Assicurazioni Generali SpA (G), Europe’s third-biggest insurer, plans to increase its investments in alternative fixed-income securities and real estate as it cuts liquidity to raise profitability.
“We have had more cash than needed, so we are drawing down that cash, seeking opportunities in fixed income, like alternative corporate loans and infrastructure debt,” Chief Investment Officer Nikhil Srinivasan said in an interview at Generali’s offices in Milan. “We are very comfortable with our sovereign debt holdings, however for new money and cash we are looking at different assets, including corporate private placements.”
Srinivasan, 45, who oversees about 500 billion euros ($679 billion) of assets at Generali, cut liquidity by 7.5 billion euros in the first half and invested the funds at an average yield of 3.5 percent. Generali joins Axa SA (CS) and Allianz SE (ALV), Europe’s two biggest insurers, in betting on infrastructure debt over the next five years as low interest rates push European insurers to seek new investments.
Generali, Italy’s biggest insurer, has about 81 percent of its portfolio in fixed-income instruments, and is seeking higher returns by diversifying its holdings.
“The infrastructure debt is a very good opportunity for insurance companies because of low capital charge, increased duration and decent yields,” said Srinivasan. “The portion of infrastructure debt we have is insignificant, we want to build up a portfolio in three to five years.”
Liquidity, which was about 4 percent to 5 percent at the end of September, will be cut to about 2 percent by March, Srinivasan said, adding that the insurer accelerated the reduction in the third quarter.
The CIO, who was hired from Allianz in February by Chief Executive Officer Mario Greco, has been strengthening the investment team with hiring in asset-liability management, equities, credit research and fixed-income.
Generali also plans to expand its 30 billion-euro real estate portfolio in the next two to three years outside continental Europe, focusing on Asia, U.S. and U.K. markets. “We have great properties in Europe, but if you look at the real estate European prices today, not much is cheap,” said Srinivasan. “We want to increase our position outside Europe. The U.K. and Japan may be two interesting countries.”
Sixty percent of Generali’s property holdings are outside Italy, including real estate in all major European capitals, according to a slide presentation of its second-quarter results.
Generali said Aug. 1 second-quarter profit rose 74 percent to 478 million euros as higher non-life earnings outweighed a drop at its life business.
The insurer’s new management led by Greco is selling non-strategic assets and focusing on its main business to strengthen finances and boost capital. Generali is more than half way to reaching its goal of raising 4 billion euros from disposals by 2015, after selling its U.S. reinsurance unit and Mexican businesses.
Srinivasan is reviewing its stock holdings, replacing non-performing, small assets with private or public equity with higher returns. “We are rationalizing our equity portfolio, selling underperforming assets -- especially on the unlisted side -- and replacing those with performing equity assets,” he said. “In private equity we are looking for a double-digit internal rate of return.”
Yesterday Generali announced the sale of its 33.5 percent stake in Agora Investimenti Srl, the biggest investor in the Venice airport operator, for about 60 million euros as part of its disposal strategy.
On the risk of a U.S. government default, the CIO expects that a compromise will be reached. Generali hasn’t taken any measures to prepare for an eventual default because it has limited holdings in the country.
A possible correction of southern European equities in the short term is a “buying opportunity,” according to Srinivasan, who has been bullish on those stocks since mid-year. “From an equity point of view the best opportunities come from southern Europe -- Spain, Italy, Greece, Portugal -- on a three-year strategy.”
European policy makers are on the right path to cutting budgets and implementing structural reforms, he said. “I cannot say the same for the U.S. and Asia.”
The markets focus on spreads has been misguided, he said. “While there will be some volatility going forward driven by local or European politics, the change in ownership of local bonds and continually-improving policy-making in the Euro zone suggest that we are unlikely to see the widenings we saw in the past.”
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