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Morningstar | Generali Fiscal-Year 2018: Disappointing Non-Operating as To Be Expected, Decent Operating Result

Generali reported full-year earnings before tax of EUR 3.45 billion, below our forecast for the full year and below consensus and the prior year. The lower result has mainly been caused by impairments on the non-operating result and declines on book value as Italian yields have unrealised gains and losses. The harvesting rate, which is net realized gains, net impairment losses, and net unrealised gains, has dropped from 70 basis points to negative 10 basis points, and the investment yield has dropped 30 basis points. However, the operating results look decent, which we discuss below. The business reported earnings per share of EUR 1.48 and EUR 0.9, resulting in a 60% payout ratio and a 5.6% dividend yield. We maintain our EUR 17.3 fair value estimate and no-moat rating.

The technical margin within life insurance has actually improved by EUR 400 million to EUR 5.8 billion, and the business has also managed to curb operating expenses. There has been quite a sharp fall in life insurance assets over the period, and this has driven the lower investment result and the lower overall life result, but acquisition, administration, and other expenses have been pulled back EUR 350 million as part of the business' 2015 to 2018 "industrial" plan, EUR 620 million over the full period. Because of the decline in assets, expenses over assets haven’t really moved much over this period, but over premium, Generali has achieved an 85-basis-point decline.

The life insurance result has mainly suffered from much higher general account impairments. Here, impairments have risen from 7 basis points to 25 basis points, well above what we think is a long-term average of 15 basis points. Normalisation of this would have improved Generali’s profit before interest and tax result by EUR 330 million.

The operating result for non-life insurance was also decent, coming in with a combined ratio of 92.9% and ultimately there is not a lot of movement within this. The natural catastrophe impact was a little benign at 170 basis points and roughly correspondingly prior-year reserve releases were slightly elevated at 560 basis points. We think moving forward a EUR 2.0 billion operating profit is still fair for this business unit.

The result within asset management is progressing well as this business continues undergoing a strategy of re-allocation to real assets and outsourcing to boutique third-party asset managers. The operating result for this business has improved by 25%, and we expect further midterm growth to EUR 400 million.