OUTLOOK

The International Monetary Fund forecasts that GDP growth in the eurozone will be 1.6% in 2016, in line with 2015 (+1.5%). Improvements in particular are expected in the economies of Germany, France and Italy (from 0.8% to 1.3%) thanks to a solid contribution from exports, and a slowdown in the Spanish economy (from 3.1% to 2.5%).
Inflation in the eurozone is rising, but will stay well below the 2% threshold. In view of this situation, the European Central Bank monetary policies will stay accommodating.
The US economy is also growing, while emerging economies are expecting a recovery, even though this will not be across the board; certain economies that slowed down in 2015, especially Brazil and Russia, should recover, even though GDP growth should stay negative. However, negative trends in China are expected to continue through 2016.

The recovery of the financial markets in the eurozone should continue through 2016, even though to a lesser extent than 2015, while financial markets in emerging countries are expected to slow down. Global growth prospects and the global economy will depend on how current geopolitical tensions play out.
With respect to the insurance industry, we expect premiums to perform well in the P&C sector in the main eurozone countries (Italy, Germany, France and Spain), in line with the - albeit weak - economic recovery. The life business will continue to feel the effects of the current low interest rates, along with minimum recovery in disposable income.
Therefore, in terms of insurance products, policies that are less sensitive to low interest rates will be favoured.
Finally, with respect to distribution, the rebalancing in the market towards unit-linked products may meet with resistance from the agency channel, while the banking channel may be less inclined to push insurance products less if the loan area recovers as expected.
With reference to the reinsurance area, the catastrophic events which occurred in the world did not have a significant impact on the reinsurance industry. The continuing absence of economically relevant catastrophic events generated a continuing reduction in reinsurance costs, with a consequent reduction in profits for reinsurers. The reinsurance market therefore broadened its product range to deal with this situation. Similarly, the Generali Group benefitted from favourable market trends, obtaining further reductions in the coverage renewal costs for 2016.

In the life segment, the Group will have to deal with a market scenario characterised by various external constraints, including the Solvency 2 directive, stricter IMD2 rules in terms of governance and transparency in the distribution of insurance products, and in general, financial markets characterized by continuing low interest rates. It will therefore further strengthen its focus on the Techex program initiatives, both at Group level and at the level of the single business units, aiming to strengthen the combined portfolio value by taking a simplification and innovation approach for the range of products. The Group’s commitment towards technical excellence needs to be increasingly driven by developing skills and managing performance: income trends will continue to reflect careful underwriting policies, in line with the common Group goals, driven by the risk appetite framework and the focus on the value of the products. Initiatives aiming at enhancing the value of the in-force portfolio through specific action and the selective development of certain business lines such as Protection and Unit-Linked products as an alternative to investments in traditional type funds. These business lines will be developed with an eye towards constructing a range of products that provides varied and suitable risk and investment profiles to both the policyholders and the Group.

Considering the pressure caused by the ongoing context of low returns, the P&C segment will continue to be highly important for the implementation of the Group strategy to become leader in the retail segment in Europe, with retail products where the capital absorption levels mean that the capital can be allocated efficiently.
There has been a further reduction in average premiums as a result of intense market competition, starting with the motor lines, but also expanding to the non-motor lines, individual products relating to household coverage and SMEs, along with a change in the expected development of claim frequency levels (which has tended to fall since 2011) in some countries (such as the motor lines in Italy and Spain). This competitive pressure has been accelerated by the distribution, which - spurred on by the digital transformation - will leave more space to non-traditional distribution networks or non-exclusive networks (for example aggregators), increasing portfolio volatility.

Therefore, from an industrial standpoint, volumes and profits should decrease. In order to deal with this competitive pressure, the Group has launched a series of initiatives aimed at offsetting the negative effects on profitability with counter-cyclical measures, a disciplined approach to risk-selection, enhancing the creation of value by improved customer profiling, concentrating on the most profitable areas and on longer-term relationships, or developing unique products with a modular system or a connectivity-based approach that could also imply cross-selling on the nonmotor products.

Group investment policies aim towards allocating assets in such a way as to consolidate current profitability and guarantee that it is consistent with liabilities towards the policyholders.
With regard to fixed-income investments, the investment strategy is aimed at diversifying the portfolio, both in government bonds, where European core rates are at minimum levels, and in corporate bonds, including private placements and secured loans. This is in order to ensure adequate profitability for the policyholders and a satisfactory return on capital, while keeping risk under control.
Equity exposure will be kept substantially stable, with a geographical and industrial rotation towards geographical and sectorial areas that have higher growth rates than Europe.
New investments in the real estate sector will be selectively made in new geographical areas such as Asia, the UK and Eastern Europe in order to improve the overall diversification of the portfolio. The portfolio will also be managed more proactively to improve overall profitability.

Despite the difficult macroeconomic environment and highly volatile financial markets, the Group will continue to pursue all the strategic actions noted above through 2016, confirming its goal of obtaining an operating ROE of over 13%, and improving shareholder remuneration in accordance with the strategic plan introduced to the market.

Milan, 17 March

2016 THE BOARD OF DIRECTORS