Significant events and opinions

Significant events after 31 December 2013

On January 14 2014, Assicurazioni Generali S.p.A placed a senior bond with institutional investors for an overall amount of €1.25 billion. The bond is intended to only partially refinance the Group’s 2014 senior maturities worth a total of €2.25 billion, in accordance with Generali’s funding strategy announced during the Investor Day held in London on 27 November 2013. The issue attracted strong interest from international investors, which accounted for approximately 90% of the placement, confirming the confidence the Group has on the international market. Approximately 37% of the placement went to UK institutional investors, approximately 18% to French companies and 15% to German companies. The placement has a duration of six years and an annual coupon of 2.875% and is listed on the Luxembourg Stock Exchange.

During the fourth quarter of 2013, in view of the imminent introduction, with effect from 1 January 2014, of the new prudential rules for banks (Pacchetto CRD IV), Generali has received from Mediobanca, with reference to the loan granted to the Company of €500 million, the request for the application of the contractual clause “additional costs”.

In order to assess the bank’s request, Generali carried out a thorough analysis of the contractual documentation and in this context, the existence of an option contract came to light that would allow Assicurazioni Generali to repay the loan in advance and that this contract had not been communicated by the Company to the Supervisory Authority in 2008, at the time of financing agreement. More specifically, the option would allow Generali, with the approval of the Supervisory Authority, to buy in advance the aforementioned subordinated liability from the twenty-fourth month following the signing of the loan agreement.

As a result of the analysis conducted by the Company it was found that at the meeting of the Board of Directors, which approved the aforementioned loan in September 2008, the possibility of requesting early repayment, with reasonable notice to the lending bank and subject to the issuance of a specific authorization by the Supervisory Authority had been mentioned, however the option to repurchase the subordinated liability was not communicated to the Board of Directors at the aforesaid meeting, nor was it subsequently disclosed, nor was it made known to the new management of the Company. In light of this, the Group has promptly sent all documentation relating to the matter to the Supervisory Authority, and as a result of the communication from IVASS on 4 February, cited below, has informed the Risk and Control Committee, the Board of Directors and the Statutory Auditors, simultaneously launching an extensive internal audit. Upon request from IVASS, Generali has also performed both a review of all subordinated debt as part of a comprehensive capital analysis and also a thorough verification of all correspondence with IVASS in recent years.

There was no evidence of any further failure to provide information to the Supervisory Authority for supervisory purposes and the competent boards of the Company. The Company is carefully evaluating the refinancing, legal and reputational costs arising from this situation.

Outlook for Generali Group

The outlook for the Euro Area in 2014 calls for a recovery of GDP (+1% variation expected by the International Monetary Fund), with a labor market that is still characterized by a high level of unemployment (12.2% unemployment rate expected by the IMF). Economic activity will benefit from the expansionary monetary policy of the ECB. With regards to Italy, the IMF expects an economic recovery in 2014 (+0.6% GDP growth expected).
In the United States the economic growth experienced in 2013 will continue (+2.8% change in GDP in 2014 expected by the IMF compared to 1.6% in 2013); these estimates are, however, related to the confirmation of an expansionary monetary policy. China will witness a slightly lower growth rate than in the past (+7.2% change in GDP in 2014 per the IMF compared to 7.6% in 2013). In emerging markets, the IMF predicts a growth rate in GDP of 5.1% (+4.7% in 2013).

The financial markets have demonstrated their dependence on the liquidity provided by central banks and on the maintenance of expansionary policies by the ECB. The Federal Reserve has postponed the announced gradual reduction of its purchases of securities on the market. The temporary measures adopted by the US government on 17 October, which enabled it to avoid default, were also crucial in the United States. A decision regarding the raising of the debt ceiling is expected for early 2014. Within this framework, markets will likely continue to remain somewhat volatile.

With regard to the reinsurance business in particular, the various catastrophic events that occurred at the level of the entire insurance marketplace had marginal effects on the reinsurance industry, despite the floods that struck Central Eastern Europe in June and Germany in July and August. Accordingly, the reinsurance business yielded a positive trend on average and has led to a reduction in costs of renewals of reinsurance contracts for 2014.

Given the scenarios described above, the Group expects written premiums in the life segment to remain stable, also based on an accurate underwriting approach that reflects the focus on product value. Initiatives to enhance the value of the in-force portfolio will progress through dedicated actions and the selective development of defined business lines, such as Protection and Unit linked products.

Coherently with the strategic objective of increasing the contribution to Group results of the property&casualty segment, an improvement in technical profitability is expected for this business, due to the conservation of the actual levels of operating efficiency and to measures that have been put in place. Underwriting initiatives including the up scaling and the optimization of technical tariffs will be extended in order to improve client retention. The product offering will be broadened with a telematics approach. With reference to Claims management, efforts will be concentrated on the optimization of damage evaluation, on the prevention and management of frauds and leakage reduction. A peril based approach (by risk type) will strengthen the integration between product development functions, underwriting and claims management. Development of clients and generation of value will be achieved through cross sell, upsell and retention. The Distribution focus will be on Tied Agents Excellence and on the creation of an Effective Multi-channel distribution system.

The Group’s investment policy in 2014 will be based on an asset allocation aimed at consolidating the current return and reducing the level of cash. With respect to fixed income investments, the Group’s investment strategy, consistent with the structure of insurance liabilities in an integrated asset and liability management strategy aims at the diversification of the portfolio, both in non-Italian government bonds and corporate bonds, ensuring both adequate profitability for policyholders and a satisfactory return on capital. The equity investment exposure will be rationalized by reinvesting in the both public and private companies, pursuing a strategy aimed at long-term capital appreciation. Investments in real estate will continue in both core markets (Italy, France, Germany) and in new areas (Asia, U.S. and UK), where selective investments will be made. With regards to liquidity, efforts to reinvest in a wider scope of asset classes will continue.

In light of the actions taken, despite the uncertainty of the macroeconomic scenario, and, in line with its strategic objectives, the Group expects an overall improvement in operating income in 2014.

Milan, 12 March 2014

THE BOARD OF DIRECTORS

Assicurazioni Generali S.p.A. - C.F. e P.IVA 00079760328