Rising Motor Claims And Nat Cat Volatility Will Erode Margins And Pressure Earnings

Catalysts

About Assicurazioni Generali

Assicurazioni Generali is a multinational insurance group providing property and casualty, life, health, and asset management solutions across Europe and selected international markets.

What are the underlying business or industry changes driving this perspective?

• The current tailwind from declining motor claim frequency and benign Nat Cat experience risks reversing as traffic patterns normalize and climate volatility rises. This could quickly erode the recently improved combined ratio and compress P&C underwriting margins.
• Heavy reliance on aggressive repricing to widen the gap between average premiums and risk premiums in key markets like Italy and Germany may reach regulatory and customer tolerance limits. This could constrain future price-led growth and slow revenue expansion.
• Ambitious efficiency and automation programs, such as claims automation and geospatial underwriting, require sustained upfront investment and complex execution. Any delay or underdelivery would cap expected gains in the expense ratio and limit improvements in net margins.
• Increasing allocation to private credit and alternatives, including real estate and infrastructure debt, exposes the group to a potential credit cycle turn and real estate repricing. This could pressure investment income and lead to impairments that weigh on earnings.
• Regulatory and capital headwinds, including temporary internal model changes, acquisitions and sovereign rating downgrades, may absorb a sizeable share of normalized capital generation. This could limit flexibility for future shareholder distributions and constrain earnings per share accretion.

Assumptions

This narrative explores a more pessimistic perspective on Assicurazioni Generali compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Assicurazioni Generali's revenue will grow by 24.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.8% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach €4.7 billion (and earnings per share of €3.19) by about December 2028, up from €3.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €5.9 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the GB Insurance industry at 13.3x.
• The bearish analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The P&C franchise is showing structurally higher pricing power than loss trends, with average earned premiums in major markets like Motor rising by more than 10% while risk premiums rise around 1%. This suggests that underwriting discipline and cycle management could sustain or further improve combined ratios and support resilient earnings and net margins over the long term.
• Life business dynamics are improving on several secular fronts, including strong net inflows already above EUR 10 billion, reduced surrenders in core markets such as Italy and France, and a shift toward protection, hybrid and unit linked products with higher new business margins. Together, these factors could underpin steady revenue growth and growing Life operating profit and earnings.
• Group wide digitalization, claims automation, Nat Cat machine learning models and the geospatial underwriting platform are already delivering measurable operational benefits. As these initiatives scale across more countries through 2026 and beyond, they may structurally lower loss ratios and expense ratios, thereby lifting long term net margins and earnings above bearish expectations.
• Capital strength and disciplined balance sheet management, including a solvency ratio around the low two hundreds even after absorbing acquisitions, model changes and sovereign rating downgrades, plus conservative reserving on Nat Cat and attritional losses, increase the likelihood that Generali maintains or enhances shareholder distributions. This may support earnings per share resilience and potentially limit downside for the share price.
• The growing and diversified allocation to private markets, especially secured real estate and infrastructure debt with high grade credit quality and limited single borrower exposure, alongside gradual government bond diversification, could enhance long run investment income without materially impairing risk. This may support revenue from investment spread and help stabilize group earnings through future cycles.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Assicurazioni Generali is €27.0, which represents up to two standard deviations below the consensus price target of €34.25. This valuation is based on what can be assumed as the expectations of Assicurazioni Generali's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €42.0, and the most bearish reporting a price target of just €27.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €108.9 billion, earnings will come to €4.7 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of €34.04, the analyst price target of €27.0 is 26.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.