Impairment test

Goodwill is allocated to cash-generating units (CGUs) pursuant to IFRS 3 in conjunction with IAS 36. It is allocated to those CGUs which are expected to generate a value in use (in the form of cash flows) as a result of the business combination that gave rise to the goodwill. Each CGU to which goodwill is allocated should represent the lowest entity level on which goodwill is monitored for internal management purposes.

In 2010 we adjusted the grouping of assets for the purposes of identifying cash-generating units in line with the structural changes in the Group’s primary insurance sector, which also affected the previous configuration of the CGUs. Until the end of 2009 the individual CGUs were defined according to the responsibilities on the holding company’s Board of Management and the internal reporting at that time and hence essentially according to the former definition of the business segments within the meaning of IAS 8. The impairment test in the previous year was therefore performed for the last time on the basis of the CGUs Property/Casualty Primary Insurance, the group of companies combined under the former HDI-Gerling Leben Serviceholding AG, the bancassurance group and the two CGUs Non-Life Reinsurance and Life/Health Reinsurance.

With effect from 2010 onwards the Group is managing and reporting both internally and externally according to the new Group structure. Since then, the Group has reorganized its insurance activities in primary insurance in conformity with a change in the responsibilities of the members of the Board of Management (compare here our remarks in the section “Accounting policies”, subsection “Change in segment reporting”, and the section “Segment reporting”). The two existing primary insurance segments of Property/Casualty Primary Insurance and Life Primary Insurance were transformed across lines into the three reportable segments of Industrial Lines, Retail Germany and Retail International. For the purpose of identifying CGUs in primary insurance, this reorganization means that the segments of Industrial Lines and Retail Germany, which also satisfy the definition of an operating segment pursuant to IAS 8, each constitute a CGU. In the Retail International segment each foreign market constitutes a separate CGU. In this segment cross-company synergistic potentials (in relation to cash flows) can only be realized in those countries in which we are represented by several companies. In terms of their products and sales structures, the individual foreign units otherwise operate largely self-sufficiently. The CGUs of the Group are therefore as follows:

  • Industrial Lines business segment
  • Retail Germany business segment
  • Non-Life Reinsurance business segment
  • Life/Health Reinsurance business segment

The CGUs of the Retail International segment are as follows:

  • Brazil
  • Poland
  • Mexico
  • Chile

On account of the internal Group restructuring activities, the goodwill can be broken down as follows according to the revised allocation set out in the segment reporting:

 

Industrial Lines

Retail Germany

Retail International

Non-Life Reinsurance

Corporate Operations

Total

Figures in EUR million

           

Balance at 31.12.2008

89

415

106

8

3

621

             

Currency translation at 01.01.2009

20

20

Balance after currency translation at 01.01.2009

89

415

126

8

3

641

Change in consolidated group

15

15

Additions

28

28

Impairments

29

46

14

3

92

Currency exchange rate differences

1

1

Balance at 31.12.2009

60

397

128

8

593

             

Currency translation at 01.01.2010

13

13

Balance after currency translation at 01.01.2010

60

397

141

8

606

Impairments

17

17

Balance at 31.12.2010

60

397

124

8

589

In order to establish whether an impairment expense needs to be recognized, the carrying value of the CGU including its allocated goodwill is compared with its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use. For all CGUs with the exception of the two reinsurance segments, the recoverable amount is established on the basis of the value in use – which is calculated by the Group using a recognized measurement method, namely the discounted cash flow method. Insofar as CGUs are composed of more than one Group company, a sum-of-the-parts approach is used.

When it comes to measuring the value of the property/casualty insurers in the CGUs of Industrial Lines, Retail Germany and Retail International, the point of departure for establishing the present value of future cash flows consists of planned income statements. The planning calculations are drawn up on a stand-alone basis assuming that the entity will continue with a generally unchanged concept; they record the post-tax net income of the five subsequent years as well as an extrapolation of the sixth year as a perpetuity factor. Entity-specific approximations are made in the detailed planning (at the time of the planning). In particular, the possibilities for growth in the market environment as well as profitability according to the claims and cost trend are estimated in the context of planned measures on the company level. Investment income is projected in relation to the specific asset portfolio. The planning calculations on which measurement is based are approved by the management of the companies concerned. The discount factor (capitalization rate) for the Group companies consists of a risk-free basic interest rate, country-specific yield curves, a market risk premium and an individual company beta factor (calculated on the basis of the Capital Asset Pricing Model). What is more, in order to extrapolate the cash flows beyond the period of the detailed planning we also use – on the basis of conservative assumptions – constant growth rates. The figures are arrived at from past experience and future expectations and do not exceed the long-term average growth rates for the various markets in which the entities operate. Present values determined in local currency are translated at the exchange rate on the balance sheet date.

The current capitalization rate and the long-term growth rate are listed below for the property/casualty insurers of the CGUs:

CGU

Capitalization rate in %

Long-term growth rate
in %

Industrial Lines

   

German-speaking countries

8.0–8.5

0.2–0.5

Other countries (EU only)

8.5–9.0

0.25–0.5

     

Retail Germany

8.0

0.5–1.0

     

Retail International

   

Brazil

13.0

1.0

Poland

10.3

1.3

Mexico

12.6

0.6

Chile

11.25

0.25

Calculations of the Market Consistent Embedded Value (MCEV) form the basis for valuation of the life insurers. The value of the entity in terms of an appraisal value (MCEV allowing for the expected new business) is regularly determined with the aid of an average market multiple (1.02) weighted for up-to-dateness, which measures the ratio of appraisal value to embedded value and is based on market data. The plausibility of the multiple is regularly checked using the New Business Value (NBV).

A variant of the method normally applicable to life insurers exists for companies with long-term exclusive cooperation agreements and the associated stability in their new business. These companies are valued using a simplified appraisal value method, in which the present value of the perpetuity factor for the New Business Value is added to the current MCEV forecast. Sales agreements that end at short notice may necessitate separate evaluation. The capitalization rates in the Retail Germany segment are 8.0%.

Small insurers and non-insurance companies are recognized either at the present value of future cash flows or with their shareholders’ equity.

For the CGUs of Non-Life Reinsurance and Life/Health Reinsurance, which together correspond to the Hannover Re Group, reference is made to the market price of the Hannover Re share as the first step for the purposes of the impairment test. The stock market value of Hannover Re is divided between the two segments – which are synonymous with the two CGUs – on the basis of the average net return on premium over the past three years. The recoverable amount determined in this way is compared with the carrying value including the goodwill allocated to the CGU in question. Alternatively, should the stock market price of the Hannover Re share be significantly adversely affected on a balance sheet date by factors that do not reflect the sustainable profit potential of the Hannover Re Group, a method based on the present value of future cash flows may be used instead.

On the basis of the impairment test carried out as at 30 September 2010, the goodwill of the CGU Mexico (EUR 17 million) was entirely written off. The positive expectations as to the future development of the company’s business were revised downwards. The Mexican economy continues to struggle with the repercussions of the financial crisis – the domestic part of the economy even more so than that which is driven by exports. Furthermore, the anticipated results in the coming years will be increasingly strained by the investments made to put in place the foundation for generating successful growth in the Mexican market going forward. The primary focus here is on the opening of new offices, the modernization of IT and the appointment of new staff as well as skills enhancement of the existing workforce.

No further impairment expenses needed to be recognized.