Unipol Grupo Spa

Good afternoon. This is the Coruscall 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 Unipol SAI and General Manager of Unipol. Please go ahead, sir.

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 at 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 agent and the bank assurance companies. distribution network. By the way, bank assurance 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 the 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 achieve in all the line of business, a lot of the line of business, in particular also in motor, where on top of that we continue to see the impact of inflation impacting in the average cost of claim. So combining these two effects, And the fact that the pricing strategy is just starting to have an effect, but 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 funds. In general, we are working in increasing the yield of the segregated funds, where we achieved an increase of more than six basis points. And at the same time, we reduced the average of minimum guarantee of one basis points. In terms of surrenders, of course, there is a small increase compared to the same number in the first quarter, 22, but at a much smaller extent. And we are still very far from the level of surrenders that we had yesterday. Before the COVID, just to give you a period in which the absolute level of interest rates in the Italian government bond were at the same level in which we are 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 market performed 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 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 UnipoSci 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 question. Thank you.

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 one under 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 Michael Hotner with Varenberg. Please go ahead.

Good morning. Good afternoon. 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 three questions, one on the combined ratio, one on the lapses in life, and one on the capital generation, all these... think areas of strength on the combined ratio so there was a worsening of 150 bits according to the slide and I just wondered if you can talk a little bit more about this you know how much exactly how much inflation was and how much frequency and also I'd be interested to have your for you or your feeling on when the pricing will start to reverse the increase in combined ratio they that you know back down this 150 bits, whether it's Q4 or is it next year. The second is on the life surrenders, and you say they're still at low levels compared to a previous time when interest rates were this high. I just wondered if you could give us some numbers around this, even in terms of lapse ratio or amount of policies, 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 sovereignty, which is so strong, 305% in Uniforsight, which is really lovely. You 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. All these questions, really, they're aimed at understanding whether I can just multiply a result by four to get the results we get. Thank you.

Thank you to you. I will answer to the second and third question, then I will, Enrico, let 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 was not in the position to sell asset to fund the surrenders. Of course, as I said, we are working to increase our distribution capability of traditional product 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 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 some numbers, we had an improvement of 13 basis points in the solvency ratio. We passed from 200% to 213%. Of that, five percentage points are capital generation and nine percentage points are the effect of the positive performance of financial markets. These are the main driver of the improvement of solvency. At Unipol's high level, the contribution of the capital generation is six percentage points and 13% are explained in the capital model by the positive performance of financial market. And inside that, I'd like to answer to the combined ratio.

Okay, good morning. So, combined ratio, as you have... As you have seen, it 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. 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 pence at 10 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 prices increases on earner premium. So it takes time to see the impact because you need not only to be able to have an increase in premium return but also the increase in earner premium. So basically what we see for the future is that As the 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 a really concerning issue so far.

Thank you. That's very helpful. Thank you.

The next question is from Elliot Peter with Kepler Chauvreux. Please go ahead.

Thank you very much. Yeah, 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 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 bank assurance would be helpful. Then secondly, yes. Just looking at the IFRS 17 impact, in your March presentation, you said you expected the combined ratio to increase. But on slide seven 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. Very 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, you know, that overall profit. And in particular, you know, whether we might get any quantification of the contractual service margin and the moving parts of that, such as how much was released. Yeah, maybe that's to come later in the year with the fuller disclosure. But it'd be useful to know what, what, what we might get there. Thank you very much.

Okay, Peter. Just to give you more color on the life business by the two main distribution channels in which we are involved, there are no big differences between the two in the sense that Both channels are in equilibrium in terms of net inflows coming in order to be invested in the segregated funds. Bank assurance is in positive net inflows, even if it is not a big amount, more or less significant. 150 millions of net inflows coming from the bank assurance. So premium are more than surrenders and maturity by 150 million. And there is an opposite number in the agent distribution channel where we have net outflows of 140 millions more or less. Consider that these numbers have to be compared to 25 billion of technical reserves, so the impact is negligible compared to the absolute level of... As I said, our commitment is focused on increasing our distribution capability of traditional product in both distribution channels in order to improve the net inflows, be able to invest at a yield 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 investment and in order to give much more distribution power to our sellers in order to improve the market. possibility to sell traditional product to our clients. In terms of IFRS 17 impact, yes, we said that there would be an increase in the combined ratio as a byproduct of the way in which we applied the formula of calculation of that. And this can be explained in the that we disclosed in the presentation on the effect of new metrics, then there is a very small change between the two, 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 will do our best to improve and to give this disclosure starting from the next quarter. Anyway, the CSM release... that we released in the PNL in life is 57 million euros.

Okay, great. That's very helpful, thank you. 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 at all?

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

Okay. Okay. Thank you very much.

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

Hi. Thanks for taking my questions. The first one is on the live business. Now, I recollect that you had mentioned about an annual profit guidance of around 250 million, so the 53 million in 1Q23. 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, you know, 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, you know, the, the increases with the risk, the claims inflation, how does that sort of compare? The third question is with regards to Unipol SAI 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 UnipolSci? I mean, would it still be at, you know, the levels that you gave for 2022? I mean, you know, the reduction or should we expect a beat on that target? Thank you very much.

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 200 and 250 million euros. 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 misleaded by multiplying by four the number of the Q1, because there are a lot of items that have to be taken into consideration, like, 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. Considering the motor business, then I will leave the floor to Enrico to comment on it. We did two important price increases, and of course, as we said before, the full effect of this price increase has to be seen in full at the end of 2023, beginning of 2024. In the meantime, the effect of inflation is impacting at 100%, starting from the second half of 2023. So there is a sort of lagging effect between pricing and premium income and claim inflation. On the final question, it's really too early to comment on dividends. So consider also that the dividend is decided according and based on the local gap balance sheet. The local gap balance sheet is impacted positively or negatively by the performance of financial market. We are still in May, so it is really too early to make any kind of comment on dividends. All right. Thank you very much.

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 at the renewal, customers have some option to reduce the increase, adopting, for instance, the telematic devices or signing a clause that obliges them to bring the car in our care repair network when I claim a course. And last but not least, there is a composition effect related to the fact that since we increase more prices when it's needed, the average premium of the contract that we don't renew is higher compared to the average portfolio premium. So even if you discount all those effects, you can expect an increase of the average premium price. 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%.

All right. Thank you.

Very helpful.

The next question is from Elena Perini with Intesa San Paolo. Please go ahead.

Yes, good afternoon, and thank you for taking my questions. The first one is about the recent floods 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 issues. risks attached. And then the second question is about your shareholders' equity that I'm referring in particular to page two of the press release of Unipol Sci, but I think that the same trend is also in Unipol. You had a a positive difference between IFRS 4 and IFRS 17 at the end of the first quarter 2022 because under IFRS 4 you had 5.6 billion and under IFRS 17 you had 6.5 billion. What drives this difference, if I may? Thank you.

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 first quarter 22 IFRS 4 and 39, if understood well, and equity value IFRS 17 and 9 is driven by the performance of financial market in the two time horizon because At the 31st of March 2022, we had a very negative performance of financial market that impacted on the IFRS available for sales reserve. And quarter on quarter, there was a very positive performance of financial market that was impacted positively. both in the fair value to OCI component of the portfolio and also in the component accounted to fair value to P&L. And this explains most of the difference between the two numbers.

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

Yeah, but it is the same. It is the same. First quarter 2023 was very positive. In the sense that the absolute level of yield decreased, both in BTP and in Bund. The spread 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 this. 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.

Okay, thank you.

Okay. Hi, Elena. About recent flood in Emilia, it 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.

Okay, thank you very much.

The next question is a follow-up from Michael Hartner with Berenberg. Please go ahead.

Thank you, and sorry again for the noise, and thank you for taking my questions. I had lost some little ones, all numbers, and probably say, well, it'll be for Q2, but here we go. I just wondered if you have a number for the CSM. You gave the release, so I can kind of work it out. My guess is it's about $3 billion, but I just wondered if you have a number. Maybe you can give us the song seat today. I know markets haven't moved that much in quarter to date, but maybe you have a number. Then I was interested to know if there's a difference between the performance of your two bank assurance partners, BIPA and Banco de Sondrio, and if there's going to be any change going forward in this. And the final is a very cheeky question, using the words of my colleague. your non-life, the motor growth, 1.7%. I just wonder if you can give it to us in a kind of underlying way, you know, adjusting for the change in accounting for these repeats or whatever premiums. Thank you.

Okay.

Concerning the CSM value, we started at the end of 2021 with a little bit more than $3 billion, as you said. And we closed at the 31st of March, 2023. with the number of 2021 was 3.263, to be precise. And at the end of March, 23 was 3.1 billion. So these are the two numbers that you... We're asking concerning the performance in bank assurance of the two partners with which we have an agreement, Bipper and Sondrio. As I said, their performance was very strong in both the players. above all in health insurance where we started with the project of Unisalute we are using Unisalute brand in distributing product both through Bipper 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 in which we are 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 component that contribute to build up the numbers are different because there are not anymore the runoff release that we used 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 components that contribute to build up the numbers are different compared to the components that were used with the old accounting standards.

Okay.

Thank you.

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. So 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 solution. So you pay with credit card or SEPA debit monthly. We send you monthly a certificate via email. So this new offer is reporting a very significant interest. And so, as you can imagine, a lot of our customers don't put in our written premium the whole year of the premium, but only the single month that they are paying. There is no effect on earned premium or on our premium. profit and loss account, but if you look at growth, this makes a material difference.

Very clear. Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. The next question is from Alberto Villavit, Intermonte. Please go ahead.

Hi, good afternoon. Just a question on the outlook for investment income contribution. It was very strong in the first quarter, especially in non-life. I was wondering if you can expect similar trends going forward. Any color on that could be helpful. Thank you.

Yes, Alberto, there are two 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 comes from the coupon and dividends that we get from our investment 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 come 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 2022, we had a much higher component classified at fair value through P&L than what we have today. And this is the reason why in the first quarter of 2022 we had a so negative effect coming from investment income because the component classified at 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 investment that can be attributed to the valuation of financial assets is much lower than the loss that we got in 2022. 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 in 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.

Thank you.

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

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

Thank you.

Okay, so what we planned to do about pricing was related on inflation forecast. And on this side, we can say that our price increases when they will become fully visible on earner premium markets. 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.

Perfect. Thank you. Mr. Latterta, there are no more questions registered at this time. Excuse me, there is a follow-up question from Michael Hotner with Barenberg. Please go ahead.

Sorry about that. Thank you so much. And I'm really sorry. You were talking about these, you explained lovely the monthly premiums. And I just wondered, if I'm a car driver and I buy a monthly premium policy from Unifo, 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?

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

Very clear.

Thank you. Mr. Lattersa, there are no more questions registered at this time.

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