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

Good afternoon. I'm the conference operator for Chorus Call. Thank you for being with us, and welcome to the Generali Group conference call covering first quarter 2021 results. <<operator_script>> Right now, I'll hand things over to Ms. Giulia Raffo, who leads Investor and Rating Agency Relations. Madam, the floor is yours.

Thanks, and hello everybody — welcome to the Generali Q1 2021 results conference call. Joining me is Cristiano Borean, our Group CFO. We're all set to take your questions now. Many thanks.

Our first question comes from Peter Elliot at Kepler Cheuvreux. Please go ahead.

Thank you so much. There are three questions I'd like to ask. First, it concerns competitive pressure in non-life. I believe both of your major rivals in Italy are describing fairly severe price competition in non-life. Reading between the lines and considering your outlook, you come across as somewhat more optimistic. I do appreciate what you said about competitors. Still, I'd like to know whether you can provide a little more detail about what you're observing and what underlies the statements you made in the outlook? Thank you. Second, regarding the non-life investment results, I'm wondering whether you could offer more hints about the moving parts. If I look at your underwriting results, they improved by €19 million versus the prior comparative, yet the operating result improved by €60 million. So I suppose there has been a drop of roughly €30 million in investment in other against what I would have thought was a relatively easy comp — any insights you can offer there would be great? And finally, on asset management, the cost income ratio showed a pretty strong improvement — is that a sustainable figure, or are there any one-offs in there?

Thanks a lot.

Thanks, Peter. Cristiano, the floor is yours.

Thank you, Peter, and hello everyone. So, first point: competitive pressure in the P&C outlook, with particular attention on our Italian peers. What I'd like to emphasize is that the collection figures you saw in the first quarter are quite strong, and they combine both the Motor and the P&C portions of our growth. What's important to understand, though, is that within the Motor segment there's pressure on overall pricing, and this shows up as a drop somewhat above 4% in the average premium for the Motor TPL component — which, yes, having looked at our competitors' figures, is slightly lower, and it ties back to retention and the strategy applied last year. Broadly, on the other component of the second question, the other component in the P&C part, and what the different moving parts are in the investment result versus the other result contribution, I would say that the effect on the technical increase of results driven by the combined ratio is bringing up €73 million out of the growth. And then there's basically a flattish plus €5 million in the investment result.

Then there's a second element — a contribution that's €16 million lower compared with a year earlier. That sits within the other component that falls outside the technical result calculation. What drives it is mainly a small positive one-off on VAT in Central Eastern Europe from 2020, which hasn't been offset by some additional VAT charges in Italy during this year, along with a modest impact from what's known as leasing amortization under IFRS 16 relating to our Portuguese acquisition. Together, those account for the €16 million decline on a comparable basis in that other line item. On your third question — the asset management cost-income ratio — is it sustainable? Keep in mind that in the first quarter of 2021 we have an effect that wasn't present last year, namely the performance commissions: this year we have €13 million of performance commission, versus basically zero, close to €2 million, last year. So clearly there are various effects at play in the cost-income ratio for asset and wealth management in the first part. Both the strong denominator and the fact that, in the numerator, COVID has meant travel and marketing expenses running below the run-rate, which would otherwise have implied a phasing in of the other IT expenses.

So all things considered, it clearly is sustainable. You ought to factor in every one of these moving pieces, and as we move ahead, you also need to account for embedding plus the performance commission, which during last year ran on the order of €100 million. Obviously, that figure has been removed from the year end 2020 number, and we don't anticipate carrying the same level of performance commission as of today, though we could see it last year — at least in the budget we will look at — and clearly this depends very heavily on volatility and on how the market evolves along with our strategies.

That's quite clear. Many thanks.

Let's take the next question.

We’ll take our next question from Andrew Sinclair at Bank of America. Andrew, you have the floor.

Thank you. Good morning or good afternoon, everyone. That was another strong update — nicely done. I have three questions, if that's all right. First, on the Swiss reserve strengthening, I was hoping you might provide a bit more detail: roughly how much of it occurred in Q1 of this year, and have your expectations for the full-year 2021 total shifted compared with your earlier guidance? Second, I wonder whether you could offer somewhat more granularity on the components driving the Solvency II ratio. And third, I'm really trying to understand the underlying progress and how the combined ratio has evolved on an underlying basis. In Q1 2020, obviously, we also saw some COVID-related frequency benefits. I believe prior year development has stayed fairly low. I'd just like to hear how you view the underlying progress — sorry, that question was worded pretty poorly — but some color on underlying progress in the combined ratio would be great. Thanks.

Yes. Hello there, good morning, Andrew. On your first question about how Swiss reserves are trending, yes, certainly, I can give you some detail: during the first quarter of 2021, we allocated roughly CHF75 million, and we're moving ahead more or less in a linear fashion across the year, keeping our cautious stance and reaffirming the amount for 2021 from the November Investor Day. In the first quarter of 2020, the reserving offer was somewhat larger. That figure was a bit over twice this one. So, since the first quarter, as you'll recall, was extremely volatile, we set aside somewhat more. As for your second question, about granularity and the moving parts of the solvency ratio, it matters that you know we had 4 percentage points, nearly a decline, stemming from regulatory changes — which is simply the substitute for a rate cut together with the portfolio shift — and almost 6 percentage points of capital generation, which I want to emphasize, that's €1.1 billion, making up nearly 6 percentage points, while economic variances lifted solvency by roughly 11 percentage points relative to the year-end level.

So essentially, what remains is capital movement, which represents the pro rata accrual of the expected dividend — that's 2 percentage points. The third question concerns how the combined ratio evolved on an underlying basis. It's worth emphasizing that we stated for the first quarter 2021, with COVID stripped out — so excluding COVID, the combined ratio would have come in at 89.7%. So in terms of the evolution, and looking ahead to the next three quarters of the year, particularly the second half, we expect a higher rise in frequency, because in the second quarter we are still seeing extended lockdowns, less intense but still present, in various countries and especially in Germany or France. We anticipate moving in a normal fashion within the corridor of 90% to 92% for the combined ratio, landing at the lower end of that corridor. And please bear in mind that during the first quarter, we had a few natural catastrophes that were lower than average, which also pulled the combined ratio down somewhat by 0.7, if my memory serves, percentage points — 0.9.

Thanks. Apologies — I just want to revisit the Swiss reserve strengthening: so full-year guidance stays the same, correct?

Correct — for the entire year, that figure stays the same. I can confirm that we're talking roughly CHF300 million, as we stated at the Investor Day in November. Even with the improved conditions, we continue to see volatility and uncertainty at this point, so we're maintaining the normalized linear strengthening we announced.

Thank you so much.

Moving on to the next question.

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

Hello there. Could you provide a little more detail on the specific regions or territories where we're driving growth in new business — Life new business? And I suppose I'm just trying to understand whether you'd still consider new business production, I assume, to be somewhat held back by the lockdowns we saw in Q1. So would you expect new business volume to pick up during the year as those lockdown effects fade? The second question, I just want to return to non-Life premium growth — in the outlook you say you expect growth rates to be higher than they were pre-pandemic. I'm still puzzled about what's driving that, because it isn't pricing, particularly for your portfolio. So what is driving the expectation that post-pandemic growth rates will be higher than pre-pandemic? I guess they aren't there yet. But I'm assuming that's something you expect, again as lockdown effects unwind? Thanks.

Thank you, Andrew. So to start with, the growth drivers for Life new business — I can confirm that in April as well, we continued to see a solid improvement in how things are developing, particularly in the unit-linked piece, which reflects a point tied mainly to the fact that people are putting somewhat more to work, the cash they had parked in bank accounts. And that could fuel somewhat more interesting investment once conditions allow. Against our outlook, we remain quite cautious given the uncertainty around how fast recovery will come. But clearly, the countries posted double-digit growth in premium on the preferred segment of unit-linked and protection in the — from the unit business premium dimension. So going forward, you should expect somewhat more focus on unit-linked once the situation holds and develops in a more predictable, growth-driven manner. Our focus will certainly be to steer production, as you have seen, as much as possible toward the super capital-light and the unit-linked product. As for the P&C side, premium growth is higher than the pandemic phase, let's say, potentially in the future and right now as well, we look and look at the figures and we saw also in 2020 that our agents apparently do not appear too much impacted by the lockdown in their sales capacity.

And this is borne out each quarter, partly thanks to the unique relationship they’ve established with our clients, and partly thanks to investment in creating seamless interaction with those clients through what we call the digital approach. The key point is that the drivers include, in certain cases, pricing on particular lines — I’m thinking of France, of pricing in the motor business — and then there’s a fleet agreement we had in Italy with Fiat Chrysler automobile, which is pushing volumes up. And in non-Motor, we’re also seeing good growth in the accident segment. And broadly speaking, people are somewhat more aware following the pandemic, and more aware of protection, provided we see economic recovery emerge afterward, if we Europeans — especially the union — are able to handle growth appropriately so as to support small and medium enterprises. Bear in mind that our mobility business is expanding within the mobility space thanks to our Internet of Things platform capability, which we’re developing not only for ourselves but also on behalf of other peers, as you know, under our agreement with Cattolica, which offers the possibility of giving the client extra assets.

So that's essentially what we see as the driver. And don't forget, we also have fleet agreements, including in Central Eastern Europe, that are very profitable. And we believe that going forward, mobility is a major growth driver in the premium segment, given the new habits and the new way people will bring their experience in moving out as well. Don't — we shouldn't forget, even though for Generali it's a small portion, since it accounts for only 10% of total premium, that growth in global corporate and commercial re-pricing, and that is really re-pricing driven, is important. Just to let you know, our segment, Global Corporate & Commercial, grew by 8.5% as premium growth in the quarter-over-quarter.

Alright, thank you so much.

Let's take the next question.

Moving on, our following question comes from Farooq Hanif at Credit Suisse. You have the floor.

Hi, everyone. Thank you very much. So, the first question is that a number of your peers, I think, are pretty clear about making bolt-on acquisitions and picking between that and buybacks. And I see your capital position as being so strong and so stable. I was just wondering, in the next phase, would it be possible? I mean, would you think about sort of broadening your remit for bolt-on M&A going forward, maybe in P&C in emerging markets? Just curious about your thoughts, because you seem to be putting a fair amount of focus on the boutique asset management strategy, but obviously, there's a wider potential here for you given your platform? And the second question is about acquisition expenses, I mean, you mention in your — in both your non-Life and your Life comments about higher acquisition expenses, is this tied to product mix, or is this kind of a lockdown related investment effect? Thank you.

Hi Farooq. So, a bolt-on acquisition versus a buyback. On our active strategies, as I've mentioned to you on many occasions, let me just remind you that we hold €2.3 billion available for capital redeployment. What's the rationale, and how should we view the alternatives now and going forward? First, we do want to pursue M&A, though not in a forced manner; for us, M&A simply has to be viewed as a means of creating value for our shareholders. Broadly, M&A should be regarded as a way to diversify where our group's cash flow comes from. That means diversifying geographically, but particularly across business lines as well — growth in P&C protection, which, as I remind you, consumes even less capital on the investment side from P&C, and also in asset management, to diversify further. That's how we approach this, in contrast with a buyback, which is in a sense reinvesting in yourselves — meaning the same pie, but fewer people at the party — and that differs from adding a different topping to the cake, which is what we'd like to do, because we believe an M&A strategy, if executed properly within our discipline and our parameters of strategic and cultural fit, does create value by reducing risk on the sources of cash flow. That's our view.

We aren’t ruling out any options, in case we don’t find a future solution — any solution — but please take a look at how we approach M&A in this context. Regarding the P&C acquisition cost, I’d like to remind you that the increase is 0.7 percentage point. That’s mainly down to two reasons: higher commissions, especially in the P&C Motor segment in Italy, where we did the B2B2C agreement as I mentioned earlier and where we also have a fostering in our sale of Motor in the so-called non-TPL components. So the other coverage, like kasko, which is very profitable. So it’s an investment to extract further profitability. And the second part also relates to the portion of higher commission paid in the non-Motor retail businesses as well, to make this growth.

Okay, great. And in Life, it seems similar as well?

Yes. When you say Life, are you referring to the cost of acquisition?

Yes, go ahead.

Yes, acquisition costs in Life are rising for that same reason. We saw robust growth in both protection and unit-linked products. So we’re actively promoting protection, particularly across Asia — don’t overlook that we’re expanding in Asia, and there especially in China, where we don’t apply fair acquisition cost accounting. So the moment you pay for a protection product, it’s embedded in a longer-term premium, and you expense it right away. So you observe that effect, but at the same time you’re building additional longer-term value, and also, don’t forget we’re making further pushes to grow the unit-linked business at a double-digit pace, just as we’ve been doing.

Alright, thanks a lot.

Let's take the next question, please.

Michael Huttner from Berenberg has the next question. Go ahead, please.

Thanks a lot. Hi, Cristiano. Hi, Giulia. I have three quick questions. First, on the Life back-book deals, I was wondering whether you could share what's included in the outlook, and maybe talk a bit about how large this could be or the potential timing? Second, on the fabulous growth in capital generation, so €1.5 billion. If I annualize that, I get to €6 billion. And I think last year, you had €4 billion, so that's a 50% increase. And I just wondered if multiplying by 4 is the right way to look at it or maybe there is some unusually good trends in Q1 I should kind of try and normalize? And the third one, maybe going back to Farooq's question on deals versus buybacks, the sense I had from your answer is that deals essentially a little bit more attractive, because they diversify your business mix and your cash flow, whereas buybacks, as you said, just increase the size of the cake for each remaining holder. But if you could maybe give — provide more of a feel. It's just that we are so close now to the end of your 3-year period and there is still over half of the capital you had originally allocated to deals.

It appears somewhat more probable now than it did previously. Thank you.

Yes, Michael. First question: on Life back-books, where do we stand? As we already highlighted last time, we're working on an extensive analysis, and that analysis has been completed; now we're in the phase of preparing the full set of streams of actions, which also matter for framing not only this year but the future group strategy, as we continuously look at opportunities. Well, what I can tell you is that you shouldn't have any more deals of the size of Generali Leben, which really changed the risk profile of our German subsidiaries, but you may see more smaller PCs that, added together, could anyhow achieve the effect of delivering a positive benefit in the capital tract. It's important to highlight that clearly this has to be managed appropriately, including the fact that in the figures so far disclosed, also on the cash and the free cash after the so-called net holding cash flow, free cash after dividend payment for the future, we did not embed any deal, because clearly this and such kind of deals has to be made at a fair price. So, it's very important to find also the combination between demand and then offer.

Second question — sorry to push back, but it isn't 1.5; the figure for capital generation in the quarter is 1.1. So obviously, annualizing that puts you a bit above last year's number, yet you shouldn't annualize it or simply multiply by 4, since the first quarter of 2021 clearly contains frequency benefits that weren't present in the first quarter of 2020. There has plainly been a shift. More frequency benefits showed up in the second quarter of 2020. So going forward you should certainly land above 3.5, and perhaps you can approach the 2020 level of €4 billion, but it definitely is not 1.5 x 4, both because the figure is 1.1 and because the relationship is somewhat nonlinear. On M&A versus buyback: deals appeal to us more, not necessarily for the sake of doing deals, but for the reason we were examining, as I mentioned — diversifying where the cash flow comes from. To give a pictorial example, we're after the topping rather than letting people be invited as a preference, because diversifying those sources lets us keep building more resilient cash flow generation and cash flow sources across the board for the group, which in a certain sense should be reflected in better value and a better cost of equity, and that ought to show up through this diversification.

So that's the reason we're actively looking for this. I get it — from where you sit, clearly with an eye on the clock, time is running out, but the road doesn't end here. 2021 is still ahead of us. And we've always been very disciplined when it comes to seeking M&A opportunities. So I can confirm to you that our disciplined approach won't change, and we'll keep pursuing these opportunities, because we do believe there are opportunities that this situation could bring to the market.

Thanks a lot, Cristiano. I appreciate it.

Let's take the next question.

James Shuck from Citi has the next question. Go ahead, please.

Hi, Cristiano. Hello, everyone. Good morning and good afternoon. My first question is about remittances, so Cristiano, I believe your guidance was for €3 billion to €3.1 billion in 2021. And when I look at the SFCRs, the foreseeable dividends from the European operations sort of suggest a fair bit less than that figure. I understand there are other elements involved, like holdcos and internal loans and capital distributions. But could you help me bridge from the €1.8 billion of insurance Europe foreseeable dividends plus maybe roughly €300 million from asset management and other toward that $3 billion to €3.1 billion? Is that still on track? And what are the moving pieces beyond those foreseeable dividends? The second question concerns the asset management business. So, I think you addressed the earlier question about the cost income ratio perhaps being a little bit flattered in Q1. You do have an operating margin target above 45%. And it’s been consistently above that in 2018, in 2019, 2020. So, I just wanted to know, is that 45% still a valid number or should we expect it to trend up more toward 55%, which it has been in recent years? And then the final question is a bit more conceptual, about digitalization and some of the benefits that you are experiencing?

It's obvious your networks are performing strongly — they keep selling a lot of the Life products and the P&C products, and on the Motor side it looks like you're gaining share. Presumably the investments you've made are making you more efficient, and that's helping with this. Do you see any reorganization of the agency distribution network coming, as a consequence of this digitization and the trends we're observing through COVID? Thank you.

Hi, James. Thanks so much. My first question is about remittances — I've seen and heard your comments, and first I'd like to confirm two figures. Number one, the full-year total remittance will definitely be somewhere between €3 billion and €3.1 billion. And the second point, which I think may be quite helpful for you: I want to confirm that as of next week — since something is coming — 90% of that total remittance of the €3 billion to $3.1 billion will already be sitting in the head office. Then the remainder, the missing 10%, will be divided evenly between the third and fourth quarters. As for the difference versus the SFCR — unfortunately, we don't publish every SFCR for the companies in the group. As you know, we have regions with many operations that contribute to the final remittance. To take just one example, Central Eastern, where we basically publish only one or two of them, we also have holding companies where money flows from the holding, and in some cases the arbitrage choice between a capital repatriation or a loan repayment is a decision made also considering not only the size of the dividend but the size of the balance sheet in the net result.