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

Good afternoon. I'm the conference operator for Chorus Call. Thanks for being with us on the Generali Group's 9 Months 2022 Results Conference Call, and welcome. <<operator_script>> Right now, I'll hand things over to Mr. Fabio Cleva, who leads Investor and Rating Agency Relations. Sir, the floor is yours.

Good morning, and thank you — thanks to all of you as well for joining this conference call covering the financial results for the 9 months of 2022. Hosting today will be Marco Sesana, our Group General Manager, along with Cristiano Borean, the Group CFO. Ahead of starting the Q&A session, I want to point out that today's emphasis is on our results, and the call should run roughly 1 hour. Operator, we're ready now to take questions.

<<operator_script>> Our first question comes from David Barma at BNP Paribas Exane.

Starting with Life — in the press release, you noted certain one-off reserving dynamics within the life segment. Could you explain a bit about what those involve, please? My second question concerns P&C and motor in particular, since the top line rose just a few percentage points during the quarter. I realize your main value focus lies more in the other lines. Still, could you discuss the trajectory for motor premiums and when the impact of the price increases we've discussed over the last few quarters will begin to show. And finally, on cash, perhaps you could update us on holding cash flexibility and where you expect to line that at year-end.

Thank you, David. Cristiano, could you take the first question about Life as well as the third one on holdco cash, and then Marco, the question about how the top line of the motor business in P&C is developing?

To begin with, thank you for raising that question. What we'll do is start at the outset to clarify the point and break down the anatomy of the Life operating result. I'll begin at the end, and then provide you with more detail. Assuming the interest rate curve remains where it stands in terms of its actual level and the forward implicit, there is an increase of EUR 514 million in the Life operating result compared with 9 months '21. I would say roughly almost 70% of that is recurring, therefore tied to a genuine uplift coming from the new environment. The remaining portion is not. Let me attempt to offer some examples across the different geographies of nonrecurring effects. One relates, for instance, to Italy, where you have certain reserve releases stemming from some local reserving calculation, which are subsequently released owing to the higher interest rate environment in a sort of automatic manner. Another relates to the fact that in France, for example, we have a twofold effect: on one side, because there have been certain changes in the opportunity for our customers to shift from a mutilation in pension products toward a lump sum offer.

So when that occurred, the longevity risk reserve was released accordingly, and clearly that's a one-off item, and it carries a positive benefit. And you also have, at the same time, some interest rate cost reserve and expense reserve that were basically there because of the higher rate environment — the coverage of the guarantees plus the expenses in any specific segregated fund is guaranteed, and some of those were released. On Germany specifically, you have, for instance, the fact that there are certain one-off elements tied in particular to the fact that you have a lower amount of <<inaudible>> allocation, which, going forward, you should even consider a possible <<inaudible>> release. Regarding the different aspects of this, this higher risk result. For instance, in Germany, on that point, the specifics here, which are running, not one-off — I would like to remind you that we decided to stop production of a pension product called reserve, which had some so-called riders. But in this reserve, there were higher acquisition costs. So going forward, you'll see lower acquisition cost because of the closing of this product and the steering towards the other. So to keep it simple, almost 70% is recurring, and the nonrecurring effect are the ones linked to what I mentioned earlier in these geographies.

Broadly speaking, we’re seeing the investment result go up, particularly in regions that carry a different liability profile — Central Eastern Europe, for instance, where the investment result on the real asset side is picking up faster, since liabilities there are shorter owing to the higher protection business’s specific nature. Turning to holdco cash, as you’re aware, we’ve consistently discussed what financial resources are available for capital deployment, and at year-end and as of today that will remain at roughly EUR 1 billion. Separately, we always maintain a cash buffer of EUR 1 billion on top of that. There are also other forms of cash — in the 9 months, for example, we have EUR 2.5 billion — but those are purely treasury operations, short-term money the companies use only for shorter-term purposes, and you shouldn’t view it as available to us. So that’s EUR 1 billion plus EUR 1 billion for the liquidity buffer. Don’t forget — though I’m already netting out the EUR 500 million to be deployed <<inaudible>> calling the December 12 bond, which is already public information — we will come back to this. Marco?

Thanks, Cristiano. Now I'll address your second question, David, about pricing and motor premiums. What we're seeing across the PSC segment as a whole is genuinely strong growth, and non-motor premium is the main thing driving it. I'd like to remind everyone that growing our non-motor premium was one of the central pillars of our strategy. We set a goal of growing above 5%, and we're on track for that, and growth is coming along very well. On motor, once again, what we're after is greater profitability rather than any particular premium growth, so we're focused on pushing through price increases, and on top of that we're working on pruning the portfolio. What we really want is to be sure our portfolio is healthy and that we can move through the coming months in a way that's genuinely profitable. We are putting price increases in place. In some countries we're already seeing that come through, whereas in others it will arrive over the next months — Germany especially, where the rate increase lands in January, and in that market we're pushing for a substantial rate increase. So we're confident motor premium will go up, but bear in mind as well that what we're after is the bottom line and profitability.

And beyond that, some portfolio pruning will also be working in a separate direction.

Andrew Sinclair from Bank of America has the next question.

Three from me too, please. First, with rates heading higher, what are the implications for Swiss reserve strengthening in 2022 and beyond? Second, digging a bit more into P&C pricing, I'd really like you to break down the premium growth in DMC and clarify how much of it stems from pricing as opposed to volume growth, and staying on that point, how much pressure are you currently seeing from underwriting competition as a result of rates moving up? And the third question concerns the combined ratio: could you pull out the details on how much is <<inaudible>>, and how much is PYD versus current year?

Cristiano, I believe questions one and three are yours to handle, while the second one goes to Marco.

Alright, Swiss reserves are strengthening. Through 2022 so far, we're setting aside roughly EUR 70 million less than we did a year earlier — that's partly from lower speed and partly from higher rates. We're still holding to a very cautious expense stance, even with rates at this improved level, so that we can manage volatility. What comes after that? After that, it's a new word — the IFRS 17 word — where in reserving you get the natural translation of profits against the guarantees, released on a revenue recognition basis, closer to a value in-force view than to the actual reserving approach. So what I'm telling you is this will be less. The impact will be tied strictly to the inner profitability portfolio, and there will be no further end. You could even see a positive effect down the road on the Swiss part. Third, combined ratio detail. Of course, I'll give you every element of the combined ratio at group level. Our loss ratio is 65.2%. The attritional current year loss ratio — which excludes large man-made claim impact above EUR 5 million and excludes natural catastrophe — stood at 64.3%.

There was a movement in the prior year loss ratio of minus 3.1%. I'd remind everyone that all of these figures embed the Argentina number, and its negative impact is roughly 0.6 percentage points higher than a year ago, which matters quite a bit. The number I think you should focus on most is the attritional piece, at 64.3%. Once you strip out the Argentina effect, what you'd see is an increase of only 0.1 percentage point, after accounting for both the man-made effect and the natural catastrophe, and that's a good illustration of the mix effect flowing into non-motor profitability relative to the one-off motor, which, as we know, has <<inaudible>> because of inflation.

Thank you, Andrew, and I'd like to address the premium growth in P&C. As I mentioned earlier, P&C is growing very strongly, particularly in non-motor, essentially across the various areas and the various lines of business. So if we set aside for a moment Europ Assistance, which is gaining from new contracts — so genuinely new business is arriving, and Europ Assistance's growth is extremely strong thanks to this new contract we have. If you exclude our core market in non-motor, we're seeing a solid rise in both retail and SMEs, driven mostly by price increases rather than volume. So we do have — we are pressing for price increases in the market. We are gaining from some of the portfolio that, as we discussed a few times previously, is tied to inflation. So roughly 40% of our P&C portfolio is linked to inflation. So we're observing growth in this portfolio, helped also by that measure.

Peter Eliot from Kepler Cheuvreux has the next question.

I’ve got a couple of questions as well, please, particularly regarding the asset manager. In Q3, the management fee has held up fairly well <<inaudible>> relative to the decline seen over the year. I’m just curious whether you can offer any commentary on that — is it sustainable, or is there anything one-off in there, and so on? Then second, I was hoping you could update us on what you expect for private equity gains and dividends. I understand this year has been somewhat tougher than we probably anticipated at the beginning. But we were also looking for some catch-up on the dividend, and that doesn’t appear to be showing up. So <<inaudible>> plus in last year. So <<inaudible>> the net result we had last year isn’t converting into dividends at this point. Should we be expecting that? And perhaps you could give us your updated outlook.

Cristiano, both of those questions are yours.

Peter, so the operating result in asset management is a relief, particularly where performance is concerned. The performance piece you saw in the 9 months is still EUR 38 million, unchanged from the half year results, when we were more accurate in the first part of the year, and there was some kind of, I would say, one-off related element. So no much bigger movement should be expected from you in the last quarter. As for the other component, we also talk about the internal capacity to have on the own managed asset in order to extract the value. And at the same time, strong attention was paid to the operating cost trend of the asset management, not related to the third party, so as also to keep track of the operating revenues versus the operating expenses. Going forward, this for sure will be reflected in lower fees because of the lower value of the asset. But as I told you, that will be a little bit focused on the especially internal part cost. Second element on the private equity on the private equity side and the FX. Let me try to highlight you a couple of, in my opinion, important messages. The first one is related to how should we look at Lion River contribution in the quarter and in the year.

Absolutely, you remember that in the prior year we enjoyed a non-recurring gain exceeding EUR 100 million stemming from our Unicorn investment, and that isn't going to repeat, so it ought to be removed right away. A portion of that showed up during this quarter since it was divided evenly between the previous quarter and the current one. So at the group level we saw a decline in the operating result contribution from Lion River of EUR 137 million, and I'd say part of that — nearly half — came from the Unicorn item, while the remainder is simply a timing delay in realization. As you mentioned, private equity managers are pushing back realizations, and regarding the effect on the dividend and the figure for the dividend impact, you've certainly observed that the number has slowed down. What we have recorded thus far falls in the first — in the third quarter, the amount of dividends paid to Lion River participants was primarily EUR 153 million in Life, EUR 103 million in P&C, and EUR 30 million in asset management. That relates to the distribution up to now. Looking ahead, I'd just like to remind you that beginning next year, IFRS 9 will take effect.

So private equity's contribution won't be shown anymore under the other business segment. It'll sit purely as an investment within the financial asset class of the Life and P&C line of business, plus some dividend received in asset management. At the same time, though, what you'll see is a fair value movement contribution rather than the operating result contribution we've had up to now, which only comes when realization arrives.

Andrew Ritchie from Autonomous has the next question.

Let me just ask a follow-up about claims trends in Motor. What are you seeing on frequency? I mean, I'd guess severity is ticking up somewhat. But what are you seeing on frequency? There's some anecdotal indication that frequency is down again in Italy, I think. And maybe you could just confirm that and explain why that might be. The second question is broader — what impact is the uncertain macro environment having on sales, Life sales and/or surrender experience? It seems benign so far, but I wonder whether you've done any additional work to look at what might happen, what kinds of products have been popular or what increased risks there might be regarding surrender risk?

Marco, both of these are meant for you.

Yes. Thank you, Andrew. Let's begin with the claims trend in motor. You clearly asked about frequency, so let me say that frequency has not yet returned to recovered levels. It remains down. We have observed frequency rising a bit over the last months following COVID. But it clearly slowed in recent weeks and probably months. So clearly, we are not yet back at pre-COVID level. Frequency is still down. We do believe energy prices are having an effect on frequencies. We tend to see vehicles used less, and that is clearly moving things and supporting the drop in frequency. In particular, you asked about Italy. This is clearly something we observe. Looking ahead, I think it depends a great deal on where we head regarding energy prices and the supporting measures from the various governments. So it is hard to say. But we do see that frequency remains below pre-pandemic level, to put it that way. Then I would take the second question, and then perhaps, Cristiano, if you can add. Clearly, Life sales are affected overall by the macro conditions.

In certain of our markets—and I mean the market as a whole, not our own performance—there's an obvious pattern of reduced sales volume. That said, we do think our concentration on the kinds of products we offer matters here. So that means hybrid products combining unit-linked and traditional protection, and drawing on our distribution, which in some markets is agent distribution, but in any case there's a solid partnership between our sales effort and the distribution side. We believe we're able to sustain a reasonably good level in our hybrid product as we move ahead. So when you look at certain markets, Italy clearly being one, we've been shifting away from Life traditional savings toward a more composite offering within the hybrid product. We'll keep doing that as we go forward, since we regard this as genuinely healthy from the standpoint of the underwriting discipline we're applying going forward. So Cristiano, over to you.

Yes, Marco. And just as an add-on, Andrew, a few numbers and trend observations, particularly regarding the surrender piece. Keep in mind that hybrid products, by their very nature, launched back in 2016 and accounting for the bulk of production, carry what you could call a 5-year tunnel for surrender — meaning that from 5 years onward you have the option to exit, and by design the actuaries build a standard exit assumption into the model and into business value. So the slight upward drift in surrenders you're seeing stems from how the product is built, not from any shift in customer behaviour. I really want to stress this point, because as you're aware, beginning next year, experience trends and variances on the customer side run through contracted service margin variances and then flow through P&L under revenue recognition — so what we're seeing is not a departure from the actuarial projections set when the product was sold. That, to my mind, is the key message I wanted to get across. On top of that, part of the surrender is self-inflicted, since we carried out some in-force management. In Italy, for instance, we changed the product offer, shifting away from what was probably higher capital intensity toward lower capital intensity and a better fit with client needs, which incidentally also let us improve our investment margin on a recurring basis.

Our following question comes from Will Hardcastle at UBS.

Let me probe a little further on one of those questions about motor and the claims trends. I'm really just trying to pin down the key differentiating features at play, because we hear quite a bit from market participants <<inaudible>> marketplace. The trends look very different in Italy and Germany. Just trying to get any color on that — what are you seeing? And I suppose we're coming up on a fairly important renewal period here for Germany. Any early indications of what you'd be hoping for or expecting? Are you focused on price? Or is this more of a terms and conditions type of discussion?

Marco, that one's yours to answer.

Yes. So if we go a bit deeper on motor, I think you're right. We observe varying trends and varying conditions across our core markets. So clearly, you brought up France, Italy and Germany. These are clearly, I would say, going through differing dynamics. So in Italy, we do see pressure when it comes to price increases. We are proceeding with that pressure. Again, if you want to go a bit deeper on the different lines of business, we see more pressure in MTPL compared to MOD, which is growing somewhat better also in Italy, but this holds true across Europe. So while we've seen trends, some price increases are already taking effect and the business continues. In Italy, this will come. MOD is coming along a little better. You mentioned Germany. I think we will have an important season in January on price increase. I think you have seen some projection in the market and forecast on how this price increase on motor might take shape. Just to give you some guidance, I think we will be in the upper part of the price increase for Germany. So we are pushing for a significant price increase in Germany in line with the market, but probably in the upper part of the markets.

Just to follow up on that: does this mean the effect on inflation in Germany is significantly higher than, say, in France — is that why you're pressing on that particular point? And which component of inflation differs so much?

Right. So I do — we do observe that inflation rates differ across Europe. We range from clearly Germany, where inflation hit a bit harder, to Italy, where we see a smaller effect on claims. And again, if you want to dig even deeper, we see this more on material damage than on bodily injury, particularly in Italy, where this is truly a clear differentiator.

Our following question comes from Farooq Hanif at JPMorgan.

Okay, back on non-life for a moment, and then I’ve got an M&A question too. But picking up on what you said, you’re in a spot where inflation is showing up—though it’s contained in certain markets—and you aren’t yet priced for it. So I’m curious what the reserving catch-up effect looks like for you, and where we’d see it. Then, for my second question, taking everything you’ve said to everyone so far: if you look at your discrete third-quarter combined ratio, it’s fairly high, 94-point-something. And even if we strip out Argentina and consider man-made losses, it just seems to me you might be tracking above your 92%. I’m wondering what you think about that 92% figure now for the next couple of years, obviously assuming IFRS 17 doesn’t exist. And my last question is on M&A. So you mentioned the EUR 1 billion budget you have statically today. But of course, you’re going to accrue more. Can you remind us what that accrual is? And at what point do you decide to say, “Guys, we’re going to give it back to our shareholders.”

Cristiano, I believe every one of those is directed at you.

Okay, regarding your first question about how inflation affects reserving, I think we should also consider it alongside the Solvency II best estimate liability impact we’ve recorded so far, which differs from what you’re seeing in IFRS accounting. As you’re aware, our book contains a very large amount of reserve adequacy, but that will vanish at year-end as we move into the new standard. On the underlying economic assumption, we chose to recognize roughly EUR 600 million — EUR 630 million during the first 9 months for the inflation effect on P&C reserving, and that has been reflected in a comparable way. This is before taxes. So that’s 2 percentage points of solvency ratio, which is precisely the approach for looking at things prudently as we go forward and for letting us manage next year, when everything would be viewed on a fully economic basis in a safe and controlled environment. On your second point about the 92% target, I first have to say two things. First, you asked me to assume that IFRS 17 will not exist. I’ll address that.

However, we definitely need to see the refined definition when we meet in December. So we'll present the market agreement we reached and the principle behind the small adjustments we're making to the definition. But beyond that, let's say it won't be there. When we built the plan, we weren't assuming any different behavior for Argentina inflation, which stood at roughly 47% at that time. So the Argentina effect, which was significant, is not included in these figures. Therefore, the 0.6% deterioration versus what we delivered is not included either. And that ought to be excluded from the control scope we should be examining. So I'd focus on managing the group excluding Argentina, since that's something within our control, whereas that other piece would not have been, plus the perimeter. Let me remind you that the calculation used the group's existing perimeter and did not incorporate the impact of either acquisition we made, such as Cattolica, India, Malaysia, which we completed, including even Medicale, which clearly shifts the scope somewhat. So of course, we're taking action to get near this figure, but there are certain perimeter effects that you should consider could produce roughly a one percentage point higher impact on the target, owing to the perimeter and the region where we're operating.

Let me remind you that India's market sits above 100% combined ratio in itself, yet the outcome is positive, owing to investment income. On your third question about M&A, let me give you one really key figure. After the dividend has been paid, this group can generate EUR 1 billion of free cash each year. How long that keeps accumulating — when I said earlier, in my previous answer, EUR 1 billion by year-end, you should keep in mind that we accrue the dividend in the first quarter or at the latest in April, with the vast majority falling in the following year. So at the latest by the end of next year, we will certainly have accrued a further EUR 1 billion on top of what was already accrued, and we have some internal bridging because we received all of the dividend while the cost and the financing come later. That gives us plenty of flexibility here. What's the figure? We confirm that we will be able to generate M&A capacity of somewhere between EUR 2.5 billion and EUR 3 billion.