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Allianz Annual Report 2012

term sustainable earnings. The financing of the assumed eternal growth in the terminal values is accounted for by appropriate profit retention. For all CGU in the Life/Health segment the value in use is based on an Appraisal Value method which is derived from the Embedded Value and new business value calculation. As a starting point for the impairment test for the CGU in the Life/Health segment, the Market Consistent Embedded Value (MCEV) and a multiple of the Market Consistent Value of New Business is used. The MCEV is an industry specific valuation method to assess the current value of the in force portfolio and is in compliance with the general principles of the discounted earnings methods. The Market Consis- tent Embedded Value approach applied is based on the CFO Forum Principles and the Allianz Group’s Embedded Value guidelines. It is a risk-neutral valuation that includes ex- plicit allowance for non-financial risk as well as allowance for options and guarantees using market consistent sto- chastic simulations that are in line with market prices for similar financial instruments. In cases where no adequate valuation reflecting a long- term view in line with management judgement and market experience could be derived from a market consistent methodology (MCEV), the Appraisal Value was derived from a Traditional Embedded Value and new business calcula- tion. The Traditional Embedded Value and new business calculation was used in the impairment test in the Life/ Health segment for entities in Taiwan, the United States and Italy. Significant assumptions In determining the business plans, certain key assump- tions were taken in order to project future earnings. For entities included in the CGU of the Property-Casualty segment, the business plans are mainly based on key as- sumptions including expense ratio, loss ratio, investment income, risk capital, market share, premium rate changes and taxes. The basis for determining the values assigned to the key assumptions are current market trends and earn- ings projections. The discount rate is based on the capital asset pricing mod- el (CAPM) and appropriate eternal growth rates. The as- sumptions, including the risk free interest rate, market risk premium, segment beta and leverage ratio, used to calcu- late the discount rates are in general consistent with the parameters used in the ­Allianz Group’s planning and con- trolling process. The discount rates and eternal growth rates for the CGU in the Property-Casualty segment are as follows: discount rate and eternal growth rate for the cgu in the property-casualty segment D 062 % Cash generating unit Discount rate Eternal growth rate German Speaking Countries 7.3 1.0 Insurance Western & Southern Europe 8.2 1.0 Iberia & Latin America 11.6 3.0 Asia-Pacific and Middle East 9.7 3.0 Central and Eastern Europe 9.9 2.0 Global Insurance Lines & Anglo Markets 7.0 1.0 Specialty Lines I 7.9 1.0 Specialty Lines II 8.0 1.0 For entities included in the CGU of the segment Life/Health, the projection of profits underlying the MCEV and the Tradi- tional Embedded Value calculation is based on assump- tions set with allowance for profit-sharing as well as a pro- jection of unrealized capital gains and unallocated premium reserves. The profits estimated for the MCEV and the Traditional Embedded Value calculation consist of pre- mium income, investment return on technical reserves, expenses, commissions, death and morbidity claims, sur- render claims, maturity claims, increases in technical re- serves, taxation and levies. For projecting future profits, assumptions have to be made on the asset performance of the operating entity. This requires consideration of the de- velopment of the market together with assumptions on the operating entity’s investment strategy as well as the cur- rent asset portfolio and allocation. The projection of invest- ment returns includes the consideration of projection of returns for the current asset portfolio and a projection of returns for reinvestments. All assumptions have been de- veloped by management under consideration of internal and external sources. For the calculation of the MCEV the projected future profits were discounted using risk-neutral discount rates, as the risks are already explicitly allowed for in the market consis- tent valuation. Time-dependent and scenario-dependent discount factors are applied. As a reference rate, the swap yield curve with appropriate adjustments for, e.g., credit risk and illiquidity premium, was used for determining the Annual Report 2012    Allianz Group D Consolidated Financial Statements 219 Consolidated Balance Sheets 220 Consolidated Income Statements 221 Consolidated Statements of Comprehensive Income 222 Consolidated Statements of Changes in Equity 223 Consolidated Statements of Cash Flows 226 Notes to the Consolidated Financial Statements 285