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Edited Transcript of UNI.MI earnings conference call or presentation 2-Aug-19 10:00am GMT

Q2 2019 Unipol Gruppo SpA & UnipolSai Assicurazioni SpA Earnings Call

Bologna Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Unipol Gruppo SpA earnings conference call or presentation Friday, August 2, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carlo Cimbri

Unipol Gruppo S.p.A. - Group CEO, GM & Director

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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

* Gian Luca Ferrari

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

* Michael Igor Huttner

JP Morgan Chase & Co, Research Division - Senior Analyst

* Peter Eliot

Kepler Cheuvreux, Research Division - Head of Insurance Sector Research

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning. This is the Chorus Call operator. First of all, welcome to the Q&A session on the consolidated results for 30th of June 2019 Unipol Gruppo. Manager and Director, Mr. Carlo Cimbri, after a short introduction, will be available to take questions. Mr. Cimbri, the floor is yours.

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [2]

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[Interpreted] Good afternoon. Good afternoon, everyone, and welcome. Now as usual, well, this introduction would be a very short one because, I guess, you already had the opportunity to go through the press releases but also the slides, making up our presentation. So I would like to use the time available today in order to answer your questions together with Mr. Laterza sitting close by. He's the General Director, UnipolSai. Please. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) So question #1 from Gian Luca Ferrari, Mediobanca.

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

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[Interpreted] I have 2 questions. So the first one is I would like to have some color on the EUR 3 million impact that I can see here in the 1H 2019. I think that this is a swap, maybe a rate swap onto the BTP portfolio. I see that the realized level is quite high, which is EUR 140 million in order to compensate it back to this mark-to-market. From the accounting perspective, can we have the mark-to-market onto the hedging so as to avoid following mark-to-market with a couple of gains?

Second question is on Car Server. I'd like to have some color on the economics of the company, for example, the profits they had last year, so which kind of assessment you have carried out? And once again, where this company will go after, I mean, being managed by Unipol? So after the price you paid, I'd like to know which kind of business this may generate in the future.

Third point, can I have the natcat Q2 because I've seen that in Emilia-Romagna, so in this region, this had quite a major impact.

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [3]

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[Interpreted] Gian Luca, good afternoon. Now back to your question on the assessments on the derivatives. Now this rate of [range] rate hedging derivatives concerning the Non-Life, so it has nothing to do with the realized capital gains that we already had in the first part of the year, in the first quarter actually. The point that you referred to has to do to the possibility to have some hedge account, I mean, from the account point of view. We opened some interest swap forward start. So once again, the start was not upon the date of, let's say, signing the agreement but, let's say, a later future date. So this kind of tool doesn't have the effectiveness or efficiency test enough to be associated to the facility's portfolio. So on the one side, you have a loss of EUR 123 million. On the other side, you have some hidden latent capital gains. As of 30th of June, we had EUR 4.5 billion, while today, the size is around EUR 5.5 billion. So I'd say the other side of the coin, if you will, in terms of the security appreciation, at this point you can see after the IFRS portfolio. Now if we manage to put them into the hedge accounting with a high level of effectiveness, why not? This can be done. But as I said before, that kind of derivative has a sensitivity now because this is forward start. It cannot be matched. They're all associated to specific securities or the so-called well efficiency test.

And now Gian Luca, the second question was on Car Server. Now I'm sure you have, well, followed the presentation of the business plan that we held in May, followed by the evolution, which is what we are getting on the so-called ecosystem. So now in this case, we're talking about the mobility ecosystem. And we have many other companies already up and running, especially those having to do with the car repair or many other services, for example, some other, let's say, well, additional services having to do with the motor vehicle total product liability.

So there will also be an evolution in terms of long-term car rental system. And of course, this is what we will do, thanks to our agency network. Now the long-term car rental market in Italy only developed in the -- well, mainly in the corporate business, so corporate segment. So we were looking for a company, and we found the Car Server. So Car Server is sort of a booster. So it's the key driver, the key booster for a project that we will be implementing and made based on our own strategies. And I'm sure that this company will also be able to evolve, and we will become sort of different from what we are today. So it's not just, let's say, an investment for the company per se, say that the situation of the company as of this day, well, it gives us, let's say, quite a high level of passion, if you will, because it is just like many other car rental companies. So they work exclusively into the corporate business.

So again, this company will be really very different because we will, let's say, reengineer this company with our own criteria. Now Car Server is also a unique company. I mean it was developed, I mean, based on the -- or would support the previous shareholders. And those shareholders also funded the company. So this means that the statement of accounts is also impacted by, let's say, shareholder's policies, of course, the previous shareholder's policies some years ago. And of course, this has to be revised and reviewed based on our own criteria.

This being said, in 2018, the turnover -- sorry, 2017, the turnover was EUR 300 million. Once again, this is the figure for 2018, once again, '18. So in terms of results, in 2015, EUR 7 million; 2016, EUR 9 million; '17, EUR 13 million. There was also a tax benefit. I don't know where it comes from. And then in 2018, they are down to EUR 4 million because of no tax, let's say, cuts.

Anyway, this assessment is, let's say, not really corresponding to the current configuration of the company or the current profitability. What we want is the platform to have, onto which we will install, let's say, a new project. With the strength of Unipol Group, this would be totally different. Currently, they have around 50,000 rental cars. So this is quite a large portfolio. And because we just wanted to get into this business. I mean we just needed to have sort of a springboard and then, of course, we will be, let's say, injecting energy onto this springboard for the future evolution of the company.

As for the, well, natcat, so on the Q2 impact. Before I give the floor back to Matteo, please don't forget that our size is a little bigger than Emilia-Romagna. I mean this is -- I mean we have very large market shares in Emilia-Romagna in this region, but we have basically the same shares also in the rest of Italy now.

Now, of course, I mean our claims are an issue for us, and I have to say that this is not a special issue in Emilia-Romagna or many other regions like Veneto, Lombardy or Liguria. This is to, well, complement the answer. Total impact in the quarter was EUR 70 million. And out of EUR 70 million, EUR 40 million have to do with natural events. I mean typical events at the end of the H1 in Bologna, Modena, Pelosi and Turin where we had natural phenomena. So this event amounted to around EUR 40 million, of which EUR 21 million on, let's say, well, cars damaged by hail and EUR 17 million on the property business.

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Operator [4]

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Next question is from Alberto Villa from Intermonte.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [5]

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[Interpreted] I do have a couple of questions. The first one, I'd like to go back to the so-called natural events or what happens in terms of negotiations. So if there are further claims of this kind, so how can you mitigate the effect of this kind of natural event?

Second question is on the profitability of investments, which is very high in H1. So it's basically 3% in Non-Life with a 3-year duration. Can I have your view based on the interest rates on possible rate modulation strategies of asset classes and investments you have? Or maybe are you unhappy of your current positioning today? How can we imagine the future profitability, especially in 2020 and 2021, considering the current market interest rates that we have today?

The third question is the following. Do you have some payback plans which is what you have resolved on? Or can I have some light on this kind of strategy that the group has?

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [6]

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[Interpreted] Well, first of all, as for the reinsurance, our negotiations or treaties, as we say, in business plan. Now at the end of 2018, we have activated or signed the reinsurance treaty covering the so-called atmospheric events, even those which are, let's say, scattered all over the national territory. The limit per event is EUR 1 million, so this is the largest amount. So once we reach quite a high number so that we can activate the trigger of the reinsurance treaty, this called the Atmos. In this case, it covers us also on the so-called atmospheric events fragmented on the national territories. So this is a coverage that we have activated at the end of 2018, also based on the evidence we collected in the past years.

And all of this was characterized by an incidence rate, which is significantly high. I mean, well, at least if you made a comparison with previous years, of course, I'm talking about so-called atmospheric events. So based on the second half of 2019, we'd see. Maybe we will reach the reactivation trigger, but this kind of layer, this kind of profession is quite good us. So we are protected very well against this kind of events.

And as for the financial income, so also in that case, we do have a business plan. It is based on the so-called technical recovery, not on the financial profitability, because we know that the current trends in terms of interest rates and by the way, this trend was definitely different when we drafted the plan versus what happened today. It wouldn't have allowed us to reach the same financial profitability that we managed to get in the past 3 years.

So we do not base profitability over the next 3 years on the possibility to replicate the same yield. I mean we do reinvest all of the Non-Life path. The rate is between 1% and 1.5%. As for the Life business, we are a little higher. So of course, while securities mature and reach their end of life, the ordinary profitability level of our securities portfolio, by the way, interest rates are like this all over the world. So just like any other company, this portfolio will shrink. Now this is still happening because as you rightly said, I mean, the duration is 3.5 years. And if I'm not mistaken, on the Non-Life, the account value of securities maturing this year is around EUR 800 million. So once again, this is the reason why we do not expect any significantly high dilution rate at least throughout this business plan.

You also have another question, and the question was on the, well, the payback plan. We have a sort of a technical resolution that we have to approve at the general meeting every year. The duration is 18 months or so. This is a decision or a resolution on purchasing our own shares, so we have to repeat this. But we didn't do this because there's a specific buyback plan going on. So once again, we don't think we will implement any buyback plan. So once again, that resolution was a purely technical one. Thank you.

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Operator [7]

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Next question is from the conference in English from Peter Eliot from Kepler Cheuvreux.

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Peter Eliot, Kepler Cheuvreux, Research Division - Head of Insurance Sector Research [8]

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Just coming back to the combined ratio. I mean if you strip out the natcat impact in this period, then I'm just wondering whether the remaining combined ratio is a sort of clean number? Or whether there were any other one-offs that you might like to highlight? And I guess, especially, as usual, it would be very useful to have the runoff contribution to that.

My second question is just on the top line. I guess, the UnipolSai development of plus 0.5% is a little bit lower than you'd sort of target your plan. And within that, the Motor TPL decline of 1.7%. I guess this is maybe a little bit disappointing, offset by other areas, but maybe a little bit disappointing versus that and what others have said. I was just wondering whether you could comment on that and how you see the progression from here.

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [9]

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[Interpreted] Thank you. As for the CR, so combined ratio and the, let's say, the one-off or extraordinary events. I mean we talked about the atmospheric events. In terms of the claims, I mean the situation is slightly better versus the previous half. I think that we improved by around 0.5%. So if you want to, let's say, reconstruct the ordinary combined ratio, you have to consider the atmospheric events delta, which is what we have highlighted in our presentation. You have to deduct the 0.5% because, I mean, in this first half of the year, we had minus 0.5% versus the previous half year.

As for the runoff of our provisions, so reserves, we are, let's say, in line with the previous half year because, basically, the runoff component is around EUR 250 million versus the EUR 230 million that we had, let's say, 1H ago. As for the breakdown, you have EUR 70 million on the motor vehicle and EUR 180 million on the non-motor vehicle. As for the TPL market, I have to say that for the time being, we are a little lower, so a little under our estimates because of the average premium, which is flat or slightly going down, while the -- our forecast was basically staying flat. But this delta, this negative side is not significant, so this is not a headache for us.

And in terms of reporting claims, I mean this trend is flat, which is good for us. It's very encouraging. Also in terms of the average price of handled cases, so we keep recording, I mean, a reduction of this level, especially thanks to all the companies included into our, let's say, ecosystem. So thanks to their contribution, we keep reducing the cost of the average payment. For example, the Auto Presto&Bene and MyGlass, the repair shops.

There's another positive element. I mean there's a reduction of the mix between personal damage and damages for things or to assets, which is what also happens in the past 6 months. So this is yet another element that gives us the possibility to manage a context in the world of the car market, which is very high level of competition or competitiveness.

Just to complement your point, Peter. You also have to have the so-called immaterials, so the CPT, as we say in Italy. So basically, the car market, if you will, is totally flat. So it is not minus 0.1. Actually, I mean the, let's say, total turnover of the motor vehicle is 0.3 down.

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Operator [10]

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Next question is from the conference in English, Michael Huttner, JPMorgan.

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Michael Igor Huttner, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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I wanted to ask 3 questions, please. One on the non-motor combined ratio and what is happening there in the trend. And the second, a little bit on Life. And actually, I wasn't listening to it, so I'm really, really sorry. But I was a little bit surprised by why the Life results was down or down so much. But maybe I'm missing something or missing an excerpt or something. So please excuse me if I missed something here.

And then the final point in terms of your broader strategy into growing non-Motor whether you could give a little bit. I know it's really early days after your strategic plan, but given the very attractive combined ratios, maybe you can say more.

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [12]

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[Interpreted] Thank you for your questions. Now question number one. Let me go through the dynamics of the combined ratio on the non-Motor business. Well, in that case, we experienced a significant improvement of the so-called technical margins. And this is basically in compliance, in line with the actions included in the business plan that we had, let's say, implemented starting, well, the end of last year. This is what we have highlighted and described in many different meetings, especially during the planned presentation meeting.

It's basically a list of actions concerning the underwriting policies, concerning every single business and at the same time, we also described how we handle claims. I may mention some of those businesses, which are now delivering very well in terms of, for example, the general total product liability, so TPL. We can see here some significant improvements, but this is also happening in many other businesses, for example, fires. Also in the fire segment, we can see the first positive consequences of our actions.

Now if you work on the so-called elementary business, for example, the non-Motor vehicle, well, this means that we work on longer time windows because of the liability profile we have to do with. So I think that this trend will continue also in the next years or so, and by the way, in compliance with the targets that we have stated in our business plan.

You had another question on the Life business, right? Now on the Life business, I can say the following. So the difference, I mean the delta only has to do with the financial income. I mean the Life margin is unchanged. And by the way, when I say Life margin, I mean the technical, for example, mortality and then expenditure, provisioning or repurchase. I mean, all of these components are very flat. But most of all, the [fire] one has to do with the financial income and this is a consequence of the policies we have implemented in the past 6 months versus last year. So the fact that this is a little lower than last year, this is due to the fact that the, let's say, realized policy is a little less important. There's nothing more than this.

As for growing the non-Motor vehicle business growth. I mean, well, you can see that there's a positive contribution from every single channel, in particular, from the bancassurance channel. So this depends on Arca Assicurazioni but also to Incontra. Basically, they have doubled the premium level, thanks to the implementation of a specific distribution strategy concerning so-called the individual health protection policies. This was started last year and of course, we are reaching full speed in the first part of this year.

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Michael Igor Huttner, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Which partner -- who is your partner on Incontra?

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [14]

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UniCredit. UniCredit (inaudible) is the complete name.

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Michael Igor Huttner, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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UniCredit, sir?

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [16]

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Yes.

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Operator [17]

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Next question is from the original conference, from Andrea Lisi from Equita.

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Andrea Lisi, Equita SIM S.p.A., Research Division - Research Analyst [18]

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[Interpreted] I have just one update on the Car Server. When do you think the closing [day] was placed? So when can we start consolidating Car Server? And when will it reach, so to say full speed, full integration in the structure that you imagine?

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [19]

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[Interpreted] Thank you for the question. Let me tell you that Car Server, let's stay, stepped into the group as of yesterday because this is what we did yesterday. Yesterday, we got 100% of the shares of the company, so we will start consolidating Car Server in the next quarterly review or report.

In terms of full speed, well, this time window depends on the development plan that we have, and this is what we are working on right now. We will go through the business plan in our -- in the next meetings because basically, as of today, we start working in Car Server because, well, until, let's say, some hours ago, that was a sort of a third-party company that we didn't own.

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Operator [20]

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Next question is a follow-up from Peter Eliot of Kepler Cheuvreux from the English channel.

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Peter Eliot, Kepler Cheuvreux, Research Division - Head of Insurance Sector Research [21]

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Just let me come back. Just one other question. UnipolReC had a pretty good result. I was just wondering if you can give us any view on the pipeline that you see there. I mean should we expect sort of this current run rate of NPL reductions to continue? And is there anything you can sort of say in terms of the speed reductions or profitability that you expect?

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [22]

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[Interpreted] Yes. Thank you. Now UnipolReC -- now first of all, we are so happy about the results of this company, UnipolReC. And I'm sure that, as you know, this company was, let's say, a specific target company, a service company within the Unipol Banca rationalization and streamlining project. So after, well, exactly 18 months of business versus the original portfolio and apart from the accounting data, so if you make a comparison with the original portfolio, it was EUR 2.9 billion gross. So this was the total gross NPL that we have transferred into UnipolReC.

So by the way, we paid this EUR 600 million. So basically, we paid 20% of their value. So out of this, we have already recorded the EUR 150 million after 1.5 years of business. And this means that basically, we have EUR 600 million gross portfolio. So the net income, if you will, was EUR 150 million out of EUR 600 million, which is basically 25% to 30% of the gross value that we have paid.

Now we are also happy and satisfied of the agreement that we signed in order to, I mean, sell Unipol Banca to BPER. As you know, we decided to purchase EUR 1.3 billion gross portfolio. We paid that EUR 0.10, or so to say, a EUR 130 million. Then the recovery, if you will, activity also continued in the interim time. So between February 7 and yesterday, when, I mean, these credits became available to us. But also, before, our friends in BPER kept working on the recovering or collecting all of these amounts of money. So together with us, so we have, once again, collected EUR 28 million out of the total of EUR 100 million. Once again, the percent was around 30% as well.

So what will come in with the, let's say, EUR 1.2 billion, while the net value we paid is EUR 120 million. I'd like just to quickly rebuild the entire story. So what we have today in our pocket is EUR 550 million net exposure. This is the money that we have to collect just to breakeven on the other side. We have a gross portfolio, which is worth EUR 3.6 billion. So we have to say that the average percentages to breakeven, I think, we have to be at around, let me check, of sort of between 16%. So it's EUR 550 million out of EUR 3.6 billion, okay?

So once again, we are really, really confident that UnipolReC will be able to deliver further satisfactory results. Of course, our hope is to do more than this. Now when I say doing more, I mean we would like to, well, to make money out of this business. And I think we have created all the conditions to do this. Of course, this will help us increase the benefits of the holding company.

In terms of future development, back to your question, we don't think there will be any other, let's say, strategic operations in order to widen the scope of UnipolReC. So once again, we're not looking for other portfolios to purchase. I would like UnipolReC to stay focused on doing a good job in collecting or recovering the money that we have in our portfolio. So this is not yet another business line that you add to the other business lines for the growth. Let's say that the safety portfolio management that we will try and do in the best way possible.

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Operator [23]

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We don't have any more questions. Mr. Cimbri?

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Carlo Cimbri, Unipol Gruppo S.p.A. - Group CEO, GM & Director [24]

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[Interpreted] Well, thank you. I would like to thank you for listening to this conference. And if this is not too late, enjoy your summer break. Thank you so much. Arrivederci. Bye-bye.

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Operator [25]

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So this is the Chorus Call operator. The conference is over. You can disconnect your devices. Thank you.

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