ARZGF - Generali: Record In Operating Profit Confirms It's A Buy

2023-03-16 14:05:57 ET

Summary

• Generali proposed a DPS of €1.16 with a plus 8.4% versus 2021 and confirmed its focus on shareholder remuneration.
• Strong earnings growth supported by inorganic growth and a diversified business model.
• The company confirmed its strategic plan objectives, and so we confirmed our valuation.

Recently, Assicurazioni Generali S.p.A. ( ARZGF , ARZGY ) released its quarterly results, and we were pleased to see an immediate positive stock price reaction of a plus 3.5%. Our buy rating which was already provided in our comps analysis with Allianz was supported by 1) the company's intrinsic value, 2) a better prediction of Life business evolution thanks to IFRS's new regulatory requirements (with the possibility to check unprofitable policies to improve margin) and 3) its juicy DPS. In addition, in our Generali initiation of coverage dated back a month ago, we also emphasized an upside in Banca Generali Sum-of-the-Part valuation (considering that the Italian insurer has a 50.17% equity stake) as well as inorganic growth opportunity thanks also to higher estimated synergies between €120 and €130 million on the latest Cattolica Assicurazione deal. Our most devoted readers know that we have a good grip on Insurance companies, and here are our main highlights:

1. First of all, Generali Assicurazioni closed 2022 numbers above consensus expectations. Gross premiums were up by 1.5% and net profit reached €2.91 billion signing a plus +2.3% compared to estimates set at €2.80 billion;
2. We should positively record the core operating result in the Life sector (already emphasized in our bullet point summary) which reached €3.52 and was up by +25.1% on a yearly basis, while the Non-Life sector grew by only 1.7%. On a negative note, and also experienced by other insurance players, we are not surprised to see a negative evolution in the Asset & Wealth Management division. Operating profit decreased by 9.6% to €972 million from €1.08 billion. Aside from the AuM flow, it was the record year for Generali with operating results reaching €6.5 billion with a plus 11.2% compared to 2021 numbers (Fig 1);
3. In our analysis, we closely monitor the combined and the Solvency ratio. The former reached 93.2%, while the latter dropped to 221% from the previous 227% achieved at the end of 2022 (it still is well above regulatory requirements). Having participated in the Q&A call, we positively report that the company's CFO explained that the solvency ratio was at around 230% as of 10 March (Fig 3);
4. The CFO also specified that Generali " has no exposure to SVB " and positively note that the company decreased its investment in the Italian treasury market (BTP). At year-end, the company's portfolio BTPs were at €44.3 billion vs an exposure of €53 billion compared to last August;
5. For the above reason, the Generali management has proposed a dividend per share of €1.16, up by 8.4% on the core DPS distributed last year. At current prices, this represents a dividend yield of more than 6.5%;
6. The group's shareholders' equity stood at €16.20 billion, down by 44.7% mainly due to the reserves available for sale ( in particular, following the performance of bonds );
7. Generali confirmed its strategic plan objectives with a growing dividend and an EPS CAGR between 6% and 8% in 2023/2024. In our numbers, we are estimating net free cash flows in excess of €8.5 billion and shareholders distribution between €5.2 billion and €5.6 billion (Fig 4);
8. Going to the valuation, comparing Generali with its peers, its largest discount between market capitalization and net intrinsic value cannot be unnoticed. For the SVB situation, financial companies' stock prices have significantly declined, and we are at the same price as our initiation of coverage. If we are looking at AXA and Allianz (both covered by our team), this discount stands at 15% compared to their net intrinsic value, while the Generali discount is close to 50%. On a P/E level, the Italian player is also trading at a discount, with a P/E of 12x, we confirmed Assicurazioni Generali's valuation with a buy target of €21 per share ($11.2 in ADR).

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