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Generali - Still The Best Way To Hedge For The Upcoming Italian, And European, Contagion

Tyler Durden's picture




 

Back in December, when noting the first material blow out in PIIGS spreads following the first Greek bailout 6 months earlier, we touched upon Italy, and specifically looked at a way to best play the coming shift in Eurozone contagion from the periphery to the core, coming up with one unique corporate name. Back then we said: "We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world." In a nutshell, Assecurazioni Generali, one of Italy's largest insurers, is a highly levered windsock for Italian and other PIIGS stress, and better yet, can be played in either equity or CDS. Now that the European bond vigilantes are once again looking beyond Greece and focusing particularly on Italy (especially based on recent Sigma X trading), none other than JP Morgan (which just cut its estimates on GASI.MI, a very appropriate equity ticker) validates the thesis that Generali (or ASSGEN per its memorable corporate/CDS ticker) is the best proxy for contagion: "Generali is one of the most sensitive stocks to both the sovereign debt crisis and the implications for the financial sector through both its government, corporate and equity investment portfolios...Generali’s sovereign exposure is mainly concentrated in Europe with Italy accounting for the largest share (37%; home market bias)."

The chart that confirms that GASI is nothing but an inverse bet on Italian viability:

A reminder of ASSGEN's sovereign exposure:

The same data in tabular format:

Some points from JPM's Andreas de Groot van Embden:

Generali’s main risk exposure to sovereign debt outside of Italy include Greece, Portugal, Ireland and Spain. The sovereign bonds are valued at market (accounted as Available For Sale). In aggregate, Generali has €12bn of gross exposure to troubled sovereign debt (excl Italy) and €2.1bn of net exposure (post tax and policyholder participation) accounting for c.14% of TNAV. We have assumed in our analysis that Generali would be able to share the impact of any potential impairments on its sovereign and financial (eg bank) exposures with policyholders given the decline in the minimum guarantees we have seen over the past few years (avg guarantee 2.3% in 2010). In practice the actual allocation will depend on the location of the bonds, the local country profit sharing rules and the level of buffer capital available in those entities (such as the free RfB buffer in Germany).

The Greek exposure is €3.0bn on a gross basis (per year end 2010) and €500m after policyholder participation and tax (based on amortized cost). This accounts for 20% and 3% of 2011e tangible book value on a gross and net basis respectively. We estimate Greek bonds will be valued at an estimated c50% of par based on a 6 year duration at end of 2011 Q2 with an estimated €160m unrealized loss included in shareholders’ equity after policyholder participation and tax. Should the debt rollover discussions be judged a credit event by either the rating agencies or auditors, we estimate that a €160m impairment would be realized through the P&L - assuming the haircut is in line with the market value of the bond. The overall impact on shareholders’ equity would be neutral (as it is already included).

Only if there is an additional haircut on the sovereign exposure that shareholders’ equity would be affected by additional impairments. In solvency terms, Generali includes unrealized gains and losses in its Solvency I and Solvency II calculations and the impairment of Greek debt should already be largely incorporated in our Q2  shareholders’ equity assumptions. Aggregating the main sovereign credit risk exposures outside Italy we estimate this factors in an unrealized loss of €3.2bn gross and €343m net unrealized losses in shareholders’ equity per end of 2011Q2 (see table below). The gap between the gross and net is material but is equivalent to 74bp of traditional life technical reserves. Substantially higher gross losses than those described below might belong more to shareholders than policyholders.

The bottom line, with appropriate sugarcoating:

Overall, a write down in line with current marks on the Greek sovereign debt exposure will not have any incremental impact on the solvency ratio of the group as the debt is already included at market value. However, further swings in the value of sovereign debt, Spanish and Italian in particular will continue to affect TNAV and solvency until the situation stabilizes.

There is much more in the full JP Morgan report but this is the gist: anyone who wishes to play the developing contagion and awakening bond vigilantism via either equity or CDS, this is without doubt the best proxy.

And for those curious how ASSGEN correlates with Italy CDS, here it is:

 

 

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Tue, 07/05/2011 - 08:48 | 1426209 Yen Cross
Yen Cross's picture

 Print this. TYLER 599gtO. Yep

Tue, 07/05/2011 - 09:51 | 1426313 66Sexy
66Sexy's picture

intangible assets, a.k.a bullshit.

Tue, 07/05/2011 - 08:51 | 1426215 writingsonthewall
writingsonthewall's picture

"€262 billion in Euro bonds on.... €10 billion in tangible equity!"

 

Capitalism - the 'wealth creator'.

 

The only thing capitalism creates is debt and misery - and right now it's moved into a brand new paradigm. State sponsored debt and misery.

Tue, 07/05/2011 - 09:03 | 1426229 averagejoe
averagejoe's picture

Real question is why does it come as a surprise.  The capitalism we have now is the inevitable consequences of its failings. A lot that post here probably think a return to free market capitalism is the solution.  But history teaches us that, that failed about 100 years ago.

Tue, 07/05/2011 - 09:26 | 1426265 Steroid
Steroid's picture

According to Mises fascism is one of the branches of socialism. It has nothing to do with capitalism!

Tue, 07/05/2011 - 10:05 | 1426316 66Sexy
66Sexy's picture

insert - corporo-gubment indoctrinated 'cry defending capitalism' comment here..

 

Tue, 07/05/2011 - 11:19 | 1426535 averagejoe
averagejoe's picture

Mussolini defined fascism as merging of corporations and the state.  And that’s what we have now.

Tue, 07/05/2011 - 09:02 | 1426230 RollOver
RollOver's picture

Where does one get his hands on some ASSgen CDS's then?

Tue, 07/05/2011 - 09:08 | 1426236 qussl3
qussl3's picture

So I should BUY this with both hands and feet right?

After all its all unicorns and roses now no?

Tue, 07/05/2011 - 09:13 | 1426250 old naughty
old naughty's picture

While everyone is looking at Spain...This is the big one, before UK, and cross- Atlantic. End is in sight.

And thanks to ZH's Early Warning.

Tue, 07/05/2011 - 09:20 | 1426260 Dick Darlington
Dick Darlington's picture

Didn't ALL the Italian insurers just pass the "stress tests"? Lol!

Tue, 07/05/2011 - 09:27 | 1426266 Bohemian Clubber
Bohemian Clubber's picture

sometimes you ve got to accept that some stocks are overvalued and will go up up up so you have to buy buy buy... boooyahh!!

Am gonna short this sucker all the way down to zero bitcheZ!!!

 

Tue, 07/05/2011 - 09:39 | 1426289 Arch Duke Ferdinand
Arch Duke Ferdinand's picture

""Time to Abolish Congress and Replace It with Mass Internet Voting on the Issues"" ...

http://www.blogger.com/posts.g?blogID=7964465388607830029

Tue, 07/05/2011 - 09:56 | 1426322 oogs66
oogs66's picture

yes, the contagion is finally spreading and investors are realizing that the PIIGS are the problem, its the banks and insurance companies that failed to build enough capital the last 2 years and held on to too much cr*p that isn't marked properly that will drag the market down again

Tue, 07/05/2011 - 10:21 | 1426380 SilverDosed
SilverDosed's picture

You seem to forget the fresh liquidity injections our "preffered" European banks received during QE2. These preffered banks would never do a thing like blow up other banks filled with toxic debt so they can buy them for pennies on the dollar with central bank backstops on all the losses.

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