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Interim Report Third Quarter 2014 - Outlook

Interim Report Third Quarter and First Nine Months of 2014    Allianz Group 35 A Interim Group Management Report 5 Executive Summary 12 Property-Casualty Insurance Operations 22 Life/Health Insurance Operations 28 Asset Management 32 Corporate and Other 35 Outlook 37 Balance Sheet Review 44 Reconciliations Economic outlook1 As 2014 draws to a close, the global economic environment is some- what mixed. The global purchasing managers’ index for the manu- facturing industry, for instance, remained stable in the third quarter of 2014, hovering resolutely above the threshold that is indicative of expansion. This suggests some upside potential for industrial pro- duction around the world. However, the level reached by the overall indicator owed a lot to the positive view of business activity in the U.S. industrial sector. We expect the U.S. economy to experience solid growth in 2015, based primarily on improving domestic demand. In the Eurozone, current economic indicators suggest that economic development is likely to remain relatively subdued in the final quar- ter of this year. Until the end of 2015 we expect to see a moderate revival of the Eurozone economy. This is likely to be based on a steady – albeit gradual – strengthening of domestic demand and on more dynamic world trade. For 2015 as a whole, we expect real GDP growth of 1.2 % in the Eurozone, following an increase of 0.8 % this year. The overall Eurozone figure conceals some major differences, however. We will increasingly have to differentiate between “reformed” coun- tries and those “with reforms outstanding”. For instance, some coun- tries are likely to finally reap the rewards of their reform efforts and expand significantly more strongly than the Eurozone average, whereas economic recovery will continue to remain relatively weak and vulnerable in countries which have a considerable reform back- log. Growth in emerging market economies has decelerated in recent years, mainly for structural reasons. We expect these markets to grow by 4.1 % this year, the weakest since the global recession in 2009. Real economic growth is then expected to pick up slightly to 4.6 % in 2015 – bolstered by more dynamic economic activity in eastern European and Latin American countries. All in all, global output is likely to grow by 3.0 % in 2015, following an expected increase of 2.5 % this year. Infla- tion is likely to remain subdued on a worldwide level, not least due to the dire unemployment situation in many industrialized countries, which keeps the lid on wages. However, risks for the global economy have increased over the course of the current year, in particular in the geopolitical sphere. One example is the risk of a renewed escalation of the conflict between Russia and Ukraine. 1 The information presented in the sections Economic outlook, Insurance industry outlook and Asset management industry outlook is based on our own estimates. Outlook −− Upward forces in the global economy to retain the upper hand. −− Operating profit outlook unchanged – the upper end of target range is in reach. Like this year, 2015 will probably stand under the twin spell of monetary policy and geopolitical tensions. Regarding the former, the U.S. central bank (Fed) is likely to make further corrections to its extraordinarily expansive monetary policy by raising the key interest rate towards the 1 % mark by the end of next year. It is very likely, how- ever, that the European Central Bank (ECB) will embark on rate hikes later than the Fed, i.e. not before autumn 2015. The exit from the ECB’s ultra-loose monetary policy is likely to focus on interest rate policy to start with, because the ECB has already promised to provide unlim- ited liquidity until the end of 2016 and the new, targeted, more long- term refinancing operations will take place until mid-2016. With short-term rates close to zero, there are limited prospects of markedly higher yields on longer-term bonds. We expect yields on 10-year German and U.S. government bonds to climb only moder- ately until the end of next year. With the ECB starting to normalize its key interest rates later than the Fed, the U.S. Dollar is likely to appreci- ate from its current level against the Euro well into next year. Insurance industry outlook Economic tailwinds for the insurance industry are set to blow for the remainder of 2014 and into 2015 – if only gently. At the same time, differences in growth levels between markets will become wider, reflecting specific political, regulatory and economic conditions. In that respect, we will see not only the usual growth gap between emerging and industrialized countries but also a widening gulf with- in these groups, namely between America and Europe on the one hand and Asia and other emerging markets on the other. The same can be said about the outlook for profitability: Many challenges remain, for example low investment returns and a more demanding regulatory environment. However, more and more companies are now well positioned to cope with these challenges, thanks to strong capital buffers, innovative products and a shifting business mix. In the property-casualty sector, we anticipate stable premium growth both in the remainder of 2014 and in 2015, driven mainly by theincreaseineconomicactivity.Pricinginmotorinsuranceremains under pressure in most markets, reflecting a benign claims environ- ment and intense competition, but other personal and commercial lines are in a better position – although we do not expect further rate hardening across the board. Overall, we expect global premium

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