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

Good afternoon. I'm the conference operator for Chorus Call. Welcome, and thank you for being with us on the Generali Group first half 2021 results conference call. Please note that everyone is in listen-only mode for now. Following the presentation, you'll have a chance to ask questions. If anyone requires help while the call is underway, they can reach an operator by pressing star and zero on their phone. At this point, I'll hand the conference over to Ms. Giulia Raffo, Head of Investor and Rating Agency Relations. Madam, please go ahead.

Thanks. Welcome to Generali’s conference call on the first-half 2021 results. Joining me are our Group CEO and our Group CFO. Before we begin the Q&A session, I’d like to hand things over to our Group CEO for a few opening remarks. Thank you so much.

Thanks, Giulia. Hi, everybody. I appreciate all of you taking part in today's call. As you noticed this morning, we released our first half 2021 results. These are strong results given a very tough environment. They demonstrate that our present strategic plan, Generali 2021, was indeed the correct plan and remains so. Joining me today is our Group CFO, Cristiano Borean. We're glad to take your questions during the next hour. But first, let me briefly walk through a few highlights from the first six months of the year. To begin, we confirmed strong profitability in our business. Our operating result rose by more than 10% compared with the first six months of 2020, landing at almost EUR 3 billion, and our net profit essentially doubled, coming in at well above EUR 1.5 billion. Our life new business margin climbed 0.73 percentage points to 4.67% in the first half of the year. Our new business value has grown by nearly 30%. In the P&C business, our combined ratio came in at 89.7%, which underscores our technical excellence. Our capital position was very solid, even in light of the uncertain context, with our solvency ratio at 231%. We keep working hard and with strong discipline to finish Generali 2021 and to meet our targets that were announced almost three years ago.

Those were confirmed in November of last year. Meanwhile, my team and I are putting together our next strategic plan, which we will present to the financial community on December 15, opening a new chapter in our group's history. We're eager to walk you through that plan, and for now, Cristiano and I are here to take your questions. Thanks once more.

Pardon me.

Go right ahead. Many thanks. The Q&A portion is now open. Thanks.

Thank you. This is the Chorus Call operator. The question and answer session starts now. If you'd like to ask a question, you can press star and one on your touch-tone telephone. To take yourself out of the question queue, please press star and two. When asking questions, please pick up the receiver. Anyone who has a question may press star and one at this time. The first question comes from Andrew Sinclair with Bank of America. Please go ahead.

Thanks very much, and good afternoon to everybody. I have three questions, as usual, if that's alright. First, I was wondering whether you can provide any color on what July's European floods cost, plus a few details regarding your reinsurance protections. That's the first question. My second one concerns asset management. Keeping expenses flat given that level of revenue growth struck me as really impressive. Do you see any risk of expenses catching up? You're running really far in advance of your operating margin target. Some context there would be really helpful. Third was on Unit-Linked great flows. How much of that do you think was just a catch up from people who've been sitting on their hands during COVID then putting some money to work? Do you think you can achieve similar flows in H2 and into 2022? Thanks.

Hi Andrew. First, regarding the cost of the July European flood — the one that was more concentrated in Germany — I'd like to remind you that our reinsurance treaty structure for this type of event doesn't permit a retention per single event above EUR 100 million. For the group, the net retention on such events is EUR 100 million. There's the installment premium, as with a normal reinsurance contract, when the effect occurred. We're already above EUR 100 million in our estimate. It will be EUR 100 million. As for how our reinsurance protection works at group level against all these kinds of events tied to wind chill, hail, and everything similar in the NatCat category of this type, we're protected up to a EUR 500 million impact as the maximum amount we can retain on the balance sheet as a sum of uncorrelated events. As you know, per single event, we don't retain more than EUR 100 million. That would be the maximum impact module of the installment premium we can get. This, translated only without reinstallment payments, would be 2.4% of combined ratio at maximum from those kinds of events. We're already at — including this July event, summing the one-off at the end of June plus other things that happened — we're at around EUR 300 million of NatCat impact on the balance sheet, which is 1.5% as of year-end premium.

For the first question, the five-year average came in at 1.8%. Regarding asset management performance and cost, you shouldn't use that 45% figure as your starting point. The number we treat as our ambition and our target aligns more closely with the expenses we began incurring in the second half of 2021 for the distribution platform, along with the IT project that will be implemented and progressively rolled out to boost our distribution capacity. You shouldn't focus on that number, which incidentally is also shaped by the performance fees effect, but rather on the long-term picture, including the expenses we'll incur for distribution going forward — that's the one that serves as the target. Third, on Unit-Linked performance: the growth is endogenous and sustainable, even when I compare it with 2019, the pre-COVID period. It isn't driven by any external factor. It truly reflects the strategy, and I'd say this is consistent with the group's capacity to grow. I'll hand over to Philippe for further comment.

We began pursuing this strategy quite a few years back, and thanks to our robust proprietary distribution, we're well positioned to handle the shift in our business mix. That's really what sets us apart. In fact, our net inflow of EUR 6.3 billion after six months is already quite strong on volume, yet it's even stronger when it comes to quality, since it consists essentially of protection and Unit-Linked alone. Clearly, had we been less disciplined, had we lacked such a powerful proprietary distribution, our net inflow might be larger but of lesser quality. That is certainly not the path we've chosen. As I said, the quality of our distribution is what sets us apart. These Unit-Linked figures are entirely sustainable.

Thanks. Let's take the next question.

Peter Eliot from Kepler Cheuvreux has the next question — go right ahead.

Thank you so much. I have three questions too, please. My first was about investment income. I was simply curious whether you could bring us up to date on what you currently expect regarding how investment income may evolve going forward, for both life and non-life — that would be very useful, please. Second, I echo Andrew's remarks on the asset management — great numbers. I suppose the one place where you're a bit behind target is external clients, and perhaps that connects to what you said a moment ago, Cristiano. I was just wondering how you view that target right now and what is achievable. Finally, the third one. I was wondering whether you could just update us on what you are seeing in Italian motor specifically when it comes to average premium trends and pricing trends. Thank you very much.

Hello, Peter. Regarding investment income, let me start by clarifying this point, because when you look at investment income for the half year today, the full allocation of the investment potential of our books isn't visible, due to the effect of the private equity, which we do report in the line holding another business, but it is an asset class in its own right. It is a company. That's why we report it as a company. Then this pays a dividend to the class shareholder, which are the different insurance companies among the group. What you should consider as investment income should also embed, even if there is a time shift between the allocation of result and the payment of the dividend of this extra result, also this component. Please don't forget what I have told you already many times, that you should not consider the private equity as a one-off result. We are already, after almost EUR 7 billion allocation, harvesting at almost double-digit result on the investment, those money put at the service of both our shareholder and our policyholder. This will grow further for the normal increase of the real asset strategy we are deploying, and this will support investment income.

That said, the low-rate environment's natural dilution is going to hit investment income. As you can see from the negative net collection in our saving business, we're at work trying to re-steer that business toward protection and Unit-Linked as well, which means less money available to invest. Broadly, we're pushing Life in this same direction. In P&C we're growing more. In P&C we're growing at a faster pace, so more money goes to investment. Looking at where the money sits — less in Life to invest, more in P&C — for next year we could expect roughly 10 to 15 BPS of yield dilution in current income on the average book cost of our asset, across both Life and P&C. Perhaps skewed more toward the 10 BPS in P&C than in Life. Asset management. The third-party client target, as you know, I think is hard to reach by year-end 2021 when expressed as a percentage. I'd like to stress that in absolute numbers — so the numerator, which was building at that 35, the present level of external revenues in that calculation was exactly coherent with the strategy's number, the numerator.

Obviously, the denominator went up further, partly due to growth in the internal asset and how the market has evolved. As for 2021, we don't believe we'll be able to hit that 35% target. On the Italian motor average premium, what's happening with pricing trends? What we're seeing is that, up to now, in motor TPL there's been a 3.9% decline in the average premium collected, which lines up well enough with our strategy of both keeping the client and growing as well through the fleet business. As you know, we have a major agreement with Fiat Chrysler Automobiles in Italy, which is performing extremely well, also thanks to the MOD development, which is growing extremely fast. By the way, I'll get ahead of the question and potentially explain the higher expense ratio you're seeing as well, because it's precisely the higher remuneration for the MOD line within motor.

That is quite clear. Thanks a lot, Cristiano. Thank you.

Moving on to the next question.

Now we’ll take a question from Farooq Hanif at Credit Suisse. You have the floor.

Hello, everyone. Many thanks. Let me start with Non-Life again. I saw that your reserve release has gone up, yet it remains below the level we have observed since 2016. Given the frequency you are still seeing, which remains low, is there still a degree of conservatism in that? Second, could you discuss what the Cattolica acquisition means for capital? For instance, if this deal proceeded on the tender offer, which diversification benefits might actually support your capital position? Last, since your capital position is very strong and your leverage ratios have fallen to good levels, could you also comment on this: looking ahead in your strategic plan, how likely is it that you could shift toward a strategy of inorganic growth rather than buybacks — something a bit more of a formal policy on buybacks versus inorganic growth — to help use that surplus capital? Thank you.

Thank you, Farooq. On the first question, in P&C, versus the prior year, you've seen a 0.8% increase compared with the first half of last year. I'd like to remind you that if I look at reserve adequacy — the excess of reserving above the best estimate we do on the Solvency II view — it is broadly unchanged, and that's explained by the fact that still in the first six months, we observed a frequency lower than the pre-COVID period in almost all the geographies, and only in the month of June did we start to observe frequency trending to the level of 2019, the pre-COVID one. For example, a country that is still below is Germany, where you see a positive benefit. My message is basically unchanged reserve adequacy. There is an increase in the prior year because maybe you remember last year I gave some guidance of extreme prudence in the prior year allocation due to the uncertainty of evolution and the prudence in the reserving. Second point, related to the Cattolica acquisition, we stated something in the order of 8 percentage points, almost 8 percentage points of solvency percentage point reduction. From the diversification benefit, you would have an increase of the P&C contribution, which diversifies well away, because as you know, the sources of profit in Italy are skewed towards Life versus P&C, which is helping.

In any case, there's going to be a countervailing factor stemming from the BTP holding that sits in the portfolio — up to now that's the biggest sensitivity risk we have, and it offsets the gain. On the cash flow side, looking at the initial diversification inside the line, we get quite favorable diversification coming from P&C. I'll pass it to Philippe to address inorganic versus buyback.

Yes — even with Cattolica included, our capital position is going to stay very strong. As you're aware, we have no obsession with doing M&A at any cost. Over the past few years we've been very disciplined when it comes to M&A. I recall telling many of you a few years back that the sort of M&A we'd favor was small and medium-sized deals, since I liked the build-up strategy — it's a safe one. It brings lower execution risks. We're very good at integrating the company we buy. That's what we did successfully in Portugal. That's what we're doing successfully in Greece. That's what we'll do successfully in Malaysia, and with the other acquisition we made in Central and Eastern Europe. We have another five months before the plan ends, because the plan finishes on December 31st at midnight. We'll stick to our strategy. We'll stick to our financial discipline. Our pipeline isn't empty — we're looking at interesting opportunities, and we'll remain very disciplined and very selective. What matters to us is creating value for shareholders. If we believe that the many opportunities we're looking at are the best one for creating value for shareholders, we'll go for it.

If that’s not the case, then we’ll look for a better use for the extra capital.

Next question, please. Our following question comes from William Hawkins at KBW. Go right ahead.

Good morning, gentlemen, and thank you very much. I’ll take the first question, please. Cristiano, I completely grasp the idea behind what you said regarding private equity. Could you help me just clarify the figures, please, on how much private equity affected other operating results in the first half, and what the first-half and second-half numbers were last year? I follow the point; I’m simply not fully clear on the figures. Second, please, on the investment result, obviously the challenge for us is that starting in the first half of this year there are offsetting factors. You have lower yields, the markets have improved, so your investment result has in fact risen, even though we are discussing yield compression. I just wondered, again, since you are also re-risking the portfolio, and I’m not sure how much of the life business versus non-life benefits from that. The brief question is, you have slide 13 showing that your investment result was EUR 800 million in the first half of this year. Can I simply double that to reach the full year? What am I assuming about next year? Is it fading? Might it be rising because you are re-risking, or do I keep it flat?

Sorry to ask again on the final question — apologies if this has already been disclosed somewhere — but on slide 30, where the roll forward of your Solvency II ratio is shown, given the debt raising and all the rest of it, could you just remind me how that 47.7% splits out by tier, please?

Right, William. Let me start with the numbers. In half year 2020, the operating result contribution from private equity came to EUR 90 million. And as I reminded you, those amounts are subsequently distributed as dividends on the investment portfolio. Half year 2021: EUR 300 million. At year end 2020, the operating result contribution from private equity stood at EUR 260 million. That gives you the comparison. Looking ahead, as I mentioned, you should anticipate this type of contribution trending — as I said — at a contribution of almost double-digit % on the investment we hold. I hope that clarifies those first three figures for you. Turning to the investment result, I take your point regarding the lower yield versus the re-risking of the portfolio. How much of that is life? We raised our equity position, in both life and non-life, helped by a step-by-step increase in our private equity, and we are also growing private debt. That relates more to our ability to source the investment — the pace depends more on that than on the willingness to invest. We are progressing toward the target. If I think about the half year 2021 life result, it should be doubled. I believe we are broadly in line with that trend. For 2022, this will likewise depend on the portfolio's capacity.

To begin with one side, growing on the sizes, since you essentially have a 3% rise in the technical reserve year-on-year, and the structure is moving in that direction. Thanks to the re-risking, we are working precisely to use some solvency points to lift the investment result and slow the pace of dilution. Let us put it pictorially. The battle is precisely to pull up the downward trend, thanks to the real asset strategy and the small re-risking, because the natural coupon of maturing bonds sits closer to the 3% side than the reinvesting amount, which is nearer to 1.3, 1.5. Turning to your last question on Solvency II, the breakdown of the 47.7 tiering is — for your information, since you mention that we issued subordinated debt — I would like to remind you that since we treat this EUR 500 million issued in the last week of June as a refinancing or pre-financing of the 2022 maturing, these are not included in own funds. We do not double count, let's say, at least at Generali, we do not double count the pre-financing. It is excluded from the tiering you see. The Tier 1, the 47.7 are EUR 41.6 billion of Tier 1, of which EUR 2.1 restricted, EUR 6 billion of Tier 2, and EUR 0.2 billion of Tier 3.

That's how the EUR 47.7 billion gets tiered.

Alright, Cristiano — that was a solid test. I appreciate it.

Next question, please. Our next one comes from Michael Huttner at Berenberg. Go ahead.

Great, thanks a lot. Plenty of very straightforward questions. On the first one, I believe during a Bloomberg interview you said there was roughly EUR 800 million to EUR 900 million of budget remaining for deals — I was wondering whether that figure is before Cattolica or after Cattolica? I mean, how does that work? Second, on cash: could you remind us what the holding's cash figure was at year-end, and perhaps say what it stands at now and where you see it heading? And on the last question, you'll probably tell me it's completely out of line, but is it correct that, as you said at the investor day — so, as you put it, almost three years ago — there could be a possibility, or you weigh up things like buybacks? Is it fair to assume that if you carry out a buyback, you effectively alter your shareholder structure, because some will accept the buyback and some will not, and those who don't take part effectively become more concentrated and gain a bigger voice — and in that way you would lose your independence? Thank you.

Michael, sorry to interrupt—could you please say your previous question again? Your audio cut out quite a bit on that last part.

Oh, my apologies.

We ran into difficulties.

Yes. My apologies.

Your microphone came through poorly for us.

My apologies.

Apologies for that.

Yes. Sorry about that. Can you hear me more clearly now? Is the connection improved?

Yes.

Yes. That’s fantastic.

Yes, that’s much better. Thank you.

Apologies for that. Yes. That was a pretty cheeky question, asking whether the decision, or the trend we’ve been seeing toward doing more deals rather than buybacks — is there a thought behind it that if you did a buyback, you would alter the makeup of your shareholder base to the extent that some would take up a buyback and some would not, and so those who don’t take up the buyback would end up with a larger say in the company, and in that way you would sort of, in a creeping fashion, lose your independence? Creeping, not in a bad sense. What I mean is in a kind of diluted way. There we go.

Hi Michael. On that first point, the EUR 800 million to EUR 900 million remaining for M&A comes after Cattolica and even after Malaysia. Cristiano will take the second question. As for the third one, honestly, what we focus on is value creation for all shareholders, and that is the only thing that matters. We don't get into any other sort of consideration.

Appreciate it.

Hi, Michael. Just to bring you up to date. I want to remind you that we issued the — as I mentioned earlier with William — the pre-financing, the refinancing of EUR 500 million, which stacks up another EUR 500 million, but I don't view those as available, because in a sense they're already earmarked for paying next year's subordinated maturing. There's also the EUR 720 million for the second tranche of the dividend, and there's the money already sitting there to cover the Cattolica deal, the Malaysia deal, leaving EUR 800 million–EUR 900 million. I'm not playing. Then you add the buffer of EUR 1 billion, the liquidity buffer, which we always keep, and that's the, let's say, cash you should count at the HoldCo. Beyond that, we have ordinary treasury cash, which isn't stable, and you shouldn't treat it as an element of our strategy. It's simply an optimization of internal users of the resources. You should start from those elements, which are the ones that count. One more thing I'd like to add, and I think it's worth being aware of: we completed 96% of our 2021 remittance.

So we're nearly at the finish line. In the final quarter, we'll take care of the remaining piece that's still outstanding. As I said when giving guidance, remittance received came to EUR 3 billion to EUR 3.1 billion, and we're firmly on track to hit that target. Looking ahead, I've consistently noted that once the dividend is paid, there's excess cash generation on the order of EUR 800 million annually.

That is fantastic. Wow, such clarity. Thanks a lot. Many thanks.

Let's take the next question. It comes from Steven Haywood at HSBC. Go ahead, please.

Thanks a lot. Clearly, I noticed you removed the October dividend payment that was expected from shareholders' equity, since shareholders have obviously approved it. Does that indicate, or does it suggest, that you have a great deal of confidence about paying it in this year's fourth quarter? My second question concerns the solvency ratio. Looking simply at how it rolled forward during the first half, there is a negative 3 percentage point variance that is non-economic. Could you give us some detail on that? Apologies if the disclosure covered it and I missed it. My third question is about the P&C top line premium growth, which you say rose roughly 9% during the second quarter. Could you elaborate on which lines and which countries were involved, whether Cattolica played a part, the recovery following COVID, and any effect on pricing too? That would really help. Thank you.

Hi, Steven. Regarding your first question, I can verify that up to now we have strong confidence that we will distribute, as anticipated, the second installment of the 2019 dividend — that is, EUR 0.46 for each share. The ECB has lifted its prohibition on repatriating capital and on banks making dividend payments. The ESRB limitation is expected to conclude by the end of September, and the regulators — especially those in Italy — have said they feel quite sure there will be no cause to extend these ESRB restrictions. We certainly have concrete grounds for confidence that this second tranche will at last be paid by October, in line with what the shareholders resolved.

Steven, if I could just add something here—from the accounting standpoint, it gets classified as debt since the IAS 32 conditions are satisfied under the accounting rules. On your second question about the solvency roll forward, the non-economic variances are mostly driven by the SCR impact of risk, which accounts for the vast majority, with a small minor portion coming from non-recurring holding expenses. It is clearly the portfolio risk that created the difference in the roll forward versus what I had seen as the average estimate made in the market. Regarding P&C top line premium growth, what's the second quarter effect? Keep in mind that Q2 2020 was also a specific quarter, since it was the quarter most impacted by COVID premium. I'd like to emphasize that we see very healthy growth in the second quarter from our global corporate commercial business, which, as you know, makes up slightly more than 10% of total premium and grew 11%. The remainder of the portfolio grew 8.9%. Don't forget there's also growth coming from accepted premium, where we increased some accepted business thanks to our underwriting strategy. Overall, there's very healthy growth in Italy, where premiums are growing 9.3% on a single quarter-over-quarter basis, in France 11.4%, in Germany 4.4% quarter-over-quarter, and in Austria, Central and Eastern Europe, Russia 7.7%.

Those make up the four biggest, and internationally we're also seeing 10% growth. It's fairly robust growth that we're seeing this quarter. Keep in mind that the second quarter of 2020 took a heavy hit, also because of COVID. That 4.9% is more a reflection of the potential. As for the effect from Cattolica, there's some reinsurance we accept from Cattolica, a few tens of millions of EUR, which sit in the Italian P&C premiums accepted that I mentioned earlier, our reinsurance acceptance. There's nothing beyond that, since, as you know, Cattolica isn't consolidated given the current 24.46 shareholding, which is equity method accounting, so their premium doesn't touch our premium. The sole premium effect comes from the reinsurance we take on from them. I hope that gives you the picture.