In 2018, a continuation of the current growth dynamics is expected; in the Eurozone, this growth should settle at 2.1%, marginally lower than in 2017, due to exports supported by a global recovery as well as consumption increasing as a result of the continued decline in unemployment and investments favoured by positive conditions for accessing credit.
As for the United States, a continuation of the current growth phase is forecasted, with a slight acceleration (real GDP of +2.4%) due to the tax reform that - as a main element - reduces the tax rate on companies from 35% to 21%. The effect on families will be reduced and concentrated on higher income brackets. With regard to monetary policy, the Fed is expected to follow its path of "normalization", increasing its reference rate three times, thus bringing the corridor to 2.00% - 2.25%.
Given solid growth and slightly higher inflation forecasts, returns within financial markets should increase, reporting growth that is probably slightly higher in the Eurozone with investors that are increasingly looking forward towards the first increase in the interest rates of reference by the ECB in 2019. As a result, both public and private bond performances are expected to be negative. The sovereign spreads of countries in Southern Europe could be negatively affected in the first quarter given the upcoming Italian elections and continuing uncertainty over the Catalan issue. However, positive growth could limit the degree of expansion of the spreads.
With regard to stock markets, the growth trend should continue. Although markets are already somewhat overvalued, the current favourable economic situation, US tax reform and the still extensive levels of liquidity will foster this growth.
With regard to insurance markets, in 2018 growth in the P&C segment will continue thanks to the positive trends in the economy. The unfavourable situation within the Life segment could continue, even if there could be a few positive signs thanks to the expected positive trend in available income and - within Italy - the presence of regulations which should render the sale of traditional products less unfavourable.
With regard to the reinsurance business, the anomalous frequency of major catastrophic events in the second half of 2017 - which mainly affected the Caribbean areas and the United States - should be noted. Hurricanes Harvey, Irma and Maria in late August/early September caused insured losses of around $ 93 billion. In addition, the earthquakes that affected Mexico as well as the vast forest fires in California and the Iberian Peninsula negatively affected the reinsurance industry while, however, demonstrating its financial strength in sustaining an extraordinary sequence of claims. Consequently, the main renewal season, concentrated on 1 January, highlighted the end of the soft cycle and a trend reversal which also spread to business classes not affected by the aforementioned events.
The Generali Group - although partly affected by the hurricanes - exploited the benefits of a centralized reinsurance structure which allowed for greater control over risk retention levels, thereby mitigating the impact of losses to levels that were essentially in line with the averages of previous years. In accordance with the market cycle, reinsurance costs have marginally suffered from the contingent circumstances, recording increases, although very limited, in reinsurance expenses for the 2018 coverages keeping retentions unchanged or, in some cases, even more conservative.
Within the Life segment, the Group will continue to face, in 2018, the various and dynamic constraints that are derived from the regulatory sector as well as markets characterized by significant competition in a financial scenario featuring continuing low interest rates.
The strategy is based on Life portfolio rebalancing with the objective of optimizing profitability and allowing for efficient capital allocation. Significant focus was placed on strengthening the Generali brand by simplifying and innovating the range of product solutions which will be marketed through the most suitable, efficient and modern distribution channels that are increasingly based on digital processes. As a result, actions dedicated to Life portfolio enhancement will continue with renewed emphasis:
- the creation of new business based on the selective development of sustainable lines of business such as the Protection & Health and unit-linked lines; the latter serves as an alternative to investments in traditional funds which are only still sustainable if capital-light. The development of these lines of business will aim at offering a wide range of insurance solutions adapted to risk and investment profiles for the benefit of both the policyholders and the Group. In particular, and with regard to Protection & Health products, the focus is on traditional risk coverage enriched with customer services that render the management and solution of critical issues subject to coverage even more concrete; unit-linked target products are characterized by protection mechanisms that are capable of coping with potential market crashes (e.g. selection of volatility-controlled funds);
- with regard to in-force business, actions dedicated to improving the degree of persistency of value portfolios, in particular through actions which aim to strengthen relations with existing customers on the basis of an analysis of current insurance needs.
The Group's upcoming objectives include following up on the positive results of the rebalancing of the business mix while emphasizing the focus on market positioning in terms of premiums.
Premium trends will continue to reflect a careful underwriting policy, in line with the common Group goals and driven by a focus on the central importance of customers’ interest, as well as the value of the products and the risk appetite framework.
Within the P&C segment, premiums are forecasted to continue their growth trend in the primary geographical areas of operation of the Generali Group. This growth is consistent with the relative growth of GDP within a macroeconomic context featuring general recovery despite persistently strong competition, particularly in the corporate sector. The growth will be driven by motor - triggered by the economic recovery and the increase in the average premium - in order to cope with claims inflation, while non-motor, although increasing, will be more affected by competitive pressure.
Competition is also expected to accelerate in terms of distribution; in fact, digital transformation will create more space for non-traditional or non-exclusive distribution networks (such as aggregators), with a potential impact, from the business perspective, on volumes and profits. To deal with this situation, the Group is intensifying its implementation of a series of initiatives launched previously in order to offset the effects on profitability (especially in the motor, particularly fleets, but not only) with anti-cyclical measures, a disciplined approach to setting prices and risk selection, improving customer profiling, promoting long-term relationships and developing products with a modular system to take up non-motor cross-selling opportunities.
Management of the P&C segment - due to the level of capital absorption of these products which allow for efficient allocation - will therefore continue to be a foundational principle for implementing the Group's strategy whose objective is to become the European leader in the retail segment.
With reference to the Group investments policy, an asset allocation strategy aimed at consolidating current returns and safeguarding consistency with liabilities to policyholders will continue.
With regard to fixed-income investments, the investment strategy aims to diversify the portfolio, both within the sector of government bonds as well as in terms of corporate bonds in order to guarantee adequate profitability to policyholders as well as a satisfactory return on capital while maintaining a controlled risk profile.
Alternative investments are considered interesting for their contribution to portfolio diversification, and the creation of a multi-boutique insurance asset manager platform is part of the strategy aimed at enhancing investment capacity in these market sectors and within a context where total investment volumes are influenced by the limited supply and the high-quality requirements of investment policies.
With reference to stock exposure, "controlled volatility" strategies will be adopted.
New investments in the real estate sector will be primarily oriented towards the European market and - to a limited extent - other geographical areas in order to improve the overall diversification of the portfolio. The focus on efficiency in management of the existing portfolio also continues in order to optimize internal geographical diversification within Europe.
The aforementioned initiatives will enable the Group to counteract the prolonged scenario of low interest rates and encourage growth, thereby confirming the pre-established objectives of the strategic plan.