8 April 2024

CIO Interview: managing Europe's third largest general account

Generali group CIO Francesco Martorana discusses the Italian giant's investment strategy and reveals some of its most exotic investments, including blockchain

In the 2021 game of musical chairs that saw Generali split its group' investment function and its asset management activities, Francesco Martorana came out as group chief investment officer, taking on the Italian giant's €460bn of assets under management.

Martorana seemed a natural fit for the role, as last time he spoke to Insurance Asset Risk, in 2020, he was chief executive officer of Generali Insurance Asset Management, the largest affiliated asset manager in the group, which at the time managed an estimated 62% of the group's total assets.

Still, Martorana somewhat switched from being (a kind of) poacher, to being Italy's largest general account gatekeeper... did that require some adjustment?

To some extent, he acknowledges, although he notes he previously worked on the asset owner side at Generali, as head of ALM/SAA between 2013 and 2017, and prior to that at Allianz. "So, I will say partially yes [some adjustment had to be made], but I had already a bit of that DNA in me."

"It is a different but very interesting job, because you see all the asset classes, all the asset managers, and so you can appreciate, in a better way, the link with the insurance business and how the various parts of the portfolio generate return and risk," he says.

Francesco MartoranaUnder the helm of the CIO are 260 professionals worldwide split between the central team at Generali's headquarters, and the local team led by local chief investment officers either in country or at regional level.

Most of the investment activity is in continental Europe, including Central Eastern Europe (CEE), but spreads across the globe from LATAM to Asia, where the business "is growing both organically and through acquisitions".

"It's never boring because we go from Latin America to the Far East," Martorana says. "I'm sure you can appreciate that clearly the regulation, market conditions and insurance businesses are quite different from one geography to the next, especially on the life side. So, we need to adapt the investment strategy to all these different environments."

The investment function is structured around four pillars that make what he calls "the investment value chain". First, is the ALM pillar; second, is the strategic and tactical asset allocation pillar; third, comes portfolio implementation and relationships with asset managers; and fourth, comes planning and reporting on investments and ESG integration.

The relationship between the mothership and the local teams is two-way traffic following a bottom up and top-down approach, Martorana explains. "Centrally, we define the overall strategy, we define the different market scenarios in terms of expected returns and asset class preferences, broadly speaking giving the direction of travel for the portfolio in terms of allocation by risk appetite, return drivers and considerations such as public vs private."

He adds: "But then the local teams need to help us understand how this can fit with the local liabilities and regulation, so then we square this to put together the two perspectives."

A lot of it is dependent on regulation, Martorana points out. "If you look at the Eurozone, you can have to a certain extent a more centralised or common approach, because it is a single currency, markets are strongly interconnected. There are still differences if you look at the way life businesses work in the different countries of the EU, but the financial markets are the same."

For CEE countries, things are already less harmonized, because each country has its own currency and each of the capital markets have their own dynamics, so they can't be seen as a whole, he continues. "Then of course you have China or India or Argentina, where you have different currencies and very specific capital markets also with restrictions to capital movements. So, you need to have a lot of local expertise and an allocation that matches those local characteristics."

AuM wise most (€360bn) comes from the insurer's general account, and the reminder €100bn is from the unit-linked business, which Martorana has been growing significantly in recent years. (More on that in part two of this interview).

He adds that the day-to-day portfolio management activities are entrusted to the group's asset management units, that have specialized teams for public and private markets. "We also use where necessary external asset managers," he says. "But of course, we try to as much as possible rely on the internal competency."

The general account portfolio is, as one would expect, mostly (78%) invested in fixed income, but also real estate (9%), equity (7%), cash (5%), and the remaining 1% is allocated in multi-asset liquid alternatives.

"Generali's approach and philosophy is to take very limited interest rate risk versus our liabilities," he says. "To have very disciplined ALM, the duration of our life portfolio is nine years and for P&C it is five years. We try to generate spread over the cost of our liabilities mainly via credit, and with some extra return also coming from equities and real estate."

Within equities, the portfolio follows a 60/40 split, with 60% in private equity and 40% in listed equity.

"We have a growing allocation to private equity, in line with our main peers, because we believe with our liability profile we can extract some extra return there versus public markets," Martorana says. "Of course, 2023 was a difficult year for private equity and real estate. But over the cycle, for the type of private equity we hold, which is mid-market buy-out essentially, but also secondaries, it has been an interesting multiple versus listed equity markets."

Private debt has also been a growing asset class. Exposure to private debt is approximately 6% of the overall GA, and although allocation to this asset class has been growing in the last five years, Martorana says it is still below the insurer's long-term target. "We would like to grow this exposure gradually a bit more, these vintages are quite attractive because the new origination in private debt occurs at attractive spread, and we have low exposure compared to our insurance peers."

But it's not all about ordinary and familiar when it comes to allocation, and it would be surprising if with such a gigantic GA to invest, Generali wouldn't venture into more exotic assets. Martorana highlights two such "interesting and innovative" opportunities the Italian insurer has pursued in the last three years.

One is renewable equities, where it invests in greenfield energy transition infrastructure, via an affiliated asset manager launched in September 2023 – Sosteneo – who received a €500m investment mandate from the insurer.

"This is a specialized team, doing new projects in the area of photovoltaic energy and potentially also wind, but also battery storage, and green hydrogen," Martorana says. " These are things where we see a strong convergence between our ESG objectives and where to generate returns."

In less than six months of activity, Sosteneo has already announced six transactions. The latest was in March, when it announced the acquisition a 49% shareholding in Enel Italia's energy transition infrastructure portfolio, Enel Libra Flexsys. The deal is expected to be completed in H2 2024.

However, a focus on renewables remains within the realm of what one would expect an insurance company to invest in. But Martorana has more than one feather to his bow, and for his second example of an 'exotic' investment he drops a word that would send a few heads spinning: blockchain.

"I'm not talking about crypto, we don't invest in crypto, neither directly nor indirectly," he clarifies quickly. "But there are some interesting technological applications [of blockchain]."

In January 2021, Generali and Groupe APICIL, a French mutual, acquired a stake in blockchain company IZNES.

"They have developed a blockchain based platform to perform orders and a reconciliation of fund transaction," Martorana explains, and although it is not an investment to match insurance liabilities, he says "it can reduce operational risk and the cost of managing a large number of fund transactions - it is a bookkeeping and settlement system done through blockchain".

"This type of solution probably will gain more relevance also for other financial applications in the settlement and in the back-office," Martorana says, adding that for the moment it is mostly used for the group's French unit-linked portfolio.

Generali also invested in two so-called digital bonds, Martorana adds, one issued by the European Investment Bank and one by Société Générale.

From a financial point of view these are traditional bonds, he explains. "But they are fully settled and recorded in the blockchain and not on the usual custodian approach. We are going to see more and more application in this field."

Part two of this interview will be published next week in which Martorana will go on merry go round of all the asset classes, from traditional fixed income, to real estate, to equity and private debt and equity.