Macro-economic scenario

European Union| United States | China | Latin America | Inflation rate | Interest rate | Exchange | Bond markets rate | Stock markets| Insurance markets|

2011 was an especially difficult year for European economies due to the continuation of the financial crisis, which highlights risks relating to the sustainability of the sovereign debt of European countries with a high public sector debt. The scenario described above even called into question the survival of the euro. The crisis most severely affected peripheral countries (Greece, Ireland, Portugal, Spain and Italy), which saw significant increases, to record levels, in the spreads between the yields of their bonds and those of the German bund, which has now become the quintessential safe haven investment. This increase in debt financing cost forced most European countries to adopt exceptional fiscal policy and cost containment measures. Those local policies were in addition to the new agreement reached at a European level to encourage a return to greater discipline among European countries in the area of public spending. A new plan, known as the “fiscal compact”, was approved on 30 January 2012 with the aim of reinforcing the stability pact by setting limits for the deficit/GDP ratio (0.5%) and reducing debt to below 60% of GDP. Such disciplined government budget policies will need to be associated, as appropriate, with measures to stimulate economic growth, which remains one of the most critical issues still to be resolved.

The Chinese economy also slowed, owing in part to a decline in foreign demand. A similar trend was also seen in emerging economies.

In contrast, the United States was characterized by a positive development of its economy, which showed clear signs of a recovery.

GDP Development


There was a trend towards an economic slowdown in the European Union following the situation of uncertainty in the Euro Area described above. The unemployment rate in the Euro Area also rose to 10.4%, compared to 10% in 2010.

The Greek crisis remains one of Europe’s key critical issues, with the country’s public debt equal to nearly 160% of its gross domestic product, a deficit in excess of 10% of GDP, while the latter is expected to decline in GDP by nearly 7% in 2011. Resolution of the problem relating to the restructuring of its debt remains the main ongoing challenge in the Euro Area. The outcome of the agreements will also condition future actions to be taken towards Portugal, which showed a 1.7% decline in GDP through the third quarter and whose public debt could reach 112% in 2012, according to estimates by the IMF. Ireland stood out among the peripheral countries: although its economic recovery slowed considerably in the second half of the year, it reported an estimated GDP growth of 1.1% in 2011 compared to a contraction of 0.4% in 2010.up

Italy was among the countries most severely affected by the Euro Area sovereign debt crisis due to its high level of debt. The risk tied to the sustainability of Italy’s public debt was the main issue in the latter part of the year, but the ECB’s intervention in support of the debt on secondary markets and the additional corrective measures subsequently enacted by the new administration calmed financial markets, resulting in a significant decrease in the spread, which fell below 310 basis points in mid March 2012 compared to 528 in December. The Italian economy showed slight growth during the year (GDP increased 0.4% compared to an increase of 1.5% in the previous year), but decreased sharply in the fourth quarter (0.5% of tendential GDP in the fourth quarter), while public debt exceeded 120% of GDP. Due to the weakness of the economy, the difficulty in obtaining credit and a climate of a lack of confidence, companies contained their investment policies. Households were the most severely affected as they saw their disposable incomes in ongoing decline, resulting in a significant decrease in their propensity to save and spend. The measures introduced by the government aim to achieve a balanced budget in 2013. Turning to the job market, the unemployment rate reached 8.9% in December (8.6% in the same period of the previous year). In further detail, the youth unemployment rate climbed to 31% (28.1% at the end of 2010). However, weak domestic demand was partially offset by the export performance, which remained positive in 2011 (up 6.2%), albeit with a slowdown compared the previous year (up 12.0%).

In France, the extensive measures aimed at consolidating the public finances were not enough to prevent the downgrading of the country’s debt, which lost its triple-A rating for the first time. The economy remained static throughout the year, showing GDP growth of 1.6% (1.5% in 2010).

Germany continued to grow, although at a slower pace of 3.0% (up 3.7% in 2010).

In the European Union Member States of Central and Eastern Europe, 2011 was a rather positive year in terms of economic growth (up 3.3% on average compared to 2010, driven by strong domestic demand), although there were differences in performance. Poland was the country least severely affected by the slowdown in the Euro Area, reporting a growth rate of 4.2% due to a lower weight of exports on its GDP (40%). In general, all Central European economies are expected to record a slowdown in proportion to their dependence on exports.up

In the United States, although economic growth fell short of expectations, there were signs of consolidation of the cyclical recovery. In particular, the decrease in the unemployment rate, which fell to 8.5% in December (9.4% in 2010), contributed to a considerable improvement in the U.S. household confidence index. However, there continue to be factors indicative of prospective weakness. Indeed, both the bear equity market performance and the high number of long-term unemployed (42.5% of the total) have a negative impact on households’ disposable income. In addition, the public deficit reached 10.7% in 2011 (8.3% in 2010), and U.S. public debt reached a record level of approximately 100% of GDP.up

In China, the macroeconomic scenario showed the first signs of weakness after years of rapid expansion, indicating that the country’s economic growth is slowing. In fact, GDP growth was 9.2% in 2011, down from 10.4% in 2010. The causes of the slowdown are to be sought in the decline in the growth rate of industrial output, construction activity and exports due to the appreciation of the yuan and to the weak foreign demand.up

There was also an economic slowdown in Latin America in 2011 due to weak foreign demand (from Europe and the U.S., but also China), on which the region is highly dependant, and a decrease in the inflow of investments from the rest of the world. In addition, commodity prices fell in the second part of the year, following on the increases showed in the first few months of 2011. In contrast, the risk of inflation remains high, especially in Brazil, whose inflation rate is currently 6.5% and which implemented an expansionary monetary policy in the second half of 2011, in contrast to the other countries in the region. The increase in prices further weakened consumers' purchasing power. In addition, high interest rates are unfavourable to investments and render outflows of foreign capital probable. In contrast, Argentina grew rapidly (GDP increased 7.5%), much faster than the average for the other Latin American countries in 2011 (where GDP increased 3.9%).up

The tendential inflation rate climbed to 2.7% (2.2% in 2010) in the Euro Area, and also rose in the United States to reach 3.0% (2.1% in 2010).up

Turning to monetary policy, central banks adopted expansionary policies: the ECB lowered its benchmark interest rate to 1%, the level of late 2010; the Federal Reserve committed to keeping the Fed Funds rate at a maximum of 0.25%.up

Period-end exchange rates(1)showed a highly volatile performance. In particular, the euro depreciated against the U.S. dollar, British pound and Swiss franc compared to 31 December 2010. In order to limit the strong appreciation of the Swiss franc against the euro, in September the Swiss National Bank decided to implement all measures necessary to ensure a target exchange rate of 1.20 between the Swiss franc and the euro.

Also with reference to the average exchange rates(2), trends varied against the Group’s major currencies of operation. The euro appreciated against the U.S. dollar and British pound. The euro depreciated against the Czech koruna and the Swiss franc — in the latter case, to a very marked extent.

In contrast, the exchange rate between the euro and Israeli shekel was stable.up

Financial markets

During 2011, and especially in the second half of the year, financial markets were characterized by tensions surrounding sovereign debt in the Eurozone. The markets were affected by concerns of a contagion effect of the crisis in Greece, Portugal and Ireland on the entire Euro Area. Italy was also characterized by a situation of great uncertainty caused by the high level of public debt and prospects of low economic growth. The effects of this phenomenon included the downgrading of Italy's public debt by the major ratings agencies. The spread between the yields on ten-year Italian and German government bonds, which stood at 185 basis points at the beginning of the year, climbed above 520 basis points late in the year, to then fall below 310 basis points in mid March 2012.

On bond markets, the performance of government bonds reflected the above-mentioned tensions in the Eurozone, with a considerable widening of spreads between German bunds and Portugal, from 368 bps at the end of 2010 to 1,153 bps at 31 December 2011 and between German bunds and Greece, from 950 bps to 3,313 bps. Ireland’s spread remained stable, passing from 608 bps to 638 bps. As mentioned above, Italy’s spread was also characterized by an extremely volatile performance, rising from 185 bps at 31 December 2010 to 528 bps at the end of December 2011.up

Long Term interest rate

The performance of the government bond market was influenced by the search for security by investors, which resulted in an increase in demand for ten-year German government bonds and thus a decline in the yields on such bonds, which represent the European benchmark rate, and which fell from 2.96% at the end of 2010 to 1.83% at 31 December 2011, reflecting in particular the decline witnessed in the second half of the year (-120 bps). The yield on ten-year U.S. government bonds also declined sharply, falling from 3.29% at the end of 2010 to 1.87% at 31 December 2011.

In contrast, the yield on ten-year Italian government bonds climbed from 4.81% at 31 December 2010 to 7.11% at the end of 2011.
Short terms interest rate

The European two-year benchmark rate decreased sharply, going from 0.86% in 2010 to 0.14%.

The U.S. two-year benchmark rate declined from 0.59% to 0.24%, showing a similar trend in the rate curve.

Corporate bonds were affected by the performance of government bonds and the economic slowdown, showing an increase in spreads, concentrated entirely in the third quarter. The spread on investment-grade bonds expanded from 144 basis points at the end of 2010 to 255 basis points at 31 December 2011. The increase in the high-yield segment was more extensive, from 494 basis points to 833 basis points. 
Stock markets

After a substantially stable trend shown in the first half of the year, equity markets recorded a significant drop at 31 December 2011, concentrated in the third quarter of the year. However, they showed a recovery in the fourth quarter. Overall, the Eurostoxx showed a significant decline of 17.7%, especially the banking sector (down 37.6%), whereas the insurance sector remained in line with the market trend (down 18.4%). Frankfurt’s Dax fell 14.7% and Paris’ Cac 16.9%, while Milan’s FtseMib reported the largest drop (25.2%). Madrid’s Ibex showed a more limited loss of 13.4%. In the United States, equity indices yielded a stronger performance: the S&P 500 was unchanged and the Dow Jones reported an increase (up 5.5%), owing in particular to the signs of a recovery in the economy, primarily due to the improvement in job market conditions.up

Insurance markets

The main European insurance markets on which the Generali Group operates showed performances that differed significantly by business segment and geographical area.

The life segment reported a downtrend following on vigorous growth in 2010 due to a combination of factors.
Firstly, this segment, in addition to the downturn in the economic scenario of several countries where the Group operates, suffered the higher short-term return rates of the government issues that affected some of the major European countries, which favored short-term banking products to the detriment of single premiums. Moreover, due to the pressing need of governments to significantly reduce the public budget deficit, in some countries tax benefits related to life insurance products have been revised, thus making them less competitive compared to other forms of savings.
In Italy, life insurance declined quite considerably. According to ISVAP figures for the first three quarters of the year, premiums fell by 18.7% compared to the same period of 2010, a year that had been characterized by the achievement of record levels of written premiums. Bancassurance and financial advisors are the distribution channels that reported the greatest declines in written premiums, whereas the traditional channel showed a more moderate decrease. The decline involved single premiums in particular.
The decline in life premiums was also particularly significant in France (down 14% according to initial estimates for 2011) due to uncertainty relating to the possible change in the taxation of savings products, as well as competition with banking products. In addition, the latter part of the year was affected by customers’ mistrust of financial institutions due to their exposure to countries with high levels of public debt. Within this scenario, outflows increased by 25% from the levels reported in 2010.
Germany also showed a marked decline in single premiums (down 17.5%). Combined with stable, yet weak growth in recurring premiums, which remained just below 1% for the entire year, this trend resulted in an overall decline of 4.8% for the segment. An even more severe downtrend was reported in Austria (written premiums decreased 7.6% through the third quarter compared to the same period of 2010).
Spain performed counter to the trend (up 9.4%) after having been the only European market to have reported a negative result in 2010. The main Eastern European EU Member States reported growth (with the exception of Hungary, which remained essentially stable), although at rates much lower than in previous years (approximately 6% in Poland and the Czech Republic through the third quarter).

In contrast, in the non-life segment, premiums increased during the year, although the difficult macroeconomic context slowed the segment’s growth. This result was driven primarily by the tariff increases observed, despite high levels of competition, including in the Motor line, which resumed growth in many of the major markets after several years of decline.
In Italy, written premiums grew in the non-life segment (up 2.8% through the third quarter). The segment’s performance is largely to be attributed to the motor general liability line, which benefited from more rigid tariff and underwriting conditions implemented by various insurers in order to restore their technical accounts, reporting an increase of about 3.5%. The segment remains under severe competitive pressure, increased by the weakness of household spending capacity and the rise in the weight of the direct channel (up 7.2% through the third quarter). Non-motor lines, while affected by the difficult economic phase, and especially the stagnation of domestic demand, should show written premiums essentially in line with the previous year’s levels.
The growth in the non-life written premiums in Germany (+2.5% compared to 2010) stood at the same levels of Italy, while showed a more sustained development in France (+4%), thanks to the positive development of all the business lines. There was a slight decline in Spain (down 0.3%), chiefly due to the decrease witnessed in the Motor line, whereas there was a more varied situation in the EU Member States of Eastern Europe. In the latter, the decline in the Czech Republic (down 1.6%) and the even more marked decrease in Hungary (down 5.8% through the third quarter, with a decline of 21% in the Motor line) was in contrast with the strong results in Poland and Slovakia (up 13.6% and 3.1%, respectively, through the third quarter), which can count on stronger, more dynamic domestic markets.
Various catastrophic events of considerable severity occurred in 2011 (earthquakes in Japan and New Zealand, floods in Thailand and Australia, and tornadoes and hurricanes in the U.S.), with a cost for the entire insurance market of over € 100 billion.
The Generali Group’s exposure to such events was limited as the Group traditionally does not have a significant presence in the aforementioned countries.up

(1)Used to convert items of the balance sheet into euro.

(2)Used to convert items of the profit and loss account into euro.