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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group First Half 2021 Results Conference Call. [Operator Instructions] At this time, I will turn the conference over to Ms. Giulia Raffo, Head of Investor and Rating Agency Relations. Please go ahead, Madam.

Thank you, and welcome to Generali First Half 2021 Results Conference Call. I'm here with our group CEO and our group CFO. Before opening the Q&A session, I would like to kindly hand over to our group CEO for some opening statement. Thank you very much.

Thank you, Giulia. Hello, everyone. Thank you to all of you for joining the call today. As you saw this morning, we published our first half 2021 results, and these are very good results in a very challenging environment. They are the proof that our current strategic plan Generali 2021 was indeed and is still the right plan. I'm here today with our Group CFO, Cristiano Borean, and we look forward to taking your questions over the next hour. But before then, let me quickly review some highlights from the first 6 months of the year. First of all, we confirmed our strong business profitability. Our operating result increased by over 10% from the first 6 months of 2020, arriving at nearly EUR 3 billion while our net profit practically doubled, reaching well over EUR 1.5 billion. Our Life new business margin grew by 0.73 percentage points, up to 4.67% in the first half of the year, and our new business value has been growing by almost 30%. On the P&C business, our combined ratio stood at 89.7%, underlining our technical excellence. Our capital position was very solid, even considering the uncertain context with our solvency ratio standing at 231%. We are continuing to work hard and with strong discipline to complete Generali 2021 and to deliver on our targets that were announced nearly 3 years ago and that were confirmed in November last year. At the same time, together with my team, we are defining our next strategic plan that we'll be presenting -- that we will be presenting to the financial community on December 15, making a new chapter of our group's history. So we look forward to illustrating this plan to you. And in the meantime, now Cristiano and myself are available to answer to your questions. Thank you again.

Thank you very much. We can now open the Q&A session. Thank you.

[Operator Instructions] The first question is from Andrew Sinclair with Bank of America.

3 from me as usual, if that's okay. Firstly, just wonder if you could give us any color on the cost of July's European floods and also just some details around your reinsurance protections? That's question one. Question two was just on Asset Management. I thought it was really impressive to keep expenses flat for that level of revenue growth. But do you see any risk of an expense catch-up here? You're running really far in advance of your operating margin target. So just really helpful to get some context on that. And thirdly was on unit-linked, great flows, but how much of that do you think was just a catch-up from people who have been sitting on their hands during COVID than putting some money to work? Or do you think you can achieve similar flows in H2 and into 2022?

Andrew, so first of all, on the cost for the July European flood, the one more concentrated in Germany. Please I would like to remind you that the structure of our reinsurance treaty for these kind of events do not allow a retention per single event above EUR 100 million. So the net retention for the group of such kind of events is EUR 100 million. Clearly, then you have the installment premium as a normal or insurance contract when the effect happened. So we are already above EUR 100 million of estimation. So it will be EUR 100 million. How our reinsurance protection works as a group against all these kind of events related to wind, wind chill, hail and all the like of nat cat of this kind, we are protected up to EUR 500 million impact as a maximum amount that we can retain in the balance sheet as in sum of uncorrelated events because, as you know, per single event, we do not retain more than EUR 100 million. So that would be the impact -- the maximum impact model of the internal premium we can get. And this translated only without internal premiums would be 2.4% of combined ratio maximum from those kind of events. We are already at -- including this event of July, some in the one-off end of June plus other happened, we are at around EUR 300 million nat cat impact in the balance sheet, which is 1.5% as of the year-end premium and the average of the last 5 years was 1.8%. This is for the first question. On the asset management performance. On the cost, you should not look at this figure of 45% as a basis to start the one, which is the ambition as we manage the -- as a target is more consistent to the expenses, we will start doing in the second half of 2021 for the distribution platform and the IT projects that are going to be implemented will be progressively rolled out in order to increase our capacity to distribute. So you should not look at this number, which is, by the way, also influenced by the performance fees effect and more on what is the long term, including the expenses that we will do for the distribution going forward, which is the one as the target. And the third one on the unit linked performance, the growth, even if I compare it versus 2019, which is the pre-COVID effect. It is endogenous and sustainable. It is not brought up by external factors. It is really the strategy. And I wouldn't mean that this is consistent to the capacity to grow. I hand over to Philippe to further comment.

Yes. This is a strategy that we started many years ago, and we are very much in a situation to manage the new business mix because of our strong proprietary distribution. This makes the whole difference. Actually, our net inflow, which is EUR 6.3 billion after 6 months, it's already very solid in volume, but it's even more solid in terms of quality because it's basically only protection and unit-linked. Definitely, if we were less disciplined, if we had not such a strong proprietary distribution, we could have a higher net inflow, but lower quality. And this is definitely not our choice. Once again, the quality of our distribution makes the whole difference. So these numbers regarding unit-linked are absolutely sustainable.

The next question is from Peter Eliot with Kepler Cheuvreux.

Three questions from me as well, please. The first one was on investment income. I was just wondering, could you update us on your current expectations on how investment income might develop from here, both for Life and non-Life? That would be very helpful, please. Secondly, to echo Andrew's comments on the asset management, great numbers. I guess the only area where you're sort of slightly behind the target is the external clients and maybe that ties into your comment just now, but I was just wondering if how you think of that target at the current time and what's achievable? And then finally, third one, I was wondering if you could just update us on what you're seeing in Italian motor, in particular, in terms of sort of average premium trends, pricing trends?

Hello, Peter. So investment income, please let me profit to make an initial clarification around this point because when you look at the investment income today in the half year, you are not seeing the full allocation of the investment potential of our books because of the effect of the private equity, which we do report in the line holding another business, but it is an asset class per se. It is a company, that's why we report it as a company. But then this pay dividend to the class shareholder, which are the different insurance companies among the group. So what you should consider as an investment income should also embed even if there is a time shift between the allocation of results and the payment of the dividend of this extra result, also this component. And please, don't forget what I told you already many times, but 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 shareholders and our policyholders. And this will grow further for the normal increase of the real asset strategy we are deploying. And this will support the investment income. Having said that, the investment income will be affected by the natural dilution of the low rate environment. And we are working and you see from our negative net collection in the savings business, but we are trying also to re-steer the business towards protection unit linked, hence having less money to be invested. And in general, we are working on Life in this direction as well in P&C, we are growing more. So in P&C, we are growing faster. So there are more money to be invested. If you look at the stake of money less on Life to be invested more on P&C, we could expect for the next year a 10 to 15 bps yield dilution in the current income on average book cost of our assets, both Life in P&C, maybe skewed towards more the trend in P&C than in Life. Asset Management, the target on the third-party client. As you know, I think that it is difficult to achieve by year-end '21 as a percentage term. But I would like to emphasize that in absolute numbers, so the numerator, which was building out at 35%, the current level of the external revenues in that calculation was exactly coherent with the number of the strategy, the numerator. Clearly, the denominator increased more also because of the growth of the internal assets and the evolution of the market. But for 2021, we don't think we can achieve it as a 35% target. For the Italian motor average premium, what are the pricing trends. What we observe is that -- so far, we are observing in the motor TPL a 3.9% decrease in the average premium collected, which is sufficiently consistent with our strategy to, at the same time, retain the client and grow as well with the fleet business. As you know, we have a big agreement with Fiat Chrysler automobile in Italy, which is doing extremely well, also because of the MOD development, which is growing extremely fast. And by the way, I anticipate a question explained, potentially also the increased expense ratio we are observing because exactly the higher the remuneration for the line MOD within the motor.

The next question is from Farooq Hanif with Credit Suisse.

Just going back to non-Life first. So I noticed that you've had an increase in reserve release, but it's still lower than what we've seen since 2016. So is there still some element of conservatism in this given the still low frequency that you're experiencing? Secondly, can you talk a little bit about the capital implication of the Cattolica acquisition? So for example, what diversification benefits could actually help your capital position if this deal went ahead to -- or the tender offer? And then finally, could you also comment on, given the capital position is very, very strong, your leverage ratios have come down to good levels. Going forward in your strategic plan, what's the likelihood that you could move to a strategy of inorganic growth versus buybacks to help a bit more affordable kind of policy on buybacks versus inorganic growth to help sort of use that sort of capital?

Thank you, Farooq. So the first question, in P&C, on the prior year, you have seen an increase of 0.8% compared to the first half last year. But I would like to recall you that if I look the reserve adequacy, so the excess of reserving above the best estimate we do on the Solvency II view, it's broadly unchanged, which is explained by the fact that still in the first 6 months, we observed a frequency, which is lower than the pre-COVID period in almost all the geographies. And only in the month of June, we started to observe frequency trending to the level of the 2019, so the pre-COVID one. For example, a country which is still below is Germany where you see a positive benefit. So 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, the evolution and the prudency 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. Anyhow, you will have a counter element, which will come from the presence of the BTP, which is present in the portfolio, which so far is our largest sensitivity risk, which is counterbalancing the benefit. But from the cash flow standpoint and from the initial diversification within the line, we have a very positive diversification from the P&C. I hand over to Philippe regarding the inorganic versus buyback.

So yes, even after Cattolica, our capital position will remain very strong. We -- as you know, we don't have the obsession of M&A at any cost. We have been very disciplined in the past few years with M&A. I remember that I told many of you a few years ago that the kind of M&A we would prefer were small and medium M&A because I like the buildup strategy, which is a safe one. It creates lower execution risk. We are very good at integrating the company we buy. This is what we did successfully in Portugal. This is what we are doing successfully in Greece. This is what we will do successfully in Malaysia and with the other acquisitions we've made in Central and Eastern Europe. We have another 5 months to go before the end of the plan because the plan is ending on December 31 at midnight. So we will stick to our strategy. We will stick to our financial discipline. Our pipeline is not empty. So we are looking at interesting opportunities, but we will remain very disciplined, very selective. What matters to us is to create value for shareholders. If we believe that the many companies we are looking at are the best one to create value for shareholders, we will go for it. If not, we will find a better use for the excess capital.

The next question is from William Hawkins with KBW.

First question, please. Cristiano, I fully understand the concept of what you said about the private equity. Could you just help me clarify the numbers, please, about what was the impact of private equity on the first half other operating results? And what was the first half and second half figures last year. I get the point, I'm just not quite clear on the numbers. And then secondly, please, for the investment results, obviously, the difficulty we've got is that there are -- from the first half of this year, offsetting factors, you've got lower yields, but then the markets have been better. So your investment result has actually gone up, even though we're talking about the yield compression. And so I just wondered, again, given that you're also re-risking the portfolio, and I'm not sure how much of the Life business versus non-Life benefits from that. The short question is you've got Slide 13 showing your investment result was EUR 800 million in the first half of this year. Can I just double that to get to the full year? And then what am I assuming about next year? Is it fading? Could it be going up because you're re-risking or do I keep it flat? And then the last question, please. And again, I'm sorry if this was disclosed somewhere, but in Slide 30, when you show the roll forward of your Solvency II ratio, given that you've been raising debt and the rest of it, can you just remind me how the EUR 47.7 billion breaks down by tier, please?

Yes, William. So first point, numbers. Half year 2020 operating result contribution from private equity, EUR 90 million. I recall you, again, these numbers then are paid as a -- as dividend on the investment portfolio. Half year 2021, EUR 300 million. Year-end 2020, EUR 260 million operating result contribution from private equity. So this is the comparison. Going forward, as I told you, you should expect this kind of contribution trending, as I told you, almost double-digit percentage contribution on the investment we have. So I hope I gave you the clarity on these first 2 -- 3 figures. On the investment result, point taken on the lower yield versus the de-risking of the portfolio. How much is Life? We increased our equity position both in Life and in non-Life, also thanks to a progressive increase of our private equity, and we are increasing also the private debt. This is more related to the capacity of finding the investment, so to speak. It is more related on that and the willingness to get. So we are working towards the target. I can think about the half year 2021 Life result, should it be doubled? I think we are broadly in line with this trend. For 2022, this will be also related to the capacity of the portfolio on one side to start growing on the on the sizes because you have basically a 3% increase of the technical reserve year-on-year, and the structure goes in that direction. So we are working exactly, thanks to the de-risking, to use some points of solvency to pull up the investment result and reduce the speed of the dilution. So let's make it pictorial. The bottle is exactly pulling up, thanks to the real asset strategy and small re-risking the downward trend because of natural coupon of the maturing bonds is closer on the 3% side than the investing amount, which is closer to the 1.3%, 1.5%. Going to your last question on Solvency II, the breakdown of the EUR 47.7 billion tiering is we have -- for your information, since you were mentioning that we issued a subordinated debt, I would like to recall you that since we treat this EUR 500 million issued in the last week of June as a refinancing or prefinancing of the '22 maturing, these are not included in your financing. We do not double count, let's say -- at least in Generali, we do not double count the paid financing. So it is excluded from the tiering you see. So Tier 1, the EUR 47.7 billion are EUR 41.6 billion of Tier 1, of which EUR 2.1 billion restricted, EUR 6 billion of Tier 2 and EUR 0.2 billion of Tier 3. This is the tiering of the EUR 47.7 billion.

The next question is from Michael Huttner with Berenberg.

And lots of really easy questions. The first one is, I think you mentioned in an interview on Bloomberg EUR 800 million to EUR 900 million kind of budget left to the deals. And I just wondered, is this after Cattolica? Before Cattolica? I mean how is that. The second is on cash. Can you remind us what the figure of cash on the holding was at the year-end and maybe you tell us what it is now and what you expected to -- where you expect it to go? And then on -- the final question, you're probably going to say this is completely out of line. But is it right, you said at the Investor Day, so as you said almost 3 years ago, that there might be possibility or you judge against buybacks, et cetera. But is it fair to assume that if you do a buyback, you effectively changed the structure of your shareholders because some will accept the buyback, some will not. And so those who do not take the buyback effectively become more concentrated and gain a bigger voice. In that way, you would lose your independence?

Michael, can I ask you please to repeat your last question as your line was particularly troubled, so we couldn't hear well on your -- sorry about that.

Yes, Sorry. Is this better? Is the line better, yes?

Yes, much better. Thank you.

Sorry about that. Yes. So it was a very cheeky question, asking if the decision or the kind of trend we've seen to do more deals than buybacks. Is there a thinking behind it that if you do a buyback, you would change the structure of your shareholders to the extent that some would accept a buyback, some would not. And therefore, those who do not accept the buyback would gain a bigger say in the company. And in that way, you would kind of, in a creeping way, lose your independence. Creeping, not in a negative way, what I mean is kind of in a diluted way.

So Michael, on the first one, the EUR 800 million, EUR 900 million lift for M&A is after Cattolica and even after Malaysia. Cristiano will answer the second one. On the third one, frankly speaking, we look at the value creation for all shareholders, and this is only what matters. We do not enter in any other kind of consideration.

Michael, to update you. So I would like to recall you that we issued that, as I was mentioning before to William, the prefinancing, refinancing EUR 500 million, which is piling up EUR 500 million more, but I do not consider them as available because they are, in a certain sense, already booked for the payment of next year of the subordinated maturing. There are also the EUR 720 million for the second tranche of the dividend, and there are the money which are ready there to cover the Cattolica deal, the Malaysia deal and being left with EUR 800 million to EUR 900 million. I'm not playing. I'm letting you adding pieces and then you add the buffer of EUR 1 billion, the liquidity buffer, which we always keep. And this is the -- let's say, cash you should consider at the holdco. On top of that, we have normal treasury cash, which is not stable, and you should not consider it as an element for our strategy. It's just an optimization of the internal uses of the resources. So you should start off from those elements, which are the one which count. The one thing I would like to add, I think it is worth to be aware of, but we completed 96% of our 2021 remittance. And so basically, we are almost there. We will do in the last quarter, the last piece, which is missing. And again, as I gave you the guidance was 3 to 3.1 remittance received, and we are well on track achieve the target. And don't recall but going forward, after dividend, I always said that there is an excess cash generation of the order of EUR 800 million per year.

The next question is from Steven Haywood with HSBC.

Obviously, I've seen that you've taken the expected October dividend payment out of shareholders' equity as obviously it's been approved by the shareholders. Does this show or does this imply that you are extremely confident in paying this in the fourth quarter of this year? Second question for me is on the Solvency II ratio. Just looking at the roll forward in the first half, there's a negative 3 percentage points noneconomic variance. Could you provide some color around this? Sorry if I missed it in the disclosure. And then thirdly from me, on the P&C top line premium growth, you say it's up about 9% in the second quarter. Can you go into more detail about what lines, what countries, what Cattolica has an impact, the rebound from COVID and any impacts on pricing as well? That would be very helpful.

On the first one, I confirm that so far, we are very confident that we will pay, as expected, second tranche of the 2019 dividend of EUR 0.46 per share because the ECB has removed the ban on the capital repatriation and dividend payment for banks because the ESRB restriction is supposed to end by the end of September and regulators, and particularly Italian regulators, have indicated they're quite confident that there will be no reason to renew these ESRB restriction. So definitely, we have tangible reasons to be confident that we will finally pay this second tranche by October as decided by the shareholders.

Steven, if I can add from the accounting point of view, it is put to debt because the condition for IAS 32 are met according to the accounting rule. Second question on Solvency around the noneconomic variances are mainly explained by SCR impact of the de-risking for the vast majority and a small minor part of nonrecurring holding expenses. So clearly, it is the de-risking of the portfolio, which has been put then the difference in the roll forward compared to what I've seen was the average estimation made on the market. On the P&C top line premium growth, what are the second quarter effect? You should think that the second quarter 2020 was also a specific quarter because it was the most impacted quarter for the COVID premium. I would like to stress that there is a very healthy growth in the second quarter from our global corporate commercial business which, as you know, accounts for likely more than 10% of the total premiums, which grew 11%. The rest of the portfolio grew 8.9%. Don't forget that there is also a growth stemming from the accepted premium where we increased some accepted business, thanks to our also strategy of underwriting. And in general, there is a very healthy growth in Italy where premium are growing on the single quarter-over-quarter at 9.3%; in France, 11.4%; in Germany, 4.4% quarter-over-quarter; and Austria, South Eastern Europe, Russia, 7.7%. These are the 4 largest and in the international area, is growing also 10%. So it's quite a healthy growth we are observing in the quarter, but please take into account the fact that the second quarter of 2020 was heavily impacted also due to the COVID. So the 4.9% is more an expression of the potential. Regarding the impact from Cattolica, there is some accepted reinsurance from Cattolica, some tens of millions of euros, which are accounted in the Italian P&C premiums accepted, which I was mentioning before, our reinsurance acceptation -- acceptance. And there is nothing else because, as you know, Cattolica is not consolidated because of the actual shareholding of 24.46% is an equity method accounting where their premium do not affect our premium. The only premium impact is in the reinsurance we accept from them. Hope I gave you the picture.

The next question is from Colm Kelly with UBS.