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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group First Half 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agency Relations. Please go ahead.

Good morning, everyone, and welcome to our conference call for the first half 2022 financial results. The call will be hosted by the group CEO, Philippe Donnet; and the Group CFO, Cristiano Borean. Before opening the Q&A session, let me hand it over to Mr. Donnet for some opening remarks. Philippe, the line is yours.

Thank you, Fabio, and thanks to all of you for joining today's call. Earlier this morning, Generali published its financial results for the first half of 2022. Even in a challenging scenario characterized by the war in Ukraine and genetic human consequences, rising inflation, higher interest rates and recession concerns, our group was able to further confirm its strength, solidity and resilience. This was also thanks to a set of measures that we promptly adopted, including adjusting our pricing policy, to be as effective as possible in this environment. I would now like to underline 4 key highlights that emerged during the first 6 months of this year. First, our gross written premiums grew by -- grew to EUR 41.9 billion, a 2.4% increase compared to the first half of 2021 on a like-for-like basis. In particular, Property & Casualty premiums posted strong growth of 8.5%. I would like to underline that non-motor premium, a key focus of our Lifetime Partner 24 strategy, grew by 10.7%. Let me remind you that at our Investor Day in December of last year, we set a target to grow them by 4% a year -- average year over the 3 years of the plan. We are already witnessing the strong development of this key pillar of our profitable growth strategy right from the start. Our Life net inflows were resilient at EUR 6.2 billion, in line with the strategic portfolio repositioning towards protection, up by 7%, and unit-linked, which grew by 2.1%. This shows the effectiveness of our distribution network. Moreover, the trend in traditional savings net inflows reflects targeted in-force management activities, and are further improving our profitability. Second, our operating results rose to over EUR 3.1 billion, up by 4.8% from the first 6 months of 2021, thanks to the broad-based and the Life positive performance of all our business lines. I'm also pleased by the material contribution from Cattolica to our operating result, which was nearly EUR 140 million. Following the squeeze-out process, we will be able to accelerate even further the integration of Cattolica into our group. The Life new business margin grew to an impressive 5.23%, while the combined ratio at 92.5% was solid as well. Third, our net results stood at EUR 1.4 billion. Without the impairments related to Russian investments, we would have posted a stable net result of EUR 1.54 billion. And finally, we confirmed our extremely solid capital position with a solvency ratio of 233% compared to 227% at year-end 2021, underlining the resilience of our business. The 233% solvency ratio already reflects the fact of the announced EUR 500 million share buyback program that will be implemented starting from tomorrow. Our strong capital position, a healthy operating profitability and the proactive actions put in place to [ manage ] the macroeconomic scenario, especially on the pricing front, make me very confident in our ability to achieve all the targets of our Lifetime Partner 24 driving growth plan. I look forward to continue [ indiscernible ] with all our people to make Generali an even stronger and more sustainable global insurance and asset management group. Before we open our Q&A, please, let me remind you of our virtual Investor Day that will be held on December 13 this year. Thank you once again for your continued interest for our group, and we are now happy to answer any questions you may have. Thank you.

[Operator Instructions] The first question is from David Barma with BNP Exane.

The first one is on Life and on lapse rate. So industry data shows that lapse rates are starting to rise in recent months. What are you seeing in your portfolio, especially in France and in Italy? And secondly, a small thing on Life. The profit sharing rate and the Life investment results seems quite low in H1. Can you explain what's driving that, please? And secondly, on P&C, can you give us an update on the kind of claim inflation rates you're seeing in your main P&C units at the moment? And how comfortable you are in being able to reflect those price adjustments?

I would kindly ask Philippe to take the first question and Cristiano to continue with the second and third question.

Yes. So far, we do not experience any significant increase in the lapse rates. As you know, we have a strong proprietary distribution, especially in Italy and Germany, which allow us to have a great monitoring of our -- portfolio of our customers. It's always a bit more challenging in France, as you know, because of the nature of the distribution channel. But I would say so far so good. Maybe Cristiano can confirm with some numbers. But definitely, so far, we do not see any significant increase in lapse rates.

Yes, Philippe. I can integrate, especially regarding David's question on France. Compared to the first half of 2021, lapse rate decreased in the saving line and did not increase. So this is just to tell you that on average, in France, we have lower lapse rate by the first half of 2021, and this is as well consistent with the product strategy that we are pursuing. If you want, I go on explaining the profit-sharing rate that seems low due to the fact that there are 3 key drivers. Don't forget that these profit sharing are driven by the rule plus the integration of some reserves. First of all, I would like to recall you that compared to last year, due to the announced change in the reserving amount in Switzerland, we had a lower amount reserved. And as well, we had also a lower ZZR gains for the German part, which -- together which will transfer [ one-to-one ] liabilities, and as well in Germany since we stopped the commercialization of the [indiscernible] product, which has an important element of commission -- this commission which are part of the risk result. The risk result has a lower profit sharing amount compared to the average investment component. And all these put together are bringing to this effect.

And How much did you reserve for Switzerland in [indiscernible]?

Almost CHF 100 million. And this is the average we confirm that -- the average amount to be reserved in the year was twice of it. Still today, having higher rates. We could have been lower, but we are keeping a prudent staffs due to the market volatility, okay? Then David, you also had a question on P&C claims inflation, right?

Yes.

Yes. Let's go on the absurd inflation seen in the different units. What we are observing, especially if we look at the evolution on the different countries, we should say that the claims severity are increasing in some countries by something in between 5% to 10% depending on the lines, more in France and Germany on the Motor Other Damages. While in the Motor TPL, the claims is a little bit -- the claims situation is a little bit lower. Looking at the motor overall, I think that the country shows the higher growth of inflation part is Germany, which is coupled with a competitive market. For what regards the other countries, we do experience a little bit of increase in France and almost a flattish effect in Italy. What is important to know is that Italy was benefiting from a first quarter of a lower effect. If I just look in isolation in the second quarter, we are getting to a kind of a high single-digit increase in inflation, and this is consistent with the trend that we are observing.

The next question is from Andrew Sinclair with Bank of America.

3 for me, please. Firstly, just on PYD, a little bit lower in H1 than we've maybe seen over the last few years. Really wondering is that just driven by caution on inflation or anything to be aware of here? And what should we expect for the rest of the year? Secondly was on investment income. Good to see the figures going higher, but how much of an impact are you seeing on pricing as investment income goes higher? Are you seeing any markets where the higher investment income is leading to upward pressure and combined ratios for more competition on the underwriting side? And thirdly, just if you can break down the P&C premium growth into what was pricing versus what was exposure growth in H1?

Cristiano for you.

Yes. Andrew. For what regards to the prior year development outlook and in general, what happened in the first half, we need to split into 2 components. One component is something that maybe we have to talk a little bit, which is the Argentina hyperinflationary effect, which is basically allowing -- in the representation, we decided to present, which is the most conservative one, an effect which is practically reducing the prior year development benefit because of the inflation effect. Out of this, which is accounting for 0.2, 0.3 percentage point reduction compared to the average normalized level, we observed a little bit of lower reduction both in Germany, Central Eastern Europe, also because of some specific portfolio like in Poland, which we are restructuring, and as well because of some prudent staffs that we are taking in this uncertain environment, due to the fact that we do think that inflation is not far from the peak. But for sure, we experienced the first 6 months, which was a little bit uncertain. Now looking at 5-year inflation rate, you see that the market is pricing it down and the behavior could be different going forward. The second question related to the investment income. Is it bringing pressure on pricing in some countries? Well -- operating in almost 60 countries in the world. The pressure is not so big in the European countries because it is more an inflation-driven development. We see an increase in rates in the Central Eastern Europe countries, but that is positively adding on the investment result while being kept under control through pricing in the inflation part. Outside Europe, for sure, there are countries which are more managing the combined ratio as overall combination between technical and investment. For example, recently, we consolidated India in our books, and that is a typical country which has an average combined ratio around 100% and where the catch-up and the investment result is bringing the positive contribution in the P&C. The third question related to the P&C premium growth, the pricing exposure. I would say that in motor, it is all pricing-driven. And in non-motor, it is driven partially because of a very important effect we have in our reserves. I would like to recall you -- in our products I would like to recall you that we have close to, let's say, 50% in the non-motor component of indexation of our policies. Just to be aware that the retail component in motor is 2/3 with indexation. The small, medium enterprise, half of it is with indexation, and basically 1/3 the accident has. And this is helping in bringing up -- On top of that, there is the commercial push that Philippe was mentioning, which was seen in all the lines, including Europe assistance, which is growing at a very fast pace, 74% half year of [indiscernible] year because of some important contracts they won in the travel space, especially with Expedia and Airbnb, which are bringing a lot of profitable business into the books.

The next question is from Peter Eliot with Kepler Cheuvreux.

Just a couple of quick follow-ups. First of all on the non-Life underwriting outlook. I guess if I look at specifically Italian motor, you're talking about premiums being up only 0.7%. So I was wondering if you could comment sort of specifically there on the outlook. In the Life result, just wondering if you would point to anything sort of being particularly unsustainable in the strong technical result that we've seen or whether you think that is -- can continue? And then finally, you've guided before to the private equity contribution likely being sort of around last year's level, less than EUR 100 million of one-offs. I appreciate quarterly volatility is always going to be there, but I was just wondering if you could update us on your current view on the outlook there.

Cristiano, these are all for you.

Okay. So Peter, regarding the Italian underwriting outlook. The Italian motor outlook -- in the last quarter, what is important is that -- we observed a decrease of the -- so the second derivative is changing. So the trend is to be keeping the low inflection point on the average premium we are seeing in our motor portfolio, which means that the tariff increase, which were already injected -- and as we already said that will be further injected in another wave going forward, are starting to catching up. So the underwriting outlook you should expect average premium to have a little bit of growth. And if we take the motor overall, including the Motor Other Damages, we are also growing in this kind of line. Please be aware that the market in Italy is always competitive, but frequency stays below pre-COVID level, and this is still helping the limiting on the combined ratio increase. What is important is that the tariff injection is allowing also to have coverage going forward. On the second question related to the Life segment, can the technical results continue so at this pace? In the first half we had a joint effect of positive technical result, which was counterbalanced by a countereffect in the investment results, which is basically allowing a kind of profit sharing on some mortality risk that we had in France, which is overall showing, when I look line by line, a slightly higher technical result in the first half and a slightly lower investment results. So my guidance is that, going forward, you should get a little bit higher investment results in the second half of the year stemming from this as well as the technical not growing at this pace, but still growing because of what I also was saying, the technical result will be supported by the stop of the [ listed ] product, say in Germany, which were improving now the risk result, hence the technical. And our collection of unit-linked is continuing, which is supporting the technical result. The third question on private equity contribution. So on the first half of 2022, you observed that we did not repeat the unicorn investment we got in the first half of 2021, which was basically impacting EUR 100 million benefit last year, which is not repeatable. Looking forward, in the 2022 space, private equity is on a fair value basis, still extremely resilient. There are some changes related to the market evaluation in some lines. But still, we have an overall positive growth on the total return, which is not necessarily reflecting in the accounting because, as you know, we account as of today -- starting from a year will be different -- the private equity result, when it is closed by the private equity fund manager. What we are seeing is that, notwithstanding the fact that there is -- the lines we are investing in, are sufficiently well diversified and insulated from -- we are far away from investing in leverage by our staff. We are very much into the health and very well diversified, including Asian investment, which are supporting. What is happening is that we are seeing potentially as a slowdown from the private equity fund manager in realizing the capital gain, and eventually wait for lower market volatility to realize then to try to maximize the full final value. But this is just a matter of time delay. This could add some -- from the accounting perspective, some shift. But as I was saying 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, 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. Hence, all these value-accretive investment will change according to the fund manager evaluation and the booked value.

The next question is from Farooq Hanif with JPMorgan.

Just returning first to P&C. When we look at your 2Q current year loss ratio, there is a big deterioration. Could you explain what the drivers were, whether for example, that was Argentina related? More broadly, you seem to be talking about a picture of claims inflation picking up in each of your countries in motor, and pricing is starting to respond, but possibly not exceeding it. So if we exclude Argentina, you're still quite close to our 92% combined ratio. So could you just reiterate your confidence in that target, and what you can do to get there and maintain it if things go wrong? Could you also -- just 2 more things, sorry. Could you also give us the benefit that you see of COVID in motor claim frequency in the combined ratio? And lastly, could you just tell us what the PE contribution was in your current return in Life and the non-Life?

Cristiano, I think they are all for you. Just to sum up is -- one question on current year loss ratio and the dynamics, and the -- whether there were COVID benefits in P&C and the contribution of private equity on Life versus P&C. Is that correct, Farooq.

Yes, that's correct.

Okay. So commenting the second quarter combined ratio that you've seen is 94.5%. I would not take this as a guidance for the rest of the year. This was particularly influenced also by the natural catastrophe impact and also by some effects, which is a time effect. When you look in such a small timeframe, one quarter, the difference between the manifestation in the claims of the increase in some lines I was commenting before, versus the time needed to have the net earned premium accruing into the book, you have this time delay. Hence, this 94.5% guidance is overestimating the long-term combined ratio level. And so we are sticking more looking at the data that I'm daily checking, going to a level which is consistent with the amount of 92% net of the Argentina effect, which is a little bit slightly out of our control due to the effect of hyperinflation, which could trigger this [ tricky ] effect. Another thing you have to take into account, please, don't forget that a 0.3 percentage point of expense ratio are up simply because we are consolidating Cattolica. Cattolica has more than a double expense ratio -- administrative expense ratio compared to the group and compared to Italy, which means that when we will complete the integration, this will go down, which is exactly consistent with the value creation of the synergy we always told you. So please look at this in that perspective. Clients' inflation and picking up confidence in reaching the target is what I think I was commenting to you. Don't forget, but a driver also helping this is the growth higher than the target expected in the non-motor component, and non-motor component has -- so far has had a lower impact from inflation, and has a higher stickiness in the behavior of the client also according to the renewal strategy, and as well can bring a little bit of more high natural catastrophe exposure. But don't forget that our coverage is the most protective within all the peers. The COVID benefit related to the first half 2022 are extremely limited. I would like more to recall the COVID benefit that we had last year in the first half 2021, where our 89.7% reported combined ratio would have seen as 91.2%. I recall that last year, the first half, especially the first quarter for Germany, was the lowest ever recorded due to a huge and massive lockdown. So putting all this together, we should get to a minor effect related to -- then to the COVID part. Notwithstanding the fact that more than COVID could help what some countries are deciding or making according to the increased cost of fuel. For example, please notice that starting from Germany, they created a EUR 9 per month [ trade in circulation ] which people are using in a visible way as well as in France things are now starting. And so this is a more material effect, which is still keeping frequency below the pre-COVID level. Then going to the fourth question.

Cristiano?

Yes, please.

I would like to add a few comments on this. There is an echo coming from the rooms. Yes, I would like to add a few comments to confirm that our confidence in keeping the combined ratio under control. So I confirm what Cristiano said about the frequency, that the motor frequency will -- is not back to the level we had before the COVID. And I think that's for many reasons that the change in the behaviors of the people because of the price of the oil, the frequency will not come back to the pre-COVID level. Then, on top of the repricing decision, we are going to take in the Property & Casualty business. There are also some other decisions we are already implementing. We are intensifying the portfolio pruning. This is really important. We are intensifying the underwriting discipline. And on top of this, we are also giving even more attention to claims management because also in claims management, there are some points of combined ratio to get. So this is something that we know quite well. We are already implementing all these technical decisions, and with the strong group we have on our distribution, we can get the benefit of this decision. And this makes us quite confident in our ability to -- on the long run, to control our combined ratio and to keep it in the good zone, I would say. Sorry to interrupt, Cristiano.

No, no. Thank you, Philippe. You just highlighted what our daily job is, to bring the machine working. And I complete the fourth question on private equity, Farooq. Just to be sure, you are requesting the accounting contribution of private equity in Life and P&C. You know that we have the 2 [ regions ] that we are giving also to you in the backup. I give you both so that you have all the elements and you have full clarity. So the total contribution of Lion River in the accounting figures that we present is EUR 26 million in Life, EUR 72 million in P&C, EUR 30 million in Asset & Wealth Management. For what regards the pro forma as if we have EUR 46 million in Life, the EUR 50 million in P&C, EUR 74 million in Asset & Wealth Management. So I think this is clarifying the 2 dimensions you're looking at. And next year, finally, we will have IFRS 9 with full allocation at fair value and no more double rate.

The next question is from Michael Huttner with Berenberg.

I had 2 questions. First one is on cash flow and cash at holding. I know it's not in the presentation, and I know it's not normally something you speak of, but given the strength in solvency, maybe you can say a few words. I remember the figure of EUR 4.1 billion in December, and you reiterated your cash remittance guidance, which I think is over EUR 8.5 billion or something for the 3 years. So I just wondered maybe you can give us a feel for this figure now. I was thinking maybe EUR 3.3 billion was the figure in December. The second is on Cattolica. Philippe, you said -- it was interesting you said Cattolica might -- interpretation get better, and EUR 140 million in the second half year. And I just wondered how quickly it could get better? I remember the figure of EUR 80 million improvement, but maybe there's already something which could happen now that you're close to the squeeze-out state. And my third question is very simply on the motor. Coming back -- I'm sorry, the efficiency of your IR, I understand Motor -- so you published a figure of 97.4% in the half year combined ratio. Last year, as I understand, it was 88%. So it's a 9% point deterioration. And both -- Cristiano and Philippe, you both mentioned that this will normalize. My fear is that it will normalize, but it will go to 100% before it normalizes. What can you say to kind of -- against that?

If okay, Philippe will take the question on Cattolica, then Cristiano integrates. And Cristiano takes the question on the holding cash flow and the motor business combined ratio in addition to what we already said so far.

Okay. No, definitely on Cattolica, we said we are talking about at least EUR 80 million of synergies run rate. So we said at least EUR 80 million. So I confirm that it will be at least EUR 80 million. The good news is that the run rate will be achieved sooner than expected because definitely, the path we are implementing now with the squeeze out, that will be completed in the next 2 weeks, and the delisting of the company will definitely accelerate the integration process of Cattolica compared to the merger, which were requiring the shareholders' meetings and so on. So this is a good news. So at least EUR 80 million of synergies, and we will get the benefit of them sooner than expected.

First of all, I integrate the number on the half year results from Cattolica so that you have the full picture. The operating result contribution from Cattolica was EUR 138 million, EUR 41 million in Life segment and EUR 96 million in the P&C segment, for an overall contribution to group result of EUR 60 million in the half year result. For what regards the first question, Michael, I always recall you that you should not account one-to-one every single euro we have in the holding because there are money which are already reserved. For example, for the buyback, which we start tomorrow, for example, for the repayment of debt, and also to close some upcoming M&A deals still not closed like Malaysia, which we hope soon that will be announced. So in reality -- I start from the end and then I mount it back. At the end, you should imagine that by the end of this year, after having implemented the buyback and after having done the M&A payment for Malaysia, we will end up with free cash to be used for capital deployment in the holding of EUR 700 million to EUR 750 million. Yes, now we are starting with a much higher level, which is above the December 1, let's say, not EUR 4.9 billion, but you don't forget that there is a EUR 1 billion buffer, some couple of billion of operating treasury which is just temporary there to be managed by the company. And so you have to strip all this number out and take what is then really less. The most important number in my answer is this one. And then there was another question on the motor business deterioration. Will it go to 100%? Well, there are some countries which were suffering on this. We have minor countries affected. For example, this was happening in Poland, but there is a pricing strengthening. Overall, broad geographies, pricing strengthening will start kicking in. And so far, we are going to see more benefit from the rate increasing injection, the one already done, but I recall you, there will be other round of rate injection, which are going to pump up in order to control the combined ratio. Don't forget that also the increase, not only of VC, has to take some time because one thing is the gross written premium and one thing is the net earned premium. So we need time to flow the benefit of the tariff increase to the and premium versus the one which are written.

The next question is from Andrew Ritchie with Autonomous.

Just a couple of clarifications. On the non-motor growth, I think you mentioned Cristiano, that a lot of that is related to indexation. Is it all -- or how much of that growth is just indexation effect? And I'm assuming, just to clarify, most of that is the property related, so is a natural indexation. But if you could just clarify that. And I guess that's the reason why you would feel the sort of 90% combined that you're running in non-motor -- is defendable because there's sort of a natural protection from severity. But if you could just clarify those aspects on non-motor, that would be useful. Secondly, just remind us of your catastrophe cover protection for the rest of the year. Given that you are running sort of above budget, I suppose are above long term for the half year, I presume you're closer to attaching sort of aggregate protection, if you could just remind us on that. And then the 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. Can you just explain why that is?