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Edited Transcript of CASS.MI earnings conference call or presentation 9-Aug-19 7:30am GMT

Q2 2019 Societa Cattolica di Assicurazione Sc Earnings Call

VERONA Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Societa Cattolica di Assicurazione Sc earnings conference call or presentation Friday, August 9, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Minali

Società Cattolica di Assicurazione - Società Cooperativa - CEO, MD & Director

* Enrico Mattioli

Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO

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Conference Call Participants

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* Alberto Villa

Intermonte SIM S.p.A., Research Division - Head of Analysts Team

* Andrea Lisi

Equita SIM S.p.A., Research Division - Research Analyst

* Elena Perini

Banca IMI SpA, Research Division - Research Analyst

* Gian Luca Ferrari

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst

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Presentation

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Operator [1]

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(technical difficulty)

June 30, 2019, Results of the Cattolica Assicurazioni Group. (Operator Instructions) I hand it over now to Mr. Enrico Mattioli, Deputy General Manager and CFO of Gruppo Assicurazioni Cattolica. Please.

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [2]

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Thank you. Thank you, everybody, and thank you for participating in our conference call on the results at June 30, 2019.

Please go to Page 3 where you can see the usual key consolidated figures. You can appreciate the double-digit growth in premiums, 10.5% to over EUR 3.2 billion overall; Non-Life going up to EUR 1.1 billion, growing 3%; and Life growing to EUR 2.2 billion, growing at 10.5% (sic) [14.8%]. We'll see later on that the joint venture we entered into with Banco BPM gave, in fact, a significant contribution.

Combined ratio is declining by 0.8 percentage point, down to 93.4%. And in fact, the combined ratio was impacted by some natural phenomenon that happened in the second half of the year.

Consolidated shareholders' equity goes up to 2.3% (sic) [3.4%]. The solvency ratio goes up by 4 percentage points to 165%. Later on, I will specify this counterintuitive increase compared to market trends, which characterized the second half.

Operating results is growing 4.3% going to EUR 156 million and that -- it was impacted once again, like I said, by natural events. Consolidated results and net results grow by 21% and 20.5%, respectively. Net results, EUR 61 million. And the return -- operating return on equity is one of our main indicators. For 2020 we expect 10%, so we are on track with an 8.6% operating return on equity.

Then we can see the contribution given by the various activities. As you can see, you can start appreciate rebalancing of our activities. And that was one of our main objectives in the business plan, we want to rebalance revenues. But if you look at Non-Life, you can see that operating results is going down by EUR 4 million. Some are due to natural events, bad weathers in Italy. So if we -- if this year we have the same type of claims as last year, the operating results of Non-Life would be growing.

But if we go above the operating line, we want to focus on EUR 61 million technical result. It was higher due to the reasons I explained. While the financial component goes up by few millions, thanks to an improved investment income, mainly coupons generated by alternative investments.

Below the operating line, in Non-Life, there is only one thing to report. That's to say revenues net of other nonoperating result, there is -- nonoperating charges, sorry. Last year, we made provisions for possible pending lawsuit concerning VAT, et cetera. So here, we have EUR 4 million or EUR 5 million from last year that are weighing down in this line and other nonrecurring provisions for Popolare di Vicenza and joint ventures.

So that is why we can say that the first half of 2019 is kind of cleaner. It's tidier in terms of operating results as well as tax rate because the expenses we made last year were not deductible against the taxes of this year. We have a more normalized situation in terms of revenues.

Life. You see that volumes are growing and operating result is what you see. And in terms of revenues, we have positive results, thanks to the restructuring of our Life product portfolio. In fact, we paid attention to the clique or nonclique components as well as other revenues components. So the main driver is, once again, volumes, but we also improved margins on the portfolio. So the operating results goes from EUR 59 million to EUR 71 million.

I think there is nothing else to say about other.

So I would just like once again to stress the operating result of EUR 156 million, which would have been plus 10% were it not for the natural events, the bad weather, that impacted us.

At Page 5, you see the consolidated shareholders' equity situation. And here, I would like to say that the result for the period compensates for dividends paid out in the second half, EUR 85 million positive impact, which is due to the decline in interest rates and which had a positive impact specifically buying bonds, so a positive impact on the available for sale reserve, positive by almost EUR 90 million. So the growth is 3.3% for consolidated shareholder equity.

On Page 6, you see the group's Solvency II ratio from 171 to 165 percentage points, a decline in the SCR component. And that is due to the declined equity exposure and also the numerator was positive, the results for the period. And also we kind of refined our model and we have model now that better reflects the liabilities situation and Life losses. So all of these elements have compensated for negative market effects, which were -- have -- were offset by market -- by interest rate decline. The spread, in fact, was really marginal.

On Page 8, you see the analysis of our performance, specifically Non-Life premiums. There is an overall 3% increase, going up to EUR 1.1 billion.

The Non-Motor segment, just like in the previous quarter, declined by about 2.5%. And that is essentially due to the loss of a significant book of registered cars and also decline in the general Motor business.

Motor, close to double digit. It's slowing down slightly compared to the first quarter. But considering that in the Non-Motor certain contracts, specifically corporate contracts, are volatile and affected by seasonality. So we think that this number may improve by the end of the year.

The contribution given to total premiums by Non-Motor is currently up to 49.5% compared to 46.5%, so we are perfectly in line with our business plan.

On Page 9, you see a very crowded page, crowded by technical ratios. You can see combined ratio, which was impacted by 2.5 percentage points due to natural events. But considering the impact of weather and related events, we can adjust the number.

Claims ratio is improving, in spite of this weather effect. So there are a number of improvements in various businesses and classes that are not impacted by this phenomenon.

Expense ratio is increasing because of what we've already seen in the previous quarter, i.e., higher commissions due to a different product mix and also due to a significant contribution to -- by the combined ratio where we also -- in certain segments where we have also higher commissions. Also, investments made by the group, they were needed to implement as efficiently as possible the business plan, had an impact on expense ratio.

Policies, as you can see, declined by 1.1%, down to almost 30,000 policies. And that is due to the underperformance by certain agencies that tend to perform less than the others. It's a specific cluster of agencies that is due to price increases in certain risks that we don't really want to retain. But probably that is not the only reason. We are also kind of shedding some clients which we could have retained instead. So we will be more flexible during the year. We will monitor this area more closely.

And our budget for 2019 -- our target for 2019, we'll be very selective with our portfolio while raising the average premium. Average premium is growing by 0.5%, in fact. And we expect that by the end of the year, we may end up between 0.5% and 1%, even though I really have to say that the market is really reporting cutthroat competition, specifically by certain players. So the average premium may be still declining, so the average -- growing the average premium and retaining the number of policies we already have is a very difficult balance we're trying to strike.

The increase in the average cost of claims, plus 3.3%. Well, this is due to different reserve calculation for certain risks that we have consolidated that we have done last -- in the second half of last year. But once the claim is actually settled, things change. But at least, the year has got to go by because we have recently adopted this criteria. By the end of the year, we'll have an average cost of claims slightly lower than this number, around 1%.

The frequency of claims declined. In the chart, maybe you cannot clearly see this, 4.8% is better than the market by 100 basis points. But over the quarter, minus about 7% compared to, like I said, the market. So it's an interesting trend.

Moving on to Life on Page 11, you can see volumes. Volumes increased by 15%, positively impacted by the consolidation of the joint ventures with Banco BPM. On a like-for-like basis, we would have shed almost 5%. I have to say the lower contribution, lower premium contribution, is essentially due to the capitalization businesses where last year we had signed significant -- I mean, large policies, which were not really profitable. So we are not really concerned by this deviation.

While if you take a look at the unit-linked contribution, you see a 37% increase up to EUR 578 million with a percentage weighting, which goes up to 26.6%. So once again, this development is in line with our business plan. We want to push these products more, sell them more through bank insurance channels, mainly, Vera, Banco BPM. They sold unit-linked products really well and gave a significant contribution to this -- to achieving these results.

On Page 12, you see Life new business. And here, you can clearly see a significant increase in class 3 products by almost EUR 600 million. Then, EUR 40 million or so are missing here because there are products that would be accounted for in July. So they were sold but were not accounted for in the first half financial statements. With profit policies increased by 5%, but additional payments go down by 28%, i.e., EUR 280 million. And that is, I have to say that, because you may think that certain guarantees may be dangerous, but it's not the case for us. Specifically, additional payments have an average guarantee of 0.66%, so perfectly in check. I would say these are no additional payments at higher interest rates. So the average minimum guaranteed for new business is 14 basis points and steadily declining. Last year, it was 23 basis points. So it's a clearly descending trend, which is extremely positive for us.

As far as Life net inflows, you see a decline, which is essentially due to the fact that Cattolica did not register the contribution by Cattolica Life and Vera Vita, who joined the JVs with Popolare di Vicenza. So there are missing contribution by former Vicenza ventures and that is what accounts for this negative inflows due to class 5 mainly.

As far as investments are concerned, I really have to say, no major changes compared to what I said in the first quarter. So I will be quick here. Investment results here are impacted by lower and lower investment rates. It's increasingly difficult to reinvest. We are reinvesting -- depending on the various liabilities and capital situations of the various portfolios, we cut back on exposure to equity, which helped the SGR, but profitability, better. The asset allocation is rather stable compared to the first quarter. No major fact or changes to report. Under the business plan, we expected to increase real estate and alternative investments.

And in Non-Life, we have reported, in fact, coupons positive contribution from alternative investments and real estate. So this is a significant line item that is bolstering the profitability of our portfolio. So average annualized return was about 2.5% in Non-Life, 2.1% Life.

Assets duration, no major changes to report. You can see that both Non-Life and Life. I think I have focused on the main constituents of our investment income and its breakdown. Let me just specify that assets' make-up on Page 17 -- sorry, Page 15 rather. You see EUR 26.3 million (sic) [EUR 26.3 billion], 74% in govies. And here, we have also 54%, which remained unchanged compared to the first quarter. So we have really adopted a very tactical approach.

Last year, when the spread widened significantly, we decided to increase it on -- in the Non-Life mainly, but then we declined again, going down towards 50% -- getting back to 50%. Currently, there is a lot of tension affecting these securities. In Italy, you really have to be tactical when you sell government bonds. You mustn't be too aggressive to get down to 50%.

Then, I'd like to show you the breakdown of technical reserves. You can see that the average income of segregated funds is 2.83%, so a positive differential of 220 basis points compared to the average guaranteed, which is about 75 basis points, declining from 74, or better, 79 in the first quarter. 74 if we include Vera. So it went down by about 10 basis points. And here, we have a target of 50 basis points in 2020.

In the following page, you see the available for sale breakdown. And here, you see the improved in the fixed income investments that is due to the decline in interest rates, so that is a positive component. So we have EUR 88 million net of coupons and taxes. Net of shadow accounting and taxes at the end of semester, previous semester was 54, so a significant increase.

The final slide. Here you see the distribution channels for the group. Independent channels are increasing to bolster our distribution network. I'd like to say there is a slight increase in the number in headcount to support and bolster the goals embedded in our business plan. The total agencies, 1,430 minus 15 compared to the previous year because we are consolidating certain agencies, making them more efficient and more profitable.

On this note, I close my presentation and hand it over to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question, Gian Luca Ferrari, Mediobanca.

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Gian Luca Ferrari, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [2]

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Three questions. First question is about your claims ratio, 72.6. Could you please tell us how much was the reserve release -- the amount of reserve release in the first half? And also, I'd like to understand how reserves changed between the first half of 2018 and 2019.

Then you talked about an investment yield of 1.8%. I did not understand whether that was Life or Non-Life or overall. Could you please give us the breakdown just for Non-Life in the first half?

Last question, possible agreement in bancassurance business with Ubi. I think you have reached the maximum amount of Tier 2 securities you can issue. Tier 1, maybe you can issue EUR 150 million more. Ubi talked about an asset valuation of about EUR 1 billion and selling 60% to 70%. So we're talking about EUR 600 million to 700 million deal, where EUR 200 million is just the capacity left to issue additional Tier 1 bonds. So should yours be the best bid, how are you going to fund this deal?

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [3]

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Okay. Lots of questions, I hope I remember all of them. So first thing, you talked about reserve release and the combined ratio. We are in line with last year. Last year, it was about 6.5%. We are in line with market averages in Italy. You probably know that better than I do. We tend to be very cautious in our reserve policy. So we are very cautious when we free up reserved money.

As to the combined ratio, maybe Atanasio -- Mr. Atanasio will get back to you because I don't have the number here.

Then, you talked about the reinvestment rate return. 1.8% is actually rather similar between Life and Non-Life. There is no big difference, slightly higher probably the yield for the Non-Life segment. But it's really not appreciable, the difference between the 2 segments.

And the return between -- I mean, comparing in the first and second quarter, I would say that the yield is really in line even though the second quarter was slightly lower.

As to Tier 2 capacity, yes, we have exhausted the capacity to issue further Tier 2 bonds unless our business volume increases because that's a possibility should we expand the business. But as I think it stands now, we have no more capacity. Tier 1, we have about EUR 200 additional million we may issue. Tier 3, no room whatsoever. So this is the current situation.

And then, you also -- maybe I forgot some of your questions. But I'd like to hand it over to our Managing Director, Alberto Minali, to take the other questions concerning Ubi.

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Alberto Minali, Società Cattolica di Assicurazione - Società Cooperativa - CEO, MD & Director [4]

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Well, currently, we are analyzing. We are conducting a due diligence on the information provided by the counterparty, and based on that, we'll submit a bid. We are participating in the bidding process. We are -- we're committed to do our best there. And the bid that we are going to submit that will be submitted to the Board will have to be economically sustainable for Cattolica. So the funding of the deal will have to be included in this.

So you said EUR 100 million more could be issued in Tier 1? No, I said EUR 200 million Tier 2 bonds. There is where we have additional capacity. So Tier -- sorry, there was overlapping voices.

As far as funding the deal, please consider that we are -- that a significant portion of the outlay will not really be paid because we can lever the credit we have from the equity investment in Lombarda Vita.

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Gian Luca Ferrari, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [5]

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Well, Alberto, concerning Lombarda Vita, could you share with us the embedded value number to try and understand the worth of this asset? Or could you tell us what was the net income reported in 2018, so that we can come up with an assessment of Lombarda Vita's worth?

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Alberto Minali, Società Cattolica di Assicurazione - Società Cooperativa - CEO, MD & Director [6]

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I hand it over to Enrico again.

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [7]

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Lombarda Vita on owned funds, EUR 150 million, that is our share, 60%. And in terms of Lombarda Vita's profitability, just give me a minute -- give me a second and I'll find the number. In the first 6 months, about a profit of EUR 20 million.

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Operator [8]

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Next question, Andrea Lisi, Equita.

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Andrea Lisi, Equita SIM S.p.A., Research Division - Research Analyst [9]

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I have an additional question. The 2.83% yield on segregated funds, does that include capital gains? And if not, what's the running yield and how did it change?

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [10]

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As far as segregated funds, you know that as soon as we realize a gain, we have to include it in the yield. But the profitability of a segregated fund portfolio depends on when you realize capital gains or losses. And in fact, we are participating in the new income fund, which was passed by the regulator recently as a provision and which gives you more flexibility in managing capital gains.

If by running yield you mean reinvestment income, please consider that in segregated funds, we also have securities that have very high yields that will mature in the future as well as the liabilities as we said in the -- as we showed in the slide.

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Operator [11]

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Next question, Elena Perini, Banca IMI.

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Elena Perini, Banca IMI SpA, Research Division - Research Analyst [12]

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I have a couple of questions concerning the Solvency ratio. So first question, could you please specify the change, if any, between the first and -- I mean the change between the first and second quarter? You mentioned 4.4 and you also mentioned the change in your model and I'd like to understand what this delta is due to?

Second question, you mentioned tensions on Italian government spreads. So I'd like to have an update on your sensitivity and also the threshold at which the country valuation and the liquidity adjustment would be triggered.

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [13]

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Elena, well, first of all, the change is 4 percentage points from 171 to 175. Two points -- 2 positive points are due to business effects, income essentially generated in the quarter. And the decline is due to a lower solvency combined ratio due to the declined exposure to equity investments. Then there are 5, 6 points due to market effects, the decline in risk-free rates. The same phenomenon we appreciated in the first quarter of the year even though it was more marked in the first quarter. The positive effect, as I said at the beginning of the call, is represented by certain refinement in terms of retrofitted business, Life business, commissions that compensated for the market effect had the same kind of amplitude. So we have a positive result on the business side. Combined with this refinement, so to speak, we have a good result.

As far as the sensitivity, spread sensitivity is concerned on government bonds, it's about 15 points for every 50 basis points. Volatility adjustment, we are now close to the volatility adjustment trigger. So here, we only have a negative effect. Other times when we were closer to the volatility adjustment trigger, we had positive sensitivity.

But to answer your question, speaking of the euro swap, the 5-year euro swap at the end of June, we would have needed an additional 70 basis points spread widening to enter that territory and that would have caused a 40 points increase in the Solvency II ratio and we would have ended up at about 180. But at present, I don't know where rates stand now, but yesterday, we were lower in the first half by 40 basis points. So the distance now, the delta is about 110. So north of VUA (sic) [VA] where it's colder, so to speak, it would take at least 100 basis points to get back to a solvency ratio similar to the current one. So if you add up the hot areas beneath VA to the colder area above it, that would cause -- it would take 200 basis points widening of the spread to get back to the level net of VA effect.

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Elena Perini, Banca IMI SpA, Research Division - Research Analyst [14]

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Okay. Could you share with us sensitivity to interest rates and also to corporate spreads, if possible?

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [15]

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Well, rate sensitivity, 30 basis points decline in rates would generate 8 -- it would be 8 points for risk-free securities. And as far as corporate rates are concerned, we have a sensitivity to both government and corporate bonds of 50 basis points. So it would be 14, so not too far from the sensitivity to government bonds. So these are our main sensitivities, government and corporate bonds. These are the main sensitivities.

I take the opportunity to answer a question by Gian Luca Ferrari that -- to say Motor TPL, 182 compared to 186 last year.

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Operator [16]

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Next question, Alberto Villa, Intermonte.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [17]

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Some of the questions I wanted to ask have already been asked, so I will concentrate on the Non-Motor growth. What can we expect? All insurers are really staking it all -- or staking a lot on this business. So what kind of growth we'll be looking at in the future? You wanted to strike a 50-50 balance between Motor and Non-Motor, so how much -- to what extent could this mix change? And that was my first question.

My second question is this one. What about the agency, the changes? Are you still turning around? Then, what kind of impact can we expect in the next quarters?

And finally, bancassurance with Banco, we see that all numbers are improving, unit-linked. We also heard Mr. Castagna, Banco's CEO, said that they really have a target for indirect deposits growth. So what kind -- can we expect this improving trend to be sustainable going forward? Or could it be reversed because it's impacted by market effects?

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [18]

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Thank you, Alberto. Well, as far as the Motor and Non-Motor rebalancing, you may recall that in the business plan, we expected an amount higher than the current one, 51 Non-Motor. And the trend should continue on. And in fact, there's generalized growth among the competitors. Of course, competition is more aggressive. But we believe we have certain affinity groups, certain specific trades and links with the specific businesses due also to the people we hired in. We believe we can be confident we can further develop this business.

I said earlier that sometime premiums in this area can be volatile due to corporate clients. So sometimes, a significant premium would just evaporate suddenly. But we believe and we are confident that this trend may continue and that rebalancing of the mix will continue as well.

What was your question again? Do you have a question about agencies?

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [19]

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Right.

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [20]

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Okay. Yes. We are still restructuring agencies. We are monitoring profitability not only from the point of view of products, but also channel profitability and clients. And we are monitoring clients' profitability as well with greater accuracy.

So the numbers I mentioned earlier in terms of agencies restructuring accounted for the most immediate measures, say, emergency measures we wanted to take right now in these -- in the past few months. But we are going on. We are continuing restructuring the agency network. And sometimes you really have refocus the agencies' contracts. We have to focus more on profitability. We want to pay more agents if they generate the kind of profit level we expected them.

So it's an ongoing monitoring that we have of agencies. And the contribution by Vera is really significant. And that contribution materialized when unit-linked in the market were losing 22 -- 27%. So minus 27% for new business, it means that even though equity is going up, there is not necessary the strong correlation.

Sometimes maybe the negative sentiment impacting other decisive factors. So once we have put our products in order, once we have tidied up our product portfolio and operationally, too, once we were ready, the network proved that they can sell products very well, so we expect this trend to continue.

Obviously, there are certain market conditions, which make selling these products more difficult. But we are confident that despite certain tough markets, sometimes certain market downturns, we'll continue selling these products.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [21]

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Did you provide the combined ratio breakdown between Motor and Non-Motor?

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [22]

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No, we didn't provide it. Do you want it? Well, okay, so Motor is around 95%; Non-Motor, 91.5%, impacted by weather events. So normalized, it would be well below 90%. But like I said, there's been a specific characteristic effect -- a weather effect that characterized this half, first half of the year.

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Operator [23]

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(Operator Instructions) Mr. Mattioli, at present, there are no questions. No further questions in the line.

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [24]

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Okay. Thank you, everybody, for attending our conference, and we'll get together again in November. Thank you. Bye-bye.

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Operator [25]

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This is the Chorus Call operator. The conference call is over. You can disconnect. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]