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Edited Transcript of CASS.MI earnings conference call or presentation 8-Nov-19 8:30am GMT

Q3 2019 Societa Cattolica di Assicurazione Sc Earnings Call

VERONA Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Societa Cattolica di Assicurazione Sc earnings conference call or presentation Friday, November 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carlo Ferraresi

Società Cattolica di Assicurazione - Società Cooperativa - MD & CEO

* Enrico Mattioli

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

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Conference Call Participants

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* Andrea Lisi

Equita SIM S.p.A., 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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[Interpreted] Good morning. This is the Chorus Call operator. Welcome to the Cattolica Assicurazioni presentation of the results as of September 30, 2019. (Operator Instructions) I now hand you over to Mr. Carlo Ferraresi, General Director of Cattolica Assicurazioni. Mr. Ferraresi, over to you.

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Carlo Ferraresi, Società Cattolica di Assicurazione - Società Cooperativa - MD & CEO [2]

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[Interpreted] Thank you very much, and good morning, everyone. Thank you very much for being here today and attending this conference call. As you might know, the Board of Directors recently appointed me Managing Director and CEO of the company, a great responsibility that I welcome with great enthusiasm. It is in my new capacity that I am addressing you today and the financial community.

Cattolica is a sound profitable company, able to create value. It's a company that can rely on a very good management team, on able and well-motivated employees [and on sound] and reliable partners.

We operate in the insurance industry that, as you know, is characterized by high competitiveness, high competition, low interest rates and substantial -- great volatility of the trading government bonds.

Within this framework, we'll be working hard over the next few months to reach the business plan target and to repay the trust of our shareholders and partners. I now hand you over to Mr. Enrico Mattioli, the CFO and Deputy Director, who will be reporting on the financial results at September 30.

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

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[Interpreted] Thank you very much, Carlo. I would like to start with the slide reporting the key consolidated figures. I'll be very quick on this page because we will have the opportunity to go into further detail in the following pages. As you can see, total direct premium growth rose to EUR 4.97 billion, up 16.5%. Thanks also to the very good performance of Banco BPM, EUR 3.5 billion roughly and [direct] premiums EUR 1.5 billion, up 3.3%. The combined ratio deteriorated by 2.1 basis points. It's still a good level, 95.1%, but I'll come back to the evolution of our combined ratio, which is an important indicator of profitability by quarter and by the 9 months.

Our Solvency ratio is 169%, up 4 basis points in the first 9 months of 2019, and I'll go back to it later on.

Operating results dropped by 6.4% to EUR 216 million. As you can see, there's been a reversal of the trend, this is mainly due to the EUR 40 million impact of weather claims related to weather conditions -- unfavorable weather conditions. This is the difference between this year and last year, EUR 40 4 0 million, considering a further impact of weather conditions. Without this impact, our operating results would be up 11%. Consolidated results will be up 16.4%, EUR 180 million and group's result [would increase] by roughly 16% to EUR 84 million. Considering that the operating result was negative, here, we have a positive impact on the operating return on equity. So as I said, the [operating income] has a negative impact on our operating return on equity and it now stands at 7.3%.

On the following page, you see the income statements by segment of activity. You may note that I'm focusing on Non-Life or the TSV business, which is the one that has the greatest impact on our operating income. Here, you see technical figure down from EUR 94 million to EUR 67 million year-on-year. You cannot see it on [any particular result] but you see the result of all the items preceding investments. The difference of EUR 27 million is due to the EUR 40 million, which I already referred to, due to weather -- unfavorable weather conditions. And we could benefit partially from reinsurance, but less than in other occasions of the past. In the past, we had rare exceptional events related to weather conditions. Whereas in this case, we had repetitive events and this had a greater impact, of course.

If you look at the operating results in the Non-Life business, you see it dropping from EUR 131 million to EUR 107 million because of the reasons that I've already mentioned. Net of this EUR 40 million, the operating result would be up EUR 13.3 million, so it would be, in a way, able to offset this difference.

If you could see the -- if we had the same kind of events that we experienced in 2018, we would have -- as I said, the difference -- a positive difference of EUR 27 million.

This year, we have 3 things that were not there last year. As you might remember, in the first 9 months of 2018, we had this provision for the litigation on VAT and for Popolare di Vicenza that we had already disposed of, which together accounted for more than EUR 7 million. So EUR 7 million, that negative figure, of course, I think were there in 2018 and is not there this year. And greater impact of realized income from 1 to 5 year-on-year. I'm still referring to Non-Life business. And this is the result of grasping market opportunities both in terms of product equity and fixed income. So grasping these opportunities provided [with a byway] to spread volatility, and we are particularly satisfied because we managed to grasp, as I said, a good opportunity. This together with provision that was there last year, but not this year, contributed to increasing our operating results in Non-Life.

The provision that I referred to were not deductible from a tax point of view. So all in all, the Non-Life business is slightly growing to EUR 51 million versus EUR 50 million of last year. These are our consolidated profits. And the Non-Life business shows again more or less a result in line with last year. But as I said, we are certainly focusing on the operating result, which is due to the events that I've already described, and we cannot do much about it.

The Life business is growing because there's no impact related to weather conditions, of course. Volumes accrued for the Life business. The operating result is growing almost double digits, up to EUR 111 million. Also the realized income has improved up to EUR 8 million. And as we've said, the result of our financial strategy and specific financial strategy on investment, which is mirrored this year. And net of taxes, you can see an increase from EUR [40 to] 60 million in terms of our consolidated profit, which is again the result also of volume increases that I'll go back to later on as well as the joint venture with Banco.

So all in all, you see an increase of the consolidated profit of EUR 16.4 million, up to EUR 108 million. And you see that the result pertaining to the group and not considering [one-off] interest is increasing too.

Here, on the following page, you see the evolution of the shareholders' equity, the results for the period net of the dividend paid for 2018 early May this year. The less positive -- the changes in the available for sale reserve is positive, thanks to the narrowing of the spread and particularly thanks to the narrowing of the spread of the Italian Governments versus the bond. So it [decreased by EUR 152] million.

And the same figure is concerned before end October as well. I'm still referring to the available for sale reserve. Then we have a minus EUR 42 million, which is the purchase of 19% of BCC Vita and BCC Assicurazioni, which is the insurance that went out recently. So all in all, shareholders' equity up to EUR 2.398 billion from EUR 1.936 (sic) [2.255] billion end of 2018.

On the following page, you see the evolution of the Solvency II ratio, which grew by 4 percentage points, reaching 169%. Here, we suffered from negative impact related to a further drop of interest rates, and we had a positive impact which has more than offset the negative impact, due to the narrowing of the spread between Italian bonds and the German bund. And this has more than offset the natural increase of [SCR] that is necessary to support the business plan and our growth. So all in all, we have a balance which is positive by roughly 5 percentage points.

Moving on to the Non-Life business performance, Page 8. You see the Non-Life premiums is -- we are well on track with our business plan. The Non-Motor is growing more than Motor business, and we see a rebalancing of our portfolio. So the Non-Motor grew by EUR 9.7 million, roughly 10%. And now it accounts for approximately [60%] of our businesses. So we are reaching that rebalancing target that we announced in our business plan. We certainly welcome the growth of the Non-Motor business. We would have loved, of course, to have the positive performance of the Motor business as well, which, in fact, suffered from the great market competition as we're going to see in the following pages. So the Motor business dropped by 1.9% because of this fierce competition. All in all, the Non-Life premium growth reached 3.3%. Like-for-like, it would be 2%. So like-for-like not including the Assicurazioni that was acquired last year -- second half year of last year.

On the following page, we have drilled down on the technical ratios with the Non-Life business. As you can see, combined ratio, 95.1%. There was a substantial impact by negative weather conditions that account for 6.9% to be precise on our combined ratio versus [2.1%] of last year. We experienced negative weather events, roughly for EUR [95] million versus EUR 50 million of 2018. Here, we have a difference of EUR 40 million that I previously mentioned. The insurance worked, however, because at September, we would have had roughly EUR 160 million worth impact for the 9 months, which is certainly now reduced to a lower figure, the substantial one, too. As a consequence, our claims ratio increases by 1 percentage point, 0.8% increase of expense ratio due to higher commissions, due to the new business mix. So the Non-Motor business implies higher commissions. And then G&A increased slightly, 0.3% and this is because of the substantial investment plan that we had including now because [especially] as the premiums grow, we expect the G&A to be fully resolved. And going forward, we expect G&A to drop.

Going back briefly to the main technical ratios. As you see, the Motor [ppl] reported a drop in the number of policies of roughly 52,000 units, which is slightly higher figure than we had estimated. Not substantially higher, we're talking about just a couple of million -- couple of thousand units less than -- more than we had estimated.

We are certainly monitoring the portfolios in a number of regions. I'm talking about nonprofitable performance. So we are cleaning up the portfolios in certain areas recently. [The CTR to versus] premium grew by 0.3%, which runs counter to the market trend that shows, in fact, a drop of 1 percentage point, slightly less than 1% of the average Motor premium. So our increase in the average Motor premium has in part impacted on the number of Motor policies issued. But please remember the Cattolica again has been adopting a policy that runs counter to market trend. For instance in 2018, the average Motor premium of Cattolica grew by 1.5% as the market dropped by 1%. So considering this, we can say that our portfolio is holding very well. The average cost of claims is growing by 3.3%. The paid claims figure is increasing. However, the serious claims parameters have been changed there. And I already mentioned it in a past conference call. So as we proceed, the figure of the average cost of claims should reach 1 -- between 1% and 2% by the end of the year. So the full year, we'll see a normalized average cost of claims. And the Motor [TPL] claims frequency is slightly improving. You can't really see it this year, but 4.8% means a drop of 1.5% of our frequency while the market stands at 5.9%. So this clearly means that the frequency is improving both on the market in general and for Cattolica as well.

Moving on to the next page, Page 11. The Life business performance. You see double-digit growth of Life premiums, both like-for-like and including the recent acquisition. So we have reached roughly EUR 3.5 billion over the past 9 months. And this also thanks to the great contribution of the bancassurance channel. And I say that all our joint ventures are performing very well, especially in Q3, they all performed very well. But particularly, our joint venture with Banco reached record results both in the first 9 months and in Q3. They contributed roughly EUR 700 million worth of premiums. And the protection products account for very high margins. And as you can see in the bottom right part of the slide, we have all in all bancassurance growing by 36.7%. Agents reported minus 24.3%. But here, we are talking about proprietary channels. The agents' network there is performing very well in terms of unit-linked. The unit-linked volumes are growing very well with the agents. Here, you see negative figures are referred to brokers. For instance, EUR 64.4 million, minus EUR 67.4 million is mainly due to the loss of large accounts, but we're talking about the pension funds mainly that we are not particularly interested in. Traditional products grew by 9% and the unit-linked grew substantially by 80%. And this, thanks to the contribution of Vera Financial that performed very well. And therefore, we are certainly able to reach the budget targets for 2019.

If you think of how the year started, this is a great result because Vera was almost idle in the early part of the year because of the migration of their IT system, which was then -- was completed successfully. The 4 migrations were completed in 18 months as expected. What I said, the average -- the market average is much, much higher than when they -- so we are very much satisfied. So once we have made Zeta fully operative, it started performing very, very well. So the first 9 months were impacted by these factors, as I say.

On the following page, you see the evolution of the Life new business and the breakdown by classes. And here, you see a substantial growth of unit-linked products, but also the other classes, class 4 and class 6 are growing very well. We're talking about protection products this year. Class 1 is growing by 5%, which is exactly what is happening on the market in general. However, product mix is different than the market. Here, we have figures at August, which, however, are suggestive of the trends -- of the market trends. So the Life premiums, new business, I'm talking about the last new business on the market, is dropping by 1.5%, and the traditional products grew by 15%, while in our case it grew by 5%. Unit-linked dropped by 27 market figure, whereas in our case, it grew by 80, which means that our execution network is well focused on these products.

Clearly, we wanted to do much better than last year, and we did perform very well. So these are [verifying] that if you offer these products adequately, you can really achieve good results. Then if you look at the new profit, additional payments dropped by 12.2, which is very good for us because additional payments have an average minimum guarantee higher than the new products. This new unit-linked have no guarantee -- minimum guarantee and they grew by 11.5%. So the additional payments account for 0.64. So a negligible figure. In other words, we don't have additional payments at 2%, 3% or 4%. When they are there, as I said, they are negligible because the average guaranteed is for the additional penalties of 0.64, as I said. If you look at the net inflows by class, again here we have a negative figure, general negative figure of EUR 191 million, much better than the first part of the year, though -- and class 3 products, as you might have inferred from my words, reported growth of roughly EUR 100 million, even though we have roughly EUR [70] million worth outflows of Cattolica Life. As you know, Cattolica Life is a form of Popolare di Vicenza. So net of that, the net interest would reach EUR 200 million instead of EUR 100 million when it comes to class 3 products. And then we also have traditional policies for a total of EUR 100 million that we are no longer interested in because [if] they refer to pension funds [it's unsupported]. So this minus EUR 317 million of class 1 and 5 must be analyzed, as I've just described. Here, we have also EUR 150 million of Vera [because we] form a joint venture that we had with the [Popolare] which clearly can no longer contribute with net inflows. So all in all, the large net inflows in Q3 versus Q2 has improved, substantially improved.

Coming to our investments. As you can see on this page, yields are counterintuitive because considering the fluctuations on the market rates. And so here, you see in the Non-life business a yield grew by 2.5%, and this affects to the strategic asset allocation that we implemented that shifted from securities, traditional securities to alternative investments like the [contact type] investment that often -- for many years provide dividends and good yields. You see the ordinary investment income has grown by 2.4% for the Non-Life.

Then we have the realized gain and losses that I already commented on. Asset allocation remains almost unchanged. We have a slight increase of the alternative investments. But the alternative investment remained year-on-year than quarter-on-quarter. So the growth of alternate investments year-on-year was definitely substantial. And this is exactly what we planned in our business plan because this provides us with yield. So that even runs counter to current market trends.

Moving on to the duration of assets. You see a slight increase of duration of assets and reduction of the mismatch between assets and liabilities and I'm referring particularly to the Life business. So here, we have some room, further room for maneuver.

On the following page, you see what I've previously referred to. Asset allocation has remained almost unchanged. If you compare 6 months with 9 months, you see no major difference. A slight increase in property and alternative investments, but very -- almost negligible. That is where that accounted for 74.4% of the total of EUR 27 billion of investment, are now down to 52% -- 53%, let's say, 52.8% to be precise, dropping versus the EUR 54.3 million of the first 6 months of the year. So we grasped the market opportunities as I said, to get some realized gains. Also to reach our target of 50% of the total investment by 2020. In fact, we want to proceed cautiously, we do want -- we do not want to rush to this 50%. We are proceeding progressively and with caution, and this has turned out to be the right way to proceed.

As I said, government bonds accounted for 73% of the total in 2016. So we have already substantially reduced this percentage.

On the following page, you see the financial performance and the minimum guaranteed technical reserve breakdown. You see that the percentage of products with minimum guarantee, there is a drop substantially and the minimum guarantee [that] is below 1% account for roughly 20% of the total and this also thanks to the contribution of bancassurance that sales of products with a much lower minimum guarantee than traditional products distributed by the traditional insurance companies. This inevitably has an impact on segregated funds. We are well below market average with 0.61. This is at the average minimum guarantee, which is lower than the market average, dropping from 0.65 of the first 6 months of the year. Our business plan target is 0.50 by 2020 and this is absolutely an obtainable target, considering the current rate last year.

We -- in the first 9 months of 2018, we had reached 0.84. So it means that in 9 months, we managed to reduce this figure by 20 basis points. And so this target of 50 basis points is more than attainable in 2020. So you see that [the retail] versus the minimum guarantee. That's slightly increased versus the first 6 months of the year to 221 basis points.

On the following page, you see the evolution of the available for sale reserve and I already mentioned it when commenting on our income statement. Here, you see a substantial growth of the gross figure to EUR 2 billion, thanks to the narrowing of the spread between Italian governments and German bund. This is less so in the net figure, because this year we have, of course, other factors that are accounting for it, but anyway the net figure, we have reached 132 million in the first 9 months versus minus 36 at the end of 2018.

I think I have provided you with all the necessary information. And we are certainly ready to take your questions now. So the Chorus Call operator will now start the Q&A session.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) The first question by 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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[Interpreted] Enrico and Carlo. I would like to go back to the page you concern -- referring to the Motor business. Can you provide us with the combined ratio figure for the Motor business and also the combined ratio net of the combined underlying combined ratio of the first 9 months? I remember that considering the claims inflation of 3 percentage points, I know that Enrico said that there might be a dropping for the full year, but an average cost of claims increase by 3.3% is important. So I would like to know that if you release 6, 7 basis points of the reserves, whether this is sustainable going forward as well? And then do you have an estimate of your combined ratio for 2020, claims of cat losses in 2020? And how do you see the combined ratio evolving for the Motor business going forward?

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

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[Interpreted] Starting from your last question. And I can tell you that we do not disclose the forecast for 2020. But I can certainly assist you in your question, telling you that the combined ratio of the known -- of the Motor business is 97.3%. The combined ratio of the motor business is 97.3%.

You mentioned that we may release reserves, and we are well in line with the first year off, so roughly 7 basis points as you -- 7 percentage points, as you said.

As for the sustainability of this trend, well, I can tell you that this trend is well in line with the market trend. We have seen an increase of the speed of settlement. As I said, there are some -- there will be some recovery of the average costs, which for the full year will stand at 1%, 2%.

As for reserves, we have never changed our provision policy, which has always been cautious over the years. And I consider that the speed of settlement for certain very serious claims has increased. So we now have the difference -- the mathematical difference between the reserves and the serious claims that we managed to settle much quicker than expected. This is why we have these runoffs. I mean, this is typical of the Italian market. As you know, there are markets where optimal losses provisions are more frequently done. Initially, this is not the case, and luckily so, in my opinion, because again, we have a very cautious provisioning policy in Italy, in general.

As for the appropriateness of our reserves, I mean again we haven't changed anything in our provisioning policy. So there's nothing unusual here. Our current provisioning policy is absolutely sustainable and is in line with our, let's say, way of thinking. I would like to point out once again that the increased speed of settlement of serious claims has definitely had an impact on this KPI, but 97.3% is after the release of the reserves. So it would be 104. Yes, it's after the release, but the current figure is not 104, it's between 100 and 102 million. Current figure is above 100 and it has been so over the past couple of years, I believe. But this is not just Cattolica, the market averages 110. But again, we certainly have our current reserves above 100, at 101, 102, as I said.

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Operator [4]

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[Interpreted] (Operator Instructions) Next question by Andrea Lisi, Equita.

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Andrea Lisi, Equita SIM S.p.A., Research Division - Research Analyst [5]

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[Interpreted] I would like to know the average rate investment rate in Life and the Life business, but new business, what is it? And what is the evolution that you expect going forward?

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [6]

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[Interpreted] So reinvestment rate of new business is roughly 2%. I just remember without checking. We expect that if we retain the current asset allocation, we can easily support this reinvestment rate, especially because again the alternative investments and the private investment can support this. As I said, we are not particularly focusing on credit -- so investment on the credit market. Since we have to invest on sovereign bonds of European states, not just Italy, well, this inevitably would lead to some dilution. So in the past, we invested in Spanish [govs] which then -- so that would be a very good investment. But again, of course, this inevitably dilutes slightly the yield. For the Non-Life business, we stand at 2.5% in terms of reinvestment rate. I can tell you that the [profits] is doing very well there. We have ranged between 4%, 5%, so very good.

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Operator [7]

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[Interpreted] (Operator Instructions) There are no further questions for the moment.

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Enrico Mattioli, Società Cattolica di Assicurazione - Società Cooperativa - Deputy GM & CFO [8]

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[Interpreted] Thank you very much. I hope this is a clear sign that I was exhaustive. I hope this is not a sign of lack of interest. Have a good day, and we'll meet again for the full year results in March next. Thank you very much.

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Operator [9]

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[Interpreted] This is the Chorus Call operator. The conference call is over. You can disconnect. Thank you very much.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]