Assicurazioni Generali, Italy’s largest insurer, was long a pawn of the country’s financial establishment -- that is to say, of Mediobanca. The legendary merchant bank dominated Italy’s industrial landscape, thanks to a web of shareholdings in such marquee names as Fiat, Olivetti and Pirelli. But Generali was by far the bank’s biggest holding and the one most critical to Enrico Cuccia, who ruled Mediobanca and its corporate empire like a Medici duke from 1946 until his death in 2000 at age 92. Through control of Generali’s investments in major Italian companies, Cuccia and, for a while, his successors at Mediobanca were able to bend much of corporate Italy to their will.
Early this year, however, business leaders’ long-festering resentment over Mediobanca’s imperious ways broke into open revolt. Alessandro Profumo, the tall, brawny CEO of UniCredito Italiano, Italy’s second-largest bank, rallied a generation of post-Cuccia-era corporate chieftains who felt that Mediobanca had amassed too much power and was thwarting market forces, to the detriment of their own enterprises. Exhibit A in their case against the bank was its repeated and unproductive meddling in Generali’s affairs: Mediobanca had, for instance, replaced the insurance company’s chairman three times in four years. Even Banca d’Italia governor Antonio Fazio came out in support of Profumo’s band of establishment rebels.
The UniCredito boss forged an alliance of financial institutions and dissident Mediobanca shareholders to wrest control of the bank’s board and, as Profumo put it, set about “untangling this web” of corporate connections. Displaying cunning worthy of Cuccia himself, the banker directed his attack not at Mediobanca but at its exposed flank -- Generali. The ultimate aim: to gain leverage over Mediobanca by capturing control of its biggest investment and principal deal-making vehicle. Mediobanca owned 13.6 percent of the insurer, which accounted for roughly half of the bank’s E7 billion ($7.8 billion) in market capitalization. Between January and March, UniCredito, Banca Intesa (Italy’s biggest commercial bank), Capitalia (the fourth largest), Banca Monte dei Paschi di Siena (the fifth) and other backers of Profumo’s coup spent E6 billion to amass a nearly 20 percent combined stake in Generali.
That caught the attention of French financier Vincent Bolloré, who held a nearly 5 percent stake in Mediobanca and whose associates owned another large chunk. The conspirators’ show of force, and determination, eventually won over Bolloré, a canny deal maker in his own right. He abandoned his longtime ally at Mediobanca -- the bank’s 70-year-old chairman, Vincenzo Maranghi, a Cuccia protégé -- and defected to the dissidents’ side. On April 7 Profumo’s faction forced Maranghi to resign and installed its own candidate in his place: former Fiat chief executive Gabriele Galateri di Genola, who has a reputation for fair dealing and appears to have no delusions of grandeur about running a corporate fiefdom.
For Generali -- and for many other companies that were in thrall to Mediobanca -- April 7 was a day of liberation. Yet for the Italian insurer, the sensation of freedom proved to be fleeting. Profumo’s UniCredito and its key banking allies in the Mediobanca assault now hold a residual 10 percent or so of Generali and seem reluctant to give up their effectively controlling stake (just as Cuccia was in his day).
That skewed share-ownership structure helps to explain why Generali, despite a tenfold surge in profits in this year’s first half, is one of the worst-performing stocks in the European insurance sector. Since March, Generali’s share price has fallen nearly 19 percent, from E24.75 to E20.10. Meanwhile, the Dow Jones Stoxx insurance index for Europe has risen more than 22 percent. Investors are uneasy about the stock overhang and the banks’ intentions toward Generali. “The potential for destabilizing power games still weighs on the stock,” says Holger Klotz, an insurance analyst at Fox-Pitt, Kelton in London.
The banks’ intentions are hazy at best. UniCredito’s Profumo was quoted this summer in Italian magazine Panorama Economy as saying that the banks have remained shareholders in Generali to protect “one of the few real flagships” of Italian capitalism from manipulation. But according to market speculation, the banks might unwind their holding in the insurer through a five-year convertible bond offering. Such a ploy would enable them to continue to exert control over Generali -- and its E211 billion investment portfolio -- for years to come. Queried about his intentions at a September 15 analysts’ meeting in Milan to announce first half-results, Profumo would only say that UniCredito planned to “analyze the form and mode” of disposing of the Generali stake.
Meanwhile, Generali’s top managers -- whose jobs will be on the line at next April’s annual general meeting -- are gamely attempting to carry out an ambitious three-year plan of slashing costs and expanding abroad. In July, Generali acquired French insurer Continent Holding for E290 million, and in September it agreed to buy a significant chunk of Zurich Financial Services Group’s French insurance business for an undisclosed sum.
Generali’s half-year results, announced in mid-September, ought to provide its executives with some job insurance. Net income jumped to E531 million from E5 million in first-half 2002, beating the consensus estimate by more than E50 million. Operating earnings in the life insurance business surged 39 percent, to E487 million, while losses in nonlife lines declined by nearly one third, to E466 million. Last year the insurer lost E754 million after a E3.9 billion write-off to reflect falling stock values. Underwriting has shown new strength, with Generali’s combined ratio, a key measure of efficiency, falling from 107.9 percent to 100.8 percent in the first half. As the insurance industry recovery picks up, Generali’s results for the full year should exceed its target of E930 million.
Generali chairman Antoine Bernheim, reporting the good news, said that he hoped the results would persuade investors that management’s business plan was meant to serve the interest of all the insurer’s shareholders, not just UniCredito and the other banks that have become its core holders.
Not long before the six-month numbers were published, however, the 79-year-old former partner at investment bank Lazard Frères & Cie. told Institutional Investor: “More than ever, Generali needs to be able to concentrate on its core business without the distraction of interventions that have nothing to do with the world of insurance. It is only through the restitution of longer mandates to Generali’s chairman and chief executives that we stand a chance of bringing an end to the current situation of institutionalized instability.”
Bernheim and the insurer’s co-CEOs -- Sergio Balbinot and Giovanni Perissinotto, both career Generali employees -- sought a formal mandate from the insurer’s board guaranteeing that they would be around long enough to see through the three-year strategy, which they launched in January. When Bernheim tried to call a special shareholders’ meeting for that purpose, however, the banks stood in his way. Says a source close to the beleaguered executive, “The banks don’t want to give that kind of independence to management.” Indeed, the banks replaced four directors on the 20-member board who were friendly to Bernheim with others aligned with their own interests.
Like Cuccia, Profumo and company seem to regard Generali, with its E240.4 billion in assets (including E45.6 billion in private banking and mutual fund accounts), as a keystone of Italian capitalism. Concludes the well-placed Generali source, “The banks may want to decide the fate of Generali and its assets among themselves.”
Like Damocles, Bernheim and his co-CEOs are trying to ignore the threat hanging over their heads as they go about restructuring the insurer. Bernheim is an old hand at Generali -- and at Italian financial machinations. As a Lazard partner, he worked with Cuccia to pool his own investment bank’s and Mediobanca’s interests in the insurer, joining its board in 1973. Twenty-three years later, after running French insurer La France, Bernheim became chairman of Generali. He carried out Cuccia’s mandate to buy up smaller insurers in France and Germany, and he bolstered the firm’s asset management capability by acquiring Swiss private bank Banca della Svizzera Italiana. In Bernheim’s three-plus years in the post, Generali’s premium revenues doubled and its share price tripled.
Nevertheless, in April 1999 Bernheim was summarily fired, for typically convoluted reasons. For a start, tensions had been mounting between Mediobanca and Bernheim’s old firm. (He remained closely affiliated with Lazard until 2000.) In late 1997 Mediobanca’s highly regarded head of capital markets, Gerardo Braggiotti -- who felt strongly that the bank should get away from cross-shareholdings and into mainstream investment banking -- left. Not long afterward he joined Lazard, where he advised Telecom Italia on resisting a hostile bid launched by a Mediobanca client, Olivetti, which ultimately prevailed. And when UniCredito made a run at Banca Commerciale Italiana -- a deal that Mediobanca resisted -- Braggiotti represented UniCredito. Bernheim, who had already opposed a Mediobanca scheme to merge Banca di Roma and BCI, made it clear that he was prepared to vote Generali’s BCI holdings in favor of the UniCredito offer. Outraged, Mediobanca’s Maranghi promptly dismissed him.
“I was just doing what I thought was best for the interests of all shareholders and not just a select few,” says Bernheim today. “I was fired by Mediobanca for reasons that had nothing to do with how I ran Generali.”
The experienced executive’s ouster plunged the insurer into nearly four years of turmoil -- the rotating chairmen and “institutionalized instability” that Bernheim speaks of. He remained on the Mediobanca board as Lazard’s representative, however, and after reconciling with Maranghi, lobbied hard to get his old job back. He reclaimed the Generali chairmanship in September 2002, six months before Maranghi was pushed out of Mediobanca.
Co-CEOs Perissinotto and Balbinot say they have no problem reporting to Bernheim, who retains ultimate say over strategic decisions. People close to the company agree that the three work well together. Says Bernheim himself, “In the 30 years I’ve been on the board, I’ve never seen a more unified management team.”
Harmony matters when the objective is to overhaul the company. The trio’s three-year plan has changed the whole tone at Generali, which historically had been a highly secretive company in the Cuccia tradition. For example, the insurer reveals previously undisclosed details about profitability and capital allocations by business line and geography.
These details portray a company well diversified within the fragmented European insurance industry. Generali derives 34.7 percent of its premium income from Italy, 26 percent from Germany, 17.2 percent from France, 4.8 percent from Austria and 4.3 percent from Spain. The remaining 13 percent comes from other markets around the world. Life insurance contributes 62.1 percent of Generali’s total premium income, nonlife -- basically, property/casualty -- the rest. In toto, the company collected E47 billion in premiums in 2002.
The numbers shape the strategic plan. The life business earns more than the company’s 7.45 percent cost of capital. Life’s operating profit, minus investment returns -- known as the technical result -- was E809.7 million last year. By contrast, nonlife lost E1.4 billion. That was about the same size hole that the business dug itself into in 2001, when Generali earned an overall E1.1 billion profit despite writing off E1.6 billion in sour investments. “In the past, like many other insurance companies, we could rely on investment income to produce a profit, but that has not been true since the bear market began,” says Bernheim. “The good news is, we’ve now got a management team that clearly understands that we’ve got to make our underlying insurance operations as profitable as possible on their own rather than worrying about market share, premium volume or geographical presence.”
Generali’s goal is to lower its overall combined ratio to 100.3 percent -- to essentially break even on its underwriting activities. By comparison, Generali rivals Allianz of Germany and Axa of France have combined ratios of about 105 percent. The Italian insurer intends to reduce its annual expenses over the next three years by a drastic E617 million, or 28 percent, and drop money-losing lines like car-fleet insurance and industrial risks. Generali is now in the midst of dismissing 2,800 of its 58,525 employees -- almost 5 percent -- a process it expects to complete by 2005. The company is also streamlining information technology systems and renegotiating agreements with agents.
Generali’s biggest property/casualty drain abroad is Germany, where the insurer suffered an operating loss on nonlife lines in 2002 of E502 million (minus investment returns and any positive effects from reinsurance). “We are prepared to prune our insurance portfolio there line by line over the next two and a half years, even if it means flat premium growth, to achieve our profitability targets,” declares co-CEO Balbinot. The 46-year-old, who runs the international operation and speaks four languages fluently, has pulled Generali out of German car-fleet insurance altogether. “We expect Germany to drive our return to profit internationally,” Balbinot says.
An even greater challenge lurks in Generali’s home market in the form of the company’s single biggest value-destroyer: p/c insurer Assitalia. Part of Instituto Nazionale delle Assicurazioni, the onetime state insurance company that former Generali general manager Gianfranco Gutty purchased for a very pricey E9.9 billion in 1999, Assitalia accounts for 11 percent of Generali’s E17.8 billion in annual nonlife premiums and in 2002 had a staggeringly inefficient combined ratio of 115.7. That is, Assitalia lost 16 cents on every euro of insurance it underwrote.
Ever since it bought INA, Generali has experienced setbacks. Its share of the Italian life insurance market, for instance, has shrunk from 28 percent to 20 percent, although INA is predominantly a life insurer. “INA,” complains Bernheim, has “a sales network that’s way too expensive. Its purchase also meant that the antitrust authorities obliged Generali to terminate profitable sales contracts with many savings banks that were allowing us to maintain and even grow our market share.”
Observers see the calculating hand of Cuccia behind the INA deal. Sanpaolo IMI, Italy’s third-largest bank, was negotiating at the time to buy INA, but as Credit Suisse First Boston analyst Maurizio Lualdi points out, “a combination of Sanpaolo IMI and INA could have constituted a rival pole of influence for Mediobanca.” So Cuccia removed the threat by having Generali buy INA instead. The company cost more than double what Generali had paid the year before for Aachener und Münchener Beteiligungs, Germany’s third-largest insurer, yet it brought in only about half of AMB’s premium income.
“Clearly, INA was not the greatest purchase in terms of price,” concedes co-CEO Perissinotto, 49, who is in charge of domestic operations and finance and investments. “But it’s been bought, and it is now our duty to fulfill its potential. That is what we should be concentrating on, rather than asking whether or not we did the right thing when we bought it. I’m confident we can turn it into a good money machine.”
A big stumbling block is INA’s reliance on Assitalia’s distribution network of 212 insurance agencies, all of which fiercely defend their turf and the status quo. For good reason. One Milan analyst estimates that the agents receive retrocession payments -- basically, commissions -- of as much as 90 percent of the fees on every policy they sell, whereas most Generali agents must make do with roughly 50 percent. Generali has little choice but to confront the touchy task of renegotiating commission deals with the Assitalia agents. As Fox-Pitt, Kelton’s Klotz notes, “bringing down costs at Assitalia is essential if Generali is to hit the three-year targets.”
Bernheim and his co-CEOs must accomplish all this while looking over their shoulders. But success -- such as those surprisingly positive half-year results -- could offer a shield against interference from Generali’s banker bosses. “At this point, they have to prove to their shareholders that their investment makes sense,” says Perissinotto hopefully. “Then I think everyone will be happy with their presence in our share capital.” A source close to the management team confides that “if they can start delivering on the objectives in the three-year plan, it will be difficult for the board to resist a motion for longer mandates at the next annual general meeting in April.”
All the same, Generali is plainly much more than an ordinary investment to the bankers. There seems to be a little Cuccia in every Italian financier, and the appeal of the insurer to anyone aspiring to be a master puppeteer of Italian industry -- as the Mediobanca chief was often described, il maestro delle marionette -- is obvious.
Generali is a honey pot of corporate holdings: 7.6 of Intesa and 5.7 percent of Banca Nazionale del Lavoro (Italy’s sixth-largest bank); 3 percent of Fiat; 3 percent of Olivetti (now the holding company of Telecom Italia); 6 percent of tire and cable giant Pirelli; and 3 percent of publishing and fashion conglomerate HDP. The insurer even owns 10 percent of Germany’s Commerzbank, itself a Mediobanca shareholder (naturally).
Megalomaniacal impulses aside, might the bankers be tempted to treat Generali as a tool to help win banking mandates? “The worry of Generali’s management’s is really the same as it was when Mediobanca tried to exercise control,” says a senior-level source close to the insurer. “A damaging battle for control could break out, this time among the temporarily united but still-competing banks, destabilizing management and damaging recovery prospects.” Adds CSFB analyst Lualdi: “None of them will want to leave Generali if any of the others remain. They are concerned about ceding influence over Generali to one another.”
The seasoned Bernheim, contends one observer, should “make it tougher for shareholders to turn Generali into a political football.” Still, Cuccia must be smiling darkly.
