Liquidity risk

Financial liabilities | Insurance liabilities

The Group manages liquidity risk with the aim of efficiently dealing with expected and unexpected cash outflows, taking into account potential difficulties in liquidating assets due to assets illiquidity.

The Group aims at maintaining a sound financial structure over a short and long time frame through a constant cash flows’ monitoring activity.

At Group level, liquidity risk is defined as the risk of not being able to efficiently meet expected and unexpected cash commitments, or rather being able to meet these risks only through a worse credit market access or through the sale of financial assets at heavy discount.

The liquidity risk is primarily monitored and managed at local level by the single business units, within a common Group framework approved by the Parent Company.

Such framework, currently under implementation, has the aim of providing a common approach to manage the liquidity risk in order to guarantee the main Group companies financial sustainability in terms of expected and unexpected cash outflows over a short/medium time frame. The Liquidity Risk framework includes: 1. an ad hoc liquidity risk policy, which will provide a common definition of the key risk factors and a detailed list of actions and strategies to be undertaken in order to prevent and mitigate possible risk situations, 2. operating liquidity risk guidelines which define the main monitoring activities, their frequency and the thresholds related to the main key risk factors and, finally, 3. a specific Contingency Funding Plan with the aim of identifying and formalizing the governance process and the financial plans to be activated in case of relevant liquidity stress situations.

In addition, with regard to entities operating in the P&C segment, reinsurance treaties towards the Parent Company allow each business unit to reduce the exposure to the main risks assumed at local level, in order to mitigate the possible negative  consequences of catastrophes events or large claims which could impact the company’s financial stability.

Liquidity Risk Model

With the aim of implementing a consistent liquidity risk monitoring approach at Group level, the main business units provide periodically a specific tool to Head Office, the Liquidity Risk Model, that highlights possible future liquidity constraints
both over an ordinary scenario and in several stressed scenarios over a one year horizon.

The model basically reflects the company’s cash flows projections over a one year time frame together with the portfolio investments liquidability, with a particular focus on the eligible assets covering technical reserves. The final output of the model is summarized through three main ratios indicating possible liquidity stress situations in each scenario. The key ratios are:

  • Technical Reserves Coverage
  • Investments’ Liquidability Ratio
  • Liquidity Gap Ratio

Parent Company

The Parent Company’s liquidity level is periodically monitored in order to satisfy all the commitments that could arise in the short and medium term. The monitoring activities include: a strict control over the ongoing operating business, detailed forecasts on dividends to be paid by the subsidiaries, evaluations on possible capital needs for the subsidiaries and a refinancing strategy analysis performed on a regular basis.

These evaluations, supported by the outcomes of the Liquidity Risk Model previously described, are also performed over unfavorable macroeconomic and financial scenarios, in order to be able to satisfy every possible liquidity needs.

The main Parent Company funding sources are the subsidiaries’ dividends, the intragroup loans, the available credit lines with the
main banking institutions, an integrated cash pooling system, the sale of assets and the quick and efficient access to the debt market, continuously monitored by the appropriate structures.

Due to the regular cash flows monitoring the Group has the aim of maintaining a sound financial structure over a short and medium term time horizon.

Financial liabilities

In order to achieve such results the Group set up a careful analysis of its cash flows. Financial liabilities are mainly fixed-rate exposures denominated in Euro. With reference to exposures denominated in currencies other than Euro, hedging has been put
in place in order to pursue goals of cash flows predictability and stability, as well to reduce the currency risks.

Liquidity risk is also managed through the placement of different kinds of financial instruments into the market; this strategy allows the Group to diversify its sources of funds, drawing from different classes of investors.

Financial liabilities at amortized cost
(€ million)
31/12/2013 31/12/2012
Subordinated liabilities 7.612 7,833
Loans and bonds 14,312 15,641
Deposits received from reinsurers 997 1,077
Bonds* 4,915 4,975
Other loans 3,738 4,643
Financial liabilities related to investment contracts issued by insurance companies 4,663 4,947
Liabilities to banks or customers 24,008 24,880
Liabilities to banks 1,616 2,147
Liabilities to customers 22,392 22,733
Total 45,932 48,354
* Including senior bond issued in May 2010 to fund the tax recognition of goodwill related to the extraordinary operation Alleanza Toro for a nominal amount of € 560 million (at 31.12.2013 the related book value amounted to € 447 million). This issue was classified as operating debt because the debt structure provides a perfect correlation between cash flows arising from the recognition of taxes and loan repayments in terms of interest than capital.

The main Group’s financial liabilities at amortized cost are represented by senior bonds and subordinated liabilities . The following tables sort Senior and Subordinated liabilities into categories based on maturity, or first call date, when applicable.
For each category of maturity, the undiscounted cash flows (including the related hedging derivatives), the book value and the fair value of financial liabilities are reported.

Subordinated liabilities
 31/12/201331/12/2012
(€ million)
Undiscounted
cash flow
Book value
Fair value Undiscounted
cash flow
Book value
Fair value
Up to 1 year
543 0 0 752 200 200
between 1 and 5 years
6,263 3,867 3,891 5,698 3,116 2,791
between 5 and 10 years
4,559 3,327 3,778 5,646 4,089 4,112
more than 10 years
602 418 384 633 428 340
Total subordinated liabilities
11,967 7,612 8,053 12,729 7,833 7,443
Senior bonds
 31/12/201331/12/2012
(€ million)
 Undiscounted
cash flow
Book value
 Fair value  Undiscounted
cash flow
Book value
Fair value
Up to 1 year
 2,554   2,234   2,280   312   0   0 
between 1 and 5 years
 1,208   514   536   3,616   2,745   2,947 
between 5 and 10 years
 584   447   448   663   511   513 
more than 10 years
 1,840   1,721   1,900   1,929   1,719   1,896 
Total bond issued
 6,186   4,915   5,164   6,520   4,975   5,357 

During 2013, the Group has not issued new debt but has repaid, using internal resources, a subordinated bank loan of Generali France for the amount of € 200 million.

Debts to banks or bank customers primarily relate to the ordinary activities of Banca Generali and BSI and are mainly on demand or short-term.up.png

Insurance liabilities

 The Group’s Companies take into account the impact on their expected profits of all the exit and entry sources and in particular those related to any rational/irrational surrenders, as reported also in the previous paragraph 5.1 ‘Life underwriting risk’. In addition, in all the valuations, including sensitivities reported in the paragraph related to the market risk, a dynamic surrender approach is implemented, taking into account the interaction between the return of policyholder funds and the financial market developments.

The liquidity risk arises from a mismatch between liabilities and assets cash flows. The Group manages this risk by means of mitigation strategies, either embedded in the products or funds structure.

In particular, in the phase of product design, penalties for surrenders are allowed, calculated in order to partially compensate the eventual decrease of expected future profits.
At the same time, for a relevant part of the portfolio, financial guarantees are not provided in case of surrender; this has a disincentive effect for policyholders and reduces the cost of this embedded option for the Company. The surrender assumptions
used both for pricing and valuation, in terms of value and risk, are periodically reviewed and updated.

The table below shows the amount of the life gross direct insurance provisions broken down by expected contractual residual duration. For contracts without maturity (annuity or whole life contracts) the expected residual duration is calculated
considering an expected date of conclusion of the contract, according to the embedded value valuation.

Life insurance provisions and financial liabilities related to investment contracts: contractual term to maturity

Gross direct insurance
(€ million)
31/12/2013 31/12/2012
Up to 1 year
25,108 27,089
Between 1 and 5 years 79,487 77,276
Between 6 and 10 years
64,786 66,573
Between 11 and 20 years 80,262 74,593
More than 20 years
62,963 54,412
Total 312,606 299,944

The total amount of insurance provisions and financial liabilities related to investment contracts is the same as the total shown
in chapter 5.1 – Life underwriting risk.

Note that the provision for outstanding claims (not included in the table), which at 31 December 2013 amounted to € 4,548
million (€4,822 million at 31 December 2012), by definition, matures in the first year.

With reference to non-life segment, the table below shows the amount of gross direct claims and unearned premiums reserves
split by remaining maturity. The total liability is broken down by remaining duration in proportion to the cash flows expected to
arise during each duration band.

Non-life insurance provisions: maturity

Gross direct amount
(€ million)
31/12/2013 31/12/2012
Up to 1 year 11,801 12,320
Between 1 and 5 years
11,370 12,268
Between 6 and 10 years
4,277 4,377
Between 11 and 20 years 3,630 3,600
More than 20 years
0 0
Total 31,079 32,565

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