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

Good morning, and thank you for standing by. Welcome to the Generali Investor Update Webcast and Conference Call. [Operator Instructions] Please note that the event is live streamed and recorded. By continuing to listen to the call, you gave it to the Assicurazioni Generali your explicit content to live stream record and disseminate your personal data on the company's communication channel and media for communication purposes. If you do not wish to provide this content, you are kindly asked to disconnect from the call. For more information on your personal data processing, please write to argenerali.com.

Good morning, everyone, and welcome to Assicurazioni Generali investor update. Today, we will share with you 2 presentations. First, our Group CFO, Cristiano Borean, will provide an overview on how Generali will implement the new accounting standards IFRS 17 and 9. Then, our Group General Manager, Marco Sesana, will present an update on the Cattolica integration. After a short break starting from 11:30, we will dedicate 1 hour to answer any questions you may have on these 2 topics. You will have an opportunity to ask questions via the conference call, but if you would like to submit your questions in advance to ensure we're able to answer them within the time frame, you are able to start sending questions through the webcast now. Before I hand it over to Cristiano, please note that the event is being recorded, and then the slides of the 2 presentations are available on our website, generali.com.

Welcome to Assicurazioni Generali Group IFRS 17 and 9 event. The aim today is to update you on the implementation and expected impact of the transition to IFRS 17 and 9 in terms of financial statements, disclosures and KPIs. As you know, starting from 2023, IFRS 17 and IFRS 9 will replace IFRS 4 and IAS 39. The formal reporting under IFRS 17 and IFRS 9 will not start until the beginning of next year. Any figures and estimates that we will present in the next slides are preliminary, indicative, unaudited and subject to change. Therefore, please consider these figures as such and refer to Slide 52 of the presentation for more details. Let me start with the key messages. The most important point to bear in mind is that the new accounting standards will have no impact on cash and capital generation, net holding cash flow, dividends and solvency. The new accounting standards are also more closely aligned with the underlying fair value and best estimate principles of Solvency 2. The second key message is that our shareholders' equity will be broadly stable at transition. This is thanks to a better reflection of the economic value under IFRS 17 that has not been entirely visible under IFRS 4. With this new accounting standard, you have further confirmation of the conservative approach taken by Generali in the way we have applied our accounting policies over the years. The third key message. Our Contractual Service Margin, or CSM, at transition, is expected to be around EUR 33 billion, reflecting the profitability of our in-force business. One way to illustrate this is to compare the Life CSM at transition to our market cap, or for those of you using some of the part models, to the value given to our Life business. At the end of 2021, our market cap was less than EUR 30 billion, and our CSM net of taxes and minorities was around EUR 23 billion. A fourth important message is that IFRS 17 will significantly improve the visibility and predictability of profit emergence in the Life business. This will lead to fewer one-offs and other non-recurring effects that often impacted the Life numbers under IFRS 4. I welcome this development because it will enable people to better appreciate and evaluate our Life business. The fifth key message is about P&C. The new accounting standard is likely to make the P&C operating result more volatile. We are, however, confident that our business mix will mitigate this effect, primarily thanks to 3 factors: our exposure to shorter tail business lines reduces the sensitivity to interest rates changes; our lower presence in commercial lines, the way we manage our NATCAT exposure through reinsurance. Let me also add that, in a general context where P&C will be more volatile, our balance group business mix provides comfort about the impact of these higher P&C volatility on the overall group's result. And finally, the operating result is going to remain broadly stable. You may know that I was an academic physicist before I joined Generali. One of the first things you learn in physics is that you do not create or destroy energy. Just you transform it. I think it is the same in accounting for value. You did not create or destroy value by changing the accounting standards. You just transform the way that value is represented and emerges through time, and this is why we decided to make 2 out of the 3 key strategic targets in our '22-'24 plan purely cash-based, and therefore, unaffected by the transition to the new accounting standards. The next slide shows you the IFRS 17 and 9 journey as we move into 2023. At the final year 2022 results on March 14, we will provide you the opening balance under IFRS 17 and 9. By the end of April 2023, we will share with you our first set of comparative figures under IFRS 17 and 9. We will explain the first quarter 2022 figures in more detail to provide you with a clear starting point to work from, for the first quarter 2023 estimates. At the half-year results in August, we will also provide full supplementary information under IFRS 17 and 9. On this, I have tasked our IR team to reach out proactively to get your views and suggestions on how we can make our new disclosure under IFRS 17 and 9 as close as possible to your requirements. We may not be able to meet all of your requests, but we will try. We are now close to Christmas. So feel free to start drafting wishlists. Moving to the section, key accounting and valuation choices. Let me start with Slide 9 which provides a translation from the old standard to the new one in comparison with Solvency 2. As I mentioned in the introduction, having an accounting standard for the insurance sector that more closely resembles the Solvency 2 regulatory framework, will be a material and lasting benefit from the transition to IFRS 17 and 9. As you can see, we will have an economic evaluation of asset and liabilities much more consistent with Solvency 2, as well as a representation of future profits in the balance sheet, but can now be bridged effectively with the value in-force component of this Solvency 2 Own Funds. Let me now give you an overview of the key accounting choices we have made and the rationales behind those choices. First, on investments, the vast majority of our fixed income portfolio, as well as of our equities not backing the VFA business, are classified at fair value through other comprehensive income. Clearly, the choice here was driven by a desire to reduce earnings sensitivities to market factors. The real estate investments backing the VFA business are also calculated at fair value to achieve economic matching between assets and liabilities. Let me move to the transition approach. This is a topic that warrants close attention. As you may already know, the requirements for the full retrospective approach are very demanding for long-term business. The best way to look at this is the transition approach between the modified retrospective approach versus the fair value. The group will apply the modified retrospective wherever possible. Almost 95% of technical provisions have a transition under the full or the modified retrospective approach. We have used the fair value approach mainly for selected runoff portfolios. Using modified retrospective approach primarily in the very small share of fair value, where appropriate, ensures an alignment to the present value of future profits of the underlying business and more continuity between the transition valuation and the new business after transition date. On the discount rate, we applied the so-called bottom-up approach with an illiquidity premium added to the risk-free curve. This is the best way to maintain alignment with the Solvency 2 framework. Finally, on the percentile approach. We will use the 75th percentile, continuing our usual prudent stance on reserving. At the 9 months 2022 conference call, I already mentioned that our P&C best estimate reserves were reinforced by EUR 630 million during 2022. While I think that there may be limits to comparing the percentiles used by different companies, let me just say that we consider the 75th percentile a prudent approach to reserving. Slide 11 looks at the changes brought in by IFRS 9, which is the new accounting standard for investments. We should look at IFRS 9 in alignment with IFRS 17, because IFRS 17 makes disciplined asset and liability matching even more important than previously. The implementation of IFRS 9 is also related to how liabilities move. The chart gives an overview on the changes from the IAS 39 to IFRS 9. First of all, let me highlight that the vast majority of the asset will be booked at fair value through OCI, or at [ harmonized ] costs. There is going to be an increase in the share of asset booked at fair value through the P&L from 4% to 23%. However, you should not look at 23% as something that will, as a whole, bring more volatility to our P&L. The share of investment leading to P&L volatility will not grow significantly. The reason is that 85% of the investments booked at fair value through profit and loss are related to the VFA portfolios. For this reason, the mark-to-market volatility will not directly impact the P&L, as it will be absorbed by our -- by the changes in the CSM. Our significant exposure to investments linked to Life portfolio will mitigate the P&L volatility linked to the introduction of IFRS 9. Over the past 3 years, we have worked in close coordination with the investment department to gradually reduce the exposure to fixed income instrument, not passing the so-called SPPI test. This preparatory work has been clearly beneficial, but the journey will continue in 2023 and beyond, with a focus on P&C portfolio to further insulate our P&L from financial markets' volatility. An important point for you to be aware of is that our general account asset managers have received an Expected Credit Loss, or ECL budget for the past 3 years. The idea was to define a glide path for the credit portfolio to get to 2022 with a desired ECL impact. This effort has also had the benefit of timing as we enter 2022, a year during which the iTraxx crossover index rose by over 400 basis points with a high quality credit portfolio. A final remark is that this new accounting standard significantly reduces the amount of impairments that we will see in any given year. As you know, the group has historically seen a larger dilution in the journey from operating to pre-tax profit compared to peers, and to some extent, this was linked to impairments. To sum up on this point, the introduction of IFRS 9 will provide a clear benefit also in light of the adjusted net result approach described in a few slides. Before moving to IFRS 17, I would like to provide an additional perspective on IFRS 9, on something that often is seen as a distinguishing element of our asset allocation, the exposure to real estate and private equity. As I mentioned on previous earnings call, there are 2 key elements: the move to the new accounting framework will lead to the emergence of a significant amount of unrealized gains in real estate where almost 85% of the assets will be measured at fair value and the remainder at cost. Private equity will be measured entirely at fair value in the segment of which the result is generated. As you can see from the slide, there is not going to be any impact at transition on shareholders' equity. The real estate and private equity holdings held by portfolios measured with VFA will effectively record the fair value changes in the CSM. The revised segment presentation will reflect the contribution from real estate and private equity directly in the insurance and in the Asset & Wealth Management segments, with a resulting decrease in the segment, Holding and Other. This will translate in an expected reduction in consolidation adjustment by around 60%. Moving to Slide 13. You can see that for the Life business, we apply the VFA model for the vast majority of our portfolios. More specifically, almost all the Life portfolios in Italy, France and Germany will apply the VFA model. Given the importance of the VFA model in our implementation of IFRS 17, we will go into further detail on this in the Life section later in this presentation. On the P&C side, 99% of the portfolios will apply the PAA approach, which will ensure continuity in terms of financial reporting. Let me move to the transition approach. As I had flagged to you in my opening remarks, while we apply the retrospective approach to the vast majority of our portfolios, it's important to appreciate that we have used the fair value approach just for a tiny portion of our Life business, primarily for portfolios in runoff. On the P&C portfolios, there will be a CSM of between EUR 0.5 billion and EUR 1 billion related to the funeral business in Spain. IFRS 17 is an actuarial intensive accounting standard, and actuarial discounting is a key part of it. In line with our peers, we have chosen a bottom-up approach to define the discount curve, adding an illiquidity premium to the risk-free rate. This is a key area where the consistency with the Solvency 2 framework is in place. At Generali, we have made a strong effort to align the discount curve, as far as possible, to the Solvency 2 curve, introducing at the same time some specific enhancement aimed at achieving a better economic representation of our portfolios. In particular, looking at the VFA business, you will notice that the illiquidity premium takes into consideration both the asset mix of each specific legal entity and the duration of the underlying portfolio. This contrast with what currently happens within Solvency 2, where it is based on a standard reference portfolio and a fixed application ratio, which are not ours. This will help to avoid artificial volatility that would otherwise affect our balance sheet and P&L, especially in case of credit spreads widening. Risk adjustment is one of the defining feature of IFRS 17. It reflects the uncertainty that arises from nonfinancial risks. Within the calibration of the risk adjustment, we use the Solvency 2 internal model approach, and thus, generally applied a 75th percentile for both Life and P&C. We believe that this is a conservative approach, and one that will maintain our prudent reserving going forward. The charts in the Slide 16 show you a comparison of the risk adjustment under IFRS 17 to the risk margin under Solvency 2 for both Life and P&C. As I said at the beginning, IFRS 17 will unlock some value in our balance sheet currently hidden under IFRS 4. I am referring specifically to the conservative approach we have traditionally implemented when accounting for acquisition cost, reserving and the valuation of directly owned real estate allocated to the Life portfolios. Our expectation is to have shareholders' equity at transition, broadly in line with IFRS 4, with a slight reduction in Life compensated by an increase in P&C. Please note that both the equity represented in the slide under IAS 39/IFRS 4 and the one under IFRS 17 and 9, are before minorities. To provide you a visual representation of the bridge from IFRS 17 and 9 equity to the Solvency 2 Own Funds, Slide 19 shows you the various moving parts. For the sake of simplicity, when you take the sum of the shareholders' equity and the CSM, you need to deduct the intangibles which are not recognized as an asset under Solvency 2. You then add the net balance of the difference between the mark-to-market of assets and liabilities and neutralize the impact of deferred taxes. It is important to remember that Own Funds also include subordinated debt. Talking about debt. I think that the implementation of IFRS 17 will also be beneficial for the way in which we're perceived in the credit market. As you know, we have not defined our leverage ratio target. For the past 3 years, we have preferred to look at a regulatory gearing ratio, which at year-end '21 was slightly below 20%. We did this anticipating that the transition to a new accounting standard would have possibly implied a significant revision of the way rating agencies and the market participants look at the leverage. While we wait for an official revision of the rating agencies' methodologies, let me highlight, for example, that Fitch has said preliminarily that they plan to include the CSM net of tax in the denominator of their financial leverage ratio. As you can see from this slide, on a simple IFRS leverage ratio, our IFRS 17 gearing, including both the shareholder equity and the net CSM in the denominator would be 10 percentage points lower compared to where it was at year-end '21 under IFRS 4. Let me now move to the Life business and start with some key messages. The transition to IFRS 17 represents a great opportunity for the group, as the new accounting standard will provide a more predictable view of the Life operating result. IFRS 17 will also be more closely aligned to the economic reality of the business. We have disclosed the new business margin and new business value for several years. But with IFRS 4, there was no simple way to link them to the Life operating result. I see IFRS 17 as an opportunity to demonstrate the contribution of our strong new business value to the Life operating result. The broad application of the VFA model implies a smoother earnings profile. Compared to IFRS 4, the Life operating result will be less affected by one-off dynamics that could -- that clouded the picture and made historical comparisons more difficult. Another important aspect is that IFRS 17 will provide analysts and investors with a clear view of the contribution of the new business to the CSM development, and, therefore, to the P&L. Of course, Life will witness a more profound change compared to P&C in terms of accounting representation. But over time, it will make things much clearer. It will be a transition to a better world where accounting and economic reality talk to each other and where accounting and regulatory figures will be more consistent and more comparable. In light of this, our expectation is that the introduction of IFRS 17 will be beneficial to the appraisal of our Life business. As you have seen on previous slides at Generali, under IFRS 17, Life basically means VFA. So I would like to take some time here to explain how VFA works. VFA is the compulsory model for long-term participating business, including unit linked and traditional saving products where the payments to policyholders are linked to underlying items. The VFA model allows us to better reflect contracts that provide investment-related services. The model was designed to avoid the type of artificial volatility that flows through the P&L and/or OCI by applying the general model. This means that there will be an alignment in the financial result of the financial income received from the underlying asset with the financial revaluation of the insurance contract liabilities. There are 3 key important points that I would like to share with you in this regard. One, at each reporting date, the CSM includes the current accounting measurement of unearned financial and insurance profit. Two, in contrast to the general model where the CSM is readjusted only for changes in operating risk factors, in the VFA model, the CSM is readjusted also for changes in financial variables. All these changes are amortized during the coverage period according to the service provided, hence, mitigating P&L volatility as a result. Three, actual financial income, both in P&L and OCI are fully mirrored by changes of insurance liabilities, and all the profit emerges as a release of CSM in the insurance service result. As you can imagine, given the duration of our business, this amortization element offers a powerful mitigation element of the year-to-year volatility, as changes in both technical and financial assumption will flow through the CSM for all our long-term participating business. It's becoming clear that one of the key areas of analysis in the IFRS 17 world will be the CSM development. The opening balance of the CSM will be increased by the new business contribution, which will be determined primarily by the quality of the new production as well as by the volume component. This is important because, in the past, high-quality underwriting and gross written premium were not directly linked to the Life operating result. Going forward, they will be linked, and the new business contribution from CSM is likely to be a key area where analysts and investors will look to assess the operating trends of the Life business. The operating variances are related to experience and assumption changes. Fundamentally, the contribution from operating variances should be, on average, 0, with years of positive contribution offset by other years of negative contribution. The CSM then grows, thanks to the interest accretion on the discounted stock of profit using current rates for the portfolio under VFA and locked-in rates for portfolio under the general model; and also thanks to the expected systematic variance due to the realization of real-world returns. Based on these drivers, therefore, we expect the stock of CSM before release to grow by more than 10% in a normal year. The CSM total release includes both the release of the expected systematic variance attributed to the reporting year and the quota of the operating balance plus new business and variances released in line with the service provided during the year. So, when we say that the total release ratio is expected to be in the range between 8% and 10%, please be mindful that this percentage should be applied to the sum of the initial CSM balance, the contribution of the new business, the interest accretion on the discounted stock of profit, and variances. Once the CSM release is done, you end up with the closing balance CSM. To give you some more color on this description, using CSM transition figure as a starting point and hypothetically assuming no operating and economic variances with a referenced 2022 contribution of around EUR 4 billion stemming from new business unwinding and the expected real-world returns, with a bit of math, you would end up with a release in the range of EUR 2.8 billion to EUR 3.5 billion and the closing CSM of about EUR 33 billion. Moving to Slide 25. The Life operating result has 2 key components: the operating insurance service result and the operating investment result. As you can see from the chart, the vast majority of the operating insurance service result comes from the CSM release and the release of risk adjustment. These are both stable and predictable items, which is the reason I said at the beginning that the profit emerging from Life will become smoother, more predictable and more stable compared to IFRS 4. In the past, the Life operating result was also often impacted by one-off items that you are unlikely to see in the IFRS 17 world. Loss component and experience variance will be difficult to forecast with an outside view, but are likely to be overall negligible. We also expect the loss component going forward to be contained by our discipline on new business and prudent assumptions on transition. The operating investment result will also be a fairly predictable portion of the Life operating result. It will primarily come from the non-participating business and from shareholders' fund, but it will also include the unwinding of the discount from the non-participating business. With the new accounting standard, given the focus on the CSM development, we have decided to review and adapt our definition of Life new business value. We have done this by linking it very closely to the new IFRS 17 world, and in particular, with the new business CSM. To provide a complete and correct view of the Life new business, we also included in the new KPI some elements that are not directly emerging from the new business CSM. More specifically, we included also the value of business measured under PAA, investment contracts falling under IFRS 9 and the look-through profits coming from funds managed by the group. And then, for consistency with the previous KPI, we deducted the taxes and minorities. In this way, we also granted continuity with the current KPI. Basically, the new KPI differs from the current KPI mainly in terms of economic assumptions and contract boundaries definitions, which are now aligned to IFRS 17, and due to the move from the Cost of Capital & Non-Hedgeable Risk concept to the new risk adjustment. Moving to P&C. Let me highlight 4 key messages. First, almost all of our P&C business will be accounted for, using the premium allocation approach. Thanks to the application of the PAA, there will be only limited changes compared to IFRS 4. A second important message relates to the Liability for Incurred Claims, or LIC, which is a new technical term for the P&C business under IFRS 17. The LIC will be aligned with the Solvency 2 best estimate liabilities. Once again, I am convinced that having an accounting standard that is consistent with our regulatory framework, is a positive development. The difference between the P&C LIC under IFRS 17 and the one under IFRS 4 is mostly attributable to the discounting and to the reserve adequacy. The third key message is that the introduction of IFRS 17 will make the P&C operating result more sensitive to interest rates because of the discounting element. This means that the longer the duration of the P&C business, the higher the sensitivity to changes in interest rates. This topic I would highlight to you the relatively short duration of our P&C book. My final key message is that the combined ratio calculation will change in line with the IFRS 17 requirements and to allow for more comparability with our main peers. This change, however, has no impact on the P&C operating result. Taking a more detailed look at the Liability for Incurred Claims or LIC under IFRS 17. Let's move to Slide 29. The IFRS 4 reserves for P&C are not discounted, and they include an element of reserve adequacy. So to obtain the IFRS 17 liability for incurred claims, we need to deduct the impact of the discounting, eliminate the reserve adequacy over the best estimate and then add the risk adjustment that reflects the uncertainty that arises from non-financial risks. The EUR 2 billion perimeter adjustment in the chart is mainly related to annuities liabilities stemming from non-life contracts. Let me reiterate also that the importance of the alignment with Solvency 2 deriving from the new accounting standard. This is something that will also shape the way we steer the business and measure its performance. As an example, already in 2022, the key performance indicator for the CEOs of our insurance business unit was the best estimate current year technical result. Moving to the structure of the P&C operating result under IFRS 17. Slide 30 focuses on the operating insurance service result. This is similar to the underwriting result under IFRS 4, or, if you will, similar to the IFRS 4 technical result, net of the other operating income and expenses. While gross written premium will no longer be a required reporting item, we will continue to publish it as a top line KPI. GWP will be replaced by the insurance contract revenues, which is similar to gross earned premiums. The total incurred claims will be derived from the sum of the current year losses discounted at current rates, the prior year development and the net effect of change in the risk adjustment, which is expected to be marginal and subject to the underlying business mix and growth. All insurance expenses will also be deducted from the insurance contract revenues, and this is also where the non-directly attributable cost will be factored in. The loss component reflects the immediate loss from onerous contracts as well as possible recoveries from them. For very short-tail businesses, think about motor own damage. For example, the loss component is primarily a short-term representation of the economic dynamics of the business. The amount of loss component is relatively small in our balance sheet, lower than EUR 250 million at transition. The loss component will impact the operating result through the net change compared to the previous year. So we expect this impact to be negligible. IFRS 17 also requires companies to display the result of their reinsurance held. The operating insurance service result divided by the gross insurance contract revenues gives you the underwriting margin. The combined ratio is equal to 1 minus the underwriting margin. For this, let's look at the next slide. On this slide, we show a bridge between the IFRS 4 and the IFRS 17 combined ratio as well as the formulae under IFRS 4 and IFRS 17. First of all, there is the change in the denominator using gross insurance revenues under IFRS 17 compared to the net earned premium under IFRS 4. Second, the numerator includes all expenses, also the non-directly attributable expenses that are not currently reported in our COR. It is important to emphasize that the inclusion of these expenses in the COR is only a representation element and does not impact the P&C operating result since these costs were already taken into consideration under IFRS 4. Let me also highlight a key element. There has been a lot of discussion at the CFO Forum on the inclusion of these expenses in the numerator. At Generali, we will apply the so-called fully loaded combined ratio view, including all these expenses in the numerator. This provides a comprehensive view of the operating insurance service result of P&C segment as well as of the combined ratio. This new approach will also ensure comparability between our combined ratio and that of our main peers. To give you a sense, the combination of the move from a net to a gross denominator and the inclusion of the non-directly attributable expenses in the numerator are expected together to lead to an optical increase in the reported COR of around 2 percentage points from IFRS 4 COR to IFRS 17 COR, with no impact on the operating result over the cycle as, once again, this is only a representational element. The current year loss ratio will benefit from the discounting effect and from the best estimate reserving approach. It may potentially also record any losses and recoveries from possible onerous contracts. The prior year development will benefit less than previously from the release of prudency due to the de-recognition of reserve adequacy at transition. Over the cycle, the change in risk adjustment is expected to be overall neutral, resulting in a shift between current year and prior year depending on business mix and growth. Finally, the changes on the current year and prior year are expected to broadly offset each other. The P&C operating investment result will be broadly in line with the current definition. The main change is the introduction under IFRS 17 of the insurance finance expense, which reflects the unwinding of insurance liabilities at the rate locked in at inception. This dynamic, especially over the cycle, would broadly offset the discounting effect that is part of the insurance service result. This means that the mix between underwriting and investment result will change compared to the IFRS 4 framework, but with no material impact on the overall level of operating result generated by the P&C segment across the cycle. Let me emphasize that realized gains and losses and market movements reported in the P&L are not part of the operating investment result, as they will be classified as non-operating items. The most important effect of the introduction of IFRS 17 and 9 on our KPIs is that, starting from 2023, the reported net result used for the EPS CAGR target will be adjusted for the following 3 new elements. First, the amortization of intangibles related to M&A transactions. On this specific point, let me highlight that we will not adjust any impairment on goodwill. Second, the volatility stemming from the mark-to-market of assets at fair value through profit and loss held in non-participating business and shareholder funds. Third, the P&L impact of the application of hyperinflation accounting. This adjustment will come on top of the adjustment for gains and losses on business acquisition or disposal, including restructuring costs incurred in the related M&A year that are already part of our shared framework. These 2 summary tables on Slide 35 provide you with an overview of what we believe will be the implication of the new accounting standards. I will not dwell on this slide too long as I have already covered most of its content during the presentation. However, let me remind you that our Lifetime Partner 24: Driving Growth plan has 3 key strategic targets, and 2 of them are cash-based targets, namely, net holding cash flow in excess of EUR 8.5 billion, and cumulative dividend payments of between EUR 5.2 billion and EUR 5.6 billion for the period 2022-2024. These 2 targets are not affected by the introduction of IFRS 17 and 9. This is one of the reasons why we chose them to enable these 2 KPIs to be independent from the transition to the new accounting standards. Also, our first strategic target, the adjusted EPS CAGR of 6% to 8% is confirmed under IFRS 17 and 9. Before I finish, let me remind you of the key points about the transition to IFRS 17 and 9. First, we expect no impact on cash and capital generation, net holding cash flow, dividends and solvency as these are not impacted by the new accounting standards. Second, we expect shareholders' equity to be broadly stable at transition. Third, we expect CSM to be around EUR 33 billion, reflecting the profitability of the in-force business. Fourth, we expect the new accounting standard to lead to improved visibility and predictability of profits in the Life business. Fifth, we expect P&C operating results to be more volatile. Sixth, finally, we expect the operating result to remain broadly stable. Before leaving the floor to Marco, let me share some closing thoughts. IFRS 4 created a gap between the accounting and the economic reality of the insurance business. During 2022, we have seen this gap magnified in the balance sheet by the move in interest rates. I think we should all welcome the transition to IFRS 17 as these dynamics will be addressed under the new regime, but also because it is an accounting standard more closely aligned with our Solvency 2 regulatory framework. At Generali, we see IFRS 17 as an opportunity to better represent the value embedded in our Life business. Life results will be more predictable with a smoother earnings profile compared to what we saw under IFRS 4. This accounting standard will enable analysts and investors to fully appreciate the economic value of the Life business, removing some of the opacity discount that has affected this segment in the past. As I mentioned during the presentation, under IFRS 4, there was no simple way to link new business margin and new business value to the Life operating result. With IFRS 17, you will have a clearer and more informative view of the link between our new business value and the Life operating result. I also think that it is interesting that our Life CSM, net of taxes and minorities, is not distant from our market cap. On the P&C front, the operating result will be more volatile, but I'm relatively relaxed about this for 4 reasons. Our P&C exposure is mostly short tail, hence less sensitive to interest rate changes. Our client base is mostly retail and small medium enterprises, avoiding the volatility that you are likely to see in corporate and commercial. We also have a lower exposure to natural catastrophe, thanks to our reinsurance strategy. And finally, our business composition between Life and P&C is balanced, and this will contain the volatility from the latter. Thank you for your attention. After a presentation from Marco on the integration of Cattolica, I will be happy to answer any questions you may have.

Thank you, Cristiano, and welcome to all of you. It is a pleasure for me to be here today. And in this presentation, I'm going to provide a deep dive into the Cattolica integration. I will be very happy to answer any question on this topic you have during the Q&A. The first rationale of the acquisition was the strategic fit. Cattolica offer a sizable and diversified P&C portfolio, around EUR 2.2 billion of gross written premium, with a significant share of accident, health and property. These are business lines that are the focus of Generali strategic plan. The transaction also brought a distinctive presence in market segment where Generali Italia is less present like Cattolica and not-for-profit organization. To give you some data points on this, 63% of insured churches in Italy are clients of Cattolica. And following our integration with Cattolica, Generali will have over 25% market share in the agricultural sector. Cattolica also had a well-known and distinctive brand as well as a deep-rooted footprint in Italy's wealthiest region, especially in the northern Italy, thanks to its 1,400 strong agency network covering almost 3.6 million customers. It also represented one of the few sizable consolidation targets in the Italian insurance market, with clear potential for operational improvement. So with clear strategic fit, the second driver was value creation. It was clear that there were significant synergy potential to be extracted from Cattolica, by integrating it into Generali Italia model. I will spend some time looking at the operational and technical synergies later in this presentation, but there were clear de-risking opportunity that would unlock significant value for shareholder. First, the opportunity to transform Cattolica from a cooperative to a joint stock company; second, the ability to de-risk its ALM profile translating into a better allocation of capital; and third, applying our capital management framework to analyze its bancassurance agreements. So in light of all of the above, it was clear to us that the IRR of this investment would be significantly above our cost of equity. Before I go a bit more in detail on the integration process, please keep in mind the core principle we adopted from the start. First, the goal was to create an efficient and centralized operating model in line with Generali Italia in terms of centralized function, product and process governance, and our focus on scaling up digital and service capability. Second, the importance of holding on, on what made Cattolica a great business, its strong brand value and heritage and its effective dedicated distribution model. Let's get started with an overview of the transaction. We signed a strategic partnership agreement with Cattolica in June 2020, taking a 24.4% stake, enabling Cattolica to meet the requirements of the Italian regulator to strengthen its capital position. The strategic partnership agreement also included initiative that helped develop Cattolica business using Generali know-how in key areas like telematics, health, capital management and investment. As highlighted in the strategic rationale, there was a clear opportunity to create significant value by transforming Cattolica into a joint stock company, regardless of any future integration, and we negotiated this as a precondition to the strategic agreement deal. By the beginning of '21, we were even more convinced about the potential for value creation because of 3 key developments: First, we were confident that the company was operationally sound and had a clear room for improvement having worked with Cattolica on key business area during 2020; second, Cattolica transformed into a joint stock company with a significantly better governance; and third, the worst of COVID-19 pandemic was over in terms of impact on operating performance. On the 31st of May '21, we launched a public tender offer to buy the remaining part of Cattolica at EUR 6.75 per share, a price that was essentially the same where Cattolica was trading in January 2020. Through the public offer, we reached an 84.5% stake in Cattolica in the end of '21. In the summer of '22, we executed the squeeze-out of the minority without paying a premium. This means we were able to acquire a joint stock company with the same price that -- when it was a cooperative, without paying a [ control ]. In August of this year, Cattolica was delisted. In the public offer memorandum, we stated that the full integration of Cattolica will generate at least EUR 80 million in pre-tax synergies by 2026. Thanks to our ability to effectively extend our operating model to Cattolica. And the good practices we found inside Cattolica, which exceeded our original expectation, I am pleased to say that we will be able to exceed the amount and shorten the timing to realize these synergies. We have upgraded the expected run rate synergies from EUR 80 million in '26 to a range of EUR 120 million to EUR 130 million in '25. This is all thanks to the effectiveness of our managers in accelerating the integration of Cattolica across 2 levers: operational synergies and technical synergies. By centralizing key operational functions at Generali Italia, there are significant cost synergies that emerge in areas such as procurement, IT and administrative expenses. This convergence ensures better coordination, more control and oversight and lower cost, by using an established, tested and effective platform at essentially 0 additional costs. The value of this centralized model is especially relevant in an inflationary environment. There are 3 main areas of focus. First, migration to the Generali Italia IT platform, a very important lever. The Generali Italia platform is fully digital and flexible. This is allowing a seamless integration of Cattolica's product and processes with basically no need for additional IT investment. We plan to decommission most of the IT platform by 2025 and the rest by the end of 2026. Second, in the new hybrid working environment, we see material scope for optimization of premises. In these areas, we're moving ahead quickly, and there are 2 main benefits: lower facility management cost, and ability to monetize the office space freed up. The third area of focus is centralized procurement to leverage Generali Italia size with supplier to achieve a lower unit cost. As you can see from the slide, we are moving ahead faster than expected on this front, and we plan to reach a run rate operational synergies between EUR 77 million and EUR 84 million by '25. Technical synergies are also very important. Again, here, 3 areas of focus. First, we are in the process of extending our new modular digital products to all Cattolica agencies. This will be beneficial for the interaction with clients and will increase the productivity and profitability of the distribution network. Second, in this inflationary environment, claims management has become more strategic. Scaling up our automation on claims management will also enable us to significantly reduce costs. We have already extended our fraud detection and anti-fraud practices to Cattolica. We will also extend Cattolica access to our agreements with body shop to customers. Third, Cattolica investments are now managed by Generali Asset & Wealth Management business unit, giving Cattolica the ability to have a more diversified asset allocation. These also create further opportunities for synergies in areas such as unit-linked and real estate. We expect overall technical synergies to be between EUR 43 million and EUR 46 million by the end of '25. Moving to products now. The migration of Cattolica's product offering to the Generali Italia platform will continue and accelerate in 2023. And we have outlined the process on the left hand of the slide. In terms of key benefits, first, we will have a unified and simplified product portfolio. We have reviewed the combined product offering of Generali Italia and Cattolica, and we plan to more than [ halve ] it by focusing on core products and eliminating inefficient overlaps, while ensuring we offer agents and customers the right choice. We will have an integrated IT system. We will save money by gradually decommissioning the majority of Cattolica's IT system in '25. And third, we will drive higher digitalization. Our initial goal is to double the share of Cattolica digital policies issued by Cattolica agents, unlocking value by enhancing productivity of the agent's network. On top of this core benefit, we will also bring improved risk selection and discount managing from the Generali Italia side, while ensuring the rollout of Cattolica best practices in the areas of expertise mentioned earlier. In addition to driving significant efficiencies, the integration was carried out extremely quickly. The process took just 8 months between the acquisition and the rollout of new systems. We have benchmarked this integration speed with other similar insurance merger that took place in recent years, and we are confident, this is significantly quicker. Before we close, let's look at the contribution we now expect from Cattolica to the EPS growth target for our Lifetime Partner 24: Driving Growth strategic plan, thanks to the additional synergies that I shared with you. First, it is important to define the starting point, which reflects the contribution of Cattolica's core activities to our 2021 net profit, as well as the assumption we made when creating the '22-'24 plan. The pro forma figure for this net profit contribution is EUR 63 million at full year '21. This is the full year '21 net result, excluding the contribution of the JVs and the one-off for the disposal of [ Lombarda Vita ]. Please also consider that even though 2022 is not part of the chart, we expect to book additional restructuring charges for this period. These charges were already part of the integration plan we designed and will gradually decline in 2023 before ending in '24. Therefore, we now expect the underlying net profit contribution of Cattolica's core operation to reach and potentially exceed EUR 145 million in 2024. This implies a 0.4 percentage point higher contribution from Cattolica to the 6% to 8% EPS CAGR growth target we have set for the plan. More importantly, there is even more to come, as during '25, we will extract additional synergies, reaching a net profit contribution of around EUR 175 million. Let me highlight that this expected net profit is almost twice what Cattolica's core operation were expected to deliver on a stand-alone basis by 2024. To summarize, the integration of Cattolica is fully on track, and we have a clear pathway to unlock Cattolica's potential. The increased synergies presented today confirm both our ability to assess and secure the right M&A opportunities, as well as our ability to integrate acquired company in a fast and efficient manner. All of this was possible, thanks to the hard work of all teams involved. Synergies are going to be higher and will accrue earlier than what we originally planned, confirming the management track record in delivering on its promises. As a result, Cattolica will be an additional driver for our EPS growth target and a source of distributable earnings confirming the value of our disciplined capital allocation framework when it comes to M&A. Thanks for your attention. We will now take a short break. At 11:30 CET, we will open the Q&A session. [Break]

Welcome back, everybody. We will now open the Q&A session of this investor update. Together with Marco and Cristiano on the stage, we also have Massimo Tosoni, our Group Head of Accounting, who will help answer your questions on IFRS 17 and 9. You can ask questions on the conference call and via the webcast. We ask you to kindly limit your questions to the 2 topics covered in today's presentation. Let's start with the conference call line. Operator, we are now ready to take questions.

[Operator Instructions] The first question from Farooq Hanif from JPMorgan.

Thanks for the excellent presentation, but very comprehensive. Just a few questions. Just firstly, can you give us a sense of the volatility of the reinsurance result? Obviously, you may not have run all the numbers historically, but I'm guessing it's going to be reasonably low, given the nature of your business. But just if you could give a sense of that? Secondly, when you talked about the discount rate of the adjustments that you will make for illiquidity premium in [ BFA ], is the understanding here that, as sovereign spreads in Italy widen or [ tighten ], but we still have kind of a much less impact on comprehensive equities of CSM and equity together? And then the third question, just one for Cattolica. In the earnings plan that you've given, what allowance is there for the additional benefits from industrial and commercial agreements, for example, reinsurance, Internet Of Things, et cetera?

I think the first 2 questions are for Cristiano and Massimo, and the third one is for Marco.

Yes. First of all, on volatility, I start and then I'll ask Massimo to complete. Basically, our insurance result was mainly impacted by the coverage that we do on the multi-peril and as well on the specific single event coverage. We are trying to limiting our volatility on the combined ratio in between 2.5 -- maximum 3 percentage points of the combined ratio historically. I don't know if Massimo you want to complete?

I guess that the main purpose is also to limit the volatility on growth tariffs. So I don't see any area of volatility of the insurance result.

Yes. Going to the second question, the discount rate adjustment on the sovereign spread, Italy wanting equity and CSM, let me try to give you some better grasp around it. I think that what we did with the IFRS 17 illiquidity premium adjustment is that, we are creating a less volatile environment because there is a much better economic matching between the movement of the assets and the liabilities. Hence, having made the risk adjustment for the risk in all asset classes of fixed income, including government bonds. So for the sovereign spread we adjust -- we do a risk correction. This is creating a much better and less volatile structure of our CSM, which is much more in line to the economic reality because it's not fully captured with the actual Solvency 2.

And Farooq, just allow me to understand, your question was on Cattolica regarding an update on the industrial synergies and on the reinsurance agreement that was part of the original partnership. Is that correct?

Yes, that's right. So the box that you gave on the additional industrial and commercial synergy, is that a major part of your product target for 2025?

Understood.

Let me say that, practically speaking, since, I would say, second half of the next year, where the legal entity is not going to be there anymore, we don't need specific agreement to work on the specific topic. So Cattolica is going to be managed as a business unit of Generali Italia, and therefore, we would manage coherently with all the framework of reinsurance, telematics and everything. Clearly, working on this topic is part of the synergies. So delivering product together and -- with the value proposition with telematics, for example, is exactly what will make the network more productive and will add more value to the bottom line of Cattolica. So that's exactly part of the synergies.

Just one thing, if I may, quick -- May I quickly ask one thing. Just on the first question, I was referring to the reinsurance result. Is that a very volatile in recent years?

Yes. I think reinsurance is going to be managing the framework of the group. So it's going to be -- the portfolio is going to be combined to the one of Generali Italia and it's going to be combined to the -- one of the group. So reinsurance result for Cattolica are going to show up in Generali Italia insurance results, and therefore in the group. So it's going to be all portfolio combined. So that would also mitigate specific volatility of the portfolio.

Thank you very much. Before continuing with the Q&A call, let's also give room for the webcast. We received 2 questions from William Hawkins at KBW. The first one was regarding the expectation potentially of higher operating profit owing to the absence of new business strain because of DAC accounting. And the other one concerns the accounting for unit-linked business, not covered by IFRS 9, and the fee cost model under the VFA approach. So these 2 are for you, Massimo and Cristiano?

Yes. I take the first, and I start the second when Massimo, you will integrate. So William, for what -- regards to the historical deferred acquisition cost amortization, in Italy, we had -- for some products, for example, regular premium, there were the fair acquisition cost amortization already in place. What is most important in our view is the expectation with respect to the operating result, what do we mean broadly stable. With -- by broadly stable, I mean something which is -- let me try not to be misunderstood, broadly stable from above. And what do I mean by this? I mean that when we discuss the 9 months result and when we will see also the year-end 2022 results, where there will be one-off effect in the IFRS 4 accounting which we said we're driving up the result, and 30% of those driving up, or the operating result in Life was considered a one-off effect. When I mean that we are broadly stable from above, I mean that we are in the new environment covering also the operating result of this one-off, which means that basically, you are increasing of the one-off effect going into the new regime. I hope this gives clarity on what do we mean by broadly stable. On the second element, for sure, unit linked business is covered under the IFRS 9, when it is purely without any form of biometric or insurance coverage. In that case, it is a purely insurance contract, and that is going to account it accordingly. But the unit linked we are selling are mostly related to also biometric coverage on top of the purely asset management related part, and are part of the hybrid products. So maybe, Massimo, if you could integrate how we treat them?

Yes. Of course, it's not a question of choice, but a question of the current application of the standard. So as you mentioned, Cristiano, when we have unit linked contracts combining debt payments -- or we have, let's say, hybrids bundling unit like component and traditional selling component. We are under the scope of IFRS 17 and the relevant model is a variable fee approach. Of course, on the contrary, when we have pure unit linked without any guarantees, without any insurance component, we have to apply IFRS 9, and in that case, the accounting treatment is more likely the asset management. While in the other case, we have to apply the variable fee approach with the mechanics that have been presented in the slides, that requires to calculate a contractual service margin and to spread this profit during the coverage period. And, of course, creates a different profit signature compared to a typical pure unit linked contracts under IFRS 9.

Thank you very much. Massimo, we can continue with the questions from the call. Operator?

We're now taking the next question. The next question from [ Ashik ] from Autonomous.

Sorry, I didn't quite understand the announcement. Can I just clarify as a question for Marco, what is the restructuring charge now? I think you initially said it was going to be EUR 150 million to EUR 200 million. In relation to that, I'm trying to calculate what your return on investment will be on Cattolica. I think with the various tranches that you've purchased the company, plus the restructuring, you've probably spent around EUR 1.6 billion. So that would imply something like a 10% to 11% ROI in 2026. Is that consistent with how you would think about it? I'm just trying to judge when you talk about the IRR exceeding the cost of equity, that's the kind of number I'm getting to. Second question for Marco. Are there any plans for disposals of closed books at Cattolica? And final question on IFRS 17 leverage. I appreciate your leverage ratio is very much lower on the adjusted basis, but the component of CSM within your adjusted equity is much, much higher than peers. Do you not think that rating agencies may look to heck up some of the CSM in the leverage calculation?

So, Marco, the first 2 questions are for you, and the third one is for Cristiano.

Yes. So going back to the restructuring charges in Italy, so I would say we are achieving higher synergies without really increasing the restructuring charges. So restructuring charges are still in line with what we declared. I think we see for 2022, 2024 period still [ EUR 160 ], [ EUR 165 ], [ EUR 170 ], probably in that range, level of restructuring charges. So completely in line with what we stated at the beginning. I think it's very important to underline that what we see in terms of additional synergy, has come from more potential that we have seen in the different levers. So it's not coming from an additional part of restructuring charges or by increasing this type of cost. So let me go to your question on the plan of disposal Cattolica closed books. I think, as you know, when we announced our plan, we discussed a stream on this topic on disposing closed book. And I think Cattolica is completely part of this picture now. It was not at the beginning because Cattolica was not in the perimeter, but now it's completely in the perimeter. And we will look also at Cattolica business to see if the close -- the books that we have in Cattolica meet the requirement, or we need to act on those closed book and then they will be part of the process that we are setting up for all the different books.

Regarding the leverage and the calculation, Andrew, first of all, we are the same animal as before. It is not accounting that should change the way we look at leverage or in the way we want to treat our debt going forward. In the past years, knowing that there was -- would have been this kind of change in the accounting standards, we always prefer to focus more on the regulatory gearing ratio, which is more stable related to Solvency 2. It is fair to say that clearly, CSM is not something which is earned and -- but it is also fair to say that, to our understanding, the official revision of the rating agencies so far, I would like to highlight, for example, that Fitch said preliminarily that they would plan to include the CSM net of tax in the denominator of their financial leverage ratio without any further [ haircut ]. Having said that, we will continue to manage the leverage and the debt of the group, taking also into account the economic environment and the higher cost of the debt. And I repeat, we are the same anymore. The benefit of this new leverage ratio calculation with these new accounting standards is simply that, in our opinion, improves comparability with respect to before.

Before we move on, Marco, would you like maybe to integrate on the question from Andrew regarding the return on equity -- return on investments from the Cattolica transaction?

Yes, I would say -- so what I can say is that, considering all the different tranches, the different investments that we have made, and looking at the synergies and the return and basically the net profit that we are having, we can say that in terms of investment return, we are well above the cost of equity. So this is clearly a deal where the return is particularly high, yes.

Operator, we can take the next question from the conference call.

The next question is from Peter Eliot from Kepler Cheuvreux.

And thank you also for a great presentation. The first question was, can you tell us what you expect to have in the way of onerous contract? And then I had a few points of clarification, please. And you say that you expect to have shareholder exit transition broadly in line with IFRS 4. I mean you're showing entire full year '21, but obviously, the transition is from year '22. So just wondering if you could sort of clarify or give any insights into that transition? Secondly, do I understand correctly that you will be disclosing both definitions of new business the [ CSM1 ] and your new KPI? And thirdly, just to clarify the time line on disclosure, when we come to do our forecast for Q1, do I understand that the sort of the light information we'll have ahead of that in April will, yes, basically sort of enable us to know what roughly to expect Q1? Yes, if you could just clarify maybe that timing, that would be great.

I think Cristiano and Massimo, the questions are both for you.

Yes. On the onerous contract, please be aware that at the transition, we had onerous contract in Life and both in Life and P&C of around EUR 200 million effect in both business lines, almost 200 million in Life and almost 200 in Life and million in P&C. Going forward, clearly, it is much depending on the underwriting improvement when you look about P&C. And on the other side, on Life, given the strict new business, we are underwriting and the strict ALM matching, but it is further enhanced during the -- thanks also to the IFRS 17 and 9 implementation. We are not expecting a higher level of onerous contracts because of all the job which has been done so far. On the second question, retail shareholder equity transition, I would like to hand over to Massimo to drive you through.

Yes. As you can see from the slide in the back, of course, we have 2 compensating movements basically in shareholders' equity. So we have a fall in Life that is, let's say, it's quite expected. But let's say, the expected reduction of the other comprehensive income due to the new accounting of the contractor service margin, has been, I would say, compensated by 2 elements. One is the topic of the acquisition cost that we were very prudent in IFRS 4. Now with IFRS 17, we have more room for deferring acquisition cost, and this, of course, was an uplift in the Life equity in our case. And the other is the topic of the real estate. As appreciated for the presentation, we move to fair value in the Life segment, and part of this value has been reflected also in the equity. So we have a drop in Life, but we have these 2 elements that are compensating the geographical, I would say, loss coming from the reclassification of the other comprehensive income in the CSM for the VFA business. In all, Life, of course, as you can see from the presentation, we have a recovery. And of course, this is thanks to the prudent reserving approach in our claims provision that we used under IFRS 4, and of course, has been substituted by the new best estimated economic view under IFRS 17. And globally, of course, the effect is the stability.

So to answer, Peter, also on the third part, it is not that we have many KPIs for the new business value. Our decision was, first, you have the IFRS 17 new business value, but it is added into the CSM. This is an accounting element, which is a very important one, which is showing within the accounting rules, what is the value which is added to the CSM from 1 year to the other, and then it is partially amortized roll forward, passing through P&L on a pro rata temporaries. The new business value we were publishing up to today, and we want to continue to publish is just a further adjustment to show the full value of the production we are having because -- for example, we are publishing it net of tax and minorities and with some effect of change of perimeter. For example, in the CSM of the IFRS 17, you don't have the value of the PAA business, which is not considered as well, you are not considering the full value of the investment contracts. and the look through profits of the funds which are managed by the group, which, for us, are an important element of value creation, which we want to continue to show to the market independently from the fact that it is not accounted for in the definition of the CSM. So you should look at CSM new business value to the projection of the future CSM release, and the growth and release on a yearly basis. And on the other side, you should look at the new business value starting from the IFRS 17 economic basis and perimeter, but adding these extra pieces, which is the full value, which is created and embedded in the business of Life we are selling. Going to the fourth question about the Q1 comparative, I would like to share with you that our time line foresee, for sure, on March when we will present the year-end 2022 with the old accounting standards, to give you the full detail of the opening balance 2022 of -- under the IFRS 17 and 9 numbers. And then, by the end of April, we will give you the comparative figures for the Q1 in order to have also for you the capacity to forecast the Q1 2023. On a rational basis, progressively throughout the year and after completing also some internal discussion within internally, I mean, within the CFO foreign community, we will align to give the further detail of all the other part of the year-end, half year and the quarters missing.

Yes, please, Peter?

No, I was just going to say thank you -- and as I said, appreciate the both – both the new business values are very useful. I just wanted to check that we were going to get both -- that's, so that’s very useful.

Yes, I confirm. I do confirm because it is the real correct representation of what happens in the account, which is really important, but as well, what is the real value we are creating with our products.

Before we continue with the conference call, let's move to the questions on the webcast. We have 2 questions from Elena Perini at Banca. The first question regards whether or not IFRS 17 and 9 bring any changes to the EPS '22, '24 CAGR target, and how that is measured? And the second question pertains to what impact has the -- changed the interest rate environment on the Life operating result, and the Life activity in general, also considering the fact that the vast majority of it is measured under the VFA? And I would say that both questions are for you, Cristiano.

Okay. The first question, are we going to have changes in the target of EPS CAGR? No, we confirm the 6% to 8%, notwithstanding the positive news but create us even more confidence in achieving it, but Marco presented to you before. And there are no changes from the new IFRS accounting standard that are basically impacting because the adjustment on the definition of adjusted net result -- but we presented to you, are basically offsetting each other when I look at the starting point of 2021. So the effect is fairly neutral in the projection going forward. Regarding the use of VFA for the vast majority of our business and the potential impact related to the better interest rate environment, for sure, economic variances are potentially positively affecting the environment. You need to take into account that this year, we did not have only interest rate increase. There were also asset class decrease in the part of the credit, in the part of the equity. So clearly, you need to balance the 2. But in general, to answer also theoretically to your point, in a purely interest rate increasing environment, the economic variances would bring further value to the business, both on the existing one, and as well, especially on the new one you are writing.

Operator, we can move with the conference call questions.

The next question is from Michael Huttner from Berenberg.

And I must admit, I didn't actually listen. I [ could ] happen something, and I really apologize. But my question is, you might say, well, go listen to the call, and that's fine. But broadly, you just answered Elena Perini and you said yes, interest rates are positive. Given that we are used to having sensitivities on Solvency 2, are we -- will we be getting sensitivities also to think about how the CSM and how the profit outlook develops going forward, both on interest rates, and the other big one, which is BTPs? The second is to catch up with [indiscernible] question, which was Cattolica and Life back book deals. Zurich did a transaction at the beginning of the year, was closed recently, which was basically to, as I understand it, to reduce that sensitivity to BTP. Would that be part of the driver of your thinking? I know it's not longer -- Cattolica is now integrated, but of the old Cattolica Life back book, which is very heavily invested in BTPs? And the third one is a very theoretical question. But for me, IFRS 17 is actually a very positive thing that gives a very economic value of the business. Do you have -- can you give us a feeling of the return on equity of the IRR we heard from Marco that the IRR is -- the return on investment from the deal in Cattolica is a way in excess cost of equity? But can you give us a feel for where you see the rest of the business? Remember, [indiscernible] was saying like 14%, Zurich 20%. These are kind of numbers which are floating, and again, I apologize.

Cristiano and Massimo would say the first question is for you. The second question is for Marco and Cristiano, of course, if you want to integrate. And the third one is for Cristiano.

Yes. So first, sensitivities on CSM. For sure, we are going to publish sensitivities because it is an important element to forecast and help in the forecasting, like you are doing for Solvency 2 because when you understand the sensitivities, your capability to predict the movement will be higher. And I would like to highlight what I said before on the BTP sensitivity in the world of IFRS 17, it will decrease compared to the world of Solvency 2. Why? Because of the liquidity premium, we are adding onto our Italian liabilities, because we are doing a risk correction on the spread, we are earning on those assets, because the IFRS 17 contrary to the Solvency 2 is made on the asset really held in the company, and it is not made on a purely theoretical market benchmark. So it is made on the assets which are there for every business unit. So you should expect a much lower sensitivity in the BTP movement from the IFRS 17 technique that we use to estimate the asset and the liabilities, which is closer to the reality because, I again stress that you are adding Italian asset against Italian liabilities, taking out the risk correction. For what regards the publication eventually and the dates, I don't know if we have already agreed, but there is a discussion within the CFO forum.

There is a discussion, of course, but CSM will be the engine of the profit under Life. So for sure, the intention is to provide sensitivities once, let's say, we will have a full disclosure on IFRS 17. And so, this will be one of the key elements of disclosure, considering the impact on Life results. We are still discussing to have a sort of consistency around the type of sensitivity to be disclosed to the market, also to have common information provided.

Probably one word on the second question on the back book transaction on Cattolica. So I would state that in-force optimization was one of the key levers in our plan. So -- and the driver of the in-force optimization are multiple. So there is -- clearly, our view to optimize the return on capital of these back books, there is the risk, the interest rate risk. So there are many different drivers that keep -- that we keep into account when we look at the back book. There are many ways to optimize this. So not everything needs to be disposed. There are also internal lever. We can rework some of the contract. And definitely, Cattolica is part of the -- of this exercise. So we will -- we have looked at the different portfolio of Cattolica and including them into the overall picture that we have on the back book transaction. So that is the type of exercise that we would do on an ongoing basis. So this is what we have done and we are doing.

And Michael, to go to the third question, you were asking about return on equity and IRR. IRR in general of a deal is measured against cash flow. So cash flow are untouched by IFRS 17. So IRR isn't touched from any metric when you measure the value of a deal. And this is fair because it is not accounting dependent. It is only solvency dependent on the company and the value of the business -- of the cash flow that can be generated. Regarding return on equity, as you may remember, when we presented last December, the 2022, 2024 plan, we did not put a return on equity in our target. We focused a lot on 2 cash purely based targets, which are totally unchanged, and the EPS, which is more related to the capacity, we generate a result for earnings per share in a consistent basis. Return on equity is slightly affected by the new change in accounting standards because both on the numerator or the adjusted net result, there is this effect on change. And in the denominator from what Mr. Tosoni said -- Massimo said, before, you've seen that our shareholder equity is broadly stable, but the components are changing in the geography. So you have a slightly less OCI and slightly more other components, which means that all in all, the shareholder equity denominator in the new IFRS 17 word is slightly higher compared to the shareholder equity denominator we were using net of OCI before. Is this driving down the return on equity? We will see going forward, but it is not the key target we are applying. In any case, we are going to have a result, which will be accretive and growing even compared to the previous metric.

And operator, we can move to the next question from the conference call.

The next question from Alberto Villa from Intermonte.

I have one question on the impact that this transaction to the new accounting standard is having on your, let's say, day-to-day business or the operating side of the business. So are those -- these changes impacting the design of the products, the commercial activity? These are effectively being managed, let's say, by the group in terms of where to push products for Life and P&C, obviously. And if there are any geographies which are more affected by the changes in terms of higher [ venture ] volatility because of their business mix? My last question is more of a curiosity. At the beginning of the presentation, you mentioned that we can compare the Life CSM at the transition to the group's market cap. I was wondering if you can elaborate a little bit on that because I missed the relationship.

Thank you very much, Alberto. I would say that the first question is for both Marco and Cristiano. While Cristiano, of course, the second question is for you.

If you want, Marco, I just started telling from the target setting approach, we were already preparing for IFRS 17 since many years. As you know, we said many times already during the call and when we have one-to-one meeting, but the target we are giving to our business unit CEOs were already purely economic target in the sense that Life -- the value of the production of Life was new business value as a target or P&C, we were focusing on the current year best estimate result of the business in euro terms, which is a very important element to be focused on, more than the purely combined ratio. So this is the way we set the target, and hence, Marco is managing the business.

Yes. So it's interesting this question, and let me probably take one second to elaborate because over time, the group has moved -- if you think about the liability profile, especially in Life of a few years ago and what we see now in the liability profile moving from pure traditional to hybrid products where we have unit linked protection where we have also part of traditional product, but we -- basically 0 guarantee or close depending on the different markets. We are very low level of guarantee 0 or even less. So if you take into account all of this transformation and you see now these changes in accounting, we really see that the core capability to design a profitable product and compelling value proposition for the client is unchanged. So this is the core thing that I would underline. So our job is to make a compelling value proposition for the client and a value creation product for the group, for the shareholder. What will change is how we see profit coming from this product. So clearly, the different accounting rule will have differences in terms of emergence of profit, especially in terms of time horizon. But I would say we have worked a lot in terms of industrial design of our products so that this is our core capability independently from the accounting standard.

Adding some focus also on the onerous contract, which could be a benefit in the way we are designing because sometimes you are bundling product where profitability is evenly split. This could be a potential benefit, I forgot to mention at the beginning of IFRS 17, rebalancing the same level of profitability with less -- with more focus on the different segments. If I go on the second question you asked, Alberto, on geographies affected by higher volatility, in general, I would say the benefit of IFRS 17, which I tried to explain during the presentation, is that, you are in Life business having much more predictability because, clearly, you are more [indiscernible] if you are not doing the real ALM, but it is the daily job of an insurer. But in general, that will funnel much higher predictability of the business. So the region with Life business should be less volatile provided that they did as we did in the past, the right ALM business. For sure, overall, one of the outcome of the IFRS 17 and 9 changes is where volatility could happen in a slightly high level in P&C. So for sure, geographies where the corporate and commercial business is more important, could be slightly more volatile by nature and by design because of the level of exposure also to natural catastrophes, which could be higher, with lower levers to counterbalance compared to before. The third comment on the Life CSM versus the market cap was more to say that, since still some of the analysts and some of the investors are analyzing companies with the so-called some of the parts, sometimes, you end up looking at the purely CSM contribution, which is unearned future value. But in a world where you do the correct ALM matching, much of it is sufficiently certain, okay, apart from clearly some large market variation. We wanted to highlight that this honored unexplained value is where -- and it is valuable, something which was closer to 80% to 85% of our market cap at year-end. Nothing more than this. Having said that, our shareholder equity is stable. So this is on top of our shareholder equity.

I don't lease -- just a point on volatility since you gave me the assist also to talk about the accounting volatility related to IFRS 9 in the sense that this is an accounting volatility that, as you know, relates to some asset class like investment fund units and some particular complex bonds. And that's the reason why, since this kind of volatility is not consistent also with the business model or with the ILM strategy, we decided to make this normalization on the net reported results. And so to take out this volatility that's pure accounting driven because it's the application of our rules, and is not fully consistent with how we are also investing and we are doing on ALM strategic asset allocation. So I guess it's an important point to focus on.

Operator, we can now take the next question from the conference call.

The next question is from William Hawkins from KBW.

Sorry, I feel like I've slightly gamed the system by typing questions as well, but there is -- first of all, could you briefly -- the EUR 32 billion of equity, what are the small numbers of minorities and OCI that you expect to sit in that number? If you could just help with clarity on that, that would be good. Secondly, Cristiano, sorry, you did say this on the formal remarks, but I got completely confused. Why is your combined ratio going up by that 2 percentage points? Some of the companies have said very simply that their absolute underwriting results or service margin doesn't change very much. And therefore, there's a natural benefit from the denominator being bigger via gross earned premiums. You clearly are not having that there's something else that's going on. You did talk about it, but I got utterly confused. So could you maybe just answer that in a sentence, why the combined ratio goes up? And then lastly, you've had a couple of questions on this already, and I do feel like I'm slightly going back to first principles, but I am confused about the stance you've taken on the illiquidity premium for your life business for Italian sovereign spreads. I mean, the way I see it, spreads on Italian sovereigns versus the euro swap is not liquidity. It's relative sovereign credit risk. Or if I put it another way, however, the sovereign yield moves in Italy, is irrelevant to the economic cost of your guarantees to Italian policyholders. So I'm not sure I understand why you're effectively stripping it out by including it in illiquidity premium. So maybe from that, I can just ask a precise question. What would the EUR 33 billion CSM be if you use the Solvency 2 volatility adjustments rather than the IFRS liquidity premium you've opted for?

Yes. On the first question -- Yes. On the equity, what we can say is that in terms of a minority, we have a number very similar to the IFRS 4. So let's say, the stabilities both on group share and also related to minority. Of course, the big change in terms of mix and composition, with the other comprehensive income. And so the amount of other comprehensive income that group plus minorities is around EUR 5.7 billion under IFRS 4. IAS 39 is very close to 0. So it's quite matched, and this is because to -- a series of points. First, all the other comprehensive income related to VFA business has been reclassified as part of the contractor service margin. And so, this is very relevant for Life. On the non VFA business, we have -- we opened an OCI related to the difference between the current interest rates and the lock-in interest rates related to this kind of business. And also, IFRS 9, let's say, produce a changed in other comprehensive income because some asset class like investment fund units, but also equity that change classification move from an OCI accounting of the unrealized gains and losses through [indiscernible] profit or loss. And so this produce a change in the geography of the shareholders' equity.

Yes. Going on the [ COR ], William, what is important is, I mentioned 2 percentage points of mathematical change with 0 impact on the result on 2 topics. The first one, we are moving from the net earned component to the gross earned component. And when you are profitable, so you are below 100. This is mathematically driving up your combined ratio because you are taking a larger number of premium as a denominator. And since you need to get to the same profit, you need to have a higher combined ratio mathematically. For what regards the other effect, which is the nonattributable expenses, typically, since combined ratio was not a purely IFRS metric on the IFRS 4. And now IFRS 17 is giving us the opportunity to take into account the combined ratio in a view, which is more only comprehensive and not purely related to the underwriting costs you are bearing. We decided to put the full nonattributable expenses within the combined ratio definition in order to get the insurance service result as one minus combined ratio applied to the premium. Simply like this, there is nothing that we are missing, all else equal. So that's why we are saying that these 2 points are purely mathematical pictorial effect for the same amount of result. On the other side, you have the positive discounting effect because of the higher interest rate when you do the current year. And we have with respect to the prior year, lower prior year related to the fact that we are not having -- going to have any more the large reserve adequacy which was built before because it's been brought to the shareholder equity. Regarding the illiquidity premium for the BTP spread, what I would like to stress is that we are not taking it only for BTP. We are taking an illiquidity premium, which is a risk-adjusted correction, which is very similar to the one we are doing, and we cross-checked with our peers within the CFO forum discussion -- simply more tailor made on our portfolio, which does mean that instead of having our asset moving against the liability -- and correctly, you said this was not changing with respect to the guarantees, especially because in Italy, for example, you don't have any more in the new business guarantees, if not only the biometrical one [ does ] guarantee only. You are not getting an artificial effect on the way you calculate your liabilities because you are not taking into account at all the beneficial element of part of the spread, which is not only higher default risk. It is also higher potential volatility. But in a buy and hold, the liquidity premium is measured also to reflect our portfolio in the portfolio of our asset versus the [ OPA ]. And I would like to stress that we are not taking full credit for the BTP spread because we are deducting out of it, the risk of the default. As I was mentioning, when I speak about risk correction, it's exactly that piece of the risk which is deducted. But the reason the other one, but in a [ bind old ] structure, you can keep it. On the EUR 33 billion CSM without volatility adjustment, again, I started the question when I let Massimo conclude, we had a lot of even internal discussion around this. It is -- what matters is to have a CSM, which is less volatile and more economically coherent with the underlying reality of our liabilities. So we could use a purely Solvency 2 driven discounting curve and then creating when you have year after year all the non-realized default, and the other part of the risk are higher variances, which would be more volatile in the way you are projecting your CSM, which is economically no sense. Maybe Massimo, if you want to integrate.

A couple of points. First, there is also a requirement of the standard to have a discount rate that, for participating business is reflecting the variability of the underlying items. And so, we take the move from the objective of the standard that for this kind of business requires to integrate more than what happens in Solvency 2, the underlying assets and the technical provision. And so this was also something -- including the objective on the standard. Secondly, I agree with what you said. So here, the point is avoiding volatility coming afterwards, because there is no match between the movements of our assets and the change of the technical provision. In general, what we are here with this discount rate see as a normal release of service in terms of profit under a CSM value with a discount rate similar to Solvency 2 would be transformed as a sort of systematic variance because every year, our assets performed better than the risk-free and would flow anyway in the profit, but as a sort of variance that should be recognized during the year rather than a normal release of the CSM. The big difference is how react the CSM to volatility coming from the market and especially the volatility coming from the spread movements.

And let me add one last important point. In Solvency 2, you have allowances for example, for the going concern reserve in Germany or the surplus fund in other geographies, which are not considered under IFRS 17. So the net effect of these 2 are basically canceling each other, which is, again, something which has a non-economic -- in some cases, ground. So when we are presenting the 2, we are really getting to a more stable, more predictable, more coherent economically compared to what we had in the other metric of Prudential Solvency 2.

Thank you very much, Cristiano. Before we continue with the conference call, let me take the last question from the webcast that comes from Sudarshan Bhutra from Societe Generale. It pertains to Slide 25 of the presentation, and there is margin release, how that is affected by new business? Cristiano and Massimo, please…?

I can take because it's -- I guess, it's a mechanical question. Of course, we're talking about Life. And in Life, the risk margin on the new business is accounting against the contractual service margin. And so, the release that you can see at Slide 25 reflects the release of the stock of risk adjustment that existing at the beginning of the year. Of course, a different story is for P&C in the reserving in the liability for in car claims where instead the risk adjustment of the year is accounting against P&L and the release of the risk adjustment of the previous generation is also released through P&L. So we have this offsetting mechanism that is mentioned in the question and broadly should be equal, but subject to a question of growth and business mix. And so maybe during some years, it can -- the risk adjustment of the new business can overcompensate the release of the previous generation. But it's likely mechanism that you mentioned in the question. For Life, it's a little bit different.

Operator, we have time for one last question from the conference call line. So please, let's go ahead.

We are taking the next question, is from the line of Michael Huttner from Berenberg.

I clearly cheated. I'm really sorry, but I'm very lucky, so I'll have 2 questions. The first one is on the excess reserves. And I think I attended a number of other IFRS 17 presentations, whereby calling it, resiliency reserves, they were basically announced to keep the same level of excess reserves. I'm thinking of telling they actually give the IFRS for the excess number and they'll call it resilience and they'll keep it. So I just wonder why you have not been able or you have chosen or why you think your treatment is a correct one to release some of the excess reserves and treat them as equity? And the second one is a pure -- kind of almost philosophical, but since you've been working on this intensely and you've attended CFO forum, and you've done lots of kind of surveys and stuff. When do you think us, analysts, and also the market as a whole, which I think is more relevant, will start believing in these numbers and giving you value for it? Because clearly, there's a lot more value here than I had anticipated.

Thanks for cheating and getting for a second level of question because I think there are 2 interesting one. Let me try to clarify the point on excess reserves. We have regular interaction with the auditors and the accounting standards of IFRS 17 are based on a best estimate of the liabilities. There is nothing out of this apart from some uncertainties of unknown events or things which are, in any case, depending on the way you treat either explicitly put or explicitly treated in the best estimate of the liabilities as usually the actuary are doing. When they don't know something, there is higher volatility and there is higher prudence even in the estimation. So we should think that compared to the past, which was linked to the local GAAP combined ratio accounting. The new IFRS principle is trying and striving to get a better economic representation of it. So for sure, when we speak about excess reserve, we are expecting -- when you are asking an actuary usually of something we should consider best estimate, there is always a marginal prudence around it, which is healthy and fair in the way the insurance business is managed. So for sure, there will be some prudency, but not at the level which is built in the local GAAP accounting approach we were using so far, but we'll continue on the local GAAP approach for the vast majority of the countries because very few adopted IFRS 17 even in local GAAP. So the correct one is to act on the best estimate because this is what the principle is asking, for sure, allowing [ from ] prudence where you do not have information. And this, again, in our case, has been embedded in the best estimate definition. On top of that, I draw your attention that we decided to have a run rate, 75% percentile, which is considered prudent, and according to the practice as sufficiently prudent in the way you are managing also the potential uncertainties, allowing us in very specific situation even to increase it if we are facing unknown environment like we had at the beginning of 2022. For what regards the second question, there is a huge stride in all the CFO community in general, the finance community and insurance, to serve at the best the outcome of this important change, which took a lot of effort and time for all these people working in finance, which was one of the most intense, and still living in the most intense period, and they are daily putting huge effort around it. Apart from that, the value of the market out of this, I think we need some time to better grasp the sensitivities to understand, to have the proof point of what we are telling you, because clearly, we are seeing things from the inside, and we need now to have you aligned and seeing with the facts and the figures that these things are happening actually. And that, for us, especially I think for Generali is a huge value, because it is finally opening up the value of our Life insurance business, which I think was not fully appreciated with the existing accounting standard. While on the other metrics of pure economic was pretty clear, having seen our new business margin, new business value creation. So I think we need the next year to have the time for you to start grasping it, modeling it, seeing it and then valuing it.

Thank you, Michael. Thank you, Cristiano. Thank you, Marco. Thank you, Massimo. This concludes the Q&A session of this investor update. Should you have any other questions or need any follow-up, feel free to reach out to the IR team. Have a nice day.