Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group nine months 2023 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agency Relations. Please go ahead, sir.
Thank you, operator. Hello, everyone, and welcome to our nine months 2023 results conference call. Here with us, we have our Group General Manager, Marco Sesana, and our Group CFO, Cristiano Borean. Before opening the Q&A session, Marco and Cristiano would like to share some opening remarks. Marco, over to you.
Thank you, Fabio. Hi to everyone. Welcome on the call. Let me start by saying that, our third quarter financial result confirmed the group operational delivery and the ongoing implementation of the action aimed at addressing the macro environment, which, as you all know, has become more uncertain after the recent geopolitical development. I will start with the client as usual, and we are very pleased that customer value positively the action that we put in place to enhance our value proposition. In the third quarter 2023, we further consolidated the number one position in our peer group in term of Net Promoter Score. In addition, retention is confirmed at 89%, and more than 50% of our customer are relying on Generali to cover at least two or more of their needs. Let me also touch an important point here.
As most of you have seen in the news, this is a difficult time for some of the community, in some of the countries in which we operate and due to recent weather events. We are very close to this community. We have defined several initiatives, and we are present on the ground to support people. And I would like to thank all of our colleagues and agents who are working hard to guarantee full support to our clients. Let's now see, briefly, our business, and we start with Life. So in terms of volume, the third quarter saw a continuation of the industry trend observed year to date. Protection reached EUR 3.6 billion of net flow, while Unit-L inked achieved around EUR 4 billion. Protection continued to generate around 40% of our new business value.
Concerning lapse, we observe an improvement in lapses in Italy, especially in the bancassurance channel. You know that in this year, this is the channel who suffer more, and we have seen a gradual normalization of the outflow in France. The net outflow numbers were impacted also by the cancellation of the quasi-money market product in Germany and by some planned expiry and low-margin bancassurance product in China. These specific outflows have had an immaterial impact on the CSM, as Cristiano will explain to you in a moment. The surrenders in our Life portfolio during the third Q were EUR 1.6 billion lower than the second Q, which led to halving of the net outflow in the third Q versus those recorded in the second Q.
Our business unit have adapted to meet the changing customer appetite and preserve market competitiveness. In particular, we are continuing to update our existing product and launching new products more attractive in the current market context. Let me also say that we maintain a strong focus on the new business underwriting discipline, on Protection and Health business, and on capital light products enhanced by protection riders. Our strategy will continue to be oriented to bundle solution, addressing multiple customer needs within a single product, in line with our Lifetime Partner ambition. These tailor-made solution are better suited to respond to client needs and are also less exposed to competition from government bonds. Let's look now to P&C. P&C business growth has confirmed the trend seen year to date. The third quarter 2023 gross written premium were up 11.9%.
At half year 2023 presentation, we disclosed an increase in the average premium in our retail and SME book of 6.4%. At nine months, the average premium was up 6.9% compared to nine months 2022, with broad-based improvement across the portfolio and an acceleration in motor, where the average annual premium increase has improved from 3.2% at half year to 3.9% at nine months. These figures are reflecting both a generalized upturn in personal line and will continue in the coming quarters, and I would say even years, as we have entered in an environment where adaptive pricing is part of our ongoing strategy. Therefore, we will continue to increase tariff in line with our granular view of claims, inflation, and frequency.
We are also continuing to implement the technical measures necessary to pursue profitable growth, especially in terms of portfolio enhancing and claims management. Clearly, the third quarter recorded significant weather events, in particular the hailstorm in Italy in July and August. The unusually Nat Cat burden reported in the quarter mainly derives from the so-called secondary perils and, of course, from organic and inorganic growth of portfolio. Nevertheless, our undiscounted current year loss ratio, excluding Nat Cat, remains strong and improving at 67.2%, with a 70 basis points improvement versus nine-month 2022. Moving to investment. So our investment yield remained very good versus in-force book and market, at 4.3% in Life and 4% in P&C. We increased cash buffer and reduced bond duration.
On listed equity, we remain, we maintain a prudent approach, and we tactically reduce exposure by investing gains after the positive performance year to date. A sizable portion of the residual exposure is hedged via derivative options. In credit, we confirm our selective approach with low exposure to more cyclical sector and highly leveraged companies. On private asset, we have been more selective in term of new commitment, balancing attractive opportunity, especially in private debt, valuation with ALM constraint. Finally, let me underline that our exposure to Israel and the Middle East, both in term of business and investment, is immaterial. In conclusion, this result of the third quarter 2023 confirmed the group continued ability to deliver solid growth and execute on our strategic plan, in line with our lifetime partner purpose.
As we move into the last quarter of the year, we are confident about the right direction on which we are steering the group. Thank you for your attention, and now I hand it over to Cristiano.
Thank you, Marco, and hello, everyone. Let me provide you some color on our nine months 2023 financial performance to complement the perspective on the underlying business trends and in addition to what we published on our website this morning. Let me say, first of all, that the numbers show a very strong and resilient performance. Our top line continues to grow in our key areas of focus, namely non-motor P&C. The non-motor gross written premium growth continued to expand, posting a 10.1% year-on-year growth, helping further the rebalancing of our P&C business mix. Excluding the contribution from Europ Assistance's strong growth, non-motor GWPs have risen by 8%. Our motor P&C top line is also showing clear signs of improvement as the ongoing tariff strengthening continues to progressively filter through the income statement.
P&C has recorded a significant increase in operating result from EUR 1.43 billion a year ago to EUR 2.15 billion at nine months 2023. This increase stems from three main drivers: the EUR 350 million increase in the undiscounted operating insurance service result, the EUR 416 million increase from discounting, the EUR 45 million reduction in the P&C operating investment result. These results embed the significant EUR 875 million undiscounted Nat Cat experience, of which EUR 687 million only in the third quarter. As a reference, last year, we had EUR 559 million Nat Cat at the nine months.
Looking at the nine months 2023 compared to the same period of last year, the current year undiscounted loss ratio, excluding nat cat, shows a 0.7 percentage point improvement, despite a higher impact from man-made losses, in particular in the second quarter. Focusing on the discounting, let me share with you that thanks to higher volumes and interest rates, and also reflecting the nat cat experience, we now expect the current year discount benefit to exceed the high end of the EUR 750 million-EUR 800 million guidance for the full year. The prior year release for the quarter is broadly in line with the previous quarters at 2.8 percentage point. Moving to Life, the operating result is broadly stable year on year if we exclude the EUR 60 million one-off we recorded at half year 2023, with an improvement compared to the previous quarter.
Life net inflows were -EUR 1.2 billion, with a visible improvement compared to the previous quarter, also thanks to lower surrenders, which are showing a reassuring trend of gradual normalization. It is also important to emphasize that a portion of the outflows recorded during the third quarter is associated to low-margin products, such as pseudo banking products in Germany, with a marginal amount of embedded CSM. The third quarter 2023 new business volumes, expressed in PVNBP terms, grew by 7.8% compared to the same period of last year, reversing the trend observed in the previous two quarters.... Thanks to this strong performance, at nine months 2023, the life new business was -8.6% year-on-year, with a significant improvement compared to the -14% at half year 2023.
The year-on-year change reflects primarily the impact of higher interest rates on the discounting of future premiums. The volumes in terms of annual premium equivalent, which is not affected by the discounting impact, are stable compared to last year. The normalized CSM growth was around 3.8% on a nine months basis, thanks to the contribution of a strong and predictable expected return, with the new business CSM broadly offsetting the CSM release. In the fourth quarter, we expect a stronger new business CSM, not affected by the third quarter seasonality. Therefore, the year-end 2023 normalized CSM growth will likely exceed the 4% guidance we gave you. I would like also to provide you an overview of the main moving parts from the EUR 5.1 billion operating result to the EUR 2.979 billion adjusted net result.
Let's start with the known operating investment result, which was EUR 240 million at the nine months 2023. Let me highlight that the ongoing portfolio turnover that we are performing within our asset allocation strategy is, on the one hand, reinvesting the proceeds in liquid fixed income assets at higher yields, while on the other hand, it is also resulting in some realization of capital losses with an impact on the non-operating investment result at year-end. Given the trends witnessed during 2023 in real estate market, I would also anticipate some potential impairment in the ballpark of mid double digit on the real estate at cost in the P&C segment. This may impact the non-operating investment result in the fourth quarter within the context of the year-end appraisal process.
Non-operating holding expenses were EUR 453 million and were broadly flat compared to last year. Net other non-operating expenses were -EUR 397 million, and they included EUR 94 million of restructuring costs. As you know, we traditionally book the majority of our restructuring costs on the fourth quarter, and I would expect an amount slightly higher than the around EUR 200 million we recorded at final year 2023, 2022, for year-end 2023. Within the net other non-operating expenses, we had a -EUR 77 million impact stemming from IAS 29 hyperinflation accounting. The tax rate for the nine months was around 29.5%, with EUR 1.382 billion taxes paid. All these moving parts led to a reported net result of EUR 2.8 billion.
The adjusted net result of 2.979 billion stems from the EUR 158 million adjustment, mainly from PNL on assets at fair value for profit and loss and hyperinflation accounting. We confirm our solid capital position with the solvency ratio at 224%. The year-to-date increase reflects around 17 percentage points from the robust normalized capital generation, thanks to the growth of both the life and non-life segments, and one percentage point of economic variances. These effects were partially offset by -2 points, resulting from the lower eligibility of part of Cattolica subordinated debt, -3 points from the combination of capital movements and M&A, and -9 percentage points of non-economic variances.
At the end of October, the solvency ratio is estimated at 222%, reflecting primarily the economic variances on spreads and equities. Thank you for your attention. Operator, we are now ready to take questions.
Thank you. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from David Barma with Bank of America. Please go ahead.
Yes, good morning. Thank you for taking my questions. I have two on P&C and one on Life, please. So the first one on P&C. So on, if I look on a quarterly basis, the underlying loss ratio, adjusted for discounting, for PYD, for nat cats and manmade, deteriorated by about 90 basis points versus the first half, and remains quite elevated. So can you explain what's happening there, and when you think you'll be able to reach your previous guidance of 95% for the combined ratio? And then the second question is on the discounting benefits. So you're saying you're going to be above the previous guidance you gave at half year.
Can you be a bit more precise on what sort of level we should expect for the year and next year, please? And, and in parallel to that, you previously said that the finance expenses should increase by about EUR 200 million next year. Is that still the case, or should it be a bit higher? And my last question on Life. So Cristiano, you've been mentioning during the quarter that we could see some revisions of lapse assumptions. It doesn't seem like the experience was that bad in the third quarter. But did you end up changing anything during the quarter? And if so, what were the operating variances in your CSM going forward in Q3? Thank you.
Thank you, David. The questions are all for, Cristiano.
Okay. Thank you, David. Let's look at the third quarter in isolation, and let's compare it also in a progressive way in order to understand the underlying dynamic. So first of all, let's compare the third quarter 2023 versus the third quarter 2022, which was the point of the highest impact in 2022 of the cost of claims, and let's see how this evolves. If I take the current year loss ratio, and I don't include the natural catastrophe, the current year loss ratio, undiscounted, improves by 1.8 percentage points to 67.6%, looking only at the third quarter in isolation, okay? And this is a first picture. Second picture, let's look at how this is evolving compared to the second quarter 2023.
In the third quarter 2023, in isolation, again, if I take the combined, the current year loss ratio and discount it, excluding natural catastrophes, I see from the previous quarter an improvement of 0.6 percentage point, which is another sign of progressive dynamics. So all in all, clearly, when I look at the nine months 2022 to nine months 2023, we already commented the 0.7 percentage point, and you know that we had higher manmade losses. What I'm trying to tell you is that we are making dynamic pictures on an evolving animal, which is the profit we would like to extract, in seeing whether the 12-18 months time span we explained you is technically entering into the numbers of the account.
If you see this, we are having a confirmed guidance onto that, because we do see this improvement. Then clearly, if you tell me, "Are you going to stop your dynamic?" No, we are ruthless, and we will be ruthless because all our action are targeted to get towards the guidance that you are mentioning. Clearly, this is a guidance which has need the time to have the full amount of increase of of tariff, a dynamic approach entering. This is for the first point. Then related to the discounting, okay, the the number of of the discounting guidance, we would like to give you, due to the fact that there are very, very simple underlying dynamics behind.
There is a higher stock, both of revenues and of claims, because we have more claims due also, especially to the natural catastrophes, so means a higher discounting than expected. And as well, we have a higher amount of interest rate dynamic compared to the point we were observing. So the guidance for the final year, 2023, has been shifted towards EUR 850-900 million. So for what regards the insurance finance expenses, we confirm the EUR 200 million, if not only slightly lifting them up due to the underlying dynamics.
Then looking at the CSM movement and the lapses, this question, I would like to tell you that broadly in the quarter, we do have some experience variance, which is absolutely marginal in decreasing on the order of double-digit million EUR because of low amount of difference compared to expected, and because of the low value of what was exiting, taking the case of the German business, which is basically broadly zero, having 0.01% new business margin. We are also having small adjustment to the experience and also hypothesis, which is bringing together with the economic variances, a net effect of -200 million EUR.
Thank you, Cristiano. Just if I can follow up on your, on your first question, when do you expect you'll be able to get to the 95 on discounting? Is that a half-year 2024 ambition?
... So, clearly, the high amount of natural catastrophe experience and the continuous experience we are having, I think you read, we commented already, but we can deep dive. We have high double digit impact already after the nine months, because there were other events, is having an effect. I stress again, in order to go to give a final guidance also on that, we would like to give you some more details, in January, at the end, in during the investor day, simply because there are a couple of moving parts. Number one, there is the effect of the final reinsurance, and the structure of reinsurance, and the impact on reinsurance, and the capability to have interest of reinsurer in in taking the coverage.
Second, there is a changing law environment under discussion in Italy, which is imposing mandatory coverages to small, medium enterprises, which could have, in any case, something to be evaluated. So we need to understand the final stuff. And then also, we will have the integration of the newly acquired entity. So we would like to give you a better guidance when the scenario is more clear. I just reconfirm that all the pricing action, and then eventually, Marco, please, integrate if you want all an hour later, we are heading ruthlessly in order to get to the 95% trajectory, because all the pricing action are continuously adapted to that. Next question, please.
The next question is from Farooq Hanif with JP Morgan. Please go ahead.
Hi, everybody. Thank you so much. Just following on from some of your comments. So firstly, what, what are you thinking about in terms of Nat Cat? So I know you're gonna wait and to see what's happening with kind of reinsurance capacity and pricing, but I think that you've already seen a move in the market, and I think the early indications are that probably not much has changed. So what do you see as your kind of longer term outlook for Nat Cat, at least qualitatively? And then secondly, you know, given all these moving parts you've had in discounting effect, how will that affect the dynamic now between finance expenses and investment income?
I mean, from the models and the numbers that you gave, it sounds like there's gonna be a bit of a squeeze on that before it stabilizes, given the unwind effect on finance expenses. But is this made worse by the higher discounting effect that you've had in Q3? And then I guess my last question is, can you talk about the holding results? So, you know, it sounds like, I mean, it's in line with last year, but you talk about intergroup dividends from France and some other factors. Just wanted to understand how one-off in nature these may or may not be. Thank you.
Thank you very much, Farooq. The first question clearly is for Marco on the Nat Cat, then the second and the third question are for Cristiano.
So hi, Farooq. So let me, let me start by saying that clearly, as Cristiano has said, so after the nine months, we saw an additional event that, you know, we quantify as in high double digit. And so we see what, what's next. So it's difficult to see, to imagine what is coming in between now and the end of the year. I think what you're pointing out in terms of long-term outlook is what do we expect in terms of trend, and what we have seen in terms of trend and what we expect for 2024 and 2025. So I would say, we have seen an increase of what we call secondary perils.
That means that these type of events are becoming more frequent, and so, this is something that we need to consider into our pricing action, for the next year. We cannot think about, we cannot rely on the insurance market. You know, it's becoming more tough on these, these kind of coverages, on the secondary peril. So I would say we will make sure that we adapt prices, on P&C in the next months, also including this type of, effect. And, and I would say this is adding on the inflation part, that it's... From now on, I think it's gonna be an ongoing, an ongoing exercise that we do.
So we are now in an environment with inflation, so we need to every year adapt tariff to this environment.
... Yes, Farooq. So regarding the higher discounting in third quarter, so for sure, a higher amount of discounting should be reflected in a, a higher amount of, finance expenses. It's a natural translation. It's the other side of the ledger, let's say, with a different timing. But, in the investing income, income dynamic, what you are observing has, an important, combination of effect, which you should take into account. I would say that, more than, seventy percent, 70% around, is broadly linked to, let's say, fixed income and, interest rate, purely related, income, part, which is following.
And thanks to our investment strategy, even going above the change of rates, which are risk-free, while we are taking also in the mix asset allocation, other asset class, not only government, where is the credit spread above that. On top of that, we have asset allocation towards long-term value accretion strategies like equity, listed or unlisted, versus also other kind of form of private asset. Clearly, these are over the cycle, increasing and giving the risk premium above the purely movement on the rate. So we are expecting, and this is the reason of the value accretion of the strategic asset allocation, what we are taking over the cycle to get exactly overcoming this dynamic.
It is in this context, you should say, please don't forget that, for example, in the first nine months, we are experiencing, for example, lower dividend stemming from our private equity investment, for example, which are explaining partially, the reduction, the towards a normal, linear, purely fixed income. Which is, in any case, something which has a longer term, higher value because of this delay in the realization. On the third question related to the Alleanza holding and other result, the intra-group dividends are not of one-off nature because are related to the allocation of the shareholding of some of our internal party, especially in this case, it is related to Generali France, also holding part of our asset management business.
So it is a recurring effect in nature, and there are a couple of positive environment of bringing further positive result. One is related to our pension management business company in Chile, PlanVital, and another one of our activity of banking related support in Germany through Badenia, which is benefiting from this higher environment.
If I may, just quickly, it sounds like your answer on Nat Cat is, we're probably not going to increase our budget because we're gonna try and price it. Is that a good way of summarizing what you just said?
Well, yeah. So we are trying to... Well, what we will do, we will clearly increase price also for the share of Nat Cat that we see as, let me call—It's difficult to call it a stable trend, but I would say for the part of the trend that we see that it's going to happen, yes, we will, we will, we will price, and we will increase prices to adjust for that. Yes.
Okay. Thank you very much.
Next question, please.
The next question is from Peter Eliott with Kepler Cheuvreux. Please go ahead.
Thank you very much. First question, I was just wondering if you can tell us what impact you expect from the Life Guarantee Fund that's being introduced in Italy from next year? The second question, sorry to come back on the discounting. You mentioned, Cristiano, you know, about the Nat Cat claims. I mean, I'm guessing that some of those claims might be paid quite quickly, and I'm thinking, you know, maybe they could end up being paid quicker than the assumption that's been made in the reserving and therefore the discounting. And could you just remind us, you know, how it would work if they do end up sort of getting paid back quicker?
Would we see, you know, how would the sort of clawback of that, that discounting work, for helpful? And then the third one, sorry, apologies, I hope I didn't miss this in your introduction. But are you able to give us any more detail on the, the life earnings split? So the, I mean, the investment result, would be very helpful, being a relatively large number. But, yeah, anything you can give us on that, that extra, that would be very helpful. Thank you.
Thank you very much, Peter. All the three questions are for Cristiano. Thank you, Peter. I will kindly ask you to repeat the third one, which I, I'm sorry I didn't get, if you please. I think it was, Peter, on the split of the life operating result-
Life-
by driver, correct?
Exactly. And anything else you can give us that wasn't in the press release, I mean, investment results-
Okay
... would obviously be very helpful, but yeah.
Okay. Yeah, absolutely. So Life Guarantee Fund expectation, it is related to a law under discussion in Italy. So if we just make the mathematical what if hypothesis of the law being approved as it is, this would entail a EUR 40 million net impact for the next 10 years, related to the actual state of the law. The second question, natural catastrophe, the speeding payment versus the assumption. I really like your question because, I think from the information we give, you can understand easily that the discounted and undiscounted effect on it shows that these are very short paying claims, which are embedded in the calculation. So if we pay them before, we will have less unwinding going forward, because we clearly have lower reserves staying there.
On the contrary, if we pay them too early, clearly, they have also an impact on the cash view versus the PNL view, which clearly has a different pattern acceleration. These are the two components related to that. On the life, the split of the life earnings is basically, you have EUR 2.16 billion in Operating Insurance Service Result, and EUR 630 million in operating investment result. So the Operating Insurance Service Result is decreasing EUR 37 million on a nine-month basis, and the operating investment result is increased by EUR 5 million on a nine-month basis.
I recall you, but half-year we were already commenting the impact we had on the reinsurance accepted business in our Generali Global Employee Benefits. So this is net of this one out. If I look at the quarter-over-quarter, I already commented in introductory speech, but we were growing, and this is why we have this healthy direction, which should be reflected also in the fourth quarter.
Thank you very much.
Thank you, Peter. Next question, please.
The next question is from Michael Huttner with Berenberg. Please go ahead.
Fantastic. Thank you very much, and well done for delivering in clearly difficult environment. I have three questions. One is on aggreg ate reinsurance, the second is on net inflows, and the third is maybe that the comment in the press release, which I saw, which I didn't understand, is towards the tail end, page eight, near the bottom, the board of directors approved the policy, et cetera, et cetera. So on the aggregate, could you give us a feel for what the current aggregate is, and of course, I'm assuming it is attaching now, and how that could be renewed next year? This is the aggregate reinsurance. The second is on net inflows.
I just wondered if you could actually give us the figures, 'cause your commentary is very good, but I get confused so easily. I'd be really interested in just having the quarter net inflows, you know, Q1, Q2, Q3 for Italy, and maybe a feel for October and how you see the rest. I assume you have line of sight now to breaking even. And then, of course, this comment on the board's strategy. I'm not quite clear. Thank you.
Thank you very much, Michael. So the first question on the cat aggregate is for Marco. The quarterly development of net inflows with a focus on Italy and by line of business is for Cristiano. While the third question regarding the part in the outlook section of the press release is also for Cristiano and Marco. Of course, if you want to comment, feel free to do that.
So, in terms of cat, cat aggregate, just to remind, we have a cat aggregate with attachment point to EUR 800 million. Just as a reminder, cat aggregate is limited to property engineering and Motor Own Damage, so just to clarify. So in terms of renewal, so we are, so clearly, it's always a discussion, and we are gonna enter into the renewal phase very, very soon. So we're gonna see how that is going to be rediscussed. I think that it's, you know, given what we see in the market, it's not gonna be soft for this type of coverages, and so we are gonna see what's the cost-benefit analysis on this, on this type of coverage.
Also, keeping in mind that our portfolio is growing in terms of organic growth and inorganic growth, so, we are fine with the coverage we have, but clearly, it depends a lot from the cost-benefit analysis we will do during the renewal phase.
Thank you.
Okay, Michael, good morning, first.
Good morning.
Italy and France especially dynamic, I think, you were asking. On the third quarter standalone view, if I compare the previous quarter with this quarter, so second quarter, third quarter, we have a positive EUR 500 million effect of, let's say, lower net outflows in the saving and pension. Same amount in the saving, basically in France, EUR 500 million lower amount of outflow. Commenting the October number, I would say, is focusing on the saving, we should take into account that there are two different dynamics.
Whenever there is in a month an insurance from the Italian government, we do experience in this channel still some outflow from the point of view of reallocating toward this, because there's a preference to the high net worth those kind of underwriting. While in France, we are observing another reduction in the exit, which means that the trend is in the saving and pension business getting further stabilizing. Going on the third question on the explanation of the board policy approval, this is related to the dynamic approach of the group, which is willing to always improve according to ESG strategy, the G component, which means the interaction with the shareholders.
And by shareholders, we mean all the shareholders, and this is framing a higher frequency of moment of contact with all the shareholders. Clearly, if we want to enter to better detail, I suggest to allocate better time and ask our ESG investor relational officer, which are more than happy to go you in the nitty-gritty of what are the actual change by chain. But the policy and the trend is making Generali more and more open, transparent, and frequently interacting with everybody.
... Thank you. Just on the net inflows, I'm really sorry, I'm so stupid. You mentioned this figure of 500, and I don't know whether it means a lesser decline or positive. So on France, if I look at the half year, you had minus 916 at the half year. So if I take your comment on the EUR 500 million, that would mean that France is now minus 400, so there's a EUR 500 million net inflow? Whereas in Italy, the trend is continuing negative, and there's not much change there. Is that how I can interpret this?
Yeah, to interpret the number, let's make it simple and make the number example. So we are only commenting the savings and pension business line, so we are not commenting the others.
Got it.
We look at that. In the second quarter, for example, Italy had a EUR -1.5 billion outflow, and now in the third quarter has EUR -1 billion outflow.
Ah.
In France, in the second quarter, had a EUR 1.35 billion outflow, and now has a minus EUR 800 million outflow, which shows the EUR 500 million improvement on both cases.
Absolutely.
I hope you get this. This is coherent.
Yeah
... Michael, to what we said, that we are seeing a reassuring trend of normalization. Okay?
Absolutely. And then, I'm going to be really cheeky. Does the data in October show any, any more normalization? Could you comment on that? And what I would—the answer I would love to hear is to see you say, you see, hear you say, "And on the sixteenth of January, whenever, we will be positive," Diego.
Yeah, let me take this one, Michael. So I would say, as Cristiano said, in October, we had an issue of BTP, so I would say we would say that this the trend is continuing, but I would not expect every single week to be better than the week before. So I would say we have a normalization trend. It can go up and down. We are seeing better development of our product, of our retention, and our work on the client is working much, much better, and so that's what we expect. So, but I would not make it week by week differences, because that's not what a trend means.
Absolutely. Of course. Thank you so much. Thank you, thank you.
Next question, please.
The next question is from Andrew Ritchie with Autonomous. Please go ahead.
Well, hi there. Sorry, the first question was actually just to clarify, you didn't answer, are you actually in the aggregate and making recoveries, now, or does that insulate you from 4Q catastrophe losses net? That's the first question. Second question, I notice Italian motor pricing momentum has improved a lot in the second half, if I look at, industry, data or even some of the price comparison sites. I'm curious, is that momentum increasing because more broadly, carriers are seeing a change in frequency and severity? Italy's been very benign, in the last, you know, compared to other countries. Has that maybe changed a bit? So some comment on the claims severity, frequency trends, in Italy.
Third question, you mentioned the new mandatory insurance cover, which I believe, or maybe you just clarify, I think that's in the budget law for Italy, and it's gonna be mandatory natural catastrophe cover for SMEs. I'm curious, is that an opportunity? Is it possible for you to write that and not end up taking on even more nat cat risk? And then just the final question, it sounds like you're still seeing some vulnerability in Italy when we get BTP Valore issuances, which may happen again. Marco, you mentioned further product innovation, and you mentioned particularly to combat the attraction of higher bond yields. What are the additional innovations?
Is this more of you started some of that earlier in the year, or is there like a meaningful additional wave of further innovations on the life side, focusing particularly on Italy?
Thanks, Andrew. Marco, I would say that all the questions here are for you.
Okay, so let me go one by one. Let's start from the aggregate question. Yeah, we are now in the aggregate, but let me just remind you that, clearly, aggregate covers specific lines, so not every single event that might happen. And also, we will see that, you know, also the per event protection work in addition to the aggregate recovery. So I would say we are in the aggregate now, and we will see by the end of the year how this has worked, also including the per event, and also looking at which type of event will happen between now and the end of the year. So, this is, in short, where we stand on the cat aggregate. So pricing for Italy, so I agree.
So that's what you mentioned, it's actually what we see. So it's still frequency overall in Italy, still under the level of 2019. So that's, you know, that's an important reference point that we use. We have seen, and we are continuing to see a good development of our motor price increase, and so the action are taking place, and we do see that coming in into our portfolio. So these are going from injected increase rate to average premium to earned premium. So we are seeing that development coming in. One other topic that clearly we need to comment is that clearly in Italy, MOD has been affected by the Nat Cat.
So what I'm telling you is the trend net of the Nat Cat that actually happened and impacted the, the MOD guarantee. So overall, we are seeing at the moment a development of our average price, even more than in line with the, what we call the risk premium. That is a combination of, claims, inflation, and, and frequency. So that's overall what we see in Italy. On your third question, so mandatory insurance cover. So I have to say it's still in discussion, so how this will be executed. So I would say that there are still, discussion that are going on, and so it's difficult at the moment to, to give you you know, a very specific, game plan for 2024 in terms of, what we...
What is our commercial strategy and what is going to be our pricing strategy in together with this, and also what is going to be our reinsurance strategy together with all of this. So we are defining this game plan. What I can tell you is that given that this is going to be apparently a mandatory insurance covering, we will need to give a price to every single customer. But also taking into account what we see in terms of development of Nat Cat, and in particular on secondary event, this pricing will include these expected loss and this exposure, so this is what we are going to price in. Fourth question, vulnerability to BTP. And what is the additional product innovation?
So we do have seen impact on just a few days before the BTP issuance. But what I care to say is that we are looking at the overall trend, and as we put innovation, product innovation into the market, you need some time to let this innovation work. So what we are doing, we are trying to make sure that our return on our policies is in line or better than the return of the market.
So, you see that our product will have feature like the one that I described, I think in the last call, if I remember well, which is having two segregated fund in parallel in one product to make sure one is higher and, you know, more dynamic, and the other one is stable and giving, you know, the base return. And so all of these type of action, retention and new business action, I would say we are seeing them picking up and getting traction on the on our clients.
Okay, thanks.
Thank you very much, Andrew. Next question, please.
The next question is from William Hawkins with KBW. Please go ahead.
Hello, thank you very much. This has already been a great Q&A, so I apologize if I'm slightly going over covered ground. I do want to come back to the cats, please. But of your three key losses, can you just be a bit more precise about what is specific to the hail and closely related weather events in Northern Italy and the German area, gross and net? And then adjacent to that, you have already touched on it, but I just want to get another feel for the impact of the renewal season going into next year. You know, I normally assume that for a company as big and good as you, that these things are kind of lost in the rounding ultimately.
So clearly, as you said, it's not gonna be a softer market, but do you worry that this is gonna be a harder market for you guys in a way that I'm actually gonna see in my model? Or, is the good news that it's kind of, you know, as I say, lost in the rounding? I mean, you know, again, the subtext there is I'm wondering, you've always argued in the past that Italy is a diversifying positive for reinsurers. I wonder if in a world of more focus in secondary perils, maybe that dynamic has flipped. Secondly, please, I'm sorry, you may already have said this, but what precisely was the impact of experience and assumption variances on the CSM roll forward in the third quarter? It was EUR 75 in the first half.
I thought I heard you say 200, but I might have misunderstood what you were talking about. And then related, can I assume that zeros in the future, or, or is there still more assumption true ups you may need to do at the end of the year? And then lastly, seeing as it hasn't come up, capital management plans. I know this isn't the focus today, but I think you've been clearer about the unspent M&A budget, and, you know, resource issues that, that may affect your thought process about what you're gonna do with that. So can you just update us on the unspent M&A budget, please?
Thank you very much, William. I would say let's start with question number three and four for Cristiano, while question number one and two are for Marco.
... Yes, William, let's discuss. What I said before was that if I was looking on the only quarterly move from half year 2023 to nine months 2023 of the CSM, the joint effect of market and the contractual and operating variances is -EUR 200 million. We did have slightly high double digit negative variances of experience part, which is decreasing compared to the pattern observed in the first two quarters, which is coherent with the changes in assumption we made. So are we going to make further changes in assumption in the last quarter?
This is potentially in the ballpark, but clearly this is also depending on the dynamic I was commenting before, also with Michael answering to Michael, because clearly we are also observing a decreasing trend in the lapse rate of the saving business, which is the one practically moving the operational assumption hypothesis. So this is the effect. On the fourth question, I do confirm that if by the end of 2024 we will not consume the EUR 0.5 billion budget, which is expected to be there in case of absence of any further M&A or redeployment, we will for sure give back the money, as already said to the shareholders.
I hand over to Marco.
Yeah. So William, I'm sorry, I will ask you to repeat the second question that I... The line was not clear, so could you just give me the question?
Sorry. On the nat cats point, I just wanted a bit more clarity on precisely the hail and weather events, 'cause presumably there was other stuff going on in the third quarter as well. I wanted to get a hint on the growth to net loss. And then I also just wanted to get a feel for how material this issue is to your reinsurance renewals. I appreciate it's a difficult conversation, but I'm just wondering, in my world, if it's something that will end up being visible, or hopefully kind of, you know, netted out in the rounding?
Okay. So, when we talk about the event in Italy that happened in July and in August, we are talking about around EUR 485 million gross. So that is more or less the type of order of magnitude that we have seen. And clearly, you're right, so that some of these similar event you're gonna see also in the fourth quarter. And so it's very similar. So not the amount, but I would say the type of event. So on the renewal season for the insurance, I wouldn't say that we're worried for the hard market. We do think that we have specific feature that are typically well received by reinsurance.
So, I still think that the type of diversification we bring to the market, it's valuable. The type of, I would say, healthy portfolio that we bring into the market is valuable. And so it's just a matter to understand exactly how hard it's gonna be the market. And, also, as I said before, we will need to understand exactly, this in light of the growth of the portfolio that we have. Because clearly, we have a portfolio that keep on growing for organic reason and for inorganic moves, and so that also has an impact of the type of reinsurance that we are going to buy in the market.
Very helpful. Thank you.
Next question, please.
The next question is from Gianluca Ferrari with Mediobanca. Please go ahead.
Yes. Hi, good afternoon, everyone. Two left from me, please. The first one is on claims inflation. If you can comment on the average cost of claim you are experiencing in Europe, not only in Italy. And the second one, if I got it right, Marco mentioned during the speech, a reduced bond duration. It's not very clear to me, considering the expectations for lower rates into next year, why you have decided to do so, if I got it right. And eventually, if you had some changes in the mix between floaters and fixed rate, or how you are preparing for a potential lower interest rate scenario in 2024. Thank you.
Thank you, Gianluca. I would say that both questions are for Marco.
Yeah. So let's start from the cost of claims in Europe. So, let me say that. So, before actually mentioning the different country, I want to say that we need to remember that the claims inflation that we see, it's typically lagging what you see in the CPI, like, general inflation, let's call it like this. So we do see in some countries still an increasing claims, but I would say nothing different than what we have seen so far. In terms of trend, this is really what we have seen even in the half year. So the trend is continuing. I would say overall is same situation that we highlighted few months ago.
So we have countries with still high inflation, like Germany, where I think next renewal season, that is in January, we are gonna still increase prices at, you know, high double-digit. So that's, that's, that's what we, what we expect. Or there are countries like, for example, Italy, with the low claims inflation. Clearly, all of this is hard because we overall, now, without going to the specific country, we do see frequency still not picking up at the 2019 level. So overall, our risk premium is increasing. It's increasing broadly in line with our increase of average price, so we do see that this is still the environment.
And as I said, we need to prepare ourself for months, and probably still years, where we increase prices every year, every renewal, because that's the inflationary environment that we see. So that's what we are preparing to do. That's what we are doing still on the next year, and so that's a different mindset compared to what we had, for example, last year, where we had to catch up on the inflation spike. Now, we are more into run rate increasing inflation. I mentioned the reduction of bond duration just because this was the right thing to do for our ALM. It's not in term of view on the market, it's just because with some lapses, our duration decrease, and so we had to adjust the duration.
In terms of your last question, in terms of preparing for lower interest rate scenario next year, I think we need to have in mind that what we care is to match our asset and liability. So that's the thing that we always try to do. So we don't take bet on how the interest rate are going up or going down, but we care to be matched going forward with our asset and liability. That's what we need to do. That's what protecting ourself and our policyholders, so that's what we will continue to do.
Thank you very much.
Next question, please.
The last question is from, Ashik Musaddi with Morgan Stanley. Please go ahead.
Yeah, thank you, and good afternoon. Just a couple of question I have is, sorry, to go back on the cat aggregate. I mean, you mentioned that the EUR 100 million is where the attachment starts. Can you give us some color as to for how long is the attachment for cat aggregates? And you mentioned that it's for property engineering, home and damage. Can you be a bit more specific to, or any other detail on that? Because I would have thought that it would be for your regular nat cat, but it looks like it's very specific cat aggregate that you have. So that's the first question. And secondly, Cristiano, I guess you mentioned that there will be some real estate related impairment in P&C of about mid double digit, if I'm not wrong.
Is there any such thing going on in the life business as well, and what is driving that? Any color on that would be very helpful as well. Thank you.
Clearly, Marco, the first question is for you, while the second one is for Cristiano.
Yeah. So just to make sure we have the clear view on the cat aggregate. So I said that it works... So the attachment point is EUR 800 million. So again, it's not working for any type of damage, but it's limited to property engineering and Motor Own Damage in the motor coverages. So these are the line where it's working. So any type of, for example, so let's make an example. In marine, cat aggregate will not cover any damage, for example, on the marine line.
So, you see, and you should expect that we before going and giving any forecast on how the cat aggregate will work, to see exactly which type of damages are going to happen in the next few months, and then see how that will work. Another point that I can give you is that our cat aggregate works on franchise and not on deductible, as most of the other cat aggregate that are on the market. So that is also a qualifying point on our cat aggregate. How long is the coverage? I mean, probably you mean it works for EUR 300 million, so that's the type of capacity that we have in our cat aggregate.
So it's attached at EUR 800 million, and it works for EUR 300 million.
That's clear, but that's fine. Thanks.
Hello, Ashik, it's Cristiano. I go for the second one. So let me recall two basic point. In P&C, when we did the transition onto IFRS 17 and 9, we kept the direct holding of real estate at cost, coherently with the previous accounting since it was possible. Clearly, all the other real estate, both the real estate funds and the real estate allocated into the life business, which is mainly VFA, are with a different dynamic, fully at a mark-to-market, with the movement of fair value. So I was commenting the stock of potential impairments related to the book accounting bucket related there.
Clearly, any effect on the life part is not material because of the VFA nature, which is then reflected throughout the revenue recognition period of the length of the liabilities. As for sure, there are adjustments in the prices, as has been already observed in the vast majority of the portfolio, because we have already more than two-thirds of the portfolio fully reassessed in value. There is only one-third, which is assessed on an annual basis. Okay.
That's very clear. Thank you. Thanks a lot.
Thanks very much, Ashik. Unfortunately, we've finished the time for Q&A for this call, and clearly, the IR team remains at your disposal for any follow-up question you may have. Have a nice day.
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