Other information

Fair value of financial instruments | Derivatives’ accounting | Impairment losses on financial assets | Use of estimates | Share based payments| Segment reportingInformation on financial and insurance risks | Changes in the presentation of consolidated financial statements

Fair value of financial instruments

Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Therefore, it is presumed that the company is a going concern without any need to liquidate and undertake transactions on adverse terms.

Fair value of financial asset is determined as follows.

In the case of financial assets quoted in active markets, the fair value is their bid price at the end of the trading day at period-end (Mark-to-Market – first level of the fair value hierarchy). A market is considered as active whether the prices are readily and regularly available and represent real market transactions carried out in a normal market environment.
If the market of a financial instrument is not active, the fair value should be determined using valuation techniques that enable to state which price the instrument should have had, at valuation date, in a free exchange carried out within normal market conditions.

A non active market is usually characterized by either none or significantly reduced transactions, high price volatility, relevant enlargements of the bid-ask spreads or an atypical liquidity premium implicit in the bid prices.

The valuation techniques should mainly use, if available, prices in recent transactions carried out in a normal market environment, if the market conditions are not significantly changed, or the fair value of instruments with similar characteristics, without considering subjective parameters (Comparable Approach – second level of the fair value hierarchy).

In case no recent transactions and instruments with similar characteristics are observable, discounted cash flow and option pricing models should be applied. The estimate of the fair value makes maximum use of market inputs and relies as little as possible on entity-specific inputs. The valuation technique incorporates all factors that market participants would consider in setting a price, such as yield curve of free-risk interest rates, i.e. parameters able to measure the credit risk, the liquidity risk and other risk factors. When no market inputs are observable or these need to be materially adjusted, the valuation techniques use internal financial models, which are based on internal assumptions and estimates (Mark-to-Model– third level of the fair value hierarchy).

Furthermore IFRS 7 requires to classify the categories of financial instruments measured at fair value - available for sale financial assets and at fair value through profit or loss following - under a fair value hierarchy, which defines three different levels based on the inputs used for pricing instruments:

Level 1 - quoted prices (unadjusted) in active markets for identical financial instruments;

Level 2 - inputs other than those included within level 1, but observable for assets or liabilities, both directly (e.g. quoted prices for similar instruments in active markets) or indirectly (deriving from prices);

Level 3 – inputs concerning assets or liabilities which are not derived from observable market data.

This additional information required by IFRS 7 are given in the other information of the notes.up.png

Derivatives’ accounting

Derivatives are financial instruments or other contracts with the following characteristics:

  • their value changes in response to the change in interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, credit rating or other pre-defined underlying variables;
  • they require no initial net investment or, if necessary, an initial net investment that is smaller than one which would be required for other types of contracts that would be expected to have a similar response to changes in market factors;
  • they are settled at a future date.

Derivatives, not accounted for as hedging instruments, are classified as at fair value through profit or loss.

In relation to the issue of some subordinated liabilities, the Group hedged the interest expense rates and GBP/EUR exchange rate, recognised as cash flow hedges and accounted for as hedging instruments.

According to this accounting model the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in an appropriate item of comprehensive income while the ineffective portion of the gains or loss on the hedging instrument is recognized in profit or loss. The amount accumulated in the other components of comprehensive income is reversed to profit and loss account in line with the economic changes of the hedged item.

When the hedging instrument expires or is sold, or the hedge no longer meets the criteria for hedge accounting, the cumulative gain or loss on the hedging instruments, that remains recognized directly in the other components of other comprehensive income from the period when the hedge was effective, remains separately recognized in comprehensive income until the forecast transaction occurs. However, if the forecasted transaction is no longer expected to occur, any related cumulative gain or loss on the hedging instrument that remains recognized directly in the other components of comprehensive income from the period when the hedge was effective is immediately recognized in profit or loss.

Further the Group set cash flow hedges on forecast refinancing operations of subordinated liabilties that are accounted for as hedge of a forecast operations, that are highly probable and could affect profit or loss. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in an appropriate item of comprehensive income. The ineffective portion of the gains or loss on the hedging instrument is recognized in profit or loss. If a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognised in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment.

Hedges of a net investment in a foreign operation are accounted for similarly to cash flow hedges: the effective portion of gain or loss on the hedging instrument is recognized among the components of profit or loss, while the part is not effective be recognized in the separate income statement.up.png

Impairment losses on financial assets

As for financial assets, except investments at fair value through profit or loss, IAS 39 is applied whether there is any objective evidence that they are impaired.

Evidence of impairment includes, for example, significant financial difficulties of the issuer, its default or delinquency in interest or principal payments, the probability that the borrower will enter bankruptcy or other financial reorganisation and the disappearance of an active market for that financial asset.

The recogniton of an impairment follows a complex analysis in order to  conclude whether there are conditions to effectively recognize the loss. The level of detail and the detail with which testing is being undertaken varies depending on the relevance of the latent losses of each investment. A significative or prolonged decline in the fair value of an investment in a quoted equity instrument below its Group cost is considered as an objective evidence of impairment.

As a result of the particular financial environment observed in the secondo half of 2011, the Group improved the definition of impairment losses of equity investments classified as Financial assets available for sale. The significant increase in volatility of financial markets, in particular the financial sector, related to the anomalous trend of spreads between government bonds following the tensions on the public debt of some European Countries, determined the presence of “exceptional circumstances” for which it became necessary to review the definition of impairment losses.

In particular, the thresholds of significance used to assess the objective evidence of impairment were determined with reference to the market sector related to equity securities. This metodology, while mantaining the thresholds of significativity at 50% as previously used, allows a better diversification, based on the specific risk of the sector of the securities. The different risk profiles were identified on the basis of the volatility of specific areas in which the Group invests more. This analiysis will be updated periodically, at least annually, to monitor the sectorial rapresentativity of the thresholds identified above.

The accounting effect of the improvement of  methodology described above compared to what would happened in case of the application of general significativity threshold of 50% previously used, is presented in part 4.5 – Available for sale financial assets in the notes.

The definiton of “prolonged” impairment has not changed (continuous loss for 36 months).

If an investment has been impaired in previous periods, further impairments are automatically considered prolonged.

If there is objective evidence of impairment the loss is measured as follows:

  • on financial assets at amortized cost, as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate;
  • on available for sale financial assets, as the difference between the cost and the fair value at the measurement date.

Any next, reversal of impairment to the value before recording losses are recognized respectively: in the profit or loss in the case of debt instruments, to equity in the case of equity securities including share of mutual funds (IFU).up.png

Use of estimates

The preparation of financial statements compliant to IFRS requires the Group to make estimates and assumptions that affect items reported in the consolidations financial balance sheet and income statement and the disclosure of contingent assets and liabilities. The use of estimates mainly refers to as follows:

  • insurance provisions for life and non-life segment;
  • financial instruments measured at fair value;
  • the analyzes in order to identify durable impairments on intangible assets (e.g. goodwill) booked in balance sheet (impairment test);
  • deferred acquisition costs and value of business acquired;
  • deferred and anticipated taxes;
  • defined benefit plan obligation;
  • share-base payments.

Estimates are periodically reviewed and are based on key management’s best knowledge of current facts and circumstances. However, due to the complexity and uncertainty affecting the above mentioned items, future events and actions, actual results ultimately may differ from those estimates, possibly significantly.

Further information on process used to determine assumptions affecting the above mentioned items and the main risk factors are included in the paragraphs on accounting principles and in the risk report.up.png

Share based payments

The stock option plans granted by the Board are share based payments to compensate officers and employees. The fair value of the share options granted is estimated at the grant date. It is based on the option pricing model that takes into account, at the grant date, factors such as the exercise price and the life of the options, the current price of the underlying shares, the expected volatility of the share price, the dividends expected on the shares and the risk-free interest rate as well as the specific characteristics of the plan itself. Another factor common to share options is the possibility of early exercise of them. The binomial pricing model takes into account the possibility of early exercise of the options. If present, the pricing model estimates separately the option value and the probability that the market conditions are satisfied. Therefore, the fair value of equity instruments granted reflects market conditions.
The cost is charged to the profit and loss account and, as a counter-entry, to equity during the vesting period, by taking into account, if possible, the possibility of satisfaction of the vesting condition related to the options granted.up.png

Segment reporting

According to IFRS 8, the disclosure about operating segments of the Group is consistent with the evidence reviewed periodically at the highest managerial level for the purpose of making operational decisions about resources to be allocated to the sector and assessment of results.

The Generali Group identifies three main business segments worldwide:

1. non-life segment, which includes non-life insurance activities;

2. life segment, which includes life insurance activities;

3. financial segment, which includes banking and asset management activities.

Following the revisitation of the segment reporting in order to improve the understanding of the operating performance of activity segments , the three primary business segments do not include the called holding expenses. The holding expenses mainly include the holding and territorial subholding direction expenses in coordination activity, the expenses relating to the parent company of stock option and stock grant plans as well interest expenses on the Group financial debt.

Assets, liabilities, income and expenses of each segment are presented in the appendix to the notes, prepared under the ISVAP Regulation No. 7 of 13 July 2007.
Segment data come from a separate consolidation of the figures of subsidiaries and associated companies in each business segment, eliminating of the effects of the transactions between companies belonging to the same segment and, the carrying amount of the investments in subsidiaries and the related portion of equity. The reporting and control process implemented by the Generali Group implies that assets, liabilities, income and expenses of companies operating in different business segments are allocated to each segment through a specific segment reporting. Intra-group balances between companies belonging to different business segments are accounted for in the consolidation adjustments column in order to reconcile the segment information with the consolidated one.

In this context, the Generali Group adopts a business approach on segment reporting, characterized by the fact that some transactions between companies belonging to different segments are eliminated within each segment.
In particular, starting from the full year 2010 consolidated financial statements, this aforementioned approach has been adopted also for the balance sheet by segment, enabling consistency of the segment reporting. Comparative figures were restated according to the new approach. 

In detail, this approach presents the following main changes: both investments and dividends received by non-life and financial companies and paid by companies of other segments, and realized gains and losses on intra-segment transactions are eliminated within the non-life and financial segments; both investments and dividends received by life holding and paid by companies of other segments, and realized gains and losses on intra-segment transactions are eliminated within the life segment.

Furthermore, loans and interest income and expense on loans between Group companies belonging to different segments are eliminated directly in each segment.

The abovementioned approach reduces consolidation adjustments, that currently include dividends received by life companies and paid by Group companies belonging to other segments, and net commissions for financial services rendered and received by Group companies.up.png

Information on financial and insurance risks

In accordance with IFRS 7 and IFRS 4, the information which enables the users to evaluate the significance of financial instruments on the Group's financial position and performance and the nature and extent of risks arising from financial instruments and insurance contracts to which the entity is exposed and how the entity manages those risks are disclosed in the Risk Report.
In this section the Group provides with qualitative and quantitative information about exposure to credit, liquidity and market risks, arising from financial instruments and insurance contracts, and sensitivity analysis to assess the impact of variation of principal financial and insurance variables on equity, profit and loss or other relevant key indicator.up.png

Changes in the presentation of consolidated financial statements

In accordance with IAS 1.45, effective 30 September 2011, a part of the Israeli insurance portfolio, previously classified to the traditional business, was reclassified among unit- and index-linked portfolios to ensure a placement that better reflects the technical characteristics of the products issued. As a consequence, all investments hedging that portfolio have been reclassified accordingly for the comparative periods as well.

The main impacts arising from the reclassification on the comparative periods are listed below:

  • the financial assets at fair value through profit or loss covering the profit-sharing products (mainly bonds, equities, real estate investments, derivatives and loans) were reclassified as investments back to unit and index-linked policies;
  • part of mathematical insurance provisions was reclassified as insurance provisions for policies where the investment risk is borne by the policyholders.
(€ million) 31/12/2010 as published Impact of
reclassifi-
cation
31/12/2010 31/12/2009 as published Impact of
reclassifi-
cation
31/12/2009
INTANGIBLE ASSETS 10,670.4 0.0 10,670.4 10,445.1 0.0 10,445.1
TANGIBLE ASSETS 3,796.2 0.0 3,796.2 3,774.9 0.0 3,774.9
AMOUNTS CEDED TO REINSURERS FROM INSURANCE PROVISIONS 5,765.3 0.0 5,765.3 5,576.2 0.0 5,576.2
INVESTMENTS 364,243.3 72.3 364,315.6 341,513.3 69.0 341,582.3
Land and buildings (investment properties) 13,232.7 -618.6 12,614.1 12,731.6 -517.1 12,214.5
Investments in subsidiaries, associated companies and joint ventures 2,439.2 0.0 2,439.2 1,986.4 0.0 1,986.4
Held to maturity investments 4,544.9 0.0 4,544.9 3,165.7 0.0 3,165.7
Loans and receivables 79,740.4 -531.4 79,208.9 81,289.4 -486.8 80,802.6
Available for sale financial assets 188,928.5 0.0 188,928.5 176,414.6 0.0 176,414.6
Financial assets at fair value through profit or loss 75,357.6 1,222.3 76,580.0 65,925.5 1,073.0 66,998.5
of which financial assets where the investment risk is borne by the policyholders and related to pension funds 50,344.0 10,292.9 60,637.0 42,467.2 7,696.2 50,163.4
RECEIVABLES 11,468.0 0.0 11,468.0 11,327.4 0.0 11,327.4
OTHER ASSETS 15,505.8 -81.6 15,424.2 40,715.2 -69.1 40,646.1
CASH AND CASH EQUIVALENTS 10,990.3 0.0 10,990.3 10,464.8 0.0 10,464.8
TOTAL ASSETS 422,439.4 -9.4 422,430.1 423,816.9 0.0 423,816.9
(€ million) 
31/12/2010 as published Impact of
reclassifi-
cation
31/12/2010 31/12/2009 as published Impact of
reclassifi-
cation
31/12/2009
1 SHAREHOLDERS' EQUITY 20,064.5 0.0 20,064.5 19,924.3 0.0 19,924.3
2 OTHER PROVISIONS 1,496.5 0.0 1,496.5 1,490.5 0.0 1,490.5
3 INSURANCE PROVISIONS 329,616.3 0.0 329,616.3 309,593.5 0.0 309,593.5
of which insurance provisions for policies where the investment risk is borne by the policyholders and related to pension funds 38,956.1 10,504.8 49,460.9 34,122.0 7,871.5 41,993.5
4 FINANCIAL LIABILITIES 53,903.8 -9.4 53,894.4 50,386.5 0.0 50,386.5
4.1 Financial liabilities at fair value through profit or loss 13,702.1 -9.4 13,692.7 10,294.5 0.0 10,294.5
4.2 Other financial liabilities 40,201.7 0.0 40,201.7 40,092.1 0.0 40,092.1
5 PAYABLES 7,650.0 0.0 7,650.0 7,381.4 0.0 7,381.4
6 OTHER LIABILITIES 9,708.4 0.0 9,708.4 35,040.8 0.0 35,040.8
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 422,439.4 -9.4 422,430.1 423,816.9 0.0 423,816.9

(€ million) 31/12/2010 as published Impact of
reclassifi-
cation
31/12/2010
1.1 Net earned premiums 65,726.5 0.0 65,726.5
1.2 Fee and commission income and income from financial service activities 1,324.2 0.0 1,324.2
1.3 Net income from financial instruments at fair value through profit or loss 4,781.6 -149.8 4,631.8
of which net income from financial instruments where the investment risk is borne by the policyholders and related to pension funds 2,901.8 921.1 3,822.9
1.4 Income from subsidiaries, associated companies and joint ventures 110.2 0.0 110.2
1.5 Income from other financial instruments and land and buildings (investment properties) 16,204.3 -47.1 16,157.2
1.5.1 Interest income 10,207.7 0.0 10,207.7
1.5.2 Other income 2,141.8 -47.1 2,094.6
1.5.3 Realized gains 3,647.6 0.0 3,647.6
1.5.4 Unrealized gains and reversal of impairment losses 207.3 0.0 207.3
1.6 Other income 2,632.3 196.9 2,829.2
1 TOTAL INCOME 90,779.2 0.0 90,779.2
2.1 Net insurance benefits and claims -67,720.0 0.0 -67,720.0
of which change in the provisions for policies where the investment risk is borne by the policyholders and provisions for pension funds -4,667.2 -1,500.5 -6,167.7
2.2 Fee and commission expenses and expenses from financial service activities -455.9 0.0 -455.9
2.3 Expenses from subsidiaries, associated companies and joint ventures -23.9 0.0 -23.9
2.4 Expenses from other financial instruments and land and buildings (investment properties) -4,034.7 0.0 -4,034.7
2.5 Acquisition and administration costs -11,892.3 0.0 -11,892.3
2.6 Other expenses -3,815.6 0.0 -3,815.6
2 TOTAL EXPENSES -87,942.4 0.0 -87,942.4
EARNINGS BEFORE TAXES 2,836.8 0.0 2,836.8
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