Allianz Vs. Generali – We Like Them Both (OTCMKTS:ALIZY)

Last time, our first paragraph did not hide our expectations. Indeed, we explicitly said that Allianz’s stock price evolution was not in line with Mare Evidence Lab’s hope, and with a publication called a Long-Term Opportunity, we reiterated our positive view about our favorite German insurer (OTCPK:ALIZF, OTCPK:ALIZY) and confirmed our buy rating at €220 per share. Our investment case was supported by: 1) a discount based on a forward P/E estimate on Allianz’s intrinsic valuation, 2) a reliable & predictable dividend per share coupled with a €1 billion buyback program, 3) a 10-year analysis of Allianz’s main financial indicators and 4) a solid solvency ratio above the regulatory capital requirements. It was a good call and we really hope that you get on board with us.

Today, we are back to comment on Allianz results and we would like to include a comps analysis with the Italian insurer Assicurazione Generali (OTCPK:ARZGY). Here at the Lab, we also analyzed UnipolSai Assicurazioni S.p.A. (OTCPK:UNPLF) within our Italian financial coverage. Allianz almost reached a fair valuation based on our internal assumption and the next company’s catalyst is scheduled on the 17th of February. Looking at the 2022 past evolution, it was a challenging year for insurers grappling with the sudden increase in rates, soaring inflation, and market volatility. AXA also suffered from nat cat damage caused by hurricane Ian which gross of taxes and net of reinsurance, generated total claims of €400 million; while Allianz, as already mentioned, was still impacted by the provisions made in the first half of the year for the proceeding of the Alpha structured funds in the USA, recording a drop in net profit of €4.7 billion in 2022 first nine months compared to the €6.9 billion recorded in the same period last year.

Here at the Lab, we did not comment on the company’s quarterly accounts, and compared to AXA, Allianz released its operating profit results. The German insurer released a good quarter with revenue slightly up and an EBIT profit increased by 7.4% thanks to P&C business. Still related to our point 4), Allianz’s solvency II ratio was in a comfort zone at 199%. Insurers’ comps are key in order to understand if there are some undervalued players. On the nine-month aggregate, despite the losses suffered by the multi-billion dollar Structured Alpha funds, the company saw an operating profit improve by 3.2% to €10.2 billion, and this was thanks to the increase in the non-life segment recorded in particular in the last quarter.

But even stronger was the growth in the operating result of Assicurazioni Generali (+7.8%) albeit decidedly lower in absolute terms compared to the German player. In the period, the Italian group recorded the most marked reduction in shareholders’ equity, which went from €29.3 billion in September 2021 to €16.5 billion last September (-43.4%) compared to a minus 35% for Allianz (from €80 billion to €51.9 billion) and -23% of Unipol (to €7.45 billion compared to €9.72 last December). This was due to Generali’s greater exposure to the Life business and therefore a longer average duration of investments (which is more affected by the increase in interest rates) as well as exposure to BTPs (€53 billion last August) which inevitably suffered from the increase in spreads. But Generali’s numbers have positively surprised the market and Wall Street analysts are starting to price the company’s new plan, knowing that, if the company will not find a strategic acquisition by 2024, it will return the excess capital to the shareholders. Generali’s dividend yield is already 20% higher than Allianz’s. More important to report is the new accounting standard released by Generali which will significantly improve the profit visibility in the life business, without having any impact on cash and capital generation, the holding’s net cash flow, dividends, and solvency.

Generali’s presentation highlighted three key points: 1) the company’s intrinsic value and 2) the possibility to model & predict life business evolution in the financial statements for the first time; and more importantly, 3) the company’s visibility on unprofitable life policies which were automatically flagged as onerous contracts and will be ready to be scrap. Therefore, here at the Lab, we believe that IFRS 17 will allows investors to gain greater confidence in the results and will provide better estimates for Generali’s future valuation. Indeed, according to our estimates, Generali’s life business profits will stand at €33 billion in the next five years, resulting in a €24 billion after-tax (around 88% of the group’s market capitalization). The group’s shareholders’ equity is equal to €29.3 billion, and if we added the Contractual Service Margin which is what IFRS 17 defines as the value of future profits in the life sector will get the total intrinsic value. We believe that the market does not place much value on intrinsic value because so far there has not been a stable and proven relationship between intrinsic value/cash remittances and dividends. For this reason and from a valuation point, in the European insurance sector, Generali trades at the largest discount between market capitalization and net intrinsic value. We estimated the ratio of equity to CSM after tax to be €53 billion for Generali, while its market capitalization is €27.8 billion, so the discount is 48%. By contrast, rivals such as Allianz and AXA are both trading at a 15% discount to their net intrinsic value. For this reason, we are still buy rating Allianz with a target price of €220 per share and a potential upside on a buyback announcement, but we also suggest having a look at Generali for both capital appreciation opportunity and a higher dividend yield versus the sector.

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