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Morningstar | Risks Remain in Italy for Generali, but Shares Look Cheap

Life insurance is a risk-management, savings, and protection business. The risk-management business practice increases capital costs, lowers investment returns, and depresses returns on equity. The cyclical nature of Generali's liabilities, spread-based guarantees, and high capital consumption have made for low shareholder returns on equity in a subdued interest-rate environment.We forecast that Generali’s continued shift to hybrid products and tilt to unit-linked will bring a better-performing business in terms of returns on equity. These products offer higher new business margins than traditional savings, and as the business continues to bring down guarantees and unit-linked carries greater weight in the portfolio, we anticipate a reversal in the operating margin decline. Hybrid products carry lower capital requirements, and though traditional guarantees will remain a drag on the business until interest rates increase, in-force portfolio management will help to offset these declines. When investment yields and interest rates do turn, Generali should be entering a sweet spot: lower guarantee liabilities, improving investment spreads, higher spread product demand, and continued sales of unit-linked.We believe the primary concern left for Generali is Italian bank debt of EUR 5.0 billion, the majority of which is held in UniCredit and Intesa Sanpaolo. We have not ruled out the possibility of a capital call from Intesa.