Activist investor takes Generali to task over governance

Among corporate governance issues, Algebris called for Generali to
end the practice of having two CEOs. At present, Giovanni
Perissinotto and Sergio Balbinot act as joint CEOs. In addition,
Algebris believes Generali’s chairman, Antoine Bernheim, should
relinquish his executive powers. Indeed, Algebris questioned
Bernheim’s suitability for the position given that he is 83 years
old. Algebris also criticised the selection of Raffaele Agrusti as
Generali’s CFO. Agrusti, who was appointed in September, is the
insurer’s first CFO.

Call for remuneration changes

On the issue of senior executives’ remuneration, Algebris called
for changes that would link total payments more closely to
Generali’s performance. Notably, data provided by Algebris in its
letter shows that in 2006, of Perissinotto’s total remuneration of
€7.47 million ($10.66 million), the salary component was 27.7
percent. Of Balbinot’s €7.59 million total remuneration, the salary
component was 27.3 percent.

Their remuneration compositions differed markedly from those of
their counterparts at other major European life insurers. For
example, Axa’s CEO, Henri de Castries, was paid a salary of
€500,000 in 2006, representing 5.5 percent of his total
remuneration of €9.09 million. The total remuneration of Allianz’s
CEO, Michael Diekmann, in 2006 was €5.83 million, of which 18
percent was in the form of a €1.05 million salary.

Bernheim’s total remuneration of €8.71 million (30 percent in
salary form) also came under fire from Algebris for being
excessively high. US magazine Fortune ranked Bernheim as the fifth
highest paid chairman/CEO in Europe in 2006. Algebris stressed that
Generali’s remuneration structure, combined with corporate
governance issues, represented significant obstacles to the
creation of value for its shareholders.

Algebris was also critical of what it views as a conflict of
interests between Generali and Italian investment bank Mediobanca,
its largest shareholder. Mediobanca holds a 14.1 percent stake in
Generali. Algebris’s criticism is nothing new, as conflicts of
interest in the Italian corporate sector have been the source of a
long-running debate in Italy. However, the issue could be
approaching a point of resolve if new corporate governance
guidelines set out by the Bank of Italy, the country’s central
bank, for banks’ relationships with companies in which they have
major stakes are adopted.

Strategic investment

Algebris owns 0.3 percent of Generali and could increase this to 1
percent via the exercise of call options it holds. Algebris noted
that it views its investment in Generali as being strategic and
long term, and that the insurer has the potential to achieve
significant growth. Formed in 2006, Algebris manages assets of
about $2 billion. Notably, one of the investors in Algebris is
another UK hedge fund, TCI, which was one of the prime agitators
for the break-up of Netherlands bank ABN AMRO.

In a response to Algebris’s letter, Generali stated that, as a
matter of policy, it welcomes all opportunities for constructive
dialogue with current and potential shareholders and noted that it
had met Algebris on a number of occasions.

In its own defence, Generali stressed that under the current
management team, which was appointed in 2002, the shareholders’
dividend has increased from €0.28 per share in the 2002 financial
year to €0.75 per share in the 2006 financial year. Generali added
that its strategic plan calls for the dividend in the 2009
financial year to be double that of 2006. This implies that the
total value of the dividends paid would have increased from €357
million in 2002 to nearly €2 billion in 2009. Net earnings would
have moved from a loss of €750 million in 2002 to a €3.8 billion
profit in 2009.

Despite these bold growth objectives, Algebris believes that even
if the 2009 target were to be achieved, it would represent only
about three-quarters of the earnings level Generali is capable of
achieving.