Methodological note

Operating result| Operating result by drivers| Operating Return on Equity| Return on investments| Consolidated investments

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 non-recurring 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, mainly including results of non-current assets or disposal group classified as held for sale as defined by IFRS 5 and run-off business, restructuring charges, the amortization of the value of business acquired directly or by securing control of companies in the insurance segment (value of business acquired or VOBA) and other net non recurring expenses.

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

Furthermore, whether 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 consolidation adjustments.

In the property&casualty segment, all profit and loss account are considered as operating items, except those which represent the non-operating result, i.e.:

  • realized gains and losses, unrealized gains and losses, net impairment losses on investments, included gains and losses on foreign currencies,
  • net other non-operating expenses, mainly including results of non-current assets or disposal group classified as held for sale as defined by IFRS 5 and run-off business, impairment losses of land and buildings used for own activities, restructuring charges and the amortization of the value of business acquired directly or by securing 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 those representing the non-operating result, i.e.:

  • realized gains and losses and net impairment losses on investments considered strategic for the Group,
  • other net non-operating expenses, mainly including both the results of non-current assets or disposal group classified as held for sale as defined by IFRS 5 and run-off business, the restructuring charges, the amortization of the value of business acquired directly or by securing control of companies operating in the financial segment (value of business acquired or VOBA) and other net non recurring expenses.

The operating holding expenses mainly includes the expenses sustained by the Parent Company and subholdings for management and coordination activities.

The non operating holding expenses refer to:

  • interest expenses on liabilities linked to the Group’s financing activities(1)
  • 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 under incentive plans approved by the Parent Company.

Operating result and non-operating result of the Generali Group are equivalent to the sum of operating result and non-operating result of the aforesaid segments, the holding expenses classified as previously said, and 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.

Lastly, 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 reconciliation statement of operating result and non-operating result to profit and loss accounts is shown in the table below:

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 operating result calculation compared to the related profit and loss items:

  • within the operating result, investment management expenses and investment properties have been reclassified from acquisition and administration costs to net operating income from financial instruments, especially in other expenses from financial instruments and land and buildings (investment properties);
  • within the operating result, income and expenses by nature related to real estate development activities have been classified as other non-operating incomes and expenses, coherently with the management model adopted that foresees the sale at completion;
    • within the operating income, gains and losses on foreign currencies were 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 the 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 transactions drawn up in order to hedge the Group's equity exposure to the changes of the main currencies of operation. 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, also the interest expenses related to the abovementioned real estate development activities are not included among interest expenses related to liabilities linked to operating activities as classified among other non-operating incomes 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 the policyholders sharing is determined taking into account the taxes for the period. These adjustment are therefore taking part in the calculation of operating income and are excluded from the income taxes.up.png

Operating result by drivers

Operating results of life and property&casualty segments are also presented in format of result drivers, which better describes the management trends of the changes 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 an 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 by 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

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.).up.png

Return on investments

Finally, the Generali Group has presented a performance indicator of return on investments, that are calculated as the ratio:

  • for the current return between interest and other income, including those arising from financial instruments at fair value through profit and loss (excluded those from financial instruments related to linked contracts) and the the average investments (calculated on book value);
  • for the harvesting rate between net realized gains, net impairment losses and unrealized and realized gains and losses from financial instruments at fair value through profit and loss (excluded those from financial instruments related to linked contracts) and the the average investments (calculated on book value);
  • for comprehensive return between current income and unrealized income and expenses accounted for both in profit and loss (excluded those from financial instruments related to linked contracts) and in shareholders’ equity, net of investment expenses, and the the average investments (calculated on book value).

The profit and loss return is equal to the current return plus the harvesting return net of expenses on investments.

The average investments (calculated on book value) includes 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 equivalent. The total investment is adjusted for derivative instruments classified as financial liabilities at fair value through profit of loss an for REPO classified as other liabilities. The average amount 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

As far as the Group investments are concerned, the following changes compared to the balance sheet have been implemented, in order to be aligned with the calculation of the related returns:

  • IFU have been split by nature between equity, bond and investment properties portfolios;
  • derivatives are presented net of those classified as liabilities. Moreover, hedging derivatives are classified in the respective asset class hedged;
  • reverse REPOs have been reclassified, coherently to their short term investment view, from ‘Other fixed income instruments’ to ‘Cash and cash equivalent’
  • REPOs classified as liabilities are presented in Cash and cash equivalent.

Regarding investments of each segment, investments in subsidiaries consolidated line by line and loans and bonds between Group companies have been excluded, except, in the life segment, those on which policyhoders’ share is based on.up.png

(1) Further details on the definition of liabilities linked to financing activities are included in the paragraph Debt in the chapter Financial position of the management report.