One of the good things about being in the life insurance business is that customers are with you a long time. The new business you write today should produce profits for years to come. Strange then, you might think, that you don't hear a lot of comment in the form of "they only reported Y of operating profit this year but the new business would produce a multiple of that - NxY, of profit per annum". Or, to be precise, to say that is what would happen if they simply wrote the same amount of new business every year.
Well, we believe its a fair challenge. And its an approach that would separate the genuine growth stories from the others. We've been looking at that multiple, 'N', and one example we'd like to highlight is Generali, where we calculate the multiple at 2.4x. Yes, 2.4x. That is a very, very, impressive level of locked-in life profit growth, and one of the highest in the sector.
How to identify the multiple
Its calculated from the new disclosure of 'undiscounted new business profit'. But is the result for Generali some kind of distortion from the peripheral Eurozone crisis? Seems not. Its around where we'd estimated it before and the plain fact is that, on the ground, Generali, along with one or two others in the sector, is not reporting IFRS operating profit derived from legacy business with no real counterpartt in new business. And its that sort of thing that, relative to Generali and one or two others at least, depresses the multiple for many insurers with large businesses in European or US life insurance.
It is somehow poetic that despite all the fancy 'embedded value' (or 'EV') reporting and the esoteric trills added to the score by the high priests of the art in recent years, this sort of simple measure is not made a lot more obvious in life insurers' reporting. We call 'N' the 'locked-in growth multiple' and we estimate it using the procedure described below, plus a few adjustments to keep things comparable between the different life insurers, allow for investment management profits in the EV reporting, whether the undiscounted new business profit does or does not include costs on day one and such like.
So what we're doing is estimating the multiple of current IFRS life operating profit that would arise from writing the most recently reported new business every year. And if you've got that you can miss the box out for now if you wish!
LIFE INSURANCE LOCKED-IN GROWTH MULTIPLE
The important point is that in Generali's case it should mean reported life operating profit has real momentum. Not necessarily quarter to quarter, or even year to year. But it will be on a robust trajectory to much higher levels over the medium term and it's not easily going to be knocked off course.
As a comparison the multiple for Standard Life is nowhere near Generali's 2.4x. We calculate it at just 1.4x, and that is using the lower starting point for IFRS profit of £650mln suggested by Standard Life as the new run rate (rather than the reported circa £900mln). Recent Q1 new business sales numbers were bouyant for Standard Life but the key will be whether the new business is very profitable. We expect it is low margin, and probably, at least in the case of the auto enrollment sales that provided half the growth, very low margin. In other words, not much future profit.
Generali's Q1 results are on Friday 10 May. Non-life is recovering. The p/e multiple on consensus forecasts is just under 11x. Life profits are on a robust higher growth trajectory, in our view, and the company has been transforming how it communicates with stakeholders under new MD Mario Greco.
We think Generali should have a great story to tell, the Italian negative is not what it was, and the share price has been showing some intriguing signs of life recently. We shall see.
All comments welcome
Ed Outsure can be contacted at citizent@live.com
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