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

Good afternoon. I'm the operator for this Chorus Call conference. Welcome, and thanks for being with us on the Generali Group First Quarter 2020 Results Conference Call. <<operator_script>> Right now, I'll hand the conference over to Ms. Giulia Raffo, Head of Investor and Rating Agency Relations. Madam, please go ahead.

Thanks a lot. Good afternoon, everybody, and welcome to the Generali First Quarter 2020 Results Conference Call. Joining us today are our General Manager, Frédéric de Courtois, along with our group CFO, Cristiano Borean. So with no more introduction needed, let's go ahead and begin the Q&A session. Many thanks.

This is the conference operator from Chorus Call. The question-and-answer portion of the call starts now. <<operator_script>> Our first question comes from Andrew Sinclair at Bank of America.

I have three questions, as usual, if that's alright. First, I was hoping you could discuss claims experience regarding the movements — what normal claims experience did you observe in Q1 during lockdown, when activity was slowing? And similarly, I know it's early days, but as lockdowns have begun to ease, what are you seeing when it comes to normal claims activity? Second, just on travel: I wanted to ask whether you could quantify the travel claims experience you've had up to now. Ideally, what is the net figure? And how far out have you provisioned for lockdowns remaining in place, as opposed to potential incremental claims? And my third question concerns reinsurance. I was really wondering what engagement you've had with your reinsurers to date — the ability to pass on claims and likewise an ability to reinstate coverage, perhaps, or possibly both.

Much appreciated. Frédéric? Go ahead.

Yes. Thanks, Andrew. Regarding claims experience, first, you've noticed that our combined ratio has improved by roughly 2 points versus Q1, consisting of 1.5 points from claims and 0.5 from expense. On that 1.5 from claims, we actually have a 2.5 improvement in the current year claims ratio, offset by a 1 point negative impact from cats and from weaker prior year results -- slightly weaker prior year result. So your question is where it comes from, and what might we anticipate going forward? Clearly, it stems from materially lower frequency -- claims frequency in March because of the lockdown, in the motor business, but in other lines as well. What might we anticipate going forward? So April is already fairly clear, and we see the full lockdown impact in April. Then, as the lockdown is gradually lifted, it's extremely hard for us to make any forecast. In May, certainly, the lockdown is only partly lifted, so we will still see some impact. Beyond that, once the lockdown ends, again, very difficult to foresee. We see conflicting signals out of China, where people are driving their cars and no longer using public transport.

There are plenty of trends, of course, that are beyond our ability to predict. Still, we already have a fairly clear picture of what the effect looks like in March, April and May. Turning to your second question about travel: travel is actually a business of Europ Assistance, and we see 2 effects there — 1 on claims and 1 on premiums. Incidentally, the larger effect is on premiums, since no premiums are coming in right now. To address specifically what you asked about claims, we expect roughly EUR 40 million gross and EUR 20 million net, so it's not especially significant. As for reinsurance, I believe it's too soon to talk about how far we can pass on claims. As you know, the main uncertainty in the market concerns business interruption claims. Our exposure to business interruption is extremely low, for two reasons: we aren't commercial bank insurers, and we're only exposed through our SME business. And also, from the analysis we've done of our business in Continental Europe, we have extremely clear worries. So I can't yet say precisely what our capacity to pass on claims is, but I believe — I'm in discussions with the reinsurers, and they have committed to the point that if claims are paid on a technical basis, I mean, they will follow us.

Peter Eliot from Kepler Cheuvreux has the next question.

If I could perhaps ask 2 follow-ups related to Andrew's points, first of all. On travel, Frédéric, I'm simply curious whether you could comment on how fixed the nature of your expenses is. So as you observe — as you mentioned the significant effect on premiums, I'm just wondering to what degree you can offset that — the expense impact. And the second follow-up concerned the reserve releases. Apologies if I missed it. I believe you said minus 1 point from cat and lower reserves combined. And obviously, the cat was nearly 1 point — sorry, cat was 1 point higher. So I guess we're talking roughly 2 points from reserve releases. But if you could just confirm my numbers there, that would be great. And then if I could ask 2 of my own. The premiums in non-life, non-motor were really strong. I was just wondering if you could just give a bit more detail about what drove that. And maybe optimistic — just sort of any comment that you can give on the — what you're seeing in April and May on the premium side of things. And then the second question is, you made some comments on the 2020 outlook today.

I realize it's quite early, but I wanted to ask whether you could share anything regarding 2021. The reason I ask is that I believe Philippe has publicly stated the target remains valid. So I'm curious whether you can offer any added confidence specifically on the EPS target. If you're able to comment on that, it would be quite helpful.

Alright, Peter, thanks. So, starting with travel: as you’re aware, within the travel segment, the bulk of costs are variable, since we pay substantial commissions to intermediaries. Even so, we do carry fixed costs. Therefore, what matters most right now at Europ Assistance is bringing fixed costs down considerably. That said, once again, for the travel business, variable costs make up most of the total. On reserve releases, as I mentioned, I referred to 1 points on bind — 1 points on cat and reserve release. So actually, cat is 0.8 worse than a year earlier, and reserve release is 0.2 worse than a year earlier. Thus, a year ago, on reserve releases, I benefited from 4 points in Q1, and at present — this quarter delivers a benefit of 3.8. So truly immaterial. On premiums — I assume your question concerns only P&C, so I’ll respond on P&C. Yes, premiums were strong in Q1. In fact, premium growth was in line with the prior year. So there’s nothing surprising, considering the lockdown began this — only in mid-March.

Keep in mind, throughout all of this, that in P&C the lockdown is of course hurting new business. Yet the lockdown is helping retention at the same time. So at this stage it's hard to say whether one is exactly offsetting the other, though I'd say it's not far from that. On 2021 — you've seen that for 2020 we made a statement in the outlook, and we can obviously come back to fees if you'd like more detail. On 2021, I think a few elements matter. The first is that we have confidence in our strategy and its underlying fundamentals. And I think our operating performance in Q1, which is very good, confirms our strategic approach. So of course, all of us — management, employees and agents — are working very hard toward our planned targets. This is an unprecedented moment in time, and at this stage it's very difficult to say exactly how quick the recovery of the macroeconomic environment will be. So we don't yet have full visibility, and in a few months we'll have much better visibility. And you know, Peter, that we're planning an Investor Day in November, and I think the Investor Day in November will be — would be a good time to give you a full update on the progress of our plan and our targets.

Andrew Ritchie from Autonomous has the next question.

I have a couple of quick questions. First, are you seeing pressure for premium rebates, especially in auto lines and personal auto? I assume that hasn’t happened yet in the form of insurers returning to consumers some of the favorable claims experience. We have observed that in a few other markets. Perhaps you could just give us a sense of that in your core markets. Second, what has the group done on asset positioning as the crisis has unfolded—have you purchased additional downside protection through hedges? Are you derisking any parts of the portfolio? Maybe just give us an update on how you have responded to the market moves on the asset side.

Thanks, Andrew. I'll take the first question about motor, and we'll leave the <<inaudible>> for the second one. So on motor, yes, there is some pressure across our various markets. We have seen pressure, especially in France and to a certain extent in Italy. You have also seen some movements from certain competitors of ours, even if quite limited. So on our side, what we're doing is providing support to our customers in the motor business through suspension of premium and/or focused discounts. So we have not yet announced measures like the ones some of our peers have announced. We believe it's too early to do that. So we're focusing on targeted measures in the field. It's too early to do that also because it's extremely difficult to know how the claims experience will evolve after the lockdown. So we will — again, we're pursuing our policy of making targeted measures on the ground, on discounts and suspension of premiums, and we will see what we do later. We have not made any decision.

So when you mention a suspension of premiums, you're referring to forbearance on renewals. Is that what you're saying?

Yes. And there's also the fact that at certain companies, we have a specific contract stating that whenever the client isn't using the car at all, we — right, we pause the — or <<inaudible>>...

Understood. Yes.

Sorry, that's 4 words in English. Temporary…

We'll pause it for a while when the vehicle isn't in use.

<<inaudible>> precisely. That's right.

Andrew, Cristiano, on your second question about asset positioning. So, first point: the group took action on 2 sectors. The first was mostly tied to the Life portfolio, and the fact that, given the prolonged low-rate environment and our expectation that it would persist, we did some asset repositioning by raising the duration of our fixed income portfolio, seeking quality in both government and corporate bonds, so as to achieve the right duration lengthening, because our liabilities naturally lengthen in such an environment. You need to understand that liabilities also gain duration when other risk factors come under stress, not just interest rates, since the loss-absorption capacity of lower liabilities shifts in cases where equity or other factors are stressed. So it's clear the group moved first to extend investment duration. And in the first — in the quarter, we made an investment carrying almost 3 years more duration than in the quarter '19 — the first quarter '19 — in the Life book. Beyond that, we — we are putting hedging in place on equity exposures protection with — we began with some out of the money protection in different form, a combination of fund and whatever.

And at this point, this position involves unrealized capital gain that is quite substantial, since we began with roughly EUR 5 billion of protection. <<inaudible>> moves in the opposite direction from market movement. So given that these protections mostly mature between 2020 and the last -- a small piece on Generali 2021 -- we also need to recognize that their contribution was partly already accounted for, and we have something on the order of slightly more than EUR 70 million, EUR 75 million of net result protection stemming from this hedging strategy. Beyond that, we did an innovative hedging of our unit-linked fees at the end of '19. We began with our country in France, where basically we were crystallizing the level of fees that we can extract, with the level of the markets on the equity book of unit-linked for a substantial part of it as of the level of year-end '19. And this protects us from having lower P&L volatility from the fees arising from the unit-linked book. Beyond that, to prolong duration, we sometimes buy forward some bonds in case -- that in case of the prolonged low rates, would protect us for a low rates environment. Hope I will -- I gave you the answer.

I just want to verify a couple of points. When you mentioned 3 years longer — you're referring to new money, correct? That new money is being invested for 3 years longer, in Q1 compared with...

Right, Andrew. Precisely 2 — as you're aware, we've essentially got a few billion each quarter earmarked for Life, and that money is deployed specifically to extend the duration in line with this.

And the hedges you had on equities, they were out of the money. But at this point you've got a gain on them. They're in the money now. Is that...

Yes, that's right.

Moving on to Michael Huttner from Berenberg, who has the next question.

Just three questions, if I may. You mentioned you'd be willing to give us a more granular outlook for 2020, covering both operating profit and net profit — if you could do that, that would be great. Second, on solvency: there was a small miss — actually, "miss" isn't the right word. It came in a little lower than we'd perhaps anticipated, and it has declined somewhat further in May. I was just wondering whether you could point to any reasons behind that gap, or any trends that we may not be fully taking into account. And the third one, which might be a bit early, concerns the dividend. Given today's environment — the regulatory environment — how likely are you, or how much more confident are you, that you'll carry through on the plan to pay the remaining EUR 0.46 later in the second half? And regarding the dividend going forward, if I look at consensus, it's down somewhat, which would suggest, on a payout ratio basis, that the dividend might be somewhat lower, and there's no official budget. But I just wondered whether you might be able to comment on that.

Thanks, Michael. This is Cristiano.

Thanks, Michael.

Hello there. <<inaudible>> Cristiano...

Perhaps I'll begin with the 2020 outlook. Cristiano will respond regarding solvency and the second tranche of the dividend, and then I'll return to the 2020 dividend. So Michael, concerning operating results in 2020, worldwide we anticipate the COVID-19 effect to land in the low to mid-triple-digit hundreds of millions of euro. What makes up that figure? There are numerous moving parts. First, we anticipate roughly EUR 100 million of P&C claims tied to COVID. That's one component. Second, we foresee an impact of approximately EUR 150 million stemming from reduced rents and dividends. The third negative component arises from certain volume declines plus measures we must undertake to support the agent network, our clients and communities. Those measures include, naturally, the EUR 100 million fund already reflected in our quarterly results, along with other steps being taken on the ground, such as the one I cited in the motor business, for example. So I'd characterize those as the 3 negative effects on our operating results. Naturally, some mitigation will exist, though at this stage it is rather hard to estimate.

However, the two primary ones are, naturally, that our costs will be positively affected, and that benefit is connected. On one hand, I'd say, to costs coming down organically because, for example, we're no longer traveling and so forth. So that flows in naturally, but also from certain specific steps we've taken this year to cut costs — particularly, of course, around personnel expenses, compensation, and so forth. And of course we have a second favorable effect, and you're already seeing it in Q1, which is lower claims frequency on the P&C side. And on that point, we stay cautious. So we know we saw an impact in Q1. And certainly, we will have seen an impact in Q2, as we observe it. We have a major question mark about what happens once the lockdown ends. And that question mark concerns, on one hand, motor. So will people drive more? And will motor frequency rise after the lockdown? First, as I mentioned, we observe that in China, people are making greater use of their private cars. So that is the first question mark.

Then the second issue is that, from what we've seen, economic crises tend to hurt commercial lines P&C business when it comes to claims, for a number of reasons. So even though our exposure to fees isn't that large — I mean, we do have exposure to SMEs. And so, again, over the short term, a strong positive effect on claim frequencies. Over the midterm, major uncertainty. That's why — for 2020, the best outlook I can give you is this low to mid-triple-digit figure for our operating result, recognizing that there's considerable uncertainty and volatility surrounding it. Cristiano, I'll hand it to you on solvency and dividend — and dividend — the second tranche of the dividend.

Thanks, Frédéric. I believe I caught it too — was there also a question asking for more granularity on net result? Did I get that right, Michael?

Yes, go ahead.

All right, so to address that — and I'll begin here so you get the complete picture. Beyond the EUR 655 million in net impairments tied to the asset we impaired within the available for sale category, I want to highlight that a bigger impact also stemmed from nondeductibility. That means a tax hit that is weighing heavily on this quarter's tax rate as a result of that effect, since certain taxes — particularly in Italy — cannot be recovered. In such a case, you are unable to record a deferred tax asset. We have EUR 15 million of net result impact arising from impairments on the Argentinian bond. We already did that at year-end. However, given the worsening situation of the foreign one, we booked an additional EUR 15 million. Then, as I believe we mentioned before, let me remind you that we also included the EUR 100 million COVID fund impact, which comes to roughly EUR 75 million net of taxes, entirely in the first quarter because of the accounting rule on the expected commitment we made. And that has been fully booked in the first quarter result. Overall, absent these kinds of specific effects — if you simply recall that in the first quarter of '19, you had under EUR 100 million of net result impact from impairments — you can see what drove the movement, and what the main drivers of the movement in net result were.

Hopefully that gave you a clearer picture. Now I'd like to turn to solvency. First, the change from March 31 — from 196% to the most recent figure we provided this morning to the journalist upon request on May 19, which is nearly 190% — indicates that market factors between March and May 19 were pushing solvency somewhat lower, chiefly through the impact of the BTPs, plus a small decline from negative health stemming from lower rates along the curve, the swap reference curve. That said, moving to the second part of the dividend: first, I hope you all observed that yesterday the dividend was in fact collected in the first tranche. As you know, per our general assembly, the second tranche will be paid by year-end and is subject to the Board's verification. In <<inaudible>> of some compliance with the limits set by the group in the risk appetite framework as of September 30, 2020, and also on positive confirmation of compliance with the norms and their record recommendation regarding dividend payments at that time, since we know they could evolve — they are evolving.

There's no way to know what might happen. To make this decision, we have to factor in every genuinely existing potential future constraint. I remember that the group risk appetite framework, which was presented at the Generali 2021 Investor Day — we — they identified what's called the operating target range for Solvency II, which was between 180% and 240%, with a soft limit of 150%, after stress. So during the Board, which is scheduled for November 11 for the approval of the third quarter results, the Board will assess the compliance of all the limits set by the risk appetite framework as per end of September. And we'll evaluate all the prevailing norms on the regulatory recommendation, and we'll take into account the development also by end of September and the moment of the valuation. And then the Board will express the decision on the second tranche of the dividend with the most informed valuation. As of today, the level we have of solvency is within and complying with our risk appetite framework, as you noticed.

And after that...

Michael, I’ll go ahead and comment, and then — I believe you had a question about the dividend for next year?

Yes, please. Yes. I'm extremely greedy. Sorry about that—yes.

Yes, that's right. So, a few points about fees. First, for a range of reasons, we have really strong cash flexibility. The first one is that, as you know, we came into this crisis with a substantial amount of cash at the holding company. The second reason is that our business units are well capitalized. And the third is that we've already managed to pay most of the dividends from our operating companies this year. So our level — we have a really strong level of cash flexibility. My second point is that we have confidence in our strategy, and we have confidence in its underlying fundamentals. We have confidence in our technical results. We have confidence in the — as I've said previously, in our technical capability and technical excellence even in a tough year such as this one. The third point I'd like to make is that we're very mindful of how important dividends are, of their stability and predictability. And we've said before, and Philippe has said it too, that hitting our target on the dividend is a priority for us. So with all of that said, we obviously have to factor in the context.

Michael, you'll appreciate that commenting on the 2020 dividend at this point would be premature, and our Board will evaluate what's suitable as time goes on. Still, I believe those 3 remarks I've just offered give you a sense of where things stand.

And our next question comes from Farooq Hanif at Credit Suisse.

If I could return to your point regarding total operating profit—much of the conversation has centered on P&C. On one side, I can see revenue declining, while on the other, margins improving somewhat. What I'd like to clarify is whether that mainly stems from non-life or from Life—the drag component, so to speak. I would have expected some investment margin tied to impairments, given the volatility as well. Then my second question concerns claims frequency. You noted that motor claims frequency has fallen. Could you offer some kind of guidance? Other companies have cited a 2 to 4-point benefit during the lockdown period prior to premium refunds. How about non-motor? What is happening there that provides support? And I suppose the final question returns to what Michael just raised. You're suggesting that you will—or potentially could, depending on the Board—be in a position where you would not follow your 50% to 60% net income payout target should impairments be high. Is that the message you're seeking to convey for 2020?

Thanks, Farooq. I'll begin with that final question of yours. I'd like to be clear that our message is this: paying the dividend in line with the targets of our plan is a high priority for us, and we believe that with the strong liquidity we have and the resilience of our business, we have good fundamentals to be able to say this. Then I made a cautious statement saying that, of course, the context is still very volatile and that it's too early to say because it will be our Board decision. But our message is that our priority is to stick to our dividend plan. Just coming back...

Yes — apologies, Frédéric. I think I’m a little mixed up here. As I understand it, your dividend plan is based on the payout ratio applied to net income. That’s the reason.

No, but — okay. You recall that when we laid out our plan, there were two goals. And we stated that those two goals carry more weight than the dividend. One goal concerned the payout ratio, and the other concerned how we allocate the cash flow we generate, and we specified a fixed dollar amount of dividend we intend to pay across the coming 3 years. So we said the payout ratio is a long-term trend, as a strategy. And that, as a midterm trend for our plan, we had this fixed amount. So when I say our goal is to stay with our plan, I'm also saying that our goal is to stay at the fixed level we committed to in our plan. I hope that's clear.

Understood—that’s perfectly clear.

Now, regarding your two other questions — on P&C and Life. The EUR 100 million impact I mentioned on claims stemming from COVID relates to P&C. Over on the Life side, the effect is actually fairly negligible for the protection business. Naturally, we hold a substantial amount of protection business. However, given the age band and particularly death policies — but given the age band of clients hit by COVID and the typical age of insured individuals, the COVID effect on claims — on fees is, I'd say, rather marginal. On the health side, we aren't a major health player. We're seeing 2 opposing trends. First, there will be a lift — naturally, a rise in claims tied to the coronavirus. The other relates to the fact that people untouched by the coronavirus haven't gone to see their doctors or visited clinics throughout the 2 months of lockdown. I'd say these 2 effects roughly offset each other, though I'd also say it's too early to tell. Turning to your next question about motor and non-motor, I believe we should examine technical indicators.

When we look at the lockdown period — the time when every country was under lockdown — what we observe is that, at a global level, motor frequencies, or rather the attrition on motor frequencies, fell by roughly 60%. And on the non-motor side, we see a decline in frequencies of around 30%. So again, the month that probably gives the best picture is April, since in April all the countries were in lockdown. Given that, I think you can derive some estimates from it. Naturally, as I mentioned earlier, you need to factor in that we are taking certain actions on the ground — in particular, providing some extra discounts to our customers and so forth — but that is what I am able to share with you.

Our next question comes from William Hawkins at KBW.