ARZGF - Assicurazioni Generali: Stand Out Results A Clear Buy Opportunity

2023-05-26 13:20:23 ET

Summary

• Q1 normalized net income at €1.2 billion, with a plus 49.7% versus last year.
• Solid performance of the company's combined ratio and strong Solvency II ratio.
• 2024 targets are confirmed, and so is our buy rating.

Assicurazioni Generali S.p.A. ( ARZGF , ARZGY ) just released its Q1 numbers and is the last top-tier insurance player to report within our coverage (here is the link to our latest publication of Zurich , AXA , Aegon , and Allianz ). Before commenting on these stand-out results, it is important to review our investment thesis. In detail, our buy was supported by : 1) Generali bank arm with supportive results on net interest margin evolution and its Italian branches presence located in the best-performer regions with higher GDP growth, 2) the company's intrinsic value with a juicy DPS, 3) Generali " Driving Growth 2024" strategic plan, and 4) better financial predictions for its Life business.

On the macro upside, we should report the Zurich Group AG recap :

... in a world with negative interest rates, insurance companies have focused on cost optimization. If we look to the past, insurer players recorded cash surplus on investment activities and reinvestment yield; however, since rates significantly declined, their aim moved to the core operating activities. The lower the combined ratio the more profitable is the insurer. Here at the Tower Lab, we are confident in the sector thanks to a double benefit 1) stable combined ratio and 2) higher reinvestment yield.

In addition, as already mentioned in UniCredit and Intesa Sanpaolo , Generali is set to outperform the personnel costs base. In the past, employees had more benefits, and thanks to strategic retirement plans, and even when considering some wage inflation, the company is likely to benefit from lower personnel expenses.

Q1 Results

Starting with the net income, the Q1 net result reached almost €1.2 billion compared to the €481 million achieved in the same period last year. To better reflect the underlying business dynamics, as already mentioned, starting this year, the Italian-based insurance group introduced a new net result definition, which neutralizes some market implications. In particular, there will be less volatility deriving from gains or losses on financial instruments and also a lower impact on intangible asset depreciation related to M&A. If we adjust the net income, Generali Q1 2022 stood at €821 million and not as mentioned above at €481 million. Despite that, the Italian player was able to achieve a net profit growth of plus 49.7%. This was mainly by operating result improvement and higher sources of income. To better compare the results, last year, we should mention that the company recorded a non-recurring profit relating to a London property sale for €193 million, partially offset by a write-off of €96 million related to Russian fixed-income securities. Going up on the P&L analysis, the company's operating result reached €1.82 billion, up by 22.1%, thanks to the non-Life segment contribution at €847 million.

To support our analysis, the combined ratio (the ratio between claims, costs, and premiums) improved to 90.7% and was supported by a lower loss ratio, and premiums up to €8.92 billion ( Fig 1 ). The New Business Margin grew to 5.72% and, as recorded by other insurance players, the company had a negative net inflow of €190 million. Asset & Wealth Management operating results were down by 10% at €233 million (Fig 2). Banca Generali significantly performed in the quarter. This was a remarkable performance with all our company-level investment reasons checked.

Fig 1

Fig 2

Still, in our upside list, the group also maintains an extremely solid capital position, with the Solvency Ratio at 227% (it was at 221% at 2022-end). This performance was due to the higher capital generation and the positive market impact, which more than compensated dividend accruals for the period.

Conclusion and Valuation

On the disinvestment activity, in the quarter, Generali sold the German pension unit, Pensionskasse to Fosun, a Chinese corporation. The Italian company will unlock €2.8 billion of capital reserves for 150,000 insurance policies. This transaction is in line with the group's Driving Growth 2024 strategic plan, which aims to improve profitability of the Life business. Again, another micro upside that fits with our initial assumptions.

Thanks to the Q1 results and the solid capital position, Generali confirmed its 2024 financial targets. In addition, with the new accounting standards, Generali will be able to significantly improve the visibility and predictability of the sources of profit (this is in line with the Zurich update called " IFRS 17 Might Provide An Upside "). Business plan objectives aim to achieve a CAGR in EPS between 6% and 8% over the period, and will likely generate net cash flows of over $8.5 billion. Shareholders' cumulative dividends are estimated between €5.2 and €5.6 billion. Going to the valuation, on a price-earning level, Generali is trading at a 20% discount on 2023 numbers compared to its closest peers. Therefore, we confirm our buy rating with a TP of €21 per share ($11.2 in ADR).

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