6. Impairment test

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 (CGUs). 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 subgroup (SEE)
• Bosnia and Herzegovina (SEE)
• Bulgaria (SEE)
• Italy as subgroup (WE)
• Croatia (SEE)
• Liechtenstein (WE)
• Poland as subgroup (CE)
• Romania (EE)
• Russia (RU)
• Switzerland (WE)
• Serbia (SEE)
• Montenegro (SEE)
• Slovakia (CE)
• Czech Republic (CE)
• Ukraine (EE)
• Hungary (CE)

Split of goodwill:

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 reflect 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 country risk premium was defined based on calculations according to Damodaran. The calculation was performed as follows: starting with the rating of the respective country (Moody’s), the yield spread of corporate bonds with the same rating to risk-free government bonds 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 inflation differential was also taken into consideration. In general, the inflation differential represents inflation trends in different countries and is used as a key indicator in assessing competitiveness. In order to calculate the inflation differential, the deviation of the inflation forecast for the country of the CGU in question in relation to the inflation forecast for a risk-free environment (Germany in this case) was used.

The capitalisation interest rate is listed below for all CGUs:

The following interest rates were applied in the previous year:

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, 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. Insurance markets that are at a similar stage of development measured against key indicators such as insurance density and insurance penetration have been pooled in categories and have an identical expected value for perpetuity.

Scenarios

The earning power of the individual CGUs is determined by a weighted probability scenario. Three scenarios were calculated:

Scenario 1 “base case” reflects detailed five-year Group planning.

Scenario 2 “best case” is the result of positive expectations with regard to the achievement of objectives contained in detailed Group planning and includes the over-fulfilment of detailed Group planning by plus 15 per cent.

Scenario 3 “worst case” is the result of negative expectations with regard to the achievement of objectives contained in detailed Group planning and includes a negative deviation from detailed Group planning by minus 35 per cent.

In scenarios 1 and 2, the discount factor applied decreases over the years, as a slight decline in country risk is assumed. In addition, the cash value of the perpetuity was calculated with a growth deduction of 1 per cent in scenario 1 and a deduction of 2 per cent in scenario 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.

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:

• Raiffeisen Research
• Wiener Institut für Internationale Wirtschaftsvergleiche
• Österreichische Nationalbank
• Economist Intelligence Unit
• Business Monitor International
• Damodaran – country risks, growth rate estimations, multiples

Sensitivity analyses with regard to the capitalisation interest rate and the main value drivers are performed in order to verify the results from the calculation of value in use and the assessment of these 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 economic crisis, constitute the greatest uncertainty in connection with measurement results.

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. Despite slower economic growth, income expectations have not changed significantly compared to previous years. The amortisation of goodwill from the Romanian company in the amount of € 15 million is a precautionary risk measure in order to ensure future goodwill potential.

The following table shows key GDP developments in markets of relevance to UNIQA. As such, no loss of these core markets for UNIQA is expected over the long term.