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 Full Year 2021 Results conference call. Please note that everyone is in listen-only mode. Following the presentation, there will be a chance to ask questions. If anyone requires help during the call, they can signal an operator by pressing star and zero on their telephone. At this point, I'd like to hand the conference over to Miss Giulia Raffo, Head of Investor and Rating Agency Relations. Madam, please go ahead.

Thanks, and hello everyone to the Generali 2021 Full Year Results Presentation. Before we begin our Q&A session with our Group CEO and our Group CFO, I would like to pass things over to our Group CEO, Philippe Donnet, for a few opening remarks. Many thanks.

Thank you, Giulia, and I appreciate everyone being on this call. Our complete 2021 financial results came out today. The performance was robust, and it offers additional evidence that our business strategy is sound. I'll walk through the main points in just a moment. Before I turn to the figures and to everything we accomplished during the past year, I want to say a few words about what is going on right now in Ukraine. All of us are profoundly unsettled by these events, and our thoughts and prayers are with everyone who has lost loved ones and with those fleeing their homes and communities. Our group has recently put in place a number of initiatives aimed at helping the population affected by the war. We set up an emergency fund of EUR 3 million for refugee programs, and that includes a donation to UNHCR, the UN Refugee Agency. Also, via our sustainability project, The Human Safety Net, we started a worldwide fundraising campaign backing UNICEF's efforts on behalf of impacted families, and Generali will match the donations collected. In addition, as we announced not long ago, we have decided to start winding down our operations in Russia, consistent with the international sanctions currently in force. These steps genuinely reflect our role in society as an insurer and an asset manager, and as a global corporate citizen.

Turning to our 2021 results, I'd like to emphasize five main points. To begin with, we achieved record operating results of nearly EUR 5.9 billion for the third consecutive year, and every business line contributed strongly. Our adjusted net results came in at EUR 2.8 billion, which is also the highest we have ever recorded. In addition, total gross written premiums climbed to EUR 75.8 billion, rising in both the life and P&C segments. Once again, these achievements demonstrate how solid our business model is, even under the current unexpected conditions. Second, the group solvency ratio hit an excellent 227%, which is 3 percentage points higher than at year-end 2020, and that was while absorbing the impact of M&A redeployment. In light of these achievements, we will propose a dividend per share of EUR 1.07 to our shareholders. Third, with these results, our strategic plan, Generali 2021, has officially come to its conclusion. Even in an unprecedented global scenario caused by the COVID-19 pandemic, which is still not over, we managed to execute successfully, thanks in large part to our group's agility and our people. Fourth, our commitment to sustainability, which will keep growing, has enabled us to deliver a strong performance for all stakeholders.

To wrap up, our attention now centers on the new strategic plan, Lifetime Partner 24: Driving Growth, which we are already actively putting into practice. Sustainability sits at its genuine source, and the plan rests on an even firmer pledge to serve as a lifetime partner for our customers. That pledge matters more today than it ever has. We are eager to share with you how the plan is progressing next month. Until then, my team and I are glad to field whatever questions you may have. We appreciate your time.

Pardon me. Speaking is the conference operator at Chorus Call. The question and answer session starts now. Should you want to pose a question, you can hit star and one on your touchtone phone. If you'd like to drop out of the question queue, just press star and two. When you ask your question, please lift the receiver. At this point, anybody with a question can press star and one. Our first question comes from Michael Huttner of Berenberg. Go ahead, please.

Thanks so much, and well done. These results really are remarkable. I have 3 questions. The first concerns the rate increase, the second has to do with cash, and the third relates to Cattolica. On rate increases, I've talked with many of your competitors. Just like my colleagues, there's nothing unusual about me at all. Groupama, Unipol, AXA, and every one of them.

Michael?

Yeah, yeah.

Pardon me for cutting in. Could you fix your microphone, please? Your voice isn't coming through very clearly for us. Sorry about that.

Is that an improvement?

The volume is a little low.

Sorry, is the volume low? It's just that I'm using my.

At this point, it's perfect. Right now, it's perfect.

At this point, it's perfect.

Thanks.

Alright, apologies for that, and many thanks. Thank you, Giulia. On rate increases — mostly in personal lines — I recently talked with AXA, and we'd also spoken with Groupama and Unipol earlier. In their respective markets, with AXA being more European and Unipol clearly Italy-focused, all of them indicate they're struggling to lift rates at the same speed as perceived inflation, or something along those lines. Perceived — I'm never entirely certain what that term means. I wanted to ask whether you could weigh in on this, and whether it might hit margins, since obviously other factors like frequency come into play. That's the challenge when it comes to pushing prices up. The second point concerns cash. Net cash remittance of 8.4 billion over the past three years is a remarkable figure, considering your original goal was above 7.5 billion. It makes the following target seem, well — I won't say simple, nothing is simple — but it appears to be 8.5 billion. You sort of think, "Hmm, that isn't much." I was wondering if you could say how much conservatism you've factored in, or give us a sense, because it feels a bit low compared with what you've delivered. The last one is Cattolica: given the accounting and the shift from equity accounting to full consolidation, and so on, I was wondering whether you could indicate what that number would have been in 2021 if you'd owned it entirely across those years, so we can get a sense of when to build a model or, you know, what to assume for 2022.

I’m not able to take a question about 2022, but that approach works best. Thanks.

Thanks. Philippe, I’d suggest you handle the first question, and then Cristiano can take the remaining ones. Thank you.

Hi Michael, and thanks for the kind words.

Yeah.

I'll take the first question. You know, in the insurance industry people aren't accustomed anymore to raising prices, because for decades there was no inflation. A lot of underwriters don't even know how to raise prices annually. As for me, I've been in this business for almost 40 years now, and I recall when I was young, I raised prices every year, and that was normal. We're returning to that kind of situation, since inflation is back. Inflation is a good way, a good lever, to be able to raise price. That's the philosophy. That said, we're taking actions within our group to put pressure on all business units in every country to monitor prices, to raise prices. We'll monitor this very carefully. I think something else that's also very important is the quality of our distribution. As you know, it's a proprietary distribution. We have, I would say, a very loyal distribution, and we also have, because we have loyal distribution, we have loyal customers. I would say we have customers who were a little bit more sticky thanks to our proprietary distribution. This is also something that can help us monitor prices better than our competitors.

There's one more point I want to make, and it matters. We have kept making our position in the market stronger across a lot of European countries, and the stronger your share of the market is, the greater your power over pricing. I feel quite confident that in the next few years we will be able to raise prices.

Thanks. Thanks.

Hi, Michael. This is Cristiano Borean. Regarding cash remittance, I accept your challenge, though I want to make a couple of points clear. Let me take a retrospective view first, then a prospective one. Looking back, across the three years we're closing out, we're in fact accounting for a specific excess capital repatriation operation and, more broadly, capital management actions. Within that three-year window, we had close to EUR 1.8 billion of capital management action between 2019 and 2021. Beyond that, there was EUR 300 million of one-off excess cash stemming from fiscal consolidation benefits, which was not foreseen. If you add those together and strip them out, then compare against the EUR 500 million of capital management envisaged in the 2022, 2023, 2024 plan I mentioned in December when we presented it, it's essentially 1.8 plus 300, so 2.1 versus 500 — meaning there is EUR 1.6 billion more. Let me offer another perspective. Take the net holding cash flow of 2021, which is EUR 2.6 billion, and multiply that by three, and you arrive at EUR 7.8 billion of net holding cash flow. The 8.5 is in fact somewhat growing and challenging, and it is not, I would say, a walk in the park.

I do accept the factual point, but we have to grasp the dynamics underneath. On the third question, which concerns Cattolica — here I hope I won't let you down, since that theoretical question simply cannot be answered. When a company is consolidated depends on the timing of the deal; you must revalue fair value, every asset and every liability. The answer hinges on the moment you perform it, and it does not represent the forward-looking view. Let me perhaps try to assist with your exercise, which is what you are forecasting and anticipating will happen. Cattolica's contribution to the group overall in 2021 comes to EUR 110 million, and that stems from 10 months of equity accounting plus two months of full accounting. Here I want to make one point clear. You cannot extrapolate the minority component result, which we don't have, out of a full Cattolica result, because when we performed the so-called purchase price allocation, we allocated the badwill to our VA. We readjusted every asset and liability relative to what appears on their balance sheet. Just to give you a sense, in the operating result contribution, since the first 10 months were fully accounted within the P&C component, we have EUR 146 million of Cattolica contribution in the 2021 operating result figure, of which EUR 70 million sits in the Life segment and 129 in the P&C segment, yielding a net result of EUR 110 million, because the first 10 months were accounted under the equity method — we saw the full amount, so it was gross equal to net on the contribution.

Looking ahead, if you want to make a projection, you need to factor in that Cattolica still has a restructuring under way. In the coming year, you should anticipate that the stake Generali has reached will go after something in the mid- to high double-digit EUR million range, so a bit under the triple-digit figure you saw this year.

Excellent. That’s really useful. Thanks. Thanks, Cristiano.

Let's take the next one. Our next question comes from Andrew Sinclair at Bank of America. The line is yours.

Thank you. I agree. Nice work on these results. I have three questions, as usual. First, regarding parent company liquidity: could you tell us the level as of today, and how much would remain on a pro forma basis once the announced acquisitions and the buyback are subtracted? Second, on the very strong P&C volumes — premium volumes in Q4 — like-for-like growth of 9.4% in Q4 is a huge number. I just want to understand whether anything one-off is included there. Third, on the Swiss reserve strengthening: I'm wondering if you can give us the contribution for 2021 — what was the total figure in the end? And remind us how much you now expect for 2022? Thanks.

Thanks. Those are all yours, Cristiano.

Yes, Andrew. Let me recall, since if you look at Assicurazioni Generali’s local GAAP balance sheet, you’ll see nearly EUR 4.1 billion of cash. I should explain where that comes from. Just as you mentioned, Andrew, there are many items we need to take out. First, keep in mind that we pre-financed EUR 500 million of debt; part of that already took place in February, and the remaining portion will be called on 1 July of this year. We had EUR 500 million set aside for that transaction. Beyond that, there is EUR 500 million for the buyback and another acquisition of the same size, which comes to an additional EUR 1 billion combining the buyback and the acquisition we already announced and reserved. In addition, don’t overlook that we hold a EUR 1 billion liquidity buffer, which I keep and limit for other purposes, particularly in an uncertain and volatile environment like the one we face today. The remainder is simply sums that fluctuate for treasury operations. Ultimately, what remains is what we showed at the December investor day, where essentially, after deducting the buyback, we have EUR 0.1 billion–EUR 0.2 billion left that was not used from the prior plan.

On the P&C premium growth question, is that a one-off? What we definitely saw is two effects at play. One is the 2020 baseline effect, which was partly hit on collection, on the COVID impact. The 2021 restart has, in relative terms, a point. Let me remind you that given the pricing action and the strategy we announced coherently as well in December under the strategic plan, we expect low to mid percent premium growth across the three years. A third question concerned the Swiss reserve strengthening contribution for 2021. We were around CHF 300 million. For 2022, I recall that under the IFRS accounting approach, the reserve is more than complete on coverage. We keep prudently reserving in 2022 as well, and we expect something in CHF 200 million plus, depending on how things go. Obviously rates are up now, and we do not anticipate a deviation from this. I remember that each year, on the liquidity pro forma part, just to complete the first answer, I would like to add that if you take the EUR 2.6 billion of net holding cash flow for 2021 and deduct the proposed dividend of EUR 1.7 billion, we land in the ballpark of EUR 900 million-1 billion of free cash after dividend, which the group generates recurringly on a yearly basis.

That’s really useful. Thanks a lot.

Moving on to the following question.

Our following question comes from Farooq Hanif at JPMorgan. You have the floor.

Hello, everyone. Many thanks. Let's move straight to the combined ratio, if we could. You mentioned a 92.3% combined ratio once COVID impacts are excluded. What makes you confident that you can return to 92 or lower going forward? Could you walk us through some of the drivers? Specifically, I saw that France had a significant rise in the underlying loss ratio. There was also a loss ratio increase in Italy. Can you shed some light on the factors at play there and what could improve? That's the first area I wanted to ask about. Second question: could you flag once more, aside from Cattolica, whether there are any one-offs within the non-life investment results that we should factor in? My final question is also about Cattolica: now that it's part of the business, can you remind us of the timing and plans for any future synergies, revenue, and costs that will come through and that we should build into our numbers? Thank you.

Yes. Let me begin with the combined ratio, Farooq. Good morning. On an ex-COVID basis, 92.3 — that's why we hold to the 92% guidance, and 92% is under that guidance. The factors behind it come down mainly to a couple of items. On the pricing side, we're raising rates across the board, in both personal and commercial lines. Commercial lines, clearly, more than personal, but we already have this flowing into every line of business. Beyond that, we're handling our claims in line with that, managing payment speed so as to cut the delay time as well in an inflationary environment. Beyond that, there's the frequency effect, which you should factor in too, because we are seeing anyway a macro trend on potential frequency. That still needs some confirmation, but even at the start of the year, in the first two months, the impact of the less severe yet very well spread, widespread COVID infection contributes some lower frequency effect. We remain under the pre-pandemic level on frequency. If you combine all three factors, that is what gives us this direction. I also recall the very prudent prior year effect of 2021 as well versus 2020.

Just a reminder that, as we move forward, everything needs to be viewed under best estimate rather than as a current year. In the second half of the year, the France combined ratio took a hit from a greater frequency of bodily injury claims, and also from a higher level of prudence that we built into the business. But I want to be clear that nothing here is tied to underlying profitability. On the investment result, there was the Cattolica benefit, which came to EUR 83 million, made up of the equity accounting contribution plus the two months. There was EUR 101 million of Banca Generali dividend, along with EUR 163 million of dividends from Lion Re. As for how sustainable this is going forward, if I look at the figure we are projecting for the investment result in P&C, we have — particularly on the current return in general, across all investment components, and not just the current one — essentially a stable 2022 budget versus 2021. I'll now turn things over to Philippe.

Hi Farooq. Yes, regarding Cattolica, as you're aware, right now we hold 84.5% of that company's shares, so we have control of it, and we're already running Cattolica as a consolidated subsidiary. We've also begun the merger process with Cattolica. As you know, we'll pursue a delisting and a merger, or a merger and a delisting. Obviously, this process calls for some regulatory steps. We haven't ever disclosed any plan for the merger, but clearly, we'll merge as soon as we can. I can confirm that run-rate cost synergies will exceed EUR 80 million a year.

Thanks. That makes sense. If I could, I’d like to ask just one more thing about the combined ratios. I recall that historically, in motor, you didn’t fully take much of the frequency benefit during COVID. Is that also something where prudence is available to you to help smooth out the combined ratio?

Yes, Farooq. Let me also add something to round out the first question. There's one more point I'd like to share with you, which I believe will be helpful, and after that we can connect on the frequency topic. Keep in mind that during 2021, natural catastrophe impact ran above average — it was actually confined to 2.2 percentage points of combined ratio, yet clearly higher than our historical average, due in part as well to the sound reinsurance coverage strategy we follow. That's an additional driver. As for frequency and severity in motor, we have consistently taken a prudent approach in how these are reflected within the accounting component. Remember that when you examine the capital generation part, where the current year best estimate result sits, you have the actual development under the economic underlying effect. We continue to see an improvement in 2021. The sole country that came in below 2020 was Germany, on motor frequency. In Italy, frequency rose clearly to levels representing more than a 20% increase in relative terms of frequency in Italy and France, but those remained well below the nine, still under the 2019 level. I hope this offers you some guidance. Also, this year, we are beginning the year in the first two months.

What I saw was a frequency that sits under the average level for motor in 2019.

I appreciate that — that’s genuinely useful. Thank you very much.

Let's take the next question.

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

Oh, hello. Cristiano, apologies, I'm a bit confused. I just want to follow up on what you said. Why is there a bigger gap this year between the IFRS non-life result and the S2 own funds P&C? Last year I could sort of take the IFRS number and more or less get there. If you're booking IFRS more conservatively above best estimate than you were before, that doesn't make any sense to me, because S2 is on a best estimate basis. Can you explain the difference this year — why the gap is larger between S2 P&C generation and IFRS? Second question, on non-operating restructuring charges in Q4 or the second half of the year, I understand the Cattolica restructuring. Maybe clarify whether most of that restructuring charge is done. Could you give us a bit more detail on all the other restructuring charges? There seems to be a shopping list of other restructuring charges. There's about another EUR 100 million in Italy outside of Cattolica. You mentioned France. You mentioned Switzerland. Are you sort of up-fronting some of the investments for the plan, or should I assume some of these recur? And just the final thing is a clarification. When I look in the annual report, it talks about EUR 10.7 billion of private equity on page 320.

Is that the new figure? My understanding was that the private equity stock stood at roughly EUR 7 billion. Are you saying it's 10.7 billion? And do you have any view on what the pipeline of realizations looks like for 2022 on that? Thanks.

Over to you, Cristiano.

Yes, Andrew, thank you. Now the gap between P&C and own funds is wider than it was a year ago, and keep in mind that during last year we had a very low frequency element. As I mentioned earlier, in 2021 versus 2020 we saw this rise in frequency on underlying economic terms. Remember that this also shows up through the underlying combined ratio on economic terms coming in higher. Essentially, there's an effect where, if you simply assess it under the premium, you're roughly three percentage points higher on the current year best estimate effect in 2021 versus 2020. Bear in mind that we also have some investment effect, but the current year best estimate was the main driver. Regarding the non-operating restructuring charges, the ones that weren't Cattolica, there was, on top of the completion of a plan begun in France that was to be completed, called Excellence 2022, which was essentially us entering the final part of our restructuring plan too, and during 2021 there was an acceleration. There was an acceleration of certain exit expenses on CTAs involving, let's say, people in Italy, on top of the Cattolica piece. A new restructuring plan was launched in Switzerland, which began to bite in 2021, but will speed up across the plan 2022 to 2024.

All in all, there wasn't really any acceleration relative to 2022 to 2024. There was, let's say, some anticipation of certain specific projects, but no acceleration versus the announced investment that was done. Looking ahead, you should expect lower restructuring charges in any case, since this was a very specific year. That said, we will keep working on our operating expenses to transform the company. What's the private equity stock tied to year-end 2021? At the balance sheet level, we hold almost EUR 10 billion of private equity, and we foresee that increasing. Essentially, the private equity result in 2022, particularly on the operating contribution side but also on the net, is almost flattish, slightly lower. That's because there was a small one-off contribution in 2021 from some unicorn investment we had in private equity. Going forward in 2023, 2024, given the different mix I mentioned previously between life and P&C, where in P&C you benefit 100% of the result, while in life, you know, you have less. With the greater weight of life versus the P&C component, we will have something on the order of about EUR 100 million of operating result lower than the 2021 contribution at the budgeted level.

We’ll see — because, as I remember, you know, we also have to factor in that starting in 2023 under IFRS 9 accounting, we’re going to see the entire fair value change on the private equity investment.

Thanks. Could I ask a quick question about the restructuring? I believe the commentary mentions pension plans or pension reform in France. What was that about, and what does it look like going forward?

Yes. Beyond a restructuring charge, that was a form of other net non-operating expense. It wasn't included in the restructuring line, but rather in other net non-operating expenses. This is a charge of almost EUR 40 million — roughly that's the ballpark — which we took in anticipation of a possible pension reform change in France. We were among the first to do so, because we believe that if this is enacted, you have the disability cost, which will rise for the company, since you pay disability costs to your insured people up until the retirement age. If retirement age is pushed back, your disability cost goes higher. We did this and booked it in anticipation, prudently, in line with the balance sheet closing. You can grasp the level of prudence we applied for this year.

All right, thank you so much. Appreciate it.

Let's take the next question.

Peter Elliott from Kepler Cheuvreux has our next question. Go right ahead.

Thanks a lot. There are a few areas where I’d like to get some clarity on the numbers too. To start with asset management: could you expand a bit on that EUR 30 million effect coming from real assets? On the China result, you mentioned it came in much stronger than you’d have expected at the investor day. Should I read that as meaning it is partly one-off in nature? Or, since the transcript also refers to growing contributions, I’m just trying to get a sense of how much of it might potentially be one-off. Then, second, back to private equity. You provided the dividends for non-life at EUR 88 million. I was wondering whether you could also provide the dividends for the other divisions. Looking at the non-life dynamics, the EUR 88 million of dividends implies that the private equity result tied to non-life was EUR 247 million. I mean, I suppose you’ve just given guidance on the budget for next year. Am I roughly right in thinking that a good proportion of that 247 should make it through to non-life next year?

Thanks a lot.

Peter, sorry — could you please ask that second question again? The first portion wasn't very clear on your two phones.

My apologies. All right. The second item concerned private equity. You provided the dividend figure for the non-life division, so I was asking whether you could provide the figures for the remaining divisions as well. I was also attempting to grasp the mechanics here, since you mentioned a dividend of EUR 88 million, which, based on your reconciliation, I believe implies EUR 247 million of private equity results tied to non-life. And is my understanding correct that a substantial share of that ought to show up in dividends for that division next year?

Alright.

Much appreciated.

Okay, okay, that's clear now. Let me walk you through it. First, an explanation of the EUR 30 million impact from real estate. It comes from a mix of specific fees tied to a higher transaction level when we partially sold our skyscrapers in Milan and in Paris. Also, there's our one-off carve-out operation, which was carried out during 2021. On the Chinese Guotai, it came in much better than expected. Is it a one-off? Well, we hadn't forecast such a positive contribution. We're seeing a track record at this company, which is growing — just for your reference, since 2009, they've increased assets under management by more than 10 times. There's a very positive dynamic at this company, which is performing well above the Chinese market's stock exchange, generating interest in it. We hold an equity stake, which is accounted for as an equity contribution, which, by the way, also distorts income when we calculate the cost income ratio, because it's an income without a cost, you know, which is clearly supporting it. Regarding the private equity dynamic across all the divisions. What we communicated is — and I think you should follow through more on this — the combination of the managerial look-through view, where all the profits were there, which is something we also put in the presentation, and not all dividend paid.