ARZGF - Assicurazioni Generali: Strategic Deal Goals Achieved

2023-07-07 10:49:58 ET

Summary

• Assicurazioni Generali S.p.A. remains a compelling investment opportunity due to its strong balance sheet, sustainable dividends, and recent acquisitions.
• The company recently acquired two companies, increasing its Assets under Management (AuM) by $157 billion and strengthening its presence in the USA and APAC area.
• Generali purchased Liberty Seguros for €2.3 billion, expected to generate strong synergies and increase the company's EPS by 5%.

The current macroeconomic context makes us very cautious about future investment decisions. However, we remain constructive on the European insurance industry as companies have strong balance sheets with an average Solvency II ratio of 217% and an attractive free cash flow yield of around 11% in 2024, which on aggregate well-covered the dividend payment (as we usually view as downside protection). We believe that Assicurazioni Generali S.p.A. ( ARZGF , ARZGY ) is still a compelling investment opportunity, and as anticipated in our initiation of coverage, our buy was supported by 1) Banca Generali valuation, 2) better prediction of the company's Life business, 3) a predictable and sustainable dividend per share (also more generous than competition) and 4) a solid balance sheet with value creative M&A optionality.

Following the Q1 results comment called " Stand Out Results, " with a buy reiteration, the company ended the quarter reinforcing its balance sheet with a Solvency Ratio of 227% (again higher than EU peers' average). Therefore, we are unsurprised to report two relevant acquisitions in the last few days.

M&A Upside

Starting with the most recent, the Italian Insurance leading player acquired Conning Holdings , one of the main global asset managers dedicated to insurance and institutional customers, from Cathay Life. This transaction concerns only the AuM division, and there is no cash outflow. This deal was structured as a merger combination in which Cathay Life will hold 16.75% of Generali Investment Holding. The acquired division will increase Generali Assicurazioni's AuM by approximately $157 billion (€144 billion). After Conning Holdings Limited's contribution to Generali Investments Holding, Cathay Life will become a minority shareholder. To support revenue synergies, the company will launch a broader partnership with Generali to support the growth ambitions strategy of the Group in asset management activity at a global level.

Indeed, thanks to this latest acquisition, Generali will benefit from AuM in the USA and the APAC area, two interesting places to develop and grow. Generali will be best positioned to expand the third-party business in key markets worldwide. This acquisition is in line with Generali's " Lifetime Partner 24: Driving Growth " strategic plan and will strengthen the Group's strategy in asset management, which aims to develop a global leader in offering investment solutions, creating a single platform with diversified expertise in fixed income, structured and corporate credit, emerging market debt and private real estate. Following the acquisition of Conning and its subsidiaries, the group's total AuM will increase to $845 billion (€775 billion), thus placing it as the ninth player in Europe.

In recent days, Assicurazioni Generali closed another maxi operation, the largest since PPF in Eastern Europe . The company acquired the Spanish Liberty Seguros for €2.3 billion, outpacing competition from Allianz and AXA . Liberty Seguros own a premium portfolio of over €1.2 billion in Motor third-party liability collected not only in Spain (65% of sales) but also in Portugal (20%) and Ireland (15%). In 2021, the company generated €50 million in net profit and renewed its bancassurance agreements with Bankinter and Kutxabank . The company has nearly 1,700 employees and subsidiaries across the Western European market. Its strong point is Spain, but it has 5,600 intermediaries in all countries and over 20 partners, with a portfolio of insurance solutions in the P&C and life sectors. Generali strengthens itself not only in the Iberian Peninsula but also in Ireland. This was an all-cash acquisition aligned with Generali's plan to grow in the EU region. This operation is also important because Liberty Seguros has a multichannel distribution platform that can create synergies with Generali tech development.

Going to the financial estimates here at the Lab, we believe that Generali could anticipate strong synergies from this transaction. We assume that the Italian insurance player might remove 35% of the Liberty Seguros Mutual cost basis, with an expected saving of approximately €140 million annually. Liberty Seguros had a combined ratio of 93%, and we anticipate a normalized profit of €100 million. The cost synergy targets care comparable to those delivered on the Cattolica transaction, where the Italian player initially guided to €80 million in saving but later upgraded to €120/130 million . As a reminder, Generali had ample liquidity space, and according to our calculation, Liberty Seguros' acquisition could be EPS accretive of 5% post synergies. Following this acquisition, we estimate a Group solvency ratio above 200%. In addition, looking at the Generali press release, Liberty Seguros also has a solid balance sheet with a Solvency Ratio of over 330%.

Conclusion and Valuation

Regarding the valuation, Liberty Seguros was priced at a 10x multiple on a P/E basis, while Generali is trading at 8x. Wall Street and investors may query the company's choice of capital deployment on acquisition versus buyback. At the Lab, we believe Generali could still use €1 billion in share repurchases optionality. This is derived from Generali's strategic plan indication. Indeed, the company reported : " €3 billion of cumulative discretionary free cash flow for redeployment to initiatives that drive profitable growth and create value, including M&A in Insurance and Asset Management ". Once again, we think this 20% discount vs. peers on the 2023 P/E level is unjustified (and this latest acquisition of a small regional player confirmed our view). From a strategic perspective, these latest transactions make sense to us and prove Generali is a leading player in the industry. Valuing the company at 10x P/E, we reaffirm our buy rating with a target price of €21 per share ($11.2 in ADR).

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