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

Good afternoon. I'm the conference operator for Chorus Call. Welcome, and thanks for being with us on the Generali Group's first half 2022 results call. Please note that everyone attending is in listen-only mode. Once the presentation ends, there will be a chance to pose questions. If anyone requires help at any point during the call, they can signal an operator by pressing star and zero on their phone. I'd now like to hand the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agency Relations. Please go ahead.

Morning, everyone, and thanks for joining the call on our first half 2022 financial results. Group CEO Philippe Donnet and Group CFO Cristiano Borean are hosting today. Before we open things up for Q&A, I'll turn it over to Mr. Donnet for a few opening remarks. Philippe, over to you.

Thank you, Fabio, and I appreciate everyone taking the time to be on this call. Generali released its financial results earlier today for the first half of 2022. Despite a difficult environment marked by the war in Ukraine and its dramatic human toll, along with rising inflation, higher interest rates, and fears of recession, our group has once again demonstrated its strength, solidity, and resilience. That was made possible also by a series of actions we moved quickly to implement, among them recalibrating our pricing approach so it works as effectively as possible under these conditions. Now I'd like to highlight four main points that stood out over the first six months of this year. To begin, gross written premiums reached EUR 41.9 billion, up 2.4% versus the first half of 2021 on a like-for-like basis. Property and casualty premiums in particular showed robust growth of 8.5%. I want to emphasize that non-motor premium — a central element of our Lifetime Partner 2024 strategy — rose by 10.7%. As a reminder, at our Investor Day last December, we set a goal of growing them by 4% a year, on average annually, across the three years of the plan.

Right from the beginning, we are already seeing this key pillar of our profitable growth strategy develop strongly. Our life net inflows held up well at EUR 6.2 billion, consistent with the strategic repositioning of our portfolio toward protection, rising 7%, and unit-linked, which was up 2.1%. This demonstrates how effective our distribution network is. In addition, the trend in traditional savings net inflows mirrors targeted enforcement management activities designed to further enhance our profitability. Second, our operating results climbed to more than EUR 3.1 billion, an increase of 4.8% versus the first six months of 2021, driven by the broad-based underlying positive performance across all our business lines. I am also pleased about the material contribution from Cattolica to our operating results, which came to nearly EUR 140 million. After the squeeze-out process, we will be able to speed up the integration of Cattolica into our group even further. The life new business margin rose to an impressive 5.23%, and the combined ratio at 92.5% was solid as well. Third, our net results came in at EUR 1.4 billion. Excluding the impairments tied to Russian investments, we would have reported a stable net result of EUR 1.64 billion. Lastly, we confirmed our extremely solid capital position, with a solvency ratio of 233% versus 227% at year-end 2021, which underlines the resilience of our business.

That 233% solvency ratio already takes into account the EUR 500 million share buyback program we announced, which will begin being implemented tomorrow. With our solid capital base, healthy operating profitability, and the proactive steps we've taken to navigate the macroeconomic environment — particularly when it comes to pricing — I have great confidence in our capacity to hit every target under our Lifetime Partner 24 driving growth plan. I'm eager to keep working alongside all our people to make Generali an even stronger and more sustainable global insurance and asset management group. Ahead of opening the Q&A, let me remind everyone of our virtual investor update, scheduled for 13th December this year. Thank you again for your ongoing interest in our group — we're now glad to take any questions you might have. Thank you.

Thank you. This is the Chorus Call conference operator. We'll now start the question-and-answer session. Any person who would like to ask a question can press star and one on their touchtone telephone. To take yourself out of the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question can press star and one at this time. The first question comes from David Barma with BNP Paribas Exane. Please go ahead.

Hi, and thanks for taking my questions. My first one concerns life and lapse rates. According to industry data, lapse rates have begun climbing over recent months. What are you observing within your portfolio, particularly in France and Italy? Second, a minor point on life. In H1, the profit-sharing rate and the life investment results appear rather low. Could you explain what is behind that, please? Second, on P&C, could you update us on the claim inflation rate you are currently seeing across your main P&C units, and on how confident you feel about reflecting those through price adjustments? Thank you.

Thanks, David. I'd like to invite Philippe to go ahead with the first question, and then Cristiano can follow with the second and third questions.

Yes. Hi, David. Up to now, we haven’t seen any meaningful rise in lapse rates. As you know, we have strong proprietary distribution, particularly in Italy and Germany, which gives us excellent visibility over our portfolio and our customers. It’s always somewhat harder in France, as you know, given the nature of the distribution channel. I’d say things are going well so far. Perhaps Cristiano can confirm with some figures. Absolutely, up to now we aren’t seeing any meaningful rise in life lapse rates.

Yes, Philippe. I can expand on that, particularly in response to what David asked about France. In comparison with the first half of 2021, the lapse rate went down in the saving line rather than going up. I mention this simply to say that, on average, lapse rates in France are lower than in the first half of 2021, which also aligns with the product strategy we are following. If you like, I will continue by explaining the profit-sharing rate, which appears low because of three main drivers. Keep in mind that these profit-sharing amounts are determined by the rule together with the inclusion of certain reserves. First, let me remind you that versus last year, because of the announced change to the reserving amount in Switzerland, the amount we reserved was lower. In addition, ZZR gains were lower for the German part, and those were transferred one-to-one to liabilities. Also in Germany, since we halted commercialization of the products known as Riester, which carry a significant commission element, that commission — which forms part of the risk result — means the risk result has a smaller profit-sharing amount than the average investment component.

Every one of those, taken together, is what produces this effect.

What amount did you set aside for Switzerland during H1?

Just about CHF 100 million — that's the average figure. We can confirm that the amount set aside during the year came to twice that. Even now, with rates higher, it could have been smaller, yet we're maintaining a cautious approach given how volatile the market is. All right.

David, you also wanted to ask about P&C claims inflation, correct?

Yes. Thanks.

Yes. Let's move on to the observed inflation across the different units. What we're seeing, particularly when we look at how things have evolved in the various countries, is that claims severity is rising in some countries by somewhere between 5% and 10%, depending on the lines. It's higher in France and Germany on motor, other damages, while in Motor TPL, claims inflation is somewhat lower. Looking at motor overall, I think the country showing the highest growth in inflation, apart from Germany, which is coupled with a competitive market — for the other countries, we do see a bit of an increase in France and an almost flattish effect in Italy. What's important to know is that Italy was benefiting from a lower effect in the first quarter. If I look at the second quarter in isolation, we're getting to a kind of high single digit increase in inflation. This is consistent with the trend that we're observing.

Let's take the next question.

Andrew Baker from Goldman Sachs has the next question. Go right ahead.

Good afternoon, everyone. I have three questions. First, on PYD, it came in a bit lower during H1 than what we've perhaps become used to across the prior few years. I'm really wondering whether caution around inflation explains that, or if there's anything else we should know about, and what ought we to anticipate over the remainder of the year? Second, regarding investment income. It's encouraging to see those numbers rising, but how significant an effect on pricing are you observing as investment income climbs? Do you see any markets in which greater investment income is creating upward pressure on combined ratios because of heavier competition on the underwriting side? Third, if possible, could you split P&C premium growth in H1 between what came from pricing and what came from exposure growth? Thanks.

Thanks. Cristiano, those questions are meant for you.

Yes, Andrew — regarding last year’s development outlook, I’d break down what occurred in the first half into two pieces. The first is something we should probably discuss a bit: the Argentina hyperinflationary effect. In the representation we chose to present — the most conservative one — that effect is essentially lowering the benefit from prior-year development because of inflation. Setting that aside — it accounts for a 0.2 to 0.3 percentage point cut relative to the average normalized level — we’re seeing somewhat less of a reduction in Germany and Central Eastern Europe, partly because of certain portfolios, such as the one in Poland that we’re restructuring, and also because of the prudent stance we’re adopting amid this uncertain environment, since we do believe inflation isn’t far from its peak, but the first six months were certainly a bit uncertain. Now, if you look at the five-year-in-five-year inflation rate, the market is pricing it lower, and behavior could differ going forward. The second question, about investment income — is it putting pressure on pricing in some countries?

With operations across nearly 60 countries worldwide, the pressure isn’t as significant in European nations, since that situation is more a matter of inflation-driven developments. Rates are rising in Central and Eastern European countries, yet that trend contributes favorably to the investment result while remaining contained via pricing within the inflation element. Beyond Europe, there are certainly countries that handle the combined ratio more as an overall blend of technical and investment performance. For instance, we recently consolidated India into our books, and that is a classic country where the average combined ratio sits around 100, and where the catch-up plus the investment result delivers the positive contribution in P&C. On the third question, which concerned P&C premium growth, pricing and exposure: I’d say that in motor, everything is pricing driven, while in non-motor it is driven partly by a very significant effect we have in our reserves. I’d like to remind you that we have close to, let’s say 50% indexation of our policies within the non-motor component. Just so you’re aware, the retail component in motor is two-thirds in, with indexation.

For small and medium enterprises, half of it involves indexation, and essentially one-third relates to accident coverage. That is contributing to the improvement. Beyond that, there's the commercial momentum Philippe referred to, which showed up across every line, Europ Assistance included — it's expanding very rapidly, at 74% half year over half year, thanks to some major contracts they secured in the travel space, particularly with Expedia and Airbnb, which are bringing a great deal of profitable business onto the books.

Let's take the next question.

Our next question comes from Peter Eliot at Kepler Cheuvreux. Please go ahead.

Thanks a lot. To start, I have a few quick follow-ups. Regarding the non-life underwriting outlook — and looking specifically at Italian motor, I believe you mentioned premiums are up just 0.7% — I'd like to hear your thoughts on the outlook there in particular. On the life result, I'm curious whether you'd flag anything in that strong technical result as particularly unsustainable, or whether you believe it can continue. And lastly, you previously guided toward a private equity contribution likely around last year's level, less the EUR 100 billion of one-offs. I appreciate that quarterly volatility will always be present, but I'd just like an update on your current view of the outlook there. Thank you very much.

Thanks, Peter. Cristiano, those are all yours.

Alright, Peter — thanks, and good morning to start. On the Italian underwriting picture, and specifically the motor outlook for the latest quarter, the key point is that we saw the decline itself getting smaller, so the second derivative is shifting, meaning the trend is nearing a low inflection point in the average premium across our motor book. That means the rate increases already put through — and, as we've mentioned before, more will be put through in a further wave down the road — are beginning to catch up. For the underwriting outlook, you should expect a bit of growth in average premium. If we look at motor as a whole, average damages included, we're growing in that line as well. Keep in mind that Italy's market remains competitive at all times, but frequency is still under the pre-COVID level. That continues to help restrain the rise in the combined ratio. The important thing is that the rate increases also allow coverage to keep improving ahead. On your second question about the life segment — can the technical result keep up this pace? In the first half, we had a combined effect of a positive technical result, which was offset by an opposite effect in the investment results.

Essentially, that permits a form of profit sharing on certain mortality risk we carried in France. Overall, looking at it line by line, it shows a somewhat higher technical result in the first half and a somewhat lower investment result. My guidance is that as we move ahead, you should see a somewhat higher investment result in the second half of the year, coming from this. And the technical will not be growing at that pace, but it will still grow because of what I also mentioned — the technical result will be supported by the discontinuation of the Riester product, let's say in Germany, which were now improving the risk result, and therefore the technical. Our unit-linked collection keeps going, which supports the technical result. The third question concerns private equity contribution. In the first half of 2022, you saw that we did not repeat the unicorn investment we had in the first half of 2021, which essentially had an impact of EUR 100 million of benefit last year, which cannot be repeated. Going forward in the 2022 space, private equity on a fair value basis remains extremely resilient. There are some changes tied to market valuation in certain lines, but overall we still have positive growth on the total return.

That may not necessarily show up in the accounting, because as you know, we account as of today, and beginning this year the private equity result will be different once it is closed by the private equity fund manager. What we're seeing is that despite the fact that the lines we're investing in are sufficiently well diversified and insulated from, we are far away from investing in leveraged buyout stuff. We are very much into health and in very well diversified, including Asian investment, which are supporting. What's happening is that we're seeing potentially a slowdown from the private equity fund manager in realizing the capital gain and eventually wait for lower market volatility to realize them to try to maximize the full final value. This is just a matter of time delay. This could have some from the accounting perspective some shift. As I was saying to you, looking at the guidance I gave in Life segment, coupled with the huge increase in the non-motor net earned premium, which will grow progressively. Because today we account for gross written premium, but we need to see the net earned premium growth. You will have further contribution. Don't forget, as I said before, that next year, private equity will be accounted on a fair value basis.

So all of these value-accretive investments are going to shift based on how the fund manager evaluates them and the booked value.

We’ll take the next question now.

Our following question comes from Farooq Hanif at JPMorgan. Go right ahead.

Hello, everyone, and many thanks. I’ll start by going back to P&C. Looking at your 2Q current year loss ratio, we saw a significant worsening. Can you walk us through what drove that? Was it, for instance, tied to Argentina? More broadly, you appear to be describing a situation where claims inflation is rising in motor across each of your countries, and pricing is beginning to react, though perhaps not outpacing it. If Argentina is excluded, you remain fairly near your 92% combined ratio. Could you restate your confidence in that target, and what steps you can take to reach it and hold it if conditions deteriorate? Sorry, just two more items. Could you also quantify the COVID benefit you see in motor claim frequency within the combined ratio? Finally, please tell us what the PE contribution was in your current return in life and in non-life. Thank you.

Thanks, Farooq. Cristiano, I believe these are all directed at you. To recap, there's a single question about the loss ratio for the current year and how it's moving, plus whether P&C saw any COVID benefits and how private equity contributed on the life side compared with P&C. Did I get that right, Farooq?

Right, that's right. Thanks a lot for joining us.

Thanks. Appreciate it.

Good morning, Farooq. To comment on that, the combined ratio you saw for the second quarter came in at 94.5%. I wouldn't treat that as guidance for the remainder of the year. It was notably shaped by natural catastrophe losses as well as by certain effects that are timing-related. When you examine such a short window — a single quarter — there's a delay between when the claims manifestation of the increase in some lines I mentioned earlier shows up, versus the time required for net earned premium to accrue into the book. So that 94.5% is overstating the long-term combined ratio level. We lean more toward the data I check daily, heading to a level consistent with 92% net of the Argentina effect, which is somewhat slightly beyond our control owing to hyperinflation, which could set off this tricky effect. One more thing to keep in mind — please don't forget that the 0.3 percentage point rise in the expense ratio is simply because we are consolidating Cattolica. Cattolica's expense ratio, its administrative expense ratio, is more than double that of the group and of Italy.

So once the integration is finished, that figure will come down, and that lines up precisely with the value creation from the synergy we've been telling you about all along. I'd ask you to view it from that angle. Claims inflation, along with growing confidence about hitting the target — that's what I believe I was saying to you. Keep in mind that another factor lending support here is growth running above target in the non-motor component. Up to now, the non-motor component has felt a smaller inflation impact, shows greater stickiness in client behavior, including under the renewal strategy, and can also carry somewhat higher natural catastrophe exposure. But remember that our coverage is the most protective among all the peers. The COVID benefit tied to the first half of 2022 is extremely limited. I'd rather remind you of the COVID benefit we enjoyed last year in the first half of 2021, when our 89.7% reported combined ratio would otherwise have stood at 91.2%. I recall that last year, the first half — particularly the first quarter for Germany — was the lowest ever recorded, thanks to a huge and massive lockdown. Taking all of this together, we should end up with a minor effect on the COVID side.

Even though COVID may be helping more than what some countries are choosing or doing in response to higher fuel costs. For instance, take note that beginning with Germany, they introduced a EUR 9 per month ticket for train and transit, which people are visibly using, and in France as well, things are now getting underway. That is a more tangible effect, which is still keeping frequency under the pre-COVID level. Moving to the fourth question.

Cristiano.

Correct.

Yes. I'd like to make a few remarks on this. An echo is coming from the rooms. Yes, I want to add a handful of comments confirming how confident we are about keeping the combined ratio under control. I back up what Cristiano said regarding frequency — motor frequency has not returned to the level we saw prior to COVID. I believe that, for many reasons, including shifts in people's behavior driven by the price of oil, frequency won't return to the pre-COVID level. Beyond the repricing decision we will take in the property-casualty business, there are also certain other decisions already being implemented. We are stepping up portfolio pruning. This really matters. We are stepping up underwriting discipline. In addition, we are paying even greater attention to claims management, since in claims management too there are some points of combined ratio to capture. This is something we know quite well. All these technical decisions are already being implemented, and given the strong grip we have on our distribution, we can reap the benefit of the decision. That leaves us quite confident in our ability, over the long run, to control our combined ratio and to keep it in the good zone, I would say.

Please forgive me for cutting in, Cristiano.

No, no. Thank you, Philippe. You've just underscored exactly what we do every day — getting the machine to work. Let me finish answering Farooq's fourth question, the one about private equity. Just so I'm certain: you're asking for the accounting contribution from private equity within Life and P&C. As you're aware, there are two ways of viewing this. We've also included it for you in the backup. I'll give you both so you have every element and complete clarity. Lion Re's total contribution, in the accounting figures we present, comes to EUR 26 million in Life, EUR 72 million in P&C, and EUR 30 million in asset and wealth management. As for the pro forma, it would be EUR 46 million in Life, EUR 50 million in P&C, and EUR 74 million in asset and wealth management. That, I believe, clarifies the two dimensions you're examining. Finally, next year we'll have IFRS 9, with everything allocated at fair value and no more double rate.

Let's take the next question.

Our next question comes from Michael Huttner at Berenberg. You have the floor.

Thanks so much. Philippe, as you mentioned, given how impressive Generali’s results are, I had 3 questions. The first concerns cash flow and cash at holding. I realize that isn’t part of the presentation, and I realize it’s not usually a topic you discuss, but with such a strong position and solvency level, perhaps you could comment briefly. I recall the December figure of EUR 4.1 billion, and you restated your cash remittance guidance, which I believe is over EUR 8.5 billion, or something like that, across the 3 years. So I was just wondering whether you might give us a sense of where that figure stands now. I was thinking perhaps EUR 3.3 billion, along with the December number. The second is about Cattolica. Philippe, you described it as interesting — you said, oh, Cattolica might, well, this is my reading of it, improve — and EUR 140 million is the figure at half year, and I just wondered how quickly it could improve. I remember the EUR 80 million improvement figure, but perhaps there’s already something that could happen now that you’re close to the squeeze-out stage. My third question is very simple, about motor coming back. Sorry. It’s the efficiency of your IR.

I get the motor picture, so you reported a 97.4 combined ratio for the half year. From what I understand, last year it stood at 88%, which means a nine-point deterioration. Cristiano and Philippe, both of you said this will normalize. My concern is that it does normalize, but it reaches 100 first before that happens. What can you say to push back against that? Thank you.

Thanks a lot, Michael. If that's alright, Philippe, you can handle the question about Cattolica, and then Cristiano will add to it, and Cristiano will also take the question on holding cash flow and the motor business combined ratio, on top of what we've already covered so far.

Hi Michael, thanks for your question. On Cattolica, no — what we've said is that we're talking about a run rate of at least EUR 80 million in synergies. At least EUR 80 million is what we said. The good news is that this run rate will be reached sooner than expected, because the route we're on right now — with the squeeze-out finishing within the next two weeks, and the company's delisting — will certainly speed up the Cattolica integration compared with the merger, which required shareholder meetings and so forth. That's the good news. At least EUR 80 million in synergies, and we'll reap the benefit of them sooner than expected.

Thank you.

To start off, Michael, good morning.

Hi there.

I’m folding in the Cattolica half-year figure so you get the complete view. Cattolica added EUR 138 million to the operating result — EUR 41 million from life and EUR 96 million from P&C — which came to a total contribution to the group result of EUR 60 million for the half year. On your first question, Michael, I’d remind you again that you shouldn’t count each individual euro held at the holding level on a one-for-one basis, since some of those funds are already earmarked. Take the buyback we’re launching tomorrow, for instance, along with debt repayment and the closing of certain pending M&A transactions that haven’t yet completed, such as Malaysia, which we expect to be announced shortly. Actually, let me begin at the end and then build back up. Ultimately, you should picture that at year-end, once the buyback has been carried out and the Malaysia M&A payment has been made, the free cash available at the holding for capital deployment will come to EUR 700 to 750 million. Yes, we’re beginning from a considerably higher level now — one that’s above the 1 December.

Rather than EUR 4.9 billion, keep in mind there's a EUR 1 billion buffer, plus a couple billion of operating treasury that's only sitting there temporarily for the company to manage. You need to strip all of those numbers out and see what's genuinely left. The key figure in my response is this one. There was another question about the deterioration in the motor business. Will it reach 100%? Some countries have been struggling with this. We had a few minor countries affected. In Poland, for instance, this was occurring, but pricing is strengthening. Across broad geographies, pricing strengthening will begin to take effect. Thus far, we're going to see additional benefit from the rate action already taken. Remember that further rounds of rate action will ramp up in order to control the combined ratio. Also don't forget that the increase has to take some time, not only this, because gross written premium is one thing, and net earned premium is another. We need time for the benefit of the tariff increase to flow through to earned premiums versus those that are written.

Let's take the next question.

Appreciate it.

Our following question comes from Andrew Ritchie at Autonomous. You have the floor.

Oh, hello. Just a few quick clarifications. Regarding non-motor growth, Cristiano, I believe you said a lot of that relates to indexation. Is all of it indexation, or how much of that growth comes purely from the indexation effect? Just to clarify, I'm assuming most of it is then property related, so it's a natural indexation. If you could clarify that, and I suppose that's why you'd feel the roughly 90% combined ratio you're running at in non-motor is defendable, since there's a kind of natural protection from severity. If you could just clarify those aspects on non-motor, that would be helpful. Second, just remind us of your catastrophe cover protection for the remainder of the year. Given that you're running somewhat above budget, I suppose, or above long term for the half year, I presume you're closer to attaching sort of aggregate protection. Could you just remind us on that. Final question. Your current yield in fixed income, just fixed income, has improved 20 basis points annualized. I'm just a bit surprised because the reinvestment yield is not above the fixed income in force yield, and you spent a long time extending duration, so I'm surprised it's showing the benefit as quickly as it is.

Could you explain the reason behind that? Thank you.

Thanks, Andrew. Cristiano, those are all yours.