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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group Half Year 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Giulia Raffo, Head of Investor and Rating Agency Relations. Please go ahead, madam.

Thank you. Welcome all to Generali First Half 2020 Results Conference Call. Here with me, there is the full top management of Generali. Before we open the Q&A session, I will hand over to our group CEO, Philippe Donnet, for some opening remarks. Over to you, Philippe.

Thank you, Giulia. Good morning, everyone, and welcome to the presentation of Generali's first half results 2020. Before we open the floor for questions, let me highlight our 4 key messages. First, the results we present today confirm that Generali is resilient, both from a financial and operating standpoint and that we are able to withstand the unprecedented challenge posed by COVID-19. Our operating result at EUR 2.7 billion was in line with that of the first half of the year 2019 when we achieved a record high figure. We confirmed once again our technical excellence with a combined ratio at 89.5% and a new business margin at 3.94%. And our solid position from a capital perspective with the solvency ratio at 194%. Second, at Generali, we promptly reacted to the COVID situation, acting like a true lifetime partner to all our customers, our agents and all stakeholders. We put in place many initiatives to support them at this critical juncture, and we implemented a number of business actions that helped mitigate the effects of the crisis. Third, we confirm our outlook for the remainder of the year, whilst being conscious of the persisting uncertainty about the socioeconomic and financial consequences of the COVID-19 pandemic. We expect our operating result to be resilient this year, thanks to a favorable business mix and a robust standard policy terms, albeit with a likely decrease compared to 2019. Fourth, we continue to execute our strategy. Our Generali 2021 strategy, we executed in a disciplined way, while accelerating on some initiatives such as digital transformation and adapting to the changing scenario. At the same time, we are ready to capture any opportunities, any good opportunities that might arise, and we will provide a full update on the progress on our strategic plan on our Investor Day which will be held virtually, of course, on November 18. Thank you very much for your time, for your attention. And together with Frédéric and Cristiano, we will be happy to answer your questions. Thank you.

[Operator Instructions] The first question is from Andy Sinclair with Bank of America.

Three for me, if that's okay. Firstly was on Switzerland where you've taken some reserve strengthening, but it sounds like there might still be quite a lot to come with a similar in H2, and you said negative operating result for 2021. Just wondering if you could give us a bit more color on this, and why can you not take the whole hit upfront? And finally, when do we think we'll get back to profitability for Switzerland? So that's the first question. Second question is on M&A. You've got a stake in Cattolica. You've been linked with Borsa Italiana, neither of which really seems naturally set into your core M&A focus. Could you give us a bit more color on these and what we should think about the M&A strategy? And then thirdly was just on P&C claims frequency. I just really wondered if you could give a bit of color on how things have changed since lockdowns started to ease. Do you still see COVID as being fairly neutral to maybe even slightly positive for the P&C business in H2?

Andy, sorry, can I ask you a favor? Can you repeat, please, the first question?

The first one on Switzerland?

Yes, sorry.

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

Thank you. I suggest we start with Philippe on the M&A strategy. And then Frédéric, if you want to answer the question on Switzerland. Thank you. And then P&C also. Thank you.

Yes, thank you, Andrew. On the M&A strategy, there is no change on the strategy we described when we presented our Generali 2021 strategy. So it's a very disciplined strategy on the insurance. It's focused on Europe. The scope is wider on the asset management side. We have nothing serious, except the Cattolica investment, which is a strategic and industrial investment. On Borsa Italiana, there is absolutely nothing. We are not involved in this. So basically, this is it. Frédéric?

So I'll start quickly with the P&C frequency before moving to the first one. So on the frequencies, yes, we've seen dramatic decreases of frequency during the lockdown, especially on motors by more than 50%. But we've also seen decreases in some other lines of business. What is interesting is that even if frequencies have increased after the significant increase after the lockdown, they've not come back yet to normal levels, which I think is a good indicator also of the economic recovery. So we still have frequencies which are down compared to our normal levels. On the first question on Switzerland. So first, this is important to understand where it comes from. So it comes from an acceleration of the reserve strengthening which relates to an old unit-linked portfolio in runoff, which was close to new business around 10 years ago. The size of this portfolio is around CHF 8 billion, and this portfolio has financial guarantees. The average guarantee on the book is at around 2.3% and these are at maturity guarantees. So the book is partially hedged for interest rate and equity market moves. But as you may have seen, the interest rates have decreased a lot recently in all countries and also in Switzerland. And due to this extremely low level and due to the fact that we want to have a prudent reserving approach, we've decided to accelerate what we had started to do about 10 years ago. So about 10 years ago, in accordance with the Swiss regulators, we had decided to set up a guarantee reserve linked to this portfolio. At the end of 2019, this reserve had reached an amount of CHF 1.3 billion. And again, linked to the context, we decided to accelerate this reserving in the -- in 2020. So we've booked CHF 300 million in the first half, and we will book to the same amount in the second half. After that, we will come back, I would say, to normal levels of reserving. So I understand your questions on why don't we do it one-off as it is linked to, first, this is linked to the way the Swiss regulator -- the agreement with the Swiss regulator and how the Swiss regulator decides that we should book this. And then you should have in mind that this is a very long-term portfolio, about 30 years maturities, and the agreement with the regulator is that we will continue to increase reserves over the next 7 years. But again, at -- we will come back to a normal pace of reserving. In addition, you may have seen that, again, with the same philosophy to be cautious. We decided to impair the goodwill on our Swiss portfolio and on our Swiss operation, and it had a EUR 93 million impact at half year. I think -- and I will conclude with this. I think it is important to understand that the Swiss portfolio against this run-off portfolio has very high technical profits and very high fees. So of course, we have a negative investment margins but we have partially compensating fees, very high technical margins and very high fees. So what I can tell you is that at current market conditions, we estimate that the value of the portfolio is negative in the region of mid-triple-digit hundreds million euro. I hope I was clear, Andrew.

The next question is from Peter Eliot with Kepler Cheuvreux.

Great. Two questions, and I might come back quickly on Switzerland. But first of all, on your expense ratio, you showed a big reduction of 0.7 percentage points. Would you be able to comment how much of that you think is structural and how much of it is simply a sort of short-term volume and mix effect that might reverse in due course? Second question, I noticed your Italian motor premiums were down 7%. I was wondering if you could just outline the drivers of that and maybe put it in the context of what you see has happened to the whole market as well. And then yes, finally, maybe just to come back quickly on Switzerland. I was just wondering if you could out -- I mean, obviously, you mentioned the lower interest rates, which are, I guess, the primary driver. But I'm just wondering if you could just highlight sort of what the further risks are for that. And whether -- sorry, just to clarify, whether from 2022, you do expect to be back on the sort of the old run rate for operating profit going forward?

Peter, thank you very much. I think Frédéric might want to take the expense ratio question and the motor and Switzerland, sorry. All for you.

So Peter, so on expense ratio, you are right that there's a strong decrease of expenses this year, which is linked to, I would say, of course, directly to the COVID impact, which is also linked to additional discipline. Again, in tough times, we have additional discipline. So it's difficult to say what is run rate and what is one-off. As a high level order of magnitude, I would say, probably around 50-50. But what is important is that all of this made us aware that we have other margins to decrease expenses, and we will continue to decrease expenses even next year beyond what we had in mind in our plan. So we've -- we are working on this. And again, this is linked to the experience of the past few months. On the motor premium development, I understand that your question was linked to Italy only. So yes, there was a quite significant decrease of premiums -- of motor premiums in Italy. Part of this is linked to a postponement of renewals. So we will see that and we will see by end of September, we will see a recovery over the coming months. Still, I expect the premium evolution figure on motor to remain negative. And this is linked to both a more difficult new business and both -- and to the fact that in the current circumstances, we support our clients. And as frequencies have decreased a lot, our clients are also benefiting from this, and we see a decrease on the average premium. I understand your third question was linked to Switzerland. But can you be more -- can you say it again, Peter, on what exactly was your question, the third question?

Yes. So I just wanted to sort of understand the risks to the guidance that you've given. I mean I'm assuming a further fall in interest rates would mean that maybe you have to take a sort of slightly bigger short-term hit, and just sort of confirm or understand that as you see it at the moment, as it currently stands, that from 2022, we should be back to a sort of normal operating level that we've seen in the past.

So it is clear that this Swiss portfolio is sensitive to the Swiss interest rate level. We've adopted for the -- for 2020, a cautious approach. But if we had a significant increase of, again, of Swiss interest rates, it would have a negative impact. Again, based on the -- based on today's scenario, as I've said before, we expect that after the strong effort that we've made this year, we will come back to normal level of reserving in Switzerland. We will continue to allocate to the guarantee reserve as we've done over the past years.

Just quickly to clarify, if I can, I think you said an increase in interest rates would mean higher reserving. I assume that you meant the other way around.

Sorry. If I said this, I must be tired. That's obviously a decrease in interest rate levels.

Just checking.

Thank you, Peter, to correct me.

The next question is from Andrew Ritchie with Autonomous Research.

Just some fairly quick questions, I think. In the life business, I noticed it was only really Switzerland and Spain, I think, where you had the declines in net investment margin. There was a lot of resilience in Italy, Germany, France, in particular. Do we expect more pressure there in second half or going forward, I mean, particularly because you've already flagged we're going to see lower real estate rents? Obviously, lower dividends must have already come through, I suppose. But maybe just clarify, is that resilience in the investment spread in those countries 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. And the final question, I should probably know the answer to this. This is a very quick one. I'm 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. But is there some seasonality in the asset management result? And I think there is, but just remind us why that is.

Thank you. Cristiano, if you can take the first question, and then we can pass on to Tim for the 2 question on reinvestment and asset management. Thank you.

Yes. Thanks a lot, Andrew. So first point on the net investment margin in the second half. If I have to compare what is the expected net of extraordinary development of the market, which is still unknown in front of us, should be quite fairly similar to the first half of the 2020 due to the actions and due to also the equilibrium in the investment part, we managed through this quite low-yield environment.

There's no effect from lower real estate rents to come through still?

From real estate, you will see potentially a slightly higher part in the second half of the year, notwithstanding the fact that this is counterbalanced by the fact that in the first half, you were missing the dividend from the banks. So you need just to make the balance among the two. That's why I'm saying it is fairly stable.

Tim?

Yes. Andrew, this is Tim Ryan, the Group CIO. So on your second question on reinvestment strategy, the first point I want to mention is we are very cautious on the way we deployed capital. You will have seen that even our cash position has increased. Why? Because we always want to look at the risk-adjusted return. And what do we do to do this? We have done a couple of key elements. One is to continue to selectively invest in investment-grade with high-quality names, and this has been very efficient. Our team has done a wonderful job on this first point. The second is to continue, as we said before because our strategy is to be resilient whatever the market situation is in real assets. And on real assets, we have seen some quite big dislocation, both on the private equity side as well as on the private debt side. And this is all across the different geographies. And for us, this is for an opportunity to even accelerate the deployment. But again, being very cautious on risk and liquidity, which is a key element. So this is to answer your second question. The third element, I will answer as well on the asset management side. We have said that our projection to deliver EUR 350 million by 2021 would be quite linear, but there is some seasonality that comes from the second point I mentioned just on your question is that we deploy on the real asset. We do have commitments. We do have fees that are captured at different point of time. There is a seasonality. That is usually the second quarter as well as the last quarter of the year, we have a bit of a pickup on the fees. So this is to understand this. But at the end, why we've been resisting fairly well is that asset mix, that is not just third party, but the asset mix we have is today, a majority of fixed income products. And obviously, with the yield compression on government bond, this has been helped -- enabled us to also benefit from a bit of a market uptick on the -- on our fixed income portfolio, which, therefore, gets more fees.

Can I just -- just to clarify, the reinvestment rates that are cited, I think, is 1.3% in both life and nonlife, I think. Is that the average for the half year? Or is that the kind of spot position?

It's the average -- to answer your question, it's 1.4% on the life side and 1.3% on P&C.

So I guess it may have come down a bit by the end of the quarter, given what's happened to spreads in [ history ]?

It depends, again, on the speed of deployment on the real asset because this is a bit more of a slow burner compared to the situation we have on the rest of the market.

The question is from William Hawkins with KBW.

First of all, thank you for the extra clarity on the COVID losses on Slide 10. Apologies if I've missed this. But with regards to the EUR 87 million in nonlife, could you give us the breakdown of that between the gross items? Because presumably, you've taken travel losses which are a negative, but then you have the benefit of frequency that we've already talked about. And I'm not sure what the 2 opposing numbers are getting to EUR 87 million. So that's question one, if you could tell us the loss versus the frequency gains. Secondly, could you update us please on where the average guarantee has got to in your life and force portfolio? I'm sorry if I'm out of date. But I think the last time you published, it was at last year's may Investor Day when you talked about 1.2% in 2018. I'm sorry if I missed it at the end of last year. But could you just give us an update on where that average guarantee has got to? Presumably, it's not changed much. I'm just assuming it may be down a little bit, and I would like to check. And then lastly, could I ask you just to comment a little bit more on your dividend outlook? Your formal comments are reassuring with regards to the second tranche. But you are being very clear that, that depends on the norms and regulatory recommendations concerning dividend payments. And as far as I can see, the outlook for that is still very uncertain. And if the banks are anything to go and buy it's still quite a challenge. So I appreciate that you guys, in terms of your numbers seem to be screening fine against your own assessment of risk. But I'm not sure where you think you are with regards to the overall regulatory environment.

Thank you. Cristiano, I suggest you take the first question on the detail around the COVID impact on our P&C operating. And if you can take also the second question on the average guarantee. And then Philippe will take the dividend question.

Yes. So the EUR 87 million, clearly, this is an estimation and has been done accordingly to a methodology compared to our budget expected point, which is a fair point to be clarified in explaining you how we did it. But basically, the EUR 87 million net benefit comprises around EUR 70 million direct claims, both travel and business interruption. And then we have a figure of lower volumes, which is having a negative impact of the order of EUR 100 million. And then this goes on the positive side with the lower claims frequency due to the reduced activity in -- particularly in motor. So the net effect of this is bringing a positive EUR 180 million between negative volumes part and positive effect on technical profitability. And then you have another delta between this EUR 180 million and to get to the EUR 87 million, which is a combination of lower income from regular income, especially dividends -- less dividends in the first half of the year concentrated and having a higher impact on a pro rata basis because it's on half year and not on the full year but -- and then other operating costs coming from COVID-related initiatives, which are not included in the technical results, but are mainly related to the support of the business given for the operational functioning during this very complex moment. Second point related to this is that we are in between 1.25% to 1.3%, in that range, in the middle of that range, that should be the expected average range -- rate guarantee you have on our life book. And this will proceed in this way according to the transformation of the lower guarantees coming from the new business that we underwrite, which are done also in some cases at negative guarantees. Don't forget -- don't focus only on the average guarantee of the book. Take, for example, into account, that 27% of the saving business and done in Italy in the first half has been done with the only debt benefit guarantee, and not a financial guarantee related to that, which is bringing further down the strain on the capital consumption of the saving business. We will clearly update you with the detailed figure for the year-end figures.

Philippe?

Thank you. Thank you, William. As approved by our AGM in May, the second tranche of the dividend is to be paid by year-end, and it's subject to the Board's verification. The Board will be held on November 11. And the Board will check the compliance with limits set by our group's risk appetite framework as of September 30 as well as the compliance with the regulation and with the recommendations of the regulator. So nothing new.

If I may come back -- sorry, my question was more on the last bit about whether you think the regulatory environment has evolved?

As far as I know, the regulatory is still in the same mood, which is to recommend an extreme presence in the way we manage capital and dividends.

The next question is from Michael Huttner with Berenberg.

Okay. And I have 3 questions, 1 on the numbers. And I'm really sorry, I didn't follow the -- precisely the answer you gave to Will on the claims and the impact in nonlife because I came up with a negative figure in total, and clearly, it's a positive EUR 87 million. So I just wondered if you could help me on that. And then you talked about the cash position and can you update a little bit on what it is? And what the cash flow you see for the whole of the year, given your target of the mid-teen, I think, over EUR 7 billion over 3 years. And then the last point, I just wondered if you could talk a little bit more about Cattolica. I noticed you mentioned it as both a financial and a strategic investment. And I just wondered if you could kind of give on industrial investment, give a kind of feeling where exactly it lies. Is it part of your budget of around EUR 4 billion of deals? And how do you see it developing?

Thank you very much, Michael. I suggest, Cristiano, if you can take the first 2 questions, and then Philippe will take the final one.

For sure. So Michael, sorry, not for being clear. I wanted to highlight also the thing -- the claim. So the technical profitability is impacted at this claim. I just gave you a further information, which is within the positive result of claim. We had an impact of EUR 70 million from travel and business interruption. So that -- you have a view of what was the impact. But at the end of the story, we had a positive impact in technical profitability for EUR 275 million and then a negative impact for volumes of EUR 100 million, which is netting out to get the EUR 180 million coming for the combination of premium and profitability overall. And this is the EUR 180 million. From EUR 180 million, EUR 87 million, you need to deduct lower income for dividend, which we did not receive from equity participation in the first half, which is even more impacting pro rata. And second, some initiatives, which are not accounted in the technical results. So you don't see them in the combined ratio final figure but are there to support the functioning of these complex moments of specific COVID environment to give to the network and the operational and the agents and all the distributors the support needed in order to function and produce at the end of the story, what, in my personal opinion, is a very good result in -- even nonlife collection, as you have seen. Second point, cash. Cash is at a strongest-ever level. I recall you that we paid in May the first tranche of the dividend and notwithstanding that last time we talked, I told you that we had more than EUR 4.1 billion. I can confirm you that we have a very healthy level about that one-off cash, which allows us to fulfill cash and capital flexibility in such an important and uncertain moment, which is one of our key assets, in my opinion, reaching and reducing a lot of uncertainty coming from the future. I hope I gave you clarity.

Can you talk a little bit about the cash flows? Because obviously, the regulators has been...

Sorry, sorry, yes. Michael, I'm getting old.

I'm almost your age.

I confirm you that in -- with the last cash flow or accounted for remittance in the first weeks of July, we are above the 90%, close to the 95% level of total remittance expected for 2020. Now what is missing basically is some Central Eastern Europe entities in regimes which were quite strict. But we hope that due to the healthy level of the solvency of these subsidiaries and the liquid position, we hope that after this summer break, we will get more clarity also from the answer of the regulator. So we are very well positioned to fulfill this 2020 remittance pattern.

And the position in cash now, you're saying it's higher than in Q1, even after paying that first tranche of the dividend?

No, it's higher -- it is higher and at healthier level. So this is bringing us the confidence. Don't forget that in July, we spent some money for the liability management exercise. So it is higher even though we did that. Okay?

Philippe, over to you for the Cattolica question.