Assicurazioni Generali SpA, Europe’s third-largest insurer, plans to cut costs and boost cash flow to more than 2 billion euros ($2.7 billion) by 2015 as it focuses on emerging markets and insurance to restore profitability.
Cash flow is expected to increase by 700 million euros from 1.3 billion euros in 2011, the Trieste, Italy-based insurer said today. The company wants to reduce costs by 600 million euros by 2015 and sees a return on equity of 13 percent, with more than 5 billion euros operating profit “over the cycle.”
“We want to create value, focusing on the insurance business and return to shareholders,” Chief Executive Officer Mario Greco said in an interview with Bloomberg television before a strategy presentation to investors in London. “We are confident to reach these targets. The ROE target is challenging, but we think we will be there by 2015.”
Greco, who took the helm at Generali in August, is seeking to convince investors he can revive profit and boost capital by cutting costs, shedding non-strategic assets and targeting faster-growing emerging markets. Cost-cutting will impact on personnel, “even if job cuts are not significant,” Greco said.
The plan is “slightly underwhelming,” Sanford C. Bernstein & Co. analysts Thomas Seidl and Rusne Didziulyte wrote in a note to clients, citing cost-cut targets below their forecast. “We do not see how Generali can achieve its target equity level without external funding which eventually would dilute shareholder value.”
Generali’s CEO ruled out any plan for a capital increase to cut debt, adding that the company may consider to raise funds “if growth opportunities arise.”
Generali shares fell percent 3.1 percent to 14.10 euros in Milan trading, the biggest one-day decline in more than three months, giving the insurer a market value of 22 billion euros. The stock, which hit its lowest level since December 1988 on May 31, rallied about 40 percent since Greco’s appointment, almost double the gain in the 26-company Bloomberg Europe 500 Insurance Index.
Generali also wants to boost the insurer’s Solvency I ratio, a measure of its ability to absorb losses, to 160 percent by 2015, from 140 percent at the end of the third quarter. That compares with a third-quarter median ratio of 195 percent for 10 insurance companies in western Europe disclosing data, according to Bloomberg Industries data.
“Generali will achieve this through retained earnings, selective disposals of non-core assets and other capital management actions,” the company said. The insurer plans to increase the weight of operating profit at its non-life business from 35 percent to 50 percent in 2015.
Analysts predict operating profit will rise to 4.91 billion euros in 2015, according to the average estimate of eight analysts surveyed by Bloomberg. The insurer targeted more than 4 billion euros of operating profit in 2012 and expects non-life premiums to climb, while life premiums will match the 2011 level.
Generali is unifying its domestic business around three brands, Generali, Alleanza and Genertel, and simplifying the Italian business as part of the plan to improve efficiency and cut costs in the country. Analysts at Merrill Lynch Bank of America, CA Cheuvreux and Equita expected cost cuts of 235 million euros to 800 million euros in the next three years.
The Italian insurer agreed last week to buy the 49 percent stake it doesn’t own in its eastern European venture with private-equity firm PPF Group as part of the plan. The CEO, who predicts profitability in the region will be twice as high as in western European markets over the next five years, said it’s not looking at other acquisitions in the region.
“We have very strong footholds in some emerging markets, such as central, eastern Europe and Asia, in particular China,” Greco said in the interview. “We will concentrate our resources in these markets.”
Generali, which operates in more than 60 countries with 82,000 employees, makes about 10 percent of its operating profit in central and eastern Europe. The company has also set up offices in India and China, where it has a joint venture with China National Petroleum Corp.
“Banca Generali is not up for sale,” Greco said, rejecting expectations of some analysts about a possible disposal of the asset.
Greco, who is seeking to sell its U.S. life reinsurance business and Swiss asset-management unit BSI Group, said that the disposals will be done only at “the right conditions.” The CEO will consider alternative options if offers are too low, because “we are not a forced seller.”
Generali, which expected non-binding offers last week, has hired Citigroup Inc. to advise on the sale of Generali USA Life Reassurance Co. The unit may be worth $800 million to $1 billion, people with knowledge of the matter have said. Asset sales will boost capital by 4 billion euros, Greco said during the presentation.
Greco was picked by Generali’s controlling shareholders, led by Mediobanca SpA, to replace Giovanni Perissinotto who resigned as CEO on June 2 after profit fell for four consecutive quarters and at a time when the insurer’s capital was weakened by exposure to Italy’s sovereign debt.
In the three months following his appointment, Greco shuffled management to spur profit growth and smooth relations with investors. He moved Managing Director Sergio Balbinot to the new position of chief insurance officer and appointed Alberto Minali as chief financial officer to replace Raffaele Agrusti, who became country manager for Italy.
Greco today appointed Nikhil Srinivasan, a former Allianz Group executive, as chief investment officer and Carsten Schildknecht as chief operating officer.