Good afternoon. This is the conference call operator. Welcome, and thank you for joining the Generali Group nine months 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 Mr. Philippe Donnet, Group Chief Executive Officer. Please go ahead, sir.
Thank you. Good morning, everyone, and welcome to the presentation of Generali's 2020 nine-month results. Before we open the Q&A, I would like to address an issue that is on everyone's mind. As you have seen from our press release, based on the current decision of our Italian regulator to stop the payment of dividends for macroeconomic reasons, our board of directors yesterday had no choice but deciding not to distribute the second tranche of the full year 2019 dividend by the end of the year. At this stage, the Italian regulator does not permit us to distribute the outstanding tranche of the full year 2019 dividend. Specifically, we received a letter from our regulator a few days ago, clarifying that the application of the ESRB recommendation does not have room for case-by-case evaluation.
As a matter of fact, today our Group is sound and solid, and our 2020 nine-month results are a further proof of this fact. Even though Generali is strong and has achieved very resilient results, of course, we have to comply with the regulator's decision. Nevertheless, we are very proud of our achievement in terms of maintaining a very strong balance sheet and delivering resilient operating profit in such a challenging environment. Our operating results of over EUR 4 billion is up by 2% year-over-year, and last year was a record year for the Group in terms of operating result. Even with the persistently low interest rate environment, our capital position is very strong, with a solvency ratio at 203% at the end of September, the highest among our peers.
It is important to note that this is after deduction of the full 2019 dividend and the accrual of pro rata dividends for 2020. Our liquidity position at the holding company has never been higher, and our priority remains the execution of our strategy and making sure the Group stays strong, resilient, and focused to be able to fulfill the needs of all stakeholders, and particularly to reward shareholders with fair cash dividends as soon as we are allowed. To that end, Generali's management remains committed to its dividend policy, and in particular, to fulfill its EUR 4.5 billion-EUR 5 billion range for cash dividend payments over 2019-2021, subject obviously to the easing of current regulatory decisions. Please note that on this call, we will focus on questions related to our 2020 nine-month figures and the information in the press release we published today.
We very much look forward to answering all your other questions on our Investor Day next week on Wednesday, November 18th. Thank you so much for your attention. Frédéric, Cristiano, and myself are now ready to take your questions. Thank you.
Thank you. This is the 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 Michael Huttner with Berenberg Bank. Please go ahead, sir.
Good morning. I hope you can hear me. I've got two questions, one which is really obvious. They're both really obvious. The first one on dividend. If I look at the screen right now, I see Poste up 3%. I see Generali is down 1%. I'm delayed, I'm not saying, it's just the screen and today and who knows what else is happening. Clearly to my mind, it's Poste is paying a dividend, Generali isn't. I was puzzled a little bit when you referred to dividend, when you effectively kind of stretched out the dividend hope right through to 2022, a payable in 2022 by referring to this EUR four and a half billion-EUR 5 billion range. My question is really how likely do you think that the regulator will kind of say, "Okay, 2020 dividends okay to pay in 2021"?
How likely is it that anything left over, even your 2019 remaining dividend, they'll kind of keep pushing out and even push out the 2020 dividend? A separate question, a really simple one. Can you talk a little bit about the Switzerland impact? Are there any more such things in your portfolio? What is the number you took in Q3? Thank you.
I will ask our Group CEO to answer about the dividend and to Cristiano to talk about Switzerland. Thank you.
Hi, Michael. This is Frédéric.
Hi, Cristiano.
This is Frédéric, yeah.
Frédéric, sorry.
Your question on the regulator is extremely tricky. We believe we have, as Philippe mentioned, all the prerequisites to pay the dividend, solvency, liquidity, resilience of the operating result. Our regulator, IVASS decision is not to allow us to pay the dividend for macroeconomic reasons. We cannot say more than that. I think at this stage, you should speak directly to the regulators, if I may say. On our side, we are confident, and we believe we have all the prerequisites to pay the dividend.
I suppose the question is really because Poste was allowed, and you're not. That's something which you kind of say, "Hang on." That's why it struck me a little bit.
To be clear, the decision of IVASS was a decision for all the Italian markets. This is not a specific decision for Generali.
Okay. Do you think they'll change their mind?
This is Philippe speaking. Maybe I should
Okay
add a word on this. Obviously, I had some interactions with the Italian regulator. Obviously, I told him that I was a bit surprised about this decision because, as Frédéric said, it's only based on the macroeconomic considerations. It has nothing to do with our position, our capital, and cash position, which they recognize is absolutely excellent. They also told me, and that was positive, that they are not in favor of the same dividend restrictions for 2021. This is what they told me a couple of days ago. As you know, there are many regulators involved. The local regulators, EIOPA as the European regulator, but also as I mentioned, the ESRB. Definitely the Italian regulators is not in favor of keeping these restrictions for 2021. I think this is important, and this is a hopeful message.
Thank you.
Hi, Michael. It's Cristiano. Regarding the second question related to the Switzerland impact in third quarter, I just reconfirm you what is the expected trajectory already mentioned in the half year presentation for the full 2020 to be broadly in the ballpark of EUR 600 million dotation of the reserve. I just recall you that some of this dotation will be non-tax deductible. That's why you can get also this effect on the net.
Okay. You couldn't just name the figure for Q3, would you?
Yeah. We are broadly in line, not far from in between CHF 450 million and CHF 500 million allocation.
Brilliant. Thank you very much.
Next question, please.
The next question is from Peter Eliot with Kepler Cheuvreux. Please go ahead.
Thank you very much. The first one was just if you are able to give us, well, again, asking for numbers, if it is possible to have the expense ratio, or if you are not wanting to disclose the number, whether you can give us any indications of the expense savings or the direction that is going, that would be great. The second question was, organic capital generation seems to have been about six percentage points in Q3 alone, gross of dividend. Obviously, a strong number. Just wondering if there is anything in particular that is driving that to maybe a stronger level than normal. Finally, I know it is not necessarily the right time to talk about it, but we have seen a bit of M&A activity recently. I am just wondering what you are thinking maybe of the prospects to deploy some of the budget that you have got at any point.
Just wondering if you can comment briefly, generically about the outlook, the environment there. Thank you very much.
Okay. I will ask our GM to answer to the first question, our CFO to the second, and our group CEO on the M&A point. Thanks.
Hi, Peter. On the expense ratio. First, in absolute terms, our expenses decreased by a bit more than 2.5%. We believe that part of this expense decrease, which is due to the new way of working, is here to stay for the long term. If I look at the expense ratio, the expense ratio is decreasing by 0.4 points. It was at the end of September last year, it was at 27.9, and it has moved to 27.5. Cristiano, on capital generation.
Yes, Peter. Capital generation, you almost correctly pointed out, we are closer to the 5% more than to the 6%. The driver are mainly a very good best estimate combined ratio in non-life and a 4.5% new business margin in the third quarter on life, which is a very healthy capital generation production, also perspectively.
We can move to M&A.
Talking about M&A, I would say that the framework for our M&A activity is still valid, both in financial and strategic terms. We've been quite active actually in the M&A, not through a very big acquisition, but I always said that our priorities at the moment was small and medium acquisitions. This is what we've been doing, fully in line with our strategy in order to strengthen our market position in countries where we already are, especially in Central and Eastern Europe. We've been acquiring Adriatic Slovenica. We've been acquiring in Poland, Concordia. We've been acquiring Seguradoras Unidas in Portugal. We are now the second player in Portugal. Before this, we were in a corner in Portugal, we completely changed the situation. We've been also quite active in the asset management, with the acquisition of Sycomore, of Union Investment in Poland as well.
We've been acting fully in our strategic and financial framework. We still have financial resources available for acquisition, definitely. I would say that what is new is that the COVID-19 crisis may create new opportunities for us that would not have been possible before. I think that the good news is we still have significant available resources for M&A. There will be new attractive opportunities for us, and we will continue being active, but we will continue being, at the same time as I always said, disciplined. We will stick to our strategic and financial framework, and at the same time, very opportunistic.
That's great. Thank you very much.
Next question, please.
The next question is from William Hawkins with KBW. Please go ahead.
Hello. Thank you very much. Top-down question first of all. When you're talking about your pre-tax operating results, you're up 2% at the 9-month stage. You're still talking about being down by the full year. As far as I can feel, most of the drivers you're talking about are actually still quite positive into the fourth quarter. What am I missing that's going to be the big negative in the fourth quarter that takes you from being up to down? Are you just being pretty conservative in your guidance? Then I suppose a bottom-up question that's slightly related to that. Your investment margin for life in the first half was just over EUR 700 million, so that's about EUR 350 million a quarter. Could you give us an indication of what happened to that figure in the third quarter?
Again, just what you're feeling about the outlook for that number, because clearly it's getting hurt by COVID, which we should think is one-off, but it's also getting hurt by low yields, which may be more enduring. I don't really know, relative to the EUR 700 million you did in the first half, is that a base from which we step up again, or is it grinding down and down from that base? Thank you.
I will ask our CFO to answer to the questions.
Hi, William. Regarding the first question, yes, we still give this guidance. I think we have been prudent in the volatile environment we are facing due to this second wave of the COVID part. We need to take also this into account in the technical analysis for the final year. Regarding the investment margin of life, what is related is mainly explained by the investment margin effect on the third quarter, also impacted by the further allocation we gave to the guarantee reserve for our Switzerland operation.
This has been also coupled, don't forget, to some also effect on our recurring investment portfolio, notwithstanding also the fact that then don't forget that there is also the effect of private equity results, which has now been allocated in the segment of private equity, but later can be and will be allocated with the internal dividend to the operating result contribution of life, and then consolidated and netted out. Clearly, there is an equilibrium also of these factors. Hope I gave you more clarity, William.
Yes. If I may just follow up, again, with regards to the top-down guidance, your combined ratio, is there any reason to assume that there's going to be any kind of true-up volatility at the end of the year? Or given that it's been staying at a pretty stable level in the first nine months, can we take that through to the year end?
William, I may take this one. We don't expect any significant impact on our combined ratio of the second phase of lockdown. It has been excellent over the first nine months, and again, no other significant impact over the next two to three months.
Thank you very much.
Next question, please.
The next question is from Farooq Hanif with Credit Suisse. Please go ahead.
Hi, everybody. Hope you're keeping well. Firstly, can you just give us a bit more detail behind the really strong asset management result? You talk about a disciplined approach leveraging multi-boutique, but what does that mean? Is it revenues? Is it inorganic? Is it some sort of costs? Secondly, can you give us a bit more detail about the private equity dividend in the holding result and how we should think about private equity dividends going forward? Lastly, what can you tell us so far? What are you willing to tell us today so far about the extra arrangements you will have with or have with Cattolica, beyond just the share in the stock? I'm talking here about the reinsurers. I'm talking also about asset management. Thank you.
I would ask our GM to answer to the first question, our CFO to the second, and our CEO on Cattolica. Thank you.
Hi, Farooq. On asset management, you are right that the result is really good. By the way, we confirm our target for 2021. I think this is a mix of various factors. First, the inflows on third-party money have again been good over the quarter. We had more than close to EUR 4.5 billion inflow of new money from third-party asset management. More than that, there are two important factors. The first one is that we have extremely low cost, and this is something we've already disclosed, much lower cost than our peers globally. We have excellent margins on our asset management business. The second factor is that we've been successful in doing what we had planned, which is moving more of our unit-linked business to our internal funds.
This is something that we had planned, this is something we realized, we are close to our target on this. The addition of all of this, especially the low cost, lead to very good margins.
Farooq, Cristiano for private equity, let me guide you a little bit on how you should think, this is a very spotted on point in my opinion, thanks for asking. Private equity, our portfolio, has been managed since many years in a fully centralized way, which allowed us to have a very good selection. By the way, for your information, this is a portfolio which has a 13% IRR, which is delivering a good result constantly. Clearly, there is some seasonality and volatility around this because of the nature of the private equity. What is important to know is that we have different vintages and seasoning. As soon as a private equity investment comes to an end, and there is the realization of the gain, you see the impact in the part of the holding and other in the private equity. This is the allocation.
As soon as the investor, which is the company, be it either a holding per se or a life or non-life company having the share of this investment, receives a dividend from this result, we have the effect of the dividend payment, which is accounted and helps in life to support the investment margin, in non-life, to get to the investment result, this is netted out through a consolidation adjustment. Going forward, due to the fact that our strategy to redeploy in real assets, among which there is private equity, is paying off and will pay off in the longer term, you should expect more effect of dividend payments, hence consolidation adjustment related to this, also a growing result coming from private equity because of the nature and the seasoning of those investments. Hope I gave you a little bit more clarity.
Just to be also very clear on that point, some of this PE dividend in the consolidation and the share with life does go to the policyholder as well?
Yes. When we present you the result, it is already accounted for this, because when we calculate the full impact on the operating and net result, it is already shown after the so-called the fair policyholder liability, which means that the figure we are already presenting is already netted out for this. The only effect will be the netting of the dividend in the consolidation. The result presented already today accounts already for this effect. Hope I was clear.
Yes, clear. Thank you.
On Cattolica, this is Philippe speaking. Well, Cattolica is a very good financial and strategic deal. As you know, we have now completed the capital increase dedicated to Generali. We own now 24.46% of Cattolica, and we have an industrial and strategic partnership on asset management, Internet of Things, health insurance, and reinsurance. Through this partnership, we will create significant value, I would say, for both partners. Once again, it's a good financial and strategic deal. Then according to this strategic agreement, we are also open to look at the future together, I would say.
May I just come back, just quickly on asset management. When you're getting life insurance customers to move into unit-linked funds, how much of that is justified by the performance?
How much of that? I didn't get the question. How much of that?
Sorry. When you're getting people to move into your own boutique funds in unit-linked in Life, which is helping your asset management results as well.
Yeah.
How much of that is justified by the fact that these funds are performing a lot better?
Farooq, I can answer in two ways. First, I can tell you that the performance of our boutique over the past few months first has been excellent. The second way to answer is that we were very. This is something we had already discussed in various roadshows. In terms of percentage of our internal funds in our unit-linked, we were very much below market standards. We keep in an open architecture model for our unit-linked, of course, but we have increased the share of our funds, and we are close to market standards now. Again, I insist on the fact that the performance of our boutiques has been excellent.
Okay. That's really great. Thank you.
Next question, please.
The next question is from Nick Holmes with Société Générale. Please go ahead.
Oh, hi there. Thanks very much. Two questions, please. Firstly, sorry to come back on the regulator, do you think that more needs to be done to establish a level playing field across Europe? We're seeing such different regulatory behavior between different countries. I think that's more the problem. It's an EIOPA issue and a sort of pan-European issue. I wondered if you could comment on that. Secondly, at the operating level, wondered with motor rebates, are you concerned that there could be more regulatory and political pressure to make rebates to customers who aren't driving because of lockdown? Is that something you might be worried about? Thank you very much.
I will ask our general manager to answer both the questions. Thank you.
Well, thank you, Nick. Obviously, the European regulators, I would say both EIOPA and the local insurance regulators, were not able to guarantee the level playing field. This is definitely an important issue. The industry has been talking about this with regulators. I have been talking about this to the Italian regulator. This is not acceptable. This is not acceptable because this is no longer fair competition. Unlike the ECB, which is able to guarantee the level playing field for all European banks. The situation is very different in the insurance industry. First of all, I don't agree with the dividend ban for the insurance industry. We are not in the situation of the banks. We didn't get any benefit from any kind of capital relief. We didn't get any benefit for any kind of state guarantee for our products.
EIOPA has always confirmed that the insurance industry is very well capitalized, especially the large international groups, especially Generali. There is no reason for this dividend ban for the insurance industry. On top of this, as you said, I fully agree on this, there is no longer a level playing field. We've been strong on this. We've been talking about this in a strong way to regulators. That's why I'm pretty confident that the situation in 2021 will improve significantly on a regulatory basis. Yes, there is a political Sorry?
Sorry, I was just very quickly going to ask, do you anticipate any sort of change on the path of the commission in looking at the level playing field in 2021?
Well, as you can imagine, we have been very proactive and very talkative on this, I think that everybody in Europe is aware of the situation that has been created. The issue has to be addressed and will be addressed. As I said before, in the last interaction I had a couple of days ago with the Italian regulator, I was positively impressed by the fact that they told me that they would not support the continuation of this kind of situation for 2021. Okay, this is what they told me a couple of days ago. As I also said, their decision in Italy is based on macroeconomic considerations. It can change in a couple of weeks or month. I don't know, but I'm much more confident for 2021, definitely.
On the political pressure on rebates to customers, there is some pressure, it depends on the countries, because we cannot say that we have to face the same pressure in all the countries. Having said that, this pressure, according to me, doesn't make any sense, okay? Of course we know that the claims frequency during the lockdown is much lower than usual, for obvious reasons. But in the same time, we have also to face claims that we didn't have to face without COVID. You cannot ask the insurance companies to give rebates when the motor insurance frequency goes down and prevent insurance companies to increase the prices when they suffer more losses because of the COVID, or when they suffer the pressure of lower interest rates. Insurance business is a whole. You need to look at it overall.
You should not look at a single business line, you need to look at it also on the longer term. This is the insurance business. If we're supposed to grant rebate because of two months of lower claims frequency, it means that there is no more benefit from diversification, it would not make sense. This kind of pressure on rebates, which is limited to some business lines and to a very short period of time, doesn't make any sense. It's not consistent with the insurance business.
If I may add on the rebates, I think we've managed it in the right way. In other words, we've not adopted, in Generali, the kind of general measures that some of our peers have adopted, like 2 months free for everybody. What we've done is to have a case-by-case approach with some discounts for some customers. I think at the end, we had a better impact on customer satisfaction and on profitability. I think we've managed it in the right way, and it also guarantees the fact that the mid to long term, the impact on the average premium will not be significant. Again, we stick to this approach. Yes, there is some more assurance from regulators, we stick to this approach. Again, this was well appreciated by clients.
That's very clear. Thank you very much.
Next question, please.
The next question is from Gianluca Ferrari with Mediobanca. Please go ahead.
Yes, good morning, everyone. The first one is on the capital gain on the private equity fund. Probably, I missed the EUR amount. If you can reiterate what was the impact in the nine months. Sorry to go back to the great, the astonishing, I would say, result of the asset management segment. On a year-on-year basis, the operating result has gone up by EUR 74 million. If I look at Banca Generali, the operating profit was up only EUR 20 million. I was wondering how we can reconcile that. What is explaining this additional EUR 50 million increase, nine months 2020 versus nine months 2019? The third one is again on Cattolica. There is the second tranche of the capital injection to take place in January. This is what the company told us yesterday.
I was wondering if you are interested in acquiring some unsubscribed shares, and if you have already asked IVASS a waiver to the mandatory tender offer in the case you are interested in acquiring those rights. Thank you. I would ask our CFO to answer to the first question, to our GM the second one, and our Group CEO, Cattolica. Thank you.
Gianluca, first question, the answer is EUR 770 million net impact.
Thank you.
In the third quarter.
On your second one, Cristiano will help me. Banca Generali is in holding and other. Cristiano, can you say more on the reconciliation?
Absolutely. First point, as Frédéric was correctly pointing out, we account for Banca Generali in the holding and other segment. If I look at the first nine months, the increase in Banca Generali, and the contribution to operating results is on the ballpark of the EUR 20 million. When I look at the delta of EUR 73 million coming from the asset management, you need to be aware that there are growth coming both from the boutique strategy, especially because of the fact that we increased our offer, and we were also able to over-perform the benchmark. There are also revenues coming from the so-called performance fees, which are slightly higher in the first nine months compared to last year. There is also the contribution coming from the total revenues, and this is basically splitted.
The revenues of the asset management segment comes in the ballpark of 60% on what is created by the group, and 40% from the third party.
Well, that's very clear. Can we have also the amount of performance fees cashed in Q3 on the boutique platform?
It is a very low double-digit effect. Okay?
Okay, not that material. Thank you.
Yes.
Thank you.
Yes. On Cattolica, there is not that much to comment. Definitely, the mandatory offer is not on the table. We are definitely not considering this situation. The unopted shares , we are considering what option we are going to choose on this, but we can do whatever we decide to do. We have no commitment of any kind.
Okay, thank you very much. Thank you.
Next question, please.
The next question is a follow-up from Michael Huttner with Berenberg Bank. Please go ahead.
Fantastic. Thank you so much. Switzerland, again, if you could remind us what is the normal run rate for additions to this low interest rate reserve? In your opening remarks, you said that liquidity has never been higher at the group level, I just wondered if you can give us a figure here? Last question, you did that lovely deal on Generali Leben two years ago, I think now. Is there any potential for more such back book deals to kind of optimize your capital further? Thank you.
Hi, Michael. Regarding Switzerland, I would like to give you more detail during next week in Investor Day, also to answer on this point. For what regards the position of liquidity clearly is higher than the half year result, and we will stick to the highest level. At the end of the year, if we will not pay the dividend, clearly we have this additional EUR 720 million on what we were forecasting, but we consider them to be futurely engaged to our shareholders. I want to tell you, we are at a very healthy and solid level, which allows us to pursue the full strategy. Even there, I will give you a little bit farther details during the Investor Day so that you will understand the full levels and the situation on how we are there.
Please let me give you with some suspense a little bit, one week more.
Excellent. Of course.
On back books?
Michael, on back books, we are always active on this, because we consider this is a way to optimize our return on equity, and there is always potential to do more.
Oh, that sounds very helpful. Okay. Is this also something you'll talk about next week?
Yes, next week we can discuss this more in depth on the midterm perspective.
Fantastic. Well, thank you very much.
Operator, are there other questions?
There is another question from Emanuele Musio with Morgan Stanley. Please go ahead.
Hello. Hi. Thanks for taking my question. It's a quick one on the non-life business. Far this year, in the first nine months, you reported a more modest prior year development. I was wondering, actually, if you can remind me, please, why you decided to take this more conservative stance, and whether we can expect stronger releases when maybe these uncertainties are gone.
Sure. On this one, yes, we have a lower previous year release compared to last year. The answer is simple, is that we made a cautious closing.
If I can integrate, I recall you again, the strong capital generation coming from the non-life, which is proving the point that Frédéric made.
Okay, thanks.
Are there other questions, please?
There is a follow-up question from Michael Huttner with Berenberg. Please go ahead.
I'm sorry. I seem to be holding the line. I'm sorry. Your three-year plan, it's 2021, I just wondered if you can, I know we're nine months 2020, but if you can say anything today about the targets, particularly the EPS target for then. The second question is much more kind of little granular. In your combined ratio, that lovely 89.7%, can you give a feel for how you've treated the run-offs? Just as a background, I spoke with one of your competitors yesterday, and they've been very conservative on the run-off because they think there may be a spike in accidents next year when people start driving again, I just wondered how you'd looked at it. Thank you.
Yes. On the first one, on EPS targets, I'm afraid that you will have to wait until November 18th to get the answer, but we will be happy to answer you on this next week. On the combined ratio, Frédéric?
Yes, Michael. On the combined ratio, as I said, we've treated it in a cautious way. Why did we do it like this? Again, we have excellent technical result, and we could afford to be cautious. Easy to cover potential future losses on something else. The basic answer is no. As I've said, we expect a negligible impact for us of the second lockdown. Midterm, I'm now more reassured on the fact, but I don't know obviously, that we will not see a spike in the claims over 2021. Again, we have to see what will happen because we are in unknown territories. In any case, we've not re-added to the reserves because we thought that we would have additional claims. We've done it because we already had an excellent technical result, that's it.
Oh, that's lovely. May I just ask a very quick, and it's just a numbers thing, on Cattolica. What's the impact on solvency?
Michael, it is less than two percentage points, the capital increase we made in Cattolica. By the way, if you want to know the solvency as of November ninth, which already embed this impact, is at 207%, deducting all the dividend discussion we had. The pro rata for 2020 expected, plus the second tranche of the 2019, which we already discussed.
Wow.
Fully deducted.
Amazing. That's amazing. Congratulations. Really. Well. Okay. Thank you.
Are there other questions on the queue?
Mr. Marciante, there are no more questions registered at this time.
Okay, thank you. I say a big thank you very much to all of you for following us in this call. The Investor Relations team is fully available for you, and we look forward to host you at our virtual Investor Day next week. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.