There are bargains to be had in Italy. Just look at insurer Generali. It is Europe’s third-largest player as measured by premiums, yet the shares are trading on a 40% discount to its European embedded value, or EEV (a regulatory valuation of the firm), of €16.70 per share on 1 March.
Worries over the eurozone have certainly unsettled investors, yet there must come a point when all the bad news is reflected in a share price. Right now, this stock looks to be valued as though it were a purely domestic play, not a multinational business deriving 75% of its premiums from countries such as France (25%) and Germany (23%).
I think Generali could rebound soon for three key reasons. Firstly, performance has already started to pick up after some big write-downs on Greek debt last year. In May the firm said that it would meet its full-year target for operating profit of between €3.9bn and €4.5bn – up 7.6% on 2011.
This improvement has come after first-quarter (Q1) premiums rose 6.1% to €19.8bn. Net assets leapt 16%, aided by a drop in yields on eurozone bonds. Generali’s solvency I ratio, used by regulators to gauge capital adequacy, jumped to 133% compared with 117% at the end of December.
Secondly, the management team is being shaken up. Mario Greco – who cut histeeth at insurance giant Zurich – is set to become the CEO on 1 August. He will cut costs, focus on value creation and make the firm’s capital work harder. Any division that does not hit his stringent return on equity targets will probably be dumped. The third boost could come from the European Central Bank via more liquidity measures. I rate the business on an 80% multiple to its actuarial EEV, or at an intrinsic worth of €13.30 per share.
Assicurazioni Generali (Milan: G), rated a BUY by Société Générale
Generali faces risks from policy errors in Brussels, which could destabilise its exposure to Italian (€54.7bn) and other peripheral (€10bn) sovereign debt. And its capital base may come under pressure from a tougher regulatory environment.
Other worries include a slowdown in life assurance sales, restructuring charges, a softening in reinsurance rates, and a decline in equity and/or property markets. For UK investors there is also foreign-exchange risk.
Nevertheless, the shares offer substantial upside, having lost about 65% of their value over the past five years. Interims are scheduled for 2 August, and SocGen has a price target of €15.30.
Rating: BUY at €10.00
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See
www.moneyweek.com/PGI
or phone 020-7633 3634.