Unipol Grupo Spa

Good afternoon. This is the Corsco Conference Operator. Welcome and thank you for joining the Unipol Group as of 31st December 2022 preliminary results Q&A session conference call. At this time, I would like to turn the conference over to Mr. Matteo La Terza, CEO of Unipol SAI and General Manager of Unipol. Please go ahead, sir.

Good morning and thank you very much for participating to this conference. Before opening the floor to questions, I will spend a few minutes to comment on the preliminary 2022 financial results that we released this morning. I have to say, first of all, that they were very strong results, despite the very challenging environment in which we have run the business last year. I will start to comment the PNC, where in the business we achieved a top-line growth above 4%, mainly driven by non-motor business, where the main catalyst was the growth that we achieved in the health insurance, with Unisalute growing double digits. In terms of distribution channels, bank assurance has been the main driver of growth, with ARCA Sicurazioni growing in the whereabout of 30%. On the other hand, in terms of technical profitability, 2022 was impacted by two different trends. If on one end in non-motor we had a positive trend, despite a slightly higher impact coming from nut cut and large losses. In motor, on the other hand, we had a deterioration of the combined ratio, mainly driven by the increase in the average cost of claim that has been offset, has been not offset yet by the repricing of the portfolio that we implemented starting from the second part of 2022. In life, the business went pretty well, despite a very challenging environment in terms of structure of interest rates. The business grew above all in pension funds, where we doubled the production compared to the number that we achieved in 2021. In terms of technical profitability, we achieved a very positive impact coming from both the financial component of the business and also the technical part, above all driven by the mortality component of the profitability. Finally, investment income was very solid. we increased based above all on the increase of the base rate of the free risk rates that gave us the possibility to diversify our financial portfolio by increasing the yield of the portfolio and at the same time we reduced the volatility of our own funds. This is a very important target, considering that we closed 2022 with a very robust solvency ratio, both at Unipol site level and Unipol group. And this was a very solid pillar that justified the the proposal of dividend of 16 cents in Unipol SAI, which is absolutely in line with the assumption of our industrial plan. And we proposed 37 cents in Unipol Gruppo, which is above the target of the industrial plan. So to sum up, I can say that We closed our first year of the industrial plan opening new ways, being on track on all the main industrial and financial KPIs. And having said that, I open the floor to questions. I'm here with Enrico Salpieto, who is General Manager of the Insurance Business, and we are open on all the questions that you have. Thank you.

This is the Coruscant Conference Operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Andrea Lisi of Equity. Please go ahead.

Hi, thank you for taking my question. First question is on the effect you are observing from the increase in tariffs in the motor business, if there is any impact on your clientele, if there is an increase in share rate or not. And the second question is still on the combined ratio for next year, given the increase in tariffs on the one hand, but on the other, there's still persistent inflationary effects. If you feel confident in your business plan target of combined ratio, or it is still too early to say, also considering if you can provide a some indication that if there are higher costs in terms of over-insurance. The second question is on the life. In particular, you usually guided for the life per tax profit in the area of $250 million, if I'm not wrong. What to expect in current environment with interest rates that are so different with respect to your guidance of pre-tax profit in life? And really last one is on if you're observing any increase of redemption in traditional life products. Thank you.

Okay, on the first two questions, I will give a general overview and then I will leave the floor to Enrico for more flavor. But as you know, starting from the second half of 2022, we started a repricing strategy of motor TPL products in our case in order to follow what has been the trend of the average cost of claim in 2022. our strategy in general will be to continue to follow the evolution of the average cost of claim in order to offset it in terms of pricing with the target to establish a decent level of profitability of the motor TPL business. So it will be very important, which will be the evolution of these of these of the average cost of claim going forward in order to decide what will be the future strategy in terms of pricing. But you have to have in mind that our target is, as I said before, to establish a decent level of profitability in the business concerning life. The 2022 was positively impacted by two items. The first one concerns the contribution to the profitability of of finance, the increase of interest rates across the board because it happened in all the financial markets, not only in Italian government bonds, allowed us to increase the level of profitability of financial assets and consequently also the increase of the profitability for the company and also for the policyholder on the other end. We had also a positive impact coming from the technical component of the profitability, above all in the mortality component of the business. And in this kind of environment, I personally think that if the structure of interest rate will remain the same also in 2023, we can maintain this level of profitability. In terms of redemption, we didn't see a significant impact coming from redemption, even if we are monitoring it. this trend very closely in order to in a sort of sense intervene on the commercial distribution channel above all with our agents in order to be able to to be very close to the asset liability management of our associated portfolio. But at the moment, we are not seeing any significant impact coming from redemption in traditional products. Then, Enrico, if you want to add something on

Thank you, Matteo. Good morning, Andrea. So going back to the motor business, you asked if there are some visible effects on retention or churn rate related to our recent increase in tariffs. So far, so good. Until today, what we are registering is a very small decrease in our retention rate that have been in the recent years at the top level of the market. And so, of course, there are other increases that we have to implement in the year and we will see what will happen. We are quite confident because all the market has the same need to restore technical profitability and increasing price to do so. And so we don't see a significant risk of deteriorating our competitive position. What Matteo said is of course also that we are working on tariffs and also on the other action that we put in our industrial plan, especially in claim handling. to offset the impact of inflation and so to be able to improve the technical profitability of our motor business and so we are targeting and improving in 2023 compared to 2022 results and even more at the year end of 2024 when we will and our industrial plan with the target that we put in it.

The next question is from Peter Elliot of Kepler-Chevreux. Please go ahead.

Thank you very much. And first of all, congratulations on the new format of the reporting. I'm sure it's gone down very well and Much appreciated by many of us, the call in English. So thank you very much on that. Three questions, if I may. Perhaps, first of all, if I could follow up on that, the non-life underwriting. Appreciate your comments about the outlook and the whole market needing to increase profitability, etc. I'm just wondering if you could specifically comment on whether you think prices are going up at the moment to offset claims inflation um i know you you gave us some stats in the presentation but that was mostly sort of you know average over the year and i'm just and and obviously your prices started in the second half of the year so i'm just interested in the current picture you know where the prices are going up at the moment enough to offset inflation that'd be the first one um the second one uh maybe following up on the the life results great great result and and good news um I'm interested specifically in the other operating items, which was basically plus 50 million for the year and sort of fairly consistently positive across the year. Is that a sort of normal run rate? Great. And then the third one, maybe on the solidarity fund, just to confirm that we shouldn't see any more negative impact going through the P&L going forward. And I'm wondering if you can just give us any confidence on you know, maybe the actions you've taken haven't impacted your operational ability at all. Thank you very much.

Okay, thank you, Peter. In non-life, and in particular in motor, we are, as I said, working on repricing. We have already worked on repricing with the target to follow the evolution of The upward evolution of the average cost of claim, of course, there is a sort of lag between how the average cost of claim evolve and how the repricing can have a full effect in the portfolio because you take one year before all the repricing happens. is in force and so we are confident to be able to follow the average cost of claim on the base of the assumption that we have not only 2022 but what we think will happen in 2023. Having said that there could be some it all will depend also on the general competitive environment on if our assumption of inflation will be correct or not and in case they will not, we will intervene in order to reach our target to establish the profitability in the motor TPL business. In life, the other operating items are all belonging and coming from the financial component of the technical profitability. It is above all due to what is called the shadow accounting item that is used in the consolidated P&L that will be replaced next year with the application of the IFRS 17. But shadow accounting is a byproduct of the financial component of the technical profitability, so you can consider it a component of the financial income of the business, of life business. If it is a normal run rate, it will depend if the structure of interest rates will remain the same in 2023 or not. As I said several times, the normal profitability of the business is in the way about 250 million. In this case, we over-delivered because there is a very positive financial market structure, and also we had a very positive result coming from the technical profitability, and this is the reason why we over-delivered in 2022. Concerning Solidarity Fund, as we said when we released and The industrial plan, it is an upfront number that we have in this industrial plan, but we can think going forward to allocate a small component of provision in order to further and enhance the effect of the solidarity funds starting from the next industrial plan.

Thank you very much.

The next question is from Sudarshan Bhutra of Societe Generale. Please go ahead.

Hello.

Hello. Hi there. Just a few questions from my side. First one is regarding the solvency ratio for FY22 versus the nine-month state. So, I mean, it has been pretty strong considering that, you know, you account for all the dividends in the fourth quarter. So can you please provide some details on, you know, what are the moving parts – of the solvency in the fourth quarter standalone. The second question is with regards to IFRS 17, when can we expect some more disclosure around that or some more insights on how you're going to adapt to the new reporting regime. And the third question is around in the life business, you have approximately six billion of reserves which are you know, for the higher interest rate guarantee business. So are you, I mean, given the current interest rate environment, are you looking at any sort of in-force actions on this particular book or this portfolio? Any comments on that would be very helpful. Thank you.

Okay, concerning the solvency ratio, I will comment on the Unipol Gruppo numbers that was released at 201%, with an increase of 4 percentage points compared to the number that we disclosed in 30th of September. And we had a positive impact coming from the positive effect of the performance of financial market in the sense that it was the base and enhanced the positive impact on the own funds for six percentage points, above all driven by the evolution of interest rates, the impact of the narrowing of the spread in corporate bonds, and also the positive performance of the equity market. We had a small negative impact coming from the widening of the spread of Italian BTPs for two percentage points, but adding all these components we had a positive impact coming from a financial market of six percentage points on our own funds. And on top of that, we had also a positive impact coming from the reduction of the solvency capital requirement of three percentage points. And So adding all these components and deducting the dividend that we proposed at Unipo Group level, we had a total impact positive for 4 percentage points overall. This is the reconstruction of the improvement of the solvency capital position. Concerning life business, no, we are not thinking about an action on the in-force portfolio. We are very confident with all our products in our technical reserves. Also considering the fact that we have still a component that have a minimum guarantee that is above 3%. But we can afford this component of reserves without any kind of problem. And so we see any reason why we should think about an action on the enforced business. Finally, concerning the IFRS 17, we disclosed in our presentation that we will have a specific event at the end of March, in particular on the 24th of March, where we will discuss all the topics concerning IFRS 17. our approach in the transition and which will be the impact on the main item of our balance sheet comparing the ifrs 4 and 17 and also approaching the application of the ifrs 9 versus the 39 okay

Okay, thank you very much. Just one more question from my side, if I may. This is regarding the non-motor business and the top line development in fourth quarter standalone, which was just about plus 2% year on year versus plus 10% at nine months. So, I mean, any color on the strengths or issues specific to fourth quarter would be very helpful.

Thank you.

Okay, so we had a very important growth in the first part of 2022, especially in the motor, driven by growth on retail and small and medium enterprises. When we arrived at the year end, we had a big corporate business renewal and We didn't have the same growth in this period, and so that's why the overall growth had a slight reduction in the fourth quarter.

Okay, thank you very much.

The next question is from George von Wies of BWM. Please go ahead.

Yes, hi, thanks very much. You've said in the past that you don't want to merge Unipol-SAI into Grupo Unipol in order to preserve strategic flexibility. And though you've been very transparent about the value of Grupo, the discount remains at around 30% now, and it varies between 20% and 35%. Now, everyone with any experience of this kind of constellation will agree that this discount will remain a fact of life. while merging the two companies would unlock about 1.5 billion euros of value for shareholders of Grupo. So the question is, what strategic steps can you take to create as much value as the amount that you're leaving on the table, and why can you take those steps only by keeping Unipol SAI and Grupo separate?

Okay. Thank you for your question because it gives me the possibility to explain the rationale, the real rationale behind the decision to disclose the dividend policy that we will apply this year, in which, as you know, we decided to increase the dividend of Unipol Gruppo quite consistently. And this is a decision that comes from the awareness on our side to be able to sustain over time a dividend policy that can persistently invert the the priority in terms of dividend yield between Unipol Gruppo, which is an holding company, and Unipol Sai, which is an operating company, because we think that if an investor decides to invest in an holding company, which has a higher risk, it is right that it is remunerated more than in the case in which it invests in an operating company. starting from the baseline that the level of profitability of the operating company is above the average of the market. And so we start from a level of profitability of the operating company that has a macro effect really interesting comparing other possible investments that you can do in the same sector. Unipol Gruppo has a value as some of the part way above the market capitalization of the company. We are way above the $5 billion, adding the market value of UnipoSci and the net financial position of the company that today is less than a little bit more than $800 million. We have a cost of debt that is in the whereabout of 3% with an average maturity of a little bit less than five years. And we were able to invest all the cash that we have in financial securities whose yield today is above 3%. So we are in the condition, as I said before, to maintain a level of profitability at the holding company level that can justify our capability to remunerate in terms of dividend yield the holding company more than the operating company. by inverting a trend that we had in the past few years. So, in this case, all the discussion concerning the the collapsing of the chain control have not a lot of sense in our point of view because we have the condition now as I said before, to deliver a yield of the holding company that is above the operating and that can justify the investment in the holding company.

The next question is from Alessia Magni of Barclays. Please go ahead.

Hi, good morning. Thanks for taking my question. I apologize, I might repeat the question. I missed the first few minutes. So I don't know if they've already been asked. But I have three questions from my side. So on combined ratio unit pool, if we look at the large losses on the year, that seems quite big. And I was wondering if you can give more color on the fourth quarter. in particular. And then on motor, I appreciate the call you gave on what you are doing as Unipol in terms of pricing, but can you please tell us what you see the market doing in terms of pricing versus inflation? And the last one is on life. Do you see any sign of surrenders? And then if you can give more color on the recent development in the fourth quarter on premium, that would be great. Thank you very much.

Okay, so the first question was about the large losses in the fourth quarter. We had some, we give in the same figure the amount of large losses and also not cut event and basically what we have seen compared to the previous year is an increase in the nut cut events in the fourth quarter. So this is the explanation for the figure that you have seen. Related to the second question about motor pricing, of course it's quite difficult to understand precisely what the market is doing. Of course we try to understand what's happening on the tariffs, but there are other mechanisms to understand the real effect on the portfolio. Roughly speaking, what we are seeing is finally the fact that the market is experiencing at the same time, and it happened in 2022, inflation and also an increase in loss frequency that is coming back to normality, to new normality, is still at a lower level compared to 2019, but in 2022 had a small growth. So, My understanding is that there's a wide awareness about the technical need to reprice And this is what is happening. So it's happening in quite a visible way. What we can see and we discussed it a few minutes before about retention rate, our retention rate despite our repricing is at the moment more or less at the same level it was last year. So basically the competitive environment is moving more or less the same way we are moving And the last question was about life surrenders, and so far no material change in surrenders, and this gives us a lot of confidence about what is going on in the 2023 exercise.

Thanks. Sorry, just very clear. Just a quick follow-up on the nut-cut events. What in particular was the driver? Is it specific to Unipol or is the market maybe something on the court?

Thanks. We are not able to give you a precise answer because, of course, the market figure is not available, but basically we didn't have the very big event like VIA in 2018, but several medium-sized events that summed up gave us this kind of increase in this kind of losses.

Perfect. Thank you very much. The next question is from Michael Hartner of Burenberg. Please go ahead.

Thank you very much. And yes, I really, just like Peter said, I really appreciate the format of this call. And I have two questions. One is on reserves in non-life, and the other one is on the solvency and your investment portfolio. On the reserves, if I remember in Q4 last year, 2021, there was a significant addition to reserves, and I can't remember the figure, but I think I estimated somewhere between 3 and 500 million. And I just wondered what has happened during the course of 2022 in terms of the reserving position in PNC, whether it has gone up or down or is stable. How are you looking at it? That would be my first question. And my second question, I noticed, and I apologize if my numbers are wrong, that the percentage of your investment portfolio invested in Italian government bonds has gone down from 33% to 27%. I just wondered if you can give us a little bit more color about this, talk about this, and maybe explain the impact on solvency and the sensitivity of Zonzi to changes in government bond spread, Italian government bond spreads going forward, and whether also you wanted to change that investment mix anymore. Thank you.

Thank you. Concerning the reserving policy that we applied in 2022, yes, you remember very well last year we were very conservative in the reservation of in PSE. This year we maintained the same approach in terms of conservative approach, but we applied these to the calculation of the best estimate of liabilities in pnc because as you know starting from 2023 in our balance sheet with the application of the frs 17 it will be the best estimate of liabilities that will be important in terms of a conservative approach going forward and this was the reason why in the best estimate of liability in PNC we added a little bit more than 400 million in order to prevent what will be the implication of inflation in the future claim in PNC. Concerning the investment portfolio, yes, we decreased a little bit our weight in Italian government bonds, but I can say that we completed our diversification strategy that we started a couple of years ago by decreasing the investment in Italian government bonds and diversifying in other corporate bonds above all in the top component of the credit structure. In other words, in the high rating component of the credit component structure of the investments. So we will maintain the present, the actual level of investment in Italian government bonds that allowed us to have For UnipoSci, a rating that is above Republic of Italy. And for us, it is enough in order to allow us a decent level of volatility of our own funds. At present, in terms of sensitivity, in case of 100 basis point increase of the spread of Italian government bonds, we could have a negative impact of 4 percentage points in Unipol and 5 percentage points in Unipol-Sci. And as I said in another question that we had in the final quarter of 2022, We had a negative impact of two percentage points in Unipo gruppo level because of the widening of the spread of Italian government bonds between the 30th of September 2022 and the 31st of December 2022. So it is not only sensitivity, but it was applied also. in the final quarter of 2022, just to be confident that these numbers are very solid.

Fantastic. Thank you.

And thank you for all the details. Thank you.

Any further questions, please press star and one on your telephone. Mr. Latterza, there's one more question, a follow-up from Michael Hartner of Berenberg. Please go ahead.

Thank you so much for the opportunity. I just wondered, can you give us a feel for how the first six weeks of the year are developing in terms of premium growth, maybe?

It is very early to give a flavor of the first part of the year. We are just in the middle of February. I can say that business is running pretty well, despite the forecast on Monday. a slowdown of European economy that I read in the newspapers, but concerning the trend in PNC business, the trend is going very well. Concerning life... As I said before, the environment is very challenging. Today, the absolute level of interest rates is quite high on all the maturity of the yield curve. And so concerning all the component of the investment products, the environment in terms of our commercial performance is very tough. On the same time, we are following very closely the trend in terms of surrenders. At the moment, there are not any reason why we can be worried about, but we have to be aware that Today, the perspective of investment portfolio, investment products in life is not so positive as it could be one year ago when interest rates were close to zero and a lot of people were looking for a traditional product in life. But overall, we are performing quite well generally. No other remarks to say or other points to add to what I have said.

Thank you so much. Thank you.

The next question is a follow-up from Peter E. Elliot of Kepler Chevrolet. Please go ahead.

Thank you very much for allowing me the opportunity to come back as well. I was wondering if I could just ask you to talk a little bit about sort of the impact of, you know, the tougher reinsurance environment pricing and just whether that sort of influence or changed your strategy at all, how you're managing that side of things.

Great. Thank you.

Of course there is a significant change in the reinsurance market, market has hardened, prices went up and capacity in some business lines shrink. For us this is something that we were able for the main part to offset since the the portfolio and results that we were able to deliver during all the years to our reinsurance partner were very good. There were some changes in our reinsurance structure. For instance, we did not renew Atmos 3, the aggregate that was protecting us for small and frequent atmospherical events, but basically the impact on pricing only on the property business line in which of course we need to reprice it, we are doing it to be able to restore our technical profitability.

Great. Thank you very much.

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

Okay, thank you very much for participating to the call, and as we disclose, we will see on the 24th of March for the next meeting. Thank you very much again, and have a good day. Bye-bye.