Generali Faces Another Uphill Climb
New capital rules, earnings power cause some concern
Mario Greco must feel like Sisyphus. Having completed one big job at Generali, the chief executive of the Italian insurer finds himself with another big task ahead.
Mr. Greco set a series of goals for the insurer two years ago. With the company’s annual results, which came out on Thursday, Generali not only met those goals but did so a year ahead of schedule. Yet Generali’s stock ended this week down.
The reason is that, since Mr. Greco launched his overhaul, the world has moved on. There are concerns that Generali looks slightly weak in terms of new capital rules for European insurers that kick in at the start of 2016. There are also questions over its earnings power.
Mr. Greco’s targets were to sell €4 billion ($4.25 billion) worth of unwanted assets, boost Generali’s capital to 160% of its minimum requirement under the existing Solvency I rules and operating return on equity to above 13%. All have been hit.
But when it comes to capital, the figure Generali reported this week for its so-called “economic capital,” which is a guide to its best estimate of where its capital will be under the new Solvency II regime, was only 151% of its requirement. That is down from 184% at the end of 2013, driven partly by the decline in interest rates—which makes it harder for Generali to meet guarantees on products sold in Germany especially—but also by an increase in the riskiness of bonds the company has invested in.
Generali acknowledges it started work on measuring capital under Solvency II rules much later than other large European rivals and so it is less sure about what its final capital number will be at the start of next year.
Given that its ratio is already behind rivals such as Allianz, which reported a ratio of 191% for 2014, this could limit the amount of dividends Generali can pay in the next year or two.
On earnings, Generali’s underlying results for 2014 failed to meet expectations. In part, this was because the nonlife business didn’t increase its profitability or grow as much as hoped. Also, profits on the life side were driven almost entirely by unrealized investment gains from the rally in government bonds over the past year. Such gains are seen as lower quality for life insurers because they are outside management control and can be lost when interest rates change direction.
Generali still trades at a slight premium to rivals Axa and Allianz in terms of multiples of earnings. And its prospective 2015 dividend yield of 3.9% is lower than both with Axa at 4.3% and Allianz at 4.5%. With work still to do at Generali, its premium looks unjustified.