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Italian Insurers
A roadmap to the Italian
conference
Paolo Tamagnini
Research Analyst
(44) 20 754 58483
paolo.tamagnini@db.com
Oliver Steel
Research Analyst
(44) 20 754 77592
oliver.steel@db.com
Cristina Giordano
Research Analyst
(39) 02 86379-859
cristina.giordano@db.com
A guide to the Italian insurers presenting at the DB conference on May 30
Following the recent release of Q108 results, we update the view we set out in
our recent note, “The roadmap, 28 April 2008”. This update should provide a
guide to the Italian insurance sector at the DB Italian conference to be held in
Milan on 29 and 30 May. Unipol remains our top pick (trading at a discount,
diversified earnings profile) and Mediolanum retains a winning business model,
though the stock might remain volatile in the short term.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Compendium
Top picks
Unipol Group (UNPI.MI),EUR1.62 Buy
Companies featured
Alleanza (ALZI.MI),EUR7.86 Hold
Azimut (AZMT.MI),EUR6.62 Hold
Banca Generali (BGN.MI),EUR5.20 Hold
FONDIARIA-SAI SPA (FOSA.MI),EUR23.63 Hold
Generali Ass. (GASI.MI),EUR26.23 Hold
Mediolanum (MED.MI),EUR3.56 Buy
Unipol Group (UNPI.MI),EUR1.62 Buy
Global Markets Research Company
Low growth premiums for non-life; no drastic profit decline expected
The recent results have confirmed the low premium growth trend in non-life that
emerged in the FY numbers. In particular the motor business (60% of the Italian
non-life volumes) is flat with any recovery difficult to predict given gov’t pressures
and market competition on tariffs. We expect most benefits generated by direct
claim reimbursement to be passed on to policyholders with downward profitability
risks. Stable combined ratio trends in Q108 seem to confirm this view, but we
consider a drastic contraction in profitability unlikely given the concentration in the
non-life segment (65% of total market share belongs to four companies).
NAVs and life profitability hit by shaky markets, growth dichotomy
The life business continues to show a dichotomous trend in different channels.
The low-margin, non-proprietary bancassurance channel remains problematic and
is hampered by its products. The appeal for linked products has sharply decreased
with the current market volatility. The life assurance proprietary channels (agents
and FAs) continue to show strong growth rates as the negative equity markets
have led to more traditional policies. The operating profit of the life segment has
dropped for both channels due to a decrease in the fee business and a
compression in spread business profitability. Market moves have impacted the
P&L and balance sheets; even with excess cash to face further market turmoil,
Italian insurers are not immune to more volatility, as Q108 results show.
Unipol and Mediolanum remain our Buys
We value these insurance stocks through our traditional SOTP model. We buy
good value shares with limited risks and solid growth (Unipol), and those which
should see a significant pay-off if there is a market recovery (Mediolanum). Unipol
trades at 6.9x ’09 stated earnings, 20% discount to the sector. We prefer Unipol
to FonSAI (Hold) given the latter’s high concentration in the low growth motor TPL
segment. We reiterate Hold on Generali, which remains a solid play, even though
the stock’s defensiveness seems well priced in. Alleanza (Hold) remains expensive
(trading at 10.7x our ’09 DB adjusted earnings vs. the sector at 7.3x), but we
prefer it to Generali as we believe that speculation on a potential Generali buyout
of Alleanza and Alleanza’s high yield should lead to better stock placement midterm.
Mediolanum (Buy) could suffer in volatile markets in the short term, but we
believe will weather the storm in the mid-term. We see value in Azimut and Banca
Generali, but equity market instability translates into our Hold ratings. Sector risks
include a marked slowdown in life and personal financial savings net inflows, and
increasing competition and a slowdown in the Italian life and P&C premiums.
Table of Contents
Executive summary ........................................................................... 4
Outlook: Unipol and Mediolanum lead the sector.....................................................................4
Valuation ..................................................................................................................................4
Risks ........................................................................................................................................5
Alleanza – Hold, TP Euro 7.7 .....................................................................................................7
Fondiaria-Sai – Hold, TP Euro 30.0 ..........................................................................................11
Generali – Hold, TP Euro 29.5 (from Euro 30.4) ......................................................................16
Mediolanum – Buy, TP Euro 4.7 (from Euro 5.0).....................................................................21
Unipol – Buy, TP Euro 2.1 (from Euro 2.4)...............................................................................26
Azimut – Hold, TP Euro 9.2 (from Euro 10.0) ..........................................................................31
Banca Generali – Hold, TP Euro 7.0 (from Euro 7.5)................................................................36
Executive summary
Outlook: Unipol and Mediolanum lead the sector
We expect the Italian non-life sector to produce little growth due to increasing competition
and tariff pressure from the regulator. Considering this framework, any profitability
improvement looks unlikely. The high market concentration, however, makes any fierce price
battle unlikely. We expect growth in the life business to be sustained in the proprietary
channels, boosted by traditional spread products that are popular in uncertain equity markets.
The life stated profitability might continue to be affected by financial market trends in the
medium run. Though excess capital at the Italian companies should smooth future hits, the
financial markets have proven a key factor for companies’ NAVs. In this context, Unipol
remains our top pick with the stock trading at a discount and presenting a sustained and
diversified earnings profile. Mediolanum retains a winning business model, though the stock
might remain volatile in the short term given market instability.
Valuation
Our valuations are based on a sum-of-the-parts methodology. We generally split the capital
and sustainable earnings of each company into four major business lines: P&C insurance, Life
insurance, Asset Management and Banking. The valuation for each sector is driven primarily
by what we believe the sustainable earnings power of each division to be, compared with its
capital employed and cost of that capital. We make allowances for growth where we believe
it is deserved. We value the life business using an embedded value methodology, restating,
in our view, the embedded value assumption on a consistent and more conservative basis
than the companies themselves. Our main adjustments vs. the Italian insurers’ assumptions
(in brackets) are: a 9.6% discount rate (6/7%), and an AA cost of capital (EU minimum).
Embedded value earnings have been adjusted accordingly. We assume a 10% discount rate
at Mediolanum, factoring in the company’s higher business volatility. We apply a 10-15x new
business profit multiplier to factor in the growth prospects of the Italian market. We
incorporate the equity markets turbulence and some potential tax increase that the new
government is expected to introduce into our ‘08-‘10 forecasts and move our target prices
slightly (see Figure 1).
Unipol remains our top pick. We maintain Buy but lower our target price from Euro 2.4 to
Euro 2.1 due to the above factors and after adjusting for the special dividend paid in
May.
We maintain Buy on Mediolanum but lower our target price from Euro 5.0 to Euro 4.7.
We maintain Hold on Generali and slightly lower our target price to Euro 29.5.
We maintain Hold on both Alleanza and FonSAI. We also maintain our target prices of
Euro 7.7 for Alleanza and Euro 30 for FonSAI.
Despite the substantial upside, we maintain Hold on both Banca Generali and Azimut.
We have slightly lowered our target prices (given the volatile equity markets) to Euro 7
(from Euro 7.5) for Banca Generali and Euro 9.2 (from Euro 10) for Azimut.
Risks
The sector-specific risks for Italian insurance include a marked slowdown in life and personal
financial savings net inflows and increasing competition and a slowdown in premiums in the
Italian life market. A key risk to our valuation is any fast cyclical downturn in the auto liability
line in Italy. The direction of long bond yields is crucial for those Italian companies offering a
minimum guarantee to their policyholders. A sustained period of yields below 4% would
have serious negative consequences on life profitability. Falling equity markets would
primarily impact those companies with asset-gathering operations, and for the majority of the
companies this would also lead to falling NAVs and declining solvency levels.
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