Investment risk

Financial Risks

The analysis of market risks indicated within the IFRS 7 framework, in relation to price changes of financial instruments, is included in the broader context of financial risks defined in the Group Risk Map.

Financial risks include equity risk, interest rate risk, foreign exchange risk, real estate and concentration risk. Equity risk arises from unexpected movements in stock prices and also includes changes in equity volatility. Interest rate risk derives from unexpected changes in interest rates and also takes in account interest rate volatility. In addition, risks related to changes in property values, exchange rates and finally, concentration risk are considered.

Unexpected movements of interest rates, equities, real estate and exchange rates can negatively impact the economic, financial and capital position of the Group, both in terms of value and solvency.

Assets subject to market movements are invested to profitably employ the capital subscribed by shareholders and to meet contractual obligations to policyholders; consequently, financial market movements imply a change both in the value of investment and insurance liabilities. Therefore, oversight through analysis of the impact of adverse market movements implies an adequate consideration of volatility, correlations among risks and the effects on the economic value of the related insurance liabilities.

Within the processes of investment management, Group companies are required to apply the Group Risk Guidelines.

At year-end 2013 the investments whose market risk affects the Group were of € 325 billion at market value3.

(€ million)Total fair valueImpact (%)Total fair valueImpact (%)
Equity instruments 17,740 5.5 15,652 4.9
Direct equity exposure 11,111   9,123  
IFU and alternative investments 6,629   6,528  
Fixed  income  instruments 284,346 87.4 280,542 87.7
Government bonds 140,339   138,760  
Corporate bonds 113,541   110,108  
Loans (oth. fixed income investments) 17,102   22,506  
IFU bonds 13,364   9,167  
Land and buildings 23,409 7.2 23,850 7.5
RE Investment properties 17,910   18,209  
Self-used real estates 3,370   3,477  
IFU real estates 2,128   2,165  
Total 325,495 100.0 320,043 100.0

The exposure to fixed income instruments, expressed as percentage of investments bearing market risks, as defined above, was quite stable at 87.4% (87.7% as at 31 December 2012) while the exposure to equity instruments increased to 5.5% (4.9% as at 31 December 2012). A slight decrease was observed for real estate investments whose weight moved from 7.5% at 31 December 2012 to 7.2%.

As mentioned above, the economic impact of changes in interest rate, equity values and the related volatilities for the shareholders will depend not only on the sensitivity of the assets to these shifts but also on how the same movements affect the present values of its insurance liabilities, which may absorb a portion of risk.

In life business this absorption is generally based on the level and structure of minimum return guarantees and profit sharing arrangements. The impact of the minimum guaranteed rates of return on solvency, both on the short and long terms, is assessed through deterministic and stochastic analysis. These analyses are performed at company and, if necessary, at single portfolio level and take into account the interaction between assets and liabilities helping to develop product strategies and strategic asset allocations aiming at optimising the risk/return profile.

In order to control the Group exposure towards the financial markets, while maintaining a perspective of risk/return, the management adopts procedures and actions on the single portfolios including:

  • credit and tactical asset allocation guidelines are being updated to the changing market conditions and to the ability of the Group to assume financial risks;
  • matching strategies, at net cash flow level or duration matching strategies, for the management of the interest rate risk;
  • dynamic hedging strategies through the use of derivatives instruments as options, swaps, forwards and futures;
  • portfolio and pricing management rules, coherent with sustainable guarantee level.

The Group uses a data warehouse to collect and consolidate the financial investments, which guarantees a homogeneous, time effective and high quality analysis of the financial risks.

The currency risk arising from the recent issuance of subordinated debts in British pound sterling has been mitigated with a specific hedging strategy.

3 Investments whose market risk affects the Group are total investments excluded investments back to policies where the investment risk is borne by the policyholders, investments in subsidiaries, associated companies and joint ventures, derivatives, mortgage loans, receivables from banks or customers and other residual financial investments different than equities and or loans as well as land and buildings used by third parties and cash and cash equivalents. Instead, self used properties are included.

Credit Risk

Financial Instruments Credit Risk

Credit risk refers to possible losses arising from a counterparty failing to meet its obligations (default) or from a deterioration in its creditworthiness (downgrade or migration), respectively, in relation to debt instruments the Group invests in or to a counterparty of a derivative contract. Furthermore, the risk resulting from a generalized increase in the level of spreads in the market is considered, due to events such as a credit crunch or a liquidity crisis, having an impact on the economic solvency of the Group.

Within the Group Risk Guidelines, investment in adequate credit quality securities (investment grade) is preferred and the diversification (or dispersion) of risk is encouraged.

The Group uses a data warehouse to collect and consolidate the financial investments, which guarantees a homogeneous, time effective and high quality analysis of the financial risks.

For the internal rating assessment of an issue or issuer, ratings of the main agencies ratings are used. In the case of different rating judgments, the second best value available is used.

Securities without a rating are given an internal one based on exhaustive economic and financial analysis.

The portfolio of fixed income investments of the Group is prudently built.

The distribution by rating class shows that the absolute majority of the investments is of high rating standing.

In order to mitigate the counterparty risk, related to market risk hedging strategies, the following measures have been put in place: the counterparty selection, the use of quoted instruments and the integration of ISDA Master Agreements with the Credit Support Annex (CSA). CSA requires the counterparty to post collateral when the derivative position is beyond an agreed threshold.

Note that the same considerations on market risk regard also the financial instruments backing life insurance policies, therefore, default, downgrades or changes in spread could affect the financial liabilities values with a consequent mitigation effect.

Group’s exposures to investments in government bonds - detailed by country of risk and rating - are reported at fair value in
the following tables:

Breakdown of investments in government bonds by country of risk
(€ million)Total fair valueImpact (%)of which home-countryImpact (%)
Government bonds 140,339   105,866  
Italy 57,719 41.1 53,337 92.4
France 28,594 20.4 21,711 75.9
Germany 10,032 7.1 7,554 75.3
Central and eastern europe 8,174 5.8 4,050 49.5
Rest of europe 23,862 17.0 9,357 39.2
Spain 7,306 5.2 4,339 59.4
Austria 4,727 3.4 2,127 45.0
Belgium 7,678 5.5 2,093 27.3
Others 4,151 3.0 798 19.2
Rest of world 2,622 1.9 501 19.1
Supranational 9,335 6.7 na na
Breakdown of investments in government bonds by rating
(€ million)Total fair valueImpact (%)Total fair valueImpact (%)
Government bonds 140,339  138,760
18,844 13.4 18,863 13.6
A 48,196 34.3 43,505 31.4
A 3,756 2.7 3,760 2.7
BBB 66,398 47.3 69,592 50.2
Non investment grade 2,726 1.9 2,884 2.1
Not rated 419 0.3 156 0.1

The government bonds portfolio amounted to € 140,339 million at the end of the period, with the 68.7% of the portfolio represented by Italian, French and German debt instruments. The exposure to individual sovereign bonds is mainly allocated to their respective countries of operation.

With reference to ratings, the AA class included the French debt instruments following their downgrade by both S&P’s (AA+, 13 January 2012) and Moody’s (Aa1, 19 November 2012). The BBB rating class included mainly the Italian debt instruments following their downgrade by both S&P’s (13 January 2012) and Moody’s (Baa2, 13 July 2012).

Group’s exposures to investments in corporate bonds - detailed by sector and rating- are reported at fair value in the following tables:

Breakdown of direct investments in corporate bonds by sector
(€ million)Total fair valueImpact (%)
Corporate  bonds 113,541  
Financial 34,989 30.8
Covered Bonds 34,644 30.5
Asset-backed 1,869 1.6
Utilities 12,288 10.8
Industrial 10,067 8.9
Consumer 5,485 4.8
Telecommunication services 5,739 5.1
Energy 3,993 3.5
Other 4,468 3.9
Breakdown of direct investments in corporate bonds by rating
(€ million)Total fair valueImpact (%)Total fair valueImpact (%)
Corporate  bonds 113,541   110,108  
AAA 29,627 26.1 32,179 29.2
AA 9,205 8.1 8,672 7.9
A 33,728 29.7 33,933 30.8
BBB 32,309 28.5 28,474 25.9
Non investment grade 6,425 5.7 4,878 4.4
Not rated 2,246 2.0 1,972 1.8

The investments in corporate bonds totalled € 113,541 million at the end of the period. The portfolio was composed for 38%
by non-financial corporate bonds, for 31% by financial corporate bonds and for 31% by covered bonds.

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