Methodological note on alternative performance measures
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.
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 non-recurring income and expenses.
Starting from this integrated report, the Group has re-determined its operating segments in order to provide disclosures which are more closely aligned with the new organizational structure of the Group and to ensure a better economic representation of the individual business and geographical segments.
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 non-recurring 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.
The Holding and other businesses segment, which includes banking and asset management activities, expenses regarding coordination activities and interest expenses on the Group financial debt, as well as other activities that the Group considers ancillary to the core insurance business.
Within this segment all profit and loss accounts are considered as operating items, except for 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 non-recurring expenses.
With reference to holding costs, are considered as operating the Parent Company and territorial sub-holding direction expenses regarding coordination activities.
In addition, non-operating holding expenses include:
- interest expenses on liabilities linked to the Group’s financing activities10,
- 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.
The operating result and non-operating result of the Generali Group are equivalent to the sum of the operating result and nonoperating result of the above mentioned segments 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. In order to provide a management view of the key performance indicators, the geographical reporting, following the segment reporting review, is now disclosed as country’s consolidated view, instead of contribution to the Group’s results.
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:
|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 through profit or loss||1.3 - 1.4 - 1.5 - 2.3 - 2.4 - 2.5.2|
|Net operating income from other financial instruments||1.3 - 1.4 - 1.5 - 2.3 - 2.4 - 2.5.2|
|Net non-operating income from financial instruments at fair value through profit or loss||1.3 - 1.4 - 1.5 - 2.3 - 2.4 - 2.5.2|
|Net non-operating income from investments||1.3 - 1.4 - 1.5 - 2.3 - 2.4 - 2.5.2|
|Net other operating expenses||1.6 - 2.6|
|Net other non-operating expenses||1.6 - 2.6|
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.
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.
Operating return on equity
Operating return on equity indicates the return in terms of operating result on Group shareholders’ equity. It is calculated according to the following ratio:
- total operating result adjusted to include:
- interest expenses on financial debt;
- income taxes based on a mid-term expected tax rate as assumed in 2015 Target (please refer to the chapter “The Generali Group’s strategy”);
- minority interests;
- average Group shareholders’ equity at the beginning and at the end of each period of valuation, excluding gains and losses included in Other Comprehensive Income OCI (e.g. net unrealized gains and losses on AFS investments, foreign currency translation differences, net unrealized gains and losses on hedging derivatives).
Return on Investments
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.
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 in accordance with the methodology described in Chapter Basis of Presentation in the Notes, par. 6 Other information.
Interest coverage ratio
EBIT (Earnings before Interests and Taxes)/interest expenses on financial debt
Financial leverage: Financial debt / financial debt + adjusted shareholders’ equity.
Adjusted shareholders’ equity consists of the Equity including minority interests, net of the profit or loss of the “Other Comprehensive Income”.
Net free surplus
The Net Free Surplus is the sum of the following components:
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:
- The net Required Capital variation
a. Release of Capital from existing business
b. Additional required capital from New Business
- 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 LI FE FCF:
IFRS Non Life Operating Result Net of Taxes (normalized tax rate) and Minorities, and net of Change in Solvency 1 required capital
Operating Result of the banking and asset management activities Net of Taxes (normalized tax rate) and Minorities, and net of Change in regulatory required capital (typically Basel 2 or Basel 3 for banks).
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.
10 For further details on the definition of financial debt, please refer to the paragraph Debt in the section Group financial position of the Management report.