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

[Interpreted] Good morning, ladies and gentlemen. This is the Chorus Call operator. Welcome to the Q&A session on the presentation of the results for the first 9 months of 2022 Gruppo Unipol. UnipolSai, General Director of Unipol, Matteo Laterza, will share with you a short introduction, and then he will accept questions. Mr. Laterza, the floor is yours.

[Interpreted] Good afternoon, ladies and gentlemen, and thank you for being with us. Now I'll have a short introduction of the results. You must have seen the presentation and even the press release. So we closed the first 9 months with a growth in terms of life but also nonlife business. And in particular, in the normalized business, we have the non-MV business development, plus 10%. We grow on all the businesses, especially the big development in the health area in terms of distribution. What is really significant is the growth coming from bancassurance. In terms of profitability or combined ratio, what is very good is the profitability in the non-motor vehicle business. As for the MV, we do have some, let's say, criticalities. This is due to the impact of inflation on the average cost of the managed business that this has an impact on the MV combined ratio. Especially, if you make a comparison with the 9 months of 2021, where, of course, the context was characterized by the lockdown in the first part of the previous financial year. So of course, the '21-'22 comparison is, let's say, a disadvantage for this reason. In the Life business, the development is fed by the growth of pension funds. We see a slowdown, a very -- well, minor slowdown on investment policies, and this is in compliance with the general market trend. In terms of profitability, we had a slightly negative impact due to the evolution of financial markets. On the financial components of life business profitability, it had an impact on the quarter, which is a one-off. This is due to the fact that in the quarter, markets have underperformed. In terms of solvency, well, this is flat. I mean there's a slight reduction which is due to the market effect. Let's say that this was offset by the profits of the quarter. Within the market effect, there's been a positive contribution from the increase of interest rates on solvency. This is what happened. In terms of profitability, we thought we can continue the best estimate liabilities to consider the inflation impact on the future performances. We think inflation is not a phenomenon having to deal with what happened this year or even next year, it is variable to be observed on a multiyear basis. We think we've been very cautious, very prudent in terms of the best estimate liabilities items. Now this is worth 3%, maybe 4%. It justifies the 4% reduction in terms of the group level solvency versus the value we had at the end of June. I'm here with the General Director, Enrico San Pietro to take all of your questions. Thank you.

[Interpreted] [Operator Instructions] The first question is from the original language conference from Gian Luca Ferrari, Mediobanca.

[Interpreted] First question is on CR, combined ratio. I see 3.3% in Q3, the situation is usually favorable. So I have to say that this is close to 94% yield target in the business plan is the 92.6% in 2024. So can you give us some color on the MV and non-MV trends? Is this the right trend? Considering the trend on the MV, you have explained the inflation impact. They will be reabsorbed maybe based on tariff increases. As for the non-MV , the improvement is definitely remarkable. This is due to indexation. So the effect of the top line that we saw in the first 9 months. Once again, -- the situation is due to was, in my opinion. So once again, can you give us some color on the MV, but also non-MV business? So are we reaching 92.6%? As for the Life business, you already clarified doubts on Q3. So on 4-Q, we should go back to a normalized rate. So my question is on -- is the following. Just like other European players, Will you have some differences in terms of IFRS 17?

[Interpreted] Thank you. Let me start on the Life business. The floor will go to Enrico. As for the Non-Life. Now as I said before, on the Life business, I mean in Q3, we have had an impact due to the financial components, especially the one due to the valuations and realizations. They have impacted the Q3 result. Now if you check the evolution of financial markets for today, I mean, from September 30th, what is happening is a one-off, which is already, let's say, impacting Q3. In terms of Q4, we should go back to normal versus, I mean, towards the trend that I have shown in the previous meetings. As for IFRS 17, whether especially in terms of life component, of course, this will be a major additional element on the contribution of the so-called the CSM contract service margin to the business or financial statements, if you will, over the next years. So as we have already said in previous meetings, we do not expect major changes versus the profit dynamics. Now of course, quarter after quarter, there may be higher volatility in the Life business profit because this will depend on the updates of the curve parameters that we do have to implement in order to estimate them in the release of CSM in every single quarter. Now overall, and if you consider that this long, if you will, term scenario, we do not expect major changes.

[Interpreted] In terms of the CSM releases, what about duration are you choosing? Which durations? Can you share this?

[Interpreted] 10 years, this is the duration.

[Interpreted] Hello, Gian Luca. Now let's talk about the Non-Life business. CR combined ratio today is in line or in contrast with our planned objectives. Now it goes without saying that there are phenomena, especially inflation. So this is a little higher than the forecast that we had at the beginning of the plan. But we think that the tariff measures, including the reduction of the average cost of every claim. Now I think that these 2 factors are keeping us in the right pathway. In terms of MV evolution and inflation. So as we said in our previous meeting for the results for the first 6 months of the year, the impact of the inflation in the first half of the year was offset by many positive well factors. And the first one is it sounds like a paradox, but as I said before, claims, very small claims are back. So the so-called composition effect on the average cost was beneficial. We also have a very important beneficial impact on the incidence of claims with injuries out of the total. We keep seeing a drop, which is, of course, positive for us. And then our settlements, mobile has been improved. So we now work with new systems, for example, with the delivery of spare parts. So we can control inflation well, much better than any other system. Now this being said, today, the average cost of the MV at the end of September, it is up by 2% versus the previous year. So the phase is phenomenon as Matteo said that this is not a temporary one. We have also implemented tariff changes. The last one, November 1st. Of course, I don't have the results, but this is quite significant. This means that the MV results it should be once again in line with our targets. As for the non-MV, the framework is quite special. So we need a longer comment in terms of growth. Now other dynamic is there. Let's start from UnipolSai, the non-MV premium increases is a little bit more than 5% number of policies in our portfolio is flat. So on the macro level, I have to say it is a so-called price effect only. There's another significant phenomenon on the premium, let's say, adjustments of the general insurers in 2021. There's been a huge increase of company's turnover, which translates today in more so-called regulations or adjustments. Then property prices are changing in terms of increasing rates, especially for new policies or the renewal of the largest corporate policies, plus the indexation effect. I mean, there's an automatic increase or even a non-automatic one of the amount insured and the premium. Most of these benefits shouldn't be temporary on the quarter result. On the health, we have an important growth, which is more than 12%, let's say, a little bit more than 50% is the increase of the number of insured including companies and retail. A little bit less than 50% is the price increase, which is the improvement of margins. This is also due to the renegotiation of some large contracts we had at the last -- at the end of last year. There's another key driver of bancassurance. So here, we have Arca and Incontra. So this is basically the increase of number of policies or risks, but I mean very profitable risks. Bancassurance with the retail non-MV production produces very high technical results. I hope I've given you, hopefully, the flavor of the general framework. We think we can continue on what we have done. This is the right way to reach the objectives we have in the plan.

[Interpreted] Next question is from the conference in English from Peter Eliot, Kepler Cheuvreux.

3 questions from me, please. The first one is I noted that you were moving towards shorter-duration bonds. Just wondering if you could clarify what impact that has had on your solvency ratio and also on your sensitivity of your solvency ratio? Second question, I'm hoping you can give us the amount of reserve releases in the quarter. And I'd be interested actually in your view as to why you don't include these within the morning release because for me, it seems like quite a material number to understanding the underlying combined ratio. Yes, I'd be interested in your comments there. And then finally, one of your competitors yesterday reported some large reserve releases in the Italian Life business due to the higher interest rates. You don't seem to have been reporting the same thing. I'm just wondering, is there -- might we get anything like that?

[Interpreted] Thank you so much. As for the bond portfolio, our duration is matched with the duration of liabilities. So the duration of bonds went down just because of the way of calculation, the mode of calculation, if rates go up and the duration goes down. Not because we carried out special operations because when you calculate the duration, the level of interest rate is inversely proportional to the calculation of the modified duration. Now just to give you a flavor of the sensitivity, which is one of your questions, I can now share with you an idea that has to do with the actual variation of solvency throughout the quarter. Now the spread between Italian BTP and German Bund became bigger of basically 50 basis points in the quarter. Now what happened as [indiscernible] is the following. The market effect -- so the total overall market effect on the Unipol Gruppo's solvency was negative minus 5%. If you consider that 5% that we had 3 positive points due to the increase of interest rates, the swap rate went up, and this impacted positively on our solvency, which is what we saw many times in terms of sensitivity. Now the 3 positive points have been more than offset by 3 negative points due to the increase of the Italian government spread levels. So 52 bps we lost the 3 points because of the Italian government exposure. 3 more points, this is what we lost because the credit spread became bigger, again, throughout the quarter. And 2 points due to the reduction of the values of the shares or equity markets. So the total is minus 5 or 5 negative points. There was a positive contribution, 3 points, thanks to the year profit. But as I've said before, we've been very cautious. So we have recalibrated the claim best estimates because the effect of the inflation and the contribution of this move is 4 points, as I said before. Now in general, this explains, I mean, the change of solvency throughout the quarter and gives you, in my opinion, an actual flavor of the sensitivity of our portfolio based on real data. So this is not an estimate on the real variations on the market experienced in the quarter. And I have to say these changes have been quite fixed. As for the provisions or reserves released now in general, again, throughout 9 months, we have released the reserves for less than EUR 500 million. This is the overall figure. I mean, EUR 180 million on MV, the rest on the non-MV business. So we keep having savings on the stock-hold reserves, both MV and non-MV, which are quite high. And this means that we've been very, very cautious, and this is what we have implemented in our reserve policies. We usually communicate the total reserve release at the end of the year because it is at the end of the year, but we can count on a specific assessment as a very precise evaluation of the reserve release situation. So this is our general policy, I mean, in terms of communication. Now you -- the way I'm mentioning a competitor, so of course, I don't know the name of this comparison. I mean I do not understand it. I mean the relationship between interest rate hike and reserve release. Anyway, we maintain our reserve policy, which is very, very cautious again. And I'm now going back to the metaphor that our CEO used at the insurance forum some days ago on the 3 pigs fairytale. One has a house made of hay, the other one in wood, the third one in bricks. So we decided to be the one where the house made with bricks. This means reserve policies which are really, really very prudent. So cautious in terms of balance sheet, but also in terms of solvency.

[Interpreted] Next question is from the original language conference from Andrea Lisi from Equita.

[Interpreted] I have 3 questions. Can I have an update from you on the investment yield considering the Life and Non-Life business? Can I also have an update on the renewal of the bancassurance agreement with Sondrio? When should we expect that?

[Interpreted] Now as for the reinvestment yield, so how much we reinvest cash flows, if I understood correctly. Now on the well Life business, but also on the Non-Life business, we managed to invest at let's say, reasonable rates versus those we found exactly 1 year ago. So in terms of Non-Life, it's between 2.5% and 3%. On the Life we have around 3.5%, maybe 4%. Now again, it goes without saying that our portfolio has the duration that you have seen. Now overall, the securities come into maturity within this year are worth EUR 3 billion, a little bit less than EUR 3 billion, actually. And before the reinvestment rates impact reflecting structural rates of the whole portfolio, sometime is required. So hopefully, interest rates will stay as such for quite a while. So we have enough time to build the portfolio with better profitability than the one we had before, which is, by the way, very high. The one -- the profitability of our Life and Non-Life portfolio now has quite a high rate. As for your second question, so we do have this agreement with Banca Popolare Emilia Romagna and Banca di Sondrio. We are right at the very end of the discussions for the renewal of this agreement and the agreement has come to, let's say, maturity. So the deadline is once again at the end of the year, but we do trust that we profit that we will be able to renew this agreement within the same schedule.

[Interpreted] Next question is from the conference in English from Sudarshan Bhutra from Societe Generale.

This is Sudarshan here from Societe Generale. My first question is around the Motor business. Can you please provide some color on the frequency trends, the motor frequency trend, because there were some comments that there is -- there has been a decline in frequency in the recent weeks? So any color on that would be very helpful. Again, second question, which is also on motor business. So looking at Q3 standalone motor premiums, they were up just 0.6%. So I mean, can you just give some color on how the pricing is developing and what this means for the margin? And my third question is on the Life business. On the experience around lapses and surrenders, how has that been and I mean, are you -- is there any sort of concern around that?

[Interpreted] Okay. Let me now answer the question on Life and then Enrico will be answering on the MV part. Our Life portfolio right now is concentrated or focused on the retail customers because basically sort of broken down fragmented. And we do not see any significant impacts in terms of repayments. And just to give an idea on figures or the general dynamics. In the first 9 months of 2021, we have had around EUR 1.4 billion repayments on Unipol side against the EUR 1.3 billion more or less in 2021. The change is EUR 100 million. The total reserves are around EUR 26 billion on Unipol side. As for Arca, this is even smaller, only EUR 300 million versus EUR 230 million in 2021. So despite of the hike of interest rates, so that maybe encourage the repayments increase phenomenon in order to go to other investment types once again, for the time being, we are not seeing this. There is no increase of repayments that's alarming for us, not at all. And so the MV question, the floor is now to Enrico.

[Interpreted] Thank you. So you had a question on the frequency. Now as for the frequency, I have to say it's going quite well. Now of course, we have just, let's say, experienced a couple of very wheels unique years. So you know that the frequency is always compared to the last normal year that was, of course, the 2019, but also -- I mean, we also make a comparison with 2021. So as compared to 2021, what we see is an increase of the frequency, well, especially originated in the very first part of the year because the first part of 2021 was sole characterized by major restrictions due to COVID. Now if we compare this with the normal, if you will, frequency of 2019, well, we can see that we are still significantly below. And this is a positive result. And this is due, in our opinion, on the one side to the composition of the portfolio because this is more and more stable. The retention and renewal rates went up so much and much more than before. Now this has strengthened our portfolio has technical evolution is much better. So the composition is better. There's also another positive effect. And by the way, this is what you can see by measuring the mileage of the vehicles of our black box customers. Now, there's been a reduction of mileage. And once again, we see single digit, but it's quite important anyway. And well, of course, this also depends we think, on the cost of fuel, which is very high. And in general, this is also due to the general overall economic situation. So once again, back to frequency, the frequency situation, so to say, is quite good today. Now as for the premiums, now I have to say that actually, as of today and as of the average premium, well, basically, this is flat. So the average premium is flat. It's not changing. But we do have a composition effect. And we also mentioned 3 months ago, when you apply tariff increases, which is what we started doing in Spain, those increases are very much customized. I mean it depends on the profile. This is much higher on the lower margin customers. So these customers renew a little bit less than the others. So these customers have a higher average premiums versus the average of the portfolio. So as a consequence, the average premium is reduced. Now this being said, we keep working so as to hike the average premium. And in particular, as I said, one second to go to Gian Luca Ferrari, we have just increased tariffs. I mean, we started, I mean, just some days ago, significantly from November 1st. So we think that in the next months also, this will generate an increase of the average premium, which is absolutely necessary to keep having a positive margin level.

[Interpreted] We now have Elena Perini from Intesa Sanpaolo, the regional conference.

[Interpreted] Now I have 3 questions. The first one is on the Life business to really understand what the profitability level that you consider as of today because you talked about a major impact in terms of realizations and valuations for Q3. So can you give us some color on the recurring profitability level considering the coverage rate increase, which has a positive effect of the financial profitability? As for bancassurance, so you talked about the renewal of the agreement with Sondrio and BPER, Banca Popolare dell'Emilia Romagna. Now the JV Incontra probably will be probably dismissed. It's true. I mean, can you give us, I mean, some color on this possibility? And if there's no renewal, what would the impact be on your accounts? Last but not least, an update, if at all possible, on UnipolMove. I'd like to know how many devices are there? And what the offer is which you are putting forward right now? And then have you already started selling additional strategies?

[Interpreted] Okay. Let me start from the Life business question. Now we have in a very -- in a specific slide, we have presented the financial margin that we retain withhold on the overall financial income of Life policies, which is around 94 basis points. We also have other items so-called called technical profits. And as for the time being, the ordinary profitability range of the Life business is between EUR 200 million and EUR 250 million. So this is the common level. Interest rates are going up. And then while they go up, the additional components will go to the insured and less and less of the company. Of course, we have to reach, I mean, the minimum level over that level, the yield, that will goes to the customer, not for the company. So there's not a perfect balance between increasing the reduction of rates because an increased rates would then bring them out some benefits in terms of profitability, but not much than there's -- I mean, maybe not really higher than the one we have now. As for bancassurance, we do have an industrial plan to 2024. So we haven't taken into account the renewal of the JV with Incontra. Now this JV won't be renewed. Once again, this has no impact whatsoever on our accounts because we have already considered this on the KPIs that we have shared back in May on the industrial plan. Now as for uniform move, we now have more than 350,000 devices. Now of course, I'm not talking about the service component, which is so important for us. And -- this creates, I mean, a flow of customers in our offices, in our ages. And so methodical we signed the Unipol move contract, but we can also do something more with those customers, especially in terms of insurance. I'm not talking about a product that at full speed at the very beginning, first 6 months are free of charge, then a customer pay EUR 1 amount. But this basically is a problem that gives us EUR 12 a year. So there is no significant impact on the turnover or the revenue from Unipol move. But it's a service component, which is so important because it's really able I mean to, let's say, integrate services in the mobility ecosystem. And this means the agents that have the possibility to do cross or upselling from the insurance point of view, which is what's happening actually with quite encouraging results.

[Interpreted] The next question is from the conference in English from Michael Huttner from Berenberg.

And lovely results as usual. A lot of questions, but they may be have been answered. I'm not quite sure. So I think at some stage, I can't remember when you talked about the settlement ratio on claims, the actual claims paid versus what you'd originally reserved. And I have in memory, and I'm probably wrong figure 45%. So I'm just wondering if you can update us if that's a relevant figure. And the second is, I noticed in Arca, there was a slowdown. Now extremely high level, so I'm not being critical, just to understand. So the 6 months, 48% growth and for Q3 as a standalone because the average dropped to 38% in 9-month and standalone Q3 is 22%. So I'm just wondering what's happening there? I was expecting more because I think the [indiscernible] network is coming on-stream. So just to give a few for it. Then the black boxes, I heard the question on UnipolMove, and I'm not sure if my question is redundant. But I think you had from memory, 40% black boxes in your system. And I can't remember the precise number is at EUR 1.6 million or something. Maybe you can update us on that and whether if rates are rising, people will try to save money by going to back boxes as of now. And then the final question. I know you did say motor sign is on track. But the difference between the non-motor combined ratio now, I think, 98% or to some the 99% and your target, which is around 93%, it seem so large. I just wonder if you can reassure this more, maybe give us a little bit more color.

[Interpreted] Well, thank you so much. Now as for the reserve payment of the previous years, let me rephrase what I said before. Now we are saving money versus what we have reserved in terms of the settlement, so the payment of claims referring to the previous years. Now this is exactly 45%. So if we have the total reserves, which is EUR 100 million, for example, we now save 45% versus what we had reserved. Now again, the remaining part is something you don't see in the financial statement, but then we sort of reopen claims, and we reassess claims of the claims that we still have in the portfolio, and this is quite a significant level. If you could see that I mean all of the balance, the component put in the financial statement is around EUR 150 million. This is a UnipolSai. We also have Linear. In this case, we have another component. I mean other releases. So 150 plus 30, which is linear. And then we have the MD business from Arca, the total is exactly EUR 180 million, which I have mentioned before. So in a nutshell, this is the breakdown of the ratio situation on the MV. Now as for Arca, you're right, there's a slowdown. Arca sales investment products, basically hybrid products. You have the so-called the first level, but also third level component. So it's hybrid. In Q3, there's been a major drop of financial markets, especially equity markets. So you're right, there's been a slowdown in terms of production or income. As I said before, this concerns as in the whole market, which is going down. The recent months have been characterized heavily by, I mean, the worst growth rate in terms of income or production, as we see in the Life business for many years. In this case, the impact is due to financial markets. As for BBs or the black boxes, we have 4 million black boxes installed -- there's no growth. I mean now we have reached a very high level of saturation. Most of black boxes are sold in Southern Italy. In that case, the penetration level is really very high. Now as for your last question, let me give the floor to Enrico -- so on the MV question. So the, let's say, difference between non-motor and target -- and Enrico?

[Interpreted] Okay. So the target in the plan and the combined ratio, okay. Yes, both, I would say. Okay. So once again, if I understand correctly, the question concerns the differences between the objectives you can see in the plan on the one side and on the other side, the current combined ratios in the MV, but also the non-MV business. Now as for the non-MV business target, and if you compare this with what you can see in the plan, well, basically, the target has already been reached because we now have 85% combined ratio. The target was 85.9%. So here we are. And we also have plenty of time to further improve, I mean this ratio. So I should say that this number, so this part as of today is highly advanced, if you will. On the MV, so on the motor business, the effect of the inflation on the average cost as of today has generated a result, which is, of course, not yet the one we have in the plan. Because the one we have the plan includes many different benefits or advantages, if you will, depending on the implementation of some specific actions not just in terms of pricing. But what is also very important is the settlement. So we would try to reduce the cost of claims with injuries. And we also would like our network to work more and better. So reaching the targets you can see in the plan is feasible, viable today. Of course, we have to do something, we have to intervene, especially on pricing a little bit more than we thought just some months ago. As I said before, this is what we are doing. We did it in May, and then we did it again in November, where we probably we will do it again in order to do all what it takes to hit the targets.

[Interpreted] [Operator Instructions] Next question is from the English conference received from Michael Huttner, Berenberg.

So I understand UnipolReC has been sold for EUR 300 million. So you'll get cash for this. What would you do with the cash? That's my question.

[Interpreted] You're right. I mean the cash will be our pocket at the very beginning of December, so in a few weeks. Now figures on the 30th of September already incorporated a small capital loss of EUR 30 million before tax. This is due to the sale of the credit portfolio of UnipolReC. So the capital loss is already included. The cash will be invested in securities and of course, we will use it to improve the net financial position of the holding company, considering the liabilities, the financial liabilities that they hold the company now has. So there will be -- if you win an improvement, but around EUR 300 million. This is something you already knew because the operation was announced in June, back in June. Once again, the reinvestment will be done in securities. There are no special operations we would like to do with that money. Mr. Laterza, ladies and gentlemen, questions are over. Thank you. Thank you so much for participating. See you in the month of February 2023 to comment the financial statements results. Thank you so much enjoy the rest of the day. Good bye.

[Interpreted] This is the Chorus Call operator, conference is over. You can disconnect your phone. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]