Unipol Assicurazioni S.p.A. (UNI) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Unipol Gruppo First Half 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Matteo Laterza, General Manager of Unipol. Please go ahead, sir.

Good morning to everyone, and thank you for participating to this call. As usual, let me make some remarks on the presentation and on the result, and then we will open the floor to the question. As you have seen, for the first-half result of '24, we did not represent any more UnipolSai numbers as a consequence of the fact that it is delisted. We represented only Unipol Gruppo with a separate representation of the insurance business and the earnings coming from the consolidated banks. As you know, concerning the consolidated banks, we represent only the first quarter in the reported number, even if we on a pro forma basis represent also the contribution of the all first-half result of the 2 banks, Banca Popolare di Sondrio and BPER Banca. Starting from the insurance business. First of all, in P&C, we reported a very robust top line growth in P&C, almost driven by the health business, but also the other line of business grew at a decent pace. Concerning the technical profitability, I have to remark that in the first-half result, combined ratio was impacted by our decision to add some reserves more than we expected at the end of '23 as a result of the update made by the Court of Milan on the table regarding big injuries and mortal accident. As a result of these, we added in the liability incurred claim and discounted almost EUR 100 million. And in the current year best estimate, combining the motor, TPL and general liabilities, we added something less than EUR 50 million. And the total impact of the combined effect of the 2 items hit by 3 percentage points on the combined ratio of the group. Very good result in terms of technical profitability in non-motor as a consequence of the action that we implemented, above all in the property line of business concerning both repricing and delisting. It is derisking. It is an action that has begun quite recently at the beginning of this year, and it will last for at least 2024 and 2025. And so we expect to see from this line of business more positive integration going forward. In life, a good result in terms of net inflows, above all driven by bancassurance, in particular BPER Banca. The technical result of life is more than what we achieved in the first half of 2023, even if we provision almost EUR 18 million for the guarantee fund that for life insurance company that was restricted by the financial law of last year. It is the provision that we made for the part that we expect in charge of Unipol Gruppo. Finally, in solvency, we closed a very robust number, 221%, notwithstanding negative performance of financial market in the second quarter of 2024. And also considering that the 100% result of the tender offer of Unipol Gruppo on UnipolSai shares impacted on the solvency ratio for 6 percentage points. Notwithstanding of these 2 components, the capital generation produced in the first half of the year by the group supported the increase of the solvency ratio at 221%. These are the most important remarks that I can do for the first half of the year. I'm with Enrico San Pietro as usual at your disposal for the question of the floor. Thank you very much.

[Operator Instructions] The first question is from Elena Perini of Intesa Sanpaolo.

The first question is on the P&C business. So, we read some press articles on new regulation regarding the portability of the black boxes. So, I was wondering whether you have already made some potential thoughts on the impact that this new rule could have on your accounts and on your volumes, given that you are the first European insurance operator for black boxes. And then I have also a second question on the life business. Really, 2 questions on the life business. The first one is a confirmation on the impact of the new guarantee fund. You just mentioned EUR 18 million, I think, for the first half. So, I believe more or less EUR 35 million, EUR 36 million for the full year. Just asking for a confirmation in that sense. And the third quarter -- question, second on life is about the CSM movement, which was up, if we compare it to the end of 2023, but it is slightly down looking at the end of March. So, if you can clarify the movements of the last quarter.

Okay, Elena. First of all, concerning the law of portability of the black box, we are still waiting for the final version of a possible of the law. For the moment, as what I know, but then I will leave the floor to Enrico that has more information and is studying more on this. We are studying on a minimum set of information that we will have to release to the client, and then consequently to the new insurance company that will take the black box from the company. There is a discussion of the indemnity that has to be paid from the new company to the old one for the information that has to be released. But we are just in the middle of the discussion that there is nothing of definitive as what I know. Then I will let Enrico to say more on this. Concerning life, no, we make some provision as what I know for the full year. So at the moment, this EUR 18 million has to be considered for the full 2024. So, we are not forecasting more addition to the -- more provision on the guarantee fund. And concerning the CSM, there are some movement in the aggregate. First of all, the CSM produced -- created with the new business is more than we released in the first half. And I think this is the most important information that has to be considered by -- for the assessment of the quality of the aggregate. Then there are some technical components that has to be taken into consideration. In particular, the negative impact comes from the operating variances that are estimated at EUR 91 million for the first half of the year. Operating variances concern the change in the portfolio of products that happened in the first half of the year and also the change in the assumption underlying the portfolio. And in this context, we had and we added more risk adjustment in the CSM, following a very prudent approach. And this additional risk adjustment is strongly related to the policyholder behavior that we consider in the assumption of the portfolio concerning what our policyholder would do potentially with the change of interest rates that can come in the processes of scenarios that we consider in the calculation of the fulfillment cash flows. Then I don't know, Enrico, if you have something more on portability of black box?

Matteo already told the important things. I add that portability, full portability that means that a new company can use a previous device with all the information and the services is something that was prescribed by a law of 2012 and then 2017, but never arrived to be operational since there are a lot of technical problems to solve. What we are discussing nowadays is something more limited. It's about the chance for the customer to have information released by the black boxes about their mileage, or some other few information to bring to another company to have a more precise quote. So the draft of the law now is under discussion. There is an important thing for us that is that the telematics service provider need to be compensated for this information that are given to other companies. And of course, we are quite confident that the law can be something we can handle without significant issues.

The next question is from Peter Eliot of Kepler Cheuvreux.

I had 3 questions. Actually, they are all kind of clarification questions on what's just been discussed, actually. But the first one, on the new tables issued by the Court of Milan, can you just -- I mean, I'd understood that it was sort of half expected that something would be coming. So, I'm just -- could you just touch on how much of that is already in your pricing? Or how much of it you've already allowed for? And how much of it is a sort of additional negative surprise that you've now had to adjust for? That was the first question. The second one was on reserve releases. Thank you for the numbers in respect of the Milan tables. I'm just wondering, could you give us the total reserve releases? And if possible, it would be great if you could split that between the runoff of risk adjustment and the pure prior year reserve development. And then the third question was just coming back to those operating variances that you've just discussed. Could I just clarify? I guess, you're already seeing some lapses. And because of the interest rate environment and developments, you're saying that you're assuming that more people will lapse in the future? Is that the right interpretation?

Okay, Peter. I will answer to the question #2 and 3, and then I will leave Enrico to elaborate to the first concerning Milan Court. So concerning the reserve release, of course, this is a number on IFRS 17 approach. The total run-off is 3.4% in the first half of 2024, which means almost EUR 160 million, more or less. And the split is all based on risk adjustment, minus 3.7%. On LIC, there was not reserve release, but a small addition as a consequence of what I remarked on the Milan Court update of the tables. And as a consequence, our decision to reinforce the best estimate of the liability and current claim undiscounted. Then on the Milan Court, Enrico will tell more on what is reflected in the pricing of motor TPL. Concerning the third question of the operating variances, at the end, the EUR 91 million negative has to do with a setup of our model, also as a consequence of an update that we did in parallel in the internal model for the calculation of the capital that can modelize properly -- more properly than we did in the past. The policyholder behavior that is our assumption, but there are only assumption on the possible reaction of our client to an increase of interest rate. In the number of scenarios that we modelize at the end, the result is that, again, for a very prudent approach that we use, we expect negative operating variances almost due to this component of the model. It has nothing to do with a change of the attitude of our clients in real world to surrender because on the contrary, we did not experience in the last -- in the first half of 2024 an increase of surrenders compared to what happened in 2023. So it has nothing to do with the real-world attitude of our clients, but only to the assumption of the border that we use for the capital and also for the calculation of the fulfillment cash flows. I hope to have been clear on that. And I leave Enrico answer to the first question.

Yes. It was very clear.

Peter, so of course, the update of the tables of the Milan Court were somehow expected. The increase -- the average increase in these tables is 16%. Of course, this applies on a part of the claims 1/3 more or less. And our reserve, our assumption were in a situation in which we can handle without any addition, using our traditional prudence in reserving. But we decided to keep untouched that buffer of prudence, updating our reserves. The amount -- the total amount is on current year claims, motor third-party liability around EUR 35 million that are more or less a couple of percentage points on the combined ratio of motor third-party liability, and more or less EUR 90 million on previous year claims. So the overall addition we had is more than EUR 120 million. That accounts for 3 percentage points on the overall non-life combined ratio.

The next question is from Gian Luca Ferrari of Mediobanca.

Yes. Three for me, please. The first one is on the motor business. I was wondering if, after the tariff increase, you lost contracts. So if you can give us the delta year-on-year or versus end of '23 in terms of number of contracts you have? And the second one is on the large beat you made on the solvency ratio. So, your solvency went up by 4 points in Q2. Can you give us the breakdown between cap gen variances and M&A. It seems that some peers reporting this morning had negative variances in Q2. I presume this could be the case for you as well. So, I was wondering how these 4 points or where they were coming from? The last one is, we read a few weeks ago about an arbitration you had in the U.K. with Covea, I guess, related to the pandemic. Some other reinsurers are having similar issues. Can you give us a bit of a sense of what is the issue here and the quantification of your legal issue with Covea?

Thank you to you, Gian Luca. Yes, the first part of the price increase that we implemented starting from the end of '22, but above all, over the course of '20, '23, brought a loss of part of our portfolio. It was completely expected as a consequence of the price increase. This trend lasted until the early beginning of 2024. But starting from March, the trend inverted, and we are starting to consolidate to increase our portfolio of clients. So in terms of premium totally collected, the impact is positive because the price effect more than compensate the loss of the portfolio. Concerning the second question that is on the solvency, as I said before, we had a negative impact coming from financial market, quite small because at the end of June 2024 compared to March '24, the performance was negative, but it was not absolutely a disaster. So, we have lost 2 percentage points for the financial market. As I said in my introduction, we have lost 6 percentage points as a consequence of the tender offer of Unipol Gruppo on UnipolSai shares. But these 8 percentage points were more than compensated by the capital generation we did in the first half of 2024, and also by the update of the in-force value in the life insurance business that usually creates own funds as a consequence of the fact that a lot of products with very high minimum guarantee go to maturity or are surrendered. And they are substituted by new production with only capital guarantee, and so this is a creation of value and as a consequence, also creation of funds. On the litigation of Covea, I leave the...

Sorry, Matteo. Sorry, you didn't have any negative impact from economic and non-economic variances then? Is that right?

No, not significant. No.

Okay.

Gian Luca, so as we mentioned, the issue about COVID business interruption claims is quite common in Europe since there is a lot of discussion and also some court working on the fact that usually there was a property coverage and with a cat business interruption and the big discussion is about the fact that the pandemic can be considered or not considered a cat event. There is a more technical issue about how you aggregate the claims in terms of time. But this is why there are several court cases in which we also are involved with Covea about this issue with the arbitration going on. But I can tell you that the amount that can stem from this court decision is not material on our figures.

The next question is from Alberto Villa of Intermonte.

The first one is on the outlook you mentioned in the press release. You mentioned that you are going to reach, if everything goes in the right direction, all the targets of the 2024 strategic plan. I was wondering if this includes also the target on combined ratio of 92.6%, which seemed to be quite ambitious at the end of 2023 and maybe now given the positive evolution we have seen in the numbers, it's more doable. The second question is back on the solvency. Can you maybe give us an idea of what is the potential impact of the derivative on the 4.7% stake on BPER we can expect on the solvency in the future. And then -- sorry, this is not specifically related on the second quarter results, but I wanted to ask, given the lot of press we have seen on the potential introduction of a windfall tax for financial companies, maybe you can help us understand if there is any ongoing discussion between the insurance association and the government on anything related to that? It seems the government would like to have a less increase in prices for motor coverages in Italy, but obviously, this is a pre-market. But in any case, maybe if you can add something on that could be helpful. And finally, on the same note, there is always a lot of press speculation about your potential interest in getting a stake in Monte dei Paschi. We discussed it many times in the past. But I wanted just to check if there is any new, let's say, tenor on this point you can share with us?

Okay, Alberto. A lot of questions. Concerning the outlook, yes, we are working in delivering the target of the industrial plan. We did some target -- financial target and also industrial target and we are working very hard to deliver both of them. There is also, in this, the combined ratio. Of course, it is quite early to say that we will, for sure, deliver this target because we are in the middle of the season in which nat cat can have impact on the numbers. First half of the year are good, as you have been able to see. Up to now I don't have evidence of further impact coming from this item. But as I said before, we are just in the middle of the season. So, we will do our best to deliver also the combined ratio target. Concerning solvency and the impact coming from the equity swap, the equity swap on BPER is a financial instrument and all the financial instruments are mark-to-market and the mark-to-market of the asset portfolio have an impact, positive or negative on the solvency. Having said that, we have EUR 60 billion of financial assets and the equity swap is EUR 300 million. So in any way, this transaction could go positive or negative. I don't expect a significant impact on the solvency. Then there is the -- yes, the windfall tax. First of all, we are not in the association. So it is not to me that you have to make this question. I know that after this call, there will be another, so you can do the same question to the next one. And we don't comment something that we read in the newspapers and so we will see what will happen. We will do all what of course, the Italian law prescribe going forward. And finally, there is the last one on Monte dei Paschi. I have to say that, today, we are fully committed with all the top management to work on the delivery of the target of the industrial plan and to work on the next industrial plan that will be very important for the consolidation of our business, for the new shape that the new group will take after the merger between Unipol Gruppo and UnipolSai. These are the topics in which we are fully committed at the moment. I have no other remarks to do on that.

The next question is from Michael Huttner of Berenberg.

Matteo and Enrico, I had 2 topics. The first one is on the dividend. I'm not 100%, but I think there was a mention or talk of adjusting the payout to the peer average, which is maybe 50% or something. And I wonder if you could say what's your view on this is and whether this would be for after the current year plan or which could be included in 2024? And then the other one is on just going back to all these moving parts and the motor combined ratio. I don't know how to answer it because I'm struggling. I've got so many numbers going in and out. I don't know what to do with them. I think the simplest way to ask would be 2 questions. The first is to say, well, you've given us these numbers. I think 3.4% in runoff, of which 3.7% is the risk adjustment and then the addition of EUR 100 million for the Milan Court. And I wonder if you can give us the equivalent number for 2023? And then maybe the simpler question is to say, well, what you see as the underlying, excluding these kind of adjustments, combined ratio and motor at the moment?

Concerning the dividend, I'm afraid that you have to be very patient to wait for a indication on dividend. First of all, we are just in the middle of the year. It is true that the first half of the year was very solid, both on consolidated basis and also on a local basis of UnipolSai. That is the number that is very important for the dividend payout. But we are just at halfway in 2024, so it's quite early to discuss about dividend. The dividend policy will be one of the main arguments and topics that will be in which we will focus on the new industrial plan regarding the '25-'27. And so we will concentrate on this topic much later in the year concerning the dividend policy of 2024. But I think that for you, it will be much more important, the guidance and the KPI that we will disclose for next industrial plan regarding '25-'27. Concerning the runoff, you have to remember when we did the presentation on the assumption on the IFRS 17, that we decided to have a very prudent approach in terms of positioning in percentile for the calculation of the risk adjustment in P&C. At that time, there was and there is still a lot of uncertainty concerning the inflation and the prospect of evolution of inflation. So, we decided to be very prudent in terms of risk adjustment. All of these is reflected in run-off release of risk adjustment year-by-year. And so you don't have to be surprised to see a run-off of 3.7% of risk adjustment. In first half of 2023, the same number was 3.5%. And in 2023, we had a run-off of LIC for 2.3%. So the run-off release of 2023 was 5.8% versus 3.4% in 2024. Of course, without the run-off release, the combined ratio would have been 3.4 percent (sic) [ percentage ] points higher than what we released in the presentation.

And then on the motor?

Enrico wants to add on this.

Okay. Michael, so let's try to go back to the basics of the underlying trends of motor third-party liability business. Basically, what we have about loss frequency is good news. They are -- loss frequency is likely decreasing. The average premium had a significant growth, as you remember, in 2023, almost 10%. And of course, this is giving us earned premiums that are increasing. And even if we had lowered the increase -- the amount of the increase that we asked for, our renewals, we are still growing with the average premium. So basically, 2 of the 3 KPIs, loss frequencies and premium -- average premium are improving. On the average cost of claim, that is the third one, of course, we have this impact of the Court of Milan tables. There is, of course, one-off for the previous year and something we need to incorporate in our tarification for the current year business. But we have to do exactly as all the competitors have to do. So, we don't expect any change in our competitive position. So, I don't know if I was useful enough to understand the underlying trends or you need some other information about it.

I'd be greedy if I may just ask one more. In your 3-year plan, you have, I think, a target figure for motor combined ratio. I can't remember it precisely. But I think from memory, was it like 95 or something, 96? How -- all these trends which we're discussing now, how do they affect your view of this figure?

Yes. Of course, I guess what Matteo told about the overall combined ratio target is valid also for the motor combined ratio. So, we can deliver and we are working to deliver. And of course, what you can see at the first-half results, have very significant impact of the tables of the Milan court. But in the second half, I'm quite confident that you will see the improvement that is needed to reach our target.

That's very helpful.

Sorry, Michael, if I remember, you also asked the run-off in motor business, right?

Yes.

In motor business overall, the run-off combined is only 90 basis points because there is the impact on Court of Milan that is, of course, in the motor and not in non-motor.

And I would assume H1 2023, so the equivalent period last year would be similar to the figure you gave for the portfolio as a whole, the 5.8?

Sorry. Can you repeat the question because I did not get it.

Yes, no, I'm confusing you. I really apologize, not my aim. So, 90 bps are so helpful. This is H1 '24. And what was the equivalent for H1 '23?

In 2023, it's -- in motor was 7.3%. Total.

Total. Yes. Very helpful.

The next question is from Andrea Lisi of Equita.

The first one is again on the P&C, in particular, given the fact that for what you said that we've seen a combined ratio, that is for the motor part for above 1%. Do you think you continue to have room for a tariff increase? And should we expect the continuation of your policy of increasing tariffs also over the next quarters? Or do you think that most of the job has been already done? And the second is on life net inflows that were positive, but I saw that in second quarter was some deceleration versus the first quarter. So just to understand, which trend are you observing and what do we expect going on also about what are you feeling in the banks and in the agency? And so what's the reaction of clients to your offer? And third, if you can update us on your investment policy also in a phase where rates are set to go down. So if we should expect some changes in your investment policies.

Okay. Concerning the price in motor, then Enrico will elaborate more. But consider that as a consequence of the action that we did in the past, there is a sort of inertial trend of prices that go forward without the necessity to make other price increase going forward. And it seems that this inertial trend is at the moment enough to compensate all what is happening in the market, comprise the impact coming from the Court of Milan. What I have to say that claim inflation is still very sticky above all concerning the auto part prices, cost of labor, materials. And of course, we face this stickiness by using our tools that above all are based on the canalization of claim in our network of Unipol service, where we still have a very important advantage in terms of cost of claim. That is still in the whereabout of EUR 800 of saving for each claim canalized in Unipol service. Of course, also Unipol service is impacted by auto part price increase and above all, cost of labor. But the absolute level of the price that we pay in this network is still much lower than what we get in car garage outside the network. Concerning life, yes, there has been a deceleration, but above all, because first quarter of the year started very well in the bancassurance area of business, they produced a lot of production, a lot of traditional products. And so it is quite normal that in the second quarter of the year, the trend could decelerate. But it's still very solid and above what we, in general, estimate as new production in 2024. The arguments that our distribution network use to sell traditional products are arguments based on the tool and facilities that are proper of the traditional product versus other alternatives that the client can have like asset management product or bank deposit or fixed income securities. I'm talking about the possibility to have options embedded in the product, the possibility to take and to have the product until for all your entire life. And above all, the possibility to be protected by the mark-to-market of the financial instruments that are underlying the product, because you have the possibility to surrender at -- with only considering the coupon -- the accrual of the minimum of the guarantee of the segregated fund, except, of course, for the penalty that you have for the first years of duration of maturity of the product. So using these arguments, we are able to support positive net inflows that are very important for us because we are able to invest all this money in life at a yield that is between 4% and 4.5%. That allow us to increase the yield -- total yield of the back book in order to give more argument to our distribution network, to compare the yield of the segregated portfolio with the bank deposit of fixed income securities. Concerning the investment policy, at the end, we are working up to now to maintain a decent level of cash in the portfolio because we were in a very -- in the middle of a very long dated bull market, both in equity and in credit market. And so we kept a lot of cash in the bank account in order to be prepared to invest during a possible risk-off period. And now we are maybe at the beginning of a correction of financial market where we take this opportunity without being rushed, because we think that this correction can last for much more than what we -- the couple of weeks in which the bear market started or the correction started in order to possible extend a little bit the duration of the portfolio and possibly to take some opportunities in the credit market and also in the equity market. As I said, we are not at all rushed to do it because possibly during this summer, this risk-off stage could last for at least the summer period. So, we think we will have opportunity to invest our cash more at more interesting prices.

Gentlemen, there are no more questions registered at this time.

Okay. Thank you very much for attending this call, and I wish you good holiday for you. And if you do it and in case not, good work. Thank you very much. And we will see -- we'll meet again in November.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.