Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group first half 2022 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agency Relations. Please go ahead.
Good morning, everyone, and welcome to our conference call for the first half 2022 financial results. The call will be hosted by the Group CEO, Philippe Donnet, and the Group CFO, Cristiano Borean. Before opening the Q&A session, let me hand it over to Mr. Donnet for some opening remarks. Philippe, the line is yours.
Thank you, Fabio, and thanks to all of you for joining to this call. Earlier this morning, Generali published its financial results for the first half of 2022. Even in a challenging scenario characterized by the war in Ukraine and the dramatic human consequences, rising inflation, higher interest rates, and recession concerns, our group was able to further confirm its strength, solidity, and resilience. This was also thanks to a set of measures that we promptly adopted, including adjusting our pricing policy to be as effective as possible in this environment. I would now like to underline four key highlights that emerged during the first six months of this year. First, our gross written premiums grew to EUR 41.9 billion, a 2.4% increase compared to the first half of 2021 on a like-for-like basis.
In particular, property and casualty premiums posted strong growth of 8.5%. I would like to underline that non-motor premium, a key focus of our Lifetime Partner 2024 strategy, grew by 10.7%. Let me remind you that at our Investor Day in December of last year, we set a target to grow them by 4%, a year, average a year over the three years of the plan. We are already witnessing the strong development of this key pillar of our profitable growth strategy right from the start. Our life net inflows were resilient at EUR 6.2 billion, in line with the strategic portfolio repositioning towards protection, up by 7% and unit-linked, which grew by 2.1%. This shows the effectiveness of our distribution network.
Moreover, the trend in traditional savings net inflows reflects targeted enforcement management activities aimed at further improving our profitability. Second, our operating results rose to over EUR 3.1 billion, up by 4.8% from the first six months of 2021, thanks to the broad-based underlying positive performance of all our business lines. I'm also pleased by the material contribution from Cattolica to our operating results, which was nearly EUR 140 million. Following the squeeze-out process, we will be able to accelerate even further the integration of Cattolica into our group. The life new business margin grew to an impressive 5.23%, while the combined ratio at 92.5% was solid as well. Third, our net results stood at EUR 1.4 billion.
Without the impairments related to Russian investments, we would have posted a stable net result of EUR 1.64 billion. Finally, we confirmed our extremely solid capital position with a solvency ratio of 233% compared to 227% at year-end 2021, underlining the resilience of our business. The 233% solvency ratio already reflects the impact of the announced EUR 500 million share buyback program that will be implemented starting from tomorrow. Our strong capital position, the healthy operating profitability, and the proactive actions put in place to manage the macroeconomic scenario, especially on the pricing front, make me very confident in our ability to achieve all the targets of our Lifetime Partner 24 driving growth plan.
I look forward to continuing with all our people to make Generali an even stronger and more sustainable global insurance and asset management group. Before we open our Q&A, please let me remind you of our virtual in vestor update that will be held on 13th December this year. Thank you once again for your continued interest in our group, and we are now happy to answer any question you may have. Thank you.
Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from David Barma with BNP Paribas Exane. Please go ahead.
Hello, and thank you for taking my questions. The first one is on life and on lapse rates. Industry data shows that lapse rates are starting to rise in recent months. What are you seeing in your portfolio, especially in France and in Italy? Secondly, a small thing on life. The profit-sharing rate and the life investment results seems quite low in H1. Can you explain what's driving that, please? Secondly, on P&C, can you give us an update on the kind of claim inflation rate you're seeing in your main P&C units at the moment, and how comfortable you are in being able to reflect those via price adjustments? Thank you.
Thank you, David. I would kindly ask Philippe to take the first question and, Cristiano to continue with, the second and third question.
Yes. Hello, David. So far we do not experience any significant increase in the lapse rates. As you know, we have strong proprietary distribution especially in Italy and Germany, which allow us to have great monitoring of our portfolio, of our customers. It's always a bit more challenging in France, as you know, because of the nature of the distribution channel. I would say so far so good. Maybe Cristiano can confirm with some numbers. Definitely, so far we do not see any significant increase in life lapse rates.
Yes, Philippe. I can elaborate, especially regarding David's question on France. Compared to the first half of 2021, lapse rate decreased in the saving line and did not increase. This is just to tell you that, on average, in France we have lower lapse rate by the first half of 2021, and this is as well consistent with the product strategy that we are pursuing. If you want, I go on explaining the profit-sharing rate that seems low due to the fact that there are three key driver. Don't forget that these profit sharing are driven by the rule plus the integration of some reserves.
First of all, I would like to recall you that compared to last year, due to the announced change in the reserving amount in Switzerland, we had a lower amount reserved. As well, we had also a lower ZZR gains for the German part, which was transferred one-to-one to liabilities. As well, in Germany, since we stopped the commercialization of the so-called Riester products, which has an important element of commission, this commission, which are part of the risk result, the risk result has a lower profit sharing amount compared to the average investment component. All these pulled together are bringing to this effect.
How much did you reserve for Switzerland in H1?
Almost CHF 100 million. This is the average. We confirm that the average amount to be reserved in the year was twice of it. Still today, having higher rates, we could have been lower, but we are keeping a prudent stance due to the market volatility. Okay.
David, you also had a question on P&C claims inflation, right?
Yes. Thank you.
Yes. Let's go on to the observed inflation seen in the different units. What we are observing, especially if we look at the evolution in the different countries, we should say that the claims severity are increasing in some countries by something in between 5%-10%, depending on the lines. More in France and Germany on the motor, other damages, while in the Motor TPL, the claims inflation is a little bit lower. Looking at the motor overall, I think that the country which shows the higher growth of inflation apart is Germany, which is coupled with competitive market.
For what regards the other countries, we do experience a little bit of increase in France and almost a flattish effect in Italy. What is important to know is that Italy was benefiting from a first quarter of a lower effect. If I just look in isolation in the second quarter, we are getting to a kind of high single digit increase in inflation. This is consistent with the trend that we are observing.
Next question, please.
The next question is from Andrew Baker with Goldman Sachs. Please go ahead.
Good afternoon, everyone. Three for me, please. Firstly, just on PYD, a little bit lower in H1 than we've maybe seen over the last few years. Really wondering is that just driven by caution on inflation or anything to be aware of here, and what should we expect for the rest of the year? Secondly, on investment income. Good to see the figures going higher, but how much of an impact are you seeing on pricing as investment income goes higher? Are you seeing any markets where the higher investment income is leading to upward pressure on combined ratios from more competition on the underwriting side?
Thirdly, just if you can break down the P&C premium growth into what was pricing versus what was exposure growth in H1. Thanks.
Thank you. Cristiano, they are for you.
Yes, Andrew, for what regards the prior year development outlook, in general, what happened in the first half, we need to split into two components. One component is something that maybe we have to talk a little bit, which is the Argentina hyperinflationary effect, which is basically allowing in the representation we decided to present, which is the most conservative one, an effect which is practically reducing the prior year development benefit because of the inflation effect.
Out of this, which is accounting for 0.2- 0.3 percentage point reduction compared to the average normalized level, we observe a little bit of lower reduction both in Germany, Central Eastern Europe, also because of some specific portfolio like in Poland, which we are restructuring, and as well, because of some prudent stance that we are taking in this uncertain environment, due to the fact that, we do think that inflation is not far from the peak, but for sure, we experienced the first six months, which was a little bit uncertain. Now looking at five-year-in-five-year inflation rate, you see that the market is pricing it down and behavior could be different going forward.
The second question related to the investment income, is it bringing pressure on pricing in some countries? Operating in almost 60 countries in the world, the pressure is not so big in the European countries because it is more an inflation-driven development. We see an increase in rates in the Central and Eastern European countries, but that is positively adding on the investment result while being kept under control through pricing in the inflation part. Outside Europe, for sure there are countries which are more managing the combined ratio as an overall combination between technical and investment.
For example, recently we consolidated India in our books, and that is a typical country which has an average combined ratio around 100, and where the catch-up and the investment result is bringing the positive contribution in the P&C. The third question related to the P&C premium growth, the pricing and exposure. I would say that in motor it is all pricing driven, and in non-motor it is driven partially because of a very important effect we have in our reserves. I would like to remind you that we have close to, let's say 50% in the non-motor component of indexation of our policies.
Just to be aware that the retail component in a motor is two-thirds in, with indexation. The small medium enterprise, half of it is with indexation and basically one-third the accident has. This is helping in bringing up. On top of that, there is the commercial push that Philippe was mentioning, which was seen in all the lines, including Europ Assistance, which is growing at a very fast pace, 74%, half year over half year because of some important contracts they won in the travel space, especially with Expedia and Airbnb, which are bringing a lot of profitable business into the books.
Next question, please.
The next question is from Peter Eliot with Kepler Cheuvreux. Please go ahead.
Many thanks. First, just a couple of quick follow-ups first of all. On the non-life underwriting outlook, and I guess if I look at specifically Italian motor, you're talking about premiums being up only 0.7%. So I was wondering if you could comment sort of specifically there on the outlook. In the life result, just wondering if you would point to anything sort of being particularly unsustainable in the strong technical result that we've seen or whether you think that is can continue. Finally, you've guided before to the private equity contribution, you know, likely being sort of around last year's level, less the EUR 100 billion of one-offs.
Appreciate, you know, quarterly volatility is always gonna be there, but just wondering if you could update us on your current view on the outlook there. Thank you very much.
Thank you, Peter. Cristiano, they are all for you.
Okay. Peter, first of all, good morning. Regarding the Italian underwriting outlook, the Italian motor outlook in the last quarter, what is important is that we observed a decrease of the decrease, so the second derivative is changing, so the trend is tipping the low inflection point on the average premium we are seeing in our motor portfolio. Which means that the tariff increase which were already injected, and as we already said, that will be further injected in another wave going forward, are starting to catch up. The underwriting outlook, you should expect average premium to have a little bit of growth.
If we take the motor overall, including the motor average damages, we are also growing in this kind of line. Please be aware that the market in Italy is always competitive, but frequency stays below pre-COVID level. This is still helping to limit the combined ratio increase. What is important is that the tariff injection is allowing also to have coverage going forward. On the second question related to the life segment, can the technical result continue at this pace? In the first half, we had a joint effect of positive technical result, which was counterbalanced by a countereffect in the investment results.
Which is basically allowing a kind of profit sharing on some mortality risk that we had in France. Which is overall showing, when I look line by line, a slightly higher technical result in the first half and a slightly lower investment result. My guidance is that going forward, you should get a little bit higher investment result in the second half of the year, stemming from this. As well as the technical not growing at this pace, but still growing because of what I also was saying, the technical result will be supported by the stop of the Riester product, say in Germany, which were improving now the risk result, hence the technical. Our collection of unit-linked is continuing, which is supporting the technical result. The third question on private equity contribution.
On the first half of 2022, you observed that we did not repeat the unicorn investment we got in the first half of 2021, which was basically impacting EUR 100 million benefit last year, which is not repeatable. Looking forward in the 2022 space, private equity is on a fair value basis still extremely resilient. There are some changes related to the market valuation in some lines, but still we have an overall positive growth on the total return. Which is not necessarily reflecting in the accounting, because as you know, we account as of today, starting from this year will be different the private equity result when it is closed by the private equity fund manager.
What we are seeing is that notwithstanding the fact that the lines we are investing in are sufficiently well diversified and insulated from, we are far away from investing in leveraged buyout stuff. We are very much into the health and in very well diversified, including Asian investment, which are supporting. What is happening is that we are seeing potentially a slowdown from the private equity fund manager in realizing the capital gain and eventually wait for lower market volatility to realize them to try to maximize the full final value. This is just a matter of time delay. This could have some from the accounting perspective some shift.
As I was saying you, looking at the guidance I gave in Life segment, coupled with the huge increase in the non-motor net earned premium, which will grow progressively. Because today we account for gross written premium, but we need to see the net earned premium growth. You will have further contribution. Don't forget, as I said before, that next year, private equity will be accounted on a fair value basis. Hence, all these value accretive investment will change according to the fund manager evaluation and the booked value.
Next question, please.
The next question is from Farooq Hanif with JP Morgan. Please go ahead.
Hi, everybody. Thanks very much. Just returning first to P&C. When we look at your 2Q current year loss ratio, there was a big deterioration. Could you explain what the drivers were? Whether, for example, that was Argentina related? More broadly, you seem to be talking about a picture of, you know, claims inflation picking up in each of your countries in motor, and pricing is starting to respond, but possibly not exceeding it. If we exclude Argentina, you're still quite close to your 92% combined ratio. Could you just reiterate your confidence in that target, and what you can do to get there and maintain it if things go wrong? Could you also just two more things, sorry.
Could you also give us the benefit that you see of COVID in motor claim frequency in the combined ratio? Lastly, could you just tell us what the PE contribution was in your current return in life and the non-life? Thank you.
Thank you, Farooq. Cristiano, I think they are all for you. Just to sum up, it's one question on current year loss ratio and the dynamics, and whether there were COVID benefits in P&C and the contribution of private equity on life versus P&C. Is that correct, Farooq?
Yes, that's correct. Thank you so much for coming on.
Thank you. Thank you.
Okay. Good morning, Farooq. Commenting, the second quarter combined ratio that you've seen is 94.5%. I would not take this as a guidance for the rest of the year. This was particularly influenced also by the natural catastrophe impact, and also by some effects, which is a time effect. When you look in such a small timeframe, one quarter, the difference between the manifestation in the claims of the increase in some lines I was commenting before, versus the time needed to have the net earned premium accruing into the book, you have this time delay. Hence, the 94.5% guidance is overestimating the long term combined ratio level.
We are sticking more, looking at the data that I'm daily checking, going to a level which is consistent with the amount of 92% net of the Argentina effect, which is a little bit slightly out of our control due to the effect of hyperinflation, which could trigger this tricky effect. Another thing you have to take into account, please don't forget that the 0.3 percentage point of expense ratio are up, simply because we are consolidating Cattolica. Cattolica has more than a double expense ratio, administrative expense ratio compared to the group and compared to Italy. Which means that when we will complete the integration, this will go down, which is exactly consistent with the value creation of the synergy we were always telling you. Please look at this in that perspective.
Claims inflation and picking up confidence in reaching the target is what I think I was commenting to you. Don't forget that a driver also helping this is the growth higher than the target expected in the non-motor component. A non-motor component so far has had a lower impact from inflation and has a higher stickiness in the behavior of the client also according to the renewal strategy, and as well can bring a little bit higher natural catastrophe exposure. But don't forget that our coverage is the most protective within all the peers. The COVID benefit related to the first half 2022 are extremely limited.
I would like more to recall the COVID benefit that we had last year in the first half 2021, where our 89.7% reported combined ratio would have been 91.2%. I recall that last year, the first half, especially the first quarter for Germany, was the lowest ever recorded due to a huge and massive lockdown. Putting all this together, we should get to a minor effect related to the COVID part. Notwithstanding the fact that more than COVID could help what some countries are deciding or making according to the increased cost of fuel.
For example, please notice that starting from Germany, they created a EUR 9 per month ticket, train and circulation, which people are using in a visible way, as well as in France, things are now starting. This is a more material effect, which is still keeping frequency below the pre-COVID level. Going to the fourth question.
Cristiano.
Yes.
Yes. I would like to add a few comments on this. There is an echo coming from the rooms. Yes, I would like to add a few comments to confirm our confidence in keeping the combined ratio under control. I confirm what Cristiano said about the frequency, that the motor frequency is not back to the level we had before the COVID. I think that for many reasons, that the change in the behaviors of the people because of the price of the oil, the frequency will not come back to the pre-COVID level.
On top of the repricing decision we are going to take in the property-casualty business, there are also some other decisions we are already implementing. We are intensifying the portfolio pruning. This is really important. We are intensifying the underwriting discipline. On top of it, we are also giving even more attention to claims management, because also in claims management there are some points of combined ratio to get. This is something that we know quite well. We are already implementing all these technical decisions, and with the strong grip we have on our distribution, we can get the benefit from the decision.
This makes us quite confident in our ability to in the long run to control our combined ratio and to keep it in the good zone, I would say. Sorry to interrupt you, Cristiano.
No, no. Thank you, Philippe. You just highlighted what our daily job is, to bring the machine working. I complete the fourth question on private equity, Farooq. Just to be sure, you are requesting the accounting contribution of private equity in Life and P&C. You know that we have the two visions of that. We are giving also you in the backup. I give you both so that you have all the elements and you have full clarity. The total contribution of Lion Re in the accounting figures that we present is EUR 26 million in Life, EUR 72 million in P&C, EUR 30 million in asset and wealth management.
For what regards the pro forma, as if we have EUR 46 million in Life, the EUR 50 million in P&C, EUR 74 million in asset and wealth management. That, I think, is clarifying the two dimension you're looking at. Next year, finally, we will have IFRS 9 with full allocation at fair value and no more double rate.
Next question, please.
The next question is from Michael Huttner with Berenberg. Please go ahead.
Thank you very much. Please, given as you said, Philippe, given Generali's amazing results, I had three questions. First one is on cash flow and cash at holding. I know it's not in the presentation, and I know it's not normally something you speak of, but given the strength and solvency, maybe you can say a few words. I remember the figure of EUR 4.1 billion in December, and you reiterated your cash remittance guidance, which I think is over EUR 8.5 billion or something for the three years. So I just wondered maybe you can give us a feel for the figure now. I was thinking maybe EUR 3.3 billion and the figure in December. The second is on Cattolica.
Philippe, you said it was interesting, you said, oh, Cattolica might, well, that's my interpretation, get better, and EUR 140 million is figure in half year, and I just wondered how quickly it could get better. I remember the figure of EUR 80 million improvement, but maybe there's already something which could happen now that you're close to the squeeze-out stage. My third question is very simply on the motor coming back. I'm sorry. It's the efficiency of your IR. I understand motor, so you published a figure 97.4 in the half year combined ratio. Last year, as I understand, it was 88%, so it's a nine-point deterioration. Both Cristiano and Philippe, you both mentioned that, you know, this will normalize.
My fear is that it'll normalize, but it'll go to 100 before it normalizes. What can you say to kind of against that? Thank you.
Thank you very much, Michael. If okay, Philippe, you take the question on Cattolica, that then Cristiano integrates, and Cristiano takes the question on the holding cash flow and the motor business combined ratio in addition to what we already said so far.
Hello, Michael. Thank you for your comment. No, definitely on Cattolica, we said we are talking about at least EUR 80 million of synergies run rate. We said at least EUR 80 million. The good news is that the run rate will be achieved sooner than expected because definitely the path we are implementing now with the squeeze-out that will be completed in the next two weeks, and the delisting of the company will definitely accelerate the integration process of Cattolica compared to the merger which were requiring shareholders meetings and so on.
This is a good news. At least EUR 80 million of synergies with, and we will get the benefit of them sooner than expected.
Thank you.
First of all, good morning, Michael.
Hello.
I integrate the number on the half year result from Cattolica so that you have the full picture. The operating result contribution from Cattolica was EUR 138 million, EUR 41 million in life segment, and EUR 96 million in the P&C segment for an overall contribution to group result of EUR 60 million in the half year result. For what regards the first question, Michael, I always recall you that you should not account one to one every single euro we have in the holding because there are money which are already reserved.
For example, for the buyback which we start tomorrow, for example, for the repayment of debt, and also to close some upcoming M&A deals still not closed, like Malaysia, which we hope soon that will be announced. In reality, I start from the end, and then I mount it back. At the end, you should imagine that by the end of this year, after having implemented the buyback and after having done the M&A payment for Malaysia, we will end up with the free cash to be used for capital deployment in the holding of EUR 700 - 750 million. Yes, now we are starting with a much higher level, which is above the 1 December .
Let's say not EUR 4.9 billion, but you don't forget that there is EUR 1 billion buffer, some couple of billion of operating treasury, which is just temporarily there to be managed by the company. You have to strip all these numbers out and take what is then really left. The most important number in my answer is this one. There was another question on the motor business deterioration. Will it go to 100%? There are some countries which were suffering on this. We had minor countries affected. For example, this was happening in Poland, but there is a pricing strengthening. Overall broad geographies pricing strengthening will start kicking in.
So far, we are going to see more benefit from the rate action, the one already done. Recall that there will be other rounds of rate action which are going to pump up in order to control the combined ratio. Don't forget that also the increase not only of this has to take some time, because one thing is the gross written premium, and one thing is the net earned premium. We need time to flow the benefit of the tariff increase through to the earned premiums versus the ones which are written.
Next question, please.
Thank you.
The next question is from Andrew Ritchie with Autonomous. Please go ahead.
Oh, hi there. Just a couple of clarifications. On the non-motor growth, I think you mentioned, Cristiano, that a lot of that is related to indexation. Is it all or how much of that growth is just indexation effect? I'm assuming just to clarify, most of that is then property related, so it's a natural indexation. If you just clarify that, and I guess that's the reason why you would feel the sort of 90% combined that you're running at in non-motor is defendable because there's a sort of natural protection from severity. If you just clarified those aspects on non-motor, that would be useful. Secondly, just remind us of your catastrophe cover protection for the rest of the year.
Given that you are running sort of above budget, I suppose, or above long term for the half year, I presume you're closer to attaching sort of aggregate protection. Could you just remind us on that. The final question. Your current yield in fixed income, just fixed income, has improved 20 basis points annualized. I'm just a bit surprised because the reinvestment yield is not above the fixed income in force yield, and you spent a long time extending duration, so I'm surprised it's showing the benefit as quickly as it is. Can you just explain why that is? Thanks.
Thank you, Andrew. They are all for you, Cristiano.
Yes. Indexation. Thanks for the question because this allows me also to tell that there are even countries where motor has indexation and for example in Austria 85% of our portfolio almost has indexation. This is telling why we are also confident to manage it, this. Regarding the non-motor part, yes, for sure I could say that on average something which is closer to 50%-60% of the portfolio has indexation. Indexation is linked to the published inflation rate, which is helping to cover. On top of this, the piece which has not indexation, and in some cases also the one which indexation according to some pricing policy could has received by some increase.
For example, we did something like this in Italy on the non-motor, which is allowing also to foster the growth. The reality is that this is exactly getting to the point of having a resilient combined ratio in the non-motor, and that's why I was telling you that the importance of the growth in this segment is relevant according to sustainability in this environment. Regarding the cat protection of this year, we just for your info, we moved due to the market dynamic and as well to the capacity in our portfolio to have a small increase in the retention level for our cat aggregate protection. We move it from EUR 500- 600 million.
Having said that, about 50% of the aggregate reinsurance has been utilized at half year, so EUR 300 million. We have room to have a further cover and protection. This is, by the way, one of the strength if I look at the Generali in the, let's say, risk adjusted and risk management capacity of those results, because we are limiting the volatility of our combined ratio, thanks to this posture. Current yield is 16.2-20 basis points, it is not as high as their investment. Their investment is only the direct investment. It's not taking into account the private debt done through third-party funds or some private debt funds, which is pulling it higher.
There is another effect which is not seen there, that we have some investment in inflation-linked bonds, which is for, especially, for example, looking at the French portfolio, were kicking up, increasing the current yield. There is a piece related also to our investment in Argentina, which are all basically inflation-linked in one way or another.
Okay. Thank you very much.
Next question, please.
The next question is from Steven Haywood with HSBC. Please go ahead.
Thank you very much. Yes, sort of two questions from me, following on from the previous question, about the reinvestment and investment yield. I saw that your life reinvestment new money yield is around 2.0%, and it's only increased 50 basis points since the first half last year, which seems low considering where the markets have moved. Considering that your P&C reinvestment rate is now at 2.3%, can you explain what is going on here? I noticed also that your bond duration has dropped by over a year as well in your life business. Secondly, on financial debt leverage on Solvency II basis, you provided this disclosure of the full year results of 19.6%.
Can you give an update of what that leverage is as of the first half of 2022? Would you be able to give us a financial debt leverage on Solvency II, but excluding the expected profits included in future premiums? Is that possible? Thank you.
Thank you, Steven. Cristiano, they are all for you.
Hello, Steven. The reinvestment, life and P&C, the – what is going on there. Life has been again, I go back to what I said before to Andrew. When we see 2%, it is not taking into account the private debt component which was invested through funds. And this is not the direct investment level. You don't see the full effect. And a part of our new money yield were invested there. On another scale, there was also an effect of having invested a little bit more in government bonds versus corporate, thanks to the environment where basically rates were going higher.
This was allowing us a lower capital consumption, not changing the return, having a little bit of benefit out of this. For what regards the affecting life, there is also a small other effect. There were some bonds of Swiss portfolio which were maturing and have been reinvested. As you know, Swiss rates are slightly lower, and especially we prefer to invest in government Swiss rates, which are the best one under the Swiss Solvency Test environment. Regarding P&C, there it is kicking in more the contribution from Central and Eastern Europe, where we have a very strong growth, and their rates kick that up much. This is also changing the reinvestment yield behavior. Regarding the financial debt leverage, going on this.
At year-end, we had the 19.6% on Solvency II, which I appreciate you are looking at because the actual accounting principle are going to expire and becoming also for a rating agency in a totally different environment next year, taking, for example, into account the contractual service margin for many of them. In 2022, we would be 20.6% if we exclude the sustainability bond that has been issued at year end, at the end of the second quarter, we would be at the 20.1%. Okay.
Next question, please.
The next question is from William Hawkins with KBW. Please go ahead.
Hello, gentlemen. Thank you for taking my questions. First of all, just the Italian investment margin, specifically, Cristiano, that was EUR 670 million, which was a big increase year-on-year. Is that all just Cattolica? And so can I double it for the full year? Or is there anything else specific going on driving the Italian investment margin? Secondly, directionally and qualitatively, across the life and non-life business operating profits, what might we have seen that's different in terms of the trends if we were looking at IFRS 17 and 9? Again, presumably you're running background tests on that, so I'm just trying to figure out, you know, can I trust all these IFRS numbers, or would we have seen different stuff on the new basis? Thirdly, please, the EUR 2 billion of capital generation.
Could you just give me the key components of that between non-life, life in force and new business? Lastly, sorry that it's four. Philippe, you've had a lot of discussion with your shareholders over the past six months. Do you think there's been any evolution in your thought process about where you're taking Generali as a result of that? You know, if anything, has it just reaffirmed your commitment to the December business plan? Thank you.
Thank you very much, William. I would kindly ask Philippe to answer the fourth question and, Cristiano then, to take the one on the Italian investment margin and the difference between IFRS 17 and 9 and the composition of the capital generation.
Okay. Hello, William. Well, you know, I didn't have that much interaction with the very vocal shareholders in the past six months. They've been very vocal. They've been presenting an alternative strategy, an alternative management team. As you know, on 29th April , on the shareholders meeting, the shareholders have made a very clear choice, which is that they wanted our plan, so Lifetime Partner 24: Driving Growth. The plan presented December last year. They wanted this plan implemented by this management team, by our management team. That was a very clear choice expressed on the day of the shareholders meeting.
I today, as of today, together with the whole management team, we are fully committed to implement successfully another time our new plan. We didn't change at all the plan. The discussion, as you said, with the shareholders didn't make us change our mind on the validity of our plan. The plan has not changed, and I can confirm that we are fully committed in implementing the plan as it is. Of course, we are evolving in a world that is changing, that is every day more challenging. We are fully aware of that, and this is another reason for us to be fully focused on the execution of the plan.
I would say that these results, these half-year results are another proof of the fact that on one hand, our plan is the right one for our company, and that so far we already started implementing successfully the plan. I can confirm our full commitment to all the targets of our plan.
William, I start with Italian investment margin. The effect is explained by a couple of points. The number one is that last year we had some extra reserving in one line, which has not been repeated also because of the new environment. On the contrary, we could get more on the release than in the allocation due to this environment. Second, the driver of in-force management activities, we worked a lot on the liabilities, and working on the liabilities is allowing to have lower guarantees in the portfolio. There were some reshuffling of existing contracts, which is bringing down also the amount of money that are with the average guarantee, having then decreased the amount of money which were going to the policyholder.
This is profitable for the investment margin, and it is continuing. As regards the second question, the difference in IFRS 17 and 9 and the trends. Well, first of all, we are in the process of completing all the accounting transitions, all the accounting changes, and in the discussion with the auditors. We will dedicate a specific Investor Day event where we would like to make all the education and prepare you for reading and understanding the Generali approach on 13th December . We followed, in the public disclosure, the ESMA request, which were more qualitative in nature.
One thing I would like now to highlight, hopefully, thanks to the change in the new accounting standards, what we are observing today in the IFRS shareholder equity movement from beginning of this year to half year, it will be finally sanitized because we are not working in a economic environment in this representation because the movement of the asset is not consistent with the movement of the liabilities, while next year this will be forced, so you will be aligned, and you will see a much lower extent of movement compared to the EUR 10 billion change you observed this. Which is, I think, also correct and helpful in the real basic logic of why also these standards could have been more supportive.
Having said that, the extra information is that you'll be more and more economical in the indicator both for Life and for P&C. Please have the patience to wait a few more months, and we will give you and prepare you for full indication. On the third question related to the capital generation, we had 9.4 percentage points of solvency capital generation in the first half, which were extremely supported by the solvency value of new production because of the higher level of profitability more than only on the volumes. This accounted for EUR 1.45 billion of capital generation, almost EUR 1.5 billion in Life.
As well in P&C, we had slightly more than EUR 700 million of non-life capital generation accounting for 3%, while Life was generating 7.1. We add then the effect of the financial and the holding. Financial is Banca Generali, EUR 200 million, 1%, and the holding was almost EUR 400 million of charges, and this is negatively impacting almost two percentage points. These are the element.
Next question, please.
The next question is from Gianluca Ferrari with Mediobanca. Please go ahead.
Yes. Hi, good afternoon. I was looking at the slide commentary, and you are mentioning the segment other, EUR 77 million contribution from real estate, of which EUR 58 million being a kind of extraordinary. Can you please describe what happened with respect to real estate? The second one is on the motor combined ratio, the 97.4%, if you can provide us with the Italian and the French combined ratio of the motor business. Last question is if there is anything material you have to flag to us with reference to the sensitivities of your solvency ratio regarding what could have happened in the second quarter to make them different from what we already have. Thank you.
Cristiano, they are for you.
Yes, good morning, Gianluca. Contribution from real estate. The EUR 77 million improvement and the EUR 58 non-recurring were more related, the EUR 58 to hedging effect of interest rates, what we put in the funds in order to have protection in the fund strategy, coherently to the part. Don't forget that the 2021 figure, when I look on relative basis, was a little bit depressed by COVID and some rents and points were not fully completed. We had this little bit effect explaining also on the negative side of the 2021 part.
For what regards the question related to the combined ratio of motor in our business of Italian business, we have including Italian business including Cattolica it is running at 97.4% half year combined ratio. While you were asking specifically,
Eastern Europe also.
Sorry?
Eastern Europe also, if you can give us.
Sì, sì. I was coming. Sorry, I'm not so
Thank you.
Central and Eastern Europe, you are referring only Central and Eastern Europe not Austria and Central and Eastern Europe. If we look just at Central and Eastern Europe, auto combined ratio in the half year 2022 is 88.5%. Okay?
Gotcha.
You know, this is our clearly most profitable motor business segment, geographical segment we have. For what regard the solvency sensitivities update, well, first of all, I have to tell you one thing. No one asked me. I have to tell you. At the end of July, all else equal, you know, the country-specific VA adjustment on solvency is a complicated three factor thing. But keeping constant the base rate swap, keeping constant all the corporate bond spread, 59 basis point more of opening of the BTP versus the base rate swap would have triggered the so-called country-specific Volatility Adjustment, which would entail not only a large difference in solvency, but in a much lower sensitivity towards it. Okay? Please keep this in mind when we comment it.
Forgetting about this, our sensitivity on BTP at year-end was 13%. We are expecting to be not far from this range at the half year. Don't forget that anyhow, our exposure has decreased both in amount of mark-to-market and as well because of maturities. Another thing which is important for me to mention is that while at year-end our interest rate sensitivities were +9 and -10 versus a +50 and -50 basis points movement of base rate, today they are in the range of being the half of this because of the higher interest rate environment. Which for me is bringing you a message of a funnel of movement, which is less large than before, and so more controllable on these elements.
Don't forget that the BTP sensitivity is also decreasing because of the liabilities. The products which we are doing in Italy, which are more and more term life with no guarantees in the savings business, where basically you are transferring the risk to the policyholder.
Next question, please.
The next question is from Will Hardcastle with UBS. Please go ahead.
Oh, hi. Thanks for taking the questions. The first one's very simple. Thanks very much for giving us those inflation data points for motor across your core regions. I guess asking something very simple, and I'm sorry if I missed it, what have the price increases been on those year-on-year so far? You talk about a price increase and another price increase. Are we trending above that or is it once we've got the next price increase you'd hope to be around there? The second one is just thinking about higher wage costs, thinking about risk of recession, I guess.
Within your non-motor portfolio, are there specific lines of business there that, you know, you'd look to be taking proactive action on in order to stay ahead of that, you know, thinking about other things other than just indexation clauses? Thank you.
Thank you, Will. If okay, I would kindly ask Philippe to start asking the first question, which deals with also tariff policy, and Cristiano to integrate and then answer the second question.
Well, we are taking actions to mitigate the impact of inflation on the cost of claims, on the general expenses as well. Taking into account also the evolution of the claims frequency. As I said before, the evolutions of the claims frequency is obviously higher than during the COVID, but not back to the pre-COVID levels, so this is quite positive. We are at head office monitoring the price increase, but it also has to be decided at the local level because we need to take into account the single situation, the situation of single companies in their local markets.
We need also to take into account the local competition, that we are increasing the price of the new business. We're going to increase also the price. We are already increasing the prices also of the policies in portfolio. The increases will be significant, definitely significant. This is what happens normally in a world with inflation. I would say this is. There is nothing extraordinary. The increase of the cost of claims at this stage on the motor insurance business is coming more from the spare parts, not yet from the labor costs. This is what we've seen so far.
We will be very reactive, very proactive, and monitor very carefully, and I would say even aggressively, the price increase. I would like to make, you know, a comment on this. I would say that for young professional in the insurance business, inflation is quite new, and they are definitely not used to increase prices. For old insurance professionals like me, inflation is something we are used to, and we are used to increase prices in the insurance business. This is definitely a habit we lost in the past few years because there was no inflation. We are back to this, and we are going to.
We're coming back to normal and regular and significant price increase every year.
Yes, William, I continue to answer you. Just to close, I give you a number. The average price injected increase in motor was 4% in the first round, and then Philippe's confirmed that there will be other rounds which will go there. Because don't forget that the dynamic, the cross dynamic between the average cost claim increase versus the frequency brings the full risk premium growing at a lower pace than the claim cost. Which is allowing us through the pricing and as well through the pruning, and as well to the managing of the claims, thanks to acceleration of payment and as well to cash offer versus body shop, to keep it under the control. The second question related to non-motor portfolio: Are there any specific actions? Well, for sure.
Let's split the portfolio in two. Speaking about the global corporate and commercial component, which is 10% of the full premium of the group, that is surfing the wave of price increase of the market. Still, the market is sufficiently hard, and it is going on because of pricing. On the other lines, especially retail, small and medium enterprises, what is happening is that we are more in bundled product offering, which is allowing a higher average premium sale per single product, and which is allowing us to keep up the growth of premium as well.
It is a combination of the pricing, but as well of the offering with bundle, which is also acting well because it has a much lower cost of acquisition, acting on our existing clients starting first and with a higher stickiness.
Next question, please.
The next question is from Ashik Musaddi with Morgan Stanley. Please go ahead.
Thank you, and good afternoon, Cristiano. Good afternoon, Philippe. Just a couple of questions I have is, first of all, just going back to Will's question. I mean, is it possible to get some color about this pricing versus inflation and frequency by region as to is there any particular region where you would say that there is still gap between how much you're able to charge to the customer and how much inflation is going up? I mean, you had mentioned on the claims side, I mean Germany, France are a bit of a place where things are running a bit ahead. I mean, if you can just give some color versus pricing, that would be very helpful. That's number one.
Secondly, I mean, if I just take a step back, I mean, Philippe, you clearly mentioned that there is no change to the plan, and thanks to the vote, it's evident that investors like the plan you have, the 29th of April vote. Just one question related to that. I mean, your solvency is very strong, your cash balance is very strong, your share price has come down because of markets. How do we think about your M&A versus capital return strategy here? And would you say, would you not say that this is a time when you can buy back a lot of your stock at a lot cheaper valuation rather than spending that money in uncertain M&A in an uncertain world? How would you think about that?
I mean, is there a reason to revisit that, doing buyback at the end of the three-year plan, or would you say it's still too early for that? These are my two questions. Thank you.
Thank you, Ashik. Philippe, the second question on the, let's say, M&A versus buyback is for you, while Cristiano will take the first question.
Thank you. Yeah. Hello. Yes. Shall I start with the second? Okay. Hello, Ashik. Well, basically, we are not changing our strategic framework for M&A. We are going to stick to our financial discipline on M&A, definitely, exactly as we did it in the past three years. We will be very selective, very financially disciplined. It's very important for us to be focused on the strategic fit, on the cultural fit, and on the financial discipline when we are considering M&A opportunities. This doesn't change.
Talking about share buyback, we will start a share buyback program tomorrow, the one that we committed because we still had the excess capital at the end of our previous three years plan. I think basically we will do the same. We will go for studying opportunities if they are good enough for the next three years. At the end of the three years, we will consider what we should do with the excess capital if there is some. I think it would not be a good idea to decide as of today, because as of today, the stock price is very low.
It would not be a good idea for shareholders if we would decide to dedicate 100% of the cash to share buyback, because we also need to think of the longer term, and we also need to think further diversifying the sources of earnings. I think it's important that we continue increasing the earnings coming from health insurance, coming from asset management. I think it's important to make our earnings even more predictable, even more stable, even less volatile. We also need to invest, and this is also our job. I basically do confirm our strategy.
We are fully aware of the interest of a share buyback right now. We take this into account, but we are not going to change the longer term strategy, and we will make an update regularly with all of you, I would say, every year.
Thank you. Thanks, Philippe.
Hello, Ashik. Cristiano. Pricing and frequency gap in any particular region. Let's split the world, basically in two, in the big four economies. I would say that, as we heard before, Central Eastern Europe is more reactive and starting from a healthier level. France is more reactive, starting anyhow from a higher average market level of motor combined ratio because of the competition, but more reactive. Less reactive Italy because of the market competition in motor and less reactive Germany, again because of the market dynamics. The trend are more evident in the retail SME and corporate segment.
In general, just to make you an example, all the non-motor component is also to subsidizing this because it is growing at a healthy and also repriced above the technical need non-motor, which is allowing to catch up. This is the, let's say, diagnosis you were asking.
Very clear. Thank you, Cristiano.
We have time for one last question.
The last question is from Elena Perini with Intesa Sanpaolo. Please go ahead.
Yes. Good afternoon. I've got two questions. The first one is related to the performance fees in the asset management business. I was a bit surprised to see from your slides that the amount in the first half of the current year is higher than the first half of last year. You know, due to market environment, I would have expected an opposite trend. The other question is about P&C operating result. You are resilient year-on-year, despite a higher combined ratio also due to the hyperinflation in Argentina.
I was wondering whether in the second half we could expect a similar resiliency with a different mix compared to last year, so a lower technical profit due to a higher combined ratio and a higher investment result also due to the different interest rate environment. Thank you.
Thank you, Elena. Cristiano, they are both for you.
Yes. Good morning, Elena. The performance in the asset management business, let me remind you that the EUR 38 million of the performance fees were booked in the first quarter. Nothing was booked in the second quarter, was a technical effect also related more to the business. We are not expecting going forward to see more performance fees. There are very few standing out from this market volatility. For the second question related to the P&C operating result, I would say that in the second half, the resiliency should start to pick up from the point of view of seeing the action in the growth. Because, you know, one thing is gross written premium, one thing is net earned premium.
We will see the basics of the combined ratio, the denominator growing, and which should support the counterbalancing effect on the one side of the inflation, but as well to improve on the trend. On the other side, the investment result, it is in the first half effect. Don't forget that there was the one-off payment, also the dividend of Banca Generali, which is not expected to come in the second half, which is accounted now in our P&C operating.
There is an increase of the reinvestment income, especially in the central Eastern Europe and as well in Argentina and as well in the rest of the business to an extent, which is bringing up the second half non-extraordinary component. I mean, the impact is not extraordinary, but cannot be repeated twice per year. We pay dividend once. So having said that, the guidance is in that direction with this kind of rebalancing, where the underlying current income is growing up, net of this contribution.
Okay. Operator, we have no more time for questions.
I confirm there are no more questions, gentlemen. The floor is back to you for any closing remarks.
Thank you very much to everyone to listen to the call and for your questions. The investor relations department remains at your disposal for any follow-up you may need. Have a nice day.
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