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.

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 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.  up.png

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)
31.12.2011 31.12.2010
Subordinated liabilities 6,610.9 6,492.9
Loans and bonds 15,698.6 15,202.3
Deposits received from reinsurers 983.5 1,070.8
Bonds 5,021.9 4,992.7
Other loans 4,623.1 4,568.2
Financial liabilities related to investment contracts issued by insurance companies 4,106.8 3,871.4
Hedging derivatives 963.2 699.2
Liabilities to banks or customers 22,284.7 18,506.5
Liabilities to banks 995.3 421.5
Liabilities to customers 21,289.4 18,084.9
Total 44,594.1 40,201.7

The main Group’s financial liabilities at amortised cost are represented by senior bonds and subordinated liabilities. In the following tables these liabilities are classified by maturity or, if available, by call date. The contractual undiscounted cash flows and the book value as well as the fair value are also pointed out.

Subordinated liabilities
      31.12.2011     31.12.2010
(€ million) 
cash flow
Book value Fair value Undiscounted
cash flow 
Book value Fair value
Up to 1 year 1,024.5 746.6 728.0 0.0 0.0 0.0
between 1 and 5 years 3,256.6 2,402.0 1,724.7 1,323.0 963.5 995.5
between 5 and 10 years 4,096.6 2,460.5 1,829.4 7,172.5 4,540.8 4,196.9
more than 10 years 2,186.2 1,001.8 619.9 2,269.5 988.6 816.2
Total subordinated liabilities 10,564.0 6,610.9 4,902.0 10,765.0 6,492.9 6,008.6
Senior bonds
      31.12.2011     31.12.2010
(€ million) 
cash flow
Book value Fair value Undiscounted
cash flow 
Book value Fair value
Up to 1 year 76.6 19.6 19.6 0.0 0.0 0.0
between 1 and 5 years 3,150.9 2,727.7 2,798.7 3,300.1 2,723.6 2,932.8
between 5 and 10 years 827.3 559.4 559.4 870.1 559.3 559.3
more than 10 years 2,915.9 1,715.2 1,587.4 3,005.6 1,709.9 1,771.1
Total bond issued 6,970.8 5,021.9 4,965.1 7,175.8 4,992.7 5,263.2

The analysed values are substantially in line with previous years as any significant issues or redemptions have occurred. A new issue of a subordinated bond of USD 100 million has been made by BSI SA, Group company of the financial segment. The change in the fair value of both subordinated liabilities and senior bonds issued is due to the Italian sovereign debt crisis deepened in the last quarter of the year.
Debts to banks or bank customers primarily relate to the ordinary Banca Generali and BSI and are mainly on demand or short-term.

Liabilities towards banks and customers basically refer to Banca Generali and BSI Bank ordinary activity and are mainly bank deposits. 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.

Life insurance provisions and financial liabilities related to investment contracts: contractual term to maturity
Gross direct insurance
(€ million) 31.12.2011 31.12.2010
Up to 1 year 23,406.8 22,320.8
Between 1 and 5 years 73,790.2 71,935.0
Between 6 and 10 years 67,611.3 64,814.9
Between 11 and 20 years 78,617.1 76,570.8
More than 20 years 59,709.1 63,361.1
Total 303,134.5 299,002.6

The total insurance provisions include the gross direct amount of mathematical provisions, which amount to € 231,587.5 million (€ 236,342.0 million at 31 December 2010), the provisions for policies where the investment risk is borne by the policyholders and for pension fund, which amount to € 46,804.2 million (€ 38,881.0 million at 31 December 2010), the ageing provision for life segment, which amount to € 9,073.0 million (€ 8,408.4 million at 31 December 2010), and financial liabilities related to investment contacts, which amount to € 15,669.8 million (€ 15,371.2 million at 31 December 2010).
Note that the provision for outstanding claims (not included in the table) which at 31 December 2011 amounted to € 4,486.8 million (€4,984.1 million at 31 December 2010) 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) 31.12.2011 31.12.2010
Up to 1 year 14,063.7 13,588.7
Between 1 and 5 years 11,161.2 11,691.3
Between 6 and 10 years 4,039.2 4,212.7
Between 11 and 20 years 3,539.1 3,063.8
More than 20 years 0.0 0.0
Total 32,803.2 32,556.4