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

Good afternoon. Speaking is the conference operator for this press call. Welcome, and thank you for being with us on the Generali Group full year 2022 results presentation. Just a reminder that everyone attending is in listen-only mode. Following the presentation, there will be a chance to ask questions. If anyone requires help at any point during the conference call, they can signal an operator by pressing star and zero on their telephone. Right now, I would like to hand the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agencies Relations. Please go ahead, sir.

Thanks a lot, and good afternoon, everyone. Glad to have you on the Q&A call for Assicurazioni Generali's full year 2022 results. Joining us today are our Group CEO, Philippe Donnet, our Group General Manager, Marco Sesana, and our Group CFO, Cristiano Borean. Before we open up the Q&A session, I'll pass things to Philippe for a few opening remarks. Philippe, over to you.

Thank you, Fabio, and I appreciate everyone being on this call. We released our complete 2022 annual financial results today. Those figures show that we can deliver strong growth and carry out our strategic plan during a year that once again brought exceptional difficulties, above all Russia's invasion of Ukraine. The conflict's impact has been broad, ranging from increased geopolitical strain to pressure on food and energy supplies and broader inflationary patterns. Amid this situation, we remain entirely focused on our successful transformation, which moves forward thanks to disciplined and effective implementation of our Lifetime Partner 24: Driving Growth strategy. There are five main points I want to emphasize. First, the group posted its strongest operating result ever at EUR 6.5 billion, up 11.2% compared with full year 2021, alongside continued expansion in gross written premiums, which reached EUR 81.5 billion, and in net result, which came in at EUR 2.9 billion. These outcomes demonstrate how our business model has been transformed, leaving the group more resilient and centered on profitable, sustainable growth. Our top line has increased 10% since 2015. Our operating result now stands 35% above our net result, and excluding Russian impairments it is 55% higher.

Apologies — 50% higher. Next, thanks to these results we can propose to shareholders a dividend increase to EUR 1.16 per share, which is 8.4% higher than last year. That rise in dividend per share became possible through disciplined execution of our strategy, and it mirrors our confident outlook, supported by our strong cash and capital position. At the close of 2022, the group solvency ratio sits at an extremely strong 221%. Owing to a range of strategic actions and initiatives, our solvency ratio's sensitivity to financial markets came down substantially over 2022, which makes us more resilient and better insulated. Specifically, I want to highlight that our sensitivity to a 100 basis points movement in the BTP spread has more than halved, from 13 percentage points at year-end 2021 to 5 percentage points at year-end 2022. Third, we are well positioned to deliver the financial targets in our strategic plan. Two of our three key financial targets are cash-based. We keep improving our cash generation, as shown by the 11% growth in net holding cash flow to EUR 2.9 billion. We have also fully maintained our disciplined, consistent and opportunistic approach to capital redeployment, following a strict set of criteria.

Being disciplined with how we deploy capital is a central part of our strategy, and we'll only go after opportunities that generate value for every one of our stakeholders. From here on, whatever dilutive effect comes from long-term incentive plans will be entirely offset by way of share buybacks. On the subject of targets, we're also making solid headway on our pledge to serve as a Lifetime Partner to our 69 million customers around the world, and we remain on track to hit our goals when it comes to customer loyalty. Generali holds the position of the biggest insurer in the European retail and SME segment, and during 2022 we worked tirelessly on client service, on simplifying products and on customer satisfaction. The results please me a great deal, both on relationship Net Promoter Score and on growth in customers holding multiple products. Being close to our customers, made possible by our strong distribution capabilities, is a key pillar of our strategy and something distinctive about Generali. Fourth, these results also mirror an effective inflation fighting program that we established to adjust to the new environment. Twelve months ago, I spoke with you about the need to raise tariffs on this front, and I can report that momentum is good, with prices climbing gradually over the course of the year, and that growth is carrying on in 2023.

We’ve managed to put these measures in place while keeping client rotation ratios high, which shows how strong our brand is and how well our distribution strategy works. In addition to tariff, we also carried out cost savings and productivity improvement measures to give our business further protection against rising inflation. This inflation fighting program shows the Generali Group’s ability to react quickly and decisively to a changing environment, led by a united management team and executed with passion and commitment by all our colleagues in unique agent networks. Fifth and final, sustainability, the originator of our plan, has continued and continues to drive all of our actions as a responsible insurer, investor, employer, and corporate citizen. Following our efforts and our continued commitment to sustainability through tangible initiatives, I was very pleased when MSCI recently raised our ESG rating to the highest level at AAA. In conclusion, today’s results confirm the success of our Lifetime Partner 24: Driving Growth strategy. We will continue to update you on the progress of the plan in the upcoming months. We are now happy to take all your questions. Thank you very much.

Sorry about that — this is the conference call operator. We're moving into the question-and-answer portion now. If you'd like to pose a question, just hit star one on your touch-tone phone. Should you want to drop out of the queue, press star two. When you ask your question, please lift the receiver. Our first question is from David Barma at Bank of America.

Hello, and thanks for taking my questions. My first one concerns the P&C top line, please. Sales were up roughly 10% in 2022. I believe you point to a price effect of around 4%. Could you discuss the volume drivers for last year a little, and how you expect that mix of volume and price to develop in 2023, please? My second question relates to Life earnings. The contribution from the Life businesses rose significantly in 2022. Can you help us understand the recurring components of those strong results, please? Finally, on the holding, could you please give us an update on the total holding cash position and also on the cash flexibility levels at year-end? Thank you.

Thanks a lot, David. Marco, I’d say the first question—on top line growth—is yours. Cristiano, the question about Life earnings, recurring versus non-recurring, and the entire cash position, both of those are for you.

Yes. Hi, good morning. Regarding P&C, the top line went up, and I believe you can observe an 11% rise. That strikes me as a really robust gain at the top line, especially in non-motor. I'd like to point out that this non-motor expansion sits at the heart of what we aim for in the strategic plan. At the start of the plan we actually made clear this would be our central priority, and that is now happening. We put in a deliberate effort to grow the non-motor P&C top line. Speaking more generally about what is driving the volume growth, I think the bulk of the volume gain we are seeing comes from a shift in average annual premium. That is the primary driver. To give you what we have shown, it is overall 3.3% retail and SME, 6% in corporate and commercial. Overall, I would say this is genuinely something we are concentrating on. I will leave it there. That really is the main driver and what we are observing in the market. On this point, it is a rise we expect to continue over the coming months in average premium, in both non-motor and motor.

Yes, David, on Cristiano Life earnings and the split between recurring and non-recurring partners. First off, let me remind you that we're commenting on the current IFRS 4 environment, where the rule going forward will change. I'll explain why I'm saying this. Within the EUR 3.5 billion of Life operating result, you should account for something in between EUR 200 million-EUR 250 million of non-recurring elements. That said, I'd like to remind you what we said at the Investor Day of December regarding IFRS 17, telling you that, even though we are not disclosing today, and we will discuss the first quarter, the comparative, we told you that we were stable from above, so you should embed part of this also one-off when looking at the new way of seeing the operating result going forward in Life. Third question regarding HoldCo cash position. As of year-end, the HoldCo cash was EUR 2.8 billion. It is composed by three layers. A first layer, which is something in the order of EUR 1 billion, which is the cash available for operations. As well, EUR 1 billion of a layer of extra prudency of cash buffer due to the uncertain volatility we are facing in the market.

We're placing a liquidity buffer somewhere in the EUR 500 million to EUR 1 billion range. As is our habit whenever volatility looks like this, we positioned ourselves at the top end of it. That last piece is purely operating cash. Looking at the end of February — before dividend season, which starts bringing us money from subsidiaries in March — we were already sitting at EUR 3.2 billion, mostly thanks to operating cash, which isn't what you should count as available for operations, but rather the cash from treasury operations there. Keep in mind that inside the EUR 2.8 billion of cash, relative to what shows up on the balance sheet, there's EUR 300 million of short-term investment, and once those exceed 15 days, they aren't recorded as cash on the balance sheet.

Moving on to the next question.

Peter Elliot from Kepler Cheuvreux has the next question.

Thanks a lot, and well done on the strong results. I have three questions, if I may. First, regarding the new business: in the slide commentary you mention that the new business margin has gained from higher interest rates, yet new business value has not. Could you clarify that for me and reconcile those two statements? Second, on private equity, we were told to anticipate a catch-up in the private equity dividend this year relative to the result, but in fact it appears to have fallen even further behind. I'm wondering whether that means we should expect an even larger catch-up in 2023, or what we should expect going forward. I appreciate that the counting is changing, but I think it's still relevant even under IFRS 17 for everything except the VFA model business. Third, I was interested that you say the VA reference portfolio changes are positive for you, which seems to contrast with others. I was just wondering why it's positive given that most of the weightings seem to have been reduced. Thank you very much.

Thanks a lot, Peter. As I mentioned, the three questions are meant for Cristiano.

Hi, Peter. It’s fair to say that the value has gotten a boost from the higher interest rate environment, and new business margin benefits from interest rates. On the other hand, with present-day new business premium, higher interest rates have worked against us, because when you compare PBNBP with the other older metric—or the other one sometimes used in the market, the Annual Premium Equivalent, the AP—the 12% decline we’re seeing in PBNBP is only a 7.9% decrease in Annual Premium Equivalent, which is mostly driven by having certain premiums, such as pension premium, that run longer. On new business value and margin, there was a modest positive interest rate effect, specifically in savings and in some protection product. The second question relates to private equity. First of all, on private equity, we saw a slowdown in dividends and especially in the fourth-quarter result, as expected and anticipated on the ninth-month call, because of the managing partner of the private equity funds delaying—usually waiting to realize the full value in this uncertain market. How do we see it going forward? First of all, I hope you—we’ll all be happy that we will treat private equity no longer as a company, even though we have a company doing it, but as an asset class.

Beginning with the 2023 representation, private equity is going to be allocated as an asset class investment within Life. When it comes to the Life business — which for the traditional business with profit is under the variable fee approach, VFA — that will move onto a fully total return approach against the portfolio. On the other side, you know, by rule, IFRS 9 will require private equity to be treated as fair value through profit and loss. Despite this, for the component that is, for example, in P&C as a dividend received, we will keep accounting for it as an operating result, while the fair value movement will sit within the non-operating component and will be netted out from what we call the adjusted net result going forward. Why did we have a positive effect from an EIOPA reference portfolio compared to our peers? Well, this is mainly related. I commented this morning to the press: we had a net-net 3 percentage point positive effect, which is the combination of a 2 percentage point negative impact from the updated VA reference portfolio. There is a positive effect for us in Switzerland, stemming from the use of the reference curve and the last liquid point. Given the structure of our business, compared to other peers, eventually we have this positive effect.

Next question, please.

Farooq Hanif from JPMorgan has our next question.

Hello, and thanks very much. I never expected to be asking this, but with your strong solvency-to-leverage position and the substantial value in force you'll have under IFRS, would you think about taking on more debt at this point? Might you deploy that strategically to support your capital deployment plans? That's my first question. Second, thank you very much for the pricing data, by the way. You mention average premium growth, and clearly there will be an earned effect in 2022. Could you compare that figure with the actual pricing on renewals and on new business? In particular, I think around motor, where the number looks low, if you could comment on that? Last, on the sharp outflows in the savings business, I would have thought that in Italy the higher yield you could potentially offer customers would be attractive, given that your capital position is quite strong. I just wondered what you think of that, whether you're still focused on capital light, and whether there's some sense now, particularly with the new accounting, of looking at traditional business again.

It would be helpful if you could share your thoughts on how those savings net flows are likely to carry on. Thank you.

Thanks a lot, Farooq. Philippe, you’ll take the first question, and then Cristiano, if you’d like to add something, of course, while questions 2 and 3, Marco, are yours.

Thanks. Hi, Farooq. The first answer is quite straightforward and unambiguous. No — raising our debt is not something we're looking at. Basically, we're content with where leverage stands right now. Just a brief note on the third question. Changing our strategy in the Life insurance business isn't under consideration. Our focus stays firmly on protection products and capital light products.

Farooq, let me pull together the very clear, simple answer Philippe gave. It's obvious we had already been examining our solvency-related leverage across many reporting periods. That isn't changing. IFRS 17 simply brings it nearer. The same animal is there, and our decision was made on it. It's also really important to stress how much it matters that we reduced leverage in order to cut the non-operating charge in an uncertain environment — that lets us achieve better predictability and less uncertainty in the final cost we must pay, particularly in a volatile environment such as the one we're in now.

Also, on my side — regarding the topic of price increases in P&C. Just to clarify, what we have here is really our change in premium stemming from the price increase, so it's the average annual premium change, and that is not a rate increase. What I want to say is that this is the real premium we see flowing thanks to the price increase we had in 2022. A couple of comments on this. As you can see, we believe growth in non-motor has been particularly strong. We view this as a genuinely positive effect developing across 2022, from the start of the year until now, and I think it will keep flowing in the coming months. As long as we see inflation and a change in the environment, we will keep pushing for this. In non-motor, I think you see, we reported 0.9%. Again, here I think we are seeing more movement in the last part of the year, and we believe more premium increase will come in the next months. Keep in mind that this is not the rate we injected on renewal rate or new business, but it's the real actual premium change that we see.

Turning back to motor, I'd say we've witnessed a more dynamic environment during the latter portion of the year in that line. Our expectation is that this carries on through the coming month. Let me just stress that this metric — the average annual premium increase — is one we regard as a fair measure. It's a solid measure for showing you the impact of rate change within our portfolio. Now to the third question, so question. As Philippe mentioned, in Italy especially, though really across the board, our underwriting posture will stay unchanged, since we think it's wise to hold a healthy portfolio and to keep underwriting a healthy portfolio, particularly on capital light. Let me emphasize that our value proposition involves broadening the kinds of products we sell. We want to bring a different type of line of business into our product — so traditional saving, unit link and protection. These large value proposition, we believe, will ensure our customer benefits from the full power of Generali when it comes to protection, risk protection and investment.

Next question, if there is one.

Michael Huttner from Berenberg has the next question.

Great, thanks a lot. Congratulations on both the numbers and the disclosure—that was genuinely nice to see. I've got three questions. First, you brought up the one-offs in the Life business. Could you expand a bit on those and on how reserving is behaving, which I believe you touch on in one of the slides? I was hoping for some commentary on Swiss reserves—any detail you can give there and how that might play out going forward would be very useful. Second, also in Life, you note in the expenses that part of the improvement is effectively being consumed by investment—my phrasing—in growth in Asia. That's interesting: what kind of payback do you expect from that sort of investment? My third question is more about strategy. Broadly on deals, what does the outlook look like right now? More specifically, there was some mention in the press a while back that you may be considering a sale or reinsurance of parts of the Cattolica Assicurazioni back book. Any thoughts on that? Thank you.

Thanks a lot, Michael. Cristiano, the first two questions are yours. The third one goes to Philippe and Marco.

Hi Michael. Let's go over the one-off item in Life a bit. I'd say there are three places where it gets released. The first involves a natural consequence of alignment in Italy on the interest rate risk reserve, which has been brought homogeneously to a level consistent with the actual interest rate and the portfolio's diversification. That's part of the one-off. A second one-off effect to keep in mind is the technical benefit we had in France tied to a release of mortality table. We already discussed this at nine months. I'll just recall that, basically, a law gave us the chance to let our pension product clients choose between a lump sum and the annuity. For clients who chose the lump sum, that clearly changed our mortality reserving, since we no longer carried the longevity risk associated with that kind of client — a one-off release coming from this regulatory change. On Switzerland, thanks to the improved reserving already done in the prior year and better market conditions, our reserving need was lower, and we got to a figure below EUR 100 million, which is clearly much closer to the right level of normal rate.

On that point, let me remind you that reserving in the IFRS 17 world will no longer exist in the sense that you have a full economic valuation of your assets and liabilities, which must be covered at every moment. As soon as they aren't covered, you move into what's called the loss component. Naturally, the reserving is done in line with that. Another one-off effect was related in Germany to the fact that we have an asymmetry between the realized gains to put and allocate in the ZZR reserve, which were done mainly in the first part of the year, and we're happy because we did it at a moment when rates were much lower than at year-end. Because of the swift change throughout the year, the need for the ZZR reserving was completely different. We had this, let's say, excess of realization compared to the need of the reserving. I hope this gives the full view on the first EUR 250 million effect of the one-off of Life. On the other side, Asia, for sure, we are reducing the payback of our, of our portfolio overall at group level. It is, I should say more than three year, almost three years, lower than the year-end, the year-end 2016, so compared to seven years, six years ago.

The payback period for our Asia business tends to run somewhat longer, so it comes in a bit above the group average. Still, keep in mind that these are quite robust and fully loaded products, since that is just how those markets work.

Appreciate it.

Regarding the third item, as always we're on the lookout for solid M&A opportunities, provided they generate value for every stakeholder and are entirely in line with both our strategic framework and our financial discipline. As for inforce management on the back books, that remains a major focus for us, though inforce management isn't just about disposing of portfolios — it also involves work on the liabilities and the use of reinsurance too. Clearly, since the targets we set out during our strategic plan presentation, market conditions around in force management have shifted entirely. In force management under zero interest rates versus in force management under higher, much higher interest is a different matter. We approach in force management opportunistically, and speaking of Cattolica, that's a good illustration, since we chose to exercise our put on the Iccrea joint venture, which is itself an in force management decision already aligned with our strategy.

I really appreciate it.

Yeah, maybe I’ll just add to what Philippe said. I’d love to note that, as Philippe mentioned, there are many ways to approach in-force management, especially when it comes to liabilities. A couple of points: in Italy, we’ve been renewing contracts and exiting certain contracts, for a total of almost EUR 7 billion. That’s really something we’ve been actively doing over the last months. Same thing in France, for around EUR 500 million. I think this is also a way of making sure we do liability management. On the other side, on Cattolica, I think it’s always important to keep our process updated on reviewing the back book we have. Cattolica is also part of this process now. When we see that portfolios are not in line with the profitability and the overall measure we use when looking at portfolios, we’ll put them under greater scrutiny.

Great, that’s useful. Thanks.

Next question, please.

Our next question comes from Andrew Ritchie at Autonomous.

Hello. I have a couple of questions. First, on the very high level in motor, are you indicating that the combined ratio for that class across the group has now bottomed out, or actually peaked, thanks to the rate push-through? Clearly we observed that combined ratio, I believe it was 97% in the first half and 98% for the full year. Will it get worse before it gets better purely because of timing effects, or ought it to begin improving from this point? That's regarding motor. Second question, just a quick clarification. Am I right to assume that for non-motor, you've shown us the rating, the price effect, but indexation would come on top of that? That's purely price. From what I understand, there's a substantial degree of indexation in non-motor owing to the property. My only other questions were on private equity: has there been any kind of additional review of exposures at year-end given the uncertainty? Related to that, when I look at the very back of the report and accounts, I noticed a significant rise in Level 3 assets. I think they've doubled. There's a reference to the macroeconomic context, which is, has changed the view of liquidity of certain of those assets.

Could you explain a bit more about what’s happening in that part? Thank you.

Thanks a lot, Andrew. So, Cristiano, I’d say the first question goes to you. Marco, you’ll take the second one. And then the third question comes back to you again.

Hi, Andrew. On the motor combined ratio outlook: above all, we are fully committed to raising profitability to the level we want and getting aligned with it, as I believe both Philippe and Marco demonstrated through the actions taken so far and those that will keep coming. Let me put things into context. Keep in mind that the motor business as a whole accounts for an operating result that represents under 8% of the total operating result reported at group level. This is something core for the client, but the value is growing all around it, particularly in non-motor. As for the motor outlook, I think we need to wait for the full 12 months of 2023. Keep in mind that I am not talking about IFRS 17 with discounting. I am really looking at the undiscounted effect on the combined ratio, which is the more technically sound way to watch it, rather than benefiting from the interest rate environment, which makes the combined ratio look better. We have to wait the 12 months to see the benefit. We are seeing healthy growth in renewal and new business premium, especially in countries that carry a lot of the bulk in the first two months of the year, as was the case for Germany.

What we're seeing from the guidance and the steps taken up to now is moving us the right way. We have to let all 12 months of 2023 play out so that the complete benefit comes through, including the pro rata temporis effect. For the second question, I'll pass it to Marco, and then I'll return.

Hello there. Just to clear something up from my end. The indexation effect is part of the impact we’ve presented. As a reminder, 60% of the non-motor book is indexed, and roughly 12% of the motor book is indexed overall. Indexation applies to 40% of the portfolio. The rise in annual average premium that we’ve presented would take indexation into account, and that clearly comes with a time lag, since you need reported inflation before you can tie it to the premium renewal. So on that effect, you clearly have a time lag.

Regarding private equity and Level 3 more broadly, let me begin with the Level 3 piece. What's happening isn't that we're altering the fair value of any asset. Rather, we're changing what's called the fair value hierarchy. What we've done is this: given shifts in market macroeconomic conditions, and working in coordination with our auditors, we've agreed to treat private debt as a Level 3 asset, which is already how we handle our private equity business. None of this has any effect on valuation. It's purely about hierarchy classification, in our view, because some assets don't carry a daily NAV but a weekly NAV, and those are what we place in the Level 3 category. Separately, on the private equity side, we recently completed a full valuation review, drawing on public market benchmarks for a meaningful share of the portfolio. Essentially, the outcome is consistent with what we've already been doing on a recurring basis: the asset managers we choose and the general partner have taken a conservative approach to valuation. Fundamentally, in the backtesting we run on our portfolio, the exit value has consistently come in above where the funds were valued during the last 12 and 24 months prior to exit.

Here's what we've accomplished up to now. I want to point out that a portion of the rise in the value of the private equity euro serving also stems from a foreign exchange effect — specifically, the fact that most of the private equity business is conducted in a U.S. dollar equivalent. When it gets reported in our accounts, because the dollar has strengthened against the euro, there's also a positive fair value change arising from that effect. I hope that clears the point up.