March 16, 2017

Barbarians not at the gate

by Breakingviews

Generali’s rumble with Intesa Sanpaolo has left a fading wake-up call. After facing down a bid by the Italian bank last month, the insurer is accelerating cost cuts and hiking its dividend. The trouble for investors is that Intesa’s interest looks a one-off.

Generali is hard to take out. Intesa wanted to buy and break it up, yet failed to get enthusiasm from buyers for the bits it didn’t want or its shareholders. Other potential acquirers, like Allianz or AXA, face competition issues. That leaves Generali nursing its own problems.

One is common for life assurers – the gap between low bond yields and the higher guarantees written to clients, which bites as bonds mature. Last year returns fell by 17 basis points, while guarantees just 7 basis points. Generali is switching clients out of guarantees, and writing more profitable new business that absorbs less capital. A rise in interest rates could ease the problem, but is not assured.

Generali also has bespoke issues. Its comfortable capital ratio of 177 percent of minimum requirements relies more on “in force” expected profits than peers, making it more volatile. Then there’s Italy. Generali’s home market is highly profitable, with a low combined ratio below 90 percent. But the insurer took writedowns on its Atlante bad bank stake last year, and owns 4.2 billion euros of bank debt and 66 billion euros of government bonds. With Italy facing a prolonged period of government instability, Generali could be exposed to a weaker economy or crisis.

There are levers to pull. Generali is bringing forward 200 million euros of cost cuts and promising higher payouts. Its operating results are better. Losses and expenses as a proportion of premiums earned – the so-called combined ratio – fell below 93 percent, and less profit came from selling assets. It’s also committed to getting out of less profitable markets where it lacks scale.

But Generali should really quit France. Despite recent improvements, the country remains an eyesore with lower margins and a high combined ratio. As traditional life insurance and investment management converge, the group also lacks a global brand in asset management.  With Intesa’s drums beating more softly, the risk is that Generali chooses not to grasp these nettles.

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