ARZGF - Assicurazioni Generali Is A Buy

Summary

• Solid solvency ratio and positive combined ratio.
• Two additional key takeaways to price in. 1) Banca Generali's strong development and 2) Cattolica Assicurazioni EPS growth.
• Among our EU insurance universe coverage, Generali is trading at a discount on a P/E basis as well as on the net intrinsic value.

Here at the Lab, we do have a good grip on the European insurance business and after having performed a comps analysis with Allianz , today we are back to scrutinize Assicurazioni Generali S.p.A. ( OTCPK:ARZGF , OTCPK:ARZGY ). Despite the highest reduction in shareholders' equity versus its closest peers, our internal team emphasized how the Italian insurer leader was a buy based on: 1) Generali's intrinsic value, 2) better prediction of Life business evolution, 3) the possibility to check unprofitable policies to improve the company's margin and 4) its tasty dividend per share (higher than comps) with the probability of higher shareholder distribution if Generali will not find an inorganic target by 2024.

Today, we would like to add two additional key takeaways to consider:

1. Assicurazioni Generali has a 50.17% equity stake in Banca Generali. Last week, the bank released its preliminary 2022 accounts with a consolidated net profit of €213 million, beating the analyst consensus estimates which envisaged a net profit amount of €207 million (Fig 1). This figure is down by 34% compared to the €323.1 million recorded in 2021; however, this was due to a negative one-off with the Italian Tax Revenue Agency. Looking at the release, we note the positive evolution generated by the higher interest rate development, but more importantly despite the complex macro scenario, Banca Generali was able to improve its business quality. In fact, recurring net profit rose by 25.2% to €221.1 million versus the €176.6 million delivered in 2021. Meanwhile, on the AuM, net inflows remain solid. Strengthened by these results, the board of directors will propose a dividend of €1.65 per share of which €1 will be paid next May and €0.65 in February 2024. This calculation reflects a payout ratio of 80% on recurring profits. At this price, the coupon translates into a yield close to 5%. In addition, Banca Generali will proceed with the 2021 second tranche dividend payment equal to €0.80 per share. In our estimates, taking into account the 2022 dividend, Bance Generali has a solid CET1 ratio of 15.6%. In addition, the company confirms its three-year strategic plan for 2022-2024 with cumulative net inflows between €18 and €22 billion, weighted average growth in recurring profits of 10-15% over the period, and growing dividends. On this basis, here at the Lab, we are implementing in Assicurazioni Generali's sum-of-the-part valuation a distribution of €8 per share of cumulative dividends in the period 2023-2025;

2. As already mentioned, Generali is looking for inorganic growth (Fig 2). A few years ago, the company launched a takeover bid on Cattolica Assicurazioni. Here at the Lab, we are updating our estimated synergies (before tax) between €120 and €130 million by 2025. We increases this number from €80 million due to a better integration process with a centralized and simplified product portfolio with Generali Italia. Compared to initial expectations, this would translate into an additional contribution of 0.8% to Assicurazioni Generali's EPS growth. We are now estimating Cattolica's core net profit at €175 million in 2025.

Source: Banca Generali Q4 and FY results presentation (Fig 1)

Source: Assicurazioni Generali Q2 results presentation (Fig 2)

Regarding the company's core results, operating profit increased by 7.8% thanks to Life and P&C segments' positive performance. Key to report is the solid Combined Ratio at 93.3%, and more importantly, we should note the insurance capital position. Indeed, Generali's Solvency Ratio is at 223%, much higher than the regulatory capital requirements set at 180%.

Source: Assicurazioni Generali Q3 press release

Conclusion and Valuation

Last time, we already reported how the company suffered from shareholders' equity development. This was due to Generali's greater exposure to the Life business and therefore a longer average duration of investments (which is more affected by the increase in interest rates) as well as exposure to BTPs (€53 billion last August) which inevitably suffered from the increase in spreads. However, with regard to the new international accounting standards' impact, we estimate a positive effect. In detail, our internal team is confident that IFRS 17 will allow equity research analysts to better understand Generali's life business profits. In our calculation, we estimate a €33 billion result in the next 5 years, and as already mentioned, this will lead to total results of €24 billion after-tax (around 85% of the group's market capitalization). In September end, the group's shareholders' equity was equal to €29.3 billion, and if we added the Contractual Service Margin which is what IFRS 17 defines as the value of future profits in the life sector will get the total intrinsic value.

Regarding the valuation, Generali is currently trading at the largest discount between net intrinsic value and market capitalization. Last time, we estimated the ratio of equity to CSM after tax to be €53 billion for Generali, while its market capitalization is now at €28.6 billion. If we are looking at Allianz and AXA, this discount stands at a 15% discount to their net intrinsic value. On a P/E basis, the company is also trading at a discount, as an additional margin of safety, Generali is yielding 5.8%. With a 12x P/E, we decided to initiate Assicurazioni Generali with a buy target of 21 and 11.2 per share in Euro and US Dollars (ADR) respectively.

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