The AUTO generation strategy is the default, and this setting simply chooses the primary key generation strategy that is the default for the database in question, which quite typically is IDENTITY, although it might be TABLE or SEQUENCE depending upon how the database is configured. The AUTO strategy is typically recommended, as it makes your code and your applications most portable.
Hibernate Generation Strategies Tutorial
The default should be IDENTITY, but it seems that is not happening in your application. One thing I might do is explicilty state IDENTITY as the auto-generation strategy, and see if it works. If it does, then something is wrong with the AUTO setting. If it doesn't, then it just looks like your database doesn't support IDENTITY.