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

You really have to take the 3-year horizon into account, so that we can provide some support. And of course, we also need to factor in — though in certain cases the amount we invested was driven by provisioning; take Germany, where the provision is something we certainly expect to stop occurring before long under these conditions, beginning in 2023. So there is less that needs to be reinvested compared with what you had on the books. That, we believe, could be a positive factor capable of offsetting the inflation-driven increase we are seeing, on one hand in claims costs and on the other in the pricing element. And of course, on the P&C side there is always a lag between claims cost going up and pricing rising to support it. The same applies to wage expenses, because across the board we see mounting pressure on the disposable income of our employees. So plainly, we must do something else to preserve this. Don't rely solely on earnings generated by higher yields — also step up the pace of accelerating the operating machine's efficiency transformation, prioritizing the projects that deliver efficiency, so as to map it out and also remain in containment of wages.

I have just one more question, if that's okay. On the whole, would you still say non-motor is notably more profitable than motor?

Yes, that's right. And across every geography, it will remain considerably more profitable than motor. The one region where motor and non-motor are not that far apart is Austria and Central and Eastern Europe, given that market's particular equilibrium, so to speak.

Moving on, our next question comes from Will Hardcastle at UBS.

To pick up a bit from what was just said — first, on motor premium in Germany and Italy in particular, you mentioned those have come down versus a year earlier. I'd like some detail on each of those markets: separating what stems from pricing and what stems from volume, and whether competition there has been especially fierce, then maybe layering in the inflation picture for those two markets. Second, on geographies and business lines, from a big-picture standpoint, where would we — where ought we to feel the most inflationary pressure on your business, whether that shows up in what gets passed through to customers or in terms of the back book?

Yes. Thank you, Will. Now, regarding motor premiums in Germany and Italy — let me begin with Germany. If you take the overall average motor premium there, it's largely holding steady, and what's behind that is a mix of a modest rise in Motor Other Damages alongside motor TPL that's either flat or easing slightly. That needs to be factored in given the frequency, particularly in the upsell up to now, which is also pushing pricing toward an equilibrium. In any event, we're definitely observing some competition, yet our distribution strategy continues. Keep in mind that Germany gives us 3 channels: the proprietary one, then the third being <<inaudible>>, DVAG, and on top of that our direct distribution via Kosmos, and finally the broker channel with <<inaudible>>. There, we're actively working, above all with bundled products that also carry a non-motor element, which helps us get overall P&C profitability to the level we want. Even so, in this country too, as everywhere, we're prepared to respond in line with inflation. Italy, of the 2 countries, is certainly the one where competition runs highest.

Even with our leading position, we're clearly in a market that's coming under pressure on average premium—particularly in motor TPL, where average premium is still declining for the frequency reason I mentioned. At the same time, we have a very positive trend in Motor Other Damages, which our fleet supports, along with the strategic product enrichment strategy we're pushing in general. So the basic strategy isn't different either. The group will act accordingly, clearly starting from a leading position and having all the point. But we've already heard publicly in the press—yet we are not alone in the movement on tariff in these kinds of countries. On the second question, where should we see inflation impacting the business, I'd like to give you 3 angles. If you look at our sensitivities, let's say, if you look at our solvency movement from year-end 2021 to first quarter '22, we had an increase in projected cost from the standpoint of the normal way you do it with the indicators. And that negatively impacted our solvency by 2 percentage points. These are mainly related to normal cost—operating cost—and, in minor part, also to inflation cost on the claims.

Since you mentioned the P&C claims, as we explained before, we hold reserves that include additional embedded inflation in motor TPL of between 4% and 5%, calculated annually through the end of the latest claim, and we remain resilient given the prudent environment. So inflation should be felt more in the wage component, potentially. That is what we must manage in line with the acceleration of the strategic project. Another area where inflation may hit is claims from newly underwritten business — hence what I said in response to the first question, the reactive approach and the proactive approach to managing it through pricing, and not only that, but also through risk selection and simplification of client management, which is a very important driver we continue to pursue, because we are also continuing to simplify how we operate claims management, reducing, let's say, the factories of paying claims, the number of claims, in order to also achieve sufficient efficiencies to tackle this. So these are the counter levers we are attempting to use.

Andrew Ritchie from Autonomous has the next question.

Let me start with the first question. I recall that when we spoke around the full year results, I asked about your expectations for private equity, and at that point you indicated it would be down slightly. To be clear, I mean the total return on private equity here, not the dividend. Has your expectation come down once more since then? In Q1, the total return was below the dividends, as I see it, and I understand there's some timing element in that. Still, given the volatility in markets, should we be thinking the total return on private equity could be lower than what you were perhaps expecting? So an update there would be helpful. Second, a question on the numbers. Life profit growth was fairly strong in the technical result, but let me check something: last year there was EUR 27 million of COVID impact in there. Did any COVID impact show up in Q1 this year? And my last question: I'm still somewhat unclear on what exactly you're telling us about non-Life claims severity. I suppose I'm setting it against how relaxed management seemed on this topic at the time of the full year results, and matters appear to have shifted. You yourself raised it several times that there is considerably more non-Life claims inflation.

Could you give us some sense of what severity is running at in, say, Italian motor? I think one of your competitors said last week it was running at 6% — what do you think it's running at? And presumably the speed at which severity trends have changed has surprised you.

Yes, Andrew. Turning to private equity. In the prior year, we benefited from certain one-off items — let's call it a unicorn investment — which essentially produced a result above what a typical cycle would deliver. If we normalize for that, it added roughly EUR 100 million to the operating result, not net, I believe that's when we had our first re-discussion, and we confirm the 2022 view on the budget. Even so, our private equity remains resilient. On that basis, it is generating positive results. And one clear area of focus is how dependent this private equity result is on leverage. Our investment selection and investment strategies are tightly concentrated around this source. Thus far, we are confirming it. And at this point, we could point to sufficient robustness given the track record already established, I should say, on that front. The second question relates to Life profit growth, beginning with the technical result. The covenant impact this year is largely negligible, since we exited the high effect of the last 2021; we're still in average countries that are, let's say, further away, like Brazil, but even I recall the big effect we had in India and other countries, which could have affected this.

At this point we're truly talking about a negligible figure. What we're describing remains a deviation in the single digits. A negative impact of that size can't produce a material effect. As for non-Life claims severity, certainly, we remain unconcerned about that movement. What we've seen so far is, in particular, some specific movement where claim severity, to be sure, is rising more quickly — at the fastest rate in Germany and Italy, for instance — and overall we're still seeing some cost increase when I look at average spare parts, Motor Other Damages included. So if I look, for example, at what I've observed not just in Germany but also in France and, generally, in Italy, I can tell you that on average the average cost is rising by 5% in Germany and 4.3% in France. Then there's a somewhat counterintuitive effect on average cost in Italy during the first quarter of '22, which is falling, partly because in Italy there's a somewhat different mix and a lower number of damages, bodily damages. So setting that aside, I think you get this overall effect.

Regarding the total effect, I’d like to add a bit more detail to the second answer I gave you. In the prior year, COVID had an impact of EUR 27 million on us. And at this point, as I mentioned, we’re looking at a figure in the single-digit millions of euros, which is essentially negligible when set against what happened last year.

James Shuck from Citi has the next question.

Okay, my first question is about the Life segment. If I look at Life operating profit, it rose 7% in Q1. There are several moving parts there that make it hard for me to project the remainder of the year, since flows are very strong, while the investment result actually declined in Q1 because of lower realized gains—yet technical results climbed 20%, which you attribute to greater unit-linked and protection sales, though I would have assumed the back book mattered more than new business sales alone. So I suppose your guidance is that the Italian investment margin dips somewhat in basis points because of Cattolica, while underlying excluding that stays flat. Looking ahead, with all the market volatility we are seeing, and with realized gains having largely disappeared, and with the investment margin possibly not performing as you expected, and then this favorable technical result effect, putting all of that together and considering the full-year Life operating profit outlook, I find it quite difficult.

Anything more you could share on that would be really helpful, thanks. Then my second question concerns asset management. Operating revenues relative to AUM come to roughly 20 basis points. I believe that held true last year and still does in Q1. Measured against peers, that figure is low, especially once performance fees are excluded. For the first quarter, it now sits closer to 17 basis points. Part of this may stem from lower fee charges on internal funds rather than external ones. But could you help me see why those operating revenues, measured against AUM, run low compared with peers?

Yes, James. Let's work through the Life operating profit discussion. What I'd say is that our view at year-end remains an operating profit increase in the mid-single digit percentage points, okay, versus the prior year's result. So what's behind it? To begin with, on the investment margin, as you've seen, it's broadly stable. But I want to point out that, yes, unrealized gains could come down, though on fixed income that isn't what we use when managing the portfolio — it's tied more to the equity side. And we're also moving further toward the approach that will begin to take hold starting next year, where we focus more on how asset classes are viewed, the total return component versus just the pure part, which means capital gains matter less, particularly in this environment, but also on a recurring basis. I'm referring to the new accounting principle view of normalizing any capital gain in the Life book and amortizing it across the Life of the contract, as will happen from next year. As for the effects, I'd like to say that in the investment component, you have pluses and minuses.

On the Italian side, you're seeing a stronger improvement, but in Asia, for instance, there's a decline, since we booked some capital losses there—we aimed to pull back from Chinese equity exposure (not fully exit, just scale it down) given the worsening COVID situation and its effect on the economy, so as to derisk this somewhat. As a result, you don't see an immediate uptick, which otherwise would have shown up. We also trimmed the capital gain. I'm also thinking of the reduction in France, so as to also gauge—shift toward the long term. Conversely, technical profit went up. It's true that the stock is what's driving it. Still, don't overlook that unit-linked is contributing a great deal and growing. And some specific countries are worth noting—in France, unit-linked isn't included in profit sharing, whereas in Germany it still is, because all the results of, say, companies are shared at 100% of the results with the policyholder. That portion isn't shared. So in France, you see a feasible rise in the technical contribution from unit-linked, which is a positive driver.

Actually, you continue to observe a productive, highly profitable existing protection business that is materializing in Italy and in Asia as well. Since the stock generated a technical result that we are beginning to see, and that was more of a stock effect than a flow effect. So taking everything into account, I maintain my expectation of a mid-single-digit rise in operating result. As for the second question, moving to the second question. I believe certainly, when compared with peers, don't forget we hold a larger share of fixed income and liability-driven investment mandates, which carry lower management fees than peers, and our third-party share is also smaller. Certainly, we are talking about mandates that mainly still come — we have always stated that our revenues were 70% captive and 30% third-party. And when we talk about that 70% captive, clearly, you are extracting on a basically fixed-income basis. We are attempting to grow it, thanks to the real asset strategy. And private debt, including private equity, are also ways to create alignment of interest and an increase of value. Certainly, these are the main drivers. So we have a smaller component of non-liability-driven, non-fixed income, specific alpha value carrying higher fees compared to certain other peers.

So that's really the fundamental driver behind operating revenues relative to assets under management.

That's really useful. Just on the Italian investment margin, once you strip out Cattolica, do you remain confident that this margin can hold steady in basis points? In other words, is there some inflection point, and if equity markets were to drop after that, would that no longer hold true?

Right. Just so I'm clear, you're asking me about the Italian investment margin on a net basis excluding Cattolica — what will drive that going forward, is that right?

No. I believe you mentioned that, with Cattolica left out, the Italian investment margin measured in basis points should hold steady in '22. So I'm just trying to understand whether that remains true. And if equity markets keep declining, at what stage would that start to come under pressure?

Yeah, it's resilient. And the prudence and the de-risking we did in the prior year are also helping to lower, let's say — on one hand the impairments, and on the other hand the need, if an adverse situation eventually arises, to realize gains. So I confirm its stability.

Michael Huttner from Berenberg has the next question.

There are 2 things I'd like to ask about. First, on asset management: could you provide the 2021 figures for us to use as a starting point, as it were — the full year — and include in them perhaps the performance fee number that was in there last year? Second, regarding the cash at holding: I know you disclose it only once a year, but since solvency has risen so strongly, I keep thinking there is probably more there than at the year-end. I believe it was EUR 4.1 billion. And the last one is a bit philosophical, so I'm not sure it's very valid. But if I picture high inflation, you have to raise pricing for that, so you need more capital, because capital in non-Life is somewhat linked to premiums. Does that mean higher inflation actually indirectly hits solvency, not just through the direct effect of higher cost?

Michael, I'll begin with the final question, since I prefer to open with philosophy—that matters here. I have said it before and I'll reaffirm it now: inflation reduced our solvency by 2 percentage points, and that comes from the combined impact of higher projected expenses, which must be projected using mechanical indexes rather than, shall we say, budgeted cost at all times, because the projection has to cover the contract's entire life. Your budget, after all, typically spans 3 years. So a mechanical effect exists, and it also drives things such as inflation. Conversely, there is likewise the fact that you have a counterbalancing element in P&C as well. I want to point out that a great many of our P&C products—non-motor in Austria and Germany—carry inflation indexation. So a natural adjustment exists around this, and it helps in managing the situation. Hence, philosophically and practically alike, what happens is that our solvency, yes, does get affected when an increase occurs. The sole point is that the projected rule is not the one tied purely to HICP inflation. So do not assume that a 50 basis point rise in harmonized inflation core price—index core price means our projected Solvency II inflation rises by 50 basis points.

It’s not a direct one-for-one relationship, but there is a mechanical impact. Even so, there’s some positive inflation-related benefit in certain health businesses, particularly in Germany, because of how costs and the premiums tied to those medical costs are affected—how the contract is structured and how the rule works out. So you get plenty of pluses and minuses. In the end, the result is a net minus. And in my view, the bigger biting effect comes from inflation—you really need to first break it down and separate what portion is wage inflation, which is negative, and what portion is claims inflation, which is also negative, but then you set that against the pricing effect and what’s already embedded in the best estimate of the liabilities, which helps and supports you. So net-net, yes, there is a negative effect, mainly driven, in my opinion, by the wages component, if I had to name one. The second question is about cash at holding. We don’t actually disclose the total figure. But I want to tell you, it’s a very simple exercise we can do backward together, okay? Don’t forget—and I hope all investors will not forget—that next week we will pay our EUR 1.7 billion dividend.

There's still EUR 300 million of our subordinated debt left to be withdrawn as of July 2022, so that brings it up to EUR 2 billion once you add the 2. And if you also factor in that we've already committed to a buyback plus some M&A, altogether that's another EUR 1 billion of cash that's already set aside. Beyond that, we've already finished 99% of the 2022 remittances. To put it almost entirely simply, we already hold the excess free cash above the EUR 1 billion dividend, as I mentioned, that we've managed to build up each year. On the yearly side, once you subtract the dividend, the net holding cash flow comes out basically around EUR 1 billion available to you. So you total up all of those components, and you also add the fact that in this volatile environment I always keep EUR 1 billion as a cash buffer. Everything else belongs to the treasury side, which you needn't take into account given its nature — it isn't free money, it's simply there to maximize centralization along with the results and return and, shall we say, the liquidity risk surrounding it, but it isn't fungible for external operations.

Regarding asset management fees, which came up first: in 2021, we recorded EUR 57 million in performance fees. I'm talking specifically about Asset Management here, not Asset & Wealth Management — keep in mind that Banca Generali also sits within that segment. Let me remind you that last year Banca Generali posted an exceptional EUR 220 million in performance fees, again within Asset Management, and I believe they've already communicated that clearly to the market. But I want to remind you that this year, because of the high watermark mechanism, if the market doesn't return to the starting level, we are not anticipating — nor even forecasting — any further performance fees for Banca Generali. That, I think, is the answer to your question.

William Hawkins from KBW has the next question.

Cristiano, thanks for making the time. On the Solvency Ratio, that 237% — can you walk us through the numerator and the denominator? The move is fairly large, so knowing what drove that change would be useful. Second, on the 11 percentage points you mentioned for market movement, you've already provided the inflation detail. Again, I don't want to go much deeper on this, but several companies have reported solvency ratios where the market sensitivities they published have been pretty clearly offset by inflation and volatility. My impression with Generali is that although you've cited inflation, the overall change appears consistent with the market sensitivities you gave at the start of the year. So it seems to me you've benefited from the markets without those offsetting drags that have hurt other companies. I'm not sure how you're thinking about that — perhaps I've misunderstood the sensitivities. I don't need a lot of detail. It's just a positive surprise that leaves me a bit confused. Then 2 other quick things, please. The unrealized gains now appear to be almost eradicated, and presumably once we account for the second quarter, they're gone.

Does that matter to you at all? Or does it make no difference whatsoever what unrealized gains you’re carrying under IFRS? And last, on the 6% increase in non-Life gross written premium, how should I think about the movement in net earned premiums? After all, that is what drives your underwriting result. Perhaps I’m overanalyzing this, but given the shifts in earnings and in how you earn premiums, and given Cattolica, how ought I to think about how net earned premiums are trending in the first quarter and the first half compared with that 6% gross written figure?

Okay, William. Let’s begin with the Solvency Ratio. As of the first quarter of ’22, that 237% figure is made up of EUR 50.2 billion in own funds and EUR 21.2 billion in solvency capital requirement—those are the numerator and the denominator. Then there were 11 percentage points of market variances, and the sensitivities were offset by inflation and volatility. For us, first of all, I’d like to say that I heard some comments suggesting the movement we saw wasn’t sufficiently consistent with what the sensitivities indicated. But let me point out that I did an outside-in—I know you may think I’m biased, but I really did a mathematical outside-in sensitivity, and I found myself slightly higher there, net of the 2 percentage points of inflation, which weren’t reported for other sensitivity. Yes, we had some negative effect on volatilities of 2 percentage points, which may be not easy to capture, but all the other factors were coherent with what the sensitivity projected. So for us, that’s how it worked. And I recall that the movement in rates was basically, for us, just the largest one. And we feel the market variances were 14 percentage points of solvency—the base rates, I mean the interest rate improvement.

On the second — sorry, the third question, about unrealized gains: do those matter to us? Absolutely — first off, they haven't been wiped out, because we have to be clear about what unrealized gains actually are. Some sit on the balance sheet and some sit off it. Let me remind you that, off balance sheet, Generali holds one of the biggest pools of unrealized gain anywhere in real estate, broadly speaking — you can see that when you reconcile the tangible component of IFRS equity against own funds. Second point: yes, interest rates and corporates have moved. My sense is that, on rates, at today's level, you're not far from a position where, broadly, with pluses and minuses, there would be no unrealized gains left overall. Even so, we still carry positive unrealized gains within our private equity investment fund unit, on top of what sits in real estate. Our concern is purely near-term flexibility. More generally, let me remind you why we are also not managing and growing — why we were more cautious on capital gains: it comes, on one hand, from the economic picture for interest right now, and also from the projected picture for next year's results under the IFRS 17 and 9 regime, where, put simply, what will count most is ALM matching.

Take a portfolio like our Life book: if unrealized gains are being depleted while you're matched and you're not seeing — as is the case for us right now, with no departure from the operating assumptions, whether lapses, deaths or morbidity — then assuming the portfolio is matched, this is the optimal approach for running that portfolio under the new IFRS 17 and 9 regime. That's how we think about it. And let me remind you that on IFRS 9 as well, next year, you may end up with fewer impairments thanks to the fair value rule for CI accounting within the P&C component, whereas this year that volatility can still be present. So there are plenty of pluses and minuses. In fact, next year there will be greater volatility coming from the instruments, which under the new rules will go through profit and loss at value. Broadly, though, for us the handling of unrealized gains is really about short-term flexibility. We simply measure it against market volatility. Then, what's the gap in the impact of — and in the growth of net earned premium relative to the gross written premium piece.

When I look at the 6.4% impact on growth—on net earned premium, for instance—it's roughly slightly under 1 percentage point of lower growth compared with the 6% of GWP in return premium, but it's marginal and stems from the growth we saw last year. Since you're starting from a lower base—and that's exactly where your question is coming from, correctly—and then you had an acceleration during part of the year, net earned premium is the pro rata portion. So 12 months are needed in full to reach that 6%. I think that's enough to support the guidance: at 12 months or less, you arrive at the same level for both net earned premium and GWP growth.

Operator, that brings us to the end of the question period. That said, the Investor Relations department is still available to any analysts and investors who might have further questions. Please don't hesitate to get in touch with us. And thank you so much for listening.

Thanks, everyone, for being here. That brings the conference to a close — you're free to hang up your phones now.