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Edited Transcript of CNP.PA earnings conference call or presentation 29-Jul-19 9:00am GMT

Half Year 2019 CNP Assurances SA Earnings Call

Paris Cedex 15 Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of CNP Assurances SA earnings conference call or presentation Monday, July 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antoine Lissowski

CNP Assurances SA - CEO & Member of Management Board

* Jean-Baptiste Nessi

CNP Assurances SA - Chief Actuarial Officer of Fonction Actuarielle Groupe

* Thomas Béhar

CNP Assurances SA - CFO

* Xavier Larnaudie-Eiffel

CNP Assurances SA - Deputy CEO & Member of Executive Board

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Conference Call Participants

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* Benoit Valleaux

ODDO BHF Corporate & Markets, Research Division - Analyst

* Michael Igor Huttner

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nick Holmes

Societe Generale Cross Asset Research - Equity Analyst

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

* William Walter Wade

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the conference call of CNP Assurances regarding the half year 2019 results. At our customers' request, this conference will be recorded. (Operator Instructions) May I now hand you over to Antoine Lissowski, CEO of CNP Assurances, who will lead you through this conference. Please go ahead, sir.

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [2]

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Hello, everybody. I'm glad to have a new opportunity to speak with you today. I'm with Thomas Béhar, CFO of the company; and with my faithful deputy, Xavier Larnaudie-Eiffel.

Let's have first different views about first -- important elements of the first half of 2019 on Page 4 of the presentation, which was provided to you. During this half year, several things occurred which seem important to me to underline. First, it was an opportunity to reaffirm the international multi-partner business model of CNP Assurance. We have noticed a very robust growth in Brazil, in which country we have now 11% -- more than 11% of market share. We have a stronger position in Cyprus where we have got the majority -- the whole ownership of capital of the subsidiary. And we have noticed agreements made by LBP and BPCE to be the extension of our partnership with them. I will come back to that. That is the first element.

The second is that we operate in France in an environment under which there is a great appeal of life insurance in the market. The market was up 3%. The technical reserves are still up and we have observed an important debate about PACTE Act, which opens a large spectrum of new opportunities for the sector. That means that insurance and life insurance in France is in process of reinventing itself. Of course, and it is a third element, we are in a low interest rate environment, which involves clearly difficulties for whole of the financial sector and for insurance as well. Then we have SCR coverage ratio at 169% under standard formula, and we have increased the policyholders' surplus reserve, which amounts now to EUR 12.7 billion. That means that in spite of that environment we are able to increase our reserve to prepare, if any -- if it occurs longer period of low interest.

Doing that, we have also to think of transforming and optimizing the business model of the company. It goes through a digital strategy and cost management discipline which are absolutely necessary in the period where the (inaudible) experience and the management of interest rates over costs will be the hallmark of all what we have to do. Doing that, we also to keep in mind the fact that in the countries where we operate, the social responsibility of economic operators is important, and it is important for our customers for the teams of the company, for the partners to heighten this commitment from CNP point of view. And you will see in the presentation how we operate to increase our investment in social responsibility.

And the last element of this slide regards to the change in ownership structure in the Bancassurance the different elements on the path of transforming the ownership structure within the state old financial group are present. The company should have the same shareholders, but in another order, meaning that we will switch from a shareholding structure under which CNP is sitting at 40% by Caisse des Dépôts plus different stakes by La Banque Postale, French State and BPCE to a structure under which Santander by La Banque Postale at 62%, then by La Poste which is the only shareholder of La Banque Postale and then by Caisse des Dépôts which will be the major shareholder of La Poste. And that in the respect of the remaining float, which will remain at around 22% and with keeping BPCE on board during the long period of time.

If I come now to the next page, on Page 5, it illustrates a multi-partner model in different figures. If you look at the EUR 17.6 billion of premium income during this half year, Banque Postale represented 25.9%. This partnership is today until 2025 and it is to be extended to end in 2036. The second partner is BPCE with 21.2% of premium income and the partnership which was exclusive until end 2022 will be, and it was confirmed last week, extended to end 2030 without any possibility to stop it before 2030.

The third partner, Caixa Seguradora, represents 18% of our premium income. And you know that this partnership was extended under an agreement signed last year until February 2041. We have several other partnerships with UniCredit with Santander. We have developed premium savings products with non-exclusive partners recently, and we have different other partners. What is important there is to show that no of our partners has the majority of the business of the company. That means that all the shareholders, including clearly the state-owned shareholders, interest is that we develop the multi-partnership model in the future as it was a success in the past.

If you come now to the Page 6 of the slide show, you have different figures regarding the business during the first half of 2019. If you look at the premium income in like-for-like changes, you observe a growth by 4.6% during the period at EUR 17.6 billion. The total revenues were up by 5.4% at EUR 2 billion, and the attributable net profit stays at EUR 687 million plus 3.3% on like-for-like. The cost-to-income ratio is still decreasing as well as the combined ratio, as you can see. Then all the figures seem to be in the good sense. If you expect the impact of a low interest rate, in fact of a decrease of interest rates on 2 figures, the consolidated SCR coverage ratio, which is now up 169%, and the APE margin ratio, which is down 4.5% at 16.9%. It is clearly a purely mechanical effect of low interest rates, which were clearly present in the presentations we have made before. We have always underlined our sensitivity to long-term interest rates, and it will be illustrated in the slide regarding the solvency ratio.

I give now the floor to Thomas Béhar, the CFO, to develop on our business performances.

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Thomas Béhar, CNP Assurances SA - CFO [3]

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Thank you, Antoine. So let's go through each of the places where we are present, beginning by France. In France, we have an unfavorable economic environment with this low environment -- or a lower rates environment. Despite that, the premium income has increase of 3.9%. And if you go for each of the business segments, you can see for the traditional savings/pension that we -- you have an increase of 8.7%. We have a decrease of 6.3% for the savings and pensions activities and a slight decrease for risk and protection. The increase of the traditional savings/pensions of 8.7% is below the increase of the market, which is 12%. But in the same time, the decrease of the unit-linked of 6% is below, so a huge decrease of the market of 80%. We have now 20% share in our business for unit-linked, a proportion of 20%, which is not far now from the market where we have 23% as a proportion of unit-linked in the sales of savings and pensions. The decrease for unit-linked comes from 2 effects. First effect is we have less Fourgous transfer in comparison to last year, and the second effect is a costing effect coming from the decrease of the equity markets at the end of the year, explaining less sales or so at the beginning of this year. And risk/protections has decreased due to the effect of the Credit Agricole one off, an increase of BPCE sales, but also trying to find and keep only the best activities for protection business.

Let's go now to the VNB and APE margins. So the evolution of the VNB and the APE comes from the same things, which is the impact of the low environment. Hence, we have now decreased from 19.7% to 13.3%, which is still high for activities that we have for savings and pension but also for the risk and protection activities.

Let's go now to the next slide, which is Slide 9, to explain the evolution of the total revenue for France. We have an improvement in the net insurance revenue for the period. And you can see that net interest revenue growth from EUR 860 million to EUR 919 million, an increase of 6.6%. This increase comes mainly from the saving and pension part as we have an improvement in the margins and technical reserve for this first half year. At the opposite, you have a decrease of the on-fund revenue. So it's a second place where you have the effect of the low environment rate. And it's also in this space that last year we have done some net profits of bonds that we have not done this year.

Let's go now to Slide 10. So we have a very huge control of the administrative costs. As you can see, they have an increase of 0.2%. So they are quite stable. And with the increase of the revenue and the control of the costs you have an improvement of the cost-to-income ratio to 31.7%. And that's why the EBIT stayed quite stable to EUR 1 billion for this first half of this year.

Let's go now to other places, Europe, excluding France. We have improved the profitability despite what you -- I will explain that has happened in Italy. So you have a decrease of the unit-linked that are installed in Italy from EUR 1.5 billion and EUR 1.2 billion. So a decrease of 22.4%. It comes from the fact that we stopped the sale of one product that used to have a tax incentive last year, but government decided to change the product. And we were waiting from the new elements which were necessary in the regulation to define what are the eligible unit-linked for that product. So this product is a [PNO] and its relative (inaudible). And our subsidiary had 18% market share of this product. Instead, we have developed multi [RAMO], multi-branches products that were not sold before.

You have an increase of the traditional saving/pensions of 27.9%. Among this number, you can see the increase of CNP Luxembourg ,which has an increase of EUR 501 million [from the old part], but also on the unit-linked part. As in this kind of business, we have more than 40% of unit-linked when we withhold the saving and pensions.

For risk and protection, we have an increase of 6.8%. It's due to the addition of the layer of generation for credit insurance for CNP Santander, but also for the increase of the risk products that are being sold in UniCredit branches following the agreements -- the new agreements that we have with UniCredit. As an addition, you can see that the VNB and APE in the right part of the slide. VNB is quite stable due to the effects that you have seen on the left has increased is due notably to all of the credit insurance that you can see in this part of Europe.

Let's go now to the next slide, with the total revenue has hugely increase of 31.5% from EUR 109 million to EUR 144 million. The increase come from both business segments, saving/pensions and risk/protection. You have an increase in the revenue due to the risk/protection earnings with additional -- the addition of generations to CNP Santander and also an increase of saving/pensions as last year we had exceptional fees due to the renewal with UniCredit but also with the new partners that we have in Italy.

For the administrative costs, you see an increase of 8%. It is clearly linked with the improvement of the revenue of 31.5%. So it's a lot below the increase of the revenue. And as -- due to the evolution of the revenue and the cost you have an increase of the EBIT of 58%. You can see that the increase is present in all the different subsidiaries that we have in Europe for CNP Santander, but also for CNP UniCredit Vita and for the other activities, such as Cyprus or the Luxembourg.

Let's go now to a focused zoom that we have chosen to do on Page 13. It's the activities of CNP Patrimoine, which is not very well-known a lot of people. That is a new activities. It's now our third largest distribution network in France as a percentage of premium income. And the unit-linked part represent 42%. We are doing that in an open model. We have a lot of different partners. There are more than 40 partners in France and in Luxembourg. It's private banking institutions, family offices, brokers, independent financial advisers. We have no exclusivity for each of these partners. It's a really open model. We are building that through -- with the help of the back-office that we have acquired. We have bought its quality insurance services management platform. You can see on the right the evolution of the premium income coming from quite nothing to a very strong EUR 2.3 billion, which is slightly below the number of last year. So it's mainly France with EUR 1.846 billion and EUR 501 million for Luxembourg for people living in France or Belgium.

And it's also a very good laboratory for us because it's organized with a lot of digital engineering. And at each stage of the customer experience, everything has been digitalized to be able to keep all the delay in a very narrow manner with the documentations management, the underwriting is digitalized. So it's a very good laboratory. And for all to meet all the requirements of the high-wealth customers.

If we are down now on Page 14, a slide which is the synthesis of what you have seen before. It's the addition of the France and Europe -- excluding France and -- France and Europe excluding France is in fact Europe. And you can see that the business is up, as a summary, up 2.2%, mainly for Europe part, traditional savings and pensions. And you have both effects -- costing effects in France and in Italy and the tax incentive in Italy, explaining the 30%. And in Europe, it was also the case in Italy. You have the impact of the low environment on the VNB and APE margin.

Let's go now to overseas to Caixa Seguradora. Caixa Seguradora has this year a very good increase of its activities. You can see that it's at constant exchange rates, you have an increase of 16.3%. And if you look in detail, this increase comes from the pension part of 22.1%. So business that is sold through unit-linked, it's more than 90% of unit-linked for these sales. And it's an increase of 22% in a market that has decreased there 0.6% for this pension. That's why now we are the third largest insurer in Brazil. We have 11.4% market share for all businesses, excluding health and consortium. The VNB and APE margin has slightly decreased, but it's quite -- it's still at a very good level of 28.8% with quite stable VNB of EUR 91 million. This margin is stable because the growth has also been done with compensations with the margin as we have a competition of the margin in pensions, but we succeeded to have a compensation between the increase of the sales and the margins.

As an effect of the progression of activities you can see the total revenue on Page 16. We have an increase of 14% of the revenue to EUR 569 million at constant exchange rate. It comes from the addition of the older stock in pensions and also an improvement in the personal risk and protection loss experience. You can see that administrative costs have increase of 7.5%, which is below the 14.1% of increase of total revenue, leading to an EBIT of 15.5% improvement. And we have still an improved cost-to-income ratio at 17.1%.

Let's go now to the -- which is very low. Let's go now to the financial performance and solvency. So you have seen that the activities were very good, and we are keeping on track all the financial performance and the EBIT is EUR 1.566 billion. Percent, we have a very good increase of more than 6% with the 6.2% on like-for-like changes. I will not comment all the figures, as you can see that's not very much. We have an increase of the cost of the debt due to the emission of the new subordinated debt in February and also last year. You have an attributable recurring profit of EUR 1.168 billion. The income tax expense of EUR 370 million. And you have the traditional non-recurring items, including the [flotation] to the PPE of EUR 325 million, leading to the very good attributable net profit of EUR 687 million.

Let's go now to the advanced indicators for the dividends, which is net operating free cash flow. It is up to EUR 846 million of progression in comparison to last year. The operating profit is up to 9.5% at EUR 789 million. The reduction in required capital for is quite the same as last year. But of course, we have -- we need much capital for new business due to the impact of the low environment rate to the new business value. And as you know, the less VNB we have, the more capital we need in the Solvency II framework.

For the Solvency Capital Ratio, so it's the first place where you have the effect of the low rate environment with 169% of SCR coverage ratio. This is down of 18 points in comparison to year-end 2018. You can see the 10-year swap rate on the right hand and that decrease is clearly linked to that curve. You have the details of the breakdown of the ratio and the major part come from the unfavorable market condition of 16 points. It's a decrease of the rate on one sense and on the opposite you have the improvement of the equity market. And that's the addition of the 2 goes to 16 points. And of course, this ratio reflects the issue of the debt in February 2019, but also in advance repayment of the EUR 500 million that has been done in July.

In next Page 21, you can see last year that we have no guarantees in the new business. So we are still guaranteed for the capital for a lot of part of the business, but we have no other guarantee above that. And of course, the stock -- the guarantee stock is reducing at each end terms of the other contracts and is now only 0.24%. That's all for all the business performance. And I give back the floor to Antoine.

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [4]

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Thanks. I present the outlook of the company, starting by 2 views and 2 aspects of, I would say, the important aspects on liabilities and an important aspect on the assets. The liability side, and it is Slide 23, regarding PACTE Act. I'll comment a little bit, mainly for our international investors who are less familiar with this new regulation than the French investors. The objective of this new regulation was to increase the French pension markets technical reserves by EUR 100 billion over 3 years, coming from EUR 200 billion nowadays. That is -- that means that the new pension products will be introduced in the market from beginning of October. And of course, we, as an important actor in this market, we represent roughly 20% of this market in France. We will be the key actor to that.

If you look at the changes involved by PACTE regulation, there are twofolds. First, the pension products -- new pension products will be created, individual or group pension savings product with different compartments. And these compartments will be -- will receive voluntary individual payments, will be used by employees to reinvest statutory and discretionary profit shares and they will also receive compulsory employer and employee contribution. It will be a package under the control of each employee with which he will be able to manage and to change company if he wants.

The second new aspect of this reform is regards to the life insurance with option opened to the policyholders to transfer their savings from one contract to another within the same company without interrupting the qualifying period for tax benefits. That means that the people will be able to change contract within the same company if they decide that another contract fits better with their needs than the contracts which that they have had before.

The combination of these 2 elements is a clear sign that the structure of life insurance sector will be changing with the possibility for people to change contract within a company in life insurance or even to change life insurance company when pension contracts are a concern. That means that for us, it will be new management of the customership base and a way to discuss better with our concerns during the life of a contract in order to adjust the producers which are offered to them and provided effectively to them a longer time of presence at the company and depending on the different needs they can have along the time. It is a clear change in the strategy for the French market, and it is representing different challenges for each company as far as CNP insurance. We will have to protect the technical reserves, we will have to work with new customers to develop up-to-the-minute products, offer a new service and to improve the customer experience, which will be an important part of the faithfulness of our customers, and we will have to manage ultrafast execution nowadays.

That's on the liability side. If I come now to the next pages, Page 24 and 26, we will have -- first, we will have to increase the commitment to socially responsible investing. When you consider not only the needs of customers but the views of the public in general, and also which is important message received by people at the distribution and within the company, it is clear that the role of an important asset owner as insurance company to improve socially responsible investing is important.

You see that we have settled different objectives and green investments are already growing last half year by 13% to represent 11.7%. The equity portfolio's carbon footprint decreased dramatically from 2014, and now it represents 0.25 equivalent of carbon on equity. We will have to increase the effort to have socially responsible investing and certainly to fix new targets during the second half of the year in order to precise and to improve this policy. This represents, and you have the list of that, an important issue in terms of rating and indexes regarding the company's activity. And as you see, we are already -- we have already good puts on that respective, but say will certainly have to be maintained and improved to renewal of this policy.

If I come now to the last page of this presentation, this page is extracted from the Board -- the file I presented to the Board of the company on June 4 where I had an opportunity with my friends to develop the strategic priorities of the company, which were all approved by the Board. If you look here, you have 5 directions. First, to leverage the closer ties with La Banque Postale in order to create value. The position of La Banque Postale in life insurance market was relatively poor and decreasing over the last 10 years, and it started to regain ground during the first half of this year. It is promising, and we have to develop this position in the coming years as well as to develop personal risk/protection and explore opportunities to diversify into non-life market in the future. This will give a new profile to the company in the future and it is the second element. The personal insurance will remain the core of our activity, but we will have also to provide non-life producers to our customers, which we haven't done so far at least in France.

The third element being to develop and extend our partnerships and expertise in Europe, meaning partnerships and expertise, we think, clearly of existing partners, in Italy with our UniCredit, in whole Europe with Santander Consumer Finance and increase of our share of interest in Cyprus is the sign of unanimous support of our Board. This increase was approved in May, unanimous approval support by our Board to a strategy in Europe of expansion in Europe. We have also to leverage our position in Brazil and expand our footprint in Latin America. You know that we have signed a new agreement to do the business in Brazil until 2041 on the certain parts of existing business with our partnerships.

We have also agreed with the new team at Caixa Econômica Federal in 2019, to adjust this agreement to fit with the very dynamic tone they give to the insurance business within the network. You can observe that the current team has good actions on development of life insurance and of insurance in general, and it made the company the third in Brazil, and it is clearly an opportunity to adjust the agreement of 2018 and to extend at least its duration.

And the fourth -- fifth element of strategy will be compounded of both digitalization and accents goods on the costs and operational excellence. It is clear that in a world where -- I mean in Europe where interest rates are very low, we have to go on digitalizing our processes. It is not only necessary to keep our costs very low, but it is also necessary to improve experience of our customers and to resist to eventual offensive which can be made by the different new actors of the economy on insurance. Clearly, we are now becoming a digital actor. The difference between us and the start-ups, which could attack that, is that we have already the customers, we have the assets and the liabilities. And the only effort we have to make is to propose to our customers a similar experience as well as digitalized as the experience which can be proposed by direct networks proposed by new companies. That within very good discipline of costs in the company we have new gains in terms of costs in group of EUR 45 million by 2021, which are planned, and we do that through overhauling of all the processes regarding savings business, regarding loan insurance business and regarding the functioning of the group activities of risk and financial management and over transversal activities of the group.

Then the strategic priorities of the groups were reaffirmed by the Board last month. And it is clearly that would be the guideline for the coming years under the new structure of capital, which in fact was already compounded of people which were present at the Board in June.

Thank you for your attention. And now with my team, we are okay to discuss and to have your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we received is from Michael Huttner of JP Morgan.

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Michael Igor Huttner, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I have 3 questions, please. The first one is on the solvency ratio. Is there a level where you would say, that's a little bit too low and we need to take additional actions and you might review your dividend policy? And the second is on Slide 21, which has the lovely -- the difference between the new interest, the money return on new investments, 1.03% and the guarantee of 0.01%. And here, I spoke with one of the -- your lovely IR team earlier and on the new business, I thought that the guarantee is, in fact, capital guarantee less your own costs of 75 bps and here which would be an annual guarantee of a negative, if you like, and here, I see a positive guarantee. So I don't -- maybe I'm misunderstanding something. And the final question is on the new agreement within Natixis Assurances on the payment protection policies, which are now 50-50. Is this 50-50 a worse ratio or a better ratio than before?

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [3]

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It is 50-50 on the group contract, on the income -- global income of the 2 companies. And regarding the new generations, until the end of the generations. And it will be completed by an agreement on the individual product, which will be proposed by the 2 companies together to the customers if they are not interested by the group contract.

I come back to the first question about our solvency ratio. It was expected. We have always said that our solvency ratio was completely sensitive to the long-term interest rates. And for the current level, just proves that we were right, and it is absolutely not a surprise for anyone. And it is completely consistent with the model of the company. There is no reason to wonder about it. We are still, as you have seen, increasing the PPE and the level of security of the company is not reduced by the simple -- this element, which is simply explainable by the environment and not by the inside management of the contract. So you want to...

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Thomas Béhar, CNP Assurances SA - CFO [4]

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For your second question, in fact, you have a guarantee, which is growth, of course only for some specific activities such as CNP Patrimoine. But for all the in-force, all the stock and for some activities that we have in France, the guarantee is still net of costs. So it's possible evolution that you can see in the future in our contract, but not decided at this time. So it's the guarantee for main part of the new business and for the in-force is net, of course meaning that we guarantee the capital and if there is no financial production, so we can't take our cost.

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Operator [5]

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The next question is from Nick Holmes, Societe Generale.

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Nick Holmes, Societe Generale Cross Asset Research - Equity Analyst [6]

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Just a couple of questions. First one, do you think there will be big operational changes when Banque Postale becomes your majority shareholder? And if so, when can you tell us about that?

And then second, on IFRS 17, just wondered what your thoughts are about cost and how it will affect the business?

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [7]

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Well, regarding the Banque Postale, it is very simple. The changes already occurred in terms of commercial activity with them. We have developed different new initiatives with them to sell contracts within Banque Postale. We are present or will be present in the different new products -- digital new products that Banque Postale is launching in its networks. And we have decided to replace the middle office tool which we had together by the new generation tool which will be built in the next months or years. Then from operational point of view, we are clearly making a very -- much closer relation -- operationally closer, with La Banque Postale as distributor.

Regarding its role as shareholder, it remains the role of our controlling shareholders as before. I mean that's Caisse des Dépôts, Banque Postale as well as BPCE were within pact, and they will continue to operate -- I mean Caisse des Dépôts and La Banque Postale, within the new structure as controlling shareholders. It will not change. BPCE will be inside of that, but still in the capital and probably still in the Board. And in fact, there will be no substantial change. The change will be in the structure of ownership of capital and ownership starting by Caisse des Dépôts and La Banque Postale and CNP, replacing a recent partner -- ownership under which there are pact between different public shareholders. Now the public shareholders, the public meaning the state-owned shareholders, will be represented at the Board of the company by La Banque Postale. But in general, the structure of their holding will be just the same with Caisse des Dépôts on the top and our controlling shareholder at the highest level will remain la Caisse des Dépôts.

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Nick Holmes, Societe Generale Cross Asset Research - Equity Analyst [8]

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Great. Antoine, just a very quick follow-up. I guess I was guessing at some revenue opportunities that you see with Banque Postale. Do you see more scope to drive growth?

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [9]

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We have just started to -- for instance, to change within the existing product some specific elements in order to help selling these products. For instance, the initial amount payable by a customer on such a product as Cachemire 2 went from EUR 25,000 to EUR 5,000. These modifications are punctual, but it is a start. And of course, we intend with La Banque Postale to modify the structure of existing products more and more in order to fit with customers' needs and certainly to create a new generation of products in order to be more accurate within a world of low interest rates. But it's clear that in insurance company you do not change all the products in couple of months. You start by modifying the technical characteristics of the most popular products in order to improve its efficiency. And after you engineer-ize -- you engineer a new generation of products and a new generation of customers' experience. It is a twofold asset, the activity. First, we have the short-term activity to relaunch the distribution. And second, we have the longer-term relation in order to create a new set of products and offers.

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Nick Holmes, Societe Generale Cross Asset Research - Equity Analyst [10]

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Okay. And IFRS 17?

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Thomas Béhar, CNP Assurances SA - CFO [11]

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For IFRS 17, in fact, the new standards will come into force in 2022, but there is still the adjustment process. So if I'm right in my calculations, perhaps, we will see it in 2023 as there is a lot of different [processes] that have to take place in Europe and it needs some time. So if you compare that to the low interest rate environment, which is now, the lower interest rate environment I think will drive much more evolution of the process of the products and also digital environment than IFRS 17. However, we are continuing to adapt and develop our IT system to be ready for IFRS 17 with developments that we have scheduled are coming into force in our IT system during this summer. And I hope that we will be able to tell you something perhaps next year according to the numbers that emerge from the different calculations that we are doing. And to enjoy our summer of course, we have the exposure draft consultations that in parallel to the Solvency II review exposure draft, that all our regulators, accounting and prudential, are making our August month much more enjoyable.

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Operator [12]

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(Operator Instructions) The next question is from Benoit Valleaux, ODDO BHF.

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Benoit Valleaux, ODDO BHF Corporate & Markets, Research Division - Analyst [13]

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Few questions from my side, if I may. First one is regarding policyholders' crediting rate. What has been the assumption that you've taken into account to your H1 results? I mean did you assume that you will pay 1/2 of last year crediting rate as in the past or not? And it's maybe a bit too early, but what do you expect for the full year because with the current value into the [total amount], we may expect some significant decrease in the policyholders crediting rate for this year?

And second question is maybe on CNP Patrimoine. Can you give us an idea of the new business margin of this company? Because you mentioned 42% share on unit-linked product, but it's also a business which is made with high net worth individual. I would just like to know what has been the impact of this business on your new business margin?

And I have also a question on this new business margin in France, which has been quite low for H1, even compared to Q1 which implies more or less, maybe less than 15% new business margin for Q2 on a stand-alone basis. So I just would like to know if you have suffered some, I don't know, negative impact from product mix in Q2 or if there is some impact only due to market variances?

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [14]

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Regarding the policyholders' dividend, yes, we have taken the assumption of policyholder dividend similar to last year's, just for the purpose of making the half-year accounts. But it is not an expectation of what will be the policyholder dividend at the end of the year. It will be clearly lower. And just -- the only comment I can make is just that we will have to discuss with our network very soon -- very early in the autumn because this year, the management of the decrease will be dedicated clearly with no interest rates on the bond market. We'll have to be careful in order to avoid either to losing customers or to be overpaying customers and gaining too much inflows if we posted too high policyholder dividends. And it is clearly one of the delicate files which wait for us after the August which (inaudible). For the other questions, Thomas?

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Thomas Béhar, CNP Assurances SA - CFO [15]

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As for CNP Patrimoine, of course, we don't disclose the -- exactly the margin. What you can know about this business is that's more than 40% of sales in unit-linked. So it drives the margins. The second point is that the fees that we have as insurer are growth, of course. And the third point is that we have a fixed fee and it's the partners which add up the fees that they are taking in the negotiation with the customer. And so we have a fixed rate that enables us to have a return and to finance the (inaudible) that we have on that business.

On the negative mix, Jean-Baptiste, you want to say something?

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Jean-Baptiste Nessi, CNP Assurances SA - Chief Actuarial Officer of Fonction Actuarielle Groupe [16]

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Yes. As you mentioned, I can confirm that the drop of the new business value is due to market environment and the drop of the interest rate mainly.

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Operator [17]

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The next question is from Thomas Fossard, HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [18]

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And sorry, I've been late to the presentation, so if I'm raising questions which have been already addressed, please tell me. The first thing would be on the French market unit-linked sales just going down Q2 versus Q1, while I mean equity markets have been strong so far this year. So just wanted to better understand if you were starting to see some better trends in terms of inflows that you could talk about?

The second question is specifically related to Italy. The revenues are significantly down, similar to what we've seen in Q1. I think that you're mentioning some tax changes which is affecting the attractivity (sic) [attractiveness] of your unit-linked product there, but I'm not sure that we are seeing such a decrease for the other Italian companies. So was wondering if you were facing a specific hurdle with your product, and what could be the remediate actions?

The third question would be related to the low interest rate. And I think that in the past, especially where interest rates were going up, I think that you several times added disclosure that you were less strengthening these low interest rate reserves or even you had some write-backs. I guess that now with this new environment we may see the reverse coming back. So you again adding up to these low interest rate reserves on pension product, but also on some risk product. Could you tell us if it was already a negative item in the H1 number? Or if not, how we should think about them for the full year and maybe 2020?

And I think -- yes, and the last point, just to come back on Benoit's question regarding the policyholders' rate. With the benefit of hindsight, I mean, do you regret now to have, I would say, boosted a bit the policyholders' crediting rate full year '18? Or I mean -- and does that make things a bit more difficult when talking about the policyholders' rate for 2019?

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [19]

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I first link the 2 questions, the first and the fourth, regarding the situation we have, policyholder dividend and so on and the unit-linked. As you can observe, we have better performance in terms of unit-linked bonds market in general that results in a narrowing of rates of unit-links between rates in the market and the rates at CNP. We have a rate of unit-links which is just 3% below the average of the market which is completely new in CNP experience. At a level -- global level of 20% which is not so high on the other hand. What that means, that means that the effort we made last year in terms of policyholder dividend to boost the sales of our different partners and mainly La Poste and CNP Patrimoine helped us also to improve the structure of sales. That means that, of course, it was a certain cost for (foreign language) of having maintained a dynamic policy of policyholder dividend in euro, but it's maintained also, I would say, an appetite for selling life insurance from our networks. And this appetite was correctly triggered and organized to improve the mix in terms of savings, which would not have occurred if we had completely -- if we have decided to reduce dramatically the policyholder dividend. It would not have helped our partners to sell more life insurance than before. Then the effort was clearly to help our distributors and to teach our distributors, to educate these distributors to sell more unit-linked. On that respect, it was a success.

Regarding Italy, I give the floor to Xavier Larnaudie, who chairs our activities in Italy.

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Xavier Larnaudie-Eiffel, CNP Assurances SA - Deputy CEO & Member of Executive Board [20]

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Thank you, Antoine. Regarding the unit-linked market in Italy, it's fair to say that, as you have noticed, we have diminished our production. It's mainly because of the specific fate of one given product, the Piano Individuale di Risparmio, PIR, which used to be the only unit-linked product with a specific tax advantage for the customers as it was dedicated to finance or to investment in Italian SMEs.

Now I won't get into many details, but the change in regulation has made it absolutely impossible to commercialize anymore because of the conflict of rules, which make it not available for sale anymore. We used to be, with our partner, UniCredit, the leaders, the absolute leaders on this product. So it has come as a very bad news on the commercial front.

Now it's also fair to say that we are specifically exposed on the unit-linked market in Italy given the fact that we enjoy there a very good ratio of 70% of our sales and savings products in unit-linked and 30% only in traditional. So it's the combination of those both factors which explains the diminution in our sales there.

This being said, the reaction with the teams and the partners to work on the other lines of the unit-linked products and also to get more steam in commercializing multi-support products were still a very high rate of unit linked, but these new generation products begin to meet to actual success in our public. So we remain confident that we will be able to progressively catch up the difficult beginning of the year. Now I say a difficult beginning of the year, that's true for the UL products; but it's not at all the case if you look at our performance for risk products, you would see that the growth there is really very steady and we are diversifying our presence. And we now enjoy a good and stable market share of more than 10% which is not nothing.

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Thomas Béhar, CNP Assurances SA - CFO [21]

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For your question about the impact of the low interest rate environment for the second part of the year, what I can say that is something that you have not yet asked, but we are usually ask if the half of the year is look liking -- looks like half of the year for the key indicators. So we've -- if everything keeps as it is, we may say something like that.

And that's why about your question, of course you can have pension and risk products implying some additional reserves. Especially as for the risk product, you have a 24-month -- mean month for the calculation of the reserve. So we will see, but it doesn't change the sentence that I told just before. As you are seeing, we still have a good addition of PPE in this account.

At the opposite, for the Solvency II, the new business value, so we have fully taken the low interest rate environment in this half year accounts. You have now around 7 to 8 years where the EIOPA curve is negative. So it has been taken into account in the Solvency II calculation and also in the new business value. Of course, in the future, you will have a decrease of the value of in-force as the bonds are coming to their terms one by one, and it means that you have a reduction of the rates of our bonds in our portfolio, meaning a reduction of the annualized gains that we have on the bonds, a reduction of the worth of the portfolio. So it's -- even if the rates stay as they are, you will have this impact on the solvency capital ratio. But to your main point about the impact or in the concern, you can take my usual sentence as it is.

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Operator [22]

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And the next question is from Michael Huttner, JP Morgan.

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Michael Igor Huttner, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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Just a little follow-up question. So I noticed the attributable income is up 1% or like-for-like 2%. The EBIT is up much more. And I just wondered which is the right number to try and understand the earnings going forward? Should I assume the current environment really gives you this 1% or 2% growth, the attributable income? Or should I use the EBIT growth which is much stronger?

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [24]

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Michael, take the one you prefer and probably the highest is the best.

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Operator [25]

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And the next question is from Liam (sic) [William] Wade, JP Morgan.

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William Walter Wade, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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This is William Wade from Credit Research, JP Morgan. Just hopefully a quick question. Regarding the green bond that CNP recently considered issuing and ultimately didn't go ahead on, I was just wondering if that was something that would still be of interest to the company in terms of, as I say, issuing that green bond? And just generally, any other comments you might have about hybrid debt issuance in the short term would be great.

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [27]

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Just one word about it. We had contemplated to make this issue and we postponed it in link with the different announcement which were made by our shareholders of the structure of CNP, but now it will be possible to resume the trial and to make something in the coming future.

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Operator [28]

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And we have a follow-up question from Benoit Valleaux, ODDO BHF.

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Benoit Valleaux, ODDO BHF Corporate & Markets, Research Division - Analyst [29]

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Just a few follow-up questions. First of all, what is currently your duration gap and is it stable compared to your end last year?

And the second question, you gave us 1% average reinvestment yield over the first 6 months of the year. So I just would like to know what was the figure only maybe for June or July? Or maybe another way to look at it is if everything remains stable, what will be your reinvestment yield for the second half of this year?

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Thomas Béhar, CNP Assurances SA - CFO [30]

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In this period, where you have assets with low rates, we are trying to increase the duration of the assets. Duration of liabilities has not changed, even if we have a slight decrease of the lapse rates. So all in all, with the increase of the duration of the assets due to the search for higher maturities, to have better rates; and on the opposite, decrease of the lapse that we have, I may say that we have quite the same kind duration gap as previously. And the second question was about your prediction of the investment yield on the half -- on the next quarters. Is it -- was it your questions?

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Benoit Valleaux, ODDO BHF Corporate & Markets, Research Division - Analyst [31]

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Yes, my question is, I mean it was at 1% on average for the first 6 months of the year, but I'm sure that it will be lower than that only in June, or let's say maybe it's June-July. So if market condition remains unchanged and if you have, let's say, a stable capital allocation or investment allocation, what could be or what will be then the expected reinvestment yield for H2?

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Thomas Béhar, CNP Assurances SA - CFO [32]

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So there is -- as you know, the rates have decreased during the first part of the year, from January to June, and so the number that you have is a median, the mean between January and June. And as we have very low points now in June, so I can't know what will be the rates between July and December. But if they stay as they are, of course, we will have a decrease of the rates of the new investments due to the level that we have reached in June. (inaudible) number because it implies also to know which corporates we will invest or in which kind of bonds we will invest during the next quarters.

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Operator [33]

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We haven't received any further questions. So I hand back to the speakers. We just now received a follow-up question from Thomas Fossard, HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [34]

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Just 2 remaining question. One will be on the operating cash flow. So maybe, Thomas, if you could say a word of how we should think about operational cash flow of CNP trending in the low interest rate environment? I mean I think that you alluded to some sensitivities for the H2 and things like that. But should we expect, I would say, a drop in the coming quarters?

And the second point will be on your perception of the credit exposure of the group. I mean we are in late-cycle environment. I mean you've got 19% exposure to corporates and 13% to banks. What's the mood currently at CNP? I mean its intention to cut some credit exposure or you believe that it still works to invest, and we should expect this to grow going forward?

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Thomas Béhar, CNP Assurances SA - CFO [35]

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For your first question about the net operating free cash flow. So as you know, you have the 3 parts. For the required capital for new business, so it means that your question is about the prediction of the VNB for the next quarters and what are the level. So it's quite hard to tell you in advance what will -- if you're able to do a prediction of VNB, I'm interested by your model. Not always gives the results, but it is behind the required capital for new business because it's clearly linked to the value of the new business that we will issue during the next month. Of course, we have taken all the impact of the low investment rates in the first part of the year, but it will clearly depend about what we will sell and I will not do a prediction about the sales. It's not what we have to do in such kind of exercise.

So the other part is the reduction in required capital for in-force. At this stage, we can't -- I would say that it's something that is much more predictable because we know that the trends about the lapses and we don't see in this low interest rate environment an increase of the lapses or surrenders during the next month. So probably these numbers will be quite the same, multiplied by 2. And now we would like to know what will be the profit of the year, which is the first component, the MCEV operating profit is clearly linked with the operating profit. And perhaps you can go back to the question that I answered previously about the prediction about the results -- operating result for the year.

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [36]

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Regarding the asset structure of the company and the investments we are contemplating to make, it is clear that the low interest rates are a challenge for insurance company, but we must have to resist the temptation to enlarge the scope of risks we take without analyzing very properly. And in fact, what we are doing now is to extend the duration of certain very traditional limits which we had, for instance, Spain on which we will contemplate to have longer-term investments than were authorized so far.

On the other side we, of course, consider the spreads and the different credits, but the period of decreasing interest rates didn't make possible sufficient discrepancy between the spreads. That means that there is no selection and everything is expensive nowadays. Even a very, I would say, relatively poor issuer finds now interesting conditions. Then we have to refrain from the temptation to rush to rates or to spreads because at the current level, risk is not paid. And so far, we have too much short-term investments. It's clear. We are proceeding to developments in, for instance, real estate or in assets which we analyze one by one. And it is the main word here, it is rather to buy assets which you analyze than to buy lines of various largely spread assets on which everybody has the same rating because this rating is not meaning -- to me, it is not meaning that the quality of the asset is maintained, it is simply because the relative quality of this asset appears as being good. And it is clear that in the current situation, the issue of having no reward for risk is almost worse than having low spread -- low swaps in itself. It is most important and it helps us -- it needs -- we need to have more time to analyze each asset than before. But we do that with the help of our asset managers.

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Operator [37]

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And there are no further questions. So I hand back to Antoine Lissowski.

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Antoine Lissowski, CNP Assurances SA - CEO & Member of Management Board [38]

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Okay. Thank you, everybody, for attendance to this meeting, and I wish you pleasant holidays. And I'm sure that our lives will be very interesting when we come back because if interest remains at the level, we will have plenty of work; we, to make the business and you, to analyze what we do. See you next time. Bye-bye.

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Operator [39]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.