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

Good afternoon. I'm the conference operator for Chorus Call. Welcome, and thanks for being with us on the Generali Group 9 Months 2020 Results Conference Call. <<operator_script>> Right now, I'll hand the conference over to Mr. Philippe Donnet, Group Chief Executive Officer. 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.

Operating results came in above EUR 4 billion, which represents a 2% increase compared with a year earlier — and for the group, last year set a record where operating results are concerned. Despite the interest rate environment staying persistently low, our capital position remains very strong, with a solvency ratio of 203% as of the end of September, the highest among our peers. It matters to note that this figure comes after deducting the full 2019 dividend as well as accruing pro rata dividends for 2020. At the holding company, liquidity has never stood higher, and executing our strategy stays our priority, along with making sure the group remains strong, resilient and focused so it can meet the needs of all stakeholders — and in particular reward shareholders with fair cash dividends as soon as we are permitted to do so. With that in mind, Generali's management stays committed to its dividend policy and, in particular, to delivering on its EUR 4.5 billion to EUR 5 billion range for cash dividend payments across 2019 and 2021, subject, obviously, to current regulatory decisions being eased. Please note that during this call, our focus will be on questions concerning our 2020 9-month figures and the information contained in the press release we published today.

We’re really looking forward to addressing all your remaining questions at our Investor Day next week, on Wednesday, November 18. Many thanks for your attention — Frédéric, Cristiano and I are now ready to take your questions. Thank you.

Operator, please go ahead and open the line for questions.

<<operator_script>> Our initial question comes from Michael Huttner at Berenberg Bank.

I have 2 questions, and honestly both are pretty straightforward. The first concerns the dividend. Looking at the screen at this moment, Poste is up 3% while Generali is down 1%. My feed is delayed, so — and I'm not claiming — it's simply what the screen shows today, and who knows what else is going on. But clearly, in my view, Poste pays a dividend and Generali does not. I was somewhat puzzled when you brought up the dividend — when you basically extended it all the way to 2022, meaning payable in 2022, by mentioning that EUR 4.5 billion to EUR 5 billion range. So my real question is: how likely do you think the regulator is to say, fine, the 2020 dividend can be paid in '21? And what's the likelihood that anything remaining, including your leftover 2019 dividend, gets continually deferred, and even the 2020 dividend gets pushed out as well? Then a second, really simple question: could you say a bit about the Switzerland impact? Are there any further items like that in your portfolio?

And how many did you bring in for Q2 -- Q3?

I'd like our group CEO to respond regarding the dividend, and for Cristiano to speak about Switzerland. Thank you.

Michael, Frédéric here. Your question about the regulator is a really difficult one. What I mean is, we think we have — as Philippe said — every prerequisite needed to pay the dividend: solvency, liquidity, and resilience of the operating result. The decision by our regulator, IVASS, is that we are not permitted to pay the dividend, and the reason given is macroeconomic. There is nothing further we can say about it. What I mean is, I can — at this point I think you ought to talk directly to the regulators, if I may put it that way. We — so we — but from where we stand, we are confident, and we believe every prerequisite is in place for paying the dividend.

So I guess the real question is: Poste got the go-ahead and you didn't. That's the kind of thing where you think, hold on. That's what — that's the reason — which is what struck me a little.

Just to be clear, though—IVASS's ruling applied across all Italian markets. So it wasn't a decision aimed specifically at Generali.

All right, and do you figure they’ll reconsider?

Philippe here. Perhaps I ought to say a few words about this, since I clearly had some dealings with the Italian regulator. Naturally, I let him know that the decision had caught me somewhat off guard, because, as Frédéric mentioned, it rests solely on macroeconomic grounds. It bears no relation to where we stand — our capital and cash position, which they acknowledge is absolutely excellent. That said, they also informed me — and this was encouraging — that they do not support the same dividend restrictions applying in 2021. That is what they told me a couple of days ago. As you know, a great many regulators are involved. The local regulators, EIOPA as the European regulator, and also, as I mentioned, ESRB. But without question, the Italian regulator does not favor maintaining these restrictions for 2021. And I believe that matters, and it is a hopeful message.

Michael, this is Cristiano. On your second question about how Switzerland affected the third quarter, let me just confirm again the trajectory we expect, which we already gave in the half-year presentation: for the whole of 2020, the reserve contribution should land broadly in the ballpark of EUR 600 million. And let me remind you that part of that contribution won't be tax deductible. That's the reason you can also see this effect on the net figure.

All right. But naming the Q3 numbers outright isn't something you could do, is it?

Yeah, we're pretty much on target — not far off, somewhere between CHF 450 million and CHF 500 million for the allocation.

Our next question comes from Peter Eliot at Kepler Cheuvreux.

Starting with the first one, if you could provide numbers — well, I’ll ask again, is it possible to get the expense ratio? Or, if you’d rather not disclose that figure, any indication of the expense savings or which direction that’s heading would be great. Then the second question: organic capital generation appears to have come in at roughly 6 percentage points during Q3 on its own, before dividend. That’s clearly a strong figure. I’m curious whether anything specific is pushing it to what may be a stronger level than usual — stronger than normal? And last, I realize this may not be the right moment to raise it, but we’ve seen some M&A activity lately. I’m wondering what your thinking is on the prospects for putting some of the budget you have to work at any point? Could you comment briefly, in a general way, on the outlook and the environment there?

All right. For the first question, I’ll have our GM respond; for the second, our CFO; and on the M&A point, our Group CEO. Thanks.

Peter, regarding the expense ratio — first, in absolute terms, our expenses went down by slightly over 2.5%. And we think a portion of that reduction, which stems from the new way of working, will persist over the long term. When I look at the expense ratio, it's falling by 0.4 points. So at the end of September last year, it stood at 27.9%, and it has now shifted to 27.5%. Cristiano, on capital generation.

Yeah, Peter. On capital generation — you basically had it right — we're nearer to 5% than to 6%. What's driving that is mostly a really strong best estimate combined ratio in non-Life, plus a 4.5% new business margin on Life in the third quarter, which also gives us very healthy capital generation production looking ahead.

Let's turn to M&A.

When it comes to M&A, I'd say the framework guiding what we do remains sound, on both the financial and the strategic side. In fact, we've been fairly busy on the M&A front — not by way of any single huge deal, but as I've always stated, our current priorities were small and medium-sized acquisitions. That's exactly what we've been pursuing, entirely consistent with our strategy, so as to reinforce our market position in countries where we already operate, particularly across Central and Eastern Europe. We acquired Adriatic Slovenica. In Poland, we acquired Concordia. In Portugal, we acquired Seguradoras Unidas. Today we rank as the second player in Portugal. Prior to this, we held a corner position in Portugal. So the situation has been transformed entirely. We've also been rather active in asset management, with the purchase of Sycomore and of Union Investment in Poland too. So we've been operating entirely within our strategic and financial framework. Financial resources for acquisitions remain at our disposal, without question. And what's new, I'd say, is that the COVID-19 crisis may open up fresh opportunities for us that previously would not have been possible. So the good news, I think, is that we still have substantial resources available for M&A.

New appealing opportunities are going to come our way, and we'll stay active in pursuing them. At the same time, though, we'll remain—as I've consistently put it—disciplined. So our strategic and financial framework will be upheld, while we also stay very opportunistic.

Our next question comes from William Hawkins at KBW.

Starting with the top-down question. You mention pretax operating results being up 2% at the 9-month mark, yet you're still indicating a decline for the full year. From what I can tell, most of the drivers you cite remain fairly positive going into the fourth quarter. So what's the missing piece — what's the large negative in Q4 that swings you from up to down? Or is your guidance simply on the conservative side? Then the bottom-up question, which ties in somewhat. Your investment margin for Life came in at just over EUR 700 million in the first half, so roughly EUR 350 million per quarter. Can you indicate how that number moved in the third quarter? And what's your sense of where it goes from here? Because obviously COVID is weighing on it, and we should treat that as one-off. But low yields are also hurting it, and those may prove more enduring. So relative to the EUR 700 million from the first half, I'm not sure — is that a base off which we climb again?

Or is it just continuing to grind lower and lower from that starting point?

I’ll have our CFO respond to those questions.

William, on your first question, yes, that guidance still stands. Given the volatile environment we're in from this second wave of COVID, I'd say we've been prudent, and that has to be factored into the technical analysis for the final year as well. On the Life investment margin, what's involved is mainly down to the investment margin effect in the third quarter, which was also hit by the additional allocation we made to the guarantee reserve for our Switzerland operation. And don't forget, that's also been combined with some effect on our recurring investment portfolio, along with the fact—don't forget—that there's also the impact of private equity results, which are now allocated in the private equity segment, but later can be and will be allocated, through the internal dividend, to the operating result contribution of Life and then consolidated and netted out. So clearly, there's an equilibrium among these factors as well. I hope that gives you more clarity, William.

Yes. And if I could just add one more thing. Again, on the top-down guidance and your combined ratio, is there any reason to think there will be some kind of true-up volatility as the year comes to a close? Or, since it has held at a fairly steady level through the first 9 months, can we carry that through to year-end?

William, I can handle that one. We’re not anticipating any meaningful effect on our combined ratio from the second phase of lockdown. It was excellent through the first 9 months. And once more, there’s no other significant impact expected over the next 2 to 3 months.

Our following question comes from Farooq Hanif at Crédit Suisse.

First off, could you expand a little on what's behind that really impressive asset management number? You mention a disciplined approach and leveraging the multi-boutique model—but what does that actually mean in practice? Is it revenue, is it inorganic, or are there some cost elements involved? Second, I'd like a bit more detail on the private equity dividend within the holding result, and how we ought to think about private equity dividends going forward. And then finally, what can you share with us at this point—or what are you prepared to share today—regarding the additional arrangements you will have, or already have, with Cattolica beyond simply the stake in the stock? By that I mean the reinsurer, and I also mean asset management.

For the first question, I’d like our GM to respond; for the second, our CFO; and on Cattolica, our CEO. Thank you.

Farooq, regarding asset management, you're correct that the result is really strong. And incidentally, we're confirming our 2021 target. I'd say this comes from a combination of various factors. First, third-party money inflows were again solid during the quarter. So we brought in more than close to EUR 4.5 billion of new money from third-party asset management. But beyond that, 2 important factors stand out. The first one, I mean, is that our cost is extremely low, and we've already disclosed this, a cost much lower than peers globally. So our asset management business has excellent margins. And the second factor is that we've succeeded in doing what we had planned, which is shifting more of our unit-linked business into our internal funds. And this is something we had planned, this is something we've realized, and we're close to our target on this. So all of this combined, and especially the low cost, leads to very good margins.

Cristiano, thanks for that question, Farooq. On private equity, let me give you a bit of guidance on how to think about it, because in my view this is a very, very, very well-targeted point. And I appreciate you raising it, because our private equity portfolio has for many years been run in a fully centralized manner, and that has let us be very selective. Just so you know, by the way, this portfolio carries a 13% IRR and consistently delivers solid results. Obviously there is some seasonality and volatility around it, given the nature of private equity. What matters to understand is that we hold different vintages with different seasoning. Once a private equity investment winds down and the gain is realized, you see the impact within the holding and other segment in private equity, and that is the allocation. Then, once the investor — which is the company, whether the holding itself or a life or non-life company holding its share of this investment — gets a dividend from that result, we then have the effect of the dividend payment, which gets accounted for and helps in Life to support the investment margin, and in non-Life to reach the investment result, and this is netted out via a consolidation adjustment.

Looking ahead, since our approach of shifting capital into real assets—private equity included—is delivering results and will continue to do so over the longer term, you should anticipate a larger impact from dividend payments, and therefore a related consolidation adjustment, as well as an increasing contribution from private equity, given the character and the seasoning of those holdings. I hope that gives you somewhat more clarity.

Let me make sure that point is also really clear. So a portion of this PE dividend in the consolidation, along with the share involving Life, does go to the policyholder too?

Right. And once we show you the result, that’s already factored in, because when we work out the entire impact on the operating and net result, it’s already reflected after what’s called the fair policyholder liability — meaning the number we’re presenting has already been netted out for this. The only effect will be the netting of the dividend in the consolidation, but the result presented today already accounts for that effect. Hope that was clear.

Yes, that’s clear.

Turning to Cattolica — Philippe here. Cattolica represents a genuinely strong deal, both financially and strategically. As you're aware, the capital raise earmarked for Generali has now closed. That leaves us holding 24.46% of Cattolica. Beyond that, we have an industrial and strategic partnership covering asset management, Internet of Things, health insurance and reinsurance. Through this partnership, significant value will be created for — I'd say — both sides. So, to repeat, it's a solid financial and strategic deal. Furthermore, under this agreement — the strategic one — we're likewise open to exploring what the future holds together, I would say.

Let me just jump back in briefly on asset management. When you’re persuading life insurance clients to shift into the unit-linked funds, what portion of that is actually supported by the performance?

What portion of that? I didn’t catch the question. What amount of that?