7 % |
9.3 % | ||
|
Liechtenstein |
6.8 % |
7.8 % |
5.8 % |
6.8 % | ||
|
Macedonia |
11.1 % |
13.4 % |
8.3 % |
10.1 % | ||
|
Montenegro |
11.1 % |
13.4 % |
8.3 % |
10.1 % | ||
|
Austria |
6.8 % |
7.8 % |
5.8 % |
6.8 % | ||
|
Poland |
8.5 % |
10.0 % |
7.1 % |
8.5 % | ||
|
Romania |
11.0 % |
13.3 % |
7.9 % |
9.6 % | ||
|
Russia |
8.9 % |
10.6 % |
7.4 % |
9.0 % | ||
|
Switzerland |
6.8 % |
7.8 % |
5.8 % |
6.8 % | ||
|
Serbia |
12.8 % |
15.7 % |
9.7 % |
12.0 % | ||
|
Slovakia |
8.0 % |
9.4 % |
6.9 % |
8.2 % | ||
|
Czech Republic |
8.2 % |
9.6 % |
6.9 % |
8.2 % | ||
|
Ukraine |
12.9 % |
15.8 % |
10.4 % |
12.9 % | ||
|
Hungary |
9.6 % |
11.5 % |
7.7 % |
9.3 % | ||
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, the management team of UNIQA International 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: 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 by 2015 the credit spreads will have returned to an average level as before the crisis. The cash value of the perpetuity was calculated in scenario 1 with a growth deduction of 1 per cent and in scenario 2 with a growth deduction of 2 per cent. 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 per cent 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
-
Raiffeisen Research – Inflation rate trends
-
Eurostat – GDP growth, interest rate trends
-
WIIW (Wiener Institut für internationale Wirtschaftsvergleiche) – Purchasing power parities, GDP growth CEE
-
Prof. Damodaran, Stern School, USA – national risks, market betas, risk surcharges for discount factors
-
Thomson Reuters, Business Climate Index, Central and Eastern Europe
Sensitivity analyses with regard to the capitalisation interest rate and the main value drivers are performed in order to verify the results.
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 or regional 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 uncertainty in individual markets, are the largest influence in connection with measurement results.
All the budgeted profit was calculated with the exchange rates as at 31 November 2011.
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 (exception: Romania) give no cause for applying unscheduled depreciations. Tight coverage is currently in place in Bulgaria, Croatia, Montenegro and Albania. An amortisation of goodwill in Romania was conducted in the amount of € 15 million. Corresponding measures for stabilisation and to promote the required upward trend in company development have already been initiated by the UNIQA Group.
The following table shows GDP development in the relevant markets since 2009. A mixed picture emerged for 2011 in which countries such as the Czech Republic and Slovakia experienced a clear slowdown in growth. On the other hand, countries such as the Ukraine, Bulgaria and Romania continued to grow.
A general weakening in growth is expected for 2012. In the long term, however, we can assume an upward trend and stabilisation in the CEE markets. As such, no loss of these core markets for UNIQA is expected over the long term.
|
|
2009 |
2010 |
2011e |
2012f |
2013f | ||
| |||||||
|
Poland |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
1.7 |
3.8 |
3.9 |
2.2 |
3.3 | ||
|
Hungary |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–6.8 |
1.3 |
1.5 |
–2.0 |
1.5 | ||
|
Czech Republic |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–4.7 |
2.7 |
1.9 |
–1.2 |
1.2 | ||
|
Slovakia |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–4.8 |
4.0 |
3.3 |
–0.5 |
2.5 | ||
|
Slovenia |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–8.0 |
1.4 |
0.4 |
–1.5 |
1.5 | ||
|
Croatia |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–6.0 |
1.2 |
0.5 |
–1.0 |
1.5 | ||
|
Bosnia-Herzegovina |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–2.9 |
0.7 |
1.9 |
0.0 |
2.0 | ||
|
Serbia |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–3.5 |
1.0 |
2.0 |
1.0 |
2.0 | ||
|
Bulgaria |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–5.5 |
0.2 |
2.0 |
1.2 |
2.5 | ||
|
Romania |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–6.6 |
–1.9 |
2.5 |
0.5 |
2.5 | ||
|
Ukraine |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–14.8 |
4.2 |
4.7 |
3.5 |
4.0 | ||
|
Albania |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
3.3 |
3.9 |
3.0 |
2.5 |
3.5 | ||
|
Russia |
|
|
|
|
| ||
|
GDP (% in annual comparison) |
–7.9 |
4.0 |
3.8 |
3.2 |
4.0 | ||
The expected global development graph of the CEE-17 countries also exhibits a positive 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 and insurance density development per CGU, no situations of insufficient coverage were identified in 2011 within the impairment test, with the exception of Romania.
The general economic situation as well as the development of the national economies continues 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 has already taken the necessary steps for accomplishing this.
A few expansions are planned for the review process in 2012: regular auditing will be expanded in order to optimise real-time monitoring for individual companies. A central location will also be set up in future to analyse the development of individual markets from a national economic perspective and to provide a consistent, uniform model for forecasting market developments. The results of this model will then be used in the calculation of company figures and in the regular planning process.
