Liquidity risk

Financial liabilities | Insurance liabilities

The Group manages liquidity risk in order to meet its expected obligations as well as its cash commitments even in the occurrence of unpredictable situations. Issues related to marketability of assets are also adequately considered.

By constantly monitoring cash flows, the Group aims at maintaining high financial strength position, in a short and long term horizon.

At Group level the 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 them only through 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 belonging to the Generali Group. The liquidity risk management is made through the continuous updating of the future cash flows projections and also through the application of the Asset and Liability management guidelines. The ALM guidelines are able to guarantee a direct correlation between payable or potentially payable liabilities in a certain time horizon, and the corresponding assets. All Group companies, in accordance with the guidelines defined by the Head Office, invest their available resources in high quality and marketable financial assets, in order to be able to benefit from a quick and efficient financial market access in case of need.

In addition, with regard to entities operating in Non-life segment, reinsurance treaties towards the Head Office 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 huge claims which could impact the company’s financial stability.

At Head Office level, Assicurazioni Generali  S.p.A., liquidity is periodically monitored in order to ensure that all short term commitments faced by the company are met. Beyond a careful control on the industrial activity’s trend, accurate estimates with regard to the dividends that could be paid by the Group’s subsidiaries are made, together with a careful evaluation on possible capital requirements of the Group entities. These evaluations are furthermore stressed using negative macroeconomic and financial market’s scenarios, in order to be able to eventually satisfy every liquidity need that may arise from several market conditions. With this aim all business units have adopted a liquidity risk model in order to anticipate potential critical future situations, based on defined “liquidity ratios” calculate in stressed scenarios with a one year horizon.

The Head Office also monitors cash flows generated by the main Group’s companies on a quarterly basis, together with a consistency analysis with regard to the forecasts made during the planning period, in order to improve the liquidity management efficiency and to optimize the performance on the short term cash investments.   

On a half-yearly basis, with regard to the main Group’s companies, the Head Office supervises the adequacy and the congruity of the assets covering technical reserves and the available surplus, in order to evaluate the   excess of capital availability for the liquidity risk management. The main sources of liquidity at Head Office level are the

dividends paid by the subsidiaries, the intra-group loans and asset sales and the quick and efficient debt market access, permanently monitored by the relevant offices.

Thanks to a continuous supervising of the overall Group cash flows, the Generali Group is able to maintain a short and long term solid financial stability.

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 and denominated in euro. With reference to exposures denominated in currencies other than euro, hedging has 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)
31.12.2012 31.12.2011
Subordinated liabilities 7,832.9 6,610.9
Loans and bonds 16,668.8 15,698.6
Deposits received from reinsurers 1,077.0 983.5
4,974.6 5,021.9
Other loans 4,642.9 4,623.1
Financial liabilities related to investment contracts issued by insurance companies 4,946.6 4,106.8
Hedging derivatives 1,027.6 963.2
Liabilities to banks or customers 24,880.2 22,284.7
Liabilities to banks 2,147.0 995.3
Liabilities to customers 22,733.2 21,289.4
Total 49,381.9 44,594.1

(1) 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 31.12.2012 the related book value amounted to € 511 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 in buckets based on maturity, or first call date, when applicable. For each bucket of maturity are reported the undiscounted cash flows (including the related hedging derivatives), the book value and the fair value of financial liabilities.

Starting from the Risk Report 2012 the methodology has been changed in order to allocate to each maturity bucket the corresponding undiscounted cash flows. The previous methodology reported for each liability the sum of the undiscounted cash flows, having as a driver for the allocation in each bucket the maturity date or the call date of the related liability, notwithstanding the timing of interest cash flows.  Consistently with the new methodology the 2011 figures have been reinstated.

Subordinated liabilities
  31.12.2012 31.12.2011
(€ million) Undiscounted
cash flow
Book value Fair value Undiscounted
cash flow 
Book value Fair value
Up to 1 year 752.4 200.2 200.5 1,411.6 746.6 728.0
between 1 and 5 years 5,698.1 3,116.0 2,791.2 4,108.3 2,402.0 1,724.7
between 5 and 10 years 5,645.9 4,088.7 4,117.0 3,467.0 2,460.5 1,829.4
more than 10 years 632.6 428.1 340.0 1,456.9 1,001.8 619.9
Total subordinated liabilities 12,728.9 7,832.9 7,448.7 10,443.9 6,610.9 4,902.0
Senior bonds
  31.12.2012 31.12.2011
(€ million) Undiscounted
cash flow
Book value Fair value Undiscounted
cash flow
Book value Fair value
Up to 1 year 311.8 0.0 0.0 342.4 19.6 19.6
between 1 and 5 years 3,615.9 2,745.2 2,947.4 3,737.2 2,727.7 2,798.7
between 5 and 10 years 663.0 510.6 513.0 742.1 559.4 559.4
more than 10 years 1,929.4 1,718.8 1,896.5 2,019.1 1,715.2 1,587.4
Total bond issued 6,520.0 4,974.6 5,357.0 6,840.8 5,021.9 4,965.1

During 2012 the company issued two subordinated bonds that modified the maturity and cash flows profile compared to 2011:

  • a first issuance of 750 million euro with maturity of thirty years and first call date in 10 July 2022. The proceeds have been used to refinance the subordinated bond with same nominal amount, redeemed in 20 July 2012.
  • a second subordinated issuance of 1.250 million euro issued last December, with maturity of thirty years and first call date in 12 December 2022.

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 adequately 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 mean of mitigation strategies, either embedded in the products and 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 the pricing and the valuation, in terms of value and risk, are periodically reviewed and updated.

The table here below shows the amount of the life gross direct insurance provisions broken down by expected contractual residual duration. For annuity in payment or whole life contract the expected residual duration is calculated considering an expected date of conclusion of the contract, according to the embedded value valuation. Excluding Migdal group from 2011, which insurance provisions and financial liabilities related to investment contracts were concentrated in classes with contractual term to maturity between 11 and 20 years and more than 20 years, the aforementioned classes would have been substantially stable.

Life insurance provisions and financial liabilities related to investment contracts: contractual term to maturity
  Gross direct insurance
(€ million) 31.12.2012 31.12.2011
Up to 1 year 27,089.3 23,406.8
Between 1 and 5 years 77,275.6 73,790.2
Between 6 and 10 years 66,573.3 67,611.3
Between 11 and 20 years 74,593.3 78,617.1
More than 20 years 54,412.2 59,709.1
Total 299,943.8 303,134.5

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 2012 amounted to € 4,822 million (€4,487 million at 31 December 2011), matures in first year by definition.

With reference to non-life segment, the table here 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) 31.12.2012 31.12.2011
Up to 1 year 12,320.3 12,736.2
Between 1 and 5 years 12,268.0 12,464.0
Between 6 and 10 years 4,377.1 4,131.3
Between 11 and 20 years 3,599.8 3,471.6
More than 20 years 0.0 0.0
Total 32,565.2 32,803.2