Assicurazioni Generali S.p.A. (ARZGF) Q1 2023 Earnings Call Transcript

Assicurazioni Generali S.p.A. (OTCPK:ARZGF) Q1 2023 Earnings Conference Call May 25, 2023 6:00 AM ET

Company Participants

Fabio Cleva - Head of Investor and Rating Agency Relations

Marco Sesana - Group General Manager

Cristiano Borean - Group Chief Financial Officer

Conference Call Participants

Peter Eliot - Kepler Cheuvreux

Andrew Ritchie - Autonomous

Farooq Hanif - JPMorgan

Andrew Sinclair - Bank of America Merrill Lynch

William Hawkins - Keefe, Bruyette & Woods, Inc.

Ashik Musaddi - Morgan Stanley

Michael Huttner - Berenberg Bank

Steven Haywood - HSBC

Operator

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group First Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Fabio Cleva, Head of Investor and Rating Agency Relations. Please go ahead, sir.

Fabio Cleva

Good morning, everyone, and welcome to our first quarter call. Here with us today, we have our Group General Manager, Marco Sesana; and our Group CFO, Cristiano Borean.

Before we open the Q&A session, let me hand it over to Marco and Cristiano for some opening remarks. Marco, the floor is yours.

Marco Sesana

So thank you, Fabio, and hi to everyone. Let me just start to say that our first quarter financial results confirmed the group ability to deliver solid growth and execute on our strategic plan even in a context for geopolitical pressure and volatile financial market that is difficult. So we believe that our strategy is stronger than ever.

Our vision of becoming lifetime partner to our customers made good progress in the first quarter. As we reach, I have to say, we reached 69 million clients, increasing our client base by almost 1 million. Clearly, it's very important that we increase so much our client base, and it's important that our customer entrusted Generali with their saving and protection. It's a proof that we are there always when the customer needs us.

Talking about this, as most of you have seen in the news, this is a difficult time for some Italian communities for the flooding in Emilia Romagna. So let me say that we are very close to this community. We have defined several initiatives, and we are present on the ground to support people. I would like to thank all of our Italian colleagues, our agents and everyone who is present on the ground and are working to support our clients.

Now going back to our customer, so we consolidated our position, our first position amongst our peers in terms of relationship Net Promoter Score with a score of 19, which is 4 percentage points higher year-on-year. This clearly reflects our effort, dedication and focus on continuously improving the quality of our advisory service. And as an example, we are now at 70% digital policies or customers that have received insurance policies to digital channels.

Let's go now to the different businesses and start with Life. In terms of volume, in the first quarter, we saw a continuation of the industry trend observed in the second half of 2022. Our distribution, our proprietary distribution channels like agents, employees remain the key lever for steering the business mix towards our preferred business line. And the product mix observed in the first quarter confirm the effectiveness of our distribution strategy.

In particular, I want to mention the protection that reached €1.3 billion, led by Italy and the international region and the unit-linked that achieved €1.4 billion, demonstrating resilience compared to the wider insurance market. I want to remind you that the protection is the main source of value as the NBV is depending from protection for more than 42%.

At Generali, we observed an increase in lapses, a moderate increase in lapses, which was concentrated in very specific customer segment on bancassurance channels. So we saw this moderate increase, particularly in Italy, mainly related to Generali Life. Those products are primarily distributed by Banca Generali as well as other banking partners to affluent and high net worth individuals who are particularly sensitive to interest rate evolution. Positively, a significant portion of this outlook has been recaptured by our bank through other managed products.

Moreover, I would say that our preliminary number in April and May show an improving trend in Italy, reflecting positive effect of our new product offering and retention initiatives. In France, also we have observed an uptick in lapse rate, primarily related to large contracts distributed through banking partner, which have a high profit sharing growth. This increase seen for this product, which typically have limited profitability from Generali perspective, is mainly driven by affluent and high net worth individuals, shifting their portfolio towards other asset classes.

In general, from a product perspective, our business units are adapting to a changing customer appetite and we preserve market competitiveness. In particular, we are updating our existing products and launching new products more attractive in the current market context.

Let me give you a few examples. In Italy, for example, we are recalibrating the share of our premium allocated to saving versus unit-linked in the hybrid offering. We are introducing temporary variable fee to provide higher yields to our customer in the short-term. And we will test a new generation of product with two underlying segregated fund, providing more competitive yield for our customers.

Let me also reiterate that our overall strategy remains unchanged following the rise of interest rates. We maintain our strong focus on new business underwriting discipline on Protection & Health business and on capital-light products, enhanced by protection items. Our strategy will continue to be focused on bundled solutions, addressing multiple customer needs within a single product in line with our lifetime partner ambition.

We are convinced that the protection business, in particular, has an important growth potential, leveraging also on the customer increase awareness of protection needs post COVID-19. As I said, this business line generates almost half of our new business value and is more insulated from lapse risk since it is less sensitive to interest rate evolution. This unique value proposition represents a substantial differentiating factor for life insurance product versus other investment programs.

In addition to our discipline on new business, we continue to pursue and adapt our strategy to optimize our in-force business. And as I think you have seen the recent announcement on the Pensionskasse disposal is in line with this and Germany is in line with this, and this is significantly reducing our exposure to the annualization risk in the German Life business.

Let's now move on P&C. P&C business growth, in particular in Italy, Germany and France, is expected to continue in line with what we have seen in 2022. First quarter 2022 of gross written premium is up 10% compared to last year. This growth is driven mainly by non-motor, which is growing both in terms of price and volume.

At full-year 2022, you remember we have disclosed an increase in the average premium in our retail and SME book of 3.3%. At the end of the first quarter, this has increased to 6.3% in motor, non-motor, accident, health and disability. Non-motor premium, in particular, continued to grow significantly, supported by tariff strengthening implemented last year as well as the effect of indexation mechanism. Travel insurance, thanks to Europe assistance confirm its strong growth trend, also supported by the U.S. partnership with the large online players.

In motor, the average premium for our main market is continuing to increase. Tariff strengthened in line with market inflation and portfolio pruning remain a key focus, and the group will continue to coordinate implementation and technical measures necessary to pursue profitable growth in our strategy.

Having said that, it is important to highlight that the price increase usually takes 12 to 18 months to unfold and give the full benefit on P&C profitability. So they will progressively develop through our numbers as policies come up for renewal during the year. Our technical levers, such as risk selection and claims manager, are being intensified.

Now we move to investment. A few notes on the different assets. So our listed equities – on listed equities, we maintained a prudent approach. In credit, we confirm our selective approach with low exposure to more cyclical sector and high levers companies. We experienced a very limited rating downgrades in the portfolio. Our funded exposure to private real assets is lower than peers, which allow us to deploy better multiples in attractive vintages.

We have taken a prudent approach to exposure to private debt as in this asset class, we confirm the existing commitments while we have reduced the new allocation given the change in market conditions. On private equity, we also see a slowdown of distribution, but we scrutinized the valuation we found that marks provided by our general partnership are prudent.

Now before I close a few comments on real estate where we have an exposure of around €35 billion. Over 80% of our direct portfolio consisting high-quality assets in big city and core location, while less than 5% of our portfolio is located in markets more under pressure like UK, U.S., Scandinavia. These together with a disciplined policy on tenant selection, explain the low vacancy that we have, which is close to 10%.

These include vacancy related to refurbishment of buildings to make them more energy efficient consistently with our ESG strategy. We are comfortable with our real estate exposure, also thanks to the negligible leverage that we have with LTV with a loan-to-value of 7%.

So in conclusion, this result of the first quarter 2023 confirm our ability to deliver solid growth and execute on our strategic plan. As we move into the second quarter, we are confident in the right direction, which are steering the group.

Now, Cristiano, over to you.

Cristiano Borean

Thank you, Marco, and good morning, everyone. Today, we presented the first quarterly results under the new accounting standards. I would like to share with you some remarks on our financial performance to complement Marco's perspective on the underlying business trends.

The numbers show a very strong start to the year with an operating result of over €1.8 billion, marking a 22% year-on-year increase. We are pleased to reiterate also in this context, but we are fully on track to make the financial targets of our strategic plan.

As stated during our December 2022 Investor Update, IFRS 17 and 9 provide a better representation of the economic trends underpinning our numbers and make the life operating result more stable and predictable. In December, we shared how the new adjusted net result will be calculated following the application of IFRS 17 and 9. This KPI, which is the basis to report our EPS growth target, normalizes the reported net result considering the impact of the following four elements.

First, volatility stemming from the mark-to-market of assets at fair value through profit or loss held in non-participating business and shareholders' fund. Second, application of hyperinflation accounting. Third, amortization of intangible related to M&A transaction. Four, gains and losses from acquisitions and disposals. The adjusted net result measure will help you to set a bottom line KPI that better reflects the performance of the underlying business.

In the first quarter 2023, the adjusted net results substantially improved from €821 million to €1.23 billion. This reflects the benefit of the group diversified profit sources that underpin our operating results and are now becoming increasingly visible.

I would now like to briefly go through the financial performance of our key business segments. Our topline continues to grow in our key areas of focus, mainly non-motor P&C. The 11.4% non-motor gross written premium growth in 2022 continued this quarter with a 12.1% growth. This is important because this acceleration in non-motor GWP enables our P&C portfolio to gradually rebalance towards a segment that enjoys healthy underwriting margins with a combined ratio at around 90%.

Of course, these premiums are now reinvested at yields that are higher than what was embedded in our strategic plan, thanks to the increase in interest rates. As such, growth in non-motor not only increases the underwriting results, but also improves the investment result before finance expenses.

Our motor P&C topline is also showing clear signs of improvement as the tariff strengthening action that Marco laid out start to filter fruit. These figures indicate that there is an upturn in trend in the personal lines. In addition to the healthy topline development, P&C has recorded a significant increase in operating results from €485 million to €847 million.

Let me share some remarks on the combined ratio, looking at this quarter compared to the first quarter of 2022. Again, in the Investor Day Update of last December, we guided to an optical overall increase of the reported combined ratio by around 2 percentage points without any impact on the P&C operating result, primarily because of the change in the calculation formula.

In the first quarter of 2023 under IFRS 17, the combined ratio was 90.7%, which is 5.6 percentage points lower than a year-ago and benefiting from four main drivers. The first one is the more material benefit of discounting following the rise in interest rates during 2022. The second is the inflation-related strengthening of provisions on our P&C reserves which as you may recall from the last calls, we implemented during 2022. The third impact is the P&C book rebalancing towards the more profitable and lower combined ratio on non-motor line. And last, the fact that the first quarter 2023 had negligible natural catastrophes. The first quarter of 2022 saw natural catastrophes losses broadly in line with historical long-term average with a 140 basis point impact on the reported combined ratio.

The discounting element under IFRS 17 makes the operating result more sensitive to interest rates. It is therefore important to include the undiscounted view of the insurance service results and of the combined ratio as relevant KPIs. The undiscounted combined ratio in the first quarter of 2023 was 93.8% compared to 97.4% in the same period last year.

As discussed previously, at reporting data disclosure, we will include both the discounted and undiscounted operating insurance service results and combined ratios. The undiscounted operating insurance service result was €446 million at the end of the first quarter, while it was €163 million in the first quarter 2022. The discounted operating insurance service result was €669 million for this quarter compared to €233 million during the same period of last year.

Given the relevant impact of discounting, let me provide you an indication of the direction of travel for the year. Putting aside interest rate moves, you should expect the discount benefit to gradually decline quarter-on-quarter, but in a non-linear way, which also means that the discount impact on combined ratio will reduce during the year. I am happy to elaborate further on this during the Q&A. But as a frame of reference, while in the first quarter 2023, we had a benefit of €223 million, you may expect a discounting benefit between €650 million and €700 million during 2023, assuming stable interest rates. The key point here is that the €223 million discount benefit of first quarter 2023 should not be simply multiplied by four.

Finally, on P&C, the operating investment results declined from €252 million in the first quarter of 2022 to €178 million in the first quarter 2023 due to higher finance expenses reflecting the effect of the increase in interest rates over the course of 2022 on the unwinding component.

Moving to Life. In this segment, the trends that started in the second half of 2022 are continuing. But it is important to highlight as Marco did, that the net inflow in protection and in unit-linked continue to be positive. The profitable business mix enabled by our strong most proprietary distribution network is essential to maintain a new business margin that remains by any standards top of class.

With regards to new business volumes, we are down by 15.6% in terms of present value of new business premiums. Please note that the year-on-year change was amplified by the higher discounting effect following interest rate rises in 2022. In fact, the new business production measured in terms of annual premium equivalent decreased by a milder minus 3.6% compared to the same period of last year. The margin was up 32 basis points to 5.72% at an excellent level. This increase reflects a marked improvement in the underlying business profitability, thanks to the quality of the product mix and the increase of interest rates.

As Marco said, beyond the new business, we continue to focus on the optimization of in-force book, the Pensionskasse disposal recently announced as part of this strategy, and will contributed to the continuous improvement in the liabilities profile with an expected positive contribution of 1 percentage point to group solvency ratio.

The life operating result of €924 million is almost 10% higher than the IFRS 4 life operating result in the first quarter 2022. As stated during our full-year 2022 earnings call, the life operating results under IFRS 17 is going to be stable from a growth. This means in line with 2022. However, keeping in mind that in 2022, the life operating result grew by 25% year-on-year, also thanks to non-recurring items that becomes recurring under the new accounting standards, also reflecting the up moving interest rates.

The life operating results at €924 million is up 1% compared to the first quarter 2022 on a comparative basis. The main element that prevented a more significant increase was the lower stock of life CSM at the beginning of the period following the negative economic variances during 2022, mostly stemming from lower equity markets and higher volatilities.

The life operating result was driven by the €743 million CSM release, which is less than €824 million new business CSM. This is a significant result given that it was achieved during a period of new business production will slow down and shows that our product mix is correctly calibrated to uplift the CSM growth path.

The expected return of the CSM, which is the sum of the unwinding of the discount and the contribution of the expected realization of real-world extra return over the risk-free rate has also contributed materially to the stock of CSN before the release. Let me stress that growing the CSM by 4% during the quarter of lower new business volumes is a remarkable performance, although supported by positive economic variances.

Once again, it is important to highlight that the new accounting standards provide a clear and more informative view of the link between new business value and the life operating results and are also more closely aligned with the Solvency II framework.

The operating result of the Asset & Wealth Management segment was €233 million in the first quarter 2023 or 10% below a year-ago. Wealth Management performed strongly with Banca Generali achieving 27.4% growth in the operating result supported by the tailwind from higher short-term interest rates. The lower contribution from asset management is primarily due to two things.

The asset under management base was €505 billion at the beginning of January of this year or €70 billion less than at the beginning of January 2022, translating mechanically into lower recurring fees. In addition, the first quarter of last year saw performances fee of €38 million, which we clearly identified as non-recurring at this time, while the first quarter of this year had none.

If you remember, last year, it was exactly the opposite. Banca Generali lower contribution, offset by the very strong first quarter contribution of asset management. This shows that we have balanced and diversified profit sources even within the same segment. One of the benefits of the new accounting standard versus IFRS 4 is the simple representation of private equity with lower consolidation adjustments.

Let me move to shareholders' equity because I was really looking forward the publication of these results to show you in practice what I hinted that in December. IFRS 17 has improved the way shareholder equity is represented in the account, and it will also significantly reduce the volatility seen under IFRS 4.

Under IFRS 4, we closed 2022 with slightly more than €16 billion of shareholders equity with the new accounting standards that were built to have a better representation of shareholder equity, we have €27 billion of shareholders' equity on January 1.

I would like to close with a comment on the solvency position, which continues to be extremely solid at 227%. The increase from the 221% solvency at year-end 2022 is mainly driven by the strong contribution of the normalized capital generation, which I expect to continue to be strong during the course of 2023.

And now I think it's time to open the Q&A session. Operator, over to you.

Question-and-Answer Session

Operator

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Peter Eliot of Kepler Cheuvreux. Please go ahead.

Peter Eliot

Thank you very much, and congratulations on the results and the very useful disclosure today. I had three questions, if I may, one on the each main division. On the Life, first of all, the Q1 operating profit. You've given us the CSN release, which is very helpful. Just wondering if you can give us any hint on the other elements. I mean, in particular, it'd be useful to know what one-off items were especially on maybe a loss component and experience variances and then later, especially with respect to surrenders. Non-life question was on the expense ratio. That's gone up a lot. Could you just expand on what's happening there?

And then on Asset Management, I just wondered if you could expand on the extra costs due to the launch of initiatives and optimizing operations. Just wondering if you could elaborate a little bit and when we might see any positive impacts from that.

Fabio Cleva

Thanks very much, Peter. I think the three questions are for you, Cristiano.

Cristiano Borean

Thank you, Peter, and good morning to everybody. So Life CSM release. For sure, you have seen the release of €743 million, and there are some elements which were also positively affecting that we had lower loss component through P&L in first quarter 2023 compared to first quarter 2022. Basically, we had €10 million loss component versus €66 million negative loss component, clearly, in the first quarter 2023 versus first quarter 2022, so it's a €56 million improvement. For what relates to the – this is also due to some reversal in some savings and protection business, especially.

Then we had also – then I would like to highlight, since you mentioned the effect on – not only on the operating results, but also you were talking about lapses, I would like to highlight that the movement that Marco described you of the exit compared to what was projected overall at a very low impact on the value of the CSM, which is clearly then pro rata temporary put on P&L. Just to let you know, it is less than €100 million, the negative impact, so the reduction in the total CSM of more than €32 billion of all the lapses experiencing on top of the projected one. As you see, it is a confirmation of the low value.

Let me go on the other element of the P&C expense ratio. There was an increase in the P&C expense ratio, mainly driven by 0.7% in the acquisition expenses stemming from two main drivers. Driver number one, the more and more increase of the weight of non-motor. As you've seen, we were growing very fast, which has a higher acquisition expense cost as well as in the motor business, there is a shift in order to accelerate the increase of profitability on the motor other damages, which are with higher level of acquisition expenses.

On the other hand, there is also the fact that we are integrating and this is also affecting not only the acquisition expenses, but also the administrative expenses by another 0.7 percentage point deviation. The newly consolidated business in Malaysia, India, where we get to the 74% shareholding and as well La Medicale. So this is also part of the higher drift to their cost since we are still not finalizing in India, it is less. But in Malaysia, there will be also some integration job to be done as well as in La Medicale to bring back to the average group profitability.

Third element, asset management. The operation were more investment in some regulatory requirement and initiatives which are under operation teams, operation and the IT. We are adapting investment in order to foster our ESG improvement of visibility and steering in the real assets, especially. And there were some investment on the operating machine to improve the system, which are more and more demanding due to the environment and the ambition of the group. I would like to anticipate that the cost has been a little bit accelerated in the first quarter, but we are expecting a deceleration of this cost increase in the last quarter of the year.

Fabio Cleva

Next question, please.

Operator

The next question is from Andrew Ritchie of Autonomous. Please go ahead.

Andrew Ritchie

Hi there. Could you just update us or remind us what the group's natural catastrophe retention and reinsurance arrangements are in light of the 2Q flooding. Secondly, could you just give us a bit more detail again on – I didn't quite understand what you've done to the Life products in light of trying to – I think you said you've adjusted some crediting rates or relaunch some more traditional savings products in order to recapture some of those outflows. Just a recap on that would be useful.

And I'm curious when you recaptured the flows, did you mean you've recaptured the flows within Generali or your partners have recaptured the flows in their savings products? And then the final question, just I think you outlined the current year discount benefit would decline. What happens to the insurance finance expense? I'm assuming that increases as the year goes on. But maybe talk about the net of the two, which is more interesting than just the separate components. Thanks.

Fabio Cleva

Thank you, Andrew. The first two questions are for Marco and the third one is for Cristiano.

Marco Sesana

Yes. Hi, Andrew. Yes. So starting with the first question. So relating to what we are seeing, for example, in this day in Italy and Emilia Romagna. So our reinsurance protection is operating in excess of €200 million, in particular, on flood losses, for example, in Italy, up to a maximum of [€2.4 billion]. So that is the time. Than we also have in place a cat aggregate. I remind you with €800 million retention. So these are the protection. Clearly, what we are seeing in these days in Emilia Romagna are much less than this number. And so these are – this is the outline on the retention and protection that we have in place.

So second question, Life product on what we mean when we recapture the masses and what are the type of initiatives that we are putting in place. So there are two type of – well, there are several initiatives that we can mainly focus on two types. So first is how do we put in place initiatives in terms of recapturing masses or making sure that we manage client that wants to exit the contract. So we have initiatives to retain the customer whether it is making, for example, offer on additional product or making an offer on protection on offering new segregated funds. So this is all what we do in terms of insurance products.

We also – as I stated at the beginning, we also had new product that we are launching, which are more skewed towards segregated fund. They have variable fee that we can apply in the short-term to make sure that we reach for the customer a certain type of return. And also, we are launching in June, especially in Italy, a product with two segregated fund, one is smaller, and it moves quickly with the yields and can be more attractive. And the other one is more stable, and we will balance toward this two segregated fund and the unit-linked product to make sure that this has an attractive return for the customer.

When we say that we recapture initiative, basically, when the churn of the – or the laps happened in distributor like Banca Generali, Banca Generali is able to recapture some of the masses in other banking products. So this will show up in return for the group, not in the insurance side, but more on the banking side. So I hope this is clear in terms of retention, new product and what we mean when we say we recapture masses. So Cristiano?

Cristiano Borean

Thank you. Andrew, perfectly spot on the question because it allows me also to explain you why also the discounting will decrease, and you should expect broadly 3x the first quarter because I think it is helpful also to give you on the discount benefit and as well the full picture on insurance, finance and expenses. I take one minute more, but I think it is extremely worthful for you to also forecast better. So the current year discounting, the reporting period is basically calculated as the discounting of the future expected and discounted claims, which are included in the claim reserves of the reporting period with the current investment rate. And they are representing an average of the market curves across the reporting period.

What do I mean by this to make an example? At the end of the discount – at the year-end, the discount curve is an average of the market curve at the beginning of the year, at the end of the first quarter, at the end of the second quarter, at the end of the third quarter and at the end of the fourth quarter. So this discount curve, as you know, is then locked in. And then this will be the basis for the unwinding of the [indiscernible] sales, which will impact the P&L starting from the following year.

So let me try to explain you better that once you have this discount curve that you can use and take from the market because it's the swap curve is multiplied for the loss ratio of the current year to get an estimate of the total claims, which it is broadly moving around 65%, 60% to 65% or to 66% according to the different quarters, but broadly in that region. Then you have a certain amount, so the insurance services revenues has to be multiplied by this ratio of current year. And then you have a certain percentage amount, which is what goes into the reserve, which is not already paid. This percentage amount has to be also multiplied by the discount rate and then the duration of the claims. This percentage amount at year-end should be 50% and the duration of the claims that we are to take into consideration is about 2.5 years.

So at the end, if you have 100 premium with a 3% flat curve during the year, just to make it simple. We have 100 times the loss ratio I was telling you before, times 50% to get a year-end times 3% of the discount times the 2.5-year duration. This is guiding you about how to get out of discounting. Clearly, it's not a perfect mathematical formula because we are mixing business with very different underlying rates. Don't forget, we have also business in Argentina. But clearly, we'll help you.

The final part is much more simpler. Insurance finance expenses are basically representing the unwinding of the discounting of the previous years for the different generations. And it is broadly linear. So you have just simply to multiply it by four the effect of finance expenses we are observing. Now as I told you before, while in the first quarter 2023, you have to multiply by three the discounting, you have to multiply by four the effect of insurance finance expenses, which to my understanding are around €90 million. Thank you.

Fabio Cleva

Next question, please.

Operator

The next question is from Farooq Hanif of JPMorgan. Please go ahead.

Farooq Hanif

Thank you very much. I'm just digesting everything you said, so apologies if I'm a bit slow. Just going to Life. You talked about protection being sold mainly as riders in your business. Can you give us a sense of what kind of penetration rate you have and which regions do you sell protection as a standalone product? And what your strategy is for growing that? Because it feels to me like, obviously, this is a massive lever for CSM growth.

Secondly, what is your kind of outlook based on current margins for the sort of growth rate in CSM? If we had to normalize it, where would you say, would it be sort of 2% to 3%, 3% to 4%? Where do you think you can have that kind of normalized growth rate going?

And then the last point is when we look at the underlying loss ratio in P&C, so if we take out nat-cat, take out reserve reasons and take out discounting, it seems to have clearly improved by about 200 basis points. So is that mainly just mix and shifted to non-motor or are we starting to see tariff increases having some impact? Thank you.

Fabio Cleva

Thank you, Farooq. The first question is for you, Marco, while the second and third for Cristiano.

Marco Sesana

Yes. So first point, I want to make that what you see appearing in a major part of the new business value at 42% in terms of protection, it's not only rider. Actually, we have a large part also of protection that is sold standalone. In the first quarter, clearly, as much as the new production is suffering, also the riders are also suffering, but what it keeps I would say what it keeps showing strong and strong momentum is a standalone protection. In terms of the question that you asked in terms of how many product have protection rider, I think we stay in the range of 60%. And this is a big increase if you compare that to a few years ago. And so we are at that level. It's a very good level. So Cristiano, over to you.

Probably, you said no strategy to grow also the protection. So as we said, we are focusing on bundling even more on this on average 60% and also the standalone business that is focusing on the needle of health and satisfying the need of the client after COVID-19 in terms of protection on health is something that we want to pursue and deliver over time. Cristiano?

Cristiano Borean

Thank you, Marco. So Farooq, the current margin on CSM. So let me say the CSM growth we are expecting on a normalized basis, which means excluding economic and operating variances, which are clearly very dependent just for you. In the first quarter, we had €1.2 billion positive economic variances due to the better especially equity in credit market in some cases, has to be taken out. We are expecting a normalized growth of CSM of 4%, taking into inclusion on the new business growth faster than the release plus the unwinding.

On the third question, I think it is quite important now to clarify that, for sure, you spotted out that discounting was improving by 200 basis points on a quarter-on-quarter basis, if I look at it. So we need to take many things out. And this is why we are telling everybody that, and not only everybody externally, internally, all our KPI and target given to the business unit are on the undiscounting effect because we don't want to mix it. And this is why we are net of natural catastrophe on the underlying current year combined ratio broadly stable in order to capture the full change in the mix, which is non-motor versus the motor.

Don't forget that in first quarter 2022, we were not observing the claims inflation part. So we are already on a certain track getting there. But our objective, our steering, our targets are all on the undiscounted combined ratio, and we are catching up throughout the year on the motor tariff increase, while no motor is compensating the inflationary part related to the motor. So overall, this is the way to look. It is fair also to say that taking out natural capacity, we are flat because we had 1.1 points less of natural catastrophes. So we would be more than 1 percentage point better, but mainly because of that.

Fabio Cleva

Next question, please.

Operator

The next question is from Andrew Sinclair of Bank of America.

Andrew Sinclair

Thanks very much, everyone. Three for me, please. First, I just wanted to go into that undiscounted loss ratio. If I strip out cats and PYD and it looks like a pretty good performance year-on-year. I just really wondered if you can unpack the drivers of that for us and in Q1 was before a lot of inflation pain kicked in last year. Just frankly quite impressed about the year-on-year development, just wondered if you could unpack that a little bit for us, if there's anything to be way off in there.

And second point was just on reserve releases under IFRS 17. We've got 2 percentage points in Q1. I felt the guidance had been for quite a lot lower reserve releases under IFRS 17. Just really wondered what drove that release in Q1, and should we think of that as sustainable any seasonality and there to be aware of. Just any color there.

And third was just on real estate. I really appreciate the color you guys gave us this morning. Interested to know about how that vacancies number has been evolving over time and where you have vacancies at the moment. What's being re-let imminently, how have those rent discussions been going? And likewise, how much of your rental income is indexed to some sort of index? Thank you.

Fabio Cleva

Thanks very much, Andrew. The first questions are for Cristiano, while the third one is for Marco.

Cristiano Borean

Hi, Andrew. So on the loss ratio part, for sure, what is driving clearly 1.1 percentage point lower natural catastrophe prior year development taking it out. Clearly, there is, as I told you, the 2 percentage points of improvement on the discounting. And as well, there are the kicking in on – the effect on the – between the mix of combined ratio of motor or non-motor of around 90% with the rest of the motor portfolio, which is bringing down to something which is around the 95% undiscounted current year, 95% to 96% undiscounted.

So this is the way you should look at it. This is the way we are managing it because it is improving. It is getting back to before very high peak of inflation. Still, we are kicking in progressively. So you need to wait the full 2023 to see the improvement also in the component around the motor.

The second question related to the reserve release of 200 bps. For sure, you should go on with a normal risk adjustment release of around 1 percentage point. What is on top is something which has a double nature. More than seasonality, I would say that the IFRS 17 principle is bringing real best estimate changes, and best estimate changes are depending when they are happening. If they are happening in the first quarter, they are happening on a base that you have to use and sometimes could happen also in the prior year. They are happening on the base which is smaller. So clearly, the impact is larger. So you have some, let's say, fluctuation because of this. This is part of the higher volatility expected in IFRS 17 principle.

What I think it is fair to say on top of this regular 1% risk adjustment release, there is something which more than in a quarter or in a yearly basis, I would say, over the cycle is the release of the expected prudency on the apps, we should stay between 0.5 and 1 percentage point. So clearly, something in between the 2 percentage point you are observing is a fair way to see on an over-the-cycle part with some, let's say, quarterly, but as well the potential yearly fluctuations. Marco?

Marco Sesana

Yes. So in terms of the early state on vacancies, the first part of the – of your question, I would say this is fairly stable. So we didn't see any significant change. This is really due to the fact that we have trophy asset, main city, high-quality tenants, very selective tenants. So at the moment, we don't see significant change. In terms of indexation, our rent are indeed indexed, clearly different in the different geographical location also due to the regulation that allows to capture a different percentage of inflation in the different countries. But clearly, we are seeing a benefit also on that because of indexation.

Fabio Cleva

Thank you very much. Next question, please.

Operator

The next question is from William Hawkins of KBW.

William Hawkins

Hello. Thank you very much. First question, I think, again, we're probably all just grappling with what is the right combined ratio or claims ratio. But however, we cut the cake, it seems that your clean figure has improved year-on-year. You've talked a lot about lines of business. Could you just give us a brief commentary by country? Should we just assume that this improvement is occurring across countries in a smaller way? Or is there any kind of particular difference between Italy and the other markets?

Secondly, Cristiano, I definitely don't need you to repeat the reply you gave Andrew because that was usefully comprehensive. But with regards to the discount rates unwind, can I just confirm. I think you said it was €90 million negative, obviously, in the first quarter, and we can just multiply that by four. So we're €360 million negative this year against the €650 million to €700 million positive you mentioned. If that's the correct understanding, what's the outlook for 2024? Because I think that number is going to keep building. And obviously, last year, it was only minus 39%, so not suggesting we multiply it by 10 next year. But I'm trying to understand the takeoff rates beyond 2023.

And then lastly, please. Thank you for the financial comments on the flood tragedy. Can I just confirm, I think you were saying because of your reinsurance protection, your captive €200 million order of magnitude? But I think you were saying you were well below that, which is good financially. Could you give us an indication of what you think the insurance industry loss is trending towards at the moment? Because again, given uncertainty about insurance penetration and that kind of thing. I'm finding it very hard to scale what's happening at the moment. Thank you.

Fabio Cleva

Thank you. Thank you very much William. So Cristiano, the second question is for you and let's start with Marco with the first and the third question, okay?

Marco Sesana

Yes, we'll start with the first saying that, yes. So we are improving in the core underlying trend of the P&C. And I would really focus on non-motor. Non-motor is the key driver for this. And I think you can really see this coming from the different geographies. We have been increasing – as you could see, we have been increasing prices early on in non-motor, and this is also giving a slightly edge on inflation. So we are improving our bottom line in non-motor, and I would say this is true in the main geographies. So I wouldn't go into the different and a small one. But clearly, for the most important geographies is true. On motor, we are seeing that the rates are kicking in. So we expect more in the second, third and fourth quarter.

Going to reinsurance protection. So let me clarify and give you a little bit of background on the – what is happening. So you can expect on the ground three different type of protection; on the retail, on SMEs and large corporation and on public entities that are mostly are insured. So the penetration on the retail business of this type of guarantees, of the cat guarantees is not very important in the region. So we would expect more losses from the SMEs and corporation and public entities.

You have understood well. So we think that our losses will be in the range of the – we're hoping less than €100 million. But that's more or less the range we expect. It's difficult to give a complete answer now as the event, it's really recent. And even yesterday evening, it was a continuous on this thing. So remember that our reinsurance protection is covering, as you correctly said, their event over €200 million. And we have 21 days to combine the different entities to consider an event. So that's the type of protection – I mean, structure, this is how we are covered.

Overall, it's difficult to project for the industry because really, we need to see because flooding is not hitting everyone at the same time, and it's more on the retail side than on the SME. So it's difficult to understand what this means for the whole industry. I think it's going to take a little bit more time to give a solid projections for us and for the industry.

Cristiano Borean

William, on the second question, thank you because I think this is helping to really close the circle around this not simple new topic of the new accounting standard. I think that the discounting I confirm is €90 million negative, and you should multiply by four, I confirm. The unwinding, I'm sorry. I'm sorry, the unwinding, the finance expenses, just to clear. And how to treat it going forward. Here is important. You need to understand that the mechanism is just kicking in all the progressive locking rate of the different generation which is slightly different from the discounting through duration because you need to take into account where the generation was built and the lock-in rate.

Just to make a practical guidance to you. Next year, you should expect an increase of 90 basis points in the discount, in the finance expenses implicit rate on the week of the year-end that you will find in 2023, which means broadly an increase of €200 million further on the annualized times for discount rate of the negative unwinding in the finance expenses.

One last thing. It is not growing as fast this effect because exactly of this effect of the older lock-in rate on loss in core claims, which means that they're going to assume topic growth, and you do not have a full effect in two to three years from zero to the actual 3% discounting. So you should get some still positive benefit between if the rate stays as they are, clearly, all what I'm saying is it the rate they have, you still get in the next one to two years to three years a small positive benefit between the discounting the component of the current year and the unwinding component of the finance expenses. If the rates I state again, are as they are. Clearly, this is one of the reasons why we always said there is more volatility in the accounting representation of P&C because of this dependency on interest rates.

Fabio Cleva

Next question, please.

William Hawkins

Thank you.

Operator

The next question is from Ashik Musaddi of Morgan Stanley. Please go ahead.

Ashik Musaddi

Yes. Thank you. Thanks a lot for all this clarity on the discounting and the interest finance expense. I just have a couple of questions on Life net flows. I mean, is it possible to get some color that out of the €3 billion savings net outflows, how much of that is Italy, how much of that is France because I'm assuming like majority would be these two countries. But given that you have other geographies which might have seen positive flows, I just want to see the extent? And secondly, given these net outflows, how are you managing liquidity to pay out these claims?

And thirdly, I guess, Marco, you did mention that in Italy, things are getting better in, say, April and May. Any color on the French book, like what you are seeing in France in terms of outflows? Thank you.

Fabio Cleva

Thank you very much, Ashik. I think, Marco, both questions are for you.

Marco Sesana

Yes. So I will start by saying that, yes, in April and May, as you stated in Italy, the trend is improving. And this is something that is happening, as I said, for our offer for I would say the fact that – the fact that we are putting new products and it's mainly. And it's – what we are observing is in Generali Life, basically, the outflows and there we have an improvement. In France, we see a stable situation. We will look better, and we see how the market is reacting to our offer. Consider that in France, as I said, the outflows that are going as a profit and really high profit participation. So the value that we lose is very limited. So that is the first part.

So Life net inflows, you asked for some different color. I would say in savings, I would say, it's most mainly, as you correctly stated, in Italy, France I would say we have a minus €1.6 million in Italy in the savings business and almost €900 million in France in the saving business. So that is something that as you capture more or less are the main part of the business, I would say.

Fabio Cleva

I think, Ashik, also had a question regarding the managing the liquidity.

Marco Sesana

So yes. So that's an additional point. So we have been prudent in the ILM at the moment to consider liquidity to pay claims and also for to provide liquidity to lapses. And so we have slightly increased our share of cash and cash equivalent. Therefore, we are adjusting our ILM to make sure that we are in a prudent position to pay claims and lapses.

Fabio Cleva

Next question, please.

Operator

The next question is from Michael Huttner of Berenberg. Please go ahead.

Michael Huttner

Thank you so much, and it’s Michael. The disclosure is amazing, it's lovely. I had three or four. What is the normalized capital generation, you said or what is the outlook? You said it would be very strong. I just looked at up, last year was a very nice €3.8 billion. I wonder if you can give a feel for that.

Pricing, you spoke a lot about non-motor pricing helping out to offset the kind of claims inflation impact in motor. Can you give a little bit more of a feel for what's happening in motor? I think Unipol has said that in November, they raised by 5%, in February by 10%. Just to give you a little bit of background that obviously wouldn't [indiscernible].

On real estate, you've given a huge amount of clarity. Do I take it that there's actually zero movement through the in terms of valuation and so that things are stable there. And then finally, a really cheeky question. I think, Cristiano, at full-year, you gave us an update on the cash holding, saying that it was ahead in March, figure of the year-end and mainly quite strong. And I just wondered if there's any kind of update. Thank you.

Fabio Cleva

So thank you very much, Michael. The first and the fourth question are for Cristiano, while the second and the third are for Marco.

Cristiano Borean

Okay. Michael, capital generation of the quarter, €1.5 billion, strong capital generation, benefiting also from the unwinding as you clearly understand of the rates in the both life and as well in the P&C, which is giving us extremely confident in getting and confirming our target of normalized capital generation throughout the three years. Related to cash upholding update. Clearly, the number at the end of March, we had was influenced also by the amount of cash we were starting to hoard, but the vast majority has been already hoarded in April, okay, of remittance.

So as of today, we already collected more than 95% of 2023 expected remittance. So we are done. We are just waiting the specifically overseas, which has different timing, but we are there. On top of that, the end of March number, which is not far from the €4 billion is detailing also the usual buffer we are holding on liquidity, €1 billion buffer on liquidity. The rest is the preparation of the payment of the dividend and some also excess cash, which I recall you, was there in order to prepare for capital deployment.

Let me clarify one point. Throughout 2023, you should expect and projected, as I already anticipated to many of you, a lower consolidated tax benefit compared to the previous year because of a specific Italian local accounting happened in 2022 of fair value of some assets called Helford Trading, which is allowing head office to have quarterly Generali a lower consolidated tax benefit of slightly more than €200 million lower, okay?

So I give you all the view, and Marco.

Marco Sesana

Yes, let's start from motor pricing. As you have seen, so the change in average annual premium has increased from last – in the end of the year was 0.9%. Now it's 2%. So it's clearly improving. I want to restate that this measure that we did in average annual premium is a pretty severe measure because it is basically the average increase in premium of the contract in place in the first quarter. So it actually takes the renewal of only one small part of the contract because the other are still in place, not renewed. So this is a conservative measure that we give, but it's something that we think is important for you to understand how it's evolving the price.

So just to give you an overview, claims inflation is in line and it's evolving from compared to the last quarter. We said that sitting differently in the different geographies. So Germany is clearly high in inflationary. In Italy, we have a low inflation at the moment. We still have a low inflation at the moment. We are moving ahead with pricing in all geographies. We see a better environment, to be honest, in terms of competition to increase prices so we are very positive that this will come in every geography.

In particular, you mentioned Italy, in your example, we see an acceleration of price increase that we have in Italy, and that is coming in the next quarter. As a side note, I just want to remind you that the operating profit from motor is only 10% that we have. So anyway, it's very important the development that we have on non-motor because this is really driving the profitability that we have. So on real estate valuation, we do expect mid-single-digit negative change, but it is more mainly offset by rent.

Fabio Cleva

Operator, we have time for one last question.

Operator

The last question is from Steven Haywood of HSBC. Please go ahead.

Steven Haywood

Thank you very much. Three questions from me. Can you tell us what your combined ratio target is now on an undiscounted basis? I guess 92% below combined ratio target, when you add on the additional 2 percentage points that you were talking about earlier, Cristiano, to get to below 94%. And if we look at the first quarter combined ratio of 93.8% on an undiscounted basis, add on a bit of normalized nat cats, maybe it's slightly above 94%. Is this the right way to think about what your compares side could be going forward?

Second question on the discounting in the P&C. Do you think about broadly matching the assets with the P&C liabilities so that the discounting in the combined ratio is offset broadly by the unwind of the finance expenses coming from the investments.

And then finally from me, on price increases in P&C, particularly on the motor side. Could you be a little specific about what can you quantify the price increases that you're putting through in Italy, Germany and France on the motor business? Thank you.

Fabio Cleva

Thank you, Steven. So the first and second question are for Cristiano, while the third one is for Marco.

Cristiano Borean

Hi, Steven. Just a clarification, I think that the undiscounted combined ratio target is something which should be looked taking into account the usual 2 percentage point of natural catastrophe on something which is in the ballpark of the 95 more than what we were seeing before. For the reason I was telling you, even last year, we are 93% ballpark combined ratio. And I told you that just for algorithmic way without changing €1 of operating risk result, we should have got 2 percentage points more from the simple change of formula.

So with this new formula, the undiscounted element, which, by the way, was the one we have in mind when we were thinking everything because we were living in a very close to zero interest rate environment is the 95% target, which should be achieved across the year. So going forward, with all the action that Marco described are higher asset in order to get there.

The second question is extremely fundamental, Steven. And I think it is the basic route of principals. The principle for IFRS 17 complex or articulated they could be, are born on a fair value view, which means cash flow discounting, which means cash flow matching, clearly, in award where all the cash flows are purely matched, there is a zero excess risk that we want to take out of it. Due to the fact that we have a risk borrowing capacity and due to the fact that our aim is to maximize value creation over more than one cycle in the medium to long-term, the choice of not having a full offset of full cash flow in the P&C is the choice of growing through our specific asset classes like some equity, private equity, real estate, which over this cycle should get more than three.

Clearly, this is a strategic decision, which is exactly consistent to the basis of the insurance business, which is basically taking a risk budget, defining a risk budget, choosing a strategic asset allocation with long-term value growth and exploiting value growth for the shareholder. What we are benefiting now as a whole industry is that we had a jump start from a zero interest rate world. And exactly in a moment, we did the transition, which is January 1, 2022, the world changes because through 2022 rates exploded more than 200 basis points.

And so we are getting this benefit of discounting. But in reality, we should focus on the undiscounted technical and underwriting discipline and on the asset allocation on the longer-term growth. For sure, a better matching reduces a little bit volatility because as it is good when it goes up, it could be volatile when it goes down. So you need to work also on that way. Knowing that there are different levels also to match assets liability like claim speed. Marco on prices?

Marco Sesana

Yes. So couple of comments on prices. So the first is clearly, we have seen different price – different average premium actually increased in the first quarter on the different geographies. And just to give you some ranges, so we go from probably a top increase that we see mostly around 5% to probably the lowest that we have – well, the lowest inflation geographies like Italy, where we have a 1% in the middle, you can find the different geographies that goes from 3% in Germany or – and that range is in between 1% and 5%.

I just want to add the second point because you mentioned price increase. We are talking about average premium price increase we injected. I want to mention one example. We said in the last quarter, we would have done high single-digit price increase, for example, in Germany. We have done that. You know that most of the renewals are some – a large chunk of the renewal are in January, and we have done that that is – then has gone pretty well. We had very good retention of risk. So we should expect over the year to see all of that effect coming into the motor portfolio.

Fabio Cleva

Thanks very much, Marco. So this concludes our Q&A for the first quarter. Thanks, everyone, for dialing in. Should you have any further question, please feel free to reach out to IR. Have a nice day.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone. Thank you.