As a cycling enthusiast, Mario Greco knows when to quicken his speed and when to hold back and conserve his energy. His pacing has proved effective in boosting the performance of Assicurazioni Generali, the Italian company that has long trailed in the peloton of European insurers.
Since taking over as CEO less than two years ago, Greco has raced to extricate Generali from a web of cross-shareholding pacts with other financial and industrial companies. Such ties have long been a feature of corporate Italy, but they gained Generali a reputation for being more interested in its position at the nexus of Italian business and politics than in delivering profits.
On other major issues confronting Europes third-largest insurer by premiums, Greco has pedaled more deliberately. He rejected the idea of seeking a quick fix for Generalis capital shortfall by making a 5 billion ($6.9 billion) equity issue immediately after taking over as CEO and instead chose to fill the gap by selling off noncore businesses. It would have looked like begging investors to give us the capital to save the company, the wiry, balding 54-year-old tells Institutional Investor in an interview at Generalis main office in Milan.
Greco is methodically trying to root out Generalis inefficiencies. He aims to reduce annual costs by 1 billion by 2016. He admits it will be an uphill slog to restore order to Generalis fragmented management. We are building a multinational organization within a group that has never been managed in an integrated way, he says. It will take years because this is a company with nearly 80,000 people.
The race is only halfway over, but Greco has steered Generali to some impressive results. Net profits reached 1.92 billion in 2013, up from 94 million in 2012 and the highest in the past six years.
Generali has already exited close to half of its 21 cross-shareholding pacts with leading Italian companies, most notably Mediobanca, the legendary Milan investment bank that virtually ruled corporate Italy for much of the latter half of the 20th century. Such pacts helped support the companies stock prices and maintained the political and corporate influence of a small business elite, but they did little for Generalis bottom line or strategic focus. Greco is eager to be done with the rest of those alliances. The remaining ones are smaller, and we should be out of them within a relatively short period, he says in a third-floor conference room overlooking Piazza Cordusio, in the heart of Milans financial district.
Greco is also ridding Generali of its chaotic decentralized structure, a by-product of years of acquisitions and loose management practices. In Italy its largest market, with 29.7 percent of gross written premiums the company has reduced the number of its brands from ten to three: Generali, Alleanza and Genertel. It expects to operate solely under the Generali brand by 2016. Similarly, it has distilled 21 separate information technology platforms into three and condensed six distribution networks into one.
Abroad, Generali has spent nearly 3 billion since the start of 2013 to squeeze out minority shareholders in its most profitable subsidiaries, including those in Germany, Central and Eastern Europe, and Asia. Those minority shareholders took 227 million of Generalis net income last year, money that the holding company will now retain. But according to Greco, the main reason for the buyouts was not cash but the desire to rationalize the business and speed up management decisions. In Central and Eastern Europe, for example, Generali is focusing on its core life and property and casualty insurance activities after agreeing to buy out its joint venture partner, PPF Group, for 2.5 billion and selling the ventures consumer finance business to PPF for 80 million.
To push Generalis transformation into a disciplined, global organization, Greco hired like-minded internationalists such as chief investment officer Nikhil Srinivasan, a Singaporean who held senior investment posts at Allianz; chief operating officer Carsten Schildknecht, a German who formerly was COO for private wealth management at Deutsche Bank; and Frenchman Philippe Donnet, former head of AXAs Asia-Pacific business, who now heads Generalis Italian operations. I needed to bring in outsiders, Greco says. It would have been impossible to change the culture and operations of such a fragmented group as Generali with the same people who ran it that way.
The boss is using incentives to drive his regime change. He has made roughly 200 senior managers accountable for meeting the groups profit and cost-cutting targets around the world. They get short- and long-term variable compensation only if Generali targets are achieved, Greco explains. These are longtime practices at other global insurers, such as Allianz, AXA and Zurich Insurance Group, but they are revolutionary concepts at Generali.
Generalis CEO has won plaudits from investors, who have nearly doubled the companys share price since his appointment was announced in June 2012, to 16.53 in mid-May. The insurer is trading at 11.6 times estimated 2014 earnings, well above Allianz (9.6) and AXA (8.2). Still, Generali has a long way to go to catch up with its larger rivals. With 66 billion in annual premiums, the Italian company ranks fourth among global insurers, behind Allianz (103.4 billion), AXA (84.6 billion) and China Life Insurance (Group) Co. ($99.8 billion). Generalis 25.8 billion market cap is good for only tenth place globally, behind Berkshire Hathaway (whose $317.5 billion value reflects much more than insurance) and No. 2 Allianzs 57 billion.
Mario Greco is the dream CEO for Italy, says Davide Serra, founder and CEO of Algebris Investments, a $2 billion, financial-sector-focused hedge fund firm with holdings in Generali.
Maybe so, but skeptics point out that tough obstacles still lie ahead for Generali and its boss. There is a demand for restructuring stories in the insurance sector, and they get a lot of credit from investors, says Thomas Seidl, a London-based analyst for Sanford C. Bernstein & Co. But the fact is that Generali has one of the lowest solvency ratios among its peers and should be trading at a lower level.
Generalis solvency ratio capital as a percentage of written premiums, a key measure of an insurers strength is slightly above 150 percent. Allianz and AXA have solvency ratios of 182 percent and 221 percent, respectively. We are working hard to dispose of assets, and that will improve our solvency position, says Generalis CFO, Alberto Minali. He aims to boost the ratio above 160 percent by 2015. That is the threshold for an AA-rated company, Greco notes.
Yet Generali can only dream of achieving such a rating because the major agencies wont rate a company more than two notches above the sovereign rating of its home country. Last year Standard & Poors lowered its rating on Italy to BBB because of its weak economy and high government debt. Generalis credit rating (A-) seems destined to lag those of Allianz (AA) and AXA and Zurich (both A+).
We spent six months in battle with Standard & Poors because they wanted to downgrade us for being located in Italy, Greco says. In March, S&P decided against a downgrade. But the agency emphasizes that Generalis rating isnt going to move up in the near future because of its large exposure to Italian sovereign bonds. Generalis final rating is as high as it can be under our criteria, says Taos Fudji, a Milan-based credit analyst for S&P.
Generalis heavy dependence on life insurance is another potential weakness. The low-interest-rate environment that has prevailed since the global financial crisis has reduced the investment returns needed to pay off life policies and generate profits. It is a totally different life business compared to the one before 2008, Greco admits.
When he took over as CEO, Greco set a goal of achieving a 50-50 balance between life insurance and p/c activities, but hes made no appreciable progress. Last year life business generated 45.1 billion of the groups premium income, or 68 percent, while p/c lagged with 32 percent. By comparison, life insurance accounted for 55 percent of Allianzs premium income and 62 percent of AXAs. Greco insists he wants to move toward greater balance organically rather than by pursuing acquisitions or disposing of some life business.
GENERALI WAS FOUNDED IN 1831 in Trieste, the northeastern Italian city that then was part of the Austro-Hungarian Empire. Though the groups official headquarters remains in Trieste, senior executives spend more time at the columned, belle epoqueera Generali building in Milan, within easy walking distance of the citys famed La Scala opera house and gothic-spired cathedral.
After World War II, Generali emerged at the center of the cross-shareholding pacts that would rule Italian business for decades. Mediobancas founder and longtime boss, Enrico Cuccia, played puppet master of the insurer through a minority stake and used his control of Generalis investments in major Italian companies to exert vast influence over the corporate and financial world from 1946 virtually until his death in 2000, at age 92. Generali may have been a pawn during the Cuccia years, but it enjoyed a long period of stability.
Antoine Bernheim, a legendary Lazard Frères & Co. partner and sometime Mediobanca ally, was the next Generali leader, taking over as chairman in 1995. For a time he enforced greater underwriting discipline, notably in the p/c business, but performance languished in his later years, when he would occasionally nod off during board meetings. Bernheim was forced out in 2010 by Cesare Geronzi, a veteran financier and confidant of former Italian prime minister Silvio Berlusconi. Geronzi was a Rome-based power broker who had climbed the ranks of the Bank of Italy and chaired Capitalia before selling it to UniCredit in 2007. He moved on to become chairman of Mediobanca, where he sought to re-create the influence and mystique of Cuccia, culminating in his ouster of Bernheim and his assumption of the chairmanship at Generali. But his power grab didnt last. Generalis board forced Geronzi out in 2011 because of differences over strategy and concerns about his conviction for fraud in the 2003 bankruptcy of food company Cirio, a conviction Geronzi appealed. (He remains chairman of the Fondazione Assicurazioni Generali, the insurers charitable foundation, which is active in museums and other cultural activities.) Less than a year later, the board sacked longtime CEO Giovanni Perissinotto over the firms sagging profits and falling share price.
Seeking a break from the past, the Generali board was determined to find a leader with global vision someone from outside the salotto buono (fine drawing room) of chummy industrialists and financiers that had dominated Italys business world. The board reached across the Alps in August 2012 and tapped Greco, a Neapolitan who had spent the previous five years at Zurich Insurance, rising to head of general insurance. It wasnt a difficult sell. To be given a chance to turn around a company of such history and importance and also being an Italian well, its something I could not turn down, Greco says.
Greco came into the insurance industry by chance. After graduating with an economics degree from the University of Rome, he earned a masters degree in international economics and monetary theory at the University of Rochester in upstate New York, then joined McKinsey & Co. in 1986.
He spent much of his time on the road advising bank clients and in 1989 asked McKinsey to find him an assignment in Milan, where his wife, Giovanna, was about to have their first child. They told me the only thing available probably wouldnt interest me it was an insurance client, recalls Greco. I knew nothing about insurance. But he discovered he liked the business, which many colleagues considered a boring backwater of finance. He left McKinsey in 1994 to join one of his insurance clients, Riunione Adriatica di Sicurtà, an Italian subsidiary of Allianz, as head of its claims division. By 2000 he had risen to chief executive of RAS. In 2007 he moved to Zurich Insurance.
Greco describes his years in Switzerland as idyllic. He and his wife bought a house overlooking Lake Zurich. He had plenty of time to go biking, his favorite pastime, while Giovanna, an accomplished equestrian, rode her horses. Their two children attended Italian universities. But Greco seemed unlikely to rise any higher. When James Schiro, the American who had led a turnaround at the Swiss insurer, stepped down as chief executive in 2010, the board passed over Greco and gave the top job to CIO Martin Senn.
By contrast, Generali considered no candidates except Greco when it was looking for a new CEO two years ago. From the time he ran RAS, he was considered the prodigal son of Italys insurance industry, says Algebriss Serra, who lobbied for Greco as an activist shareholder. And the Zurich experience gave him a strong, global vision. No other insurance executives in Italy had those credentials.
Grecos first task was to establish a reputation for transparency after the years of boardroom intrigue. Mediobanca remains the companys largest shareholder, with a 13.3 percent stake. But it only enjoys the same rights as other shareholders, insists Greco. This is the way Mediobanca behaves today, and its the way the board, management, everybody views them. Serra concurs, saying Mediobancas influence over management at Generali is over. Its zero.
Lending credence to a new era of transparency are the rapid moves to end Generalis investments in strategic cross-shareholding arrangements. Greco has terminated such pacts with Mediobanca as well as tire maker Pirelli & C., multimedia company RCS MediaGroup, Venice airport operator Agorà Investimenti and high-speed train company Nuovo Trasporto Viaggiatori. The most significant remaining pact is with Telco, the investor group that controls Telecom Italia. Generalis 19.3 percent stake is worth about 500 million; Greco expects to sell it this month. I think everybody is aware that we are determined to exit all such agreements, he says.
Greco has also left little doubt about his determination to rid Generali of noncore assets. Thus far he has sold off 2.4 billion of the 4 billion total he has targeted for 2015, representing the bulk of Generalis capital replenishment need. Among the biggest disposals thus far are Israeli insurer Migdal Insurance and Financial Holdings (sold in 2012 to Israeli insurer Eliahu Insurance Co. for 705 million); Generali USA Life Reassurance (sold in 2013 to French reinsurer SCOR for $910 million); and Mexican insurer Seguros Banorte, in which Generali had a 49 percent stake (sold in 2013 to its majority shareholder, Mexican bank Grupo Financiero Banorte, for $858 million).
The largest single noncore asset left to sell is Generalis Swiss bank and asset manager, Banca della Svizzera Italiana. According to Greco, the disposal has been postponed until BSI reaches a final accord, involving specified fines, with the U.S. Treasury Department for helping U.S. citizens evade taxes.
Although the disposal of noncore assets has been a difficult, drawn-out process, Greco insists it was preferable to an equity issue an idea he rejected without even sounding out the market. If I had made a capital increase in 2012, would I devote the time to sell BSI today? he asks. Probably not, and that would have been the wrong thing to do, because it is a banking business and we are insurers. As for Seguros Banorte, although Mexico is a promising market, a minority stake in an insurer controlled by a big bank like Banorte is not a priority. Sure, Id like to be in Mexico, though not by lending capital to a bank to run an insurance business, Greco says.
Getting a grip on investments has been at least as important a part of Generalis ongoing transformation as raising capital. CIO Srinivasan says that before he came aboard in 2012, there was no centralized asset-liability-management process. There were instances of Generali executives making investments in their markets he mentions France as an example without first clearing them with headquarters. They werent doing anything illicit, Srinivasan says. But in a large corporation, investments simply have to be centralized.
Adding urgency to better investment management is the fact that yields on Generalis 500 billion investment portfolio have been falling, as they have at insurers everywhere. In Generalis case investment returns dropped from 4.4 percent in 2011 to 3.7 percent last year. We expect a modest continuing decline in yields this year simply because risk-free rates across Europe continue to tumble, says Srinivasan.
Generalis investments largely mirror those of its peers. Government and corporate bonds account for 83 percent of the portfolio, equities and real estate each make up 5 percent, cash is 4 percent, and the remainder is in private equity and other alternative investments. But within these asset classes, some shifts are under way. The most obvious: a 10 percent reduction in Generalis exposure to Italian sovereign bonds last year, from 60 billion to 54 billion, and their replacement by higher-rated sovereigns and corporate bonds from other countries. Srinivasan says the firm plans to continue that shift.
In equities Srinivasan has tilted the companys holdings toward higher-yielding (and riskier) shares in Southern Europe, especially Italian equities, using some of the capital gained from the disposal of noncore assets. We made that call publicly in the middle of last year, he says. It was a good call, and I see no reason to change it now, because when markets turn, they dont just turn for a year, and we want to be a part of it.
His optimism extends to Southern European bonds. Anticipating a swing in market sentiment, Generali was the only insurer to participate in the first postcrisis Greek senior bond issue: 500 million of 5 percent, three-year senior unsecured bonds issued on March 18 by Piraeus Bank and taken up mostly by banks and private equity funds. We were confident that Piraeus would raise equity, and they did, says Srinivasan, pointing out that on March 28 shareholders of the Greek bank approved a cash-only capital increase of as much as 1.75 billion.
A turnaround effort often reaps unexpected rewards, and that has been the case thus far with Generalis life business, which defied company projections of slimmer earnings to post a 5 percent profit increase last year. Since interest rates are so important in life insurance, one automatically assumes that the results should be down because rates are so low, says Generalis chief insurance officer, Sergio Balbinot.
Shortly after Greco and his team took over, they determined that Generali had been offering excessively generous guaranteed rates of return on so-called guarantee products, focusing on market share rather than profits. Such products, which account for the bulk of life insurance sold in Italy and Germany, carried an average minimum return of 2 percent, a relatively high level in todays ultralow rate environment. Since early last year the company has trimmed the guaranteed rates on new policies to an average of 1.23 percent.
Such an easy adjustment wont be enough to overcome the long-term problem of low investment returns in life insurance. Generali is especially vulnerable because it remains primarily a life insurer, and guarantee products are a large part of its portfolio. Generali is simply at the mercy of the markets where it operates, and Italy and Germany are markets where it has to offer guarantee products, says Peter Eliot, a London-based analyst at Berenberg Bank.
Shareholders are the main losers from guarantee products. As interest rates declined, the yield on Generalis life insurance investment portfolio fell by 40 basis points last year, to 3.5 percent, while the average yield on guarantee products fell by just 15 basis points, to 1.85 percent. So the spread between investment income and what is given to policyholders is coming down, and this means policyholders get a bigger slice of the pie than shareholders do, says Bernsteins Seidl. In 2013, Generali policyholders received 85 percent of total investment returns in the life business, the highest ratio in four years. The comparable figure at Allianz was 75 percent.
New policies are being written with better terms and conditions for shareholders. We have tried to diversify the range of products and push business that is less correlated with interest rates, Balbinot says. That has meant more sales of unit-linked and protection products and fewer sales of savings products. Of the companys 45.1 billion in life premiums in 2013, unit-linked products rose 8.4 percent, to 8.5 billion in premiums, and protection products rose 3.6 percent, to 7.5 billion, while savings and pensions declined 4.1 percent, to 28.3 billion. Reinsurance chipped in the remaining 800 million.
The p/c business looks to be more profitable than the life segment in the long run. Last year Generali had a combined ratio which measures costs and claims as a proportion of premiums of 95.6 percent, a 20-basis-point improvement over 2012. A level under 100 percent indicates an insurer is making money on its underwriting. By comparison, the 2013 combined ratio for Allianz was 93 percent, down from 97 percent in 2012, while AXA improved to 96.6 percent from 97.7 percent.
Nearly 70 percent of Generalis p/c business is retail, with a focus on motor vehicle, homeowners and fire insurance. It has virtually no long-tail businesses, such as workers compensation, that require higher reserves.
Some of Generalis best returns have come in Italy, where it generated an exceptional 92.4 combined ratio in 2013 through price increases, stronger reserves and a sharp drop in the number of claims because of the recession. The impact of the recession was noticeable in motor vehicle insurance, where a 10 percent decline in gasoline consumption last year indicated less driving and fewer accidents and claims. Insurers also benefited from a 2012 change in the law, requiring policyholders to provide medical evidence for minor injury claims. These account for about 80 percent of injury claims and 30 percent of the cost to insurers, according to the Italian Insurance Association.
Generali acknowledges it cannot count on these factors to maintain its excellent Italian motor vehicle results. The company is the second-largest auto insurer in the country, with a 13.2 percent market share last year. Because business has been so good, we are seeing stronger competition and in a market that isnt growing, Balbinot says. To enhance its performance and gain an edge on rivals, Generali is embracing telematics, which uses tracking devices to determine how much and how well policyholders drive.
With business lagging in Western Europe and the U.S., Generali is turning to growth markets, especially Central and Eastern Europe. Last year the region accounted for 434 million, or 10.3 percent, of operating profits, and 3.5 billion, or 5.3 percent, of premium income, up from less than 1 billion at the end of 2007.
We have size and high visibility in Central and Eastern Europe, Greco says. Thanks to Generalis roots in the Austro-Hungarian Empire, its winged-lion emblem hung on buildings and billboards in Budapest, Prague and Bratislava even back in the Communist era. Generalis exposure to the CEE region is second to none, says Berenbergs Eliot. The company has a combined life and p/c market share of about 6 percent of premiums in the ten countries where it operates.
There have been setbacks in Hungary, where private pension funds, including Generalis, were nationalized in 2011, and in Poland, where government bonds making up more than half of the investment portfolios of private pension funds, including those managed by Generali, were seized this year.
But for Generali the regions future is bright: Insurance penetration in CEE countries is only a third the level in Western Europe, and its rising. According to data cited by Generali, gross written premiums in the CEE region are forecast to grow at a compound annual rate of 5.8 percent between 2011 and 2017, compared with 3.2 percent in Western Europe. This was a key reason Generali agreed last year to buy out PPF Groups stake in their CEE joint venture.
Asia remains a far tougher market to crack. With the exception of the U.K.s Prudential, no Western insurer has gained a significant share in the region. Profits in life insurance are especially difficult. It is a slow process because it involves such a long-duration product, says Markus Engels, Frankfurt-based insurance analyst for Allianz Global Investors. You need distribution in these countries, and there are already local insurance companies doing it.
Although Generalis Asia business grew by 20 percent last year, the region accounted for only 995 million, or 1.5 percent, of gross written premiums. Two thirds of those premiums came from China, where Generali has a 50-50 joint venture in life insurance with China National Petroleum Corp. Since they are not in the insurance business, they arent tempted to tell us what to do, notes Greco. Though the joint venture makes Generali one of the largest Western life insurers in China, its still tiny compared with major players like China Life Insurance and Ping An Insurance (Group) Co. of China, which have 50 percent and 16 percent of the market, respectively. Hopefully, our China operation will keep growing, Greco says. But elsewhere in Asia we do not have any major market to drive us.
During Grecos brief run Generalis profits have resulted more from cost savings than from new business. Every other major European insurer went through rounds of cost-cutting in the aftermath of the global financial crisis, but Generali didnt get started until last year. There are no plans to significantly shrink the head count, which has dropped by less than 3 percent since 2012 to the current total of 77,185 employees. Even so, Generali expects to achieve half of its targeted 1 billion in cost reductions by the end of this year. This involves the low-hanging fruit, concedes Greco.
Tales of waste at Generali were legion before Greco arrived. Management didnt know how much cash was available because subsidiaries kept most of it rather than remitting it to the holding company. So when we needed cash, we turned to the debt market, issuing senior bonds, says CFO Minali, who stopped the practice. It seems like a bad joke, but it cost us between 60 million and 70 million of net income per year.
The company has also tightened the reins on spending for consulting contracts, travel arrangements and office space. Generali will save 80 million by the end of next year by moving its French headquarters from the tony Place de lOpéra, in the heart of Paris, to a less expensive location. Instead of seven Internet service providers, Generali now has one, saving a projected 12 million by 2015. Executives now fly economy class on short flights, and they are expected to rent cheaper cars. These arent huge savings, but they change the company mentality, Minali says.
Despite the sweeping reforms and ongoing turnaround at Generali, some of the biggest hurdles ahead appear to be beyond management control, with Italian politics and macroeconomics topping the list. Market pressures on Italy have eased considerably since 2012, when the European Central Bank broke the back of the debt crisis by declaring its readiness to purchase sovereign bonds. The countrys political prospects have improved with the end of the longtime burlesque of the Berlusconi era and the rise to power of Matteo Renzi, a popular, 39-year-old, center-left politician who in February became Italys youngest postwar prime minister by promising to institute a wave of economic reforms.
But Italy remains vulnerable to economic and political troubles. Public debt has climbed to 130 percent of gross domestic product, by far the highest level of a major European country, while the economy is emerging sluggishly from a long recession; the European Commission projects growth of just 0.6 percent this year and 1.2 percent in 2015. The question now is whether the reforms proposed by the Renzi government will go far enough to improve those growth projections in the longer term, says Federico Santi, a London-based analyst for Eurasia Group, a political risk consulting firm. Our answer is, not really.
The primary measures taken so far by Renzi have involved a plan to expedite the repayment of public administration arrears amounting to 68 billion, owed mostly to small and medium-size enterprises and a 10 billion cut in income taxes, mainly for blue-collar workers. Neither measure will jump-start the economy overnight or improve the governments credit rating and Generalis cost of borrowing. Management cannot do anything about that, says Bernsteins Seidl. This leaves Generali as a macro-driven group.
Greco emphasizes that Generali is far larger than its Italian business. Germany is almost as big a business for us, he says, noting that the country is Generalis second-largest market, generating 27.9 percent of premium income last year. We are a European play, no doubt about it.
But Generalis Italian identity and bond holdings will play a big part in its ability to compete. Like other insurers, Generali is waiting to see the final contours of Solvency II, a European Union directive that aims to tighten capital requirements for insurers. Some specifications arent yet on the table, says Allianz Global Investors Engels. These include whether companies have to hold capital to cover investments in government bonds.
Generali also must cope with the additional capital requirements that will be imposed by the Financial Stability Board on global systemically important insurers (G-SIIs), of which it is one. Although requirements for the G-SIIs program have not yet been agreed upon, Generali has committed itself to taking specific measures by the end of this year to strengthen its capital base in case of an Italian sovereign default. The most important of these measures is a risk mitigation plan under which Generali will arrange with international reinsurers to secure capital against the value of future profits. According to S&Ps Fudji, this plan was crucial to his agencys decision to maintain Generalis A rating.
As the two-hour interview with Greco at his Milan offices comes to a close, he sounds wistful about exercising his passion for cycling something he has rarely gotten to do since he climbed into the drivers seat at Generali. No cell phone, no iPad ... just nature ... entering a different state of mind for a few hours a week, he says. But I travel almost constantly. Last week I was only a day in Milan and another in Trieste and three days in Barcelona. Next week I will be traveling elsewhere in Europe. I go to Asia once every three months and to the CEE countries also every three months and Latin America twice a year. This is normal for anybody in my position.
A visitor points admiringly to a superb collection of early-19th-century Italian prints depicting ancient Roman ruins on the wall behind Greco. It reminds the CEO of yet another turnaround task ahead. We havent even made an appraisal of Generalis art collection, he says. It needs to be insured.