Opinion: Does an Allianz-Generali Merger Make Sense? Perhaps Not…

By and Chris Hughes | January 23, 2017

The last time Italian insurer Assicurazioni Generali SpA was rumoured to be in play, the supposed bidder, France’s AXA SA, said such a costly and complex deal would “make no sense at all.”

This time, the interest comes from an even bigger insurer: Allianz SE, possibly in conjunction with Intesa Sanpaolo SpA, according to La Stampa. The report was enough to send Generali shares up as much as 7 percent on Monday, even though it’s not clear what type of deal of Allianz might want.

A deal would make sense in terms of timing and restructuring appeal — but there are enough antitrust and political risks ahead to keep those animal spirits in check.

Among investors, there’s a clear willingness to believe that the timing is ripe for some kind of deal. Generali’s management is in turnover mode. Frenchman Philippe Donnet only recently took the CEO spot while CFO Alberto Minali is reportedly due to step down.

Top shareholder Mediobanca SpA is planning to trim its 13 percent stake, according to the Financial Times. With the ink barely dry on Luxottica Group SpA’s merger with France’s Essilor International SA, the idea of a cross-border deal involving an Italian champion isn’t so far-fetched.

There’s scope for cost savings, too. The two insurers have major overlaps in markets like Germany, Italy and France, according to Hammer Partners’s Enrico Racioppi.

Assume, then, the deal took the form of an all-stock merger between Allianz (market value 72.2 billion euros) and Generali (a smaller 22.7 billion euros).

Suppose Allianz could eliminate just 1 billion euros of Generali’s 5.5 billion euros of annual costs. That’s a conservative estimate. Dutch insurer NN Group NV reckons it can cut about a quarter of Delta Lloyd’s expenses after buying its domestic peer. Taxed and capitalized, the savings could be worth around 7 billion euros, which would allow Allianz to fund a 30 percent takeover premium for Generali.

But Allianz could arguably rip out many more costs, leaving value for both sets of shareholders. That might be more tempting than the current strategy of both companies, which is to shrink separately to boost returns on equity.

While the investment bankers’ pitch looks a no-brainer on paper, it’s hard to see regulators and politicians being quite so welcoming.

There would be obvious antitrust qualms, even with Intesa’s involvement. Intesa and Generali are the No. 1 and No. 2 life insurers in Italy, according to Bloomberg Intelligence. Generali and Allianz are the No. 2 and No. 3 in Italian non-life. Any tie-up would imply a very big jump in combined market share: Allianz and Generali’s quarterly premium income in France, Germany and Italy is about 12 billion euros apiece.

Corporate Italy may look as if it’s back in play after the Luxottica-Essilor deal, but it’s important to note Generali is a linchpin of Italian capitalism and a very political crown jewel. It helped to fund Italy’s Atlante bank rescue fund and holds more Italian government bonds than any other insurer.

That alone should make Allianz shareholders pause for thought: Buying Generali would mean adding 63.8 billion euros of exposure to Italian government debt to its already sizable 30 billion-euro holding.

European insurance stocks are enjoying a bump as markets price in a rise in bond yields. Since the end of October, Generali has risen 23 percent, AXA 12 percent and Allianz 11 percent.

Deal-making is very clearly on the agenda for these supertanker-sized companies as they grapple with the structural challenges of slow economic growth, still low-interest rates and competitive pressure to cut prices.

But a cross-border mega-merger involving as many as three parties would be a stretch to deliver — however good it looks in PowerPoint.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.


Allianz, Intesa Sanpaolo Eyeing Generali Deal: News Report

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