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 9 Months 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Philippe Donnet, Group Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning, everyone, and welcome to the presentation of Generali's 2020 9-month results. And before we open the Q&A, I would like to address an issue that is on everyone's mind. As you have seen from our press release, based on the current decision of our Italian regulator to stop the payment of dividends for macroeconomic reasons, our Board of Directors yesterday had no choice but deciding not to distribute the second tranche of the full year 2019 dividend by the end of the year. At this stage, the Italian regulator does not permit us to distribute the outstanding tranche of the full year 2019 dividend. Specifically, we received a letter from our regulator a few days ago clarifying that the application of the ESRB recommendation does not have room for case-by-case evaluation. As a matter of fact, today, our group is sound and solid, and our 2020 9-month results are a further proof of this fact. Even though Generali is strong and has achieved very resilient results, of course, we have to comply with the regulator's decision. Nevertheless, we are very proud of our achievements in terms of maintaining a very strong balance sheet and delivering a resilient operating profit in such a challenging environment. Our operating results of over EUR 4 billion is up by 2% year-on-year, and last year was a record year for the group in terms of operating results. Even with the persistently low interest rate environment, our capital position is very strong with a solvency ratio at 203% at the end of September, the highest among our peers. It is important to note that this is after deduction of the full 2019 dividend and the accrual of pro rata dividends for 2020. Our liquidity position at the holding company has never been higher, and our priority remains the execution of our strategy and making sure the group stays strong, resilient and focused to be able to fulfill the needs of all stakeholders, and particularly to reward shareholders with fair cash dividends as soon as we are allowed. To that end, Generali's management remains committed to its dividend policy, and in particular, to fulfill its EUR 4.5 billion to EUR 5 billion range for cash dividend payments over 2019, 2021, subject, obviously, to the easing of current regulatory decisions. Please note that on this call, we will focus on questions related to our 2020 9-month figures and the information in the press release we published today. We very much look forward to answering all your other questions on our Investor Day next week on Wednesday, November 18. Thank you so much for your attention, and Frédéric, Cristiano and myself are now ready to take your questions. Thank you.

Operator, you can start the questions.

[Operator Instructions] The first question is from Michael Huttner with Berenberg Bank.

I've got 2 questions, one which is really obvious -- well, they're both really obvious ones. So the first one on dividend. So if I look at the screen right now, I see Poste is up 3%, I see Generali is down 1%. I'm delayed, so -- and I'm not saying -- I mean, it's just the screen and today and who knows what else is happening. But -- and clearly, to my mind, it's -- Poste is paying a dividend, Generali isn't. And I was puzzled a little bit when you referred to dividend. When you effectively kind of stretched out the dividend right through to 2022, i.e., payable in 2022, by referring to this EUR 4.5 billion to EUR 5 billion range. So my question is really how likely do you think that the regulator will kind of say, okay, 2020 dividend is okay to pay in '21? And how likely is it that anything left over, even your 2019 remaining dividend, they'll kind of keep pushing out and even push out the 2020 dividend? And then a separate question and really simple one. Can you talk a little bit about the Switzerland impact? Are there any more such things in your portfolio? And what is the number you took in Q2 -- Q3?

I would ask our group CEO to answer about the dividend and to Cristiano talk about Switzerland. Thank you.

Michael, this is Frédéric. Your question on the regulator is extremely tricky. I mean we believe we have, as Philippe mentioned, all the prerequisites to pay the dividend: solvency, liquidity, resilience of the operating result. Our regulator, IVASS, decision is not to allow us to pay the dividend for macroeconomic reasons. We cannot say more than that. I mean I can -- I think at this stage, you should speak directly to the regulators, if I may say. We -- so we -- but on our side, we are confident, and we believe we have all the prerequisite to pay the dividend.

So I suppose the question is really because Poste was allowed and you're not. That's something which kind of -- you kind of think, hang on. That's what -- that's why -- which struck me a little bit.

But to be clear, the decision of IVASS was a decision for all the Italian markets. So this is not a specific decision for Generali.

Okay. And do you think they'll change their minds?

This is Philippe speaking. Maybe I should add a word on this because, obviously, I had some interactions with Italian regulator. Obviously, I told him that I was a bit surprised about this decision because as Frédéric said, it's only based on the macroeconomic considerations. It has nothing to do with our position, our capital and cash position, which they recognize is absolutely excellent. But they also told me, and that was positive, that they are not in favor of the same dividend restrictions for 2021. This is what they told me a couple of days ago. As you know, there are many regulators involved. The local regulators, EIOPA as the European regulator, but also, as I mentioned, ESRB. But definitely, the Italian regulators is not in favor of keeping these restrictions for 2021. And I think this is important, and this is a hopeful message.

Michael, it's Cristiano. Regarding the second question related to the Switzerland impact in third quarter, I just reconfirm you what is the expected trajectory already mentioned in the half year presentation for the full 2020 to be broadly in the ballpark of EUR 600 million dotation of the reserve. I just recall you that some of this dotation will be nontax deductible. That's why you can get also this effect on the net.

Okay. But you couldn't just name the figures for Q3, would you?

Yes, we are broadly in line, not far from -- in between CHF 450 million and CHF 500 million allocation.

The next question is from Peter Eliot with Kepler Cheuvreux.

The first one was just if you're able to give us -- well, again, I'll ask you for numbers, if it's possible to have the expense ratio? Or if you're not wanting to sort of disclose the number, whether you can give us sort of any indications of the expense savings or the direction that's going, that would be great. And the second question was organic capital generation seems to have been about 6 percentage points in Q3 alone, gross of dividend. Obviously, a strong number. I was just wondering if there's anything in particular that is driving that to maybe a stronger normal than -- a stronger level than normal? And I mean, finally, I mean, I know it's not the -- necessarily the right time to talk about it, but we've seen a bit of M&A activity recently. I'm just wondering what you're thinking maybe of the -- sort of the prospects to deploy some of the budget that you've got at any point? Just wondering if you can comment sort of briefly generically about the outlook, the environment there.

Okay. I will ask to our GM to answer to the first question, our CFO to the second and our Group CEO on the M&A point. Thanks.

So Peter, on the expense ratio. So first, in absolute terms, our expenses decreased by a bit more than 2.5%. And we believe that part of this expense decrease, which is due to the new way of working, is here to stay for the long term. If I look at the expense ratio, so the expense ratio is decreasing by 0.4 points. So it was -- at the end of September last year, it was at 27.9%, and it has moved to 27.5%. Cristiano, on capital generation.

Yes, Peter. Capital generation, you almost correctly pointed out, we are closer to the 5% more than to the 6%. The driver are mainly a very good, best estimate, combined ratio in non-Life and a 4.5% new business margin in the third quarter on Life, which is a very healthy capital generation production also prospectively.

We can move to M&A.

Okay. Talking about M&A, I would say the framework for our M&A activity is still valid, both in financial and strategic terms. We've been quite active actually in the M&A, not through a very big acquisition, but I always said that our priorities at the moment was small and medium acquisitions. So this is what we've been doing, fully in line with our strategy in order to strengthen our market position in countries where we already are, especially in Central and Eastern Europe. We've been acquiring Adriatic Slovenica. We've been acquiring in Poland, Concordia. We've been acquiring Seguradoras Unidas in Portugal. We are now the second player in Portugal. Before this, we were in a corner in Portugal. So we completely changed the situation. We've been also quite active in the asset management with the acquisition of Sycomore, of Union Investment in Poland as well. So we've been acting fully in our strategic and financial framework. We still have financial resources available for acquisition, definitely. And I would say that this -- what is new is that the COVID-19 crisis may create new opportunities for us that would not have been possible before. So I think that the good news is we still have significant available resources for M&A. There will be new attractive opportunities for us, and we will continue being active. But we will continue being, in the same time, as I always said, disciplined. So we will stick to our strategic and financial framework, and in the same time, very opportunistic.

The next question is from William Hawkins with KBW.

Top-down question, first of all. When you're talking about your pretax operating results, you're up 2% at the 9-month stage. You're still talking about being down by the full year. And as far as I can feel, most of the drivers you're talking about are actually still quite positive into the fourth quarter. So what am I missing that's going to be the big negative in the fourth quarter that takes you from being up to down? Or are you just being pretty conservative in your guidance? And then I suppose the bottom-up question that's slightly related to that. Your investment margin for Life in the first half was just over EUR 700 million. So that's about EUR 350 million a quarter. Could you give us an indication of what happened to that figure in the third quarter? And again, just what you're feeling about the outlook for that number? Because clearly, it's getting hurt by COVID, which we should think is one-off. But it's also getting hurt by low yields, which may be more enduring. So I don't really know relative to the EUR 700 million you did in the first half, is that a base from which we step up again? Or is it grinding down and down from that base?

I will ask our CFO to answer to the questions.

William, so regarding the first question, yes, we still give this guidance. I think we have been prudent in the volatile environment we are facing due to this second wave of the COVID part, and we need to take also this into account in the technical analysis for the final year. Regarding the investment margin of Life, what is related is mainly explained by the investment margin effect on the third quarter, also impacted by the further allocation we gave to the guarantee reserve for our Switzerland operation. And this has been also coupled, don't forget, to some also effect on our recurring investment portfolio, notwithstanding also the fact that then, don't forget, but there is also the effect of private equity results, which has now been allocated in the segment of private equity and -- but later can be and will be allocated with the internal dividend to the operating result contribution of Life and then consolidated netted out. So clearly, there is an equilibrium also of these factors. I hope I gave you more clarity, William.

Yes. And if I may just follow up. Again, with regards to the top-down guidance, your combined ratio, is there any reason to assume that there's going to be any kind of true-up volatility at the end of the year? Or given that it's been staying at a pretty stable level in the first 9 months, can we take that through to the year-end?

William, I may take this one. We don't expect any significant impact on our combined ratio of the second phase of lockdown. So it had been excellent over the first 9 months. And again, no other significant impact back over the next 2 to 3 months.

The next question is from Farooq Hanif with Crédit Suisse.

Firstly, can you just give us a bit more detail behind the really strong asset management result? You talk about disciplined approach, leveraging multi-boutique. But what does that mean? Is it revenue, is it inorganic, is there some sort of costs? Secondly, can you give us a bit more detail about the private equity dividend in the holding result and how we should think about private equity dividends going forward? And then lastly, what can you tell us so far or what are you willing to tell us today so far about the extra arrangements you will have with or have with Cattolica beyond just the share in the stock? So I'm talking here about the reinsurer, and I'm talking also about asset management.

I would ask our GM to answer to the first question, our CFO to the second and our CEO on Cattolica. Thank you.

Farooq, so on asset management, so you're right that the result is really good. And by the way, we confirm our target for 2021. I think this is a mix of various factors. First, the inflows on third-party money have again been good over the quarter. So we had more than close to EUR 4.5 billion inflow of new money from third-party asset management. But more than that, there are 2 important factors. I mean the first one is that we have extremely low cost, and this is something we've already disclosed, a much lower cost than our peers globally. So we have excellent margins on our asset management business. And the second factor is that we've been successful in doing what we had planned, which is moving more of our unit-linked business to our internal funds. And this is something that we had planned, and this is something we've realized, and we are close to our target on this. So the addition of all of this and especially the low cost lead to very good margins.

Farooq, Cristiano. For private equity, let me guide you a little bit on how you should think because this is a very, very, very spotted on point, in my opinion. And thanks for asking because private equity, our portfolio has been managed since many years in a fully centralized way, which allowed us to have a very good selection. And by the way, for your information, this is a portfolio which has a 13% IRR, which is delivering good result constantly. Clearly, there is some seasonality and volatility around this because of the nature of the private equity. What is important to know is that we have different vintages and seasoning. As soon as private equity investment comes to an end and there is realization of the gain, you see the impact in the part of the holding and other in the private equity, and this is the allocation. Then as soon as the investor, which is the company, be it either holding per se or a life or non-life company having the share of this investment, receives a dividend from this result, then we have the effect of the dividend payment, which is accounted and helps in Life to support the investment margin in non-Life to get to the investment result, and this is netted out through a consolidation adjustment. Going forward, due to the fact that our strategy to redeploy in real assets, among which there is private equity, is paying off and will pay off in the longer term, you should expect more effect of dividend payments, hence, consolidation adjustment related to this, but also a growing result coming from private equity because of the nature and the seasoning of those investments. Hope I gave you a little bit more clarity.

So just to be also very clear on that point. So some of this PE dividend in the consolidation and the share with Life does go to the policyholder as well?

Yes. And when we present you the result, it is already accounted for this because when we calculate the full impact on the operating and net result, it is already shown after the so-called the fair policyholder liability, which means that the figure we are already presenting is already netted out for this. The only effect will be the netting of the dividend in the consolidation, but the result presented already today accounts already for this effect. Hope I was clear.

Yes, clear.

On Cattolica, this is Philippe speaking. Well, Cattolica is a very good financial and strategic deal. As you know, we have now completed the capital increase dedicated to Generali. So we own now 24.46% of Cattolica. And we have an industrial and strategic partnership on asset management, Internet of Things, health insurance and reinsurance. And through these -- this partnership, we will create significant value for -- I would say, for both partners. So once again, it's a good financial and strategic deal. And then according to this agreement, to the strategic agreement, we are also open to look at the future together, I would say.

May I just come back just quickly on asset management. When you're getting life insurance customers to move into the unit-linked funds, how much of that is justified by the performance?

How much of that? I didn't get the question. How much of that?

Sorry, when you're getting people to move into your own boutique funds in unit-linked in Life, which is helping your asset management results as well, how much of that is justified by the fact that these funds are performing a lot better?

I can -- Farooq, I can answer in 2 ways. First, I can tell you that the performance of our boutique over the past few months [ first ] has been excellent. And the second way to answer is that we were very -- and this is something we had already discussed in various roadshows. In terms of percentage of our internal funds in our unit-linked, we were very much below market standards. So we keep in an open architecture model for unit-linked, of course, but we have increased the share of our funds, and we are close to market standards now. But again, I insist on the fact that the performance of our boutiques has been excellent.