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

Good afternoon. Speaking is the Chorus Call conference operator. We welcome you and appreciate your participation in the Generali Group 9 Month 2023 Results Conference Call. <<operator_script>> Right now, I'll hand the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agency Relations. Sir, the floor is yours.

Thanks, operator. Hi, everyone, and welcome to the conference call on our results for 9 months 2023. Joining us are Marco Sesana, our Group General Manager, and Cristiano Borean, our Group CFO. Ahead of starting the Q&A session, Marco and Cristiano want to offer a few opening remarks. Marco, the floor is yours.

Thanks, Fabio. Hello, everyone. Glad to have you on the call, and I want to begin by noting that the financial results for our third quarter validate both the operational execution of the group and the continued roll-out of the measures intended to tackle the macro backdrop which, as all of you are aware, has grown more uncertain following the latest geopolitical developments. As always, I'll begin with the client. And it's a real pleasure that customers are responding positively to the steps we've taken to strengthen our value proposition. During the third quarter of '23, we strengthened further our #1 standing among our peer group when it comes to Net Promoter Score. Beyond that, retention holds steady at 89%, and over 50% of our customers count on Generali for coverage of at least 2 or more of their needs. Let me also raise an important matter here. As most of you will have seen in the news, this is a tough period for certain communities in some of the countries where we operate, owing to recent weather events. We feel very close to those communities. We have set out a number of initiatives, and we are on the ground to help people. And I want to thank each of our colleagues and agents who are working hard to ensure our clients receive full support.

Let's take a quick look at our business now, beginning with Life. So where volume is concerned, the third quarter carried on the industry pattern we've seen throughout the year to date. Protection came in at EUR 3.6 billion of net flow, while unit-linked brought in roughly EUR 4 billion. Protection kept producing about 40% of our new business value. On lapse, we saw an improvement in Italy, particularly within the bancassurance channel. As you're aware, that channel has been the one hit hardest this year. And in France, we've witnessed a gradual normalization of the outflow. The net outflow figures were also affected by the cancellation of the quasi-money market product in Germany, along with some plan expiry and a low-margin bancassurance product in China. Those particular outflows had an immaterial impact on the CSM, as Cristiano will explain to you shortly. Surrenders in our life portfolio during the third Q were EUR 1.6 billion below the second Q, and that cut the net outflow in the third Q by half compared with what was recorded in the second Q. Our business unit has adapted in order to meet shifting customer appetite and to preserve market competitiveness. Specifically, we keep updating our existing products and launching new ones that are more attractive in the current market context.

I also want to mention that we keep a firm emphasis on underwriting discipline for new business in Protection & Health and on capital-light products, strengthened by protection riders. Our strategy will remain oriented toward bundled solutions that address multiple customer needs within a single product, in line with our lifetime partners ambition. These tailor-made solutions are better positioned to respond to client needs and are also less exposed to competition from government bonds. Let's turn now to P&C. So growth in the P&C business has confirmed the trends seen year-to-date. Third quarter '23 gross written premium rose 11.9%. At the half year '23 presentation, we disclosed a 6.4% increase in average premium in our retail and SME book. At 9 months, average premium was up 6.9% compared with 9 months '22. With broad-based improvement across the portfolio and an acceleration in motor, where the average annual premium increase has improved from 3.2% at half year to 3.9% at 9 months. These figures reflect both a generalized upturn in personal lines and will continue in the coming quarters, and I would say even years, as we have entered an environment where adaptive pricing is part of our ongoing strategy.

So because of that, we'll keep raising tariffs, consistent with how we see claims inflation and frequency at a granular level. We're also pressing ahead with the technical steps needed to grow profitably, particularly when it comes to enhancing the portfolio and managing claims. Obviously, Q3 saw major weather events, notably the hail in Italy during July and August. The unusually high nat cat burden we reported this quarter came mostly from what are known as secondary perils and, naturally, from both organic and inorganic portfolio growth. Even so, our undiscounted current year loss ratio, excluding nat cat, is still strong and getting better, at 67.2%, which is 70 bps better than the 9 month '22 figure. Turning to investment. Our investment yield stayed very good relative to the in-force book and the market — 4.3% in life and 4% in P&C. We raised the cash buffer and shortened bond duration. On listed equity, we stay — we keep a prudent stance, and we tactically trim exposure by our vesting gains following the positive performance year-to-date. A sizable portion of the residual exposure is hedged via derivative options. In credit, we reaffirm our selective approach, with low exposure to more cyclical sectors and highly leveraged — and highly leveraged companies. On private assets, we've been more selective about new commitments, balancing attractive opportunity, especially in private debt valuation, with ILM constrained.

To close, I want to stress that our exposure to Israel and the Middle East — whether we're talking business or investment — is immaterial. To sum up, the third quarter '23 result confirms that the group can keep delivering solid growth and executing its strategic plan, consistent with our lifetime partner purpose. Heading into the final quarter of the year, we feel confident about the direction in which we are steering the group. Thank you for listening. I'll now pass it to Cristiano.

Thanks, Marco, and good morning, everyone. I'd like to give you some additional detail on how we performed financially over the first 9 months of 2023, to round out the picture on the trends in the underlying business and to add to the material we posted on our website earlier today. First, let me state that these figures reflect a performance that is both very strong and resilient. Revenue at the top line keeps expanding within the areas we prioritize, specifically non-motor P&C. Gross written premiums in non-motor continued their expansion, delivering growth of 10.1% year on year, which supports the further rebalancing of the mix within our P&C business. If you set aside the contribution from the strong growth at Europ Assistance, non-motor GWPs are up 8%. There are also clear indications of improvement in our motor P&C top line, as the tariff strengthening we have been carrying out keeps progressively flowing through into the income statement. P&C posted a substantial rise in operating result, moving from EUR 1.43 billion a year earlier to EUR 2.15 billion at 9 months 2013 -- '23. Three main drivers account for this increase: a EUR 350 million rise in the undiscounted operating insurance service result; a EUR 416 million gain from discounting; and a EUR 45 million decrease in the P&C operating investment results. Embedded in these results is the significant EUR 875 million undiscounted nat cat experience, with EUR 687 million of that arising in the third quarter alone.

For reference, during the same period a year ago, nat cat losses at the 9-month mark stood at EUR 559 million. If we compare the first 9 months of 2023 with the equivalent stretch of last year, the current year undiscounted loss ratio, once nat cat is excluded, reveals an improvement of 0.7 percentage points, and that holds even with a bigger hit from manmade losses, especially during the second quarter. Turning to discounting, I can tell you that because of larger volumes and higher interest rates, and also reflecting how nat cat played out, we now anticipate that the current year discount benefit will come in above the top end of the EUR 750 million to EUR 800 million guidance for the full year. The prior year release for the quarter sits broadly in line with earlier quarters, at 2.8 percentage points. Now on to life. The operating result is broadly stable versus a year earlier when we strip out the EUR 60 million one-off booked at half year 2023, and it improved relative to the prior quarter. Life net inflows came in at minus EUR 1.2 billion, a clear improvement over the previous quarter, helped as well by fewer surrenders, which are displaying a reassuring pattern of gradual normalization. It also matters to stress that some of the outflows booked in the third quarter relate to low-margin products, for instance pseudo-banking products in Germany, carrying only a marginal amount of embedded CSM.

For the third quarter of 2023, new business volumes measured in PVNBP terms rose 7.8% versus the same quarter a year earlier, which reverses what we saw across the prior 2 quarters. With that strong showing, life new business at 9 months 2023 stood at minus 8.6% year-on-year, a meaningful betterment relative to the minus 14% recorded at half year 2023. That year-on-year movement mainly mirrors how higher interest rates affect the discounting of future premiums; volumes measured as annual premium equivalent, which discounting does not touch, held steady versus last year. Normalized CSM growth came in at roughly 3.8% on a 9-month basis, helped by a strong and predictable expected return, with new business CSM about matching the CSM release. Looking to the fourth quarter, we anticipate a stronger new business CSM, since the third quarter seasonality will not be a factor. As a result, normalized CSM growth for year-end 2023 will probably come in above the 4% guidance we provided. I'd also like to walk you through the key items bridging the EUR 5.1 billion operating result to the EUR 2.979 billion adjusted net result. We'll begin with the nonoperating investment result, which came to EUR 240 million at the 9 months 2023.

I want to point out that the continuous portfolio turnover we're carrying out as part of our asset allocation strategy is, on one side, putting the proceeds back to work in liquid fixed income assets and higher yields, while on the other side it's also bringing about some realization of capital losses that will affect the nonoperating investment result at year-end. Considering the trends we saw during 2023 in the real estate market, I would also expect some potential impairment in the ballpark of mid-double digit on the real estate at cost in this P&C segment. That could affect the nonoperating investment result in the fourth quarter as part of the year-end appraisal process. Nonoperating holding expenses came in at EUR 453 million and were broadly flat versus last year. Net other nonoperating expenses were minus EUR 397 million, and they included EUR 94 million of restructuring costs. As you know, we traditionally book the majority of our restructuring costs in the fourth quarter, and I would expect an amount slightly higher than the around EUR 200 million we recorded at final year 2023 -- '22 for year-end 2023. Within the net other nonoperating expenses, we had a negative EUR 77 million impact stemming from IAS 29 hyperinflation accounting.

For the 9 months, the tax rate came in at approximately 29.5%, and taxes paid amounted to EUR 1.382 billion. Taking all of those moving parts together, we ended up with a reported net result of EUR 2.8 billion. The adjusted net result of EUR 2.979 billion comes from the EUR 158 million adjustment, which is mainly from P&L on assets at fair value through profit and loss and hyperinflation accounting. We confirm a solid capital position, with the solvency ratio standing at 224%. The year-to-date increase reflects roughly 17 percentage points coming from robust normalized capital generation, driven by growth in both the Life and Non-Life segments, plus 1 percentage point of economic variances. Those effects were partly offset by minus 2 points arising from the lower eligibility of part of Cattolica subordinated debt, minus 3 points from the combination of capital movements and M&A, and minus 9 percentage points of noneconomic variances. As of the end of October, the solvency ratio is estimated at 222%, primarily reflecting the economic variances on spreads and equities. Thank you for your attention. Operator, we are now ready to take questions.

<<operator_script>> Our first question comes from David Barma at Bank of America.

I have 2 on P&C and 1 on Life, please. So the first one on P&C. So if we look on a quarterly basis, the underlying loss ratio adjusted for discounting, for PYD, for nat cat and man-made, deteriorated by about 90 bps versus the first half and remains quite elevated. So can you explain what's happening there, and when do you think you'll be able to reach your previous guidance of 95% for the combined ratio? And then the second question is on the discounting benefits. So you're saying it's going to be above the previous guidance you gave at the half year. Can you be a bit more precise on what sort of level we should expect for the year and next year, please? And in parallel to that, you previously said the finance expenses should increase by about EUR 200 million next year. Is that still the case? Or should it be a bit higher? And my last question on Life. So Cristiano, you've been mentioning during the quarter that we could see some revisions of lapse assumptions. It doesn't seem like the experience was that bad in the third quarter. But did you end up changing anything during the quarter?

And if that's the case, what did the operating variances look like in your CSM as we head into Q3?

Thanks, David. All of those questions are directed to Cristiano.

All right. Thank you, David. Let's examine the third quarter on a standalone basis, and let's also look at it progressively so we can grasp the underlying dynamic. So first, let's set the third quarter of '23 against the third quarter of '22, which marked the peak impact of claims costs in 2022. And let's see how that has developed. Taking the current year loss ratio and leaving out natural catastrophes, the current year loss ratio undiscounted comes in 1.8 percentage points better at 67.6%, looking at the third quarter alone, all right? That's the first picture. Second picture: let's see how things are moving from the second quarter of '23 to the third quarter of '23 on a standalone basis. Again, taking the combined -- the current year loss ratio undiscounted, excluding natural catastrophes, I see an improvement of 0.6 percentage point versus the prior quarter, which is another signal of progressive dynamics. So overall, clearly, when I look from the 9 months of '22 to the nine months of '23, we already discussed 0.7 percentage points. And you know we had higher man-made losses. What I'm trying to convey is that we are building dynamic pictures of an evolving animal, which is the profit we want to extract, and checking whether the 12 to 18 months time span we explained to you is technically showing up in the numbers of the account.

And if you're seeing this, we've got confirmed guidance on that, since we really do see that improvement. So then, to be clear, if you ask whether we'll halt our dynamic — no, we're ruthless and we'll stay ruthless, because every action we take is aimed at reaching the guidance you just mentioned. Obviously, this guidance needs time to incorporate the full tariff increase, with a dynamic approach coming in. That's the first point. Then on discounting, okay, regarding the discounting guidance number, we want to give it to you because the underlying dynamics are very, very simple. There's a high stock of both revenues and claims, since we have more claims as well, especially because of the natural catastrophes, which means higher discounting than expected. And also, we have a larger interest rate dynamic than at the point we were observing. So the guidance for final year 2023 has moved to EUR 850 million to EUR 900 million. So as for insurance finance expenses, we confirm the EUR 200 million, though maybe lifting them slightly because of the underlying dynamics.

Now, regarding the CSM movement and the lapses, that's a fair question. What I'd like to say is that, generally speaking, during the quarter we did see some experience variance, and it is actually declining only marginally, on the order of double-digit million euros, because the difference versus what was expected is small, given the low value of what was exiting — taking the German business case, which is essentially 0, with a 0.01% new business margin. We also have a minor adjustment to experience and, in addition, to assumptions, which, combined with the economic variances, produces a net effect of minus EUR 200 million.

To build on what you asked first — when do you think you'll reach that EUR 95 million on discounting? Is that a target for the second half of '24?

So obviously, the significant level of nat cat losses and the ongoing experience we're dealing with — I think you've read, and we've already mentioned, that we can go deeper on this. We've already got a high double-digit impact after 9 months, because other events are also having an effect. I'll emphasize once more that to provide final guidance on this as well, we'd prefer to give you further details in January at the end, during the Investor Day, simply because several moving parts are involved. First, there's the impact of the final reinsurance arrangement and its structure, along with the effect on reinsurance and the ability to secure reinsurer interest in taking on the coverage. Second, there's a shifting low environment being discussed in Italy, which is imposing mandatory coverage on small and medium enterprises, and that could in any case require some evaluation. So we need to understand the final situation. And then, too, we'll have the integration of the newly acquired entity. So we'd like to provide you with better guidance once this scenario is clearer. I just reconfirm that all the pricing actions — and then eventually, Marco, please add your input if you wish, an hour later — we are heading roughly toward the 95% trajectory, because all the pricing actions are continuously adjusted to that.

Farooq Hanif from JPMorgan has the next question.

To build on a few of your points: first, regarding nat cat, what are you considering? I realize you plan to hold off and observe how reinsurance capacity and pricing develop, though I believe you have already witnessed a market shift, and early signs suggest little has changed. So at least qualitatively, how do you view nat cat over the longer term? Second, with all the moving parts from the discounting effect, how does that change the interplay between finance expenses and investment income? Based on the models and figures you provided, it sounds like there will be some pressure there before it settles, owing to the unwind effect on finance expenses—but does the higher discounting effect in Q3 make this worse? Finally, could you discuss the holding results? They sound in line with last year, but you mention intergroup dividends from France and some other factors, and I just want to understand how one-off these might or might not be.

Thanks a lot, Farooq. So the first question is definitely directed to Marco regarding the nat cat. After that, the second and third questions go to Cristiano.

Hi, Farooq. Let me begin by noting that, obviously, as Cristiano mentioned earlier, following the 9 months, we encountered one more event that we measure in the high double digits. So we're watching to see what comes next. It's hard to foresee what will land between now and year-end. What I believe you're getting at regarding the long-term outlook is our expectation for the trend, what the trend has shown us, and what we anticipate for 2024 and '25. I'd say we've observed a rise in what we term secondary perils. In other words, these kinds of events are occurring more often. So that's something we must factor into our pricing moves for next year. We can't assume — we can't depend on the reinsurance market. It's getting tougher for these sorts of coverages in the secondary peril space. So I'd say we'll be sure to adjust prices in P&C over the coming months, incorporating this kind of impact as well. And I'd add that this comes on top of the inflation piece, which — starting now, I think it will be a continuous effort on our part.

We're in an inflationary environment now, so each year we have to adjust our tariffs to fit that environment.

Yes, Farooq. On the greater discounting seen in Q3 — certainly, more discounting ought to show up as more finance expenses; that is a natural translation, and it's the opposite side of the Libra, so to speak, arriving at a different time. But when it comes to the investing income dynamic, what you're seeing involves a significant combination of effects that you should factor in. I'd say more than 70% — around 70% — is broadly tied to the portion of income purely related to fixed income and interest rates, which follows our investment strategy and, thanks to it, even exceeds the movement in risk-free rates, while we also hold in the mix, through asset allocation, other asset classes, not just government bonds, with the credit spread on top of that. Beyond that, we have asset allocation toward long-term value accretion strategies such as listed or unlisted equity versus other forms of private assets as well. Clearly, over the cycle these are increasing and delivering a risk premium above the pure movement in rates. So we expect this — and it's the reason for the value accretion from the strategic asset allocation that we hold across cycles — to do exactly the job of overcoming these dynamics.

You should mention this point, and please keep it in mind: in the opening 9 months, we are seeing, for instance, reduced dividends coming from our private equity investment — which, as I partly explained, reflects the shift toward a more normal, linear, purely fixed income approach, and that in any case carries greater value over a longer horizon owing to the delay in realization. Regarding your third question about holding another result, the intergroup dividends aren't one-off in nature, since they stem from how the shareholding of certain internal parts of ours is allocated — in this instance, specifically, it involves Generali France also holding a portion of our asset management business. So its character is recurring. And there are a couple of positive circumstances that should bring further favorable results. One concerns our pension management company in Chile, Planvital, and another is our banking-related support activity in Germany via <<inaudible>>, which is gaining from this stronger environment.

If I can jump in briefly — it sounds like what you're saying on nat cat is that we probably won't raise our budget, since we're going to try to price it instead. Is that a fair way to sum up what you just told us?

Yes, so what we’ll do is this: we’ll definitely raise price for the nat cat portion as well. It’s hard to describe that as a stable trend, but for the part of the trend we believe will occur, yes, we will price for it and we will increase prices to adjust for that, yes.

Peter Eliot from Kepler Cheuvreux has our next question.

Starting with the first question, I'd like to know what effect you anticipate from the Life guarantee fund that Italy is bringing in starting next year. Second question — sorry to revisit the discounting topic. Cristiano, you brought up the nat cat claims. My guess is that a portion of those claims could be settled rather fast. And it occurs to me they might be settled faster than what's assumed in the reserving, and hence in the discounting. Could you remind us how things would work if they do wind up being paid back sooner — what we'd see in terms of how that discounting clawback would function would be helpful. And the third one — sorry, apologies, I hope I didn't overlook this in your introduction. But can you share any further detail on the life earnings split. So the — I mean, the investment result would be very helpful given it's a relatively large number, but anything you can provide on that extra would be very helpful.

Thanks a lot, Peter. Cristiano is the one who will handle all 3 of those questions.

Thanks, Peter. Could you please say that third item again? Sorry — I didn’t catch it. If you wouldn’t mind.

I believe it was, Peter, regarding how the Life operating result breaks down by the...

Right, exactly. And whatever additional details you’re able to share beyond what was included in the press release — the results, obviously — that would be very helpful.

All right, yes, certainly. So the Life guarantee fund expectation stems from a law currently being discussed in Italy. If we simply run the mathematical what-if hypothesis that the law gets approved in its present form, that would carry a net impact of EUR 40 million over the next 10 years, based on where the law actually stands. On the second question, natural catastrophe, the speed of payment versus the assumption — I really appreciate that question, because from the data we provide, it's easy to see that the discounted and non-discounted effect on it demonstrates that these claims are paid very quickly, and that's embedded in the calculation. So if we pay them earlier, there will be less unwinding going forward, since clearly lower reserves remain on the books. Conversely, paying them too early clearly also affects the cash view versus the P&L view, which obviously follows a different pattern of acceleration. Those are the 2 components involved there. On life, the split of life earnings is essentially EUR 2.16 billion in operating insurance service result and EUR 630 million in operating investment result. So the operating insurance service result is down EUR 37 million on a 9-month basis, while the operating investment result is up EUR 5 million on a 9-month basis.

As I mentioned, during that half-year period we were already discussing the effect on the reinsurance accepted business within our general employee benefits. So net of that one-off item, if I look at the quarter-over-quarter comparison—I already touched on this in the introductory remarks—we were growing. That's why we see this healthy direction, which ought to show up in the fourth quarter as well.

Michael Huttner from Berenberg has the next question.

Great. And congratulations on achieving that in what is obviously a tough backdrop. Three questions from me. The first concerns aggregate reinsurance, the second net inflows, and the third is perhaps that remark in the press release I noticed, which I didn't follow, near the end, page 8, close to the bottom, about the Board of Directors approving the policy, and so on. So on the aggregate, could you give us a sense of where the current aggregate stands? And naturally, I'm presuming it attaches now, and how might that be renewed next year? That's the aggregate reinsurance. The second one is net inflows. I just wondered whether you could actually provide the numbers, because your commentary is very good, but I get confused so easily. I'd be really interested simply in having the quarterly net inflows for Q1, Q2, Q3 for Italy, and maybe a sense of October and how you see the remainder. I assume you now have a line of sight to breaking even. And then, of course, that comment on the Board strategy, I'm not quite clear.