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

Good afternoon. This is the Chorus Call conference operator speaking. Welcome, and thank you for being with us for the Generali Group Nine-Month 2024 Results Presentation. Just a reminder that everyone is in listen-only mode. Following the presentation, there will be a chance for you to ask questions. <<operator_script>> Right now, I'd like to hand the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agencies Relations. Sir, please go ahead.

Hi, everyone, and thanks for joining the call on Generali's results for the first nine months of 2024. Joining us today are Group General Manager Marco Sesana, Giulio Terzariol, who is CEO of Insurance, and Group CFO Cristiano Borean. Before we open things up for Q&A, I'll pass it to Marco and Cristiano for a few short opening remarks.

Thank you, Fabio, and hello everyone. Good morning. First, I want to note that the third quarter has validated the ongoing gains in both business and operations we've seen all year, along with the favorable impact of the commercial and technical measures put in place since 2023. We've also kept a strong Net Promoter Score leadership position relative to peers. That reflects our capacity to engage multi-holding customers and stands as a clear testament to our Lifetime Partner proposition. Today I'd like to walk you through three main highlights from the third quarter. The first concerns Life. We see confirmation of a solid trend in new production, generating meaningful net inflow concentrated in our preferred line of business. During the first half 2024 results call, we gave guidance for the new business margin of between 4.5% and 5%. I'm glad to confirm that in the third quarter we arrived at a 4.92% new business margin. While we reaffirm that guidance, we anticipate a new business margin in the fourth quarter that is lower than the third quarter, reflecting falling interest rates and how product mix affects the margin. The third quarter additionally saw 9% growth in new business volume, with Protection up by 11.5%.

During our Investor Day in January 2024, we laid out what we see as attractive opportunities for long-term profitable growth in Protection over the coming years. Protection once again accounted for more than 40% of our new business value in the past quarter. As we said before, lapse rates in France have essentially returned to the level we saw in 2022. In Italy, we kept observing a decline in lapses during the second half of the year. We have every expectation that this trend will continue as competition from government bonds and bank deposits steadily fades. Italy went back to positive net collection in the third quarter, and we reaffirmed our expectation that the Italian business will post a positive net inflow for the year by the end of 2024. At that time, we will assess how to gradually reduce some of the commercial incentive we brought in last year to support production. My second point concerns trends in the P&C business. The figures we published today confirm the positive effect, driven both by rising tariffs and by claims inflation normalizing against a backdrop of overall benign frequency. To go into more detail, the annual average premium across our 10 main markets rose by 6.8% overall. In motor, that increase equals 7.5% and translates into an annual earned premium of 6.5%, more than offsetting the 0.3% rise in the risk premium.

We keep executing on pricing and technical excellence, and that strategy is producing more and more favorable movement in the attritional combined ratio. On an undiscounted basis, the combined ratio now stands at 96.3%, which is 1.4% better than a year ago. Very benign frequency and a low incidence of severe bodily injury claims also contributed to the third quarter's improvement in the undiscounted attritional combined ratio. We would not extrapolate the third quarter's pace of improvement in a straight line going forward, but it is definitely heartening to witness this trend as we move into a new strategic cycle. We reaffirm our confidence in hitting our target by the end of 2024, with an undiscounted combined ratio under 96%. That holds even though natural catastrophe has an impact at nine months 2024 that runs roughly 100 basis points above what we budgeted. Our confidence rests on the strong improvement in our underlying underwriting result, which is showing up more and more clearly in the numbers. And in fact, natural catastrophe is the subject of my third message. The third quarter has plainly been an adverse one. We will factor that development into our new plan, in which a higher budget for natural catastrophe will be appropriate.

In all likelihood, this occurrence is going to result in the hardening cycle continuing within personal lines across Europe. In the final month of the year, we typically see a gentler pattern where weather events are concerned, given the footprint of our portfolio. Since September came to an end, natural events are estimated to produce roughly 100 extra net natural catastrophe losses during the fourth quarter up to now. On top of that, we record a €20 million loss, mostly stemming from the riots in Martinique. Regarding the tragic events that all of us have witnessed in Spain, allow me to set aside the economic impact and voice our grief for the numerous people affected. To back this effort, Generali is giving active support to the Spanish Red Cross through financial aid. As a way of showing solidarity with the affected areas, we have likewise started a worldwide fundraising campaign in support of the Spanish Red Cross on the ground, with a focus on assisting those displaced from their homes or severed from essential services. We are additionally offering active support via our Human Safety Net Foundation in the areas of Spain where it operates. Thank you for listening, and I will now pass things to Cristiano.

Thank you, Marco, and good morning to all of you. I’d like to offer a bit more detail regarding how we performed financially across the first nine months of 2024, building on the business trends Marco just described. To begin with Life, the operating result for the third quarter rose by nearly 11% versus the same quarter in 2023. Two things I want to call out for you. First, CSM increased by close to €500 million during Q3, even after absorbing roughly €100 million in negative operating variances, which were largely tied to lapses. My expectation is that across the whole of the second half of 2024, we could book a level of operating variances comparable to what we saw in the first half, in the context of the annual assumptions update that we will finish by December. Second, investment results for the quarter came in at €266 million, which represents a year-on-year gain above 20%. I should point out that this increase also reflects non-recurring items when comparing 2024 against 2023. Turning to P&C, Marco already addressed the combined ratio improvement. I would stress that the quality of that improvement is very high, coming entirely from the current year component, since we held prior year development in line with the 2 percentage points of guidance we gave.

Like Marco mentioned, we're reaffirming our undiscounted core guidance for 2024 at below 96%, and that mirrors the gain in underlying technical profitability. That confirmation does, naturally, hinge on the final count of natural catastrophes. Turning to the fourth quarter, within P&C we anticipate only a minimal level of current-year discounting—roughly €50 million, I'd say—which mirrors lower interest rates and how discounting has trended during the year. Regarding the current-year loss ratio, benefits from tariff increases will keep showing up, though we'll likewise set conservative initial loss picks, consistent with Generali's long-standing prudent reserving practice. On the non-operating result, bear in mind that during the fourth quarter we expect certain restructuring costs, possibly also stemming from the recent acquisitions, and beyond that we're also likely to record some impairments on a selected number of real estate exposures as part of the end-of-year appraisals. As for the tax reform now being debated in France, we anticipate booking roughly minus €14 million in the fourth quarter should the corporate tax measures' final version mirror what has been discussed up to now. Lastly, on Solvency, note that by year-end we expect to finish closing the step-up in the Generali China P&C joint venture, which should carry a minus 1-percentage-point effect on our final year 2024 Solvency 2 ratio.

With the year wrapping up, I want to express our appreciation for your ongoing backing. I’m eager to meet you at our Investor Day in Venice on January 30th. Operator, we’re ready now to take questions. Let me get ahead of things a bit—since our Investor Day is coming in January, we might hold off on forward-looking questions until that event.

Much appreciated. Speaking is the conference operator from Chorus Call. <<operator_script>> Andrew Baker of Goldman Sachs has the first question.

Thank you for the questions. First, on P&C attritional: benign frequency — low bodily injury claims in Q3 — and you're cautioning us against projecting that in a linear way going forward. Could you give us a bit more color on breaking that out, in terms of how much of the attritional you'd view as more one-off or as a quarterly benefit in 3Q? Second, on the Life CSM, could you help me unpack the variances a little? The expected return in Q3 actually looked like it was up a little, and that was lower rates — so I'm curious what's going on there. And I think you mentioned the €100 million of operating variances, primarily lapses. Directionally, what was the impact from the economic variances? That would be really helpful. Thank you.

Thanks a lot, Andrew. Cristiano, I’d like you to take both of those questions.

Hi, Andrew. Regarding how benign frequency and disinflation are affecting things — something we've all observed sitting below where it was before COVID — that remains a significant trend still being verified each quarter, and the remark was more tied to the bodily injury piece. Even so, one point I'd like to make. As I mentioned during the introductory speech, you will certainly witness technical profitability continuing to improve as we go forward, and that is reflected in the number. So if we simply add up the first nine months and arrive at the year-end figure, there will be additional improvement in the year-end 2024 number compared with the year-end 2023 number. The pace of that acceleration will also be softened by what I said, but we will keep applying strict prudence when it comes to initial loss peaks. The disinflationary forces, please note, are showing up more and more clearly in the number, so you should keep projecting, though at an appropriate level, as I was saying. That covers the first question. On the second question, the variances observed during the quarter, I'd put them at roughly €400 million for economic variances in the third quarter versus the healthier number, and slightly more than €100 million in operating variances, with the vast majority clearly linked to the fact of the lapses.

Looking at the economic variances, the main things moving the numbers are how well equity markets have done worldwide—both in Europe and in Asia—and also the favorable effect of reduced market volatility, which, as you're aware, helps with the time value of options on guarantees. Those, I'd say, are the two biggest factors, with a bit more of the benefit coming from equity performance, more than offsetting the negative impact of interest rates, which comes to roughly €100 million on the downside.

Moving on to the next question.

Our following question comes from David Barma at Bank of America.

Hello, and thank you for taking my questions. I have two quick ones on Life, please. First, regarding the investment results — clearly another strong quarter. You indicate that some non-recurring items are included here. Is the share the same as what you mentioned in Q2, which I believe was half of the annual growth, so could you give a bit of color on that? Then on the new business margin, 4.9% in 3Q, is there still an effect in there from the French Protection business booked in Q1 this year and from the various marketing actions taken in Italy, and perhaps could you quantify those together? And lastly, on P&C, could you give us an update on pricing versus claims inflation in your main markets and where you're seeing some pretty strong renewals at the end of the year? Thank you.

Thanks a lot, David. Cristiano will take the first question about the Life investment result and the one on the new business margin, and Giulio will handle the question on pricing versus claims inflation along with the renewals outlook.

Hi, David. What I'd consider recurring versus non-recurring ties more to what wasn't recurring in Q3 2023 than to anything non-recurring in Q3 2024. In the third quarter of 2023, we saw some negative impact from higher hedging costs in Switzerland, since, as we mentioned before, we were shifting the dynamic hedging toward a more stable asset liability management approach, which incidentally provided substantial support to the Solvency of our Life entity — the right move, but it carried a cost of roughly, I believe, €40 million in that last third quarter of 2023. That's the main item I'd flag there. On the second part, regarding new business margin, we still have commercial action in place, though there's no impact from the French Protection effect, as that was already fully booked. And the impact of commercial actions, mainly concentrated in Italy, comes to somewhere in the range of 30 basis points to 40 basis points, if I total all of them up.

Sure. On the pricing question, on the motor side I can tell you that we're seeing average price increases of roughly 7.5%, and that's running well ahead of the risk premium increase we're observing. It's almost 4 percentage points ahead of it, so that's a significant improvement. Also keep in mind that when you look at our numbers, the earned premium increase is slightly below the average premium increase, so there's an improvement that's essentially embedded as we head into next year as well. When we think about motor, there we see an increase of more like 4% in the average premium, but we're improving the attrition or loss ratio, excluding the man-made, by about 1%. So basically this means the average premium increase is almost 3 percentage points ahead of the risk premium, and in Accident and Health we're seeing an improvement of almost very high single digits, so there's a lot of strength in what we're seeing right now. And as we think about the start of 2025, we're still going to pursue premium increases that at least match a risk premium increase or are ahead of it, depending on the case.

From that standpoint, we're beginning from a solid foundation, and we keep pushing to ensure we lock in what we believe is a really strong position. That's everything on pricing from me.

Let's take the next question.

Michael Huttner from Berenberg has the next question.

Thank you very much. I really enjoyed that line about the crocodile's jaws, and so my question is: how long are those jaws? Put differently, does the reach extend to — I realize this is forward looking, so I'm not sure — 2026, 2027, 2028. Let me give you some context. On Monday I attended a lunch held by your Spanish competitor, and they too brought up the crocodile's jaws, though their figure was two years, so I'm hoping you might say that thanks to pricing actions still ahead of you, perhaps it's three years, who knows. My second question concerns cash. I realize it's far too early, and you'll probably repeat your earlier answer and set that aside, but I know there's a great deal of one-off cash this year, so maybe you could give us a sense, given the very strong outlook across both of your core businesses, of how quickly that €700 million might be cashed back, or earned back, or whatever the right way to put it is, in terms of restoring cash flow to current levels. And then my final question — apologies, that makes three. On the operating side, within Solvency, your fantastic IR gave me a very detailed breakdown of the Solvency movement, which includes a 1.5% negative operating variance.

I’m sure this is something you’ve already mentioned, but I’d be curious? Thank you.

Thanks a lot, Michael. I believe the crocodile jaws effect question is directed at Marco, whereas the questions about cash and the solvency movement — particularly the operating variances — go to Cristiano.

Hey there, Michael.

Morning, everyone.

To expand on what Giulio said, we're quite optimistic: we anticipate another embedded price increase arriving next month, and we're actively pushing for it. We also see an overall risk premium moving in a favorable direction. What does that mean? Inflation hasn't gone away. Some portions of the business still face inflation. Bear in mind there's a lag between consumer price inflation and claims inflation. So the decline shows up somewhat later than what's visible in the public market. That said, the frequency trend offsets this, and so far it's heading the right way. I'd call it a trend—something we've observed for many quarters now. So I'd say we see potential to keep this margin expansion going through the coming quarters. Beyond that, you rightly brought up the nat cat effect, which will influence the rates we'll see, on corporate and commercial as well as on retail.

Since obviously every one of us is going to have to handle what I'd call a different mindset when it comes to nat cat — and not just on the technical side, so grasping precisely how much we — how we handle volatility and how we guarantee that we're properly positioned on this risk — but it will also have an impact on pricing as well. So obviously this is going to give us some room to raise prices further during the next quarter.

Thank you.

Hi, Michael. Turning to cash — that said, at the nine-month mark, including operating cash, we had roughly €3.7 billion to €3.8 billion, though you need to remove the operating portion from that figure. What matters for you is knowing that we hold the customary €1 billion liquidity buffer, plus funds covering the buyback and a minor €100 million of spare cash out of it. Certainly, we'll provide the full detail at the Investor Day regarding how things will evolve going forward. The one point I'd like to emphasize is that during 2024, we were again able to generate excess cash repatriation through a specific capital management operation — for instance, the one we discussed in Austria — and, as we noted this year, we also presented and completed an operation to restructure the composition of participations in, for example, our Italian entity, which will deliver, as we've already mentioned, the additional benefit we'll discuss at the Investor Day.

Understood. Thanks.

When it comes to the non-economic side — the other movements, the non-economic variances in the Solvency, that 1.5-percentage-point figure — I'd say there are mainly a couple of drivers, and they're evenly split. The first is a somewhat higher investment risk in the portfolio, driven by the risk-bearing capacity and how it evolves, and when that's active it gets accounted for in this non-economic piece, since management actively decides on it. The other piece is some small non-recurring and non-operating expenses, which then get accounted for there.

That's great. Thanks so much.

Moving on to the next question, please.

Will Hardcastle from UBS has the next question.

Appreciate you taking the questions. On the motor side, thank you for the broad comments about pricing around the world. I suppose which countries do you feel most confident about growing volumes in right now, and are there any where you still sense that a bit of retrenching is needed? And it certainly sounds as though the nat cat budget is getting attention. I guess, what do you think has gone wrong with budget setting over the last two years? Is it simply more frequent and more severe events compared with the reinsurance shift of the last couple of years, and is there anything you can do on the reinsurance side, or is it just a matter of raising the budget? Thank you.

Thanks a lot, Will. Giulio, the first one's for you, and Marco, the second one is yours.

Sure. On motor specifically, I wouldn’t single out a market where we clearly see greater room to expand the business, and motor isn’t really where the focus sits either. So at present in motor, we’re broadly keeping the line steady on the risking force, and that will more or less remain the approach as we head into 2024. The growth we do see comes from motor, from SME, and from Accident and Health. That’s where our attention is going, and it also fits with our strategy around what we call multi-holding customers. From that standpoint, localistically — and there’s the Life side too, by the way, when we think about multi-holding. So localistically, the situation is this, and it isn’t about necessarily driving production on the motor side, where our focus is very much on making sure we have a very, very strong combined ratio. So that’s where things stand. On pruning, we’ll keep pruning. Roughly 200 million of pruning is what we carry out each year. To a certain degree, we should expect that to keep going. So the mix of good rate increases plus everything we’re doing on underwriting should serve us well from a profitability standpoint, and on the growth side, we expect to achieve growth not necessarily from motor but from the other lines of business.

Regarding the nat cat budget—I don't believe anything specifically went wrong during last year's budgeting phase. Rather, what we're observing is a trend that, I'd say, comes alongside numerous other patterns across the industry, and I should also stress that this reflects the larger portfolio we now carry. We've expanded considerably, so clearly the kinds of disease events we encounter are rising. On the reinsurance front, we've made adjustments—modestly revising the reinsurance structure across the past 2 years. At this renewal we'll examine what options exist. Honestly, I don't anticipate significant structural shifts. What strikes me as important is approaching climate change from every angle, at 360 degrees, differently. That means not just claims—it also covers the services we'll offer, the coverages we'll offer, how we can handle volatility in new ways going forward, and equally how we can remain closer to the client whenever something happens.

We'll get into all of that in January at our Investor Day. What I'd say is this is something you'll see more of going forward, and it will also push prices going forward.

Let's take the next question.

Our following question comes from James Shuck at Citi.

Hello there, and good morning — or good afternoon, depending on where you're joining from. My first question concerns restructuring costs. You touched on these in your remarks. For a number of years now, restructuring costs have been something of a recurring feature at Generali, taking up a fairly large share of net income. I believe last year landed at roughly the €300 million mark. I'm curious where this will settle in the current year, and then what the outlook looks like as we head into the next plan. Ideally it ought to diminish to zero, but I'd like to hear your thinking on it. That's question one. Second, Cristiano, I believe you previously said that for the Life insurance service results, across the full year the total of the lost component, experience variances and other income expenses would come out at negative low triple-digit millions, which it appears will indeed be the outcome. My question really concerns the outlook there, since I want to grasp whether some portion of those will recur going forward, as that would matter a great deal when considering the earnings growth outlook. And then, if I could, a quick question about how investment income in P&C is likely to trend.

Regardless of where we end up at year-end this year, would you anticipate absolute growth in investment income? Do you still observe a positive gap between the running yield and the reinvestment yield? Thank you very much.

Thanks a lot, James. Cristiano, all three of those questions are yours to answer.

Hi, James. Sure — let me remind you, though: in 2023 there was a very specific restructuring charge, a larger one, of €200 million euro in our country, Italy, where there was an agreement with the union and operation. For 2024 we are not foreseeing this kind of level. What I just recall is that in 2024 there are also the acquisitions done so far, but the level is absolutely lower — I would say halving the level you are seeing there for 2023, if I have to make a guess for the year end 2024, this about restructuring. And they are going forward — with the actual perimeter we are having, they are going forward to decline, and clearly, we are continuously looking for efficiency solution and measures and on that, for sure, we will comment more on the Investor Day. On the second question related to the insurance service result for the lost component experience balance and other, the outlook for 2024 is coherent with the guidance of low-triple digits between minus €150 million, minus €200 million, which is consistent. Going forward, you need to be aware that this kind of element, especially I’m expecting the experience variance on the component to scale down materially compared to the number we have seen so far and the number I was commenting will be posted also in the cumulated, but don’t forget that one of them, which is the loss component, is volatile and depending sometimes on the market condition.

So obviously, we're lowering the ALM risk within the portfolio, though certain assets can push things up or down. Take what happened in the third quarter: equity markets performed strongly, and some unit-linked accounts swung from a negative loss component into positive territory, which generated a positive P&L. On the trajectory — that's the third question — for investment income in P&C, where we'll end up in 2024 and the mix between running yield and investment yield: first of all, I'd remind you that in 2023 we had roughly €50 million of specific private equity dividend payments tied to performance fee structures that did not recur in 2024, has not repeated this year, and is more erratic by nature, so you shouldn't extrapolate it forward. Meanwhile, we've seen the asset under management perimeter expand thanks to the Liberty acquisition, which in P&C alone is contributing €60 million in the first nine months of the result we posted today. So their investment yield remains more than 30 basis points above the current return — which is 50 basis points above the current return — so 3.6% versus 3.1%.

Also, keep in mind that within P&C our asset mix is tilted, with 30% in non-fixed income assets, and those aren't moving in the same way as their investments; still, across the cycle we're capturing a risk premium, and that should become visible as we go forward.

That is genuinely useful.

Let's take the next question.