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

Good afternoon. I’m the conference operator for Chorus Call. Welcome, and thank you for being with us for the Generali Group First Quarter 2024 Results Presentation. <<operator_script>> Right now, I’ll hand the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agencies Relations of Generali Group. Sir, please go ahead.

Thank you. Hi, everyone, and welcome to the Generali first quarter 2024 results call. Joining us today are the Group General Manager, Marco Sesana; the CEO of Insurance, Giulio Terzariol; and the Group CFO, Cristiano Borean. Before we open the Q&A session, I'll hand things over to Marco and Cristiano for some opening remarks. Marco, the floor is yours.

Good morning, everyone. These first-quarter results confirm the group's delivery as well as the beneficial impact of the commercial measures we put in place during 2023 to tackle the challenges of the macro environment. Within Life, the return to positive net inflow makes us very pleased. What we told you all through the second half of 2023 — that the situation was under control — is confirmed by the first-quarter figures. It also shows we can meet customer demand for protection and unit-linked products. Protection net inflows came to EUR 1.5 billion, while unit-linked net flows stood close to EUR 1 billion. More than 40% of our new business value continues to be generated by Protection. Savings outflows were limited — a significant improvement versus last year — and were very much tied to low-value products. Indeed, the commercial measures implemented since 2023 underpinned the strong production seen in Life overall. Our business units have adapted to changing customer appetite and perceived market competitiveness by continuing to update existing products and launch new products that are more attractive in this new market condition. The strong Life production also reflects positively seasonality in the first quarter, especially in China. As such, we expect some moderation in the coming quarters. We maintain our strong focus on new business underwriting discipline for Protection and Health businesses and on capital-light products enhanced by protection riders.

Capital-light products’ proportion hasn’t moved, and the European Life business’s average guarantee keeps coming down. Consistent with our plan ambition, we’ll keep steering strategy toward bundled solutions that serve several customer needs in one product. With overall market conditions continuing to normalize and improve, we intend to step down gradually some of the commercial incentives we brought in last year to support production. That should help margins. Now on to P&C. First-quarter P&C growth bore out the trends from 2023, with gross written premium up around 11%, or more than 6% excluding Argentina hyperinflation’s impact. During the full year 2023 presentation, we reported a 6.1% rise in average premium across our retail and SME book. By the close of the first quarter 2024, average premium had risen 6.3% versus the same period a year earlier, with the motor segment in particular driving that growth. Strengthening tariffs beyond market inflation stayed a key management priority, particularly in Germany, Spain and Italy. We’re also still rolling out technical measures designed to pursue profitable growth, particularly in portfolio enhancing and claims management.

Our pricing approach and technical expertise are paying off. The first-quarter attritional current-year undiscounted combined ratio confirms the favorable trends that were already evident in the fourth quarter. We're also observing frequency stabilizing and claims inflation easing, and those things support the direction of technical profitability. I should note, though, that early in the second quarter we experienced a specific man-made accident in the GC&C book, with a preliminary estimate falling between EUR 25 million and EUR 30 million. Now, turning to the first quarter: we saw Liberty Seguros consolidated into our figures, and bringing Liberty in efficiently and effectively will strengthen our platform further as we move into a new strategic cycle in 2025. Asset Management's recurring revenues rose 3% year-on-year, driven by a higher average asset under management. That figure does not yet reflect the Conning consolidation, since the transaction closed in April. In the press release, we've included some elements to help with comparison against the first quarter of 2023 on an operating and net result basis, given the differing timing in booking variable costs, costs tied to the Conning transaction, and tax payments.

If you adjust for that effect, the operating result came in roughly flat versus last year, and the drop in net result would land somewhere between 4% and 5%. Turning to investment now. Our investment yield stayed quite strong relative to the in-force book — approximately 3.7% in life and 3.5% in P&C. Looking across the asset classes: in listed equity, we stayed — we kept a prudent stance. In credit, we reaffirm our conservative posture, with limited exposure to sectors that are more cyclical and to companies carrying high leverage. Rating downgrades in the portfolio were negligible. On private debt, we've been more selective regarding new commitments, weighing attractive opportunity — particularly private debt valuation — against ILM constraints. To wrap up, our first quarter results reaffirm the group's continued capacity to deliver solid growth and to execute our strategic plan consistent with our Lifetime Partner purpose. As we progress through this final year of the strategic cycle, we have great confidence in where the group is headed. Cristiano, over to you now.

Thanks, Marco, and good morning, everyone. I’d like to give you a bit more detail on the financial results we posted for the first quarter of 2024, adding to what was said about the business side. What we released today demonstrates a performance that was both strong and resilient. Operating profit rose 5.5%, and every segment contributed positively. Adjusted net profit was up 8% after excluding the EUR 193 million net capital gain from the sale of a London building that we booked in the first quarter of last year. Remittance to the parent company has come through in a very satisfactory manner. As of today, we have already collected approximately EUR 4 billion in remittances from subsidiaries, which represents roughly 90% of what we expect for the full year. Our capital position remains solid. The Solvency II ratio is currently estimated at 216%, and that includes the effect of the LTI buyback we announced this morning. Please keep in mind that we will subtract the EUR 500 million share buyback from the Solvency II ratio once the regulator gives its approval, which we expect before we report our half year results. I’d like to share some specific color on Life and P&C to add to what has already been reported in the press release.

On the Life side, when you compare the new business margin with last year, some unusual factors come into play. In my view, the clearest approach is to break it into 3 parts. First, there's a purely accounting piece. Second, a business mix piece. And third, a market effect. As the press release already noted, an optical negative hit of roughly 90 bps arises from how IFRS 17 treats the French collective protection business. That business, with fairly low profitability, typically provides 1-year coverage running from January 1 through December 31, with contracts written in December of the prior year. Most of the contracts issued in 2022 fell into that onerous category and were therefore recognized in the fourth quarter of 2022, as the accounting standards require. This means the first quarter 2023 new business margin at group level came out higher, because volume in the French collective protection business was lower. On the flip side, contracts issued in December 2023 were deemed profitable, though with low profitability, and so are fully recognized in first quarter 2024. The large volumes combined with the thin margin on this business accounted for about 90 basis points of the gap between the first quarter '23 and first quarter '24 new business margin.

That accounting impact is going to taper off gradually over the course of the year. Now let me turn to the mix component and to the market effects. The commercial initiatives we put in place in Italy to bring in customers have worked especially well at Genertel Life, and that is where the great bulk of last year's Italian lapses occurred. New production at Genertel Life has rebounded very strongly in the first quarter of 2024. The portion of Italian PVNBP coming from Genertel Life has risen from roughly 12% last year to roughly 21% this year, propelled by the saving business. Because Generate Life carries an average new business margin that is about half of the country Italy average, this shift in mix also weighed on the group's new business margin. Keep in mind as well that beginning in the second quarter of 2023, we carried out commercial initiatives aimed at supporting volume growth, and those led to a reduced new business margin. Those commercial initiatives are still feeding through into 2024 new production, which makes the first quarter of 2023 a difficult comparison. Beyond that, as Marco pointed out, first quarter volumes in China were exceptionally strong ahead of the regulatory changes that took effect in April.

In fact, PVNBP in China has grown by more than 2x compared with a year earlier in terms of China's share of group PVNBP, and that share has risen from roughly 5% to above 8%. The saving business drove this entirely, and its new business margin sits below the group average, also reflecting the present market situation in China. Together, these effects account for about 60 basis points of the new business margin contraction between Q1 '23 and Q1 '24. In addition, shifts in financial market variables — especially the drop in interest rates — cut the group new business margin in Q1 of this year by roughly 30 basis points versus the same period in 2023. In summary, the 179 basis point decline in the new business margin comprised 90 basis points of pure accounting impact from the French protection business, 60 basis points from mix with more savings and more China, and 30 basis points from market variables. Going forward, most of these factors should normalize, and I expect the new business margin to rise noticeably as early as Q2 2024. Turning to P&C.

For the first time, Liberty Seguros was consolidated — specifically, 2 months of it during the quarter. On the top line, Liberty added EUR 219 million in premiums, and it contributed almost EUR 220 million to the operating result. Our first quarter combined ratio went up by roughly 0.1 percentage points because of Liberty. When we report half year results, I'll give you updated guidance covering our undiscounted combined ratio on the current year discounting as well as the insurance finance expenses for full year 2024, with the consolidation of Liberty Seguros also embedded in it. That's also because we must wait until the final purchase price allocation exercise on Liberty's insurance assets and liabilities is completed in accordance to IFRS 3 before a new guidance can be provided. Turning to P&C: within our P&C combined ratio, prior year development has come in broadly in line with the 2 percentage point indication we gave. As you've seen, prior year development of 1.8% in the first quarter was not impacted by late claims or revised claims costs stemming from the 2023 Italian hail storms. That reflects the conservative initial loss peaks I mentioned to you at our full year results. Lastly, beyond the top line impacts highlighted in the press release, the moves in the Argentinian peso and the inflation are reflected in higher insurance finance expenses and an increase in the investment income.

Insurance finance expenses came in at minus EUR 213 million for the first quarter of '24, which is a rise of EUR 123 million compared with a year earlier. More specifically, roughly EUR 80 million of that growth comes from the pure unwinding component tied to the liability for in card claims. That aligns with the guidance we've given of a EUR 250 million increase across the full year 2024, versus the EUR 149 million booked in 2023. That said, some other EC components tend to be more volatile. We've consistently noted that the ones connected to IAS 29 hyperinflation accounting could potentially matter most. Indeed, they hit EC by approximately EUR 60 million during the first quarter of 2024, up EUR 40 million against the same stretch last year. Even so, that effect is also reflected in the higher investment income, yet it fully offsets the higher insurance finance expenses. During the first quarter, P&C operating investment income rose EUR 124 million year-on-year, and about EUR 50 million of that gain originated in Argentina. I hope these points helped you better grasp the trends in our first quarter figures. As I said earlier, we're very pleased with these strong and resilient numbers. Thank you for your attention.

Operator, we’re ready to take questions now.

<<operator_script>> Our initial question comes from Will Hardcastle at UBS.

To start with, within motor excluding Argentina, premium growth appears to be 5.5%. To me, that seems possibly at or below the average price increases being achieved. Is that accurate? And I suppose which geographies are seeing volume growth versus contraction? And are any of those specific geographies seeing a significant uptick in competition? And just returning to the new business margin versus volume growth, really helpful explanations there. I believe what you're saying — and correct me if I'm wrong — is that although it won't immediately revert to a more normalized type level of growth and margin in Q2, it will be pretty close. And then from the second half, you'd expect it to be running at more historical levels. Is that right? Or might it drag on a little bit longer?

Giulio, you get the first question, and Cristiano, the second one is yours.

Giulio here, Will. Yes, beginning with motor, the growth is precisely what you described — 5.5% when Argentina is excluded. Now, what we actually observe is a solid rise in effective price change, and we see a solid rise essentially across every one of our entities. Just to give you a sense of it, in Germany, Italy, Spain, and Portugal, we're in the high single-digits, while the remaining markets sit more in the middle digit. On risk in force, typically we're fairly flat. One country has us down somewhat, and that's Germany. But taken altogether, I'd call it a very strong picture. Another important point: we look at effective price change and compare it against the loss trend, which is essentially frequency and severity combined. And we can see effective price change running well ahead of loss trends. This holds essentially across all the geographies. So from that standpoint, we've had genuinely nice development on the motor side. And given that we're going to see some net premiums rise because of the injected rates, we're also going to see the combined ratio in motor develop further positively, assuming of course that frequency and severity stayed Audio Gap.

Overall, then, I'd describe the growth picture as solid, driven by pricing actions—and those effective price changes came in above the loss trend, and above it as well by, I'd say, a few percentage points.

Yes. Will, yes, what I wanted to say is that I'll add a bit of color to that. If you simply remove the protection — the group protection France item, basically, the new business margin for the quarter would be 4.7% — slightly above 4.7%, which tells you that despite higher production in China, we are running at that level of marginality this quarter with lower interest rates. And so you have, for sure, no longer the effect of dilution. Or if you look at the quarter in isolation, this will not impact. It will be averaged out throughout the year. So divided in a certain — it will be only 1/4 of the full yearly effect. And less weight expected on China, because, as you understood or you may know, the rush or the sale was related to some cap in the broker channel commission were — clearly accelerated some sales before the 1st of April. So we don't think this is something that will happen again in the projection for a slowdown on that part. On the other side, there is another positive effect of slightly higher interest increase, which stays together with the negative effect of the commercial action on the margin.

Just to revisit something—I don't think we made a remark on this earlier, though I want to point out that overall new business value increased by 5% across the board. From the latest update, sensitivity of the market to the new business margin under this sort of mix, for 50 basis points, comes to roughly 25 bps of sensitivity in either direction—with the design clearly moving up when things rise and down when they fall. And when it comes to the pure saving business, that sensitivity on the margin is twice as large, alright? So at 50 bps, you get a 50 bps effect on new business margin. As a result, there's something embedded that sits slightly lower owing to market and economic factors, on the order of 25 bps, which you can project.

Could we take the next question, please?

Peter Eliot from Kepler Cheuvreux has the next question.

Three from me, if I can. First off, is there anything you can share regarding the flows and operating variances observed in Q2 so far? I'm just curious about how that trend is carrying on. Second, when it comes to asset management, you highlight those timing differences. Is it fair for us to expect the Q2 cost to income ratio to come in a few points better than usual, and for net results to represent a higher share of operating than typical? Just so we understand that it should normalize. And the last one. Giulio, you said earned premiums would rise from the injected rate starting now. I'm wondering how much further there is to go on that journey, since I believe quite a lot was accomplished in Italy early last year. So could you update us or remind us where we stand in terms of how far through that journey we are?

Cristiano, you'll take the first two questions, and Giulio, the third one is yours.

Peter, on the operating variances, I'd like to point out that I believe a portion of them is largely explained by what we saw in Italy regarding some product value exit — and as you know, marginality there runs above the group average — along with a one-off effect from a risk margin adjustment. All told, the operating balances came to slightly under EUR 200 million, EUR 170 million, and 1/4 of that is a one-off effect. The remainder was purely negative lapse experience. Looking ahead, I think part of this trend could continue somewhat. We made some adjustment to the projected full average surrender rate across the entire runoff. So obviously, this is on the present value with the right assumption, but it can be a bit bumpy quarter-over-quarter, year-over-year. That said, I think that covers the operating balances. On the asset management side, we first need to take one piece of information on board. We need to fully embed the Conning integration starting from the second quarter. And clearly, with Conning, there are some integration costs that should be projected in. Overall, in our discussion with the business unit, we have confirmation that, looking at the full 2024, you should confirm and see a cost/income ratio guidance of 60% confirmed with these — all these effects.

Okay. So regarding your question about how far we can go: the answer is always market by market. I'd say the place where we're still pushing on rate increases as we move into the second part of the year is Germany. So in that geography, you're going to see a further improvement. And right now we're already running at a good combined ratio. In Italy, I'd say there's still some room, but that's relatively lower compared to Germany. And then another geography where we definitely are pushing rate increases is Spain. So all in all, I'd say, when you look at the portfolio, there's still some room to go. And then, clearly, we're also going to react to the trend we see, as I was saying before. We see a positive difference between effective rate changes and the loss trend. Especially we see frequency going down. That's more or less across the portfolio. And then on the severity side, I'd say this is in the -- below 5% in general. So we're more at 3%, 4%. And we also see that on spare parts, there's a deceleration of inflation.

Obviously, we'll respond to whatever we observe. Still, we feel fairly confident about the steps we're taking. And on this point as well, Marco can share his perspective.

Yes, Peter. Marco Sesana speaking. I just want to add that at the group level, we're really pushing for an additional increase this year. So for as long as risk premium keeps climbing, we'll make certain that each business unit across the group prices in a further rate increase. That matters a great deal. What we're seeing — as Giulio mentioned, what we're seeing right now reflects the work done in 2023. And we'll push again this year, because with us entering a new cycle, particularly in motor, it's crucial that we keep going — that we move forward rather than sit back and simply wait for the cycle's next development. So we'll push for rate increases throughout this year. And after that, as Giulio put it, we'll see what market conditions bring.

Next question, please?

Our next question comes from Michael Huttner at Berenberg.

Alright, cash, big loss, and additional cash. Regarding the cash, thanks a lot, Cristiano. My understanding is — so EUR 4 billion divided by 90% would give me 4.4. And I believe it was 3.6 last year. Is that roughly correct? Am I right on those figures for cash remittances, because in that case it's remarkable. You're working — this is a figure I had for 2025. So we're 1 year ahead. And perhaps you could — any thoughts on that, where it's coming from or whether these are one-offs? Anything would be very useful. Second, if I recall when you did the — announced the Liberty Mutual deal, there was some excess capital. And I was wondering whether you've already upstreamed that or you intend to upstream it? And also do you have more precise thinking about the business that doesn't quite fit, which is Italy. And then the final point. You mentioned man-made, a large loss in April or perhaps May, I'm not sure. Maybe you could comment and give us a sense of the combined ratio, both for Q1 and Q2 in terms of man-made.

Thanks a lot, Peter. I’d say all 3 of those questions are for you, Cristiano.

The math checks out perfectly. Yes, that's the figure we expect for the year. Keep in mind this was a particular year in which we're bringing in roughly EUR 400 million — we've already received EUR 400 million from integrating Cattolica. That money has now been paid to us, and it's essentially a one-off stemming from the capital synergies we've captured. On top of that, there's a one-off from Austria of approximately EUR 200 million, plus EUR 100 million from Central Eastern Europe — a stronger longer-term profitability and capital position. So I wouldn't treat these as a fully recurring item right away. As I said earlier, I'd view them more — the Austrian piece especially — as excess capital capacity across the cycle, measured over a 3-year cycle. The second point on cash — again, you're asking about Liberty — is whether excess capital is coming up to the parent company. You can count on that for certain. And clearly, we did some front-loading through bridging already this year, which, as I mentioned at the Investor Day at the end of January, is also baked into the final acquisition cost for buying the Liberty stake. As for the remaining timing, we'll handle it next year.

And if it’s required, an additional year would depend on how quickly it can go and how much acceleration can be achieved. But in principle, this ought to become available beginning next year. On Italy, I believe I’ve already been asked—I’ve already given you my answer regarding the Cattolica piece. Certainly, as you’ve heard, we’re continuing to make capital more fungible, which also aligns with what we announced yesterday about merging Genertel Life into Allianz—a company that, as you’re aware, is very, very well capitalized. That is encouraging and supporting, from the next cycle onward, further consideration of capital fungibility for Mama, head office. As for large losses, the experience—I think Marco has already told you that in the second quarter, we’re seeing something on the order of up to EUR 25 million, EUR 30 million for the accident. I believe it is the NL1. And regarding the impact we had this year in the first quarter, EUR 54 million of man-made claims versus the EUR 100 million we had in the first quarter of ’23. So essentially, that is the positive upside compared with this quarter.

Moving on to the next question, please?

Our next question comes from William Hawkins at KBW.

To start, you've circled this topic somewhat already, but I was hoping we might get a little more precision on your expectation that the undiscounted combined ratio will come in under 96% by the full year. If I look at the first quarter and add back light net caps, the number appears to land at almost exactly 96%. So I'm curious whether, in your view, you're perhaps more bullish on the targets given that all those rate increases are still flowing through? Or should I dial back my enthusiasm since you've enjoyed the manmade tailwind and there could be more from Liberty Seguros or other items ahead? So could you just address that below 96% target, please? And second, thanks for all the detail. But can I simply ask what the PVNBP was for China and the French collective protection business in the first quarter, please?

Thanks a lot, William. Cristiano, both of those questions are for you.

William, I think we're broadly in line with that guidance. But if you simply run the math and take the 93.7%, then normalize for the 2.7 percentage point of net cat budget expected for 2024, and you've got 0.2% lower in the prior year, you land at 95.8%. But don't forget, Liberty is embedded in that number. The guidance was set before, and Liberty's impact comes to 0.1 percentage point. That said, I want to remind you that, again, we kept a very prudent initial loss picks position in this quarter as well. Then, moving on to what the PVNBP of China is in the French protection business. So for the French protection business, PVNBP in the first quarter is EUR 3.14 billion of PVNBP. While for China, we have EUR 1.4 billion of PVNBP accounted this year this quarter.

Let's take the next question.

Iain Pearce from Exane PNB Paribas has the next question.

Starting with Non-Life: I'm simply trying to get a handle on why you haven't shown more appetite for putting capital to work—especially by expanding risk exposure, given the current rate environment and the optimism you've expressed about rate increases relative to loss cost trends. Could you break that down between Germany and everywhere else, particularly bearing in mind the contraction in Germany? I mean, if you look at your combined ratios there over the past 2 years, they appear quite robust. So I'm just seeking to understand why there isn't more growth in risk exposure within non-Life. Then, on the French protection business: would you ordinarily expect that to be onerous at inception? Or was there something particular about last year that caused it to be onerous, and going forward should we take it that this is baked into our margin assumptions?

Thanks a lot. So, question one goes to Giulio, and question two is for Cristiano.

Yes. So first off, obviously, P&C is one area in which we are putting capital to work. That said, I wouldn't suggest you can assess it quarter by quarter. And as you're aware, there are certain inflation-related dynamics at play. So on the pricing side, we need to take ash. And we've been extremely, extremely resolute about taking action to ensure we don't get surprises, because at this point we see severity stabilizing. We see — not in Germany, but elsewhere — frequency also coming down, yet we have no crystal ball. So from that standpoint, we are acting so as to ensure we have a very profitable business. The combined ratio in Motor is indeed improving. As Marco said earlier, we will be cautious in any case to ensure we have a very healthy book. And the long-term trajectory is clearly to grow the P&C business, where I would add that part of the strategy is in any case to grow, not necessarily motor but in non-motor as well. So there's no change in direction, but clearly, we need to make choices. And we need to err on the side of caution, because last year it happened to some companies that they got surprised by the shift in frequency or severity.

So at this stage, we'd rather steer clear of anything unexpected. That's regarding the Life side. As for the French business, I'd say the same, if you'd like, Cristiano, since I went through something comparable in my prior Life role when it came to how profitable this book is. That book has the potential to be marginally profitable. So nothing specific to us right now, but it is something that matters for the market. I'd put it this way: if you're able to drive the combined ratio to 90%, 98%, given how marginal the capital requirement is and also given that in reality this business also covers overheads — if you can push the combined ratio to 98%, you reach a point where you can even achieve a double-digit ROE. In our case, in 2022, as I understand it, there was a broader line. And that's why we had this sort of accounting noise. But now, as you can see, we're essentially running at a level that lets us get to that profitability. And as you'd expect, we'll do everything we can to make sure we hold on to this level of profitability.