ARZGF - Assicurazioni Generali S.p.A. (ARZGF) Q3 2023 Earnings Call Transcript
2023-11-17 15:04:09 ET
Assicurazioni Generali S.p.A. (ARZGF)
Q3 2023 Earnings Conference Call
November 17, 2023 6:00 AM ET
Company Participants
Fabio Cleva - Head of Investor & Rating Agency Relations
Marco Sesana - Group General Manager
Cristiano Borean - Group Chief Financial Officer
Conference Call Participants
David Barma - BofA Securities
Farooq Hanif - JPMorgan
Peter Eliot - Kepler Cheuvreux
Michael Huttner - Berenberg
Andrew Ritchie - Bernstein Autonomous
William Hawkins - KBW
Gian Luca Ferrari - Mediobanca
Ashik Musaddi - Morgan Stanley
Presentation
Operator
Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Generali Group 9 Month 2023 Results Conference Call. [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
Thank you, operator. Hello, everyone, and welcome to our 9 months 2023 results conference call. Here with us, we have our Group General Manager, Marco Sesana; and our Group CFO, Cristiano Borean. Before opening the Q&A session, Marco and Cristiano would like to share some opening remarks.
Marco, over to you.
Marco Sesana
Thank you, Fabio. Hi to everyone. Welcome on the call, and let me start by saying that our third quarter financial results confirm the group operational delivery and the ongoing implementation of the action aimed at addressing the macro environment, which, as you all know, has become more uncertain after the recent geopolitical development.
I will start with the client as usual. And we are very pleased that customers value positively the action that we put in place to enhance our value proposition.
In the third quarter '23, we further consolidated the number one position in our peer group in terms of Net Promoter Score. In addition, retention is confirmed at 89% and more than 50% of our customers are relying on Generali to cover at least 2 or more of their needs.
Let me also touch an important point here. As most of you have seen in the news, this is a difficult time for some of the communities in some of the country in which we operate and due to recent weather events. We are very close to this community. We have defined several initiatives, and we are present on the ground to support people. And I would like to thank all of our colleagues and agents who are working hard to guarantee full support to our clients.
Let's now see briefly our business, and we start with Life. So in terms of volume, the third quarter saw a continuation of the industry trend observed year-to-date. Protection reached €3.6 billion of net flow, while unit-linked achieved around €4 billion.
Protection continued to generate around 40% of our new business value. Concerning lapse, we observed an improvement in lapses in Italy, especially in the bancassurance channel. You know that in this year, this is the channel who suffered more.
And we have seen a gradual normalization of the outflow in France. The net outflow numbers were impacted also by the cancellation of the quasi-money market product in Germany and by some plan expiry and low-margin bancassurance product in China. These specific outflows have had an immaterial impact on the CSM as Cristiano will explain to you in a moment. The surrenders in our life portfolio during the third Q were €1.6 billion lower than the second Q, which led to halving of the net outflow in the third Q versus those recorded in the second Q.
Our business unit have adapted to meet the changing customer appetite and preserve market competitiveness. In particular, we are continuing to update our existing products and launching new products more attractive in the current market context.
Let me also say that we maintain a strong focus on the new business underwriting discipline on Protection & Health business and on capital-light products, enhancing -- enhanced by protection riders.
Our strategy will continue to be oriented to bundle solution addressing multiple customer needs within a single product in line with our lifetime partners ambition. This tailor-made solution are better seated to respond to client needs and are also less exposed to competition from government bonds.
Let's look now to P&C. So P&C business growth has confirmed the trends seen year-to-date. So the third quarter '23 gross written premium were up 11.9%. At half year '23 presentation, we disclosed an increase in the average premium in our retail and SME book of 6.4%. At 9 months, the average premium was up 6.9% compared to 9 months '22. With broad-based improvement across the portfolio and an acceleration in motor where the average annual premium increase has improved from 3.2% at half year to 3.9% at 9 months.
These figures are reflecting both a generalized upturn in personal line and will continue in the coming quarters, and I would say, even years as we have entered in an environment where adaptive pricing is part of our ongoing strategy. Therefore, we will continue to increase tariffs in line with our granular view of claims inflation and frequency.
We are also continuing to implement the technical measure necessary to pursue profitable growth, especially in terms of portfolio enhancing and claims management. Clearly, the third quarter recorded significant weather events, in particular the hailstorm in Italy in July and August.
The unusually nat cat burden reported in the quarter mainly derived from the so-called secondary perils and of course, from organic and inorganic growth of portfolio. Nevertheless, our undiscounted current year loss ratio, excluding nat cat, remains strong and improving at 67.2% with the 70 bps improvement versus 9 month '22.
Moving to investment. So our investment yield remained very good versus in-force book and market at 4.3% in life and 4% in P&C. We increased cash buffer and reduced bond duration. On listed equity, we remain -- we maintain a prudent approach, and we tactically reduce exposure by our vesting gains after the positive performance year-to-date.
A sizable portion of the residual exposure is hedged via derivative options. In credit, we confirm our selective approach with low exposure to more cyclical sector, highly leveraged -- and highly leveraged companies.
On private asset, we have been more selective in terms of new commitment, balancing attractive opportunity, especially in private debt valuation with ILM constrained. Finally, let me underline that our exposure to Israel and the Middle East, both in terms of business and investment is immaterial.
In conclusion, this result of the third quarter '23 confirm the group continued ability to deliver solid growth and execute on our strategic plan, in line with our lifetime partner purpose. As we move into the last quarter of the year, we are confident about the right direction on which we are steering the group. So thank you for your attention.
And now I hand it over to Cristiano.
Cristiano Borean
Thank you, Marco, and hello, everyone. Let me provide you some color on our 9 months 2023 financial performance to complement the perspective on the underlying business trends and in addition to what we published on our website this morning.
Let me say, first of all, that the numbers show a very strong and resilient performance. Our top line continues to grow in our key areas of focus, namely non-motor P&C. The non-motor gross written premium growth continued to expand posting a 10.1% year-on-year growth, helping further the rebalancing of our P&C business mix.
Excluding the contribution from Europ Assistance's strong growth, non-motor GWPs have risen by 8%. Our motor P&C top line is also showing clear signs of improvement as the ongoing tariff strengthening continues to progressively filter through the income statement.
P&C has recorded a significant increase in operating result from €1.43 billion a year ago to €2.15 billion at 9 months 2013 -- '23. This increase stems from 3 main drivers: the €350 million increase in the undiscounted operating insurance service result; the €416 million increase from discounting; the €45 million reduction in the P&C operating investment results. These results embed the significant €875 million undiscounted nat cat experience, of which €687 million only in the third quarter. As a reference, last year, we had €559 million nat cat at the 9 months.
Looking at the 9 months 2023 compared to the same period of last year, the current year undiscounted loss ratio, excluding nat cat, shows a 0.7 percentage point improvement despite a higher impact from manmade losses, in particular, in the second quarter.
Focusing on the discounting, let me share with you that thanks to higher volumes and interest rates and also reflecting the nat cat experience, we now expect -- the current year discount benefit to exceed the high end of the €750 million, €800 million guidance for the full year. The prior year release for the quarter is broadly in line with the previous quarters at 2.8 percentage points.
Moving to life. The operating result is broadly stable year-on-year if we exclude the €60 million one-off we recorded at half year 2023, with an improvement compared to the previous quarter. Life net inflows were minus €1.2 billion with a visible improvement compared to the previous quarter, also thanks to lower surrenders, which are showing a reassuring trend of gradual normalization.
It is also important to emphasize that a portion of the outflows recorded during the third quarter is associated to low-margin products such as pseudo-banking products in Germany with a marginal amount of embedded CSM.
The third quarter 2023 new business volumes expressed in PVNBP terms grew by 7.8% compared to the same period of last year, reversing the trend observed in the previous 2 quarters. Thanks to this strong performance, at 9 months 2023, the life new business was minus 8.6% year-on-year with a significant improvement compared to the minus 14% at half year 2023.
The year-on-year change reflects primarily the impact of higher interest rates on the discounting of future premiums, the volumes in terms of annual premium equivalent, which is not affected by the discounting impact, are stable compared to last year.
The normalized CSM growth was around 3.8% on a 9-month basis thanks to the contribution of a strong and predictable expected return with the new business CSM broadly offsetting the CSM release. In the fourth quarter, we expect a stronger new business CSM, not affected by the third quarter seasonality. Therefore, the year-end 2023 normalized CSM growth will likely exceed the 4% guidance we gave you.
I would like also to provide you an overview of the main moving parts from the €5.1 billion operating result to the €2.979 billion adjusted net result. Let's start with the non-operating investment result, which was €240 million at the 9 months 2023.
Let me highlight that the ongoing portfolio turnover that we are performing within our asset allocation strategy is on the one hand reinvesting the proceeds in liquid fixed income assets and higher yields while on the other hand, it is also resulting in some realization of capital losses with an impact on the non-operating investment result at year-end.
Given the trends witnessed during 2023 in real estate market, I would also anticipate some potential impairment in the ballpark of mid-double digit on the real estate at cost in this P&C segment. This may impact the non-operating investment result in the fourth quarter within the context of the year-end appraisal process.
Non-operating holding expenses were €453 million and were broadly flat compared to last year. Net other non-operating expenses were minus €397 million, and they included €94 million of restructuring costs.
As you know, we traditionally book the majority of our restructuring costs in the fourth quarter, and I would expect an amount slightly higher than the around €200 million we recorded at final year 2023 -- '22 for year-end 2023.
Within the net other non-operating expenses, we had negative €77 million impact stemming from IAS 29 hyperinflation accounting. The tax rate for the 9 months was around 29.5% with €1.382 billion taxes paid. All these moving parts led to a reported net result of €2.8 billion.
The adjusted net result of €2.979 billion stems from the €158 million adjustment, mainly from P&L on assets at fair value for profit and loss and hyperinflation accounting. We confirm our solid capital position with the solvency ratio at 224%.
The year-to-date increase reflects around 17 percentage points from the robust normalized capital generation thanks to the growth of both the Life and Non-Life segments and 1 percentage point of economic variances. These effects were partially offset by minus 2 points resulting from the lower eligibility of part of Cattolica subordinated debt minus 3 points from the combination of capital movements and M&A and minus 9 percentage points of noneconomic variances.
At the end of October, the solvency ratio is estimated at 222%, reflecting primarily the economic variances on spreads and equities. Thank you for your attention.
Operator, we are now ready to take questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from David Barma with Bank of America.
David Barma
I have 2 on P&C and 1 on Life, please. So the first one on P&C. So on a look on a quarterly basis, the underlying loss ratio adjusted for discounting for PYD, for nat cat and man-made deteriorated by about 90 bps versus the first half and remains quite elevated. So can you explain what's happening there and when you think you'll be able to reach your previous guidance of 95% for the combined ratio?
And then the second question is on the discounting benefits. So you're saying it's going to be above the previous guidance you gave at the half year. Can you be a bit more precise on what sort of level we should expect for the year and next year, please? And in parallel to that, you previously said the finance expenses should increase by about €200 million next year. Is that still the case? Or should it be a bit higher?
And my last question on Life. So Cristiano, you've been mentioning during the quarter that we could see some revisions of lapse assumptions. It doesn't seem like the experience was that bad in the third quarter. But did you end up changing anything during the quarter? And if so, what were the operating variances in your CSM moving forward in Q3?
Fabio Cleva
Thank you, David. The questions are all for Cristiano.
Cristiano Borean
Okay. Let's -- thank you, David. Let's look at the third quarter in isolation, and let's compare it also in a progressive way in order to understand the underlying dynamic. So first of all, let's compare the third quarter '23 versus the third quarter '22, which was the point of the highest impact in 2022 of the cost of claims. And let's see how this evolves.
If I take the current year loss ratio and I don't include the natural catastrophe, the current year loss ratio undiscounted improves by 1.8 percentage points to 67.6%, looking only at the third quarter in isolation, okay? And this is a first picture.
Second picture, let's look at how this is evolving compared to the second quarter '23 in the third quarter '23 in isolation. Again, if I take the combined -- the current year loss ratio undiscounted, excluding natural catastrophes, I see from the previous quarter, an improvement of 0.6 percentage point, which is another sign of progressive dynamics.
So all in all, clearly, when I look at the 9 months '22 to nine months '23, we already commented a 0.7 percentage points. And you know that we had higher man-made losses. What I'm trying to tell you is that we are making dynamic pictures on an evolving animal, which is the profit we would like to extract in seeing whether the 12 to 18 months time span we explained you is technically entering into the numbers of the account.
And if you see this, we are having a confirmed guidance onto that because we do see this improvement. Then clearly, if you tell me, are you going to stop your dynamic? No, we are ruthless and we will be ruthless because all our actions are targeted to get towards the guidance that you are mentioning. Clearly, this is a guidance which has need the time to add the full amount of increase of tariff, a dynamic approach entering. This is for the first point.
Then related to the discounting, okay, the number of the discounting guidance we would like to give you due to the fact that there are very, very simple underlying dynamics behind it. There is a high stock both of revenues and of claims because we have more claims due also, especially to the natural catastrophes, so it means a higher discounting than expected. And as well, we have a higher amount of interest rate dynamic compared to the point we were observing.
So the guidance for the final year 2023 has been shifted towards €850 million to €900 million. So with regards the insurance finance expenses, we confirm the €200 million, if not only slightly lifting them up due to the underlying dynamics.
Then looking at the CSM movement and the lapses, this clear question. I would like to tell you that broadly in the quarter, we do have some experience variance, which is absolutely marginally decreasing on the order of the double-digit million euros because of low amount of difference compared to expected because of the low value of what was exiting taking the case of the German business, which is basically broadly 0, having 0.01% new business margin.
And we are also having small adjustment to the experience and then also hypothesis, which is bringing together with the economic variances, a net effect of minus €200 million.
David Barma
Just if I can follow up on your first question. When do you expect you'll be able to get to the €95 million on discounting? Is that a half year '24 ambition?
Cristiano Borean
So clearly, the high amount of natural catastrophe experience and the continuous experience we are having, I think you read we commented already that we can deep dive. We have high double-digit impact already after the 9 months because there were other events is having an effect.
I stress again, in order to give a final guidance also on that, we would like to give you some more details in January at the end during the Investor Day, simply because there are a couple of moving parts. Number one, there is the effect of the final reinsurance and the structure of reinsurance and the impact on reinsurance and the capability to have interest of reinsurer in taking the coverage.
Second, there is a changing low environment under discussion in Italy, which is imposing mandatory coverage to small, medium enterprises, which could have, in any case, something to be evaluated. So we need to understand the final stuff.
And then also, we will have the integration of the newly acquired entity. So we would like to give you a better guidance when this scenario is more clear. I just reconfirm that all the pricing actions, and then eventually, Marco, please integrate if you want an hour later, we are heading roughly in order to get to the 95% trajectory because all the pricing actions are continuously adapted to that.
Operator
The next question is from Farooq Hanif with JPMorgan.
Farooq Hanif
Just following on for some of your comments. So firstly, what are you thinking about in terms of nat cat. So I know you're going to wait and see what's happening with kind of reinsurance capacity and pricing. But I think that you've already seen a move in the market. And I think early indications are that probably not much has changed. So what do you see as your kind of longer-term outlook for nat cat at least qualitatively?
And then secondly, given all these moving parts you've had in discounting effect, how will that affect the dynamic now between finance expenses and investment income. I mean from the models and the numbers that you gave, it sounds like there's going to be a bit of a squeeze on that before it stabilizes, given the unwind effect on finance expenses, but is this made worse by the higher discounting effect that you've had in Q3?
And then I guess my last question is can you talk about the holding results. So it sounds like -- I mean, it's in line with last year, but you talk about intergroup dividends from France and some other factors. I just wanted to understand how one-off in nature these may or may not be.
Fabio Cleva
Thank you very much, Farooq. The first question clearly is for Marco on the nat cat. And then the second and the third question are for Cristiano.
Marco Sesana
Hi, Farooq. So let me start by saying that, clearly, as Cristiano has said during -- so after the 9 months, we saw an additional event that we quantifiers in high double digit. And so we see what's next. So it's difficult to see -- to imagine what is coming in between now and the end of the year.
What -- I think what you're pointing out in terms of long-term outlook is what do we expect in terms of trend and what we have seen in terms of trend and what we expect for 2024 and '25. So I would say that we have seen an increase of what we call secondary perils. That means that these type of events are becoming more frequent.
And so this is something that we need to consider into our pricing action for the next year. We cannot think about -- we cannot rely on the reinsurance market. It's becoming more tough on this kind of coverages on the secondary period.
So I would say we will make sure that we adapt prices on P&C in the next months, also including this type of effect. And I would say this is adding on the inflation part that it's -- from now on, I think it's going to be an ongoing exercise that we do. So we are now in an environment with inflation, so we need to every year adapt tariff to this environment.
Cristiano Borean
Yes, Farooq. So regarding the higher discounting in the third quarter, so for sure, a higher amount of discounting should be reflected in a higher amount of finance expenses is natural translation is the other side of the Libra, let's say, with a different timing. But in the investing income dynamic, what you are observing has an important combination of effect, which you should take into account.
I would say that more than 70%, 70% around is broadly linked to, let's say, fixed income and interest rate purely related income part, which is following and thanks to our investment strategy even going above the change of rates, which are risk-free, while we are taking also in the mix, asset allocation, other asset class, not only government with the credit spread above that.
On top of that, we have asset allocation towards long-term value accretion strategies like equity listed or unlisted versus also other kind of form of private asset. Clearly, these are over the cycle increasing and giving the risk premium above the purely movement on the rates. So we are expecting, and this is the reason of the value accretion of the strategic asset allocation what we are taking over the cycles to get exactly overcoming these dynamics.
It is in this context, you should say, please don't forget that, for example, in the first 9 months, we are experiencing, for example, lower dividend stemming from our private equity investment, for example, which I explained partially the reduction towards a normal linear purely fixed income, which is, in any case, something which has a longer term, higher value because of this delay in the realization.
On the third question related to holding another result, the intergroup dividends are not of a one-off nature because are related to the allocation of the shareholding of some of our internal part, especially in this case, it is related to Generali France also holding part of our asset management business.
So it is recurring effect in nature. And there are a couple of positive environment of bringing further positive results. One is related to our pension management business company in Chile, Planvital, and another one of our activity of banking-related support in Germany through [indiscernible] which is benefiting from this higher environment.
Farooq Hanif
If I may, just quickly, it sounds like your answer on nat cat is we're probably not going to increase our budget because we're going to try and price it. Is that a good way of summarizing what you just said?
Marco Sesana
Well, yes. So we are trying to -- well, what we will do, we will clearly increase price also for the share of nat cat that we see as it's difficult to call it a stable trend, but I would say for the part of the trend that we see that it's going to happen, yes, we will price and we will increase prices to adjust for that, yes.
Operator
The next question is from Peter Eliot with Kepler Cheuvreux.
Peter Eliot
First question, I was just wondering if you can tell us what impact you expect from the Life guarantee fund that's being introduced in Italy from next year. Second question, sorry to come back on the discounting. You mentioned Cristiano about the nat cat claims.
I mean I'm guessing that some of those claims might be paid quite quickly. And I'm thinking maybe they could end up being paid quicker than the assumption that's being made in the reserving and therefore, the discounting. Could you just remind us how it would work if they do end up sort of get paid back quicker, what we see -- how it would sort of clawback of that discounting work would be helpful.
And then the third one -- sorry, apologies, I hope I didn't miss this in your introduction. But are you able to give us any more detail on the life earnings split. So the -- I mean, the investment result would be very helpful being a relatively large number, but anything you can give us on that extra, that would be very helpful.
Fabio Cleva
Thank you very much, Peter. All the 3 questions are for Cristiano.
Cristiano Borean
Thank you, Peter. I will kindly ask you to repeat the third one, which -- I'm sorry, I didn't get. If you please.
Fabio Cleva
I think it was, Peter, on the split of the Life operating result by the...
Peter Eliot
Yes, exactly. And anything else you can give us that wasn't in the press release, results, obviously would be very helpful.
Cristiano Borean
Okay. Yes, absolutely. So Life guarantee fund expectation, it is related to a law under discussion in Italy. So if we just make the mathematical what-if hypothesis of the law being approved as it is, this would entail a €40 million net impact for the next 10 years related to the actual state of the law.
The second question, natural catastrophe, the speed in payment versus the assumption, I really like your question because I think from the information we give, you can understand easily that the discounted and non-discounted effect on it shows that these are very short paying claims, which are embedded in the calculation.
So if we pay them before, we will have less unwinding going forward because we clearly have lower reserves staying there. On the contrary, if we pay them too early, clearly, they have also an impact on the cash view versus the P&L view, which clearly has a different pattern acceleration. These are the 2 components related to that.
On the life, the split of the life earnings is basically you have €2.16 billion in operating insurance service result and €630 million in operating investment result. So the operating insurance service result is decreasing €37 million on a 9-month basis, and the operating investment result is increased by €5 million by -- on a 9-month basis.
I recall you that half year, we were already commenting the impact we had on the reinsurance accepted business in our general employee benefits. So this is, net of this one-off, if I look at the quarter-over-quarter, I already commented in the introductory speech but we were growing. And this is why we have this healthy direction, which should be reflected also in the fourth quarter.
Operator
The next question is from Michael Huttner with Berenberg.
Michael Huttner
Fantastic. And well done for delivering in clearly difficult environment. And I have 3 questions. One is on aggregate reinsurance, the second is on net inflows. And the third is maybe that the comment in the press release, which I saw, which I didn't understand, it's towards the tail end, Page 8, near the bottom, the Board of Directors approved the policy, et cetera, et cetera.
So on the aggregate, could you give us a feel for what the current aggregate is? And of course, I'm assuming it is attaching now and how that could be renewed next year? This is the aggregate reinsurance.
The second is on net inflows. I just wondered if you could actually give us the figures because your commentary is very good, but I get confused so easily. I'd be really interested in just having the quarter net inflows in Q1, Q2, Q3 for Italy and maybe a feel for October and how you see the rest. I assume you have a line of sight now to breaking even. And then, of course, this comment on the Board strategy, I'm not quite clear.
Fabio Cleva
Thank you very much, Michael. So the first question on the cat aggregate is for Marco. The quarterly development of net inflows with a focus on Italy and by line of business is for Cristiano. While the third question regarding the part in the outlook section of the press release, it is also for Cristiano. And Marco, of course, if you want to comment, feel free to do that.
Marco Sesana
So in terms of cat aggregate, just to remind, we have a cat aggregate with attachment point to €800 million. Just as a reminder, cat aggregate is limited to property engineering and motor own damage, so just to clarify.
So in terms of renewals, so we are -- so clearly, it's always a discussion, and we are going to enter into the renewal phase very soon. So we're going to see how that is going to be rediscussed. I think that it's -- given what we see in the market, it's not going to be soft for this type of coverages and so we are going to see what's the cost benefit analysis on this type of coverage.
Also keeping in mind that our portfolio is growing in term of organic growth and inorganic growth. So we are fine with the coverage we have, but clearly, it depends a lot on the cost benefit analysis we will do during the renewal phase.
Cristiano Borean
Okay. Michael. Good morning first. So Italy and France, especially dynamic, I think you were asking. On the third quarter stand-alone view, if I compare the previous quarter with this quarter, so second quarter, third quarter, we have a positive €500 million effect of, let's say, lower net outflows in the savings and pension.
The same amount in the saving, basically in France, €500 million lower amount of outflow. Commenting the October number, I would say, focusing on the savings, we should take into account that there are 2 different dynamics.
Whenever there is in a month, an issuance from the Italian government, we do experience in this channel still some outflow from the point of view of reallocating towards this because it is a preference to the high net worth, those kind of underwriting. While in France, we are observing another reduction in the exit, which means that the trend is in the savings and pension business getting further stabilizing.
Going on the third question on the explanation of the Board policy approval, this is related to the dynamic approach of the group, which is willing to always improve according to ESG strategy, the G component, which means the interaction with shareholders. And by shareholders, we mean all the shareholders, and this is framing a higher frequency of moment of contact with all the shareholders.
Clearly, if we want to enter to better detail, I suggest to allocate better time and ask our ESG Investor Relations Officer, which are more than happy to go in the nitty-gritty of what are the actual chain by chain. But the policy and the trend is making Generali more and more open, transparent and frequently interacting with everybody.
Michael Huttner
Just on the net inflows. I'm really sorry, I'm sort of stupid. You mentioned this figure of €500 million, and I don't know whether it means a lesser decline or positive. So on France, if I look at the half year, you had minus €916 million at the half year. So if I take your comment on the €500 million, that would mean that France is now minus €400 million, so there's a €500 million net inflow, whereas in Italy, the trend is continuing negative and there's not much change here. Is that how I can interpret this?
Cristiano Borean
Yes, to interpret the number, let's make it simple and make the number examples. So if -- we are only commenting the saving and pension business line. So we are not commenting the others, and we look at that. In the second quarter, for example, Italy had a minus €1.5 billion outflow.
And now in the third quarter, has minus €1 billion outflow. In the France in the third -- in the second quarter, had €1.35 billion outflow and now has minus €800 million outflow, which shows the €500 million improvement on both -- of both the business. I hope you get. This is coherent, Michael, to what we said, that we are seeing a reassuring trend of normalization, okay?
Michael Huttner
Absolutely. And then I'm going to be really cheeky. Does the data in October show any more normalization? Could you comment on that? And what I would -- the answer I would love to hear is to hear you say and on the 16th of January, whenever, we will be positive.
Marco Sesana
Yes. Let me take this one, Michael. So I would say, as Cristiano said, in October, we had an issue of BTP. So I would say -- we would say that this -- the trend is continuing. But I would not expect every single week to be better than the week before.
So I would say we have a normalization trend. It can go up and down. We are seeing better development of our product, of our retention and our work on the client is working much, much better. And so that's what we expect. So -- but I would not make it week-by-week differences because that's not what a trend means.
Operator
The next question is from Andrew Ritchie with Autonomous.
Andrew Ritchie
Sorry, the first question was actually just to clarify. You didn't answer are you actually in the aggregates and making recoveries now? Does that insulate you from 4Q catastrophe losses net? That's the first question.
Second question, I noticed Italian motor pricing momentum has improved a lot in the second half, if I look at industry data or even some of the price comparison sites. And I'm curious, is that momentum increasing because more broadly, carriers are seeing a change in frequency and severity?
Italy has been very benign in the last -- compared to other countries. Has that maybe changed a bit? So some comment on the claims severity frequency trends in Italy.
Third question, you mentioned the new mandatory insurance cover, which I believe -- or maybe you could just clarify, I think that's in the budget law for Italy, and it's going to be mandatory natural catastrophe cover for SMEs. I'm curious, is that an opportunity? Is it possible for you to write that and not end up taking on even more nat cat risk?
And then just final question. It sounds like you're still seeing some vulnerability in Italy when we get BTP Valore issuance which may happen again. Marco, you mentioned further product innovation, and you mentioned particularly to combat the attraction of higher bond yields.
What are the additional innovations? Is this more of you started some of that earlier in the year? Or is there like a meaningful additional wave of further innovations on the life side, focusing particularly on Italy?
Fabio Cleva
Thanks, Andrew. Marco, I would say that all the questions here are for you.
Marco Sesana
Okay. So let me go one by one. Let's start from the aggregate question, yes, we are now in the aggregate. But let me just remind you that clearly aggregate cover specific lines, so not every single event that might happen. And also we will see that also the prevent protection work in addition to the aggregate recovery.
So I would say we are in the aggregate now and we will see by the end of the year, how this has worked also including the prevent and also looking at which type of event will happen between now and the end of the year. So this is in short where we stand on the category.
So pricing for Italy. So I agree, sir. So that's what you mentioned. It's actually what we see. So it's still frequency overall in Italy still under the level of 2019. So that's an important reference point that we use. We have seen and we are continuing to see a good development of our motor price increase.
And so the actions are taking place, and we do see that coming in into our portfolio. So these are going from injected increased rate to average premium to earned premium. So we are seeing that development coming in.
If I -- one other topic that clearly we need to comment is that, clearly, in Italy, MOD has been affected by the nat cat. So what I'm telling you is trend net of the nat cat that actually happened and impacted the MOD guarantee.
So overall, we are seeing at the moment, the development of our average price even more than in line with what we call the risk premium that is a combination of claims inflation and frequency. So that's overall what we see in Italy.
On your third question, so mandatory insurance cover. So I have to say it's still in discussion. So how this will be executed, so I would say that there are still discussions that are going on.
And so it's difficult at the moment to give you a very specific game plan for 2024 in terms of what we -- what is our commercial strategy and what is going to be our pricing strategy together with this and also what is going to be our reinsurance strategy together with all of this. So we are defining this game plan.
What I can tell you is that given that this is going to be apparently a mandatory insurance covering, so we are -- we will need to give a price to every single customer but also taking into account what we see in development of nat cat and in particular on secondary event. This pricing will include these expected loss and these exposure. And so this is what we are going to price in.
Fourth question, vulnerability to BTP. So -- and what is the additional product innovation? So we do have seen impact on just a few days before the BTP issuance. But what I care to say is that we are looking at the overall trend. And as you put innovation, product innovation into the market, you need some time to let this innovation work. So what we are doing, we are trying to make sure that our return on our policies is in line or better than the return of the market.
So you see that our product will have a feature like the one that I described I think in the last call, if I remember well, which is having 2 segregated funds in parallel in one product to make sure one is higher and more dynamic and the other one is stable and giving the base return. And so all of these type of action, retention and new business action, I would say we are seeing them picking up and getting traction on our clients.
Operator
The next question is from William Hawkins with KBW.
William Hawkins
I do want to come back to the cats, please. On your Q3 losses, can you just be a bit more precise about what is specific to the hail and closely related weather events in Northern Italy and the German area, gross and net?
And then adjunct to that, you have already touched on it, but I just want to get another feel for the impact of the renewal season going into next year. I normally assume that for a company as big and good as you that these things are kind of lost in the rounding ultimately.
So clearly, as you said, it's not going to be a softer market. Do you worry that this is going to be a harder market for you guys in a way that I'm actually going to see in my model or is the good news that it's kind of the lost in the rounding. I mean, again, the subtext there is I'm wondering, you've always argued in the past that Italy is a diversifying positive for reinsurers. I wonder if in a world of more focus in secondary perils, maybe that dynamic has flipped.
Secondly, I'm sorry, you may already have said this, what precisely was the impact of experience and assumption variances on the CSM rolled forward in the third quarter? It was €75 million in the first half. I thought I heard you say €200 million, but I might have misunderstood what you were talking about.
And then related, can I assume that zeroes in the future? Or is there still more assumption true-ups you may need to do at the end of the year?
And then lastly, seeing it hasn't come up, capital management plans, I know this isn't a focus today, but I think you've been clear about the unspent M&A budget and resource issues that may affect your thought process about what you're going to do with that. So can you just update us on the unspent M&A budget, please?
Fabio Cleva
Thank you very much, William. I would say, let's start with question #3 and 4 for Cristiano, while question #1 and 2 are for Marco.
Cristiano Borean
Yes, William. Let's discuss what I said before was that if I was looking on the only quarterly move from half year '23 to 9 months '23 of the CSM, the joint effect of market and the operating variance is minus €200 million. We did have a slightly high double-digit negative variances of experienced part, which is decreasing compared to the pattern observed in the first 2 quarters which is coherent with the changes in assumptions we made.
So are we going to make further changes in assumption in the last quarter? This is potentially in the ballpark. But clearly, this is also depending on the dynamic I was commenting before also with Michael -- answering to Michael because clearly, we are observing a decreasing trend in the lapse rate of the saving business, which is the one practically moving the operational assumption hypothesis. So this is the effect.
On the fourth question, I do confirm that if by the end of 2024 we will not consume the €0.5 billion budget, which is expected to be there in case of absence of any further M&A or redeployment. We will, for sure, give back the money, as already said, to the shareholders. I hand over to Marco.
Marco Sesana
Yes. So William, I'm sorry, I will ask you to repeat the second question that I -- the line was not clear. So could you just give me the question?
William Hawkins
On the nat cat point, I just wanted a bit more clarity on precisely the hail and weather events because presumably there was other stuff going on in the third quarter as well, I wanted to get a hint on the gross to net loss.
And then I also just wanted to get a feel for how material this issue is to your reinsurance renewals. I appreciate it's a difficult conversation. But I'm just wondering in my world, is it something that will end up being visible or hopefully kind of even netted out in the rounding.
Marco Sesana
Okay. So when we talk about the event in Italy that happened in July and August, we are talking about around €485 million gross. So that is more or less the type of order of market that we have seen. And clearly, you're right, so that some of these similar event, you're going to see also in fourth quarter. And so it's very similar. So not the amount, but I would say the type of event.
So on the renewal season for the reinsurance, I wouldn't say that we are worried for the end market. We do think that we have specific feature that are typically well received by reinsurance. So I still think that the type of diversification we bring to the market is valuable, the type of, I would say, healthy portfolio that we bring into the market is valuable.
And so it's just a matter of to understand exactly how hard is going to be the market. And also, as I said before, we will need to understand exactly this in light of the growth of the portfolio that we have because clearly, we have a portfolio that keep on growing for organic reason and for inorganic moves. And so that also has an impact of the type of reinsurance that we are going to buy in the market.
Operator
The next question is from Gian Luca Ferrari with Mediobanca.
Gian Luca Ferrari
Two left for me, please. The first one is on claims inflation. If you can comment on the average cost of claims we're experiencing in Europe, not only in Italy.
And the second one, if I got it right, Marco mentioned during the speech, a reduced bond duration. It's not very clear to me considering the expectations for lower rates into next year, why you have decided to do so, if I got it right.
And eventually, if you had some changes in the mix between floaters and fixed rate, or how you are preparing for a potential lower interest rate scenario in 2024?
Fabio Cleva
Thank you, Gian Luca. I would say that both questions are for Marco.
Marco Sesana
Yes. So let's start from the cost of claims in Europe. So let me say that -- so before actually mentioning the different country, I want to say that we need to remember that the claims inflation that we see is typically lagging what you see in the CPI, like general inflation, let's call it like this.
So we do see in some countries still an increasing claims. But I would say nothing different than what we have seen so far. In terms of trend, it is really what we have seen even in the half year. So the trend is continuing.
I would say, overall, is same situation that we highlighted a few months ago. So we have countries with still high inflation like Germany, where I think next renewal season that is in January, we are going to still increase prices at high double digits. So that's what we expect or there are countries like, for example, Italy with the low claims inflation.
Clearly, all of this is there because we, overall, now without going into the specific country, we do see frequency still not picking up at the 2019 level. So overall, our risk premium is increasing, is increasing broadly in line with our increase of average price. So we do see that this is still the environment.
And as I said, we need to prepare ourselves for months and probably still years where we increase prices every year, every renewal because that's the inflationary environment that we see. So that's what we are preparing to do. That's what we are doing still on the next year.
And so that's a different mindset compared to what we had, for example, last year, where we had to catch up on the inflation spike. Now we are more into run rate increasing inflation.
I mentioned the reduction of bond duration just because it is -- this was the right thing to do for our ALM, it's not in terms of view on the market. It's just because with some lapses, our duration decrease, and so we had to adjust the duration.
In terms of your last question in terms of preparing for lower interest rate scenario next year, I think we need to have in mind that what we care is to match our asset and liability. So that's the thing that we always try to do.
So we don't take bet on how the interest rates are going up or going down, but we care to be matched going forward with our asset and liability. That's what we need to do. That's what's protecting ourselves and our policyholders. So that's what we will continue to do.
Operator
The last question is from Ashik Musaddi with Morgan Stanley.
Ashik Musaddi
Just a couple of questions I have is sorry to go back on the cat aggregate. I mean you mentioned that €100 million is where the attachment starts. Can you give us some color as to how long is the attachment for cat aggregates.
And you mentioned that it's for property, engineering, home and damage. Can you be a bit more specific as to -- or any other detail on that because I would have thought that it would be for your regular nat cat, but it looks like it's very specific cat aggregate that you have. So that's the first question.
And secondly, Cristiano, I guess, you mentioned that there would be some real estate related impairment in P&C of about mid-double digit, if I'm not wrong. Is there any such thing going on in the Life business as well? And what is driving that? Any color on that would be very helpful as well.
Fabio Cleva
So clearly, Marco, the first question is for you, while the second one is for Cristiano.
Marco Sesana
Yes. So just to make sure we have the clear view on the cat aggregate. So I said that it works. So the attachment point is €800 million. So again, it's not working for any type of damage, but it's limited to property, engineering and motor own damage in the motor coverages. So these are the line where it's working.
So any type of, for example, so let's make an example. In marine, cat aggregate will not cover any damage, for example, on the marine line. So you see -- and you should expect that we -- before going and giving any forecast on how the cat aggregate will work to see exactly which type of damages are going to happen in the next few months and then see how that will work.
Another point that I can give you is that our cat aggregate works on franchise and not on deductible as most of the other cat aggregate that are on the market. So that is also a qualifying point of our cat aggregate.
How long is the coverage? I mean, probably you mean -- it was for €300 million. So that's the type of capacity that we have in our cat aggregate. So it's attached at €800 million, and it works for €300 million.
Cristiano Borean
Hello, Ashik, it's Cristiano, I go for the second one. So let me recall 2 basic points. In P&C, when we did the transition onto IFRS 17 and 9, we kept the direct holding of real estate at cost coherently with the previous accounting since it was possible.
Clearly, all the other real estate -- both the real estate funds and the real estate allocated into the Life business, which is mainly VFA, are with a different dynamic fully at mark-to-market with the movement of fair value. So I was commenting the stock of potential impairments related to the book accounting pocket related there.
Clearly, any effect on the life part is not material because of the VFA nature, which is then reflected from the revenue recognition period of the length of the liabilities. As for sure, there are adjustments in the prices as has been already observed in the vast majority of the portfolio because we have already more than 2/3 of the portfolio fully reassessed in value. There is only 1/3 which is assessed on an annual basis. Okay.
Fabio Cleva
Thanks very much, Ashik. Unfortunately, we finished the time for Q&A for this call. And clearly, the IR team remains at your disposal for any follow-up questions you may have. Have a nice day.
Operator
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
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Assicurazioni Generali S.p.A. (ARZGF) Q3 2023 Earnings Call Transcript