Unipol Grupo Spa

Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Unipol Group's first quarter 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. Mateo La Terza. CEO of UnipolSci and General Manager of Unipol. Please go ahead, sir.

Good morning to everyone and thank you for participating to this call. Before opening the floor to the questions, let me make some remarks and statements on the presentation that you saw this morning that, as you know, does not include in the consolidated results the contribution coming from the bank, even if, as you are able to see in the presentation, we gave evidence of the contribution of the two banks as well in the pro forma data. Anyway, coming back to the insurance business, starting from the PNC, we achieved a quite solid increase in revenues in the high single-digit almost driven by all the line of business above all as usual health insurance is the driver of the business but as I said all the other line of business achieved quite solid increase in the premium and This is, above all, the effect of repricing that are underway in the PNC in general, in particular in motor, where I can see that the repricing is almost in its full stage, but it is starting to take effect also the repricing in some area of non-motor, above all property and fire in order to take in consideration in our risk assumption the possible evolution and effect coming from NatCat going forward. In terms of technical profitability, of course, the increase of premium and repricing gave a positive contribution to the combined ratio. Consider Nevertheless, the first quarter usually has a positive seasonality because of the lack of nut cut in the first quarter. But anyway, 91.1% is a quite good number if you compare it to the 94.8% of the first quarter in 2023. And on top of repricing that I talked before, we had a positive contribution coming from a reduction of claim frequency above all in the comparison with the first quarter of 23. Concerning life, we had a very strong production coming above all from a bank assurance, the contribution of banks is very solid and they contributed above all for the 750, 748 million of net inflows that we achieved in our segregated portfolio. That is very helpful in order to increase, reinvest our new cash flows at higher rate and contribute more to the increase of the gross yield of our segregated portfolios. As you can see in our presentation, we continue to have an increase of the gross yield, a decrease of the minimum guarantee, and this is very positive also for the capital absorption coming from the life business. This strong production gave a quite important contribution to the new business. You were able to see that the contractual service margin created by the new business is almost twice the contractual service margin released, and this is a direct effect of the very strong production that we did in life. Finally, insolvency, we had a quite small increase compared to the number at the end of 2023. 217 is a very solid number, but in order to compare ourselves to the other insurance players, as we said last time, you should take in consideration the solvency coming only from the insurance perimeter, that is 269 that we showed in the presentation and in the press release. And this number is at the top of the range of the insurance business at the European level. Having said that, I am here with Enrico San Pietro, General Manager, and we are open to answer to your questions. Thank you very much.

Thank you, sir. 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 1 on their touch-tone telephone. To remove yourself in the question queue, please press star and 2. We kindly ask you to use handsets when asking questions. The first question comes from Peter Elliott of Kepler-Chevreau.

Thank you very much. Maybe three questions, if I may. First one, very strong combined ratio, congratulations. I guess it's always difficult for us to see from the outside to get a feel for the underlying profitability given that we don't have the moving parts like the reserve releases. Just wondering what numbers or anything you can give us to help us understand that and get a bit of a feel for that. Maybe in particular you could give us the discount benefit would be very helpful, but anything else you can say would be great. Second question is on the life result. I mean, if I look at the, obviously you have the CSM release of, was it 59 and total life profit of 68, so you have 9 million outside of the CSM release. If I look back over the recent quarters since ARPHA 17 was introduced, It's been quite a volatile number. Just wondering if you can give us any sort of guide to what we should expect or what we should consider a normal run rate to be for the profit outside of the CSM release. And then the third question, just looking at the non-life running yield, the investment yield, it seems to be lower this quarter than previous quarters. Could you just help me understand what's happening there and how that should develop? Thank you very much.

Okay. Concerning the first question, then I leave Enrico to comment more in depth concerning the composition and the evolution of the combined ratio. But just to say that in this quarter, we did not make any significant reserve release. We have only the runoff of the risk adjustment coming from the claim that we paid. And the impact in the first quarter, 24, is a little bit lower than five percentage points. On top of that, the discount effect on the combined ratio is 4.5% of the premium. Anyway, the bulk of the improvement of the combined ratio come, as I said in my comment before, above all from... the repricing activity that we are implementing since last year, and this is also a consequence of the underwriting strategy that we have in risk assumption, a consequence of the reduction of the claim frequency that we are achieving in motor and in non-motor. Concerning the second question that concerns the life business, yes, we doubled the new business value creation compared to the number that we released in the quarter, and this is the effect of the very strong production that we achieved in the first quarter that has a very high profitability, significant profitability in absolute value. And as a consequence of this, we had this evolution of the CSM. Concerning the quarter, you are comparing – if you understood well the question, you are comparing – The margin in life in the Q1-24 with the Q4-23 or something like that.

Actually, to be honest, the new business information you just gave is very helpful, actually, because that was something that interested me as well. But actually, the question was on the P&L impact, so not the stock of CSM. It was just if I look at the life profit, you reported 68 for the quarter, right? 59 million of that is coming from the CSM release. So what I was interested in is the gap, the difference, the 9 million of other stuff. And I just wanted to understand if you were able to give us any guidance for what that number should be on a normal run rate. Obviously, there's a lot of volatility quarter on quarter, but just wondering if you can say anything about what we should expect going forward.

Yeah, I understand. I understand, Peter. Of course, it's not very easy to make the unbundle of the 9 million which can be contributed by operating profitability and also from the financial market contribution to this number. it could be misleading to multiply by four the number that we released in the first quarter because it all will depend on the evolution of financial markets in the next quarter because first quarter was a quarter in which financial markets performed quite well And as a consequence of this, there is also a contribution which is not significant because, as you correctly said, the bulk of the numbers come from the CSM release, but there is a positive contribution coming from financial market. I could see that normalizing the impact of financial market, so assuming that is close to zero, we are comfortable with a total contribution coming from life above 300 million, more or less. Then if it will be more, or as it happened in 2023, or less, it will depend on the performance of financial markets. Concerning the third question that was on the running yield of the non-life. No, there is not a... A negative contribution coming from the running lead. The truth is that in the first quarter of 2024, we realized less earnings coming from investment compared to what we did in 2023. Actually, the contribution coming from coupons and dividends is In Q1, 24 is above the number of the same period of 2023. You can see in the presentation where there is 3.3% coming from coupons and dividends in non-life versus 3.2%. in the first quarter of 2023. Of course, there is a prosecution of reinvestment of new cash flows at higher yield compared to what it was in the past year. Of course, you have to take into consideration that the duration of the PSE portfolio is above – three years, and so you take time before there is a complete revolving of the total asset portfolio. Daniel, I don't know if you can add something on the combined ratio.

Yes, good morning, Peter. A little more color on combined ratio results. As Matteo said, if you compare to the first quarter 2023, there is not An increase in reserve release, on the contrary, a decrease. And there is also a very similar discounting effect. So the combined ratio improvement is related. to the current year combined ratio result driven by essentially the pricing effect. You remember we discussed last year about our strong tariff increases and the fact that it It takes time to see the whole effect of what you do on prices on earner premium. It takes some quarters. Now, the time has come to see what we have done last year on tariffs, and so basically the... strong improvement in motor third-party liability is related to this increase and also the positive technical selection of our evolution in tariffs that is driving down the loss frequency. There is also another effect on property. We started from the beginning of the year to increase prices also on a quite significant part of our property book and this is driving both our written premium up and also our combined ratio down.

That's very helpful. Thank you very much for those very detailed answers. On the non-life investment income, I guess what I was looking at, I was looking at 117 million from coupons and dividends this quarter. that seems to be less than you got in Q4 or Q3. So I was just surprised it hadn't carried on going up quarter over quarter, but I can follow up with IR afterwards. Thank you.

Yeah, okay. Of course, you can't... It all depends. You can't multiply by four a quarter in order to see the investment income coming from any segment because it depends on... the quarter in which you get more dividends compared to others, it can depend on many other items that can change the cash flow profile of the single quarters. But anyway, our IR is available to any more detailed questions on that. Thank you very much.

The next question is from Elena Perini of Intez of Sao Paulo.

Yes, thank you very much for taking my questions. Actually, I've got three questions. The first one is if you can quantify the impact of the unwinding effect on your non-life investment results in this quarter, because it seems to me to have been quite high. The second question is on your tax rate, because for me it was slightly higher than expected, so I was... was wondering about any new components in the calculation. And then I was wondering if you have made any provisions for the insurance fund for life companies because other companies are already doing them. So if you can clarify, please. Thank you very much.

Thank you, Elena. Concerning the unwinding effect in the Q1 2024, the amount is almost 50 million euros in the quarter. Of course, it is an implication. It is a consequence of the discount of the So there is a positive effect on the combined ratio that we did in the past on the LIC reserves. Concerning the tax rate, yes, it increased. We have always a very prudent approach. In this case, the reason why we did it is because of the unwinding. the abolition of the ACE that before was applied as a benefit for, as a contribution to the economic growth of our country that is not valid anymore. And as a consequence of that, we did not, of course, take into consideration this component in the tax rate. Concerning the provision, yes, we did a provision of $4 million on the insurance fund.

Okay, thank you very much. If I may, I've got two follow-ups on your answers. The first one is how much was the unwinding in the first quarter of 2023? And the second one is if you can quantify the impact for the full year of the AC abolition. Thank you.

Okay, concerning the unwinding in 2023, the numbers was a single digit, so it was not 8 million. In the first quarter of 2023, we were just at the beginning of the application of the IFRS 17. So the impact coming from unwinding is quite significant. in 2024 compared to 2023. Concerning the tax rate evolution, taking into consideration the abolition, the wind-down of the AGE, I can tell you a forecast at the moment. So we have to work out with our CFO, and then I can follow up or he will follow up with you. But it is a too technical question for me. Sorry about that.

Okay, thank you very much. I will follow up with the IR team.

Yeah, thank you. Thank you very much.

Thank you.

The next question is from Michael Hutner of Barenburg.

Good morning. Thank you, and well done. Lovely results. I had lots of little technical questions. The first one is, this is your final year of your three-year plan. What is the target combined ratio for the group? I can see in the slide pack you did for the investor day back in 2021, some figures for motor and non-motor, but I don't see an aggregate figure, so I just wondered if you can help. And then on the pricing, Could you talk a little bit, say, how much non-motor prices are up and also how much motor prices are up now in Q1 and also how much the average premium is up? So in other words, how much more there is to come from pricing in the average premium. Then on the life, the new business is lovely, as you said, so the profitability doubled there. I just wonder if you can explain whether this is something we should kind of model for the rest of the year, or would it tail off in some way? And then my final question is on sovereignty. So we have this lovely 269% ratio. Is that the ratio for the merged group now?

Thank you.

Concerning the combined ratio, Yes, we disclosed a KPI in terms of combined ratio at the end of the industrial plan. As I said before, the number of who won has a favorable seasonality because of the lack of nut cut. And so... It could be misleading to say that being at 91.1, we are close to reach the target of combined ratio of the industrial plan. Of course, the real issues have to be faced usually in the third and fourth quarter, And so we will see how will be the evolution of NatCat, above all, after taking into consideration the repricing that we did in our property portfolio, in motor, all the change in our underwriting strategy, and we will see We will see if we will be able to reach the target. We are working very hard to do it. I think we are pretty on track to reach this target, but it's quite early to say that we are being to meet the number. It's a number 92.6?

Yes.

Okay, lovely.

Thank you. Concerning the pricing in motor, I will leave the floor to Enrico, and I will take it back on live. Thank you.

Good morning, Michael. So, roughly speaking, we can say that when you look at our motor tour party liability premium, we are more than 6% increase. That is the effect of an average premium that is increasing almost double digit and a decrease in the number of contracts, of course, due to our hard repricing. So quite similar is the situation for the property business. It started later, but it's having a similar effect. So basically double digit increase on a part of household condos and small and medium enterprises contracts and also a negative effect on the number of contracts that are renewed. Not that big, but quite visible. Welfare business is not having significant repricing and growth is for a small part repricing, for a big part an increase on the number of contracts and number of persons on collective agreement that are insured in these kind of contracts.

Very helpful, thank you.

The next question is from Alberto Villa.

Sorry, I have still to answer to two questions. I apologize, sir. Sorry about that. So there was a question on solvency and, of course, the solvency of the combined entity. And the solvency of the combined entity, as we said in our presentation in February, depends on the result of the tender offer. Now, as you know, we closed the tender offer with a result of 94.9% of total stake in Unipol Gruppo. And we are in the process to be authorized by CONSOB for the sell-out procedures and the We look forward to manage it within the month of May and June. And as we said in February, in the assumption of a success of the sell-out process, which means to overcome 95%, And so to apply the squeeze-out process, and as a consequence of this, we would reach 100% stake of Unipol-Sci. We don't expect a big change of the solvency ratio of the group compared to what it is today. because we have the benefit of the merger on one side, but on the other side we have to pay the consideration for the tender offer, that assuming 100% stake is above 1.1 billion, and so as a consequence of the two components, that offset each other, we will remain more or less at the same level in which we are today, which means 217 or 269 considering only the insurance perimeter. And concerning the new business value, of course, yeah, the CSM, the CSM. No, you can't multiply by four the number. It is a very important production that we did in the first quarter, and then we will see if we will be able to maintain this trend that is very challenging, or there will be a slowdown in the production. That means, of course... a reduction, consequently, of the contribution to the CSM coming from the new business.

Excellent. And what's your expectation today on that?

My expectation? We are on track. We are working well in life. Then you know that financial conditions are very important. for the production in the investment product, we still have an environment of quite high interest rates. Even if central banks disclose their intention to cut interest rate, the question mark is when. And if there will be a delay in the reduction of interest rates, as it is the case today, it is quite challenging to sell interest traditional product because we have the clients, our clients have many other alternatives to invest like Italian government bonds, bank deposit, fixed income securities and so the environment of interest rate is very important in order to see if we will be able to maintain this trend or not. At the moment, as I said before, the production, the commercial business is going very well, above all in bank insurance, but also our agents are working quite well in life.

Brilliant. Thank you so much, Mr. Vitezzo. Thank you.

The next question is from Alberto Villa of Intermonte.

Good afternoon, and thanks for taking my questions. You already touched base on most of my questions, but I wanted to go back to the repricing you have done and the change in coverage for some specific property and other business lines, also in wake of what has happened last year for the natural events. I was wondering what was the reception by the clients and the agents of these changes, and if you feel confident that these changes will eventually allow you to reduce the risk of having significant and negative impact from natural events. In other words, I'm also interested in understanding if the slowdown in growth of the property is also related to these changes you are implementing throughout the portfolio. If there is a significant, let's say, decrease in the number of contracts on some specific businesses because of this change in coverage you are implementing. The second one is also related, maybe an update on the reinsurance situation in terms of both cost and coverage you are implementing. And the third one is, I think, probably not, but I wanted to ask you if you, as we have seen for some other players, reduced the commissions on some live products, especially traditional live products, in order to maintain the level of production, but you didn't experience the kind of problems some other networks, both agents and bank assurance, have had last year, so probably you didn't do anything. But just maybe a comment on that. They reduced the commissions for a temporary period, period to push production.

Thank you.

Hi Alberto, I try to answer to your questions. So about repricing, of course we've been discussing this on Moto Tour Particulability for one year, roughly speaking, since we've started to increase double digit or even around 20% our tariffs from February 2023. So It was quite hard to discuss with agents, but they understood what we have to do. And of course, it's not easy for them and for us to argue with some customers about this kind of increase. But at the end, the results are very good. So average premium is increasing. The combine ratio is improving, the loss frequency is improving, and of course now we are able to look at the near future more in terms to maintain our profitability instead of recovering, sharply recovering our profitability as we have been doing in the last year. Quite similar at an early stage is what we are doing on property business. So, as you probably know, the most part of the non-motor book in Italy is based on automatic renewals, so you have to give a notice to... terminate the contract to change the condition. We began six years ago to put into the new business contracts in non-motor retail a clause in which we could change tariff and so we are using on a quite significant part of portfolio, of retail portfolio and small enterprises portfolio to increase the increase depends on the region in which you are since of course the major risk we are facing is about not cut so the northern region are facing a a major increase if you compare with the southern region of italy we also are putting an increase in the percentage deductible so 20 percent of the of the damage is not covered instead of 10 percent that was before so also this is something quite hard to to discuss with agents and clients but we are seeing that the results are good in terms of price increase and not that bad in terms of decrease of portfolio that is somehow something that has, as you told us, a positive effect. So, especially in the northern region, having big increases in prices is provoking a decrease in the number of contracts that also are decreasing the amount of our exposures on NatCat. But this is not yet significant. We are doing several things about this. For instance, we are reducing our peak exposure on corporate business But we think to better manage exposure to reduce the risk to have a bad impact like last summer on NatCat events. So I go on on reinsurance also. There were quite significant changes in our insurance program. Of course, it was a very hard renewal season. We used to have an aggregate treaty, the name was multiple, that was covering us on several business lines on medium-sized events or single claims. was not possible to renew this treaty, that last year had a recovery of the full capacity of the treaty of 85 million, so aggregate on the market are disappearing, but this provocation save about 25 million of cost of this, And on the other hand, we had to pay more to be more protected on the Fire Prevent Treaty, that is the major one, in which we used to have a 150 million priority. that does not include also motor other damages, only property. So in the 2024 treaties, we are able to sum up damages on the same event coming from property business and motor other damages. We also have a multi-year cover that is starting from April. 100 million, not from 150. So we are covered from 100 million. In the end, despite a very difficult renewal season, we were able, in our view, to improve our protection on NatCat. On the other hand, also, we had to spend more. If you consider that we saved 25 million, but in the end we have to put more on this kind of cover, so the overall cost increased about 23 million euros if you compare to the same treaties of last year.

There is a final question on life. It concerns our strategy on maintenance commissions on life. Yes, we did the same kind of strategy. We had no chances to do something more. considering not only what the competitor were doing but above all the position of our sales people who had to talk with our clients who had Italian government bonds yielding at that time more than 4% in the 10 year maturity or also the bank deposit or fixed income securities we have an advantage compared to our competitors That is the fact that looking at the gross yield of the segregated portfolio, gestioni separate, that are a public number that you can see, you can realize that Unipol group have, on average, higher gross yield compared to our competitors, not only coming from having agent distribution problems, channel, but also, and above all, coming from bank assurance. And so having this advantage, we were able to cut our commission for the first couple of years on average, and then the commission was to be reset at the same level in which it was before. in order to allow us to be, I don't want to say competitive with the gross yield of fixed income securities because it was not possible considering the back yield of our segregated portfolio, but having a yield that were comparable with the yield coming from securities. the single alternative in which our clients could invest. Having said that, the selling point of a traditional product don't have to be based on yield, because if you base your selling points on yield, you will never have clients that make arbitrage with our back book of And so they will buy product when interest rates are high, and they will sell product when they are low. and doing this kind of strategy brings usually to very bad implication for life insurance company as it happens recently, as you know very well, to a quite significant company that was bailed out by Unipol and other four companies. So the selling point is different. We have to select our clients in the retail market. segment of business we have to fragmentate our investment and if you do this you will be able to have much lower lapse rate than the market average has as a matter of fact we are achieving in our group.

Thank you very much Paul.

The next question is a follow-up from Peter Elliott of Kepler-Shivro.

Thank you very much for the opportunity to come back. Just one more, please. I've discussed this a little bit with IR already, but I was wondering if you could just give me a sort of feel for the underlying premium growth that you're seeing in non-life overall. I guess it's quite difficult from the figures to sort of back out the installment effect from last year, and I think you had one large one-off contract in Q1 this year. If I back those out, it sort of looks like the premium growth is coming down a bit. Just wondered if you could give us any sort of comments or feel on that. Thank you.

No, no, Peter. Actually, in the first quarter, 24, the installment selling strategy is in its full stage. It means that you have one complete year in which we got started with this strategy. So the number that you see. in the Q1-24 is, as a matter of fact, not impacted by the installment strategy. So it is a number that is clean.

Yeah, no, I just mean last year the numbers were understated a little bit. So if you adjust upwards last year's numbers and maybe you adjust down the Q1 number for this large contract.

Exactly.

That's sort of what I was doing. So you want the Q1-23 restated, that it is not a number that I am following?

Yeah, I mean, I'm following up with IR on the exact numbers, but I'm just wondering if you had any comments.

You can follow up with our investor relator on this.

Yeah, okay. No, thank you.

The next question is from Joshua Vincentini of Barclays.

Hi there. Thanks for taking my question. I just had a quick one on solvency. The 2023 ratio was obviously much higher than initially expected. And we are awaiting the outcome of the merger. So we don't know exactly what solvency is going to look like. but where it currently stands, it looks like solvency would be boosted further. Do you need to keep your solvency at a level around 220%? And how should we think about the use of this capital once the merger has gone forward, particularly in terms of return to shareholders or debt redemptions? Are there any other considerations or constraints we should have in mind?

No, on solvency, what we said last Friday is that we are all set above 200%, and now we are at 217%, a couple of points more than at the end of the year. The progress is not significant in absolute value, but we have to take into consideration that the positive contribution coming from capital generation and from The positive evolution of the financial market was partially absorbed by the increase of solvency capital requirements coming from life risk above all, but also non-life. That is a consequence of the growth that we are achieving in the two businesses. The final number of the combined entity, as I said before, depends on the result of the tender offer. Assuming a full success of the tender offer, we will maintain more or less the same level in which we are today. As we said several times, we are not... inclined to take in consideration capital distribution to shareholders because the Solve EC2 environment is very volatile. It's a very volatile number and above all depending on the trend of financial market. And the number that you can see today could be very different in case of risk of attitude of financial market. And so the strategy to give capital back to the shareholder in good time in order to ask it back in bad time is not a strategy that is on the table in our group.

The next question, sir, is a follow-up from Michael Hutner of Barenburg.

Thank you so much. They link a little bit to what you just talked about, but here it's more on the debt side. So you've got 750 million hybrids, I think, during June, and then you've got the big billion, one billion senior notes due next year, 2025. And I just wondered if you could explain how you see your strategy in terms of debt and leverage. Thank you.

Okay. Concerning the senior unsecured bonds, as I said before, once the combined entity will become an insurance operating company, the senior unsecured bonds will be useless because an insurance company does not need to finance itself by issuing bonds because we get premium before and then we pay claims and so there are no reasons why we should refinance the one billion senior notes. Concerning the other bonds, this is a discussion that is underway because we still have a some time to take to take decision on what we will do with the 750 million not so much time but we have we have some time to think about it okay thank you of course no i understand thank you as a reminder if you wish to register for a question please press star and one on your touchtone telephone

For any further questions, please press star and one on your telephone. Mr. Baterta, gentlemen, there are no more questions registered at this time.

Okay, thank you very much to all of you and see you next summer for the first half result. Bye-bye.