Generali’s Greco Bets on Emerging Markets to Lure Investors

Assicurazioni Generali SpA Chief Executive Officer Mario Greco is targeting growing emerging markets as he seeks to revive profit at the third-largest insurer in Europe, a mission that cost his predecessor the job.

Generali has agreed this 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 a plan to boost business in the region, considered by Greco “a core market.” The CEO expects profitability in the area will be twice as much as in western European markets over the next five years.

The 53-year-old CEO, who took the helm at Trieste, Italy-based Generali in August, will unveil Jan. 14 in London the guidelines of his plan to strengthen finances, boost profit and cut debt. He will seek to convince investors he can replicate what he achieved over 17 years in the insurance industry, when he oversaw businesses in countries including France, Spain, Turkey and Italy.

“Allocating resources in growing businesses and freeing-up capital in non-core business is the right strategy,” said Stefano Girola, who manages about 3 billion euros ($3.9 billion) at Banca Albertini Syz & C. in Milan and owns Generali’s stock. “Greco is showing investors he is on the right track to turn around and modernize the company.”

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 the main markets of the Far East, including India and China, where it has a joint venture with China National Petroleum Corp.

High-Growth Markets

Generali’s agreement to buy PPF’s stake is “a way to reinforce its position as the market-leading insurance company in the region,” Greco said in a conference call Jan. 8. “Definitely, this is also a clear signal that we invest in high-growth markets and we use core markets as the engine to finance growth in the most developing markets.”

Greco arrived at Generali at a time when the insurer’s capital was weakened by exposure to Italy’s sovereign debt and its stock was trading near the lowest level in more than 20 years. The insurer’s “poor track record for governance” weighed on the shares as well, Atanasio Pantarrotas, an analyst at CA Cheuvreux wrote in a Jan. 9 note.

Investors led by Mediobanca SpA and Leonardo Del Vecchio, which together own 16 percent of the company, forced Giovanni Perissinotto to resign as CEO on June 2, after profit fell for four consecutive quarters on writedowns of assets including Greek bonds and lower earnings at the life-insurance unit. The controlling shareholders picked Greco, then head of general insurance at Zurich Insurance Group AG, to replace Perissinotto.

CEO Ousting

The shares, which hit their lowest level since December 1988 on May 31, just two days before Perissinotto’s ousting, have rallied 42 percent since Greco’s appointment, compared with the 23 percent increase in the Bloomberg Europe 500 Insurance Index, showing investors’ optimism about his ability to turn around the company.

Despite the recent share performance, “there may still be some upside on the stock,” Matteo Ghilotti, a Milan-based analyst at Equita Sim wrote in a Jan. 7 report.

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.

Generali also created a ten-member management committee that will be led by Greco with Balbinot as deputy, and it will include the heads of Italy, France and Germany as well as other top executives.

Asset Sales

While on one hand Generali is boosting investment in high-growth areas, on the other hand Greco will seek to improve its capital position and reduce debt by disposing of non-strategic assets, including the U.S. life reinsurance business and Swiss asset-management unit BSI Group and cutting costs. Analysts at Merrill Lynch Bank of America, CA Cheuvreux and Equita expect cost cuts between 235 million euros and 800 million euros in the next three years, with a reorganization in Italy and a boost to efficiency through a simplified structure.

Generali’s solvency I ratio, a measure of its ability to absorb losses, was 140 percent at the end of the third quarter, compared with a median of 195 percent for ten insurance companies in western Europe disclosing data, according to Bloomberg Industries data. 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.

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