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, goodwill is not subject to scheduled depreciation, but is 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, the present value of future cash flows, and the value to be covered, consisting of goodwill, the proportional net assets and any capital increases and internal loans. If the resulting value exceeds the realisable value of the unit based on the earning power method, an impairment loss is recognised.

The UNIQA Group has apportioned goodwill into the following CGUs, which coincide with the countries in which UNIQA is active, with the exception of the Sigal Group, in which the three countries of Albania, Kosovo and Macedonia were combined as one CGU due to their similar development and organisational connection:

• Albania/Kosovo/Macedonia as “Sigal Group” sub-group (SEE)
• Bosnia and Herzegovina (SEE)
• Bulgaria (SEE)
• Italy as sub-group (WE)
• Croatia (SEE)
• Liechtenstein (WE)
• Austria (AT)
• Poland (CE)
• Romania (EE)
• Russia (RU)
• Switzerland (WE)
• Serbia (SEE)
• Montenegro (SEE)
• Slovakia (CE)
• Czech Republic (CE)
• Ukraine (EE)
• Hungary (CE)
• UNIQA Re

Goodwill breakdown:

The UNIQA Group calculates the recoverable amount on the basis of value in use 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, the estimate of the long-term results achievable by the CGUs and long-term growth rates (perpetuity) are used as the starting point for determining the earning power.

The earning power is determined by discounting the future profits with a suitable capitalisation interest rate after assumed retention to strengthen the capital base. 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 Svensson method was used (German treasury bonds with terms of 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.
• In Austria, the market risk premium was defined conservatively on the basis of the current standards of the Kammer der Wirtschaftstreuhänder (Austrian Chamber of Public Accountants and Tax Advisors). 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 reduction of the country risk is assumed on the basis of further development over the course of the coming years.
• 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. This is adjusted annually in the detailed planning with the expected inflation and then applied unvaryingly as an average for the medium- and long-term phase.

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 in the UNIQA Group with the involvement of UNIQA International in combination with the reporting and documentation process integrated into this dialogue. The plans are formally approved by the Management Board and also include material assumptions regarding the cost and loss ratio, investment income, market shares, and the like.

Phase 2: Extended seven-year planning phase

Following the strategic detailed planning, the earning power model was extended by a seven-year period in order to avoid giving too much weight and influence to the perpetuity and to produce longer-term growth potential. The further development of each country is determined firstly by internal economic analyses and secondly by assumptions of insurance market developments and market trends in the individual sectors and the comparison of the expected growth in phase 1. The growth rates decrease on a straight-line basis over the seven years and lead to the perpetual growth rate.

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 growth 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 15.0 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. A stronger decline of the country risk is assumed for the best case and a somewhat weaker one for the base case. It is assumed in the third scenario that the credit spreads in the first phase remain at the same level and a very weak reduction of the country risk is assumed only thereafter.

The weighting of the three scenarios is again defined by country groups and remains the same over the three phases, whereby the categorisation uses the same groups that were applied to determine the perpetual growth rates. The values are categorised and determined under the assumption that countries are more volatile and can exhibit greater growth spreads depending on their stage of development.

Expected value

The company value was calculated on the basis of discounting the cash flow forecasts less an assumed retention of profit after taxes and with the defined weightings for each scenario according to the probabilities of occurrence of the three scenarios by country group. This results in an expected company value, which is lower than the present value of the base case because of the assumption of corresponding probabilities of occurrence and is thus recognised more conservatively.

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 reference sources included the following studies and materials:

• UNIQA Capital Markets
• Raiffeisen Research
• Wiener Institut für Internationale Wirtschaftsvergleiche
• Österreichische Nationalbank
• Business Monitor International
• Damodaran – country risks, growth rate estimations, multiples
• VVO
• Insurance Europe
• Swiss Re Sigma Report

Sensitivity analyses with regard to the capitalisation interest rate and the main value drivers are also performed on a sample basis 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 and the insurance markets develop completely differently 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.

No impairment was necessary in 2013.

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.