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Italian insurer Generali has reported a 4 per cent jump in first half profits, beating analysts’ expectations.

The company, which earlier this year saw off bid interest from Italian bank Intesa Sanpaolo, said that it made operating profits of €2.6bn in the period. Analysts at Deutsche Bank had pencilled in a profit of just over €2.5bn.

Profits from the company’s life insurance operation fell slightly but that was offset by improvements in property and casualty insurance and at Banca Generali, the company’s banking business.

Chief executive Philippe Donnet said:

The successful execution of our strategic plan led to today’s positive results with a 3.7 per cent rise in net profit, operating return on equity remaining above our target and an overall increase in capital-light products.

We are achieving our financial goals thanks to the determination, the focus and the commitment with which we are implementing our strategy to make Generali ‘simpler & smarter’.

The company also reported a solvency ratio – a measure of capital available as a proportion of the minimum required – of 188 per cent.

Mediobanca boss Alberto Nagel has again confirmed his openness to sell a 3 per cent stake in insurer Generali “at the right price” in order to reinvest in tactical acquisitions.

Mr Nagel made the comments as the Milanese bank reported six-month revenues up 9 per cent to €1.1bn with net interest income up 6 per cent and fees up 23 per cent.

Net profit rose 14 per cent to €476m.

The lender, Italy’s best known investment bank which is branching into asset and wealth management, said its assets under management rose by €1.5bn in the past six months.

Mr Nagel has in the past commented several times that he is open to selling 3 per cent of its 13 per cent stake in Generali to raise funds to invest further in asset management.

In December, Mr Nagel launched Mediobanca Private Banking, which will be focused on high net worth individuals. It followed Mediobanca acquisition of RAM Active Investments, a Swiss investment manager.

It underlines the efforts of Mediobanca to pivot away from its postwar role as a powerbroker of Italian finance at the centre of a web of cross shareholdings. Mr Nagel has progressively shed Mediobanca’s equity stakes since the European debt crisis when its extensive exposure to Italy became a weight on its balance sheet.

Ahead of Italian elections on March 4, Mr Nagel added that he hoped for “government that would have the strength to make more structural reforms to allow the economic growth we are witnessing to be less cyclical”.

Italian banks have been buffeted by tougher European regulations over the past two years on their stockpile of non performing loans, which are worth about a quarter of the region’s total.

Mediobanca, which has emerged as one of the healthiest Italian banks, said its gross-non performing loans stood at 4.8 per cent of its total, among the lowest in Italy.

Italian insurer Generali said that its operating profits were flat at €3.6bn for the first nine months of the year, despite €260m of claims for natural catastrophes.

The disasters, which have hit results across the industry, pushed down profits in Generali’s property & casualty business by 5 per cent. Life insurance profits fell by 2 per cent because of higher costs. But there was a stronger performance from Banca Generali, the group’s banking operation.

Net profits fell by almost 10 per cent to €1.5bn, partly because of an impairment charge taken when Generali sold its Dutch business to ASR for €143m in September.

Generali said that its solvency ratio – a measure of capital available as a proportion of the minimum required – was 195 per cent at the end of September, up from 178 per cent at the end of 2016.

Ralph Hebgen, an analyst at Keefe, Bruyette & Woods, said that the solvency ratio was higher than expected, but that operating profits slightly missed consensus forecasts.

Generali’s chief financial officer, Luigi Lubelli, said: “The nine-month results confirm our strong performance. Our business continues to grow thanks to the consistent execution of our strategy.”

Italian economic growth fell slightly in the fourth quarter, but the Eurozone’s third-largest economy still ended 2017 on a much stronger note than it did in the previous year.

Gross domestic product expanded 0.3 per cent from the third quarter, according to the Italian National Institute of Statistics. The pace was 0.1 percentage point below the third quarter rate and the forecast of economists in a Reuters survey.

The year on year rate clocked in at 1.6 per cent in the fourth quarter, below the 1.7 per cent logged in the previous period, but significantly stronger than the 1 per cent recorded in the final three months of 2016.

Italy’s economy strengthened last year amid a robust performance for core eurozone economies, like Germany, as well ones considered to be on the economic periphery.

Outside the eurozone, Poland said on Wednesday that its fourth-quarter GDP expanded by 5.1 per cent, just shy of expectations of 5.2 per cent.

Italy’s economy is in much better shape than before the last general election in 2013. The country’s gross domestic product then was 10 per cent smaller than in 2008, nearly 1m jobs had been lost and banks were accumulating bad debts.

Now GDP has been expanding for three years, unemployment is declining and banks are healthier. Yet the country is still a laggard among its peers and economic discontent has not disappeared.

Here the Financial Times considers the main economic challenges the next prime minister will face.

1. Slow economic growth and low productivity

Italy was on “on the right track”, Paolo Gentiloni, the country’s prime minister, said in January at the World Economic Forum in Davos. Output is now 4 per cent larger than it was in 2013 and economists keep revising up their growth forecasts for this year.

Yet Italy’s growth remains among the slowest in Europe. It is also among the few economies within the OECD where output is not yet back to pre-crisis levels. The gap with 2007 levels is the second-largest after Greece.

A related problem is that Italy shows the weakest productivity performance among G7 countries.

Sluggish productivity growth means Italian businesses need increasingly more people to produce the same value of output as in other big economies.

2. High public debt

High public debt is one of “Italy’s most pressing problems”, says Nicola Nobile at Oxford Economics. Its debt is the third largest among 34 OECD countries after Japan and Greece, and a hot topic in the country’s relationship with the EU.

Public debt went up 33 percentage points to 132 per cent of GDP since 2007, largely as a result of falling government revenues and shrinking real GDP.

The trend is finally reversing “thanks to prudent fiscal policy, lower interest rates and rising GDP growth”, says Mauro Pisu, head of the OECD’s Italy desk. But the high level of public debt makes any rapid increase in interest rates “a major risk for public debt dynamics” and leaves little room for tax cuts or increases in spending, as proposed in most parties’ manifestos.

3. Poor job opportunities for young people

The economy has managed to create more than 1m jobs since September 2013, but unemployment rates remain well above pre-crisis levels.

One in three people in the labour force aged under 25 is unemployed and Italy has the largest proportion of youth not in employment or training among OECD countries. What is more, Italy shows the second-lowest employment rates of recent graduates among EU countries after Greece. Economic frustration among the youth is the main reason for Italy’s brain drain.

4. High levels of banks’ debt

The banking sector “is more stable than two to three years ago”, says Mr Pisu. Economic improvements, pressure from regulators and investor-friendly reforms have led to a reduction in banks’ bad debts. The last year “has been a watershed in terms of the health of Italian banks”, says Marco Troiano at Scope Ratings. The recapitalisation of the main troubled banks has “resulted in a much-improved sector-wide asset quality picture”, he adds.

But Italian banks still make up the EU’s largest slice of non-performing loans, which curtail banks’ ability to lend. “The challenge for 2018 lies in the continued reduction of the stock of bad loans, and with execution of some more capital increases, especially for the weaker players,” says Mr Troiano.

5. Low levels of foreign direct investment

In the past few years Italy “has made considerable progress” towards a more business-friendly environment, says Lorenzo Codogno at LC Macro Advisors. In 2006, Italy ranked 156th in the World Bank ease of doing business global survey — 110 positions below where it is now. The country is now closer to the best performing in most of the ranking’s measures, including ease of starting a business.

Italy “has significantly increased its attractiveness as an investment destination among the mature economies”, says Donato Iacovone at EY. Yet, it still lags behind most of its peers. The value of greenfield FDI projects in Italy in the past 10 years is half that of France.

Policies “will need to be maintained for a long time”, says Mr Pisu. “Foreign investors prefer stability.”

Grand coalitions aren’t just a German thing. An alliance between Matteo Renzi’s centre-left Democratic party (PD) and Silvio Berlusconi’s centre-right Forza Italia party has long been the “base case scenario” — the most likely outcome — of the Italian election looming on March 4.

Many politicians in Rome have also been operating under the assumption that a hung parliament with no clear majority would inevitably lead to this marriage of adversaries who’ve always had some sympathy for each other.

But in recent days, the chances of GroKo, Italian-style, have been shrinking as two other possibilities — an outright victory for the centre-right, or a drift to a second election — have gathered momentum.

Both Mr Berlusconi and Mr Renzi have always been very careful about touting the possibility of forging an alliance after the vote. They’re wary it could depress their own voter base and backfire electorally. But this was always seen as clever campaign tactics rather than true conviction.

In recent days, however, both men have ratcheted up their opposition to a deal after the March vote. “There is no chance of having a coalition with this PD,” Mr Berlusconi said on Monday. “If there is no majority it will be necessary to return to the polls”. On Tuesday, Mr Renzi said he felt the same way. “I agree with Berlusconi’s reasoning that if no one has enough seats we should go vote again: it’s the right thing,” the PD leader said.

Perhaps the reality of how difficult, and possibly politically costly, it would be for both the PD and Forza Italia to govern effectively together is sinking in. Opponents of a grand coalition — to the left of the PD, to the right of Forza Italia and within the Five Star Movement — are fiercely agitating against it — and would be taking big potshots at any such government.

Moreover, it is really not clear that the PD, Forza Italia and a few other centrists would even have enough seats in parliament to win a majority.

From Mr Berlusconi’s perspective, a deal with Mr Renzi really is a distant plan B and has become even more so now that his coalition — including the Eurosceptic Northern League and Brothers of Italy parties — is within reach of absolute majority on its own steam. Mr Renzi’s calculation, if he survives an election that is likely to be dispiriting for the PD, could well be that a second roll of the dice might be better at preventing an implosion of his party than a tie-up with Berlusconi.

As Wolfango Piccoli, an analyst at Teneo Intelligence, put it in a note last week: “An unnatural grand coalition dictated by party leaders, which would most likely fail to deliver, would only further discredit mainstream parties, raising the risk of a victory of the populists in the subsequent early election”.

The grand coalitions might best be left to Germany.

Chart du jour: The German exception

The Great Recession has left plenty of scars on Europe’s labour market for politicians and economists to puzzle over. The topic is the subject of the latest quarterly examination of the eurozone’s economy from pointy heads at the European Commission (read their detailed and fascinating report here). Among the labour market trends they spot is the striking chart above. It shows how under-employment among part-time workers (people who want to work more hours) has gone up in almost every euro economy since the crisis — with one big exception: Germany.

There was major news from Germany’s roaring labour market on Tuesday where the country’s most powerful union, IG Metall, ended a series of strikes and ill-tempered negotiations to reach a deal securing a 4.3 per cent wage rise and the right to a 28-hour working week over the next 27 months (FT). Detlef Esslinger at Süddeutsche Zeitung calls it partly a “solid” achievement (the wage rise) and partly a “risky bet” (the working hours).

The best of what we’re reading

GroKo...finally

There’s still a few hurdles to go but the German coalition agreement looks to have been polished off. Leaks of the text in the German media show the key chapter on Europe policy to be broadly unchanged from a preliminary draft last month. Notable tweaks include:

• A stress on preserving the credibility of the euro’s fiscal rules — known as the Stability and Growth Pact
• Making sure any new European Monetary Fund is “anchored” in EU law but without diminishing the control held by national parliaments
• Regretting the Brexit vote and ensuring that UK, EU, and German ties are preserved after Britain’s departure

On the eurozone debate, Lucas Guttenberg at the Delors Institute in Berlin, thinks the CDU/SPD are showing an “openness to negotiate without making any real concessions on substance”. He adds:

Europe should not expect a major opening from the new government on euro area reform as mistrust toward other Member States and the Commission cuts across party lines.

Mutti Merkel — a legacy

Der Spiegel examines how posterity will judge the “mother of the nation” as the German chancellor gets ready for her last term in office:

Germans are strangely divided on the woman who has ruled so long that the younger ones do not even remember a time when a man was running the chancellery.

Welcome to vassaldom

Brussels wants the power to punish the UK for breaking terms of its Brexit transition by summarily cutting off access to parts of the single market. That’s according to a draft treaty text seen by the FT.

No show

Salah Abdeslam, the last surviving terror suspect in the 2015 Paris attacks, is refusing to show up for his trial in Brussels which started this week and is due to resume Thursday, reports Sky News.

Re-writing history

A scathing op-ed from Jan Gross of Princeton University on Poland’s new Holocaust law which was signed off by President Andrzej Duda on Tuesday (FT):

Under the pretence of defending Poland’s sovereign rights to pass its own law, the authorities are pandering to the xenophobic and anti-Semitic prejudices of some sections of the public, while exacerbating these sentiments in the process.

Coming up on Wednesday

The European Commission will release its latest set of triannual economic forecasts at noon (CET). The European Parliament in Strasbourg will vote on what do to with British MEPs seats after Brexit, including a plan to adopt Macron-supported pan-EU lists. Michel Barnier is in Frankfurt to see Mario Draghi at the ECB. The EU also confirmed March 26 as the date for its next EU-Turkey summit to be hosted in Varna, Bulgaria.

Milan is stepping up its efforts to grab a slice of London’s asset management industry after Brexit. A delegation from the Italian government is set to meet UK companies in the next few weeks.

The Italian financial hub hopes that up to 1,500 asset management and investment banking jobs will move from London.

Italy’s initial attempts to woo fund companies in 2016 were rocked by prime minister Matteo Renzi’s failure to push through constitutional reforms in a referendum.

The poll result sent the country’s financial and political systems into a tailspin and caused concern among potential recruits.

Now Select Milano, a government-sponsored lobbying group, is increasing its efforts despite the potential for more political upheaval in the Italian general election in March.

Fabrizio Pagani, chief of staff in Italy’s finance ministry, said he was being realistic in not expecting big companies to make wholesale moves to Italy.

He said, however: “We think Milan has every chance to get its share if there is a diaspora from London.”

He pointed to the fact that Milan missed out on gaining the European Medicines Authority only by the drawing of straws as a sign that the city could compete in attracting post-Brexit business.

The Italian government changed its personal tax regime last year to try to lure high-earning expats.

Mr Pagani said this was partly designed with fund company executives and portfolio managers in mind. Incentives include a 50 per cent reduction on income tax for five years for middle managers and a flat €100,000 annual tax on foreign earnings for wealthy individuals, which lasts for 15 years.

“In speaking to people there are two main points of consensus: London will remain important and that there will not be a ‘new London’ post Brexit,” said Mr Pagani.

“There will be a wide spread of finance centres. It will be much like the 1990s where we had trading centres in different countries.”

When Amundi announced it would buy Pioneer, Italy’s third largest fund company by assets, in December 2016, chief executive Yves Perrier said his plan was to double the number of staff in Milan to 600.

Italy’s fund industry is the sixth largest in Europe, accounting for 5 per cent of market share and €1.2tn in assets, according to figures from the European Fund and Asset Management Association.

Two months after beginning Brexit talks with the EU, the UK is making a play to fast-forward the negotiations to an urgent issue for British business: future trading relations with the bloc and a transition regime.

Brussels insists that such topics cannot be addressed until the autumn, or even next year.

But by setting out plans on Tuesday for future customs ties — both for a two to three-year “interim” period after Brexit and beyond — the UK is seeking to up the pace of talks and to open up discussion on long term issues.

With the UK’s departure set for March 2019, businesses in the UK and elsewhere in Europe are calling for clarity on what will happen the day after. Since many companies need firm plans at least 12 months in advance, they want reassurance about the terms of transition by at least March next year.

“Business interests on both sides want to see this,” said Guntram Wolff, director of Bruegel, a Brussels-based think-tank. “By one side suggesting this [an immediate discussion on future ties] it increases pressure on the other side to consider this.”

Michel Barnier, the EU’s chief negotiator, insists that discussions on a future relationship can only take place when “sufficient progress” has been made on divorce talks — covering the Brexit bill, citizens rights and the status of Northern Ireland — something he does not expect before October or even December.

Even then, he suggests, transition talks will have to wait until a further barrier is overcome. “Once we have a clearer picture of the form this new relationship will take, we will be able to discuss the possibility of transitional measures,” he said in a speech last month.

But the UK is trying to pry open the process — injecting flexibility in the talks’ timeline and fulfilling the ambition of David Davis, Mr Barnier’s British opposite number, to talk about divorce, future ties and transition at the same time.

The argument, one British official said on Tuesday, is that “the EU phasing creates an artificial divide . . . Customs and future partnership will be essential to resolving the issue with the border between Northern Ireland and the Republic of Ireland.”

Tuesday’s paper sought to put pressure on the commission to reconsider its strict sequencing by proposing a “time-limited customs union” with the EU to ensure businesses only have to adapt to one new set of customs procedures and avoid facing a cliff-edge in March 2019.

It also linked the customs arrangements and Northern Ireland — one of the trio of issues in Mr Barnier’s “first phase” of talks. The EU and the UK are seeking to agree arrangements that minimise disruption in the island of Ireland and do not introduce the hard border of the past between the Republic and the North.

“The proposals set out . . . for new customs approaches [between the EU and the UK as a whole] are first steps to meet our objective of trade across that land border being as seamless and frictionless as possible,” the customs paper said.

In other words, it suggested, that only by discussing the UK’s customs plans — and other longer-term issues — can the two sides move towards settling the issue of Northern Ireland.

To date, member states have strongly backed Mr Barnier’s approach in their public statements.

“The European Council guidelines and the Council’s negotiating directives for the first phase of the negotiations are clear and there is no need to modify them,” a European official said.

London has detected some cracks. A buoyant Mr Davis argued in a round of media interviews on Tuesday that the negotiations were not just about the UK’s interests. “The benefit goes both ways,” he said.

The UK maintains that at a summit of the remaining EU27 states in April, countries including France, the Netherlands and Belgium pushed for a discussion of matters beyond divorce but were resisted by the commission.

“The UK government knows that some of the member states are worried about the commission’s position that transition arrangements cannot be discussed until ‘sufficient progress’ has been made on divorce arrangements and agreeing the final relationship,” said Charles Grant, director of the Centre for European Reform.

“They are hoping the Nordics in particular will put pressure on Barnier to acknowledge quickly that sufficient progress has been made on those areas.”

However, Mr Grant added that “Britain should not expect other member states to put pressure on Mr Barnier to begin discussion of those issues until the UK has caved in on some of the Article 50 divorce issues.”

Insurance companies are not known for being fleet of foot but the industry is having to catch up with the fact that customers often no longer need long-term cover in an economy where goods are rented rather than owned.

Three years ago, executives from the industry were called into 10 Downing Street to see David Cameron, then UK prime minister, who was concerned that a lack of insurance cover was holding back new rental-based business models.

Graeme Trudgill, chief executive of the British Insurance Brokers’ Association, which chaired the meeting, said that from an insurance perspective there were very different risks attached to renting compared with ownership — and that insurers did not have much data about these.

Humphrey Bowles, an entrepreneur who used to work for accommodation website onefinestay, says: “Insurance was my bugbear. Seeing hosts try to get access to insurance was ridiculous.”

Some of the industry’s bigger companies are now taking an interest in the move towards rental. Allianz organises insurance for Drivy, which allows people to hire their own cars out to others. UK insurer Admiral, meanwhile, has just launched Veygo, which allows people who do not own a car to insure themselves on other people’s cars.

For Mr Bowles, however, the problem was residential home insurance policies, which were all designed for long-term residents or landlords. None of them was designed for properties that were sometimes lived in, and sometimes rented out.

Mr Bowles now runs Guardhog, one of a number of companies trying to fill that gap. Guardhog’s home insurance is an add-on to traditional policies, covering the homeowner during periods when the property is let out.

“The idea is that we offer on-demand cover to take the uncertainty out of people [renting out] their homes. Insurance has been a big barrier that puts people off,” he said.

Property and car hire are not the only areas insurers are targeting. Others have developed policies for people who want to rent out their possessions or even their pets, or for people who want to earn some extra income with freelance jobs.

Tapoly, a start-up, is about to start offering insurance for freelance workers. Founder Janthana Kaenprakhamroy says: “They only work part-time, or only need work-related insurance for a subset of their contracts, yet the only products available to them are annual policies.”