10/21/2017

Analyzing Assicurazioni Generali SpA – One of the World’s Largest Insurance Companies

Generali

Having a database that covers over 20,000 companies worldwide, allows us to provide interesting buy ideas that are not traded on US exchanges. In recent months, fears over the health of the Italian economy have risen. Specifically, the Banking and Financial Sector appears to be in the middle of a full scale crisis. Over the past 12 months, the average return (equal weighted) of the GICS Financial Sector in Italy is -38.7%. Additionally, new estimates in housing and loan data suggest that Italy could face further troubles ahead. According to the Guardian, roughly 17% of all Italian bank loans are bad. Furthermore, the Financial Times states that housing values in Italy have dropped around 15% since 2010. Given the harsh macroeconomic environment, along with general concerns in the European market (Brexit, high debt levels in other countries, and mass migration of refugees), the selloff seems warranted.

However, in any crisis situation, there may be opportunities in companies that are unfairly punished by the aggregate panicked selloff. For investors with high risk appetite and/or want exposure to Europe, whether it is to take advantage of the recent market sell off, or anticipate currency appreciation of the Euro, AFG’s valuation framework can help select investment ideas. Using the AFG Excel Add-In, we can pull the GICS Financial Sector into a new workbook. Then, sorting by ticker, we can narrow down to only firms beginning with “IT” to focus on Italian companies. Next, we can pull in data items such as Market cap, Company Grade, and Investment Grade, and sort to only view A and B graded companies. If we want to attempt to limit risk, we can narrow our focus further to large companies. In the table below, we can see that only one Italian financial company has a significantly “large” market cap and also grades well: IT:G.

01

AFG Excel Add-In, Market Cap in USD, 8/17/16

IT:G is the ticker for Assicurazioni Generali SpA, one of the largest insurance companies in the world. The company provides an array of standard insurance products including Life, House, Car, Health, and others. Looking at the default AFG metrics, IT:G shows good Intrinsic Value and Quality metrics, but poor Momentum metrics. The firm also pays an annual dividend which has a yield of 5.95%, based on last year’s payout.

02

Snapshot Page, EquityInsights.com, 8/17/16

Moving to the Wealth Creation page, we can see that the firm’s profitability suffered during the initial ’08 crisis and the after effects in 2011 and 2012. However, IT:G has managed to earn positive economic profits over the past three years. Furthermore, the firm is forecasted to earn profits again in 2016 and 2017.

03

Wealth Creation Page, EquityInsights.com, 8/17/16

Before going into valuation, we can look into IT:G’s revenue streams, specifically their investment incomes. Using the 2016 First Half Report from the company website, we can see the breakdown by investment type and by rating. We can see that a majority of the company’s investments are in Fixed Income and carry an array of ratings, but are concentrated around BBB. We should note that this puts a significant portion of their income at just above the Investment Grade line. Additionally, a large number of the firm’s investments are concentrated in Italy.

04IT:G First Half 2016 Financial Report, pg. 19
05IT:G First Half 2016 Financial Report, pg. 62

06

IT:G 2015 Annual Report, pg. 201

Looking at median consensus analyst estimates, we can see an immediate decline in current year sales and earnings for IT:G. However, those metrics are forecasted to stabilize in 2017.

07

Estimates Page, EquityInsights.com, 8/17/16

Moving to the AFG Proforma Builder, we can enter some initial data to create a model.

Sales Growth: We’ll enter -17% for the current year, 2% in 2017, and hold sales flat in the out years.

EBITDA Margins: To be conservative, we’ll use the 2013 EBITDA Margin percentage of 4.3% (lower than 2014 and 2015), for each year in the model.

Asset Turns: Since historical Asset Turns have been relatively stable, we won’t make any changes from the default (0.18).

08

Value Expectations, AFG Proforma Builder, 8/17/16

Our initial model shows a target price of €15.82, representing 30.7% upside. Since IT:G is a financial company, AFG uses a modified ROE model using Balance Sheet equity. If we’re comfortable with reported values, then we can move on to the Income Statement. One thing that stands out for the company is the presence of Non-Operating Income over the past few years. Looking into the company’s footnotes on Other Expenses, the firm gives only limited guidance on past charges, so it will be difficult to forecast in the future. For now, we’ll use -236M for 2016 (Q1 charges already taken), and leave other years at zero.

There are few Advanced Valuation changes that we can make since IT:G is a financial, so we’ll focus on the main value drivers to look at other scenarios for our model. In our initial setup, we were realistically conservative with estimates. To look at a more pessimistic scenario, we’ll lower our estimates to the following:

Sales Growth: -20% in 2016, and -5% in all other years.

EBITDA Margins: 2012 was the worst year for margins in the last 10, with the company reporting only 1.93% for the full year. We’ll use this value in each of the five forecast years.

Asset Turns: No change (0.18 for all years).

In our pessimistic scenario, we can see that the model shows downside of 25.4%:

09

Value Expectations, AFG Proforma Builder, 8/17/16

Note that our previous model is quite harsh, especially in the current year for EBITDA Margins, as Q1 Margins were around 6%. In an alternative optimistic scenario, we could assume the following:

Sales Growth: -15% in 2016, and 2% in all other years (slightly above consensus estimates).

EBITDA Margins: We’ll use the 2015 value of 5.39% for all years.

Asset Turns: No change (0.18 for all years).

In this rebound scenario, we see a target price of €20.84, showing upside of 72.3%:

10
Value Expectations, AFG Proforma Builder, 8/17/16

Given the large number of uncertainties in the Italian economy, there could be a number of scenarios for IT:G. The three above: Base, Pessimistic, and Optimistic, represent simple situations that could occur. We will add one more to this mix: a scenario of absolute crisis in which the company heads towards insolvency and is nationalized at €1.00 per share. With these four scenarios, we can look at probabilities to better understand some of the factors currently priced into the expected value of the stock:

[Scenario]: [Estimate equity value], [Likelihood of occurrence]

Base: €15.82, 30%

Pessimistic: €9.02, 30%

Optimistic: €20.84, 30%

Insolvency: €1.00, 10%

Expected Value: 30% * (15.82) + 30% * (9.02) + 30% * (20.84) + 10% * (1.00) = €13.80

In this setup, we arrive at an expected equity value of €13.80, just above the latest closing price of €12.10. Although we could look at a number of scenarios with varying probabilities to come up with a range of expected values, we should note some of the shortcomings of this analysis in this particular case:

Country Risk: The firm’s large exposure to Italian bonds could be dangerous if the nation’s economy worsens.

Macroeconomic Uncertainty: European assets represent around 90% of the firm’s total investments. If negative-yielding debt continues to become prevalent, the firm may face headwinds on its investment incomes.

Insolvency Case: There is no guarantee that a bailout will occur in an insolvency scenario; the equity values could fall to zero or the firm could be nationalized at a value higher than €1.00 per share.

Given the points above, it may be difficult to develop a high-confidence model for IT:G. Scenario analysis in this case appears to be somewhat speculative as well. Although we can see that the expected value based on the probabilities above, as well as our most likely Base case model, shows upside, that upside appears limited (between 15-30%). As investors, we would need to decide if the potential benefits are worth the possible risks.

About John Holt 5 Articles

Research Analyst at The Applied Finance Group

Focus areas: Equity Analysis, Portfolio Consulting, Quantitative Research.
Joined AFG in 2015

About John Holt 5 Articles

Research Analyst at The Applied Finance Group

Focus areas: Equity Analysis, Portfolio Consulting, Quantitative Research.
Joined AFG in 2015