Unipol Gruppo SpA

MIL:UNI

Earnings Call Transcript

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Unipol Group First Quarter 2023 Results and Q&A Session Conference Call. At this time, I would like to turn the conference over to Mr. Matteo Laterza, CEO of UnipolSai and General Manager of Unipol. Please go ahead, sir.

[Matteo Laterza, executive]

Good afternoon to everyone. I'm here with Enrico San Pietro, Insurance General Manager. Before opening the floor to the Q&A, let me make some comment on the first quarter that we closed at the 31st of March. As you know, it is the first quarter, in which we applied the new accounting standards, IFRS 17 and 9. We look forward to give more information and more disclosure in the next quarter.

I will start from the P&C business, where a level of top line, we achieved a very solid top line growth, matching the assumption of our industrial plan above all in non-motor, where we grew in all the line of business, above all in Health, where UniSalute achieved a growth of more than 40% in terms of premium, driven not only by the traditional business, but also by the fact that starting from January of this year, we started to distribute UniSalute product to both the agents and bancassurance distribution network.

By the way, bancassurance was, in general, one of the most important driver of growth in general in non-motor. Considering motor, top line grew close to 2%, driven both by an increase of the number of clients in the first quarter and from the pricing effect that is just starting to give some effect in the increase of the premium collected.

Passing to the profitability. The combined ratio, as you saw, had a small deterioration. This deterioration is driven both by an increase of frequency that we achieved in all the line of business -- a lot of the line of business, in particular in -- also in motor, where on top of that, we continued to see the impact of inflation impacting the average cost of claims. So combining these 2 effects and the fact that the pricing strategy is just starting to have an effect, but it is not -- it is just at the beginning, it explains the big part of the increase of the combined ratio versus the same number at the end of March '22.

In Life, we had a very strong growth, as you saw in the presentation. This growth is driven by the pension funds business, where we achieved a very important mandate for the management of very important pension fund. In general, we are working in increasing the yield of the segregated funds, where we achieved an increase of more than 6 basis points. And at the same time, we reduced the average of minimum currency of 1 basis point. In terms of surrenders, of course, there is a small increase compared to the same number in the first quarter of '22, but at a much small extent, and we are still very far from the level of surrenders that we had before the COVID, just to give you a period in which the absolute level of interest rates in the Italian government bonds were at the same level, which we have today.

Concerning investments, the contribution of investment income in the first quarter of '23 was very strong, driven by the very good performance of financial market. We had a tightening of the spread across the board, both in the Italian BTPs versus bund and also in the credit market -- in all the segments of the credit market. And on top of that, also equity markets performed very well. And this is the reason why the contribution of investments in first quarter '23 was good, on the opposite on what it were in the first quarter of '22 applying the new accounting standards, IFRS 9.

The capital generation produced by the group and the good performance in financial market was the main driver of the improvement of the solvency ratio, both at group level and at UnipolSai level.

These are the main remarks and comments that I can make on the first quarter '23. Having said that, with Enrico, we are open to answer to your questions.

[Operator]

[Operator Instructions] The first question is from Michael Huttner with Berenberg.

[Michael Huttner, analyst]

I'm sorry, I'm calling from -- it's a bit noisy. I hope it's okay. Well done on really lovely results, and I had a few questions, one on the combined ratio, one on the lapses in Life and one on the capital generation or these, I think, areas of strength. On the combined ratio, so there was a worsening of 150 bps according to the slide. And I just wondered if you can talk a little bit more about this. How much -- exactly how much inflation was and how much frequency. And also I'd be interested to have your view or your feeling on when the pricing will start to reverse the increase in combined ratio back down to the 150 bps whether it's Q4 or is it next year?

The second is on the Life surrenders and you say they are still at low levels compared to previous time when your interest rate was a bit high. And I just wondered if you could give us some numbers around this either in terms of lapse ratio or monetary policy, what they are now and what they were in this prior period just to get a feel for it.

And then the final one is on the operating capital generation and the rise in the solvency, which was so strong, 305% in UnipolSai, which is really lovely. It's -- we must be delighted. And I just wondered if you can talk a little bit about the capital generation and how strong it was and how you see that developing. And only question really is the aim that understanding was I could just multiply that by 4 to get to the result for the year.

[Matteo Laterza, executive]

Thank you to you. I will answer to the second and third question and then I will let Enrico answer to the number -- to the combined ratio. Concerning lapses, just to give you a number, the lapse rate compared to the technical reserve in the first quarter of 2023 was 1.7% versus 1.5%, which was the number in the Q1 '22. So there is a small increase, but it is absolutely negligible. Just to give you another information, in terms of net inflows at group level, we have -- just concerning the traditional product, not unit-linked and other pension funds and others, we have the total premium collected match completely the maturity and lapses.

So we have not outflows in the first quarter. So we didn't -- we was not in the position to sell asset to fund the surrenders. Of course, we -- as I said, we are working to increase our distribution capability of traditional products in order to be able to invest net inflows at interest yield level that today are between 4% and 5% in order to increase the yield of the segregated funds net -- that -- in order to give our policyholder an interest rate that is comparable and competitive with what they can get from deposits, money market funds, treasury bill and whatever.

In terms of capital generation in solvency, just to give you the -- some numbers. We had an improvement of 13 basis points in the solvency ratio. We passed from 200% to 213%. Of that, 5 percentage points are capital generation and 9 percentage points are the effect of the positive performance of financial markets. These are the main driver of the improvement of solvency. At UnipolSai level, the contribution of the capital generation is 6 percentage points and 13 are explained in the capital model by the positive performance of financial market. Having said that, I'll let Enrico answer to the combined ratio.

[Enrico Pietro, executive]

Okay. So combined ratio, as you as you have seen is worsening from 97.5% to 102% in motor business. This is the main driver, since, of course, the non-motor business has a small improvement in combined ratio. So basically, the worsening is related to motor business. In this, we are seeing, in the first quarter, an impact -- a negative impact of inflation and also a negative impact in loss frequency. More or less, we can consider the worsening is around 5 percentage points. And roughly speaking, you can split in half due to inflation and half due to increase in loss frequency compared to the first quarter of 2022.

We haven't seen yet material impact of price increases in earned premium. So it takes time to see the impact because you need not only to be able to have an increase in premium written, but also the increase in earned premiums. So basically, what we see for the future is that as the month or year goes on, we will see more and more the impact of our price increases that were very significant, both in November and even more in February. We are seeing some impact also on the retention rate that of course is lowering a little bit, but not that much to be really a concerning issue so far.

[Operator]

The next question is from Eliot, Peter with Kepler Cheuvreux.

[Peter Eliot, analyst]

Just a quick follow-up for me, first of all, actually on the Life persistency. I was just wondering if you could elaborate a little bit on -- I mean, those numbers were very helpful. Just wondering if you could comment on the various channels. So I mean -- and maybe particularly what you're seeing in bancassurance would be helpful.

And secondly, just looking at the IFRS 17 impact. In your March presentation, you said you expected the combined ratio to increase. But on Slide 7 in today's presentation, you seem to show a decrease from IFRS 17. So I'm just wondering if you could sort of clarify the accounting impact there would be helpful.

And then on Life, obviously, we don't have the earnings by sources this time. I'm just wondering if you can give us any disclosure to help sort of break down that overall profit. And in particular, whether we might get any quantification of the contractual service margin and the moving parts of that such as how much was released. Maybe that's to come later in the year with the fuller disclosure. But it'd be useful to know what we might get there.

[Matteo Laterza, executive]

Okay, Peter. The -- in -- just to give you more color on the Life business by the 2 main distribution channels, in which we are involved. There are no big differences between the 2 in the sense that both channels are in equilibriums in terms of net inflows coming in the -- in order to be invested in the segregated funds. Bancassurance is in positive net inflows, even if it is not a big amount, more or less EUR 150 million of net inflows coming from the bancassurance. So premium are more than surrendered by -- and the maturity by EUR 150 million. And there is an opposite number in the agent distribution channel, where we have net outflows of EUR 140 million, more or less. Consider that these numbers has to be compared to EUR 25 billion of technical reserves. So the impact is negligible compared to the absolute level of technical reserves.

As I said, our commitment is focused on increasing our distribution capability of traditional products in both distribution channels in order to improve the net inflows, be able to invest at yields that today are between 4% and 5% and to improve further the absolute level of asset yield that is above the highest in the industry. In order to be more and more competitive with other investments and in order to be -- to give much more distribution power to our sellers in order to improve the possibility to sell traditional products to our clients.

In terms of IFRS 17 impact, yes, we did -- we said that there would be an increase in the combined ratio as a by-product of the way in which we apply the formula of calculation of that. And this can be explained in the chart that we disclosed in the presentation on the effect of new metrics, then there is small change between the 2, and it is very difficult to make a comment on that.

What is important is the effect on the combined ratio driven by what Enrico said before as a consequence of the increase of frequency and average cost of claim, and this is the main point that should be commented today on top of the formula that we use in IFRS 17.

Considering the Life earnings by sources, this is one of the information that we want to add in the next quarter because, as I said before, we are just at the beginning. So we want to be sure that the numbers and the way in which we present the numbers are solid. So we do our best to improve and to give this disclosure starting from the next quarter. Anyway, the CSM release that we -- we released that in the P&L in Life is EUR 57 million.

[Peter Eliot, analyst]

Okay. Correct. That's very helpful. And can I -- just one cheeky follow-up on the combined ratio. I suspect you might not give this given this is a Q1, but worth a try. I mean, obviously, the runoff is now changing with the risk adjustment. But can you give us any indication of what the release in non-Life was?

[Matteo Laterza, executive]

We don't have runoff release in the first quarter '23 because on the new accounting standards, there are not in the Q1.

[Operator]

The next question is from Sudarshan Bhutra with Societe Generale.

[Sudarshan Bhutra, analyst]

The first one is on the Life business. Now I recollect that you had mentioned about an annual profit guidance of around EUR 250 million. So the EUR 53 million in 1Q '23, that's slightly lower than the run rate. So I mean, any comments for this or how we should view this going forward? That's the first question.

The second question is on the motor pricing. Now can you just give us some idea about what is the level of price increases that you're injecting in the motor business? And how does that compare with the claims inflation? So the increases vis-a-vis the presentation, how does that sort of compare?

The third question is with regards to UnipolSai and the dividend target for 2022 to '24. I mean given the very strong solvency ratio, I mean, how should we think about the dividend for UnipolSai? I mean, would it still be at the levels that you gave for 2022, I mean the reduction? Or should we expect a beat on that target?

[Matteo Laterza, executive]

Thank you to you. Concerning the first question, you remember very well but you remember the top of the range that I said because usually I say that the range of Life business profitability is between EUR 200 million and EUR 250 million. And we are in the range. Having said that, it is just the first quarter. Of course, our commitment is focused to be on the top of the range. Don't be misled by multiplying by 4 the number of the Q1 because there are a lot of items that have to be taken into consideration, for instance, the effect of investments, the mirroring, the CSM and a lot of things. So we are in this range. And as I said, we look forward to be in the higher part of the range.

Concerning the motor business, then I will leave the floor to Eric to comment on it. We did 2 important price increase. And of course, as we said before, the full effect of this price increase has to be seen in full at the end of '23, beginning of '24. In the meantime, the effect of inflation is impacting at 100% starting from the second half of '23. So there is a sort of lagging effect between pricing and premium income and claim inflation.

On the final question, it is really too early to comment on dividends. So consider also that the dividend is decided according and based on the local GAAP balance sheet. The local GAAP balance sheet is impacted positively or negatively by the performance of financial markets. We are still in May, so it is really too early to make any kind of comment on dividends.

[Enrico Pietro, executive]

Okay. Let me add some color on the second question about motor pricing versus claim inflation. Probably you remember what we discussed the previous time about our price increases. Our price increases were done in November and February. If you sum up the effect of both on average, the renewal offer that our customers are receiving are more expensive around 15%. This doesn't mean that the average premium will increase of 15%, since of course, there are some other effects that are decreasing this impact. The most important one are the amount of discounts that we give to our agents to deal with the customers around 3%. The fact that the renewal customers have some option to reduce the increase adopting, for instance, the telematic devices or signing a close that oblige them to bring the car in our care repair network when a claim occurs.

And last but not least, there is an effect -- competition effect related to the fact that since we increase more prices when it's needed, the average premium of the contract that we will -- that we don't renew is higher compared to the average portfolio premium. So even if you discount all those effect, you can expect an increase of the average premium around 7%, 8% versus an inflation that was on our claims in motor around 5% in 2022. Now if you look at the first quarter, roughly speaking, compared to the first quarter of 2022, you can measure an inflation effect on the average cost of a claim that is around 2.5%.

[Operator]

The next question is from Elena Perini with Intesa Sanpaolo.

[Elena Perini, analyst]

The first one is about the recent frauds in Emilia-Romagna. I don't know, I think that probably is too early, but I would like to know if you have already any ideas of the potential claims or the potential price attached? And then the second question is about your shareholders' equity that I'm referring in particular to page 2 of the press release of UnipolSai, but I think at the same trend is also in Unipol. You had a positive difference between IFRS 4 and IFRS 17 at the end of the first quarter 2022 because under IFRS 4, you had EUR 5.6 billion and under IFRS 17, you had EUR 6.5 billion. What drives this difference, if I may?

[Matteo Laterza, executive]

Okay. Elena, I will answer to the final question, and then I will leave the floor to Enrico for the first one. But the main effect between '22 and first quarter '22 IFRS 4 and 39, if I understood well. And equity value, IFRS 17 and 9 is driven by the performance of financial market in the 2 time horizon because at 31st of March 2022, we had a very negative performance of financial market that impacted on the IFRS available for sale reserve. And quarter-on-quarter, there was a very positive performance of financial market that was impacted positively both in the fair value through OCI component of the portfolio and also in the component accounted to fair value through P&L. And these explain the most of the difference between the 2 numbers.

[Elena Perini, analyst]

I'm sorry, but I was wrong in my mentioning because it was not at the end of the first quarter 2022. But at the end of 2022?

[Matteo Laterza, executive]

Yes. But it is the same. The first quarter 2023 was very positive in the sense that the absolute level of yield decreased, both in BTP and in bund, the spreads tightened. The credit market performed very well. Equity market performed very well and consequently, the financial asset value increased, and this is the main reason of -- and consider also that applying the IFRS 17 technical reserves are discounted. And so you have also a positive impact on the liability side of the balance sheet compared to the IFRS 4.

[Enrico Pietro, executive]

Elena, about recent fraud in Emilia is definitely too early to have some figures. Of course, we are collecting all the information as soon as possible. At that very early stage, it doesn't seem really concerning events on our overall profitability.

[Operator]

The next question is a follow-up from Michael Huttner with Berenberg.

[Michael Huttner, analyst]

I'm sorry again for the noise. I had lot of little ones, all numbers and probably say, well, it will be for Q2, but here we go. I just wondered if you have a number for this yet. You gave the release. I can kind of work it out. So my guess is it's about EUR 3 billion, but I just wanted to have a number. And maybe you can give us the solvency today. I know the markets have not moved that much in quarter to date, but maybe you have the number. Then I was interested to know the difference between the performance of your 2 bancassurance partners BPER and Banca di Sondrio. And if there's any kind of -- if there's going to be any change going forward in this. And the final is a like tricky question using the words of my colleague. Your non-life number, the motor growth, 1.7%. I just wonder if you can give it to us in the kind of underlying rate adjusting for the change in accounting for these repeat whatever premiums?

[Matteo Laterza, executive]

Okay. Concerning the CSM value, we started at the end of 2021 with a little bit more than EUR 3 billion, as you said, and we closed at the 31st of March 2023 with -- the number of 2021 was EUR 3.263 billion to be precise. And at the end of March '23 was EUR 3.1 billion. So these are the 2 numbers that you were asking.

Concerning the performance in bancassurance of the 2 partners with which we have an agreement, BPER and Sondrio, as I said, the performance was very strong in both the player above all in health insurance, where we started with the project of UniSalute, we are using UniSalute brand in distributing products, both through BPER distribution network and also Sondrio. But we have very positive numbers also in the other line of business, above all in non-motor, which is the area which we are focusing the most.

Concerning the non-motor, I have to say that what Enrico already said is the most significant component in order to comment the number because we have not significant change in the absolute level of the number that can justify the transition from the old to the new accounting principle. Of course, the components that contribute to build up the numbers are different because there are not any more the runoff release that we use in the old accounting standard. We have the CSM, we have the loss component, we have the fact that we discount the cash flows at the yield curve plus liquidity premium. And so of course, the component that contribute to build up the numbers are different compared to the component that were used with the old accounting standards.

[Enrico Pietro, executive]

Okay. Let me add something about motor growth because if I understand well, you are asking also to have a comment of the 1.7% increase in the motor. And this gives me the opportunity to add some relevant information on this. You have to normalize the effect of motor growth that if you don't take into account this new offer we have on our customers, is around 5%, not 1.7%. The new offer is basically a new monthly installment scheme that is not financing the whole premium, but something more similar to a subscription economy solutions. So you pay with the credit card or SEPA debit monthly. We send you monthly certificate via e-mail. So this new offer is reporting a very significant interest. And so as you can imagine, we for a lot of our customers, don't put in our written premium the whole year of premium, but only the single month that they are paying. There is no effect on earned premium or on our profit and loss account. But if you look at growth, this makes a material difference.

[Operator]

[Operator Instructions] The next question is from Alberto Villa with Intermonte.

[Alberto Villa, analyst]

Just a question on the outlook for investment income contribution. It was very strong in the first quarter in -- especially in non-life. I was wondering if we can expect a similar trend going forward. Any color on that would be helpful.

[Matteo Laterza, executive]

Yes, Alberto. There are 2 components that you have to keep in mind. The first one is, I guess, the most important and is the core yield of the portfolio, which come from the coupon and dividends that we get from our investments that are very stable and are increasing. Today are close to 3.2%. And if interest rate will continue to be at this level or higher, of course, we look forward to increase this number.

The second one is much more volatile that comes from the performance of financial market. This is a very important thing that we said when we met for the IFRS 17 and 9. In the sense that in the first quarter of '22, we had a much higher component classified as fair value to P&L than what we have today. And this is the reason why in the first quarter of '22, we had so negative effect coming from investment income because the component classified fair value through P&L impacted very negatively on our accounts.

Today, we have a much lower exposure to that, and this is the reason why the positive impact coming from investments that can be attributed to the valuation and -- of financial asset is much lower than the loss that we got in 2022. This is what -- this is to say that our commitment is focused on lowering the volatility of our P&L on financial market performance both in the upside and the downside. But in general, if you see a positive performance of financial market, you have to expect a positive impact coming from not only coupons and dividends but also from valuation. On the opposite, you can expect a deterioration, which will be much, much lower than what we would have got in 2022 if the new accounting principle were applied starting from January '22.

[Operator]

The last question is from Alessia Magni with Barclays.

[Alessia Magni, analyst]

Just a quick question from my side. Do you think that the price increases that you have to put through so far are enough to achieve your combined ratio target, or are you planning to increase prices even further?

[Matteo Laterza, executive]

Okay. So what we planned to doing about pricing was related on inflation forecast. And on this side, we can say that our price increases, when they will become fully on visible on earned premium could be enough. On the other side, we are seeing some increase in loss frequency, not that big, but these would need some more increases that we are planning and we will probably introduce in the next month.

[Operator]

Mr. Laterza, there are no more questions registered at this time. Excuse me, there is a follow-up question from Michael Huttner with Berenberg.

[Michael Huttner, analyst]

Sorry about that. And I'm really sorry. You were talking about this -- you explained roughly this monthly premium and I just wondered, if I'm a car driver and I buy a monthly premium policy from Unipol, does it mean that effectively I bought an annual policy and I have to pay every month, or can I, at the end of any month, decide, well, actually, I don't need this policy anymore and then just stop?

[Matteo Laterza, executive]

Okay. Thank you, Michael. So until now in our flagship company, UnipolSai, contracts are 1 year duration. And they -- customer can pay monthly and we send them monthly certificate. What we are experiencing in our new enterprise BeRebel, we discussed during the industrial plan presentation is monthly contracts. So the customer signs a contract for 1 month. Of course, every month, the contract is renewed if the customer wants to renew it. So basically, now in our portfolio, contracts have a yearly duration and with this new offer some customers -- quite big amount of customers are paying monthly installments.

[Operator]

Mr. Laterza, there are no more questions registered at this time.

[Matteo Laterza, executive]

Okay. Thank you very much to all of you, and we will meet again for the first half results. Thank you very much, and have a good day. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.