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

Good afternoon, everyone. I'm the conference operator for Chorus Call. We appreciate you being here, and welcome to the Generali Group call covering results for 9 Months 2021. <<operator_script>> Right now, I'll hand things over to Ms. Giulia Raffo, who leads Investor and Rating Agency Relations. The floor is yours, madame.

Thanks, and welcome everyone to the Generali 9 Months 2021 Conference Call. Joining me is our group CFO, Cristiano Borean. We're ready to take your questions now. Thank you so much.

<<operator_script>> Our initial question comes from Peter Eliot at Kepler Cheuvreux.

I have 3 questions, though I'm afraid all of them are number-driven. For the first one, it would be a big help for our modeling if you disclosed the private equity exposure results and dividend by division. I'm not sure how much of that you can share on this call or afterward, but whatever you can say would be very helpful. My second question concerns the non-Life business. I'm wondering whether you could provide the split of operating results between technical, investment, and other. And within technical, reserve releases came in at 6% in Q3 in isolation — I was wondering if there's anything particular worth commenting on there. Then finally, my third question is on the asset manager. It looked like the revenue margin dipped a little and the cost income ratio rose to 43% in Q3 from 37% in Q2. Maybe that's just normal quarterly volatility, but I was wondering if there's anything worth commenting on, yes, or whether it is just normal volatility.

Hi, Peter. Now, on your first question about private equity exposure: to begin with, the private equity contribution to the group's operating result came to EUR 540 million in the first 9 months, as shown in the results. As for how the asset splits across divisions, we'll provide you with the complete detail in the year-end figure. Keep in mind that in the past we began with a larger P&C weighting, and over recent years we've also been growing the Life exposure, as guidance. On your second question, about the operating result split: for the third quarter reserve release, and more broadly the third quarter percentage figure, I'd kindly ask all of you to focus on the roughly 9 months result rather than on the single Q3, which is unusual in particular because of the elevated level of natural catastrophe we saw. More generally, you should focus on a run rate, and take guidance from what you've seen across the 9 months rather than from the single quarter piece. On your third question, about the cost income ratio moving higher: this isn't volatility. It's something we announced in the half year results. As you'll recall, we also stepped up some investment to develop the franchise and the capacity to build our asset strategy in terms of investment capabilities and infrastructure.

And this is something that is going to be discussed already, and it is more on the IT and distribution part. So it is absolutely in line with the strategy.

Alright. Great. Could I perhaps just round out the picture very briefly? First, many thanks for the group contribution. By any chance, are you also in a position to provide the dividend figure? And regarding Asset Management, I’m simply wondering whether you can share the performance fees?

Right, so on the asset side — let me begin with the second item, since I have that in front of me. Over the first 9 months, performance fees come to a bit above EUR 19 million within asset management. After that, the dividend that private equity paid out during those same first 9 months amounts to EUR 164 million.

Andrew Sinclair from Bank of America has the next question.

Okay, I’ll take the third question as well, if that works. Sorry, first, just to pick up on the private equity gains. So looking at EUR 540 million year-to-date. I was really wondering whether you could provide any guidance for the near term and even the medium term on where you expect that to land in Q4 and over the longer term. Second, since this is the first time we’ve spoken after the Cattolica transaction closed, I really wondered whether you could remind us of your options from here — what options do you potentially have for squeezing out the minorities in Cattolica? And third, it was just on motor experience and the COVID experience today. What are you now seeing in terms of frequency benefits? Are they just neutralizing? Or are you actually getting any reversal in the short term as the world gets back to work? Just an update there would be great.

Yes, hi Andrew. On the private equity gains and the fourth-quarter guidance: we certainly had some particular exits from certain investments that were stronger than a specific quarter among the first 3, which were flat across the first 9 months. So the fourth quarter will definitely be positive — perhaps not quite as positive as the average of the first 3 quarters, but still positive. So you should expect another contribution again in the fourth quarter. As for forward guidance on private equity, I'd like to say that because the amount of money invested in private equity was piling up, also due to growth in Life, you should expect an increase in this contribution before any sharing with the policyholder as a pure investment. But when you look at the overall picture, the net effect after also the Life component, which is growing, you should expect broadly a result over the next years in line with what we are observing this year on the so-called after-policyholder basis — the sum of the P&C plus the effect on the Life. What remaining options are there for us here at Cattolica? For me — for your information, the tender offer has been successfully executed.

At this point we hold 84.475% of Cattolica, which is just under 84.5% ownership. Our aim now is to reach the goal of delisting Cattolica shares by way of a merger. That merger plan will therefore go before the Boards of Directors of both Generali and Cattolica for approval, and broadly speaking it will also need the green light from the Italian Insurance Supervisor Authority. Once that merger process is done, the company will be integrated in a fully complete way. And that ties in with what we stated in the information memorandum for the initial public offering, the bid for Cattolica. On the frequency benefits — this is the third question, on Motor. I'd say there are roughly 3 areas of focus I want to lay out for you. The first big question is whether we are back at the pre-COVID 2019 level. The answer is no, not yet. Are we back above the 2020 level in the countries? In some we are, but not in all. What we see — in Germany especially — is still a frequency below the 2020 level. In some countries of Central and Eastern Europe we still see a positive development. They are clearly under now fourth bag potentially.

And those frequency advantages aren't completely offsetting things. We're observing slightly fewer, even if I add up how many frequency claims we saw, including when you're in a country that's catching back up more, such as Italy or France. Even so, we still haven't gotten back to where we were before COVID, in 2019. I hope that was helpful on this point.

Andrew Ritchie from Autonomous has the next question.

To build on what Cristiano said about frequency trends, could you update us on severity trends you're seeing in the key markets? I ask given broader economic inflation has picked up somewhat — are you noticing any significant shifts in severity? Second question, just to clarify: at this morning's press conference, I believe you mentioned EUR 1 billion remaining for M&A. My assumption is you're framing that within the 2018 to 2021 plan and budget, which might carry it to year-end. Just confirming that's correct.

Andrew, I appreciate the question. So, to begin with, the frequency trend has already been covered. As for severity, allow me to share something that, in my view, is quite interesting, and something I routinely mention to our technical colleagues. The first thing is that when we examine how the average cost has evolved, there is a downward trend relative to the quarter we saw at the start of the year — that is, the first quarter of 2021. So we sit below that level of increase, and this holds true in both Italy and Germany. In France, if you strip out, shall we say, the larger claims, you find precisely a mildly declining trend in average cost, and that tells us something. What we have observed is that claims inflation — particularly on spare parts, which is what affects the attritional the most — was already beginning more than 12 months ago. So in the middle of the COVID period, the pace of adjustment from the spare part providers had already started, and we were already seeing that. So now, as you roll out the 12-month windows, you observe a smaller effect from average cost increases, because you are moving out of that rolling window.

What we're seeing now is inflation growth that's stabilizing and looking more natural than the pace we've seen up to this point. I hope that gives you a sense of the dynamics at play.

That's great. Sorry, that relates to Motor damage. Now, Property?

When it comes to property, we're seeing a modest rise in the average cost, but we're talking about really just tens of a percentage point—so a 0.2%, 0.3% uptick in average cost, which is truly immaterial. And in any case, there's a bit of consistency on the, let's say, Property side, perhaps some scarcity of supply given the huge demand. But what we're observing is still absolutely limited. Let me state that clearly: inflation is one of those beasts that's harder to predict. But I'd like you to know that in any case, our proactive approach on this already began years ago, and we're always working to improve how fast claims get settled. On one hand, because of the new world we're in following the drop in rates, which clearly benefits this. And the second way also because it serves our clients better. So we truly kill 2 birds with 1 stone through this acceleration in speed, which is where our focus lies. Don't forget that on the Property side, there's also the natural catastrophe effect embedded, which could alter the average somewhat.

On the M&A point, let me clarify that the EUR 1 billion comes from a very straightforward mathematical calculation. We had been saying that we were at roughly EUR 800 million, already excluding the funds set aside to complete the settlement of the Malaysian operation, so EUR 800 million plus. The minorities, which were not purchased with cash and will be acquired via the merger on Cattolica, take us to EUR 1 billion. So that is certainly the actual budget. Obviously, at the Investor Day, we will give you an update on the full numbers, but that is the budget as of now.

Michael Huttner from Berenberg has the next question.

Great results — congratulations. On product equity, I have just 2 figures. If I think about the contribution, excluding policyholders, could you give us a number, or give me that number? I don't know what it would be. And then on total exposure: looking at your half year slides, I see alternative funds at EUR 10 billion. I'm wondering whether that is the private equity exposure right now, which would be — it's quite big. My second question is on Cattolica. You originally guided to synergies of EUR 80 million on top of operating profit, which I think is all the profits, and you have Bloomberg to use consensus on EUR 130-odd million. I wonder if you can give a feel for how much you've already booked year-to-date from Cattolica from your 24% stake, et cetera? In other words, what would the delta be now that you're at 84% full consolidation? And then the final question is really a stupid question. You gave the answer to Andrew, but I didn't quite understand. And this is me, I'm really sorry. The EUR 1 billion left for M&A.

Am I correct in my understanding — and this is a question, I'm not sure that this must or should be spent before year-end, which is why it goes to shareholders? Or is it — was there a bit more flexibility there?

Michael, on your first point: if we set aside both the policyholder contribution and the alternative contribution, the P&C component currently carries a somewhat larger contribution, and that's due to the earlier stage of adoption, exactly as we've consistently stated. So you should anticipate this will even out. Right now the contribution is plainly larger because the life side still has an operating contributor. From the adjusted results we're publishing, I believe you can extrapolate the Life contribution somewhat, since it's already displayed with policyholder participation rather than without it. On your Cattolica question: in the 9-month result, under equity method accounting applied from the very first time we booked Cattolica onto our balance sheet, we recorded the entire Cattolica result within P&C. It added EUR 70 million to the first 9 months result. Obviously, that reflects both of Cattolica's lines combined, but it carries a specific effect. Keep in mind that in our purchase price allocation, the booking embedded a genuinely prudent approach, with no form of intangible considered whatsoever. So plainly, if you attempt a comparison and multiply that by 4, what you're looking at will not give you Cattolica's number, because all the known economic items — let's say only the impairment side and the other form — aren't accounted for on our side, since we already booked them in the opening balance, okay?

Now, on the fourth-quarter contribution — as you know, for the portion of that period starting November 5, we’ll be accounting for it on a consolidation basis. The difference relative to the 85% also needs to be taken into account with respect to this effect. So at year-end, I think we can provide better guidance on the split. One last point on Cattolica, and don’t forget this: because we don’t know Cattolica’s results, since they publish after us, we incorporate them only with a 3-month lag. So please keep in mind that when we look at the full year, we also need to adjust for catching up on all of this in line with the accounting rules. The amount of assets we have under Cattolica is EUR 7.8 billion in assets under management. Don’t forget that, under the strategic agreement, they gave us these, and clearly they will no longer be accounted for as third-party money, as they have been in the inflows so far as of the 9 months. On the third question, regarding the EUR 1 billion left for M&A — again, Michael, I’d tell you that for us, M&A is a means of achieving diversification of our earnings.

Through diversification, you also get dispersion—not just geographically, but across business lines too. With Cattolica, as we've already discussed, the aim was to secure the #1 position in one of the world's most profitable P&C markets, namely Italy. Using M&A also serves as an accelerator toward our strategic goal. That said, M&A by itself isn't an end for us. So we always assess how we use it and how we redeploy capital against our strategic objectives. And then, as a final point, we'll give you an overview of what remains and what our approach will be on December 15.

And could I just ask 1 follow-up question about Cattolica? That EUR 70 million in P&C — am I right in taking that as pretax operating?

No. Since equity accounting applies, it's a full net-of-tax figure. So you record Cattolica's entire net result as the base, and by definition that also gets booked as operating.

David Barma from Exane BNP Paribas has the next question.

I have three questions, if that's alright. First, regarding the Life new business margin, which was strong once more this quarter: could you provide some detail on what drove that, and on the product mix versus market effect? Second, on Life and Asset Management: could you update us on how things stand with your goal of internalizing unit-linked funds within your Asset Management division? And finally, on solvency — and I apologize if I missed this in the release — could you tell us the organic capital generation for Q3, please?

David, I apologize — the second and third questions you asked came through a bit unclear for us. Could you please repeat those? Sorry about that.

Yes. Are you able to hear me clearly at this point?

Yes.

Right, so the second question concerned bringing unit-linked assets in-house. Could you update us on what portion of those unit-linked assets is managed internally? And the final one was about solvency. Please provide the organic capital generation figure for 3Q.

Yes, David. Thank you. So for Life new business margin, I'd say let's begin with what's driving the change from the 9 months of '20 to the 9 months of '21. The biggest factor comes from improved product features and profitable products, as well as the higher production volume. I'm referring to protection, particularly on the unit-linked side, where you absorb the fixed cost better, and that pushes you toward a more profitable effect. The economic variance worked more on the negative side because of the full discount rate. But you have to use not just the risk free — you also need to factor in that the volatility adjustment in the discounting is lower than in the 9 months of '20, which is actually pulling that effect down. What matters a great deal is the product mix that's emerging. Because if you look at our presentation, new business premium, the growth in protection and unit-linked is more than 3 — it's basically 3x higher than the presentation business premium of the savings. So we're clearly growing in the most profitable segment. And I'd remind you that our net inflow isn't related to new business value.