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

Good afternoon. I'm the conference operator for Chorus Call. Thanks for being with us, and welcome to the Generali Group call covering Full Year 2020 Results. <<operator_script>> Right now, I'll hand the conference to Ms. Giulia Raffo, Head of Investor and Rating Agency Relations. Madam, the floor is yours.

Thanks, and hello to everyone joining us. Before we start the Q&A, I'd like to pass things over to our Group Chief Executive, Philippe Donnet, who has a few opening remarks. Many thanks.

Thank you, Giulia. Good morning, everyone, and welcome as we present Generali's results for 2020. The COVID-19 pandemic has turned out to be the most severe crisis since World War II. Against that backdrop, our group delivered excellent financial results showing how resilient Generali is, in terms of both technical excellence and capital strength. Because of our strategic positioning and our agility, we were able to steer through the crisis, and we continue to do so, from a position of strength. We also had digital and technological platforms ready to keep the business running and to serve our customers even during the toughest moments, which reinforced our role as a lifetime partner. Before we begin the Q&A session, I want to open with 4 key messages that best capture how we performed in 2020. First, for a second consecutive year, we recorded an operating result at an all-time high of EUR 5.2 billion, with strong contributions from P&C and Asset management. That achievement is clear proof of how solid our business model is and of our diversification. Second, even with interest rates persistently low, we kept our capital position strong, with a solvency ratio of 224%, stable year-on-year, which confirms our excellent standing as best-in-class among our peers.

This outcome was also made possible by our record capital generation of EUR 4 billion. Third, given these achievements, we will put to shareholders a dividend per share of EUR 1.47, divided into 2 tranches. The first tranche of EUR 1.01 for 2020 is to be paid this May, more than 5% higher than last year. The second tranche of $0.46, tied to the second part of the 2019 dividend that we had to retain, will be payable in October should no supervisory recommendations stand in the way. Lastly, at our Investor Day last November, we reaffirmed our full commitment to the targets of our 3-year strategic plan Generali 2021. Our confidence in execution remains very high. And the results announced today show that we are well on track to deliver on these targets. Thank you, again, for your attention. And now Cristiano and I are happy to open the floor for your questions.

Thanks, operator. Our first question comes from Andrew Sinclair at Bank of America.

Three for me, if that's alright — 2 on P&C and one on holdco cash. First, it's clear you had a really strong year in P&C even with lower reserve releases. I was just wondering about that: have you actually raised the buffers in your P&C reserves? Second, on P&C pricing, I'd really like to know if you could update us on your thinking for your key markets, and in particular, how much of the 2021 frequency benefits do you think will get competed away through pricing? And the third question: really strong cash remittance in 2020. I was just wondering whether there's any guidance for 2021. And could you also update us on holding company cash balances? Right now it feels like that must be a pretty strong number.

Thanks a lot. I’ll have Cristiano address your question regarding the PYD and the holdco cash. After that, Philippe will respond to your question on the P&C outlook.

Hi, Andrew. Now, on prudence and how our P&C business is developing — first, I'd like to point you to the best-estimate view, which shows up in the capital generation piece, where the P&C contribution basically almost doubled year-on-year. As for our prior year development, we said already at the half year and in the 9 months results that this level isn't the recurring level you'll see going forward. So it will move back more toward a normal level, similar to the previous one you've seen. I'd also like to draw your attention to the fact that our best-estimate liabilities have always been assigned very prudently. And as more time passes, each year we get some positive change coming from best-estimate assumptions, which means we were underwriting prudently, and this is progressively reflecting out of that. That said, there are other nontechnical items whose prudence was there on the IFRS results, not reflected in the best-estimate liabilities, but which are on the IFRS balance sheet.

Regarding the P&C business, several distinct effects come into play. Clearly, the 2020 lockdown benefited us — it created a positive one-time effect on claim frequency within motor insurance. And I'd note that during 2021, given partial lockdowns in certain countries or cities and curfews in certain countries or cities, motor insurance claim frequency is going to stay rather low. Still, that remains a one-time effect. Conversely, we've seen some inflation in motor and spare parts prices. So this — strictly speaking, this is why prices on the motor insurance business need to go up. But local competition matters. In certain countries, competition is fiercer than in others. So again, your ability to set prices, your pricing power, rests on 2 things: how good your distribution is — the more control you have over distribution, the greater your pricing power. That's something I've said consistently. And beyond that, it also hinges on your market share and your market position. At Generali, we've always stayed consistent on this. We have strong proprietary distribution, and that boosts our pricing power. And we're aiming for an even stronger market position and market shares across most countries, particularly in Europe, which will push our pricing power up further.

That said, when it comes to retail insurance, competition is fairly intense across the board. The picture differs in large corporate and commercial business, where conditions are tightening considerably as a result of the reinsurance market hardening. And as a participant in this market, we will certainly see some upside from that for Generali corporate and commercial.

Cristiano?

Yes. On holdco cash — at the end of 2020, our holdco cash position stood at EUR 4.76 billion. Let me remind you that this figure includes the retained $0.46 dividend that wasn't paid at year-end '20, and that has been reported this year. So when you factor in how remittances evolve and the 2021 guidance, which should remain at the EUR 3 billion, EUR 3.1 billion-plus level, you arrive at a final-year cash level that is stable to slightly higher than the 2020 level, because you have to keep in mind that we'll be spending the EUR 724 million catch-up on that $0.46 we mentioned earlier.

Solid figures.

Peter Eliot from Kepler Cheuvreux has the next question.

I have a few questions that are pretty similar to Andrew's, actually. First, on cash: at your 2018 Investor Day, you set a target of EUR 3 billion to EUR 4 billion for capital redeployment. Given the very strong figures you're reporting now, my guess is that considerably more than that has become available. And obviously, we're in the final year of the plan. So I was wondering whether you could remind us how that has been used so far, and whether there's any update on plans for what remains. Second, on non-Life prudence, there was a very clear answer on the PYDs and so on. I'm just wondering whether you would say you've also been quite prudent in setting your current year loss picks given the current environment. And maybe a third question: you mentioned in your transcript the joint venture with Accenture. I was wondering if you could talk a little bit about the benefits that might bring, and also the associated costs.

I'll take the first question, and then Cristiano will add some more detail. Essentially, up to now we have been investing and have redeployed EUR 1.8 billion in what I would describe as small and medium-sized acquisitions. By the way, the majority of the companies we bought have already been integrated. The most recent one was AXA in Greece. As soon as closing happens, we will begin integration. But take Portugal, for instance: notwithstanding the COVID crisis, which hit quite hard, we managed to finish integrating Tranquilidade in almost 9 months. So every one of these acquisitions was completely consistent with the strategy. And integration has gone well. That means we will be able to capture all the synergies we expect from these acquisitions. So under the Generali 2021 plan, we have basically another EUR 2.3 billion left to redeploy. For sure, we are examining opportunities with that same discipline, because absent our discipline we might perhaps have made more acquisitions, but we have stayed very disciplined and we will keep being very disciplined. In fact, we always benchmark -- you need to understand that in our thinking, acquisitions and M&A are not a goal. Acquisition and M&A are the means by which we create value for shareholders.

We always evaluate acquisitions, and we compare them with the alternative of not doing the deal—looking at how much value each path creates for shareholders. So before the year is out, I can't say what we'll do. It comes down to how good the opportunities are and whether they line up with our strategy and our financial discipline.

Cristiano?

Yes, to address that first item, once we factor in every bit of capital put to work, prior to funding the agreed AXA Greece transaction, we'll be at 2.3 to EUR 2.5 billion ahead of that payment. On the second question — whether we'd been conservative in the P&C IFRS accounting — the answer is yes, relative to the prior year. We carried roughly 0.5 percentage points of additional prudence in this year's IFRS accounting. And again, as I mentioned earlier to Andrew, there are in any case other technical — nontechnical items afterward where we likewise applied prudent accounting so that the full operating result would not capture the entire benefit the way it shows up in operating capital generation. As for the third item, the joint venture, we were establishing it, and we did establish it, to create mutual gain through a two-way exchange of knowledge — partly given the progressive aging within the IT department and the need to refresh toward the best and emerging innovation standards — and we adopted this structure so that both sides benefit: knowledge gains on one hand, and on the other, gains for us in efficiency and, let's say, greater efficacy in how we deploy our infrastructure, particularly.

So going forward, that ought to show up as a gradual decrease in certain ongoing costs for our infrastructure once the initial setup is done.

Farooq Hanif from Credit Suisse has the next question.

Great results today. Let me return to holdco cash and capital management. This year I saw notably big upstreaming out of Italy and CEE, Austria, and Russia. Could you discuss what further opportunity exceptional capital management might bring? For instance, did extending the internal model for operational risk open up chances to upstream during 2021 and 2022? Second, regarding the management structure changes, could you say a bit about what you believe was not working well, especially on the ALM side, that should now improve under the new management? And the same question for the Deputy CE role. Finally, I've seen the gap between new business reinvestment yield and guarantees narrow somewhat in Life. So I was wondering what your outlook is for the investment margin, how that will feed through into IFRS going forward, and what worries you about it.

Thanks. I’ll have Philippe respond to the question about the management structure, and after that, Cristiano will take the rest. Thank you.

Thank you, Farooq. Well, to start with, the organization we had before was performing effectively. We didn't make the decision to alter it because it was failing — it was doing fine. And I'd argue the evidence lies in how strong our 2020 results turned out. Still, that doesn't imply that when a setup is functioning well you ought to leave it alone, since there's always room to make something better even when it's working. And to begin with, we're in the midst of a crisis, because in fact the COVID-19 crisis hasn't ended yet. So this organization is more of a crisis management setup, since it's simpler and it speeds up how decisions get made. That's what we need during this kind of crisis period. Then, the asset/liabilities management was performing well. But we want to make it even stronger. Why? As you understand, the financial fallout of COVID-19, with the heavy public debt in most of the countries, adds further pressure on the interest rates. And this matters to us as one of the major life insurance groups. So it's important to be even more proactive. For instance, on the in-force management, it's important to be more proactive on the asset/liabilities management.

Managing liabilities alongside assets is fundamentally important. That's exactly why we've been innovating. We've been innovative—we created a new role, Group Chief Insurance and Investment Officer. By doing this, we'll manage insurance and investment jointly, meaning liabilities will be handled alongside assets. A further motive for this reorganization was to sharpen our focus on the asset management business, since we aim to grow that business further. So having a business unit for asset and wealth management, with its CEO reporting directly to me just like the other important business units, mattered to us. And the third motive was speeding up the digital transformation through this new Chief Transformation Officer position, which brings together strategy, operations, IT and digital. Those are the reasons behind the organizational change.

Thanks. Cristiano?

Yes. Thank you, Farooq, for those questions, and thanks for the kind words. Let's begin with the holdco cash. You're right to point out that Italy and Central and Eastern Europe, Austria, in this case, truly made a contribution, particularly through extraordinary capital management action. Other entities lent support as well. However, the 2 biggest contributors to the EUR 1.2 billion capital management action of 2020 came from Italy and Austria. Looking ahead, are there additional opportunities to upstream more capital through capital management actions? The answer is yes. That said, the answer is not at the same level and not at the same pace. So you should expect, going forward, a lower contribution stemming from the fact that we will complete the vast majority between '21 and '22 of the extra remittance part, apart from the ordinary net result component. So clearly, you should expect something compared to the EUR 1.2 billion this year in the next 2 to 3 years being in the order of slightly less than half of it, EUR 0.5 billion. The third question concerns the new business reinvestment yield in Life. The outlook for the investment margin. We need to understand the effect of what you have seen in the drop.

To start, dividends and rents contributed an 8 basis point effect versus 2020, and in our view that was a quite particular one-off item affecting the total book and the amortized cost return. Next, normal rate dilution will weigh on the outlook, though at a slower pace than the 2019 to 2020 delta you saw. The main reason is that during 2020 we carried out a derisking activity, along with an asset/liability management effect, which I will address later. I also need to remind you of one point: when you look at the average guarantee of the book and of the new business written, that average includes no calculation contribution base from the product — the savings product we sell in Italy, which already accounts for 34% of all savings sales in the group, and which carries no guarantee, only a death benefit. So they are not included in this average. In reality, then, the implied guarantee is lower, let's say, but you can't count on it, because it is not a guarantee. Just a clarification on this point. And looking ahead, on their investment yield in Life, we could expect an amortized return in 2021 that is roughly 18 to 19 basis points lower.

Also keep in mind that we've now arrived at a really key stage in the ALM restructuring and derisking, and this lets us — because of the very strong solvency level and also because of the operational risk gains in the SCR, the solvency capital requirement model — hold a very strong solvency position in the operating entities as well, which lets us eventually handle the possibility of risking or rerisking in a far more, let's say, disciplined manner, since we've built a very solid foundation from which to start growing and add extra profit to support the investment margin. But the fundamental story is that, first, we need to complete our baseline. That baseline is now in place. And at this point we're able to benefit from this new environment, including this higher-yield environment relative to what we had in the plan.

Moving on, our next question comes from Andrew Ritchie at Autonomous.

I’d like to circle back. Cristiano, you brought up the current income outlook. Is there still a headwind in 2021 coming from reduced current income? My concern is especially real estate and, to some extent, equities. I’m not certain about those. Assuming it normalizes in ’21 seems optimistic. Could you just clarify which headwinds remain in 2021 from COVID-related effects as they relate to current income? Second question. Your restructuring charges have come down to a lower level. I mean, you did roughly EUR 130 million in 2020. I mean, over 2 years it has fallen sustainably from the historic run rate that used to be $200 million, $300 million. Is that a new level for restructuring charges, although I’m struck that various new initiatives are being launched? So will restructuring charges rise again in ’21? And the final question, in asset management, the metric that moved in the wrong direction in 2020 was the percent of revenue from external clients, which dropped from 33% to 30%, and you have a target of more than 35%, which implies a pretty substantial increase in 2021 from external clients. What — I think the reason it fell was because you had outflows, but what is the — how do I have confidence you can — the external revenue, is there a strong pipeline?

So how exactly are you going to reach that goal, that specific goal in '21?

Cristiano, the floor is yours.

Alright, Andrew. So I’m with you on that, but the recovery in equities and real estate hasn’t fully played out yet. What I meant was that the 8 basis points of impact in 2020 ought to be smaller in 2021. And keep in mind that we had also begun at the close of 2020 and gradually also a redeployment into what we call the real asset component, which is catching up somewhat, and that also helps support the run rate of the fixed income part, steadily raising the so-called real asset component by — over the last 3 years by nearly 2.5 percentage points in the asset allocation. So that’s the reason why. So we aren’t capturing it entirely, but we are recovering a large piece. And if you’d like, and you’re a derivatives person, if you look at the dividend swap market, you’ve seen that there is a substantial catch-up in the last quarter also across all the financials, which is a positive. Second question on restructuring charges. Yes, they are lower than the historic run rate. I reminded you of what I told you during the — I told the market during the Investor Day in November, there will be something in the order of EUR 30 million less restructuring charges in 2021 compared to what you have seen in 2020.

Number three, asset management. Yes, on that external percentage metric — external revenue — the revenue derived from outside clients declined in 2020. A one-off factor hit 2019: EUR 23 million from a particular one-off tied to a client closing a sale of assets, and that one-off is what produced it. That explains what you see in relative terms. And it's the reason we're confident that in 2021 the mix will hold to the target we already have.

James Shuck from Citi has the next question.

Starting with the first question about own funds generation for 2020, specifically the Life contribution. New business value increased, yet funds generated by Life-owned operations declined. As I recall, it dropped to EUR 2.7 billion from EUR 3 billion. Could you go a bit deeper into the drivers behind that movement? Related to this, on P&C-owned funds generation, I believe you said it doubled during the year, which it did, though the prior year was extremely weak. When I compare P&C owned funds generation against operating profit for 2020 net of tax, those figures are in fact quite similar. And still, your guidance appears to point to P&C-owned funds generation reverting toward the 2019 level. So some elaboration there would be helpful. Next, on SCR release, you provide very solid disclosure breaking down SCR movements, especially within Life for 2 new business and the release from the back book. What I notice is that the release from the back book is moving lower. It has gone from 1.6 to 1.4 and now down to 1.3.

Could you expand a bit on the glide path for that SCR release? That would be useful. Then my last question: I wasn't able to find a date for the new 3-year plan. Of course, it concludes at the end of 2021. And I assume there will be a Capital Markets Day at the end of this year. Philippe, I don't want to take ages, that's all, but I'm just keen to know whether you -- are you going -- still going to be the person who sees the new 3-year plan through? When does the Board sign it off? And is there any pressure to be more aggressive on the M&A side?

James, apologies — we had trouble catching your previous question. Could you say it again, please?

Yes. Of course. It concerns only the new 3-year plan. My assumption is that you'll hold a Capital Markets Day toward the end of the year. I can't find a date for that. But Philippe, I'm wondering whether you're the right person to see it through. Will your mandate run through the next 3-year plan? And regarding talks with the Board, is there any kind of pushback on initiatives, perhaps to be more aggressive on the M&A side specifically?

James, I want to make sure I’ve got the first question right about the new business value contribution — you’re saying yes, new business value is up, but its contribution is down. I think the effect also ties to the fact that you have the real-world versus risk-neutral effect as well, which has to be factored in and which released a positive effect of 3.9%, 4% for us. And on that point, don’t forget there’s also the fact that you mentioned the SCR. So to answer your third question, you also mentioned that the SCR release from the back book is trending down. Why? Because clearly there’s a bigger impact from the ultra-low rates we saw in 2020. So there’s a kind of balancing effect. And despite this, you’ve seen that there is nonetheless a positive SCR release, because we still have EUR 100 million less SCR coming basically from the entire Life part. So that relates to the new business value contribution. And on the SCR on owned-funds generation in P&C compared with the operating result, to be sure I understand, your question is that you were asking about the differences between the 2 and where you’re looking at the deltas, just to be sure I answer your question correctly.

To put it plainly, you appear to be suggesting that P&C's owned-funds generation reached an exceptional level this year. Yet it looks to be roughly consistent with the post-tax operating result. So I'm puzzled as to why it would all at once decline and go back to where it stood last year.

Yeah. Keep in mind that within the P&C piece you're seeing one item — the gap between the real-world view and IFRS and the best estimate. Remember that if you simply blend all of those elements together, I'd agree with you that EUR 4 billion was an exceptional year. And if you look more at a run rate, it lines up better with the EUR 3.5 billion we referenced in 2018 when we laid out the strategic plan.

Yes. Regarding your final question, James. First and foremost, every one of us remains highly concentrated on hitting the goals set out in our present strategic plan, Generali 2021. As you're aware, that plan was already extremely ambitious prior to the COVID-19 crisis. It becomes even more ambitious in the midst of this crisis. And we remain strongly dedicated to reaching the target in spite of the difficulties. So it demands a great deal of focus. That said, we began — we had already begun preparing for the following strategic cycle, though obviously it's too soon to comment on it. We'll present it either at the end of this year or in early next year, as soon as we're ready. I don't anticipate any shift where M&A is concerned. We — once again, M&A is not an objective. It can't serve as a strategic objective. It's a means of achieving objectives, and our approach is going to stay the same — disciplined and opportunistic, meaning we can be aggressive when we believe it's appropriate to be aggressive. So I don't anticipate any disruption on this front. I believe our ambition to become a lifetime partner to customers will remain a good ambition, since we aren't there yet, and we still have efforts to make before we truly become the lifetime partner of our customers.

However, this is the thing that’s going to generate substantial value for shareholders. Now, on the subject of refreshing the Board of Directors: the entire Board is set to be renewed at the general assembly — that is, the shareholders’ meeting — next year. And once that time arrives, our Board of Directors will begin work on the process for renewing the whole Board.

Is there a required retirement age in your case, Philippe?

James, apologies — we couldn’t catch that.