Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group First Quarter 2020 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 Miss Giulia Raffo, Head of Investor and Rating Agency Relations. Please go ahead, madam.
Thank you. Welcome, everyone, to Generali First Quarter 2020 Results Conference Call. Here with me, we have our General Manager, Frédéric de Courtois, and our Group CFO, Cristiano Borean. Without further introduction, we would like to open the Q&A session. Thank you very much.
Excuse me. 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 touch-tone 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 Andrew Sinclair with Bank of America. Please go ahead.
Thanks, good day, everyone. Three from me, as usual, if that's okay. Firstly, I just wondered if you could talk about claims experience in terms of the movement in, say, normal claims experience you saw in Q1 during lockdown, as we saw slowing activity. Likewise, I realize it's early days, but as lockdowns have started to ease, what are you seeing in terms of the normal claims activity? Secondly, just on travel, I just wonder if you could quantify for us what travel claims experience you've seen so far, ideally both gross and net, and how far out you've provisioned for lockdowns staying in place, just potential incremental claims. Third question is just on reinsurance. I just really wondered what engagement you've had with your reinsurers so far, ability to pass on claims, and likewise, any ability for reinstatements of coverage if that's so needed. Thanks.
Thank you very much.
Thank you.
Frédéric? Yes.
Thank you, Andrew. On the claims experience, first, you've seen that our combined has improved by about two points over the Q1, which is made of 1.5 points on claims and 0.5 on expense. On the 1.5 on claims, in fact, we have 2.5 improvement on the current year claims ratio, and then one point negative due to CAT and due to slightly lower prior year's result. Your question is, where does it come from, and what could we foresee for the future? Obviously, it comes from a significant lower claims frequency during March due to the lockdown on the motor business, but also on other lines. What could we foresee for the future? The month of April is already pretty clear, and we see the full impact in the month of April of the lockdown.
As the lockdown gradually released, it's extremely difficult for us to make any forecast. In May, the lockdown is only partially released, we will still see some impact. After that, after the end of the lockdown, again, very difficult to foresee. We see contradictory signals from China, where people are using their cars and are not using any more public transport. There are a lot of trends that we cannot foresee. Again, we have a pretty clear view of the impact in March and April and May already. On your second question on travel. On travel, actually, which is a business of Europ Assistance, we have two impacts. We have one impact on claims and one impact on premiums. By the way, the biggest impact we have is on premiums because we don't have premiums flowing in at this moment.
Specifically on your questions on claims, we foresee an impact of about EUR 40 million gross and EUR 20 million net. Not extremely significant. On reinsurance, I think that's too early to discuss about our ability to pass on claims. You know that the main uncertainty on the market is around claims on business interruption. We have an extremely low exposure on business interruption, both because we are not a commercial line insurers. We are obviously exposed on our SME business. Also because based on the analysis we've made on our business in Continental Europe, we have extremely clear wordings. I cannot tell you yet exactly what is our ability to pass on claims, but I think discussing with the insurers, the insurers have committed on the fact that if claims are paid on a technical basis, then they will follow us.
Very helpful. Thank you very much.
Thank you. We can move to the next question, please.
The next question is from Peter Eliot with Kepler Cheuvreux. Please go ahead.
Thank you very much. If I maybe have two follow-ups on Andrew's. First of all, I was just wondering on travel, Frédéric, I was just wondering if you could sort of comment how fixed the nature of your expenses are. As you commented on the big impact on premiums, just wondering to what extent you can offset the expense impact. The second follow-up is just on the reserve releases. Apologies if I misheard. I think you said minus 1 point from CAT and lower reserves combined, and obviously the CAT was almost 1 point. Sorry, CAT was 1 point higher. I guess we're talking sort of 2 points from reserve releases, but if you could just confirm my numbers there, that would be great. If I could ask two of my own. The premiums in non-life, non-motor were really strong.
I was just wondering if you could just give a bit more details about what drove that and maybe optimistically, just any comment that you can give on what you're seeing in April and May on the premium side of things. The second question is, you've made some comments on the 2020 outlook today, and I appreciate it's very early, but I'm just wondering if you can say anything about 2021. I ask because I think Philippe was on record talking about the target still being valid. I'm just wondering if you can add sort of any confidence on the EPS target in particular. If you can say anything, that'd be very useful. Thank you. Sorry, that was a lot.
Okay, Peter. Thank you. First on travel. You know that in the travel business, most of the expenses are variable expenses because we pay high commissions to the intermediaries. Still, we have fixed expenses, the name of the game for the time being in Europ Assistance is to significantly decrease fixed expenses. Again, most of the expenses are variable for the travel business. On reserve release, as I said, that 1 point on CAT and reserve release. In fact, CAT is 0.8 worse compared to last year, and reserve release is 0.2 worse compared to last year. Last year on reserve release, I had the benefit of 4 points on reserve release in Q1, and now this quarter, I have a benefit of 3.8, really non-material. On premium, I guess your question is only related to P&C, I will answer on P&C.
Yes, premiums have been strong in Q1. Actually, the growth of premium has been in line with last year. Nothing unexpected given that the lockdown had started only mid-March. You have to have in mind on all of this, that on P&C, of course, the lockdown is impacting negatively the new business, but the lockdown is also impacting positively the retention. Hard to say at this stage if one is exactly balancing the other, but I would say not far from this. On 2021, you've seen that on 2020, we've made a statement in the outlook, and we obviously can come back to this if you want to have more elements. On 2021, I think there are a few important elements. The first one is that we are confident in our strategy and its underlying fundamentals.
I think that our operating performance in Q1, which is very good, confirms our strategic approach. Of course, all of us, meaning management, employees, and agents, we are all working very hard towards our planned targets. It is an unprecedented moment in time, and it is very difficult at this stage to say exactly how quick will be the recovery of the macroeconomic environment. We do not have yet a full visibility, and we will have a much better visibility in a few months. You know, Peter, that we are planning an Investor Day in November, and I think the Investor Day in November will be a good time to give you a full update on the progress of our plan and our targets.
All right. No, thanks very much indeed.
Thank you. We can move to the next question, please.
The next question is from Andrew Ritchie with Autonomous. Please go ahead.
Hi there. Good afternoon. Some quick questions from me. Do you see, particularly in auto lines, personal auto, pressure for premium rebates coming through? I guess it hasn't so far, by way of insurers giving back to consumers some of the good claims experience. We've seen that in a few other markets. Maybe if you just give us a sense of that in your core markets. The second question, what's the group done on asset positioning as the crisis has unfolded, in terms of have you bought additional downside protection by way of hedges, de-risking any parts of the portfolio? Just give us an update as to how you've responded to market moves on the asset side. Thanks.
Thanks, Andrew. I will answer the first one on motor, and we leave Cristiano on the second one. On motor, yes, we see some pressure on our various markets. We've seen some pressure, especially in France and to a certain extent in Italy. We've seen also some movements from some of our competitors, even if quite limited. On our side, what we are doing is giving support to our customers on the motor business in terms of suspension of premium and/or focused discounts. We haven't announced yet measures like the ones announced by some of our peers. We believe it is too early to do it, we focus on targeted measures on the field. It's too early to do it also because it's extremely difficult to know how the claims experience will evolve after the lockdown.
Again, we pursue our policy to make targeted measures on the ground, on discounts, on suspension of premiums, and we will see what we do later. We have not made any decision.
Sorry, when you say suspension of premiums, you mean forbearance on renewals. Is that what you mean?
Yes, also the fact that in some companies, we have a special contract, which is that when the client is not using at all the car, we suspend the premium.
I've got it. Yeah.
This is a poor English word, sorry.
Temporary suspension if the vehicle isn't being used.
Exactly. Yes.
Yeah. Okay.
Hi, Andrew. Cristiano here. Good morning. For the second question regarding asset positioning. First point, the group reacted on two sectors. The first one was mainly related to the life portfolio and the fact that due to the prolonged and the view of prolonged low rates, there was some asset repositioning through increase of duration of our fixed income portfolio with seek for quality, both in government and in corporate bonds, in order to get the appropriate duration lengthening because of the natural lengthening of our liabilities in such an environment. You have to understand that liabilities increase duration also when there is a stress on other risk factors, not only of interest rates because of the loss absorption capacity of our liabilities changing in case of the stress of equity of other factors.
Clearly, the group first positioned itself to prolonged duration investment, in the first quarter, we had an investment with almost three years more duration compared to the first quarter 2019 in the life book. On top of this, we're putting hedging on equity exposures protection. We started with some out of the money protection in different form, combination of put and whatever. Now, these positions are in unrealized capital gain, quite substantial because we started with some EUR 5 billion protection. Clearly, these gains moves contrary to the movement of the market. Being these protection mainly maturing between 2020 and a small piece on January 2021, we need also to understand that their contribution was partially already accounted, and we have something in the order of slightly more than EUR 75 million net result protection coming from this hedging strategy.
On top of this, we did an innovative hedging of our unit-linked fees at end of 2019. We started with our country, France, where basically we were crystallizing the level of the fees that we can extract with the level of the market on the equity book of unit link, of a substantial part of it, as of the level of the year-end 2019. This is protecting us to have a lower P&L volatility from the fees arising from the unit link book. On top of this, to prolong duration, we sometimes buy forward some bonds but in case of a prolonged low rate, will protect us for low rate environment. Hope I gave you the answer.
Just to check two things. When you said three years longer, you mean new money is being invested three years longer in coupon versus?
Yes. Indeed, Andrew. Exactly to.
And-
You know that we have basically some EUR billion per quarter to be invested in life, these are used exactly to prolong the duration accordingly.
Okay. The hedges you bought on equities, they were out of the money, but now you've got a gain on them. They're now in the money. Is that?
Indeed. They are.
Yeah. Okay, fine. All right. Okay, that's brilliant. Thanks very much.
Welcome.
The next question is from Michael Huttner with Berenberg. Please go ahead.
Good afternoon, guys. Thank you very much. Just three questions, please. You said you'd like to provide an outlook, a more granularity on your 2020 outlook, both in operating profit and net profit. If you could do that'd be wonderful. The second, on the solvency, there was a small miss. Miss is the wrong word. It was a little bit lower than maybe we'd expected, and it's come down a little bit more in May. I just wondered if you can highlight any kind of reasons for the difference or trends that we're probably maybe not fully thinking about. The third one, and it may be a bit premature, but is on dividends.
Here, given the regulatory environment today, how likely or how much more confident are you that you will execute on your plan to pay the remaining EUR 0.46 later in the second half? On the dividend going forward, if I look at consensus, it's down a bit, which would imply using a payout ratio that the dividend might be down a bit, and there's no official notch yet, but I just wondered if maybe you can say something about that. Thank you very much.
Thank you, Michael. It's Cristiano.
Thank you, Michael. Yeah, Cristiano, it's neither.
I think it's the Cristiano.
Maybe I'll start on the outlook 2020, Cristiano will answer on solvency and the second tranche of the dividend, I'll come back for the dividend 2020. Michael, on the operating results in 2020, we expect globally the impact of COVID-19 to be low to mid-triple digit, hundreds million EUR. What are the various parts of this? There are a lot of moving parts. The first one is that we expect around EUR 100 million from P&C COVID-related claims. This is one part. The second part is that we expect an impact of around EUR 150 million from lower rents and dividends. The third negative part comes from some volume reduction and measures that we have to support the agent network, our clients, and communities.
These measures are, of course, the EUR 100 million fund that is already in our quarterly results, also some other measures that we are taking on the ground, as the one I mentioned on the motor business, for instance. I would say these are the three negative impacts on our operating results. Of course, there will be some mitigation, the mitigation are, at this stage, quite difficult to estimate, the two main ones are, of course, the fact that we will have a positive impact on our costs. The positive impact is linked, on one hand, I would say to a natural reduction of costs due to the fact, for instance, that we are not traveling anymore and so on, naturally flowing in.
Also on some specific measures that we've taken to reduce costs this year, especially, of course, on personal expenses, compensation, and so on. We have, of course, a second positive impact, and you've seen it already in Q1, which is the reduced claims frequency on the P&C side. On this, we remain cautious. We know that we have this impact in Q1, and for sure, we will have this impact in Q2 as we see it. We have a big question mark on what will happen after the lockdown. The question mark is, on one hand, on motor. Will people drive more, and will the frequency on motor increase after the lockdown? First, as I said, we see that in China, people are using more their private cars. This is the first question mark.
The second question mark is that we really know from our experience that economic crises are never good for the commercial lines, P&C business in terms of claims, for many reasons. Even if we are not so much exposed to this, we have an exposure to SMEs. Again, short term, strong positive impact on claim frequencies, mid-term, big question marks. That's why with our outlook for 2020, the best outlook I can give to you is this low to mid-triple digit number on our operating result, knowing that there is quite a lot of uncertainty and volatility around this. If I can, I'll leave you the word on solvency and dividend, second tranche of the dividend.
Thank you, Frédéric. I think if I understood, there is also a question on more granularity on net result. Did I understand well, Michael?
Yes, please.
Okay. Also to answer, I start with this one, which is to give you the full picture, on top of the EUR 655 million of net impairments coming from the asset in the available for sale category we impaired, where I would like to point out that there was a larger effect also of non-deductibility. A tax impact, which is hitting severely the tax rate of the quarter due to this effect, because there are some, especially in Italy, tax, which cannot be recovered. You cannot write a deferred tax asset in face of that. We have an effect of EUR 15 million net result coming from impairments of Argentinian bond. We did already at year-end, but due to the deterioration of the situation of the foreign one, we did further EUR 15 million.
I recall you, as I think we already said, but we put also the EUR 100 million COVID fund impact, which is basically EUR 75 million net of taxes, full in the first quarter due to the accounting rule of the expected commitment we did. This has been fully booked in the first quarter result. All in all, without these kind of specific effects, if you just recall that in the first quarter 2019, you had less than EUR 100 million net result impact coming from impairment, you can understand what were the major driver of the movement in the net result. I hope I gave you more insight on that, and I would like to jump on the solvency.
First of all, the movement from March 31st, so the 196 to the last updated figure we gave this morning to the journalist when requested on May 19th, which is almost 190, means that there were drivers in the market from March to May 19th, which were bringing further a little bit down the solvency, which were mainly the effect of the BTPs, and really a little piece of drop as well of negative health coming from lower rates in the swap reference curve. Having said that, going on the second part of the dividend, first of all, I hope you all noticed that yesterday the dividend really were cashed in the first tranche. Now, as you know, our general assembly, the second tranche will be paid by year-end, and it is subject to the board's verification.
Inter alia, of some compliance with the limits set by the Group in the risk appetite framework as of September 30, 2020, and as well on the positive confirmation of the compliance with the norms and the regulatory recommendation concerning the dividend payments at that time. Since we know they could evolve, they are evolving, we don't know what could happen. We need to take into account all the really existing potential future constraints to take this decision. I recall that the Group risk appetite framework, which was presented in the Generali 2021 Investor Day, identified the so-called operated target range for Solvency II, which was in between 180 and 240, with a soft limit of 150% after stress.
During the board, which is scheduled for November 11th for the approval of the third quarter results, the board will assess the compliance of all the limits set by the risk appetite framework as per end of September, and will evaluate all the providing norms.
On the regulatory recommendation, we'll take into account the developments also by end of September and the moment of the evaluation. The board will express the decision on the second tranche of the dividend with the most informed valuation. As of today, the level we have of solvency is within and compliant with our risk appetite framework, as you noticed.
And then-
Michael, I'll comment then. I think you had a question on the next year dividend, no?
Yes, please. Yes, I'm very greedy.
Yes. Yes, you are. A few comments on this. First, we have very good cash flexibility for various reasons. The first one is we've entered this crisis with a high level of cash in the holding company, as you know. The second reason is that our business units are well-capitalized. The third reason is that we've already been able to pay three year most of the dividends from our operating companies. We have a very good level of cash flexibility. My second comment is that we are confident in our strategy. We are confident in its underlying fundamentals. We are confident in our technical results. We are confident in, as I said before, in our technical capability and technical excellence, even in a difficult year like this one.
The third comment I would like to make is that we are very aware of the importance of dividends, of their stability and predictability. We've already said in the past, and Philippe has also said it, that for us, achieving our target on the dividend is a priority. Saying all of this, we obviously have to take into account the context. You will understand, Michael, that it is too early to comment on our dividend for 2020, and that our board will assess over time what is appropriate. I think that with the three comments that I've made, I've given you some flavor.
That's wonderful. Thank you. Thank you very much indeed. Thank you.
Next question, please.
The next question is from Farooq Hanif with Credit Suisse. Please go ahead.
Hi, everybody. Thank you very much. Just going back to the comment you made about overall operating profit. A lot of the discussion is focused on P&C. On the one hand, I can see revenues dropping, but on the other hand, some better margins. I just want to understand, is this mainly going to come from non-life or life, the sort of drag factor? I would've thought you'd have some sort of impairment related, investment margin related volatility as well. The second question, looking at claims frequencies. You mentioned motor claims frequency drop. Could you give us some sort of guide? Other companies have talked about a 2- to 4-point benefit in the lockdown period before premium refunds. What about non-motor? What's going on there that's supportive? I guess the last question is going back to what Michael just asked.
You're implying that you could be potentially, depending on the board, in a position to not follow your 50%-60% net income payout target if impairments are high. Is that the kind of message that you're trying to get across for 2020? Thank you.
Thank you, Farooq. I'll start with your last question. I want to make it clear that the message is that paying the dividend in line with the targets of our plan is a high priority for us. We believe that with the strong liquidity that we have and with the resilience of our business, we have good fundamentals to be able to say this. I've made a cautious statement saying that of course, the context is still very volatile and that it's too early to say because it will be our board decision. Our message is that our priority is to stick to our dividend plan.
I just-
So coming back-
Apologies. My understanding is, well, I'm slightly confused. My understanding is that your dividend plan is a payout ratio on net income. That's why.
Okay. No, you remember that when we communicate our plan, we had two objectives, and we say that the two objectives are important on dividend. We had an objective on the payout ratio, and we had an objective on how to allocate the cash flow that we have, and we had given an absolute amount of dividend that we want to pay over the next three years. We have said that the payout ratio is a long-term trend as a strategy, and that as a mid-term trend for our plan, we had this absolute amount. When I'm saying that our objective is to stick to our plan, I also say that our objective is to stick to the absolute level that we have committed to in our plan. I hope it is clear.
That's very clear. Thank you.
On your two other questions, on P&C and life. The EUR 100 million impact I've said on claims due to the COVID-19 is linked to P&C. On the life side, actually, the impact is quite insignificant on the protection business. Of course, we have quite a lot of protection business, but due to the age band, and especially death policies, but due to the age band of the clients affected by COVID-19 and the age of the people usually insured, the impact of the COVID-19 on the claims on this is, I would say, is quite marginal. On the health side, we are not a huge health player. We have two contradictory trends. One, of course, an increase of claims linked to the coronavirus.
Another one linked to the fact that people not affected by the coronavirus have not visited their doctors or their clinics over the two months of the lockdown period. I would say these two effects are more or less balancing, but I would say that's too early to say. If I look at your next question on motor and non-motor, I think we need to look at technical indicators. If I look at the lockdown periods, when all countries were in lockdown, what we can see is that globally, motor frequencies on the attritional motor frequencies have decreased by about 60%. We see that on non-motor frequencies have decreased by about 30%. Again, this is, I would say the best month to look at it is probably April, because we had all the countries in lockdown in April.
Based on this, I think you can make some estimates. As I said before, you have to take into account that we take some measures on the ground especially to give some additional discounts to our customers and so on. This is what I can tell you.
That's really kind. Thank you so much.
Next question, please.
The next question is from William Hawkins with KBW. Please go ahead.
Hello, gentlemen. Thank you very much. On the Solvency II ratio, when you think about the decline that you've experienced year-to-date and the impact of capital markets, do you think the capital markets have affected you roughly as you anticipated with regards to your published sensitivities? Or have there been any particular outliers or funny correlations that you've kind of learned over the past five months? Adjunct to that, should we still be using those sensitivities as our kind of back of envelope for how your Solvency II ratio moves from here? Or is there anything we should change from what you told us at the full year? Secondly, you already kind of touched on your capital management process. In answer to Michael's question, you were talking more about the timeline rather than the substance.
I just kind of wondered if you could share with us whether you have had any update in your thinking about capital management as a result of the regulatory intervention that we've seen in the past couple of months, given that you have suspended your dividend when you were still within what you told us was your comfort range of 180%-240%. Has that led to any discussions about how you think about ranges or modeling, or is it just business as usual, but we're suffering a market dislocation? Lastly, when your EUR 100 million pandemic fund contribution, are there other costs that are likely to occur in the next three quarters that would also be booked below the line like that? Or have we now seen that figure?
Whilst I appreciate you might consider it semantics, can you remind us why you're booking that as a non-operating item? Because in many ways, it feels to me, yes, it's related to the emergency that we're all going through, but it really is, it's a soft element of the underwriting costs of your business. Thank you.
Cristiano, please.
Hello, William. Can I start with the last question, which is accounting easy point. Regarding the way we booked in the non-operating item component, the COVID fund, it's simply because this is a one-off effect, which has no relation to the fact that we are operating the business in the normal time. Take into account that there are initiatives which even for more than EUR 30 million to EUR 40 million, are only related to supporting real people which are not even clients of Generali, really giving protection, mask, and helping the Italian so-called Protezione Civile. This is nothing related to the operating recurring thing, and this is why we decided to book according to accounting principle as a constructive obligation fully in the first quarter.
Second point, going back to the solvency ratio. Solvency ratio, the clear impact of financial market is moving parts in the sense of how we measure our things. If you allow me to say, I noticed that the consensus before this call was in the 198%. We published at 196%. The consensus is based on the sensitivities you basically on average are doing. In this context of a non-linearity applied to a contingent joint effect of all the risk factors opening, low rates, equities down, and credit opening up, including BTP spreads, is showing a certain sense level of predictability, which I would be delighted to say that it is quite predictable according to what is the outcome compared to the expectation.
What can change at first quarter half is the fact that, for example, you have with slightly lower impact and slightly lower effect on interest rates, you have some 1 to 2 percentage point sensitivity in the interest rate down, which could be slightly different, but it is slightly more than one point, which is sufficiently marginal compared to the stress situation of the market so far. For what regards the capital management process, let me just continue the argument that Frédéric did before relating to our capacity to upstream in the head office. We are, and we were able to already collect more than 80% of the expected remittance for a year on our subsidiaries. The other part is not blocked, is suspended because there are subsidiaries which are expected to give this piece are simply doing this later.
In some cases, will do in the next quarters, and in other cases, they will be done after October. We have our major subsidiaries, which are very well capitalized to bear even this part of the unpaid dividends still, and these subsidiaries are very resilient on the situation. That's why when we look into prospective, the capital management approach we had this year, this one allowed us to cash in a large amount of the expected, and also the exceptional one-off capital management operation we were planning to be cashed in and remitted to the head office in 2020. What is interesting is also for you to know that we had a cash position as of end of March of EUR 4.1 billion after having paid back EUR 1.25 billion of senior in January and a certain amount of something around EUR 600 million for the two companies in Portugal.
I have to tell you that after the payment of the first part of the dividend, as of today, we are well above that level. Just to put this into context.
That's brilliant. Thank you.
I'll add a comment, William. William, if I'm correct, you had a question on will there be apart from the fund that we have created, will there be other costs?
Yes. Thank you.
Yes. The basic answer is yes. Let me tell you more. The fund was dedicated to sustain and support first communities, and I think on this, we've done a lot, and I'm not expecting much more. It was the first target of the fund. It was also to sustain, in some specific circumstances, our agents. Again, we've done it already. There may be some more to do, but I'm not expecting significant numbers. The fund was also built to sustain and support some clients in difficult situation. On this, I've mentioned it before, we still have a question mark. This is all about what I call the discount or suspension of premium and bid for motor clients or SME clients.
We are doing it on the ground, so I can tell you that there will be some additional costs that you may not see on the cost line because it may impact the premium line or it may impact the technical results line on our P&L. There will be additional costs, and they are difficult to quantify at this stage.
That's brilliant. Thank you very much.
Next question, please.
The next question is from Nick Holmes with Societe Generale. Please go ahead.
Oh, thank you very much. Just a couple of follow-ups, please. Firstly, coming back on equity exposure, I wasn't quite sure what you were saying earlier. Are you saying that you are now pretty much fully hedged for downside risk? Can we take that as the assumption going forward? Second question is looking at revenue pressures. Just wondered how worried are you on the life side, and in particular, of course, unit-linked, what sort of pressures do you see there? Thank you very much.
Christiano?
Cristiano, I take the second one.
Just to clarify, equity exposure, what I mean that we are at that level of hedging. We started an out-of-the-money hedging, and this now gets in-the-money. The part which is in-the-money is counterbalancing the further reduction on a piece of portfolio. This is a hedge which will expire throughout the time. We will need to review our hedging policy according to the level of the market and expectation our investment team will have and also to protect the capital. I would like to clarify, it is not that the full portfolio is protected. This is not true.
On top of this, I would add that the fact that if in June, when we will close the book, we will book the impairment for a certain amount, depending on the level of the market, there will be a portion of our portfolio, which is in the order of more than 25%, which is in the so-called once impaired, always impaired category, which could be in that category, and means that you can have some volatility level in the balance sheet, which has to be managed then accordingly. I would like to clarify the two points on this. Hope I gave you clarity.
Yes. I think you did. Thank you.
Hi, Nick. An answer to your second one. I guess it's mainly focused on the life business. I think I answered on the P&C side when I said that more or less on the P&C side, lower new business is compensated by higher retention, and that we expect this to continue. On the life side, what is interesting is that the figures on volumes are better than what we had expected, and I'll give you some more on this. Especially the product mix has been significantly better than what we had expected over the first two months, but also in March, April, and May. On the volumes, as of now, we are on the APE at a decrease of a low single-digit percentage after a decrease of the APE in April by 15%.
Not insignificant, but again, better than what we had expected on the new business. What is interesting with this crisis is that the product mix is much better than what we had expected on two fronts. The first one is that we are selling more risk products on the life side, so protection products, and we are expecting this trend to continue. We've made big market surveys and tests in all the countries where we are, and we see that clients are much more open to buy this risk or protection products. I think this is a trend to stay. The biggest surprise is on the unit-linked side. You know that usually in previous crisis, we had seen clients dramatically reducing their purchase of unit-linked. We had seen also clients massively reallocating from unit-linked to general account and usually with a bad timing for them.
The good trend that we have seen in January and February on unit-linked is continuing in March, April, and May. To give you an example, the unit-linked at the end of April are increasing by 30%. At the end, we are left with a much better product mix because general account sales have usually been down, whereas unit-linked sales have been up and protection sales have been up. That was a long answer for a short question. We are not worried on volumes. We are not worried on mix. We see again a good mix. We've seen also over the past two weeks, volumes on the life side recovering quickly.
That's great. No doubt. That is very interesting indeed. Sorry, can I just have a very quick follow-up, which is revenues this time on the P&C side. You described suspension of motor premium. Is that a cash rebate this year, or will it be taken off renewal next year?
Again, there are various modalities on this. It depends on the contracts, but no cash rebates. It is just about postponing the renewal.
It's just about, okay, the revenue pressure is put into the future. Yeah. That's great. Thank you very much.
Thanks.
Next question, please.
The next question is from Gianluca Ferrari with Mediobanca. Please go ahead.
Yes. Good afternoon, everyone. I have three questions. The first one is if you can share with us any exposure to retirement houses, the so-called RSA, and if you see any potential claims in general liability or any IBNR here in Q1. The second is if you have any update on the EUR 655 million impairments. As of today, do you think the situation has materially changed anyway, or we are almost there? The third and final one is a bit of additional color on the CAT losses, where they were generated in the quarter. Thank you.
I'll start on the first one. Leave it to Cristiano for the second one, and I'll take the third one. Ciao, Gianluca. On retirement houses. Yes, of course, we looked at the exposure we have across the group. Of course, we have exposure to retirement houses with some focus on Italy, but nothing specific or nothing specifically material. There is some uncertainty around this. There's an uncertainty on the responsibility, and I'm expecting this to stay for quite a long time. We have no specific, and again, we've assessed well our exposure, we have no specific worry on this. Cristiano, on the second one.
Yes. Ciao, Gianluca. On the second point of impairments, I would like to give you a little bit of additional color. Please, I would like to profit from your question to remind everybody that this first quarter is not an accounting closing. We are not accounting this in the book in the first quarter. We need to wait June 30th. We need to wait the level and the amount as of June 30th to book this, and then definitely pass through P&L. The final amount that will be passed will depend on the levels as of end of June, and the actions that will be done up to that moment.
If we just check the situation in these days, I should say that we have an improvement of high double-digit million EUR compared to the one we were showing in the first quarter account, compared to the EUR 655.
Thank you. Thank you so much.
On your last question on CAT losses, mainly storms in Q1, Germany, and a bit of Central Europe and France.
Gianluca. Thank you so much.
Next question, please.
The next question is from Jonny Vaux with Goldman Sachs. Please go ahead.
Yeah, thank you. Good afternoon. Just a couple of questions. Just the first question, I wonder if you have made any adjustments to your internal model with regards to more negative assumptions you're putting through. That's the first question. Second question is in relation to sensitivity to downgrades, in particular to BBBs, if you have any that you could provide. The third question is just in regards to remittances, and you spoke about this, but if local regulators, in particular, say, the French regulator, says that all financials should not pay a dividend, will you observe what the local regulators tell you to do? Thank you.
Good morning, Jonny. Let me start, if I can, with the remittances and the local regulator approach. As I told before, I would like to stress one point. We had a calendar, which we were already planning, onto which we wanted to cash in with our subsidiaries, and we are strictly following this calendar. As I told you, since we obtained slightly more than 80% of the expected remittance, the calendar has been set accordingly, and happened before some constraints. What we are managing with the regulators and what is outstanding is mainly related to companies which are in the top five best capital solvency even in these days. That's why it is putting ourselves in the confidence of obtaining it.
It is true that each regulator, I think about a specific regulator in Central Eastern Europe countries, which were very vocal and explicit, even in blocking for the full year. These are impacting in a minor way the potential remittance we have. That's why our plan of remittance is on track to be completed without any major effect. What I mean by major, we are really speaking about some few percentage points. For what regards the approach, we will for sure follow any indication of the regulator, and our rule is to commit to what the local regulator applies as a basic rule on the companies. Notwithstanding that, we have solid proof points and action to present how the remittances are sustainable and can be executed.
For what regard the first question related to any adjustment in our internal model for negative assumption, we did not readjust the internal model. The adjustment which happened in the first quarter was the ultimate forward rate and the reduction of the eligible own funds for the IORP business as agreed with the French regulator, which will be the last cap you will observe going forward, because now we reached the asymptotic level of percentage recognition of own funds in that business. This is what is the change, let's say, of the model. For what regards the analysis of the triple D exposure, let me remind you one thing, which is, I think it is quite important. Of course, we are continuously monitoring the quality of our portfolio.
Of course, even in the investment strategy, when we had the chance, we profited to, let's say, rebalance due to the higher credit spread of the period, rebalance to better credit quality the portfolio in order to manage in a proactive way the potential future risk. We have a high-quality corporate bond portfolio, as you know, because 90% are investment grade. What we did, we did for sure some analysis in order to understand what could happen in stress scenarios. We ran various potential stress scenario concerning both migration, default risk across the different portfolio.
Just to give you a sense, the combination of rating migration and default of what we can share similar to 2008, 2009 downgrade and default, the experience, coupled also with a one-notch downgrade also of our triple D government exposure, Italian exposure would fall in the region of the order of almost 15 percentage point impact.
5-0. 50?
No. One, five. 15.
One, five.
Almost 15.
Okay, good.
Don't let us jump off the chair, please. One, five.
Perfect. Thank you.
Welcome, Jonny.
Next question, please.
The next question is from Ashik Musaddi with JP Morgan. Please go ahead.
Good afternoon, Stefano. Cristiano, sorry. A couple of questions again on capital. First of all, the one you mentioned to Jonny, that you mentioned one-notch downgrade of triple D to what level? Triple D-minus, or are you talking about one letter downgrade, which will have 15 point impact, or just one-notch downgrade? That would be the first question. Secondly, you have taken a reasonable amount of impairment in first quarter, EUR 655 million, and you're saying that some of that might be reversed in second quarter. Is there any other asset classes where you're a bit more worried that the impairment could go up if there are some defaults or some downgrades? Is there some assets which are very close to getting into impairment risk again? Thank you.
Hi, Ashik. Just to clarify exactly, what I mean is one letter notch, one full letter notch down of the Italian sovereign. Full.
Okay.
The 2008-2009 experience of default and credit migration on all the rest of the portfolio. Hope I was clear. Full letter.
Yes, that's very clear. Thank you. Yeah.
Okay. Regarding the impairment and the worriness about the future, clearly, what is important is to understand for sure your point is if the market has a negative downturn compared to end of March, there will be no action in between then, you can end up with a higher level to be booked in the balance sheet. Again, because there is this asymmetry between tax recoverability, between bad and less bad impact. This is a very important element to be kept into the mind. There is not a fully symmetric effect even on the tax recoverability. The better will be the market as of end of June, you have a higher catch up. You have also some digital effect because don't forget that we have the so-called Threshold, a loss in value, which is set for us at 30% compared to book value.
If the market has a recovery, this effect could trigger back to a lower impairment. This is not true if things go down. Clearly, there is the protection of the portfolio then, but could become even more positive as a payoff for the equities, but not the full portfolio is protected. You are perfectly right, but the level could increase in case of a higher downturn. We increased, for your information, further in the month of April, some hedges, which is bringing us now to a level of higher protection on the portfolio. Having basically EUR 5 billion of portfolio now protected. Okay?
Yes, that's okay. I just have one follow-up on this. Whatever impairments you have taken in first quarter, in which book is it sitting at? Is it sitting at the Italian business, French business, German business? Any thoughts on that?
The largest part is in the Italian business. There is a part in the German business, and then after, the French one, and other minor effect on the other minor company. The largest part, and especially the largest part, also due to the net effect because of tax non-recoverability, the major part is in Italy, the effect of tax not recoverability. We have this, plus some non-deductibility of impairment on the German non-life business as a rule.
That's right. Many thanks for this, Cristiano.
You're welcome.
Next question, please.
The next question is from Emanuele Musio with Morgan Stanley. Please go ahead.
Hi, thanks for taking my question. A quick one on solvency, please. You already discussed about market impact and so on, so it is a quick follow-up. If you could please provide a breakdown of the -23 percentage point movement in your solvency ratio due to market movements. Also, you just mentioned a 15 percentage point impact for a full letter downgrade. I didn't get, is this including GOVs? These two, please.
Hi, Emanuele. Ciao. Yes. I answered the second question was specific on the one letter down in the GOVs as well. On the variances of the solvency, I can tell you that the movement of the market, the contribution of interest, GOVs and corporate overall, I would say that you have spreads, and VA is more on the line of 3.3, and equities are more on the line of eight. You have what is expected on interest rate, which is in the order of seven. You have volatility and other parts. This is basically the effect.
Okay, thank you. Interest rate, how many points?
Seven.
Seven. Okay, cool. Thanks.
Welcome.
Next question. We have time only for one last question. Thank you very much.
The next question is from Andrea Lisi with Equita. Please go ahead.
Hi. Thank you for taking my question. Just a quick question on your real estate portfolio. We know that a significant portion of your portfolio is related to offices, and a lot of them obviously were closed with the lockdown, with people working at home. I just want to ask you, what impact do you see there? What are the risks that you see on your real estate portfolio? Thank you.
Yes. Hi, Andrea. On the real estate portfolio, the action we are taking, it is true that we have offices, but we have also long-term rent in these offices, and we have also a very good relationship with our clients related to this. We are maintaining a strategy to, let's say, follow through the needs. This is why we were saying that we could expect some effect on rents in order to make the trade-off, in some cases, between lower rents and taking the unused part or increasing the relationship and finding a common solution, which is what we are doing now. All in all, I could expect by real estate, a high double-digit net impact.
Thank you.
I recall that our portfolio under IFRS rules is at cost. The realized capital gain are not in the balance sheet. I just recall for everybody.
Thank you very much.
The floor is back to you.
Thank you very much. As always, the Investor Relations team will be at your disposal for any additional question or follow-up you might have. We look forward to meeting you in person in the future, hoping that we'll be able to do so in a short period of time. Our next event will be for the half year results at the end of July. Thank you very much. Have a good day. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.