Macro-economic scenario

Macro-economic scenario | Financial markets | Insurance markets

Macro-economic scenario

The just ended year was marked by a weak  macro-economic situation, although there were some positive signs in the second half of the year characterized by a more sustained economic growth in the United States and a significant reduction in volatility in the European stock markets.

In the Euro Zone, BCE measures were determinant, which were proven to be efficient in significantly reducing the spread between the bund and government bonds in Euro Zone Countries with a high public debt, in particular  Italy and Spain. During 2012, the Central Bank granted loans to European Banks through LTRO (long term refinancing operation) operations, implementing quantitative easing (purchasing government debt) at the same time and, subsequently drafted a plan (called Outright Market Transactions – OMT) to support those Countries whose sovereign bond returns do not seem justified by the basic macroeconomic indicators.

At the same time, in this political contest, the framework for a European banking union was developed, which will be monitored by the BCE. Two important measures were approved, the so-called fiscal compact, aimed at strengthening the Stability Agreement (limiting the deficit/GDP ratio at 0.5% and the repayment of public debt exceed 60% of the GDP) and the ESM (European Stability Mechanism), a mechanism aimed at assisting struggling Euro Zone countries.  A final important sign for the stability of the Euro is the success of the buy-back operation (buying back restricted debt), implemented by Greece, which was able to obtain a new tranche of assistance.

Despite reducing financial turbulence, the economy of the European Union is struggling to grow, given the particularly weak internal demand due, in large part, to the effects of austerity policies aimed at reducing the public deficit. The data from the third quarter underline a worsening economic situation with a GDP that is expected to be around -0.4% for all 27 countries in the Union and this drops another -0.6% for all countries in the Euro Zone. Unemployment in the Euro Zone in the last quarter of the year remained stable at 11.7% while the tendential inflation rate in the Euro Area dropped to 2.0% in January 2013 compared to 2.2% at the end of 2012.

In the European Union, Italy is among the countries where economic activity slowed down significant (the GDP changed -2.7% in the fourth quarter of 2012) due to a decline in internal demand and the measures undertaken by the government, which however contributed to the stability of the public accounts in the country.  Germany continued to be the economic driver of the European Union, even though it experienced some slow down compared to the previous fiscal year (+0.9% increase in GDP in the third quarter compared to +2.7% last year), particularly due to weak foreign demand.

Encouraging signs of recovery came from the United States in the third quarter, where the GDP increased by +2.5%, thanks, in particular, to the labour market and real estate market recovery. China continued to show sustained growth rates (+7.8% increase in the GDP in 2012) even though this was a slow down compared to the previous fiscal year (+9.2%) due to a decline in global demand.up


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Financial markets

In 2012, financial markets showed signs of recovery, especially benefiting from the intervention by the European Central Bank which, through two refinancing auctions on favourable terms, provided abundant liquidity to the banking sector. These injections of liquidity, largely used by banks to purchase government bonds, improved the investors’ confidence index. During the year, the markets were nonetheless characterized by high volatility.

Bond markets reacted positively including with respect to government bonds. The strong recovery, which had characterized the first quarter, however, proved temporary due to the worsening situation in Greece, exacerbated by the country's political uncertainty and, above all, the deterioration of the Spanish banking sector, particularly affected by significant difficulties in the real estate. To cope with the deteriorating markets in late June the European summit launched several important measures including the possibility for the ESM to purchase bonds of member countries of the Euro Area with financial difficulties and the intention to recapitalize banks in crisis. Furthermore, at the end of September, the European Central Bank also announced expansionary monetary policies.

Corporate bonds also reacted positively to such measures: the spread on the bonds of European investment grade issuers in respect of risk free interest rates narrowed from 255 bps to 131 bps; for high yield issuers, the spread fell from 833 bps to 505 bps.

 

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The yield on ten-year German government bonds dropped from 1.83% of 31 December 2011 to 1.32% at 31 December 2012, reaching a low of 1.17% in July. In further detail, the spread between the yields on Italian ten-year BTP and German Bunds, which had come to 527 bps at the end of 2011, fell to a low of 278 bps in March, to then return to 318 bps on 31 December 2012.  Euro swap 10year-rate decreased.

The yield on ten-year U.S. government bonds dropped from 1.88% to 1.76%, partly due to monetary policy measures by the Federal Reserve.


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The Bund two-year rate dropped, becoming negative from 0.14% at the end of 2011 to -0.01% at 31 December 2012, with a flattening of the rate curve. The Euro swap rate saw a similar trend.
The US two-year rate remained substantially stable at 0.25% (0.24% at the end of 2011).

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Equity markets mainly showed positive performances, although characterized by high levels of volatility; after the slowdown that had characterized the second quarter, the main indices showed significant growth.

Eurostoxx recovered significantly (up +15.53%). In particular, the segments with the best performances were the Motor segment (up +35.30%) and the insurance segment (+34.11%). The banking sector also showed signs of recovery (+11.98%).

The main European stock exchanges recorded generally positive performances: Frankfurt’s DAX (up +29.06%), Paris’s CAC (+15.23%) and Milan’s FTSE (+7.84). The exception was Madrid’s Ibex (-5.08%).

In the US, the stock markets showed a similar positive yield thanks to the economic recovery. The S&P 500 was up 13.41% and the NASDAQ 15.91%.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 continued to show the downtrend that had characterized the previous year; however, there was a dichotomy between the more mature markets of the Euro Area, where premiums written fell sharply and the countries of Central and Eastern Europe, where the life product market regained some momentum.

As regards Italy, the trend in premiums written for direct labour for the first nine months of the year decreased by 8.9% compared to the same period of 2011, thus confirming the negative trend that started in mid-2011. New production continued to decline (-10%), however up compared to 2011 (-28%). The contraction is mostly due to traditional products (-13.3% in the third quarter) while linked products show strong signs of recovery (+13.3% for new production in 2012). As concerns sales  channels, there was a contraction in the premiums written in the banking segment (-21% in the third quarter, -17% for new production estimates in 2012) and a more contained decline in the agency channel (-3% in the third quarter). By contrast, brokers performed in sharp contrast to the trend, reporting an increase in premiums written of 15% in the third quarter (+26% for new production) driven by unit-linked policies.

In Germany, premiums written have recovered from the decline during the previous year, thanks to the increase in life products in the strictest sense with single premium policies that show a 0.6% increase while regular premiums are up 0.9%.

France continued to show the decline in premiums written observed in the previous year. Despite a deceleration of the contraction in the second half of the year, the estimates for 2012 show a contraction of premiums totalling 6%. For the first time, the net cash inflow for the segment was negative (-3.4 billion Euros) due to reduced family income and competition from other investment products, particularly from banks.

In the main Central and Eastern European countries, life insurance markets have generally shown a positive trend with the main exception being Hungary. Poland showed robust written premium growth (+10.6% in the third quarter) due, in particular, to the linked product success (+16.5%), which show a positive trend in the Czech Republic (+6.3%) and in Slovakia (+13.4% in the first half of the year). On the contrary, the negative performance of linked products (-12%) led to a contraction in the life insurance market in Hungary (-8%).

Also in Spain, the first estimates for 2012 show that the life segment market suffered a sharp decline (-9%), mainly due to the decline in premiums written through the banking channel and difficulties with saving and pension products (-10%).

In the property & casualty damages segment, premiums written showed differentiated performances in the Group’s main markets of operation.

In Italy, the weakness of domestic demand had a negative influence on overall premiums written in the property & casualty segment (-0.6% in the third quarter of 2012). In further detail, there was a decrease in the Motor line (-0.5%), which was affected by the sharp decline in new registrations while non-Motor segments, despite a weak internal demand, showed stable premiums written during the third quarter.

In Germany, there is a significant increase in premiums written in the Motor segment (+5.1%) and a positive results for the property segment performance (+4.1%).

In France, the property & casualty segment showed an increase in premiums of 4%, in large part due to rate increases (particularly in the non-Motor segment) aimed at restoring the technical profitability, which has dropped significantly in recent years. In the Motor segment, the increase in premiums is instead 3%.

Concerning the other main European operating Countries for the Group, there was a significant decline in Motor premiums almost everywhere except Poland (+3.2%) with a particularly negative trend in Hungary (-8% in the third quarter) and Spain (-6% for the first estimates in 2012). The property segment, due primarily to the rate increase applied, instead shows a positive dynamic in all countries with an increase in premiums written of around +3% on average.up