F.1. Intangible assets
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 |
|---|---|---|
| Goodwill | 1,780 | 1,782 |
of which is goodwill on Penzijní Společnost České pojišťovny, a.s., | 584 | 584 |
of which is goodwill on Generali SAF de Pensii Private S.A. | 730 | 724 |
of which is goodwill on acquisition of business in Poland | 466 | 474 |
| Other intangible assets | 1,233 | 1,492 |
Software | 1,153 | 1,370 |
Present value of future profits from portfolios acquired | 71 | 84 |
Intangible assets – other | 9 | 38 |
| Total | 3,013 | 3,274 |
In 2014 the Group has outsourced part of its IT operations to the related party Generali Infrastucture Services (GIS). In relation to this business decision intangible assets in the total amount of CZK 121 million were sold to GIS; software in the amount of CZK 99 million and other intangible assets in the amount of CZK 22 million. A profit of CZK 14 million has been realised.
Of which relates to Transformed fund
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 |
|---|---|---|
| Other intangible assets | 71 | – |
Present value of future profits from portfolios acquired | 71 | – |
| Total | 71 | – |
In 2013, Present value of future profits from portfolios acquired in the amount of CZK 84 million was reported by Pension company, therefore it has not been presented in 2013 for Transformed fund.
F.1.1. Goodwill
The balance of the goodwill on Penzijní Společnost České pojišťovny, a.s. represents the goodwill that arose from the acquisition of ABN AMRO Penzijní fond, a.s. in 2004. The goodwill related to Generali SAF de Pensii Private S.A. is connected with the acquisition of the company in 2008. The goodwill related to Poland is connected with the acquisition of business in Poland in 2012.
The cash-generating units (CGU) to which goodwill has been allocated are tested for impairment annually by comparing the carrying amount of the CGU, including the goodwill, with the recoverable amount of the unit. Annual impairment review resulted in no impairment charge neither for 2014 nor 2013.
The following sections describe how the Group determines the recoverable amount of its goodwill carrying cash-generating units and provides information on certain key assumptions on which management based its determination of the recoverable amount.
Generali SAF de Pensii Private S.A and Polish branch
The recoverable amount of Generali SAF de Pensii Private S.A. in Romania and insurance branch in Poland is calculated on the basis of its value in use. The Group employs a valuation model based on discounted post-tax cash flows. The model calculates the present value of the estimated future cash inflows and outflows, considering projections on budgets/forecasts approved by management. The cash flows are projected for 20 years in case of Generali SAF de Pensii Private S.A. in order to take into account the long-term nature of the pension fund investments, and 15 year for Polish operations respectively.
These key assumptions have been made by management reflecting past experience and are consistent with relevant external sources of information. The key assumptions to which the calculation of value in use is most sensitive are the earnings projection, long-term growth and discount rate.
The key assumptions used for value in use calculations to test the recoverability of goodwill are as follows:
| Long-term growth rate | Discount rate | |
|---|---|---|
| Generali SAF de Pensii Private S.A. | 2.0% | 8.6% |
| Polish branch | 2.0% | 7.29% |
Concerning the Polish branch, the indicator summarizing in the best way the earning projections is the gross combined ratio, which is expected to improve from 116,1% in 2014 to 98,9% in 2017; such improvement is a consequence of both better claims ratio (increasing share of renewals and voluntary covers), and expected economy of scale following the planned increase in volumes, which shall reduce the expense ratio.
Concerning Generali SAF de Pensii Private S.A. in Romania, the most important assumptions behind the earnings projections are the fees on contributions from pension fund members, which is equal to 2,5% of the contribution, and the asset management fee, which is equal to 0,6% of the managed assets. Management believes that both percentages will be stable during the planned period.
The discount rate applied is comprised of a risk-free interest rate and a market risk premium. Management believes that, currently, there are no reasonably possible changes in any of the key assumptions, which would lead to the recoverable amount being below the carrying amount.
Penzijní společnost České pojišťovny including Transformed fund (PFČP)
The Dividend Discount Model has been used for the determination of the value in use of PFČP.
The Dividend Discount Model is based on the hypothesis that the value of a cash-generating unit is equal to the present value of the post-tax cash flows available for its shareholders. These cash flows are supposed to be equal to the flows derived from the distributable dividends, while maintaining an adequate capital structure as required by the laws in force and the entity’s economic nature and to maintain its expected future development.
According to this method, the value of the cash-generating unit is equal to the sum of the discounted value of future dividends plus the terminal value of the cash-generating unit itself.
The application of this criterion has generally entailed the following phases:
- For forecasting the future cash flows of PFČP, the detailed information included in the last available Rolling Plan 2015–2017 has been considered. The main economic-financial data (i.e. net profit) has been calculated for two additional years (2018 and 2019) on the basis of the growth rate in the last year of the Rolling Plan (2017) to extend the forecast period.
- Explicit forecasting of the future cash flows to be distributed to shareholders in the planned time frame, taking into account limits requiring the maintenance of an adequate capital level.
- Calculating the cash-generating unit’s terminal value, that is the expected value of the cash-generating unit at the end of the latest year planned.
- The discount rate of the future cash flows has been defined on the basis of the Capital Asset Pricing Model (CAPM) formula. This model considers the return rate of risk-free investments and the consequent premium return requested by the capital market of reference regarding risk-free investments.
Key assumptions used for value in use calculation are as follows:
| Long-term growth rate | 2.0% |
| Discount rate | 5.9% |
Management believes that, currently, there are no reasonably possible changes in any of the key assumptions, which would lead to the recoverable amount being below the carrying amount.
F.1.2. Other intangible assets
Tables below show the development of individual classes of other intangible assets.
| (CZK million) 2014 | Software Value of Future Profits | Present | Other intangible assets | Total |
|---|---|---|---|---|
| Balance as at 1 January - Gross amount | 6,087 | 153 | 196 | 6,436 |
Additions | 268 | – | 10 | 278 |
Disposals | (432) | – | (136) | (568) |
Foreign currency translation effects | (1) | – | – | (1) |
Other changes | (99) | – | – | (99) |
| Balance as at end of reporting period - Gross amount | 5,822 | 153 | 70 | 6,046 |
| Accumulated amortisation and impairment losses | ||||
| Balance as at 1 January | (4,717) | (69) | (158) | (4,944) |
Amortisation of the period | (363) | (13) | (18) | (394) |
Disposals of accumulated amortisation | 337 | – | 115 | 452 |
Other changes | 73 | – | – | 73 |
| Balance as at 31 December | (4,670) | (82) | (61) | (4,813) |
| Total - Net amount | 1,153 | 71 | 9 | 1,233 |
| (CZK million) 2013 | Software Value of Future Profits | Present | Other intangible assets | Total |
|---|---|---|---|---|
| Balance as at 1 January - Gross amount | 5,856 | 153 | 173 | 6,182 |
Additions | 360 | – | 32 | 392 |
Disposals | (3) | – | – | (3) |
Business combinations | (18) | – | – | (18) |
Foreign currency translation effects | 5 | – | – | 5 |
Other changes | (113) | – | (9) | (122) |
| Balance as at end of reporting period - Gross amount | 6,087 | 153 | 196 | 6,436 |
| Accumulated amortisation and impairment losses | ||||
| Balance as at 1 January | (4,409) | (55) | (138) | (4,602) |
Amortisation of the period | (403) | (14) | (21) | (438) |
Amortization - Foreign currency translation effects | (2) | – | – | (2) |
Business combinations | 4 | – | – | 4 |
Other changes | 93 | – | 1 | 94 |
| Balance as at end of reporting period | (4,717) | (69) | (158) | (4,944) |
| Total - Net amount | 1,370 | 84 | 38 | 1,492 |
Of which relates to Transformed fund
| (CZK million) 2014 | Software Value of Future Profits | Present | Other intangible assets | Total |
|---|---|---|---|---|
| Balance as at 1 January - Gross amount | – | – | – | – |
Other changes | – | 153 | – | 153 |
| Balance as at end of reporting period - Gross amount | – | 153 | – | 153 |
Amortisation of the period | – | (13) | – | (13) |
Other changes | – | (69) | – | (69) |
| Balance as at end of reporting period | – | (82) | – | (82) |
| Total – Net amount | – | 71 | – | 71 |
Present value of future profits
The Group performs a valuation of present value of future profits related to ABN AMRO portfolio, within the annual embedded value calculations. This valuation showed the present value of the respective portfolio to be in the amount of CZK 512 million, which significantly exceeds its carrying amount (CZK 71 million).
Embedded value calculation follows the Market Consistent European Embedded Value (MCEEV) Principles. The reference rates used to derive risk-neutral economic scenarios are calibrated to CZK government bonds and both investment rates and implied volatilities are as at the end of year 2014.