EV movement

The following table shows the movement of the EV and its components (VIF and ANAV) from the end of 2010 to the end of 2011, together with the movement of ANAV components (required capital and free surplus). Expected results are calculated using best estimate assumptions (see Annex B1).

Movement of Embedded Value (€ mln)

EV  VIF  ANAV  Required Capital Free  Surplus
Value at 31/12/2010 23,927 12,951 10,976 8,667 2,309
Change in perimeter -177 -136 -40 -21 -20
Exchange rate fluctuation -17 -14 -4 -3 0
Model change 609 379 230 114 115
Adjusted Value at 31/12/2010 24,341 13,180 11,162 8,758 2,404
New business value 976 1,962 -987 760 -1,746
Expected existing business contribution 1,580 1,488 92 - 92
Transfers from VIF and req. cap. to free
0 -2,060 2,060 -629 2,689
Operating experience variance -144 -101 -44 164 -208
Change in operating assumptions 404 404 - - -
Operating EV earnings  2,815 1,694 1,121 295 826
Economic variances  -7,224 -6,641 -583 1,936 -2,519
Total EV earnings -4,408 -4,947 538 2,231 -1,693
Capital movement -561 - -561 - -561
Value at 31/12/2011 19,372 8,233 11,138 10,989 150
Total Normalised
EV earnings -4,408 2,858
Return on EV -18.1% 11.7%

Value at 31/12/2010: the starting point of the movement, represented by the official value at 31/12/2010.

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 2010 and 2011. The impact on EV (-177mln) mainly reflects the sale of Generali’s participation in Afore Banorte, in Mexico. 

Exchange rate fluctuation: the impact due to the difference between the exchange rates at the end of 2010 and 2011. The impact on EV is negligible (-17mln), mainly as a consequence of the weakening of Euro against Swiss Franc and US Dollar, offset by its strengthening against Israeli Shekel and most currencies in Central and Eastern Europe.

Model change: the impact of enhancements of projection actuarial models to better capture the characteristics of the business or changes in legislation. Such enhancements have an overall impact of +379mln on VIF (mainly referring to Belgium, Germany and the Netherlands), of +230mln on ANAV (adjustments to previous year reporting, mainly in France, Switzerland and UK), and of +114mln on required capital (mainly in Germany). 

Adjusted value at 31/12/2010: the adjusted starting point of the movement, basis for the calculation of the return on EV.

New business value: impact of the new business written in 2011. The impact on EV (+976mln) represents the new business value at point of sale (based on year-end assumptions). The impact on free surplus (-1,746mln) represents the total new business strain, which is the combined effect of the negative contribution to profit in the year of sale (-987mln impact on ANAV) and the negative contribution to free surplus (-760mln), as a consequence of the additional capital required by the new business, net of eligible items that can be used to support capital requirements.

Expected existing business contribution: the impact on VIF (+1,488mln) reflects the effect of rolling forward the beginning of year VIF at the 2010 implied discount rate (see Annex B2), inclusive of the effect of rolling forward the relevant required capital. The amount in the columns dedicated to free surplus and ANAV (+92mln) refers to the expected after tax return on free surplus.

Transfers from VIF and required capital to free surplus: the negative impact on VIF (‑2,060mln) represents the release of the 2011 after tax result, as expected at the end of 2010 from the value in-force, inclusive of the expected return on the assets backing the required capital. The impact on required capital (-629mln) represents the expected required capital release from the in-force business, which is shown net of the variation of eligible items that can be used to support the required capital. Such amounts are released from the in-force and the required capital into the free surplus (+2,689mln), with no impact on the EV. 

Operating experience variance: impact of actual versus expected 2011 experience for operational items such as mortality, persistency, profit sharing levels[1] and expenses.

The negative impact on EV (-144mln) comprises the experienced impact of profit sharing levels (‑57mln, mainly in Germany), extraordinary expenses (‑43mln, mainly in France and Germany), surrenders (-6mln) and other operating factors (such as renewals and reinsurance, amounting to -79mln and emerging mainly in Italy and Spain), partially offset by positive experience related to mortality (+30mln, especially in UK, US and Israel) and ordinary expenses (+11mln, mainly coming from France and Switzerland).

The impact on required capital, which combines experience variance and change in assumptions, is +164mln. 

Change in operating assumptions: impact of changes in future assumptions for operational items such as mortality, persistency, profit sharing levels1 and expenses.

The positive impact on VIF (+404mln) is driven by favourable changes in assumptions regarding mortality (+250mln, coming from US, Switzerland and UK), expenses (+139mln, most of them in France and Switzerland), profit sharing levels (+21mln, in Switzerland) and long–term shareholders’ quota in Germany (+30mln), only partially offset by unfavourable changes in assumptions concerning surrenders (-6mln) and other operating factors (-30mln).

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 +2,815mln. 

Economic variances: impact of actual versus expected 2011 experience and changes in future assumptions for economic items such as yield curves, implied volatilities, investment returns and taxes.

The negative impact on EV (-7,224mln) is the sum of a negative experience variance on ANAV (-583mln) and a significant negative variance on VIF (‑6,641mln), which can be split into the following components:

    • 2.3bln impact of lower interest rates (assuming that government and corporate bond rates have followed the movement of swap rates, i.e. maintaining their spread against swap unaltered);
    • 2.3bln impact of actual widening of government and corporate spreads against swap rates, net of the impact of the liquidity premium;
    • 1.3bln impact of poor equity market performance;
    • 0.7bln impact of higher interest rates and equity volatilities.

Negative economic variances on EV, whose value (in central and stressed conditions) is the basis of the internal risk capital model, also cause an increase of required capital (+1,936mln).

Total EV earnings are equal to the sum of operating EV earnings and economic variances, and amount to -4,408mln. The corresponding return on EV (obtained dividing the EV earnings by the adjusted opening EV) is equal to -18.1%.

Capital movement: dividends paid in 2011 out of the consolidation perimeter by the covered companies (-1,126mln), net of movements (+565mln 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 also defines the normalised EV earnings as the operating EV earnings excluding the impact of the extraordinary expenses included in the operating variance (‑43mln). According to this definition, normalised EV earnings amount to 2,858mln, with a 11.7% return on adjusted opening EV (up 1.9 percentage points from 9.8% in 2010).

(1) Impacts of changes to profit sharing rates, when direct consequence of modifications of economic assumptions, are classified as economic variances.