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 fair value of identifiable assets, debts and specific contingent liabilities. In accordance with IAS 36, goodwill is not subject to amortisation, but reported at the acquisition cost less any accrued impairments.

For the purpose of the impairment test, the UNIQA Group has allocated the goodwill into “cash-generating units” (CGUs). These CGUs are the smallest identifiable groups of assets that generate cash flows that are to the greatest possible extent independent from the cash generating units of other assets or other groups of assets. The impairment test involves a comparison between the amount that can be generated by selling or using each CGU, the present value of future cash flows with its 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 discounted cash flow method, an impairment loss is recognised. The impairment test was carried out on 1 October 2014. If there were any particular deviations from the planned performance in the fourth quarter, the CGUs were updated individually. The UNIQA Group has allocated goodwill to 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)
• UNIQA Österreich (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 discounted cash flow method (DCF). The budget projections (detailed planning phase) of the CGUs, the estimate of the long-term net profits achievable by the CGUs and long-term growth rates (perpetuity) are used as the starting point for determination of the capitalised value.

The capitalised value is determined by discounting the future profits with a suitable capitalisation rate after assumed retention to strengthen the capital base. In the process, the capitalised values are separated by statement of financial position segments, which are then totalled to yield the value for the entire Company.

Taxes on operating income 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 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 rate was calculated as follows: a uniform, risk-free interest rate according to the Svensson method (German treasury bonds with 30 year maturities) was used as a base interest rate.

In the reporting period, the beta factor was determined for the first time on the basis of the monthly betas over the last five years for a defined peer group. The betas for the non-life, life and health segments were determined using the revenues in the relevant segments of the individual peer group companies. The health insurance segment, which is strongly focused on the Austrian market, is operated in a manner similar to life insurance. A uniform beta for personal injury insurance is therefore used in relation to the life and health insurance business.

The market risk premium was determined conservatively on the basis of the current standards issued by the Kammer der Wirtschaftstreuhänder (Austrian Chamber of Public Accountants and Tax Advisors). The calculations published by Damodaran were used to determine the country risk premium. The country risk premium in accordance with the Damodaran method is calculated as follows: starting from the rating of the country concerned (from Moody's), UNIQA obtains the yield spread from credit default swap spreads with the same rating as risk-free government bonds and adjusts this spread to reflect the volatility difference between equity and bond markets. UNIQA also assumes that country risk will decline over the next few years on the basis of subsequent trends.

The calculation in 2014 also factored in the inflation differential for countries outside the euro zone. 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 subsequently applied for perpetuity with the value of the last year of the detailed planning phase.

The capitalisation rate is listed below for all CGUs:

The following discount rates were applied in the previous year (reporting date impairment test 31 December 2013):

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 participation 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 combined ratio, investment income, market shares and the like.

Phase 2: perpetuity

The last year of the detailed planning phase is used as the basis for determining the cash flows in phase 2. The growth in the start-up phase leading up to phase two was determined using a projection of the growth in insurance markets. It was assumed that the insurance markets would come into line with the Austrian level in terms of density and penetration in 40 to 60 years.

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:

• Internal research at UNIQA Capital Markets GmbH
• 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

In order to substantiate the results of the calculation and estimation of the value in use, random sensitivity analyses with regard to the capitalisation rate and the main value drivers are performed.

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 in particular 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 valuation results.

In the event that the recovery from the economic crisis turns out to be much weaker and slower than assumed in the business plans and fundamental forecasts, and the insurance market trends differ entirely from the assumptions made in those business plans and forecasts, the individual CGUs may incur impairment losses. Despite slower economic growth, income expectations have not changed significantly compared to previous years.

A sensitivity analysis shows that if there is a rise in interest rates of 50 basis points in the countries of Bulgaria, Croatia and Romania, there could be a convergence between the value in use and the carrying amount or a value in use that is lower than the carrying amount. If there were a stronger rise in interest rates of 100 basis points or more, Bosnia/Herzegovina would also be affected. If the underlying cash flows change by -5.0 per cent, there will also be a risk of a convergence or a value in use that is lower than the carrying amount in the countries of Bulgaria, Croatia and Romania. This list expands to include Herzegovina when there is a deviation of more than -10.0 per cent in the cash flows.

In 2014, an impairment loss of €25 million was recognised for Romania.

Backtesting:

Backtesting is regularly carried out on the planning for the individual countries. The objective is to obtain information for internal purposes on the extent to which the operating units plan their results accurately and on the extent to which details useful with regard to subsequent development are highlighted. This backtesting can also be used to draw conclusions to be applied to the latest round of planning, thereby enhancing planning accuracy in forthcoming financial plans.