EV movement

The following table shows the movement of the EV and its components (VIF and ANAV) from the end of 2011 to the end of 2012, together with the movement of ANAV components (required capital and free surplus). Expected results are calculated using best estimate assumptions.

Movement of Embedded Value (€ mln)
  EV  VIF  ANAV  Required Capital Free  Surplus
Value at 31.12.2011 19,372
8,233
11,138
10,989
150
Change in perimeter  -1,046 -750
-296
-543
247
Exchange rate fluctuation 6
14
-8
3
-10
Model change 205
218
-13
302
-315
Adjusted Value at 31.12.2011 18,536
7,715
 10,821 10,749
72
New business value 863
1,809
-945
678
-1,624
Expected existing business contribution 1,733
1,749
-15
-
-15
Transfers from VIF and req. cap. to free surplus -
-1,901
1,901 
-862
2,763
Operating experience variance -158
 -150 -8
-
-8
Change in operating assumptions 251
251
-
229
-229
Operating EV earnings  2,690
1,757
933
46
887
Economic variances  1,084
-120
1,204
468
736
Total EV earnings 3,774
1,637
2,137
513
1,623
Capital movement -910
-
-910
-
-910
Value at 31.12.2012 21,400
9,352
12,047
11,263
785
 
Total Normalised
EV earnings 3,774 2,731
Return on EV 20.4% 14.7%

Value at 31/12/2011: the starting point of the movement, represented by the official value at 31/12/2011.

Change in perimeter: the impact due to the difference between the Group companies’ interest in the covered business or the covered business itself at the end of 2011 and 2012. The impact on EV (-1,046mln) mainly reflects the sale of Migdal in Israel.

Exchange rate fluctuation: the impact due to the difference between the exchange rates at the end of 2011 and 2012. The impact on EV is negligible (+6mln), mainly as a consequence of the weakening of Euro against most currencies in Central and Eastern Europe, offset by its strengthening against the US Dollar.

Model change: the combined impact on EV (+205mln) is the sum of

  • +378mln arising from the modified assumptions on risk free reference rates extrapolation, which now allows for an anticipated entry-point for Euro (from 30 to 20 years) and a shorter convergence period to the ultimate forward rate;
  • -173mln arising from various improvements and refinements of the actuarial models used locally for the projections of VIF (with negative impacts in France and Italy, only  partially offset by the positive impact in Germany and US) and from minor opening adjustments to ANAV.

Model changes also affect the calculation of the required capital (+302mln).

The limited impact of the changes in the extrapolation method is due to the fact that these changes relate to projection years beyond year 20, and the contribution of profits after year 20 to the overall VIF is marginal (12%).

Adjusted value at 31/12/2011: the adjusted starting point of the movement, basis for the calculation of the return on EV.

New business value: the impact of the new business written in 2012. The impact on EV (+863mln) represents the new business value at point of sale, calculated as the sum of the NBV of each quarter (evaluated with beginning of period operating and economic assumptions). The impact on free surplus (-1,624mln) represents the total new business strain, which is the combined effect of the negative contribution to profit in the year of sale (‑945mln) and the additional capital required by the new business (-678mln), net of eligible items that can be used to support capital requirements.

Expected existing business contribution: the impact on EV (+1,733mln) is the sum of

  • +1,749mln coming from the roll forward, at the 2011 implied discount rate, of the beginning of year VIF and relevant required capital;
  • -15mln referring to the expected after tax return on free surplus.

Transfers from VIF and required capital to free surplus: the neutral impact on EV comes from the release, from VIF to ANAV, of the 2012 after tax result (1,901mln), as expected at the end of 2011 and inclusive of the expected return on the assets backing the required capital. The impact on required capital represents the expected required capital release (862mln) from the in-force business, which is shown net of the variation of eligible items that can be used to support the required capital. The release of profit and capital from the in-force business into the free surplus, in aggregate, amounts to +2,763mln.

Operating experience variance: the impact of actual versus expected 2012 experience for operational items such as mortality, persistency, profit sharing levels and expenses.

The negative impact on EV (-158mln) comprises the following items:

  • +37mln on mortality;
  • -128mln on surrenders;
  • +7mln on levels of premiums;
  • -14mln on profit sharing levels;
  • -11mln on ordinary expenses;
  • -41mln on extraordinary expenses;
  • -8mln on residual operating items.

 The negative experience on surrenders mainly arises from one-off events occurred in France (high lapses in the first quarter of the year due to fiscal uncertainties) and in German health business (where the high lapses were triggered by specific premium adjustments on certain business segments).

Change in operating assumptions: the impact of changes in future assumptions for operational items such as mortality, persistency, profit sharing levels and expenses.

The positive impact on VIF (+251mln) is the sum of the following items:

  • +291mln on mortality;
  • -22mln on surrenders;
  • -32mln on levels of premiums;
  • -6mln on profit sharing levels;
  • +33mln on ordinary expenses;
  • -13mln on residual operating items.

 The significant impact of the revision of mortality assumptions, in line with the positive experience, affects all areas of operation (and, in particular, France, Germany, Switzerland and the US).

Changes in operating items underlying the calculation of the required capital (therefore affecting either the minimum regulatory capital or the economic capital) determine its increase of +229mln.

Operating EV earnings are equal to the sum of the new business value, the expected existing business contribution, the transfers from VIF and required capital to free surplus, the operating experience variance and the change in operating assumptions. Operating EV earnings amount to +2,690mln.

Economic variances: the impact of actual versus expected 2012 experience and changes in future assumptions for economic items such as yield curves, implied volatilities, investment returns and taxes.

The positive impact on EV (+1,084mln) corresponds to the sum of the variances on ANAV (+1,204mln, arising from the revaluation of fixed income assets due to lower interest rates, and from actual returns which have exceeded the returns projected in the previous year) and of ‑120mln variances on VIF.

More specifically, the -120mln VIF variances can be split as follows:

  • -1,920mln: the impact of the swap curve decrease (assuming the government and corporate return decrease by the same amount, that is, keeping a constant spread with the swap rate);
  • +400mln: the combined effect of the positive impact of the closure of the spread (versus the swap curve) of the government (+2,460mln) and corporate (+1,000mln) bonds, and the negative impact of the reduction of the liquidity premium (-3,060mln);
  • +730mln: the impact of the positive equity market performance;
  • +670mln: the impact of the reduction in interest rate volatilities and equity volatilities.

The low interest rate environment is the main cause of the increase in the required capital (+468mln), particularly evident in Germany.

Total EV earnings are equal to the sum of operating EV earnings and economic variances, and amount to +3,774mln. The corresponding return on EV (obtained dividing the EV earnings by the adjusted opening EV) is equal to +20.4%.

Capital movement: this amount (-910mln) comprises dividends paid in 2012 out of the consolidation perimeter by the covered companies (-614mln), together with net movements (‑297mln in aggregate) corresponding to dividends received from Group companies, capital injections and changes in covered companies’ interest in other Group companies and other consolidation differences.

Generali defines the normalised EV earnings as the operating EV earnings excluding the impact of the extraordinary expenses included in the operating variance (‑41mln). According to this definition, normalised EV earnings amount to 2,731mln, with a 14.7% return on adjusted opening EV (3.0 percentage points up from 11.7% in 2011).