In order to help the assessment of the quality and sustainability of the net result of the Generali Group in the various business segments and territorial areas, the Management Report includes the following alternative performance measures.
Under CESR Recommendations on alternative performance measures (CESR/05 – 178b), the operating result cannot replace earnings before taxes calculated in accordance with IAS/IFRS. In addition, it should be read with the financial information and related notes on the accounts which are included in the audited financial statements.
The operating result was drawn up by reclassifying items of earnings before taxes for each segment on the basis of the management characteristics of each segment and taking into consideration the recurring holding expenses. Specifically, the 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 report, the Group has reviewed the portrayal of its operating segments through the introduction of a new Asset Management segment, to provide a disclosure more closely aligned with the new Group organizational structure, in addition to ensure an improved economic representation of the performance of the individual business and geographical segments.
In the Life segment, all profit and loss accounts are considered as operating items, except for the following which are represented in the non-operating result:
- net realized gains and net impairment losses on investments that do not affect the formation of the local technical reserves, but only the calculation of the deferred liabilities towards policyholders for the amount not attributable to the policyholders, and on those of the free assets;
- net other non-operating expenses that mainly include the results of the run-off activities, company restructuring charges, depreciation of the value of the portfolios 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 entirely calculated net of the estimated amount attributable to the policyholders. Furthermore, where a new fiscal law materially affects the operating result of the countries where 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 for the following which are represented in the non-operating result:
- 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 the results of real estate development activities, run-off activities, the impairment losses on property held for own use, company restructuring charges and 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 Asset Management segment, all profit and loss accounts are considered as operating items, except for the following which are represented in the non-operating result:
- net other non-operating expenses, principally including project costs, including consulting, and severances.
The Holding and other businesses segment includes the activities in the banking and asset management sectors, the costs incurred for the direction, coordination and financing activities, as well as all the other operations that the Group considers to be ancillary to the core insurance business.
All profit and loss accounts are considered as operating items, except for the following which are represented in the non-operating result:
- non-recurring realized gains and losses and net impairment losses;
- net other non-operating expenses that mainly include the results of the run-off activities, company restructuring charges, depreciation of the value of the portfolios acquired directly or through acquisition of control of companies operating in the banking and asset management sectors (value of business acquired or VOBA) and other net non-recurring expenses.
With reference to holding costs, the general expenses incurred for management and coordination are considered as operating, by the Parent Company and territorial sub-holdings.
In addition, non-operating holding expenses include:
- interest expenses on financial debt3,
- 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 Group are equivalent to the sum of the operating result and the non-operating result of the abovementioned segments and related consolidation adjustments.
In accordance with the approach described above, the Generali Group also provided the operating result in the main countries where it operates for the Life and Property & Casualty segments and the consolidated figures. In order to provide a management view of the operating result by geographical area, the review of the key performance indicators by business segment and geographical area allows measurement of the result of each geographical area from a country viewpoint instead of as a 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 were considered by the same standards as transactions concluded with external reinsurers. This representation of the life and Property & Casualty operating result by territory makes this performance indicator more consistent with both the risk management policies implemented by each company and the other indicators measuring the technical profitability of the Group’s companies.
The following table reconciles the operating and non-operating result with the corresponding income statement items:
|Operating 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 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 and holding operating expenses||1.6 - 2.6|
|Net other and holding non-operating expenses||1.6 - 2.6|
The following reclassifications were made in the calculation of the operating result with respect to the corresponding items of the income statement:
- the investment management and investment property management expenses in the operating result were reclassified from acquisition and administration costs to net operating income from other financial instruments, more specifically into other expenses from financial instruments and land and buildings (investment properties);
- income and expenses related to real estate development activities in the operating result were classified as other non-operating income and expenses, in accordance with the management model adopted that provides for sale at completion;
- gains and losses on foreign currencies in the operating result were reclassified in the Life and Holding and other business from net operating income to net operating income from financial instruments at fair value through profit or loss. In the Property & Casualty segment, gains and losses on foreign currencies in the operating result were 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;
- in 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 under other non-operating income and expenses in accordance with the management mod- el adopted that provides for sale at completion;
- the net other operating expenses in the operating result were adjusted for operating taxes and for non-recurring taxes that significantly affect the operating income of the countries where policyholders’ stakes are determined by taking the taxes for the period into account. These adjustments were included in the calculation of operating income and are excluded from the income taxes item.
Operating result by margins
The operating result of the various segments was also shown in accordance with a margin-based layout which shows the operating trends of the changes that occurred in each segment performance more clearly.
The operating result of the Life segment comprises a technical margin including insurance costs, a net investment result and a component that includes acquisition and administration costs related to the insurance business and other net operating expenses. The technical margin includes the loadings and the risk and profit from the surrender results for the period.
The net investment result comprises operating income from investments, net of the portion attributable to the policyholders. Finally, the insurance management and other operating components are indicated separately.
The operating result for the Property & Casualty segment comprises the technical result, the financial 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 comprises 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 related to the insurance business, depreciation of tangible assets and amortization of long-term costs, provisions for recurring risks and other taxes.
Operating return on equity
The operating return on equity indicates the return on capital in terms of the Group operating result. It is calculated through the relationship between:
- consolidated operating result as described above adjusted to include:
- interest on financial debt;
- income taxes based on a mid-term expected tax rate;
- minority interests;
- average Group shareholders’ equity at the beginning and end of each period of valuation, adjusted to exclude other gains and losses booked directly to equity included in Other Comprehensive Income OCI such as gains and losses on AFS investments, foreign currency translation differences, net unrealized gains and losses on hedging derivatives.
Return on investments
The indicators for the return on investments are presented, obtained as the relationship:
- for the net 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 (excluding 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 REPOs classified as other financial liabilities. The average is calculated on the average asset base of each quarter of the reporting period.
The indicators for the return on investments described above were presented for Life and Property & Casualty segments as well as for the Group.
With regard to the presentation of consolidated investments, the following variations, with respect to the corresponding balance sheet items have been implemented, in order to provide the figures consistently with those used to calculate the relative profitability:
- Investment Fund Units were split by nature between equity, bond and investment property portfolios;
- derivatives are presented on a net basis, and therefore also including derivative liabilities. Moreover, hedging derivatives are classified in the respective asset class hedged;
- reverse REPOs were reclassified, in accordance with their nature of short-term liquidity commitments, from Other fixed income instruments to Cash and cash equivalents; and
- REPOs classified as liabilities are presented in Cash and cash equivalents.
The segment investments were presented in accordance with the methods described in the chapter Segment reporting of the Notes.
3 For further details on the definition of financial debt, please refer to the paragraph Debt in the chapter Group’s financial position of the Management Report.