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

Good afternoon. I’m the operator for this Chorus Call conference. Welcome, and thank you for being with us on the Generali Group Half Year 2020 Results Conference Call. Just as a reminder, everyone participating is in listen-only mode. Once the presentation is finished, there will be a chance for questions. If anyone requires assistance at any point during this conference call, they can alert an operator by pressing Star and zero on their phone. Right now, I’d like to hand the conference over to Miss Giulia Raffo, Head of Investor and Rating Agency Relations. Madam, please go ahead.

Thanks. Welcome, everyone, to the Generali First Half 2020 Results Conference Call. The entire top management team of Generali is here with me. Before we begin the Q&A session, I'll pass things over to our Group CEO, Philippe Donnet, who has some opening remarks. Philippe, over to you.

Thank you, Giulia, and good morning to all of you. It's a pleasure to welcome you to the presentation of Generali's First Half Results 2020. Before we take your questions, I'd like to walk you through our four key messages. First, the results we're showing today confirm that Generali is resilient, both financially and operationally, and that we can withstand the unprecedented challenge posed by COVID-19. Our operating result came in at EUR 2.7 billion, in line with the first half of 2019, when we posted a record high figure. Once again we demonstrated our technical excellence, with a combined ratio of 89.5% and a new business margin of 3.94%. And our capital position remains solid, with a solvency ratio of 194%. Second, at Generali we reacted promptly to the COVID situation, acting as a true lifetime partner to all our customers, our agents, and all stakeholders. Third, we launched many initiatives to support them at this critical juncture, and we carried out a number of business actions that helped mitigate the effects of the crisis. We confirm our outlook for the remainder of the year, while remaining conscious of the persisting uncertainty surrounding the socioeconomic and financial consequences of the COVID-19 pandemic.

For this year, we anticipate that our operating result will hold up well, supported by a favorable business mix and solid standard policy terms, though it will probably be lower than in 2019. Fourth, we keep carrying out our strategy — our Generali 2021 strategy. We do so in a disciplined manner while stepping up the pace on certain initiatives, including digital transformation and adjusting to the evolving situation. Meanwhile, we stand ready to seize any attractive opportunities that may come along, and a complete update on how our strategic plan is progressing will be given at our investor day, which, of course, will take place virtually on November 18th. Many thanks for your time and for your attention; along with Frédéric and Cristiano, we will be glad to take your questions. Thank you.

Pardon me. Speaking is the Chorus Call Conference operator. The question and answer session starts now. If you'd like to ask something, you can press Star and one on your touch-tone phone. To take yourself out of the queue, just press Star and two. When you ask your questions, please lift the receiver. At this point, anyone with a question may press Star and one. Our first question comes from Andy Sinclair at Bank of America. Go ahead, please.

Thank you, and good afternoon to everybody. I have three items, if that works. The first concerns Switzerland, where some reserve strengthening has been applied. It sounds as though a considerable amount more could still be coming, with a comparable hit in H2. You mentioned a negative operating result for 2021. I was just wondering whether you might provide a little more detail on that. Why is it not possible to absorb the entire hit up front? When do we expect profitability in Switzerland to return? That is my first question. My second question concerns M&A. A stake in Cattolica has been purchased, and you have been linked to Borsa Italiana, and neither really appears naturally to fit within your core M&A focus. Could you give us a little more detail on those and on what we should think regarding the M&A strategy? The third was simply about P&C claims frequency. I was really wondering whether you could give us a bit of detail on how things have shifted since lockdowns began to ease. Do you still view COVID as being fairly neutral, or perhaps even slightly positive, for the P&C business in H2? Thanks.

Andy, my apologies. Could you do me a favor? Would you mind repeating the first question, please?

Starting with Switzerland, then?

Yes, my apologies.

Sure. Just on Switzerland, you've had the reserve strengthening, but it sounds like a similar hit is coming in H2. You've guided for a negative operating result in 2021. I really just wondered if you could give us a bit more color on that, and when profitability might return for Switzerland, and actually, could you not just take that whole hit up front rather than spreading it over a couple of years?

Thanks. My suggestion is that we begin with Philippe on the M&A strategy. Then, Frédéric, if you'd like to respond to the question about Switzerland — thank you. And then P&C as well. Yeah, thanks.

Thanks, Andrew. Regarding our approach to M&A, nothing has changed from the strategy we laid out when we presented Generali 2021. That strategy is a highly disciplined one. Where insurance is concerned, it centers on Europe. On the asset management side, the scope is broader. Apart from the Cattolica investment — which is a strategic and industrial one — we have nothing serious in play. As for Borsa Italiana, there is absolutely nothing there. We are not involved in that at all. That's basically it. Frédéric?

Let me begin briefly with P&C frequency, then I'll get to the first question. On frequencies, yes, we observed sharp declines during the lockdown, particularly in motor, of over 50%. We've seen reductions in certain other lines as well. What's noteworthy is that although frequencies rose considerably once the lockdown ended, they haven't yet returned to normal levels, and I think that's also a useful signal regarding the economic recovery. Frequencies remain below our usual levels. Turning to the first question about Switzerland. First, it's important to grasp where this originates. It stems from an acceleration of reserve strengthening tied to a legacy unit-linked portfolio in runoff, which was shut to new business roughly 10 years ago. The size of that portfolio now stands at approximately CHF 8 billion, and it carries financial guarantees. The average guarantee across the book is about 2.3%, and these are guarantees at maturity. The book is partially hedged against interest rate and equity market movements. As you've likely observed, interest rates have fallen substantially of late across all countries, Switzerland included. Given this extremely low level, and given that we want a prudent approach to reserving, we've chosen to speed up what we began doing roughly 10 years ago.

Roughly a decade back, working together with the Swiss authorities, we made the decision to establish a guarantee reserve tied to that portfolio. By the close of 2019, the reserve had grown to CHF 1.3 billion. Once more, given the circumstances, we chose to speed up this reserving during 2020. We booked CHF 300 million in the first half, and the same figure will be booked in the second half. Following that, we'll return, so to speak, to usual reserving levels. I get your questions about why we don't simply do it as a one-off. That ties to the arrangement with the Swiss regulator and to how the Swiss regulator determines what we ought to book. Keep in mind as well that this portfolio is very long-term in nature, with maturities of roughly 30 years. Under the arrangement with the regulator, we'll keep raising reserves across the coming seven years. Once again, we'll get back to a normal reserving pace. On top of that, you might have noticed that, once more, following the same cautious approach, we chose to impair the goodwill on our Swiss portfolio and our Swiss operation, which produced a EUR 93 million impact at the half year.

To wrap up, I want to stress one thing: you have to recognize that the Swiss book — once more, this is a portfolio in run-off — generates extremely strong technical profits and extremely strong fees. Naturally, our investment margins are negative, yet fees offset that to some degree, and we have very strong technical margins plus very strong fees. What I can say is that under today's market conditions, we put the portfolio's value at a negative figure around the mid-triple-digit hundreds of millions of EUR. I hope that was clear, Andrew.

Got it — that clears things up completely. That's genuinely, genuinely useful. I appreciate it. Thank you.

Peter Eliot from Kepler Cheuvreux has the next question. Go right ahead.

Thanks a lot. I have two questions, and I may follow up briefly on Switzerland. First, regarding your expense ratio, you reported a substantial drop of 0.7 percentage points. Could you say what portion of that you view as structural, and what portion is merely a short-term volume and mix effect that could later reverse? My second question: I saw that your Italian motor premiums fell 7%. I was hoping you could lay out what drove that, and perhaps frame it against what has occurred across the entire market. Then, finally, maybe just a quick return to Switzerland. Of course, you cited the low interest rates, which I assume are the main driver, but I was wondering whether you could point out what additional risks exist there and whether — sorry, just to be clear — whether from 2022 you do expect operating profit to return to the previous run rate going forward. Thank you very much.

Peter, thanks a lot. Frédéric, I think you may want to handle the question about the expense ratio, and motor.

Yeah, Switzerland.

Switzerland, and that one's all yours.

Hi, Peter. Regarding the expense ratio, you're correct that expenses have dropped sharply this year, and I'd say that's tied, of course, directly to the COVID impact, which is also connected to extra discipline. Again, during tough times, we apply additional discipline. It's hard to distinguish what's run rate versus what's one-off. At a high level, as an order of magnitude, I'd put it at probably around 50/50. The key point is that all of this has made us aware there are other margins on which we can cut expenses, and we'll keep reducing expenses even next year beyond what we had in mind in our plan. We're working on this, and again, it ties to the experience of the past few months. On motor premium development, I understand your question related to Italy only. Yes, motor premiums in Italy fell quite significantly. Part of that is tied to renewals being postponed. We'll see that, and we'll see it by end of September. We'll see a recovery over the coming months. Still, I expect motor premium evolution this year to stay negative, and that's tied both to a more difficult new business and to the fact that, in the current circumstances, we support our clients, and since frequencies have fallen a lot, our clients are also benefiting from this, and we see a decrease in the average premium.

I know your third question had to do with Switzerland, but Peter, could you repeat it — what precisely were you asking in that third question?

Yeah, I just wanted to get a handle on what could put the guidance you've provided at risk. My assumption is that if interest rates drop further, maybe that means you'd have to absorb a somewhat larger hit in the near term. Just to confirm or get clarity on how you see it right now, as things stand today, that starting in 2022, we should return to the kind of normal operating level we've witnessed previously.

Obviously, this Swiss book reacts to the level of Swiss interest rates. For 2020, we have taken a prudent stance. Should Swiss rates rise substantially once more, that would hurt us. Based on the current scenario, as I mentioned earlier, we anticipate that following the major effort we undertook this year, we will return to a normal reserving level in Switzerland. We will keep adding to the guarantee reserve, just as we have in prior years.

Thanks a lot. Just to get one thing straight, quickly, if I may. I believe your comment was that a rise in interest rates would bring about greater reserving. My assumption is that you meant it the opposite way.

My apologies. If I said that, I must be tired. Clearly, that's a drop in the interest rate level.

Just doing a quick check to see if

Thanks, Peter, for that correction.

Let’s take the next question.

Andrew Ritchie from Autonomous Research has the next question. Go ahead, please.

Oh, hi there, thanks. Just a handful of fairly quick questions, I think. In the life business, I noticed the decline in net investment margin was really only in Switzerland and Spain, I think, while there was a lot of resilience in Italy, Germany, and France in particular. Should we expect more pressure there in the second half or going forward? Especially since you've already flagged that we're going to see lower real estate rents, and obviously lower dividends must have already come through, I suppose. Maybe just clarify: is that resilience in the investment spread in those countries something not to be extrapolated, or is it? Linked to that, maybe just update us broadly on what you're doing with your sort of reinvestment strategy in current markets. I've seen that you've obviously flagged very low reinvestment rates. I don't know what you can do to supplement those. Maybe just give us an overview as to how you're treating the problem of reinvestment right now, which has clearly got even more challenging. The final question, I should probably know the answer to this. This is a very quick one. I am a bit confused. Asset management result was up a lot quarterly, as in Q2 versus Q1, even though average AUM must have been down, at least for external clients.

Does the asset management result show some seasonality? I believe it does, but could you just remind us of the reason for that? Thanks.

Thanks. Cristiano, could you handle the first question, and after that we’ll go to Tim for the two questions about reinvestment and asset management. Thanks.

Yeah, thanks. Hi, Andrew. Starting with the net investment margin for the second half: if I compare it against what we expect once you strip out the unusual market developments that we still can't see ahead of us, it ought to come out fairly close to the first half of 2020 — that reflects the actions we took and also the balance we achieved on the investment side while working through this environment of quite low yields.

And there's still no benefit from lower real estate rents that has yet to come through?

On the real estate side, you may see a somewhat larger contribution in the second half of the year, even though that gets offset by the fact that during the first half, the bank dividends were absent. You simply have to weigh the two against each other. That is the reason I describe it as fairly stable.

Alright.

Tim?

Yes. Good afternoon, Andrew. Tim Ryan here, the Group CIO. Regarding your second question about reinvestment strategy, the first thing I'd like to note is that we're quite careful in how we put capital to work. You'll have noticed that our cash position has actually gone up. Why is that? Because we always want to consider the risk-adjusted return. So what are we doing to achieve this? We've carried out a couple of key things. One is that we keep investing selectively in investment grade with high-quality names, and that has proven very efficient. On this first point, our team has done a wonderful job. The second is that we continue — as we've said previously — because our strategy is to be resilient, whatever the market situation is in real assets. On real assets, we've seen some fairly big dislocation, both on the private equity side as well as on the private debt side. This is across all the different geographies. For us, this represents an opportunity to even accelerate the deployment. Again, being very cautious on risk and liquidity, which is a key element. That's to answer your second question. The third element I'll answer as well on the asset management side.

We've indicated that our plan to reach EUR 350 million by 2021 would be fairly linear, though seasonality exists, stemming from the second factor I brought up in response to your question — namely that when we invest in a real asset, we take on commitments and fees that get recognized at varying moments. There's a seasonal pattern, typically in the second quarter and also in the final quarter of the year, when fees pick up somewhat. That's the context for understanding this. In the end, the reason we've held up reasonably well is the asset mix, which isn't purely third party — the mix we hold today is mostly fixed income products. Naturally, with yield compression on government bonds, that has let us gain as well from a modest market uptick in our fixed income portfolio, which consequently generates more fees.

Appreciate it. To make sure I understand correctly: the reinvestment rates I mentioned are 1.3 for both life and non-life. Does that figure represent the half-year average, or is it more of a spot position as of the end of the—

That's really the mean figure. So, addressing what you asked, the life side comes in at 1.4, while P&C sits at 1.3.

I suppose it might have decreased somewhat toward the close of the quarter, considering what occurred with spreads in Q3.

Again, that hinges on how quickly we can deploy on the actual asset, since this one is somewhat more of a slow burner than what we're seeing across the rest of the market.

All right, thank you so much, everybody.

Appreciate that, Andrew. Let's take the next question.

Our following question comes from William Hawkins at KBW. The line is yours.

Hi there, and thanks so much for taking my question. First off, I appreciate the added detail you provided on the COVID losses shown on slide 10. I apologize in case I overlooked this, but regarding the EUR 87 million figure in non-life, might you break that down for us across the gross items? My assumption is that you've included Travel losses, which count as a negative, and then there's the frequency benefit we've already discussed. What I'm unclear on is which two offsetting figures combine to arrive at EUR 87. That's my first question — if you could walk us through the losses against the frequency gains. Second, would you please bring us up to date on where the average guarantee now stands within your life in-force portfolio? I'm sorry if I'm behind on this, but my recollection is that the most recent disclosure came at last May's Investor Day, when you cited 1.2% for 2018. Apologies if I missed an update at the close of last year — could you simply let us know where that average guarantee now sits? My guess is it hasn't moved much. I'm just assuming it might be slightly lower and wanted to verify. Finally, might I ask you to say a bit more about your outlook on the dividend?

What you said in your formal remarks about the second tranche is reassuring, since you make it very clear that it hinges on the norms and regulatory recommendations around dividend payments. From what I can tell, the outlook there remains highly uncertain, and judging by the banks, it is still quite a challenge. I appreciate that, as far as your numbers go, you seem to be screening fine against your own assessment of risk, though I am not sure where you believe you stand with respect to the overall regulatory environment. Thank you.

Thanks. Cristiano, I’d like you to handle the first question, which covers specifics about how COVID is affecting our P&C operations. Please also take the second one, on the average guarantee, and Philippe will field the question about the dividend.

Yes. The 87 — obviously that's an estimate, and it was put together using a methodology measured against where we expected the budget to land, which is a fair thing to clarify so you understand how we arrived at it. In essence, the 87 net benefit is made up of roughly EUR 70 million in direct claims, spanning both travel and business interruption. We have a lower-volume figure, and that carries a negative impact on the order of EUR 100 million; on the positive side, this is offset by reduced claims frequency stemming from lower activity, motor in particular. The net result of that is a positive EUR 180 million, combining the negative volumes piece and the positive technical profitability effect. There's a further delta between EUR 180 million and the EUR 87 figure, which comes from a mix of reduced regular income, dividends especially — fewer dividends in the first half of the year, concentrated and therefore hitting harder on a pro rata basis, since it falls on half a year rather than the full year. Then there are other operating costs arising from COVID-19 related initiatives, which sit outside the technical results and are mainly tied to supporting the business so operations kept running through this very complex moment.

The second thing tied to this is we're at 1.25% to 1.3%, right in the middle of that range. You should expect that as the average rate guaranteed on our life book.

Appreciate it.

That pace is going to move based on how the lower guarantees from the new business we write shift, and in some cases those are written at negative guarantees as well. Don't look just at the average guarantee across the book. Consider, for instance, that 27% of the savings business written in Italy during the first half was written with only a death benefit guarantee, with no financial guarantee attached to it, and that is pushing down further the strain on capital consumption in the savings business. We will of course update you with a detailed figure when we have the year-end numbers.

Philippe?

Thanks. Thanks, William. The second dividend tranche is set to be paid by year-end, as approved at our AGM in May, and it depends on the board's verification. The board meeting takes place on November 11th. At that point the board will verify compliance with the limits established under our group's Risk Appetite Framework as of September 30th, along with adherence to the regulation and to the regulator's recommendations. Nothing new.

Let me just come back on that, sorry. What I was really asking about was the last part — whether you believe the regulatory environment has evolved.

To my understanding, the regulator remains in that same frame of mind — namely, advising that we exercise extreme caution in how we handle capital and dividends.

I appreciate it.

Moving on to the next question.

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

Thank you very much. There are three things I'd like to ask. First, on the figures. My apologies — I didn't quite track the response you gave to Will regarding claims and the effect in non-life, since my own total came out negative, and obviously the actual number is a positive EUR 87. I was hoping you might walk me through that. You brought up the cash position — could you give a bit of an update on where it stands today, and on the cash flow you expect across the full year, keeping in mind your objective of remitting, as I recall, more than EUR 7 billion across three years. My final point concerns Cattolica. I noticed you described it as an investment that is both financial and strategic. I was wondering whether you could give a sense — or an industrial investment — of just where it sits. Does it fall within your budget of roughly EUR 4 billion for deals, and how do you expect it to develop? Many thanks.

Thanks a lot. Michael, my suggestion is that Cristiano handle the first two questions, if you’re able to. Philippe will cover the last one.

Absolutely. Michael, apologies for not being clearer. I also wanted to emphasize the claim itself. This claim does affect technical profitability. I was simply providing you with additional detail: inside the positive claim result, there was an impact of EUR 70 million from travel and business interruption. That gives you a sense of what the effect was. Ultimately, we saw a positive effect on technical profitability of EUR 275 million and a negative volume effect of EUR 100 million, which nets out to the EUR 180 million arising from the combination of premium and profitability overall. That is the EUR 180. To go from EUR 180 to EUR 87, you have to subtract lower dividend income, which we did not receive from equity participation in the first half, and which has an even greater impact pro rata. Second, there are certain initiatives that are not reflected in the technical results, so you won't see them in the final combined ratio figure, but they are there to support how things function during these complex moments of the specific COVID environment — to give the network, operations, agents, and all the distributors the support they need in order to function and, ultimately, to produce what in my personal view is a very good result, including in non-life collection, as you have seen.

That's very clear. Thanks.

Moving to the second item, cash. Our cash position has never been stronger. Let me remind you that in May we paid the first installment of the dividend, even though when we last spoke I mentioned that we held over EUR 4.1 billion. I can confirm that our cash level is quite healthy and sits above that figure, which gives us the cash and capital flexibility to handle this important and uncertain period — something I view as one of our key strengths, as it helps us get through and cut down considerably on the uncertainty ahead. I hope that gives you clarity.

Could you give us some color on the cash flows?

My apologies. My apologies.

Yeah.

Yeah, that one's on me. I'm getting old.

Absolutely. What is our age?

I can confirm that, with the most recent cash flow, or the remittance we accounted for during the opening weeks of July, we have moved past 90% and are near the 95% mark of the total remittance anticipated for 2020. Essentially, what remains outstanding involves certain Central Eastern Europe entities operating under rather stringent regimes, though given the healthy solvency level of these subsidiaries and their liquid position, we hope that following this summer break we will receive greater clarity from the regulator's response as well. We are very well positioned to fulfill this 2020 remittance pattern.

So you're saying the cash position right now is higher than it was in Q1, even after that first tranche of the dividend has been paid out.

No, no — that figure is actually higher.

That figure is higher.