Morningstar | Generali Reports a Tough First Half; Shares Still Undervalued. See Updated Analyst Note from 06 Aug 2018
Generali reported first-half 2018 operating profit of EUR 2.5 billion and net profit of EUR 1.3 billion. The combined ratio came in at an impressive 92% with life new business margin of 4.5% . While this is slightly better than our short-term expectations, we think the previous valuation we applied to the business was overly generous, based on interest, claims, and benefits paid to policyholders. We are therefore revising our fair value estimate down to EUR 17.30 per share from EUR 17.70. We maintain our no-moat rating.Generali continued with its 2016-18 strategic plan during the first half, and we are impressed with the speed and quantum with which management is progressing. This is targeting a more streamlined business portfolio, something we like, including disposal of the clear majority of Generali Leben. To date, Generali has generated disposals of EUR 1.5 billion, ahead of the EUR 1 billion target.
In line with the asset-management strategy, assets under management have increased by just under 5%, driven by China and Banca Generali.
Still, the Italian elections and political uncertainty have had a visible impact. The present value of new business declined just under 4% versus the comparable period, which was most marked at savings and pension products in Italy, as well as Germany and Spain, as customers steered away amid the uncertainty. However, the mix shift resulting from portfolio rebalancing, changing preference within product mix, and recalibration of guarantees led to a 3.6% increase in new business value to EUR 965 million, along with a near 40-basis-point rise in new business margin.
The political uncertainty has also had a direct impact on equity. A EUR 1.3 billion reduction in reserve for unrealised gains and losses has come about because of the spread widening on Italian debt during the first half of the year.
We think this has been a very tough period for Generali, and we anticipate the situation improving. The revision in our fair value estimate is more related to consistency around underwriting than changes within the Italian political situation.
Assicurazioni Generali is the parent company for The Generali Group (the Group), an insurance and financial services provider. The commercial offer is composed of savings and pure risks policies, which constitute the majority of the portfolio, which includes protection and pension funds. In the non-life sector the Group is focused primarily on the retail market. In addition, through the Europ Assistance Group, Co. is engaged in services in motor, travel, health, home and family. The Group has also expanded its business from insurance to a range of asset management, property and financial services.
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