Assicurazioni Generali S.p.A. (G) Earnings Call Transcript & Summary

Good afternoon, everyone. I’m the Chorus Call conference operator. We’re glad to have you with us for the Generali Group Full Year 2019 Results Conference Call, and thank you for joining. Please note that everyone is in a listen-only mode for now. Once the presentation is finished, you’ll have a chance to ask a question. <<operator_script>> I’d now like to hand the conference over to Ms. Giulia Raffo, Head of Investor & Rating Agency Relations. Madam, the floor is yours.

Thanks so much, and welcome everyone to the Generali Full Year 2019 Results Conference Call. Joining me here are our group CEO, Philippe Donnet; our General Manager Frédéric de Courtois; and our group CFO, Cristiano Borean. Before we begin the Q&A session, I'd like to give the floor to our group CEO for a few introductory remarks. Thank you all. Philippe?

Thanks, Giulia. Many thanks. Good morning, all, and welcome as we present Generali's 2019 financial results. For our group, 2019 mattered a great deal, since it saw the start of execution of Generali 2021, our three-year plan for growth and transformation. Yet before we dig into the finer detail of these very strong results for 2019, and before we open up the Q&A, I want first to tackle a matter that clearly weighs on everybody's mind. That matter is COVID-19. The COVID-19 outbreak, together with the uncertainty hitting the communities where we operate across the world, and the market environment as well, makes this a particularly difficult situation for all of us. Our top priority was to act the moment the crisis began to emerge, focusing chiefly on the health of our people — be they employees, agents, or business partners — and on keeping our services running without interruption. We have introduced technology and processes that let most of our employees work from home, ensuring we can guarantee continuity across all our operations while maintaining our full product offering and client service levels. And in this context, the work already carried out to transform Generali into a more resilient and digitally savvy company leaves us well positioned in the current environment, both financially and operationally.

Generali is unquestionably a highly robust and dependable group, and the 2019 figures we posted offer even more evidence of that. Our customers are able to keep counting on us, and we shall keep providing them with the strongest possible protection both now, during this emergency period, and going forward as well. Lastly, allow me to share four main points concerning the 2019 results. To begin with, we posted a record operating result of €5.2 billion, along with robust expansion in our normalized net result, which reached €2.4 billion — 6.6% above the 2018 figure. Next, even with interest rates remaining persistently low, we bolstered our capital position further, reaching a solvency ratio of 224%. Third, thanks to these accomplishments, we intend to put before our shareholders a dividend per share of €0.96, which is 6.7% higher than last year. Fourth, these results let us get nearer to delivering the Generali 2021 targets and put us fully on track to reach the Generali 2021 ambition. I appreciate your attention. And at this point, my colleagues and I are ready to take your questions.

Sorry about that. This is the Chorus Call Conference operator; the question-and-answer session is starting now. <<operator_script>> Our first question comes from Nick Holmes at Societe Generale. Your line is open.

Hey, everyone. Thanks a lot. I just had a couple of questions I wanted to ask. The first one is sort of a big-picture question: what would you say the biggest difference is between the current situation and the financial crisis? Do you feel much more confident about solvency and your capacity to ride out a downturn? And then my second question relates to credit deterioration — how worried are you about that? Thanks.

Thanks a lot. I’ll hand it over to Philippe for an intro, and I believe Cristiano will pick it up after that.

That's not a bad question at all. We'll address it right away, starting with…

Nick, good morning. On the ways this crisis differs from the last one — if I grasped your question correctly, solvency is a new framework relative to 2008 <<inaudible>>, assuming my understanding is right, and how that is helping. I really do believe that the gains across all enterprise risk management practice, plus knowing where the weak or risky points sit inside each individual company, let us take a far more disciplined approach to how our business is structured — and taking risk in insurance is plainly, by its nature, a risk-taking decision. I think that is bringing greater discipline to how we run the company than what I witnessed in an earlier crisis, which I saw at the start of my career here at Generali. And on the second question, about credit deterioration. Okay, I want to emphasize that we diversified our investments enormously, and not just in the traditional corporate bond segment; we are also diversifying within the alternative fixed income segment. Diversification and dispersion matter greatly, and precisely so in the context of managing the risk of our book. I should also recall that we have an expected credit loss limit in how we run our credit portfolio, which is assigned to our investment asset manager, and they must handle that risk budget clearly and consistently.

I'd also like to emphasize that, when we compare our credit exposure to the actual EIOPA — the latest EIOPA portfolio was somewhat lower. And may I get ahead of the question: this accounts for that somewhat awkward swing you can see in credit spread sensitivity, since there's a shift in the discount factor for liabilities that delivers a bigger benefit than what shows up on the asset side, and that likewise clarifies the sensitivity. I hope that answered your questions.

Thanks. Yeah, no — that's really helpful. Just one quick follow-up. With the market collapse, which is clearly very severe right now, how concerned are you that it will wipe out the unit-linked recovery we've been seeing?

Frédéric here. To start, though, unit-linked results were solid in 2024, particularly in France and Germany, and Italy showed a nice rebound during the final quarter. Fees have been robust across every market where we operate through January and February. So the exact fee outcome is something I can't yet predict. You're correct that customers will likely turn more risk averse, which probably means unit-linked will take a hit. We do have fee-related solutions. I'd say our unit-linked range is quite strong at this point. We also have answers, notably in Italy, built around clients putting money into Generali accounts and then being moved automatically and gradually into unit-linked — for someone who invested, say, last year, that works very well given where markets stand. So solutions exist. That said, I won't pretend market volatility might not leave unit-linked affected.

Thanks so much. That’s great.

Of course.

We now move to Peter Eliot from Kepler Cheuvreux for the following question. Peter Eliot, your line is open, so please proceed.

Apologies. Are you able to hear me at this point? Hello.

Yes. We can hear you, Peter.

Yes. We’re able to hear you.

Okay, and apologies for that. On a related note, though looking at the liability side — clearly our concern is with the human toll — but regarding what you foresee for claims stemming from this, where do you expect the risks to emerge? And perhaps also whether you have exposure in those areas? Then for my second question, and I appreciate these are volatile times so it's likely not front of mind right now, but I was wondering whether you could confirm how much of your M&A budget is left. What prospects do you have, or perhaps had, for spending, and at what point would you consider using it when opportunities weren't available? And specifically, I suppose, you're signaling that ongoing capital management actions are possible, which would lead to higher remittances, so it appears you have considerable optionality. I'm just wondering how you're thinking about that right now? And if I may, a third question on asset management. You referenced some one-offs on revenues and mentioned certain investments in start-ups raising expenses. I'm just wondering what you make of the underlying result once these effects are stripped out.

Thanks a lot.

Thanks, Peter. I'll hand it over to Frédéric for the question on claims, and then I'll have Philippe take the M&A question and Cristiano cover asset management.

Hi, Peter. Regarding how these crisis and claims affect us, the initial response — and I’ll go into more detail — is that the effect is broadly neutral. Let me expand on fees. Looking at the particular issues you’ve heard about lately: first, our exposure to event cancellation is zero. That line isn’t part of our underwriting policy, so we don’t write that kind of business. Second, on business interruption, our exposure is close to zero for business interruption covering this kind of event. So those are totally insignificant. A third area where our exposure is greater is, of course, travel, which is a Europ Assistance business. And here, as you can imagine, the travel business will of course be impacted. For Europ Assistance this is relatively significant. But at the group level, I’d call it insignificant. The fourth point — and that comment is more of a question mark — concerns the motor business: we believe, and we’ve had some first signals over the past days, that it may have a positive impact on motor frequencies, because people of course drive much less. It’s a bit early to say, but I’d say we believe we’ll have this positive impact.

And that's the reason the confusion around all of this comes down to this: we don't anticipate any meaningful effect on our claims experience. I'll turn things over to Philippe Donnet.

Sorry, let me just quickly follow up on that. You said there’s zero business interruption exposure for this kind of event. I’m just wondering: once governments step in and impose lockdowns, could the cause then be attributed to the government shutting down events instead of the original cause? There’s no scope. Thanks for that.

We don’t think that’s going to happen. But then again, we’re winning far too many trophies.

Appreciate it.

Philippe, anything you'd like to add on M&A?

Right, and I want to say a bit about claims, since with everyone staying at home, burglary exposure has fallen to zero — so that isn’t the positive side on claims. On motor insurance, yes, people aren’t driving and they’re at home, so certainly a lot of risks are near zero. That said, on M&A, we’ve already put in roughly €1 billion — slightly above €1 billion — on a handful of targeted acquisitions that are fully aligned with our strategy. Let me remind you that the biggest one, closed at the start of this year, was Portugal, which makes us the number two player there in the property casualty business. That amount was €600 million. Then we did a few smaller deals, <<inaudible>> in the U.S.; Union Investment in Poland; Concordia in Poland; and Adriatic, Slovenia. We also bought a consolidated stake in Sycomore in France. So that’s what we’ve delivered on M&A. If you look at our strategy overall, as of today, I don’t see any reason to change it dramatically. Our strategy remains very valid. It is a very solid strategy, and we have no reason to make significant changes.

Certainly, we'll revise this strategy as necessary, since clearly we're dealing with a highly unusual set of circumstances — the health crisis, on the one hand, and, I'd say, its effect on the financial market on the other. I wouldn't call it a financial crisis. What you're seeing is the health crisis's impact on the financial market. So it's genuinely unlike what we've seen before. So certainly, as ever, we'll stay very conservative, very cautious, very disciplined, very prudent, but that doesn't mean we intend to sit still, because sitting still isn't caution, it isn't prudence. We have to act. We have to be disciplined and opportunistic. So, as ever, we'll be disciplined and opportunistic. I believe that over the coming few weeks, we'll perhaps redefine our priorities regarding M&A, probably. We'll likely be extremely, extremely selective. As we were previously, we stay extremely, extremely selective, and we'll proceed, we'll proceed. And we've always stated that we feel more pressure on this front. On M&A, we'll pursue M&A if it assists in speeding up the plan, the execution of the plan. But if we don't identify good counterparties, we've always said that we'd find alternative solutions.

I'll let the team comment on asset management.

Yes, good morning, Peter, and thanks for asking about the asset management side. Regarding the start-ups: right now we are running 4 start-ups, and we've made progress today. The most recent one to receive the regulator's approval was 360 in Italy. Across all of the start-ups, performance is in line with what we had planned — in fact, it's even quicker. Our first start-up was generic global infrastructure, and we're beginning to see a really solid client pipeline. Ultimately, these start-ups together account for under 10% of operating results at present. But we recognize it's a long tail, since discipline matters greatly both when taking on clients and in managing costs. So we maintain our guidance: overall — not only for start-ups, but overall — we target a cost-to-income ratio in asset management below 55%. That's a matter of discipline, and the start-ups fall under that same discipline. Clearly, a bit more investment is required. Yet, as you're aware, doing so will also build shareholder value over time. So that's my response to your question.

All right, thank you so much.

Our next question comes from James Shuck at Citi. Go right ahead.

Morning, everyone. First off, my question is about the uncertainty surrounding the liquidity situation. I believe you mentioned a solid level of group liquidity. Could you be more specific about what that figure actually is, and how you keep it managed within particular target ranges? Then, related to that, when you consider the 2020 outlook for remittances coming from the local operating units, do you foresee any chance that you might need to inject cash back down into those operating units? That's my first question. Second, regarding the normalized operating capital generation of 18 points: as we look ahead over the coming year, you'll probably sell fewer life new business, which contributed to that, along with the other headwinds affecting expected profit in particular. Could you provide revised guidance for the 18 points of operating capital generation, please? Thank you.

James, appreciate the question. Cristiano, I’ll have you take those, please.

Hi, James. On your first point about liquidity: at year-end 2019, our accounts show over €3.5 billion in cash held either in bank accounts or invested in market funds at the head office, and that puts us in a very solid, strong position. As for how 2020 has evolved, we're progressively cashing in remittances from our operating entities these days and over the coming weeks, which keeps our liquidity position very strong. On the 2020 guidance and the company's ability to deploy its cash and capital plan, we do confirm that our main operating entities are well capitalized. And in line with pursuing the strategic actions, as I've reminded you many times, starting from the Investor Day, we're accelerating our capital management capabilities and actions, which gives us another lever to improve capital feasibility across the group — clearly very important for the objectives we've set. On your question about capital generation and the guidance, first of all, let me remind you that about 18 percentage points of capital generation are solid and were achieved in a context of very low interest rates, which are still continuing downward.

Let me remind everyone that we carried out a great many initiatives across the portfolio. Even so, we keep saying the same thing: we act on the liability side. In France, for instance, we were extremely proactive in steering collections and shifting them further toward unit-linked, and last quarter bore that out. We are still modifying the features of our products and of how they are collected in Italy. Take savings: you should expect a share above 20% of total present value in new business premium from that benefit alone, and it is somewhat less sensitive — considerably less sensitive — to interest rates in the market. Clearly, a lower interest rate setting puts a bit more strain on generating new business value. Still, that is very much taken into account in the next year portion, since remember that capital generation also contains other items, including in the holding part, where the full gain from the deleveraging we completed will show up, amounting to €100 million less interest cost on our debt, and that will be in the 2020 books. With all of that said, this leaves us in a position where we can hold firm in seeking to keep capital generation at the best possible level, and the volatility around it should not be expected to run too high.

I trust that response addressed your question, James.

Right, yes — let me just briefly go back to the liquidity question, since I believe you have €3.5 billion in substantial liquidity, and I'd really like to get a sense of what target range you'd put on that. Also, from what you've said about the operating units and when I look at the outlook, it doesn't appear you're suggesting there's any additional pressure when it comes to getting those local solvencies off in 2020, given what's happened year-to-date and the impact of local solvencies?

James, the key thing to understand is that our approach involves actively steering decisions across every part of the balance sheet — assets and liabilities alike — so that the business maintains solid liquidity. That, in turn, lets us handle the current circumstances in a coherent manner. Everything we've done previously on the liability side is moving us toward a transformation and a further lowering of the average guaranteed rate on our books. That said, greater fungibility across the group means we can move cash and capital from the extremely capitalized companies back to the head office far more efficiently than we did before. That's an advantageous factor we're able to leverage right now. And keep in mind that every individual business unit — certainly the major ones — serves as a capital buffer precisely for managing uncertainties.

All right, thanks so much.

Michael Huttner from Berenberg has the next question. Go right ahead.

Great. Thanks so much, and congratulations on staying so composed during this tough period while delivering such strong figures. Now, I have three questions. First, I noticed a headline, though I could be totally wrong. I was at home and my impression is that the market is extremely, extremely constrained. It concerns a shift in how Italian BTPs are treated with respect to solvency. I was just wondering whether you might talk about that and perhaps give a sense of what possible buffers the regulator could bring in, not so much in our Q, but hopefully with some of your local peers. Second, on the cash, precisely as James asked, I was wondering if — I saw on the slides that 15% of the cash is capital management and that it's sustainable, and I thought that's very nice. Well, I just wondered whether there might be a mix we aren't aware of, coming from the various deals you've completed. Maybe you could talk about that. And third, given all this and here we go, sort of, entirely crazy, but particularly in process lastly, but perhaps a bit more, could that be with regard to next year?

I realize this is the first year you're still sort of transitioning into the new plan and all that. But perhaps the dividend growth might be a bit more next year, just to mirror what's underlying those extremely solid numbers? Thank you.

Thanks, Michael. Could I ask a quick favor? The connection was a little —

Yeah, I get it. <<inaudible>> — otherwise maybe I could send an e-mail, but that's just not possible for me.

No, no, that's fine. So, just to be clear on the first question, you're asking about the GA, like the GA adjustors?

Italian base-level charges.

Regarding your second question, you're simply looking for some clarity on the capital management piece inside the remittance from subsidiaries. As for the third question, I lost that one too, if you —

The question was simply asking whether there's any possibility of boosting dividend growth down the road. And understand this: in year one of the three-year plan, perhaps moving forward, given how strong the results are, they're making a flex to pick.

Apologies — regarding that final question, about whether they were providing 5-year targets, or did they —

No, not the dividend.

Regarding the dividend — all right.

Correct — the dividend.

Okay. Cristiano, would you like to kick things off?

Yes. Hi Michael, welcome back. First off, thank you for raising that question about the BTP, since if we simply consider what has occurred over these days, there are plenty of interesting points to make regarding the new handling of what is called the country-specific volatility adjustment level — previously fixed at 100 basis points, now altered to 85 basis points through a regulation that will take effect from 2020 onward. What this means is that under today's actual conditions, that country-specific VA level would have been triggered. And what does that imply for Generali, and for the Italian operation too, but in particular for Generali Group as well, in terms of sensitivity toward the BTP? As you'll recall, we went through this during 2019: whenever this country-specific VA kicks in, you essentially cut in half the sensitivities to spread widening. So that means, beginning now, the sensitivity of the Generali Group to any further widening of the Italian BTP spread is halved relative to the year-end sensitivities. And this likewise delivers a good degree of satisfaction plus a capital buffer for the operations at the specific Italian country business unit, because it is supportive. So that covers the first question.

Regarding your second question, that's a fair point — 15% of the capital management component in the ratio of IFRS result, total remittance in IFRS results. The point relates to the fact that we're still working to minimize excess tangible capital that's available for remittance at the head office. What we're doing going forward is that this figure should not decrease in mid-2020. And this is very simple, because first of all, it's a three-year plan. And second, in a certain way it's a tool to improve the group's capacity to create shareholder value, because we can extract all that capital from lower return on equity entities and redeploy it at the head office for growth or for derisking on the liabilities, as we did on the debt. And the key in the growing entities or growing geographies strategically aligned with our Generali 21 strategy is growth there, retaining the earnings to support that growth. So allow me to say that this is an efficient use of excess capital of operating entities to increase the future capital deployable in the growing entities. I hope I gave you the answer on this point.

Perhaps you could tell us which country it is. I know I'm pushing my luck here, but maybe.

Our surplus capital tends to sit mainly within the core European legal entities, so the attention really needs to go there. And this year's contribution, too, has been clustered in Italy, Germany and France. But going forward, you should expect that we will extend those capital management figures to our Austrian operation as well.

Thanks.

Philippe, I'll hand things over to you for the dividend.

When we announced the Generali 2021 plan, we set the dividend trajectory: steady dividend growth and greater sustainability, which means gradually lowering the payout ratio or keeping it within the range. That is precisely what happened in 2019, since our dividend of €0.96 grew 6.7% versus the prior year, fully in line with normalized earnings per share growth. At the same time, we managed to reduce the payout ratio versus 2018, and that ratio sits fully within the range we chose. So 2019 aligns perfectly with the dividend path we announced. I don't see any reason for that to change next year. Of course, we need earnings growth. Of course, we still need a stronger capital position. But as we've said, our capital generation is strong. Our business is solid. Our portfolio is very resilient. So I foresee no disruption to the dividend trajectory. And I believe that, on the dividend as well, we will reconfirm the plan's target.

Thanks, Philippe. Appreciate it.

Our following question comes from Johnny Vo at Goldman Sachs. The line is yours, go ahead.

Good morning. A few more questions about remittances. Clearly, we see that 15% increase, but as you mentioned, Cristiano, it stems from your key entities. Italy has benefited from the country-specific VA. Yet France will certainly be affected by the lower rate environment. So should we truly expect the scale of capital management actions to generate the remittance level we're observing this year? Or should it decline somewhat? Also, on a local level regarding Italy, are you using the standard formula for BTPs when it comes to capital charge? And my last question concerns zero maturity guaranteed business. Since rates keep falling, can you change those zero maturity guarantees into negative guarantees? Thank you.

Cristiano, this part is all yours.

Yes. Hi, Johnny. On the first point: should remittance in 2020 be at the same level as year-end 2019? Yes, and the reason is straightforward — as we mentioned, capital is held in pockets, and that includes non-life entities as well as life ones. There are also measures underway to boost capital feasibility and cash flexibility, and those are what let us continue on this journey. Of course, if you're saying this also gains from the country-specific VA, that's a possible factor, but we don't run the business around that kind of sticky point — digital activation, yes or no. For your information, our capital plan is managed without that activation, and I think that's relevant to you. We maintain a very prudent stance as we transform the liabilities. And perhaps I can add to what is still taking place in Italy: new production now goes essentially entirely into — at-maturity guarantees, with a very large component — even absent that, as I said, with only that benefit, which is certainly helping profitability in such a complex world. Because what you said is true: complexity is considerably higher, as you've seen from the sensitivity.

Even so, that is the excess capital in tangible form that certain units hold. Therefore, for 2020, guidance remains capital management at this level, or above it, given the actions already planned and underway. And looking ahead, I will confirm that a rebalancing will be visible in the future, even beyond 2021. Regarding the capital charge for the BTP standard formula, one matter is what gets applied at group level. A different matter is what the entities apply locally, since they do not apply a specific charge for the BTP as the local regulator requires. The third point, if I understood correctly, is the zero maturity guaranteed business for Italy. Did I understand that correctly?

Yeah, yeah.

Yes.

Plus additional markets.

I hope I anticipated that it will be joining in the first answer. The zero maturity guarantee are the full amount of production basically of 2020. Already it is more of 1.95 <<inaudible>> we are basically close to 100%. And among this there is — we felt guarantee comprehensive product plan change foreseen in Italy, which is bringing more weight to the debt-only guarantees, which for your information is bringing a very good relief. Also when you measure the new business value of this product, because absorbs much, much less capital. And this is part of the commercial strategies, which is underway in Italy. Clearly the low rates we are observing are bringing overall down the new business value for market sensitivity, but sensitivities you have them in their own funds and new business varies the supplemental information and then it's pure mathematics you can make it, okay?

Yes. Great. Thanks a lot.