Methodological note on alternative performance measures

Operating result| Operating result by drivers| Return on Investiments| Return on investments| Consolidated investments| Interest coverage ratio | Leverage ratio | Net free surplus| Net cash flow before dividend 

In order to support the assessment of the quality and the sustainability of the Groups earnings in each segment and country, in the management report the performance indicators have been included.

Operating result

Under CESR Recommendation on alternative performance measures (CESR/05 – 178b), operating result cannot replace earnings before taxes calculated in accordance with IAS/IFRS. In addition, it should be read together with financial information and the related notes on the accounts which are included in the audited financial statements.  

Operating result was drawn up reclassifying items of earnings before taxes of each segment on the basis of the management characteristics of each segment and taking into consideration the recurring holding expenses. Specifically, operating result represents earnings before taxes, gross of interest expense on liabilities linked to financing activities, specific net income from investments and nonrecurring income and expenses.

Specifically, operating result represents earnings before taxes, gross of interest expense on liabilities linked to financing activities, specific net income from investments and nonrecurring income and expenses.

In the life segment, all profit and loss accounts are considered as operating items, except those representing the non-operating result, i.e.:

  • realized gains and losses and net impairment losses on investments which both did not affect the statutory reserves to the extent they were not included in the deferred policyholders liability and those on shareholders’ fund;
  • net other non-operating expenses, principally including results activities in run-off, Company restructuring charges, amortization of value of business acquired directly or through acquisition of control of insurance companies (value of business acquired or VOBA) and other net nonrecurring expenses.

In particular, with respect to the calculation method of the policyholders’ profit sharing based on the net result of the period, the life non-operating result in Germany and Austria was calculated net of the estimated amount attributable to the policyholders.

Furthermore, where a new fiscal law materially affects the operating result of the countries for which the policyholders’ profit sharing is based on the net result of the period, the estimated non-recurring effect on the income taxes attributable to the policyholders has been accounted for in the operating result.

In the property&casualty segment, all profit and loss accounts are considered as operating items, except the following which are represented in the non-operating result, i.e:

  • realized gains and losses, unrealized gains and losses, net impairment losses on investments, including gains and losses on foreign currencies,
  • net other non-operating expenses, principally including returns from real estate development activities, activities in run-off, the impairment losses of property held for own use, Company restructuring charges and the amortization of the value of the portfolios acquired directly or through the acquisition of control of insurance companies (value of business acquired or VOBA) and other net non-recurring expenses.

In the financial segment, all profit and loss accounts are considered as operating items, except the following which are represented in the non-operating result, i.e.:

  • non-recurring realized gains and losses and net impairment losses,
  • other net non-operating expenses, principally including results activities in run-off, Company restructuring charges, amortization of value of business acquired directly or through acquisition of control of insurance companies (value of business acquired or VOBA) and other net nonrecurring expenses.

The operating holding expenses include the expenses sustained by the Parent Company and territorial sub holdings for management and coordination activities.

The non-operating holding expenses refer to:

  • interest expenses on liabilities linked to the Group’s financing activities1
  • restructuring charges and other non-recurring expenses incurred in the management and coordination activities,
  • costs arising from the assignment of stock options and stock grants by the Group.

1 Per ulteriori dettagli sulla definizione di debito finanziario si rimanda al paragrafo Indebitamento del capitolo La situazione patrimoniale e finanziaria della relazione sulla gestione.

The operating result and non-operating result of the Generali Group are equivalent to the sum of the operating result and non-operating result of the above mentioned segments, the holding expenses classified as previously mentioned, and
related consolidation adjustments.
In accordance with the approach described above, the Generali Group has also presented the life, property&casualty and Group operating result of the main countries where it operates. This performance indicator measures the contribution of each country to the operating result of each segment and of the Group.

Within the context of the life and property&casualty operating result of each country, reinsurance operations between Group
companies in different countries have been considered as transactions concluded with external reinsurers. This representation of the life and non-life operating result by country makes this performance indicator more consistent with both the risk management policies implemented by each company and with the other indicators measuring the technical profitability of the Group’s companies.

The following table reconciles the statement of operating and non-operating result to the corresponding income statement items:

Operating result and non-operating result Profit and loss account
Net earned premiums 1,1
Net insurance benefits and claims 2,1
Acquisition and administration costs 2,5,1 - 2,5,3
Net fee and commission income and net income from financial service activities 1,2 - 2,2
Net operating income from financial instruments at fair value thriugh profit or loss 1,3 - 1,4 - 1,5 - 2,3 - 2,4 - 2,5,2
Net operating income from other financial instruments
Net non-operating income from financial instruments at fair value thriugh profit or loss
Net non-operating income from investments
Net other operating expenses 1.6 - 2.6
Net other non-operating expenses

Please note the following reclassifications implemented in the calculation of the operating result compared to the corresponding
items of the income statement:

  • within the operating result, investment management and investment property management expenses have been reclassified
    from acquisition and administration costs to net operating income from financial instruments, into other expenses from financial instruments and land and buildings (investment properties);
  • within the operating result, income and expenses related to real estate development activities have been classified as other
    non-operating income and expenses, coherently with the management model adopted that foresees the sale at completion;
  • within operating income, gains and losses on foreign currencies are reclassified in the life and financial segment from net
    operating income to net operating income from financial instruments at fair value through profit or loss. In the property&casualty segment, within operating income, gains and losses on foreign currencies have been reclassified from net operating income to net non-operating income from financial instruments at fair value through profit or loss. The classification for each segment is consistent with the related classification of the derivative transaction drawn up in order to hedge the Group’s equity exposure to the changes in the main currencies of operations. The net operating and non-operating income from other financial instruments are therefore not subject to financial market volatility;
  • within net operating income from financial instruments, interest expenses on deposits and current accounts under reinsurance business are not included among interest expenses related to liabilities linked to operating activities but are deducted from the related interest income. Moreover, the interest expenses related to the abovementioned real estate development activities are not included in interest expenses related to liabilities linked to operating activities but are classified among other non-operating income and expenses coherently with the management model adopted that foresees the sale at completion;
  • within operating income, net other operating expenses are adjusted for operating taxes and for non-recurring taxes that affect in a relevant manner the operating income of the countries where policyholders sharing is determined taking
    into account the taxes for the period. These adjustments are included in the calculation of operating income and are excluded from the income taxes item.up.png

Operating result by drivers

The operating results of the life and property&casualty segments are also presented in the format of result drivers, which better describe the management trends of the changes that occurred in each segment performance.

The operating result of the life segment is made up of a technical margin gross of underwriting expenses, a net investment result and acquisition and administration costs related to insurance business and other net operating expenses. In detail, the technical margin includes loadings, risk and surrenders results. Net investment result consists of operating income from investments, net of the related policyholders’ interests. Finally, other net operating expenses are indicated separately.

The operating result of the property&casualty segment consists of a technical result, an investment result and other operating items. The technical result is equivalent to the insurance activity result, i.e. the difference between premiums and claims, acquisition and administration costs and other net technical income. The investment result is made up of current income from investments and other operating net financial expenses, like expenses on investment management and interest expenses on operating debt. Finally, other operating items mainly include acquisition and administration costs not related to the insurance business, depreciation of tangible assets and amortization of multi-annual costs, provisions for recurring risks and other taxes.

The operating result of the financial segment is split between net operating result from financial activities, acquisition and administration costs and other net operating expenses.

The operating result of the financial segment is split between net operating result from financial activities, acquisition and administration costs and other net operating expenses.

Specifically, the net operating result from financial activities is defined as the intermediation margin, net of net operating impairment losses on other financial instruments. The intermediation margin is equal to all net operating income arising from financial activity and, in particular, comprises the sum of net fee and commission income, net interest income and other financial items. Lastly, the interest margin is equal to interest income, net of interest expenses.up.png

Return on Ivnestiments

A performance indicator of return on investments has been presented, that is calculated as the ratio:

  • for the current return between interest and other income, including income from financial instruments at fair value through profit and loss (excluding income from financial instruments related to linked contracts) net of depreciation on real estate investments and the average investments (calculated on book value);
  • for the harvesting rate between net realized gains, net impairment losses and realized and unrealized gains and losses from financial instruments at fair value through profit and loss (excluded those from financial instruments related to linked contracts) and the average investments (calculated on book value);

The profit and loss return is equal to the current return plus the harvesting rate net of investment management expenses.

The average investments (calculated on book value) included land and buildings (investment properties), investments in subsidiaries, associated companies and joint ventures, loans and receivables, available for sale financial assets, financial assets at fair value through profit or loss less financial assets and liabilities related to linked contracts, derivatives classified in financial liabilities at fair value through profit or loss and cash and cash equivalents. Total investments are adjusted for derivative instruments classified as financial liabilities at fair value through profit of loss and REPO classified as other liabilities. The average is calculated on the average asset base of each quarter of the reporting period.

These investment returns have been presented in the life and property&casualty segments and for the Group consolidated figures.up.png

Consolidated investments

With regards to the presentation of consolidated investments, the following variations, with respect to the corresponding balance sheet items have been implemented, in order to provide a consistent representation to that used for the calculation of the relative profitability:

  • Investment Fund Units have been split by nature between equity, bond and investment property portfolios;
  • derivatives are presented net of derivative liabilities. Moreover, hedging derivatives are classified in the respective asset class hedged;
  • reverse REPOs have been reclassified, in accordance with their nature of short-term liquidity commitments, from ‘Other fixed income instruments’ to ‘Cash and cash equivalent’;
  • REPOs classified as liabilities are presented in “Cash and cash equivalent”. Segment investments are presented net of investments in subsidiaries consolidated line by line and loans and bonds between Group companies, except for, in the life segment, in the cases where the returns determine the policyholders’ share.

Segment investments are presented net of investments in subsidiaries consolidated line by line and loans and bonds between Group companies, except for, in the life segment, in the cases where the returns determine the policyholders’ share.up.png

Interest coverage ratio

EBIT/interest expenses on financial debt.

Leverage ratio

Financial leverage: Financial debt / financial debt + adjusted shareholders’ equity.

Net free surplus

The Net Free Surplus is the sum of the following components:
LIFE FCF:
The Life FCF is calculated from the EV source and it represents the “Expected” Cash Flow generation in a given year from existing and new business, i.e. it is the movement of the Free Surplus excluding operating and economic variances. More in detail, it is the sum of:

  1. The net Required Capital variation
    a. Release of Capital from existing business
    b. Additional required capital from New Business

  2. The ANAV variation:
    a. Run off profit from existing business, i.e. transfers from
    VIF to ANAV
    b. New business profits (commissions)

In a different way: 1a (capital) + 2a (profits) is the Expected Cash Flow generation from the Existing business and 1b + 2b is the New business strain.

NON LIFE FCF:
IFRS Non Life Operating Result Net of Taxes (normalized tax rate) and Minorities, and net of Change in Solvency 1 required capital

FINANCIAL FCF:

IFRS Financial Operating Result Net of Taxes (normalized tax rate) and Minorities, and net of Change in regulatory required capital (typically Basel 2 or Basel 3 for banks)

Holding expenses
IFRS holding expenses, including interest expenses on financial debt, net of taxes and minorities.

Net free cash flow before dividend

The Net Free Cash Flow before Dividend represents the percentage of theoretically distributable earnings, i.e. Gross Free Surplus, made by our subsidiaries (including reinsurance cash flows) that is actually remitted or passed up to the parent company net of the above mentioned Holding expenses.

 

Assicurazioni Generali S.p.A. - C.F. e P.IVA 00079760328