Generali has entered an agreement to purchase the remaining stake in GPH from PPF Group for EUR 2.5 billion. The deal will further strengthen Generali’s leadership position in Central and Eastern Europe, or CEE. The deal is a positive to the company. It removes the uncertainty over Generali’s development strategy in CEE and the resources required from the company to put it in place. The deal further demonstrates CEO Mario Greco’s determination to improve the company’s profitability through aggressive expansion in a high-rowth region.
GPH was created between Generali and Amsterdam-based PPF Group in 2007 as a joint venture to market life and P&C insurance products in 14 Eastern European countries. Over the course of five years, gross premiums have quadrupled to EUR 4 billion, making GPH one the largest and most profitable insurers in the CEE region. The CEE region is Generali’s fourth-largest market after Italy, France, and Germany.
Generali, which already owns 51% of GPH, will purchase the remaining ownership in two equal tranches. The first tranche will be funded by the end of March using the EUR 1.2 billion proceeds from recently issued 30-year bonds. This funding arrangement results in minimal impact on Solvency I capital ratio, which the management expects to be around 150% after the completion of the first tranche. It is not clear how Generali expects to finance the second tranche yet, which is due by the end of 2014, but given the company already generates EUR 1.5 billion of cash each year, it doesn’t seem like Generali will need external funds.
The fast-growing CEE region is likely to draw more competition from other European insurance companies. AXA, for example, has indicated its desire to further expand its presence over the next few years. The deal is important to Generali in terms of finding new markets to grow the company’s profits while keeping the capital base in check. The company will host its Investor Day conference next week to provide more updates.
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