Significant events and opinions

Significant events after 31 December 2011

Financial market tensions, and especially low interest rates and the widening of spreads on sovereign debt yields — the consequences of which included downgrades of several important Euro Area countries, including Italy — resulted in a revision of the ratings assigned to Assicurazioni Generali at the beginning of the year. In detail, in January the ratings agency S&P revised its rating, changing it from A+ to A, two notches above that of the Group’s main country of operation, and confirmed the stable outlook for the Group, thanks to its ability to generate profits, reflecting solid business fundamentals and geographical diversification. On the same grounds, in February the agency Moody’s also changed Assicurazioni Generali’s rating from Aa3 to A1, with negative outlook.

Lastly, in the first few months of 2012 there has been a gradual improvement in equity market performances, as well as a considerable reduction in the spread between Italian government bonds and the German Bund, one consequence of which was a significant improvement in the Group’s Solvency I ratio, which exceeded 130% at the end of February.

In order to increase the liquidity of the available capital, withdrawing from a market which, in the last few years, is no longer considered core for its development strategy, which focuses on geographical markets with high growth potential and low insurance penetration, such as Eastern Europe, Asia and Brazil, on 7th March 2012 the Generali Group signed an agreement to sell its participation in Migdal Insurance and Financial Holdings. The transaction, which effectiveness is subject to approvals by the competent Israeli authorities, should generate a capital gain of approximately € 103 million on a consolidated basis. As a consequence of the sale, the Solvency I ratio improves by approximately 2.4 percentage points.

On 8th March 2012 the proposal of Greece regarding its debt’s restructuring has been successful,  achieving the quorum provided for participation of private investors. The Generali Group complied with the plan, which provides, among other things, a write-down of 53.5% of the nominal value of the bonds covered by this restructuring plan.

Outlook for Generali Group

Following the recovery in global gross domestic product to pre-crisis levels reported in 2010, in 2011 the world economy experienced a renewed setback, owing in particular to volatility and uncertainty in financial markets due to the sovereign debt crisis involving several European countries. Expectations for 2012 call for a very gradual and uneven economic recovery in the Euro Area, driven, on the one hand, by severe restrictive fiscal policies and the gradual recapitalization of the banking sector with possible negative repercussions for the availability of credit, and, on the other, by all of the measures adopted to promote the functioning of the financial sector and low short-term interest rates supporting the economy. A contraction is expected in Italy, but even more solid economies such as Germany could be affected by weak internal demand. This trend will result in a significant slowdown in international trade. It will probably be necessary to wait until 2014 to see a return to significant GDP growth by Euro Area economies. An economic slowdown is also probable in the United States, which is affected by the weakness of the job market and difficulty in the real-estate sector, which is struggling to recover.
With reference to the financial markets, thanks to the measures taken by central banks in late 2011 and early 2012, tensions surrounding financing for the banking sector and Italian and Spanish government bonds have shown a decrease. In further detail, in February the European Central Bank completed an important financing operation for Euro Area banks with favourable terms, resulting in a significant increase in the liquidity of the sector.  The ten-year spread between BTPs and German Bunds declined from 528 basis points at the end of 2011 to 310 basis points in March and the yield on ten-year BTPs fell back below 5%. Eurozone banking sector equity prices climbed 10% and all exchanges are in positive territory. However, although sovereign debt tensions and concerns regarding a possible abandonment of the euro seem to have relented, it is likely that markets will remain highly volatile due to the development of the situation in the countries of the Euro Area with a high public sector debt, Greece and Portugal in particular.
In the United States, in January the Federal Reserve announced that it intends to hold rates stable until 2014. The inflation target, set at 2%, was also presented.

In 2011 certain catastrophic natural events of considerable intensity took place (earthquakes in Japan and New Zealand, floods in Thailand and Australia and tornadoes and hurricanes in the U.S.), resulting in a decrease in the flexibility of reinsurance cover, with capacity offered selectively, sharp price increases in the areas affected by the aforementioned events and essentially stable prices in regions not affected by these phenomena. Accordingly, the Group, which has not traditionally had a significant presence in the countries directly affected, should not be subject in the near future to significant changes in the pricing of insurance programmes.

Given the financial and macroeconomic scenario described above, the life segment is expected to confirm the levels of written premiums of 2011, while preferring products that absorb less capital and with more value in terms of new business, thus resulting in stable technical margins. However, stabilization of the financial markets and a recovery of economic development are in fact an essential condition for the life business to resume a dynamic of growth.
On the contrary, the non-life segment is expected to confirm the growth rates of the Group's written premiums observed in the year owing to the performance both of the Non-motor business and of the Motor line. If natural catastrophes are confirmed at physiological levels, overall technical margins may be expected to improve due to the maintenance of current levels of operating efficiency and the continuing effects of the tariff and claims management policies implemented by the Group.

The Group’s investment policy will continue to be based on a prudent asset allocation focused on consolidating current return and reducing the capital absorbed. In the life segment, the investment strategy will be aimed at ensuring an asset allocation consistent with the technical reserve profile, while also pursuing an optimal risk/return profile and a financial return profile appropriate to each individual portfolio. In the non-life segment, the primary goal will remain to favour a reallocation of the risk capital from financial risks towards insurance risks, with the aim of improving the operating result by increasing the return on the invested capital.
Lastly, the Group will continue to implement its aforementioned de-risking strategy.

On the basis of the scenario described above, which should result in a significant reduction in the exceptional components that in 2011 affected both the operating and the non-operating result, the life and the non-life segment operating results as well as the Group’s net result are expected to increase.



Milan, 20 March 2012                                                                                               THE BOARD

                                                                                                                             OF DIRECTORS