Good afternoon. This is the Chorus Call Conference operator. Welcome, and thank you for joining the Generali Group Half Year 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 all to Generali First Half 2020 Results Conference Call. Here with me there is the full top management of Generali. Before we open the Q&A session, I will hand over to our Group CEO, Philippe Donnet, for some opening remarks. Over to you, Philippe.
Thank you, Giulia. Good morning, everyone. Welcome to the presentation of Generali's First Half Results 2020. Before we open the floor for questions, let me highlight our four key messages. First, the results we present today confirm that Generali is resilient, both from a financial and operating standpoint, and that we are able to withstand the unprecedented challenge posed by COVID-19. Our operating result at EUR 2.7 billion was in line with that of the first half of the year 2019, when we achieved a record high figure. We confirmed once again our technical excellence with a combined ratio at 89.5% and a new business margin at 3.94%. And our solid position from a capital perspective with a solvency ratio at 194%. Second, at Generali, we promptly reacted to the COVID situation, acting like a true lifetime partner to all our customers, our agent, and all stakeholders.
Third, we put in place many initiatives to support them at this critical juncture, and we implemented a number of business actions that helped mitigate the effects of the crisis. We confirm our outlook for the remainder of the year, whilst being conscious of the persisting uncertainty about the socioeconomic and financial consequences of the COVID-19 pandemic. We expect our operating result to be resilient this year, thanks to a favorable business mix and robust standard policy terms, albeit with a likely decrease compared to 2019. Fourth, we continue to execute our strategy, our Generali 2021 strategy. We execute it in a disciplined way while accelerating on some initiatives, such as digital transformation and adapting to the changing scenario.
At the same time, we are ready to capture any good opportunities that might arise, and we will provide a full update on the progress on our strategic plan on our investor day, which will be held virtually, of course, on November 18th. Thank you very much for your time, for your attention, and together with Frédéric and Cristiano, we will be happy to answer your question. Thank you.
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 Andy Sinclair with Bank of America. Please go ahead.
Thanks. Good afternoon, everyone. Three from me if that's okay. First was on Switzerland where you've taken some reserve strengthening. It sounds like there might still be quite a lot to come with a similar hit in H2. You said negative operating result for 2021. Just wondering if you could give us a bit more color on this. Why can you not take the whole hit up front? When do we think we'll get back to profitability for Switzerland? That's the first question. Second question is on M&A. You've bought a stake in Cattolica, you've been linked to Borsa Italiana, neither of which really seems naturally to fit into your core M&A focus. Could you give us a bit more color on these and what we should think about the M&A strategy? Thirdly was just on P&C claims frequency.
Just really wondered if you could give us a bit of color on how things have changed since lockdowns started to ease. Do you still see COVID as being fairly neutral to maybe even slightly positive for the P&C business in H2? Thanks.
Andy, sorry. Can I ask you a favor? Can you repeat please the first question?
The first one, on Switzerland?
Yes, sorry.
Sure. Just saying on Switzerland, you've had the reserve strengthening, but it sounds like a similar hit to come in H2. You've guided for a negative operating result in 2021. Just really wondered if you could give us a bit more color on that and when profitability might return for Switzerland and actually Could you not just take that whole hit up front rather than spreading that over a couple of years?
Thank you. I suggest we start with Philippe on the M&A strategy. Then Frédéric, if you want to answer the question on Switzerland. Thank you. Then P&C also. Yeah, thank you.
Yeah, thank you, Andrew. On the M&A strategy, there is no change on the strategy we described when we presented our Generali 2021 strategy . It's a very disciplined strategy. On the insurance, it's focused on Europe. The scope is wider on the asset management side. We have nothing serious except the Cattolica investment, which is a strategic and industrial investment. On Borsa Italiana, there is absolutely nothing. We are not involved in this. Basically, this is it. Frédéric?
I'll start quickly with the P&C frequency before moving to the first one. On frequencies, yes, we've seen dramatic decreases of frequency during the lockdown, especially on motors, by more than 50%. We've also seen decreases in some other lines of business. What is interesting is that even if frequencies have significantly increased after the lockdown, they've not come back yet to normal levels, which I think is a good indicator also of the economic recovery. We still have frequencies which are down compared to our normal levels. On the first question on Switzerland. First, this is important to understand where it comes from. It comes from an acceleration of the reserve strengthening, which relates to an old unit-linked portfolio in runoff, which was closed to new business around 10 years ago.
Now the size of this portfolio is around CHF 8 billion, and this portfolio has financial guarantees. The average guarantee on the book is at around 2.3%, and these are at maturity guarantees. The book is partially hedged for interest rate and equity market moves. As you may have seen, interest rates have decreased a lot recently in all countries and also in Switzerland. Due to this extremely low level, and due to the fact that we want to have a prudent reserving approach, we've decided to accelerate what we had started to do about 10 years ago. About 10 years ago, in accordance with the Swiss regulators, we had decided to set up a guarantee reserve linked to this portfolio. At the end of 2019, this reserve had reached an amount of CHF 1.3 billion.
Again, linked to the context, we've decided to accelerate this reserving in 2020. We've booked CHF 300 million in the first half, and we will book the same amount in the second half. After that, we will come back, I would say, to normal levels of reserving. I understand your questions on why don't we do it one-off. This is linked to the agreement with the Swiss regulator, and how the Swiss regulator decides that we should book this. Then you should have in mind that this is a very long-term portfolio, about 30 years maturities. The agreement with the regulator is that we will continue to increase reserves over the next seven years. Again, we will come back to a normal pace of reserving.
In addition, you may have seen that, again, with the same philosophy to be cautious, we decided to impair the goodwill on our Swiss portfolio and on our Swiss operation, and it had a EUR 93 million impact at half year. I think, and I will conclude with this, it is important to understand that the Swiss portfolio, again, this is a run-off portfolio, has very high technical profits and very high fees. Of course, we have negative investment margins, but we have partially compensating fees, very high technical margins, and very high fees. What I can tell you is that at the current market conditions, we estimate that the value of the portfolio is negative in the region of mid-triple digit hundreds million EUR. I hope I was clear, Andrew.
Super clear. That's really, really helpful. Appreciate it. Thanks.
The next question is from Peter Eliot with Kepler Cheuvreux. Please go ahead.
Great. Thank you very much. Two questions. I might come back quickly on Switzerland. First of all, on your expense ratio, you showed a big reduction of 0.7 percentage points. Would you be able to comment how much of that you think is structural and how much of it is simply a sort of short-term volume and mix effect that might reverse in due course? Second question, I noticed your Italian motor premiums were down 7%. I was wondering if you could just outline the drivers of that, and maybe put it in the context of what you see has happened to the whole market as well. Then, yeah, finally, maybe just to come back quickly on Switzerland.
Obviously, you mentioned the low interest rates, which are, I guess, the primary driver, but I was just wondering if you could just highlight sort of what the further risks are for that and whether Sorry, just to clarify, whether from 2022, you do expect to be back on the old run rate for operating profit going forward. Thank you very much.
Peter, thank you very much. I think, Frédéric, you might want to take the expense ratio question, and motor.
Yeah. Switzerland.
Switzerland. All for you.
Hi, Peter. On expense ratio, you're right that there's a strong decrease of expenses this year, which is linked to, I would say, of course, directly to the COVID impact, which is also linked to additional discipline. Again, in tough times, we have additional discipline. It's difficult to say what is run rate and what is one-off. As a high level order of magnitude, I would say probably around 50/50. What is important is that all of this made us aware that we have other margins to decrease expenses, and we will continue to decrease expenses even next year beyond what we had in mind in our plan. We are working on this, and again, this is linked to the experience of the past few months. On the motor premium development, I understand that your question was linked to Italy only.
Yes, there was a quite significant decrease of motor premiums in Italy. Part of this is linked to a postponement of renewals. We will see that, and we will see it by end of September. We will see a recovery over the coming months. Still, I expect the premium evolution this year on motor to remain negative, and this is linked to both a more difficult new business and to the fact that in the current circumstances, we support our clients, and as frequencies have decreased a lot, our clients are also benefiting from this, and we see a decrease of the average premium. I understand your third question was linked to Switzerland, but can you say it again, Peter, on what exactly was your question on the third question?
Yeah. I just wanted to sort of understand the risks to the guidance that you've given. I'm assuming a further fall in interest rates would mean that maybe you have to take a sort of slightly bigger short-term hit. Just sort of confirm or understand that as you see it at the moment, as it currently stands, that from 2022, we should be back to a sort of normal operating level that we've seen in the past.
It is clear that this Swiss portfolio is sensitive to the Swiss interest rate level. We've adopted, for 2020, a cautious approach. If we had a significant increase, again, of Swiss interest rates, it would have a negative impact. Again, based on today's scenario, as I've said before, we expect that after the strong effort that we've made this year, we will come back to normal level of reserving in Switzerland. We will continue to allocate to the guarantee reserve as we've done over the past years.
Thank you very much. Just quickly to clarify, if I can. I think you said an increase in interest rates would mean higher reserving. I assume you meant the other way around.
Sorry. If I said this, I must be tired. That's obviously a decrease in interest rate level.
Just checking if
Thank you, Peter, to correct me.
Next question, please.
The next question is from Andrew Ritchie with Autonomous Research. Please go ahead.
Oh, hi there. Thanks. Just some fairly quick questions, I think. In the life business, I noticed it was only really Switzerland and Spain, I think, where you had the decline in net investment margin. There was a lot of resilience in Italy, Germany, France in particular. Do we expect more pressure there second half or going forward? Particularly because you've already flagged we're going to see lower real estate rents, obviously lower dividends must have already come through, I suppose. Maybe just clarify, is that resilience in the investment spread in those countries not to be extrapolated or is it? Linked to that, maybe just update us broadly on what you're doing with your sort of reinvestment strategy in current markets. I've seen that you've obviously flagged very low reinvestment rates. I don't know what you can do to supplement those.
Maybe just give us an overview as to how you're treating the problem of reinvestment right now, which has clearly got even more challenging. The final question, I should probably know the answer to this. This is a very quick one. I am a bit confused. Asset management result was up a lot quarterly, as in Q2 versus Q1, even though average AUM must have been down, at least for external clients. Is there some seasonality in the asset management result? I think there is, but just remind us why that is. Thanks.
Thank you. Cristiano, if you can take the first question, then we can pass on to Tim for the two questions on reinvestment and asset management. Thank you.
Yes, thanks. Hello, Andrew. First point on the net investment margin in the second half. If I have to compare what is the expected net of extraordinary development of the market, which is still unknown in front of us, should be quite fairly similar to the first half of 2020 due to the actions and due to also the equilibrium in the investment part we managed through this quite low yield environment.
There's no effect from lower real estate rents to come through still?
From real estate, you will see potentially a slightly higher part in the second half of the year, notwithstanding the fact that this is counterbalanced by the fact that in the first half, you were missing the dividends from the banks. You need just to make the balance among the two. That's why I'm saying it is fairly stable.
Okay.
Tim?
Yes. Good afternoon, Andrew. This is Tim Ryan, the Group CIO. On your second question on reinvestment strategy, the first point I want to mention is we are very cautious on the way we deploy capital. You will have seen that even our cash position has increased. Why? Because we always want to look at the risk-adjusted return. What do we do to do this? We have done a couple of key elements. One is to continue to selectively invest in investment grade with high-quality names, and this has been very efficient. Our team has done a wonderful job on this first point. The second is to continue, as we said before, because our strategy is to be resilient, whatever the market situation is in real assets.
On real assets, we have seen some quite big dislocation, both on the private equity side as well as on the private debt side. This is all across the different geographies. For us, this is for an opportunity to even accelerate the deployment. Again, being very cautious on risk and liquidity, which is a key element. This is to answer your second question. The third element I will answer as well on the asset management side. We have said that our projection to deliver EUR 350 million by 2021 will be quite linear, but there is some seasonality that comes from the second point I mentioned just on your question, is that as we deploy on a real asset, we do have commitments, we do have fees that are captured at different point of time.
There is a seasonality that is usually the second quarter as well as the last quarter of the year, we have a bit of a pickup on the fees. This is to understand this. At the end, why we've been resisting fairly well is that asset mix that is not just third party, but the asset mix we have is today, a majority of fixed income products. Obviously with the yield compression on government bond, this has enabled us to also benefit from a bit of a market uptick on our fixed income portfolio, which therefore gets more fees.
Thanks for that. Just to clarify, the reinvestment rates that I've cited is 1.3 in both life and non-life. Is that the average for the half year or is that the kind of spot position at the end of the-
It's the average. To answer your question, it's 1.4 on the life side and 1.3 on P&C.
I guess it may have come down a bit by the end of the quarter, given what's happened to spreads in Q3.
It depends, again, on the speed of deployment on the real asset, because this is a bit more of a slow burner compared to the situation we have on the rest of the market.
Okay, great. Thanks very much, everyone.
Thank you, Andrew. Next question, please.
The next question is from William Hawkins with KBW. Please go ahead.
Hello. Thank you very much for taking my call. First of all, thank you for the extra clarity on the COVID losses on slide 10. Apologies if I've missed it, with regards to the EUR 87 million in non-life, could you give us the breakdown of that between the gross items? Presumably you've taken Travel losses, which are a negative, then you have the benefit of frequency that we've already talked about. I'm not sure what the two opposing numbers are that get us to EUR 87. That's question one, if you could tell us the losses versus the frequency gains. Secondly, could you update us please, on where the average guarantee has got to in your life in-force portfolio?
I'm sorry if I'm out of date, but I think the last time you published it was at last year's May Investor Day when you talked about 1.2% in 2018. I'm sorry if I missed it at the end of last year, could you just give us an update of where that average guarantee has got to? Presumably it's not changed much. I'm just assuming it may be down a little bit and would like to check. Lastly, could I ask you just to comment a little bit more on your dividend outlook? Your formal comments are reassuring with regards to the second tranche, you are being very clear that that depends on the norms and regulatory recommendations concerning dividend payments.
As far as I can see, the outlook for that is still very uncertain, and if the banks are anything to go by, still quite a challenge. I appreciate that you guys, in terms of your numbers, seem to be screening fine against your own assessment of risk, I'm not sure where you think you are with regards to the overall regulatory environment. Thank you.
Thank you. Cristiano, I suggest you take the first question on the detail around the COVID impact on our P&C operating. If you can take also the second question on the average guarantee, Philippe will take the dividend question.
Yes. The 87, clearly this is an estimation, and has been done accordingly to a methodology compared to our budget expected point, which is a fair point to be clarified in explaining you how we did it. Basically, the 87 net benefit comprises around EUR 70 million direct claims, both travel and business interruption. We have a figure of lower volumes, which is having a negative impact of the order of EUR 100 million, this goes on the positive side with the lower claims frequency due to the reduced activity in particular in motor. The net effect of this is bringing a positive EUR 180 million between negative volumes part and positive effect on technical profitability.
You have another delta between EUR 180 million and to get to EUR 87, which is a combination of lower income from regular income, especially dividends, less dividends in the first half of the year, concentrated and having a higher impact on a pro rata basis because it's on half year and not on the full year part. Other operating costs coming from COVID-19 related initiatives, which are not included in the technical results, but are mainly related to the support of the business given for the operation and functioning during this very complex moment. Second point related to this is that we are between 1.25%-1.3%, in the middle of that range. That should be the expected average rate guaranteed you have on our life book.
Thanks.
The rate will proceed in this way according to the transformation of the lower guarantees coming from the new business that we underwrite, which are done also in some cases at negative guarantees. Don't focus only on the average guarantee of the book. Take, for example, into account that 27% of the saving business done in Italy in the first half has been done with the only death benefit guarantee, and not a financial guarantee related to that, which is bringing further down the strain on the capital consumption of the saving business. We will clearly update you with a detailed figure for the year-end figures.
Philippe?
Thank you. Thank you, William. As approved by our AGM in May, the second tranche of the dividend is to be paid by year-end, and it's subject to the board's verification. The board will be held on November 11th. The board will check the compliance with the limits set by our group's Risk Appetite Framework as of September 30th, as well as the compliance with the regulation and with the recommendations of the regulator. Nothing new.
If I may come back. Sorry. My question was more on the last bit about whether you think the regulatory environment has evolved.
As far as I know, the regulator is still in the same mood, which is to recommend an extreme prudence in the way we manage capital and dividends.
Thank you very much.
Next question, please.
The next question is from Michael Huttner with Berenberg. Please go ahead.
Okay, thank you so much. I have three questions. One on the numbers. I'm really sorry I didn't follow precisely the answer you gave to Will on the claims and the impact in non-life, because I came up with a negative figure in total, and clearly it's a positive EUR 87. I just wondered if you could help me on that. You talked about the cash position. Can you update a little bit on what it is and what the cash flow you see for the whole of the year given your target of remitting, I think it's over EUR 7 billion over three years. The last point, I just wondered if you could talk a little bit more about Cattolica.
I noticed you mentioned it as both a financial and a strategic investment. I just wondered if you could kind of give, or industrial investment, give a kind of a feeling where exactly it lies. Is it part of your budget of around EUR 4 billion of deals and how you see it developing? Thank you very much.
Thank you very much. Michael, I suggest, Cristiano, if you can take the first two question. Philippe will take the final one.
For sure. Michael, sorry not for being clear. I wanted to highlight also within the claim. The technical profitability is impacted by this claim. I just gave you a further information, which is within the positive result of claim, we had an impact of EUR 70 million from travel and business interruption. That you have a view of what was the impact. At the end of the story, we had a positive impact in technical profitability for EUR 275 million, a negative impact for volumes of EUR 100 million, which is netting out to get the EUR 180 million coming for the combination of premium and profitability overall. This is the EUR 180. From EUR 180 to EUR 87, you need to deduct lower income for dividend, which we did not receive from equity participation in the first half, which is even more impacting pro rata.
Second, some initiatives which are not accounted in the technical results, so you don't see them in a combined ratio final figure, but are there to support the functioning of these complex moments of specific COVID environment to give to the network and the operational and the agents and all the distributors the support needed in order to function and produce at the end of the story, what in my personal opinion, is a very good result in even non-life collection, as you have seen.
Very clear. Thank you.
Second point, cash. Cash is at the strongest ever level. I recall you that we paid, in May, the first tranche of the dividend, notwithstanding that last time we talked, I told you that we had more than EUR 4.1 billion. I can confirm you that we have a very healthy level above that one of cash, which allows us to fulfill cash and capital flexibility in such an important, and uncertain moment, which is one of our key asset, in my opinion, reaching, and reducing a lot of uncertainty coming from the future. Hope I gave you clarity.
Can you talk a little bit about the cash flows?
Sorry. Sorry.
Yeah.
Yes. My fault. I'm getting old.
Of course. No . How much are we aged?
I confirm you that with the last cash flow or accounted for remittance in the first weeks of July, we are above the 90%, close to the 95% level of total remittance expected for 2020. What is missing basically is some Central Eastern Europe entities in regimes which were quite strict, but we hope that due to the healthy level of the solvency of these subsidiaries and the liquid position, we hope that after this summer break, we will get more clarity also from the answer of the regulator. We are very well positioned to fulfill this 2020 remittance pattern.
The position in cash now, you're saying is higher than in Q1, even after paying that first tranche of the dividend.
No, no, it is higher.
It's higher.
It is higher and at healthier level. This is bringing us the confidence. Don't forget that in July, we spent some money for the liability management exercise, it is higher even though we did that. Okay?
Oh, wow. Okay. Oh, wow. Okay. Thank you. Hmm.
Philippe, over to you for the Cattolica question.
Yes. Thank you, Michael. The potential investment in Cattolica is both strategic, industrial, and also financial because it's an investment. It's still potential because, as you know, it's subject to the transformation from cooperative company into a joint stock company. The meeting of the shareholders of Cattolica will decide tomorrow if they accept, if they approve the transformation and the capital increase proposed by the board of directors of Cattolica. At this stage, I would say it's still potential. If we make the investment, it will be something around EUR 350 million, for having 24.4% of the company. It goes obviously together with an industrial partnership on asset management, on reinsurance, on health insurance, and on Internet of Things. This industrial partnership would provide additional revenues and earnings for Generali. Basically, this is what I can comment at this stage about this partnership.
Is there any, given your position in Italy, which is quite large, with the regulator, is there a potential risk that the regulator says, "Oh, you can influence a bigger share part of the market now?
We don't see this kind of issue. We don't see any kind of antitrust issue at this stage.
Good. Thank you so much. Thank you. Good luck with it.
Thank you, Michael.
Thank you, Michael. Next question, please.
The next question is from Farooq Hanif with Credit Suisse. Please go ahead.
Hi, everybody. I hope you can hear me well. My first question, just coming back to Cattolica. Can you give us some idea of how much of the assets you might manage, and to what extent you'll be reinsuring, so that we can get maybe some clue on the potential uplift next year, if this potential deal goes through? Just a scope of it, what kind of return you expect. That's the first question area. Secondly, going back to just clarify on the claims frequency benefits. I believe, Christian, you said, it was a EUR 271 million benefit. The actual claims frequency is just that part. Just want to clarify that number again. Lastly, going back to life, excluding the commercial contract, obviously, volumes are down. They're not down that much considering the environment. Just wondering what you're seeing in terms of life in Q3.
With your updated systems, with lockdown ending, is there a pickup now happening? Could you please talk about that? Thank you very much.
Thank you very much, Farooq. Sorry, can I ask you a favor? Of the first question, it didn't come out too well. At some point, the sound broke. Can you repeat, please, on the Cattolica?
Yes, of course. Thank you. The scope of the asset management and the reinsurance of Cattolica, some numbers maybe to give us an idea if this deal goes through, of what your ambition is.
Well, thank you, Farooq. This is Philippe speaking. Before letting Tim Ryan answer on the asset management, I would first say that for the time being, it's still a potential investment. For the time being, it's not real. We will know more about this tomorrow night.
On the scope, Farooq, on the scope of the agreement that will be subject again, as Philippe mentioned, to the votes of tomorrow, we have in scope the traditional insurance asset management services around LDI, liability driven investment, as well as real estate, and the scope will be in the double digit of billions of EUR.
Can I just follow up on the reinsurance? I know it's early, but presumably you will be able to add a lot of value for motor book and the non-motor book of Cattolica.
But it's impossible at this stage to provide the details of what would be the reinsurance agreement. I think that the first step is tomorrow. After that, obviously, we would discuss the detail of the agreement.
Okay. Thank you.
Frédéric?
First, you have to know that we've closed our accounts, and especially on the claim side, we've closed these accounts in a cautious way, I would say. Which means even more cautious than we were used to do in the past. Why have we done so? Because there are a lot of uncertainties over the coming months. We thought that it was a good policy to be extremely cautious in closing our accounts and in closing our claims. You see part of the benefits of the claims frequency in the half-year accounts, you do not see all of it, and we will see what happens in the coming months. There were scenarios, we had been looking at China and at the increased traffic in China after the lockdown.
We were thinking that frequencies may increase after the lockdown. Now we are monitoring this extremely carefully, and as I said before, in July, frequencies have not fully come back to normal levels. Again, your question is absolutely valid. It's complex to answer. You see part of the benefit in our combined ratio in the first half. You do not see everything because we've been cautious, and we are anticipating, or we want to anticipate potentially what happens in the coming months. Again, if you ask me in the second half how frequencies will be, I cannot tell you yet. I can just tell you that in July, frequencies are still improving compared to last year. On the life side, so in fact, volumes have been doing well in the first six months. There is a combination of various factors.
First, people, and it may seem a paradox, but people have saved more globally in the first half, which is good for our business. The second factor is that our agent channel has been extremely performing over the lockdown period, and that was something we had never experienced. We were not sure of what to expect. The combination from agents and digital tool has proved to be an extremely strong weapon, if I may say. Our agents have continued to advise our clients. Our agents have continued to sell, and we are extremely happy with the performance of our agent channels around the globe. There is a third interesting factor on the live volumes, is that mix has, and I had already discussed this at the end of the Q1, mix have significantly improved. You see that protection has continued to increase.
You see that unit linked have dramatically improved. Even if you exclude this specific pension contract in Italy, unit linked have slightly improved over the first six months, and general account new business has decreased. I would say that this is extremely interesting because this is different from previous crisis that we had experienced in which clients were selling their unit linked products to invest in guaranteed products. We've not seen this at all, and we're happy to see that the mix has continued to improve. What will happen next? It's difficult for me to say. We've made a big survey in about 20 countries where we're active. Clients tell us that they want to be more protected, and that they want to invest more in life insurance products. This is what they tell us, which is a good signal. Will it happen?
I cannot tell you yet, but let's say that we are quite positive based on this survey and what our clients tell us. Again, this is an uncertainty.
Thank you very much.
Cristiano, do you want to add something on the claims side?
Yes, I think this could help also for refer to dig in a little bit. Clearly, okay, apart from the lower NatCat burden of 0.3 percentage points, what you see is that the positive contribution for prior years development decreased to 2.5% compared to 4.1 of last year. This drop, as very well underlined by, highlighted by Frédéric, does not reflect the change in the strength of the reserving position. This is rather contingent on prudency in the liquidation of the claims in the process of the current COVID-19 environment. As a proof point of this, if I just look in the capital generation of the first half of the year, which before deducting for the accrued dividend pro rata. I'm just saying capital generation, what happens in that before the dividend deduction is 10 percentage points.
If I look at the contribution coming from the non-life part, in the first half of 2020, I have a capital generation which is higher than the full 2019 capital generation non-life, which is, I think, the fair element to be looked when we look at what was the impact. Hope I gave you more insight.
That was very useful. Thank you very much.
Next question, please.
The next question is from Nick Holmes with Societe Generale. Please go ahead.
Hi there. Thank you very much. A couple of questions, please. Really just follow-ups. First, coming back on Switzerland Question is, what prompted you to strengthen the reserves now? Is it the market or the regulator or combination of the two? Sorry, just very quickly coming back on PYD. Cristiano, I wasn't quite sure, you were saying it's obviously fallen to 2.5%, but is 4% still what you would expect on a normal basis? Thanks very much.
Frédéric?
Hi, Nick. Useless to say that we always close our accounts in agreement with the regulator, especially as for the reserving of this kind of product in Switzerland, the rules are principle-based. What we've always agreed with the regulator on how much should be the guarantee reserve and at which pace it should be done. The trigger this year is the low level of interest rates. Again, this is why we decided, and again, in agreement with the regulator, to make strong accelerations this year.
Sorry, just a very quick follow-up. These financial guarantees are interest rate guarantees rather than equity guarantees, or are they? You mentioned equities, I think, as well.
The underlying are unit-linked products, and we are investing in low volatility funds. The main risk is interest rate risk, and there is some limited equity risk.
Understood.
Cristiano, on the PYD outlook?
Yes. Nick, I confirm you that the 4% is a more appropriate view of the run rate of prior year development in the, let's say, not uncertain environment, prudent reserving as we made in the first half.
Okay. Thank you very much. That's very clear.
Thank you. Next question, please.
The next question is from Colm Kelly with UBS. Please go ahead.
Thank you. First one on capital management. The normalized capital generation was strong in the first half at EUR 1.9 billion, due to the boost from P&C. I suppose looking forward to potential recessionary scenarios where the P&C result might be more normalized and the life contribution may be impacted by continued lower investment income and lower new business value. Do you remain confident that Generali can deliver on the normalized capital generation target of EUR 10.5 billion over the 2021 plan? That's the first question. The second question is just relating to the reserving action and the ongoing profitability drive for the Swiss Life business.
Does the action today, and over the first half, alter your view on the strategic position of that business and the Swiss business within the Generali Group, given that it's unlikely to generate profitable growth or generate a high return on capital deployed, which are core metrics within the Generali 2021 plan? Lastly, and maybe simply on the BTP solvency sensitivities, you very helpfully gave an update in March around the BTP sensitivity changes from the full year due to the country-specific VA volatility adjustment. Given the changes in spreads since then, would you mind updating on any material changes to that BTP solvency sensitivity? The 197 solvency would suggest it may have changed again, so an update would be very helpful. Thank you.
Cristiano, I suggest you answer the first and the last question, Frédéric will take the question on Switzerland.
Absolutely. Colm, fair point to say that there is a kind of support, as of today, in the P&C capital generation. What I would like to stress is, you need to take into account different factors. Going forward, our product mix, as well highlighted by Frédéric, was giving even more in the capital light space. Even in the saving world, as I was telling you, for example, in Italy, 27% of the saving has been done without a financial guarantee, only with a death benefit. In case of that, you guarantee the amount of premium, nothing else. Which is a very healthy capacity to generate a new business margin.
We are continuously focusing in growing the ancillary guarantees and protection part in this business and the unit-linked collection, which allows us to be confident to get to the capital generation level, knowing the fact that we are doing well in growth also for the P&C part, with a very healthy growth on the non-motor component. Having said that, we are not in this environment under pressure for the 10.5. We will see the evolution going forward, but we were very well dynamically acting against this, and our new product are showing this form of resilience. I think you have seen from our new business margin. Third point related to sensitivity on BTP. Are they changed from the final year?
Let me say that, no, because if I look as of also these days, we are at level of spread, which are not far, even slightly better than the year-end, and in a level of not activation of the so-called country-specific VA. We need really an opening of BTP spread, let's say as of half-year condition end of June, okay, because that was the last moment we calculated. The trigger would have been with flat corporate spread, as of end of June, we would have need something in the order of 50 to 60 basis points of further opening of BTP spread before triggering the country-specific volatility adjustment. No big changes, in my opinion, to the sensitivity reported. Hope I gave you flavor.
Yes. Thank you.
Colm, on your second question, it's important to understand that our Swiss business is made of three different bits. We have a good P&C business on a market which is profitable. We have a good life new business, and we have this book, which has been underwritten in between 2000 and 2009, which obviously is not good and which is impacting our result for the time being. I will not tell you that we are happy with this result in Switzerland, but as of today, our strategic view on the market and the company has not changed.
Okay. Thank you very much.
Next question, please.
The next question is from Ashik Musaddi with JPMorgan. Please go ahead.
Yeah. Hi, thank you. This is Ashik Musaddi. Just a quick follow-up on Swiss business again, sorry for this. How should we think about the mark-to-market impact of low interest rates on that business? I think you mentioned that it would be negative triple digit value. I think I also heard that you're talking about adding EUR 300 million reserves in first half and then similar in second half. So how can it be only mid-triple digit negative value if you're adding EUR 600 million just in 2020? So what are we missing here? Any thoughts on longer term market consistent value of that business would be good. Secondly is in terms of asset allocation of that Swiss business, can you give us some color on where those assets are invested?
Just to understand, is it possible for you to get a yield pickup by going up on the risk curve on that asset base and reduce the interest rate drag on that? Thank you.
Ashik, sorry, I didn't get the second question. Apologies.
No, that's fine. The second question is simple is what is the asset allocation of that Swiss life book? Just to understand if you can go up on the risk curve to address the low interest rate problem on that business. Thanks.
Tim, I don't know if you want to take this second question first.
Sure. I will take the second question on your question on the asset allocation. We have, like any business that is related to life, a very conservative approach that is to rely on fixed income and also to deploy within the real asset, especially on real estate. The answer is that we have room to take risk. We are obviously very careful about the adjustment that you need to do to back some of the guarantee. We are using both the government for the typical duration matching as well as corporate bond spread, which we look at hedging back into CHF, and on the margin to have a pickup around the real estate and investing in a very prudent way in the debt mortgages as well in Switzerland, which is a very high margin business for us.
Thank you. Frédéric, do you want to take the first question on the interest rates?
On your first question, on mark-to-market, I said that our estimate is mid triple-digit negative on this book of business in mark-to-market. Of course, it depends very much on your interest rate assumption. Just as a reminder, in 2023, we will have IFRS 17. At this point, everything will be really mark-to-market. I cannot say much more. Again, as I have said, we have this negative investment margin, very interest rate dependent, and we have extremely high fees and mortality margins, which are not interest rate sensitive.
Is it fair to say that the EUR 600 million hit that you will be taking this year is just to do with the recent interest rate decline, or is it a bit of a catch-up from past as well? What I am trying to understand is how should we think about future reserving additions, et cetera, if interest rates do not change. If it is, let's say, if the EUR 600 million is just because of this recent drop in interest rates, more or less, I do not think you would need to worry in the future too much. If there is a bit of catch-up from past as well, probably interest rates play a bit of a role here, because interest rates have been declining for the past, let's say, 10 years.
As I said, the EUR 600 million is directly linked to a catch-up on the lower interest rates. I have said that after this, having done this catch-up, after this, if interest rates remain where they are, we will come back to more normal levels.
Okay. Yeah, that's right. Yeah. Thank you.
We have time for one more question.
The next question is a follow-up from Michael Huttner with Berenberg. Please go ahead.
Thank you very much for this chance. Just on the solvency, I was hoping solvency would be up versus Q1. It's actually down. I was trying to work out the moving parts. It's in other, and I know you have this thing about the adjustment to the bank, which I think costs about 1%. Other for me was a delta of 3%, and I just wondered if there's something here which I missed.
Cristiano, this is for you.
No, there is nothing specific on this part. The only important thing you have to keep in mind, it has been the BSI transaction, and the plan for the employees of Generali, where we bought back the shares of Generali, which then are a non-eligible own funds item for a temporary moment, because then we will give them back in 2022 at the end of the plan. It's a temporary drop, let's say, due to the execution of the plan. Nothing more specifically missed apart from the EUR 100 million COVID expenses on an international fund. These were the three elements, but in the first quarter, we booked the COVID fund in the IFRS account already.
Yeah. Generali shares, how much is that?
Michael, I really did not understand.
Sorry. The Generali shares, how much is that, please?
It is six million Generali shares buyback. It is in the order between EUR 70 million-EUR 80 million. This is public information as we disclose to the market each single chunk of transaction done.
Got you. I missed it. Thank you so much.
Michael, this is Frédéric. Maybe I should remind also that, I know you know it, but this year is the year in which we will implement our Operational Risk Internal Model, which will have a positive impact on our solvency margin at year-end.
Oh, brilliant. How much will that be? I'm pushing my luck here, but
Unfortunately, I cannot disclose it because we need to have the final signature from the regulators, so you will know more at year-end.
Lovely. Thank you so much. Thanks, Frédéric. Thank you. Thanks a lot.
Thank you very much. We already running over time, so this concludes our Q&A. Thanks a lot for all your questions. As always, the investor relation team will be at your disposal for any follow-up. We wish you a happy summer break. Thank you. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.