Ladies and gentlemen, welcome to the Allianz conference call on the financial results of the first quarter 2020. For your information, this conference is being streamed live on allianz.com and YouTube. A recording will be made available shortly after the call. At this time, I would like to turn the call over to your host today, Mr. Oliver Schmidt, Head of Investor Relations. Please go ahead, sir.
Thank you, Emma. Yeah, good afternoon from my side as well, and welcome to our conference call. I don't have to tell you that capital markets had a significant impact on our results in the first quarter. We thought that you may be interested in a more detailed discussion about our asset allocation and investment strategy. Therefore, we have invited our Chief Investment Officer, Günther Helling, to join us today. He will support Giulio and me during the Q&A session. Before we come to that, Giulio will talk you through the key numbers of the quarter.
Hi, good afternoon and good morning to everybody. I hope you are all safe and well, and not just you, but also your friend and family. Now I would like to go through quickly to the numbers, then, as usual, the most interesting part of the call is the Q&A section. If you move to page three, you can see that clearly it was a challenging quarter, but it's important to notice that the underlying performance was good. If you adjust our operating profit for the impact of COVID, which we quantify at EUR 0.7 billion for the quarter, you can see that the performance in Q1 was actually good. This applies both to the operating profit, and then also to the net income, if you also adjust accordingly the net income.
Even considering for the impact of COVID, I would say that the results of Allianz in the first quarter in a very challenging environment have been resilient. We now move to page five, here you can see the development of the IFRS equity and also the Solvency II capital. On the IFRS equity, clearly you see a reduction of about 6%, which is driven by the change in unrealized gains on our investments. This is clearly the consequence of what happened on the equity market and also on the credit spreads. I think for you, it's more interesting and relevant what is the development of the solvency ratio which has decreased by 23 percentage points from 212% at the beginning of the year to 190% as of end of March. I'm going to go into the reason for the drop in a second.
If you look at the sensitivity on the right-hand side, they are kind of unchanged, if you want, compared to the sensitivity that we had at the end of Q4. The one sensitivity which has reduced is the sensitivity to equity markets. At the end of Q4, the sensitivity was -15%, and now it's -12. Otherwise, the other sensitivities are more or less unchanged. If we move to page seven, we can speak about the evolution of the solvency ratio. As you can see, we have a couple of percentage point reduction in the solvency ratio because of the regulatory changes. Here we are speaking about the UFR. The organic generation, the operating earnings generation, was actually good at plus 5%.
If you remove the taxes and also the dividend, which we accrue on this profit, we have an increase of +2%, which is in line with our expectation. What you see is a big change due to the market movement, that's on a pre-tax basis, -28%. On an after-tax basis, it's 23%. Based on our sensitivity, that number would be more like -15%, and driven by equity and by interest rates. On the credit spread, based on the sensitivity, we would have expected something closer to zero. The point is we have a gap of about 8 percentage points, and this is coming most likely from cross effects.
We have always assumed these cross effects are relatively minor, and they are usually offset by the mitigating measure that we have put in place, but it looks like the cross effects are more significant than what we saw in the past. That's one thing. When you look at the other position, the other position looks like a plus two, so like a positive, but here we need to consider that we have the positive effect of the taxes on the loss in market values. In reality, if you remove that, we are losing about one to two percentage point of solvency due to other. This has to do with lower diversification benefit. In a crisis, you can see that the amount of market and credit risk is going up, and there is less diversification benefit with other risks.
I would say the explanation for the 190%, that I know there was an expectation it's going to be a little bit higher than that, is due to cross effects, which are more substantial than what we have assumed, and also for diversification benefit. This said, I would say 190% is a very good solvency level. Also perspective is think about this number from an absolute point of view in terms of excess capital. We have EUR 37 billion excess capital above the EUR 41 billion of SCR, so we feel that our solvency ratio and solvency situation is actually pretty strong, and we are very confident in these regards. With this, we can move to the segments at page nine. We start, as usual, with the property casualty segment. As you can see, we had, on the growth side, a growth rate of about two percentage points.
What is good is the growth rate is coming from price development and not so much from volume. That's usually a good thing, especially considering the future performance of the business. You can see a nice dynamic in the U.K. from a price development and growth point of view. In Spain as well, although you see a negative number from a growth point of view, the price change was very positive. Also AGCS had a double-digit price increase offset by lower volume, but that's definitely the picture we like to see in the case of AGCS. I would say you have a couple of companies like Italy or Euler Hermes, where you see a reduction in growth. This is where we see also the impact of the COVID, which in the case of Italy might be more temporary.
In the case of Euler Hermes, this might be for a prolonged time in 2020. Let's move now to page 11. The operating profit for the P&C segment has decreased by about EUR 400 million. This is clearly driven by the underwriting results or by the combined ratio, which has decreased or increased by 4 percentage points. As you can see, first of all, we had the impact due to COVID, which is EUR 400 million. This is coming from entertainment and from business interruption. Other effects have been offsetting each other. If you translate this EUR 400 million in a loss ratio impact, this is about 2.5 percentage points. As you see, we have also a higher amount of net cats compared to last year. That's also a swing of 2.5%.
If you adjust the loss ratio for the COVID impact and also for the higher amount of natural catastrophe, in reality, you can see that the loss ratio accident here has improved by one percentage point compared to last year. On top of that, you can see that the expense ratio is better by 50 basis points compared to 2019, the first quarter. The expense ratio is also affected somehow by COVID, the improvement is even more than that. Overall, when you look at the underlying performance of our P&C business, in reality, Q1 has been very satisfactory and also is clearly indicating that in the absence of all the noise that we saw in Q1, we are tracking well to get to our targets for 2021. Coming to slide 13, where we can see the development for the single companies.
Maybe I draw your attention just to a few companies with a combined ratio over 100, which is the U.K., for example, or Australia or AGCS. In the case of the U.K. and Australia, this is driven by natural catastrophe. Once you adjust the numbers for natural catastrophe, you get to a picture which is consistent with what we would expect. In the case of AGCS, here we had the COVID impact. If you adjust for the COVID impact, the combined ratio of AGCS would have been 100%. Otherwise, we see good numbers in most of the other companies, especially, I think, pleasing is the result in Spain. If you remember last year, Spain was around 98. As you see now, we are back to a 94% combined ratio. As I was saying before, we have also nice price increases coming through.
We believe that Spain is back on track as we were expecting. Page 15, that's on the investment income on the P&C side. Overall, you see a decrease of the investment results by about EUR 70 million. This is in reality mostly driven by noise associated to FX effects. If you just look at the underlying investment income, the current income is stable compared to the prior period level. All in all, I would say in P&C, again, if you look at the numbers and you look in the underlying performance, I think there is a lot of strength in the business. Now for 2020, we need somehow to face the COVID impacts, but the underlying expectation remains very solid. Now moving to page 17 on the life side. First of all, you can see that the production has been up a couple of percentage points.
This means that in reality, the impact coming from COVID in Q1 was kind of limited. I wouldn't say it was zero, but it was kind of limited. Clearly, we're going to see a little bit more impact as we go through the remainder of the year. On the new business margin, you can see a good new business margin of 2.7%. You just need to consider that the interest rate level is very much down compared to the level that we had one year ago. I'm sure you know the numbers, but just to refresh the numbers a little bit. In the case of the euro, the interest rates are 80 basis points lower compared to last year. In the case of the U.S., more than 100 basis points lower. Overall, a good new business margin under the economic conditions.
You see the mix has improved compared to what we had last year. The majority now, 90% of our products are in the so-called capital-light bucket. Moving to page 19, the operating profit of the life business has been clearly affected by the turbulences in the capital markets. We have quantified the entire gap to the prior period, which is also, if you want, our expectation for the quarter, as COVID-related, because we know that up to February, indeed, our performance in property casualty in Life Health was tracking fine. What is coming here to make an impact is clearly on the VA side in the U.S. We know that in this kind of environment, hedging costs are going up and also the business risk has a tendency in this kind of environment to be negative.
Allianz Life is explaining 60% of the deviation compared to the prior period. Clearly in a situation where you have a lot of impairments on equity, even if there are mitigation through hedges, and even if we have mitigation through the policyholder participation, you're still going to have clearly a lower performance compared to a situation where markets are stable. Still, EUR 800 million of operating profit in a very challenging quarter, I think is also a testimony to the resilience of our operating profit in the life business. At page 21, you can see the numbers for the new business margin for the operating profit by companies. As I was saying before, the biggest drop was Allianz Life USA. We had also a significant drop in the case of Germany Health. This is related to impairments.
In the case of Spain, in reality, this is just due to the deconsolidation of our joint venture with Banco Popular. The rest of the business you see more resilience or even you see a couple of situations where the operating profit has gone up. With that, maybe moving to page 23. That's the breakdown of our investment margin. I think first of all, what is important to notice is that the difference between the current yields and the guarantee is pretty much stable. Indeed, even maybe slightly up, but let's say stable. That's very important because this is the KPI that has to stay as much stable as possible over time. Then clearly, we have a significant impact on the so-called harvesting, which is mostly offset by the profit sharing when you run the math.
Still, eventually, when you run our calculation, we lose about 4 to 5 basis points in investment margin. Again, considering the environment for Q1, I will say that an investment margin of 15 basis points is pretty good and pretty resilient. Now we come to asset management on page 25. We have in total 2.1 trillion of assets under management. Thereof, 1.6 trillion are for third party. Clearly when you look at what happened in Q1, the assets under management for third party have decreased by about 8%. If you look at the different asset classes, you can see that all asset classes or all regions have gone down. This is clearly what you would also expect in a case of a crisis like this, where spreads are going up and the equity markets are going down.
Still, the starting point in reality that we had, especially because of the good performance in 2019, was pretty good. From that point of view, I think that's been very helpful for the quarter, as we're going to see in a few slides. When you look at page 27, here we can see also the driver, the development of the asset base. On the outflows or the inflow side, we had EUR 46 billion of outflows. They are mostly coming from PIMCO. As of February, we had a situation of inflows. Everything happened indeed in March. I would even say everything happened in a few weeks in March. Towards the end of March, we already saw a stabilization. In the month of April, for example, we saw or to date May, we are seeing slight positive inflows at PIMCO. We see more stability.
What happened in Q1 is not Allianz related. A lot of retail investors went to the sideline, and we also expect that eventually they are going to come back. Stability has been definitely there as we went into the second quarter. On the market development, you can see clearly there was a big swing in the month of March. Net, the position, the loss in assets under management between market and the FX was about EUR 80 billion plus. I think we recovered already EUR 40 billion, even a little bit more in the month of April. Clearly we will see what the markets will do as we move into the remainder of the year. At page 29. You can see that revenue are up, and that's because, as I was saying before, the development of our asset management operations being overall, compared to one year ago, very good.
You can see a nice development of the revenue. This is coming from PIMCO. In the case of AGI, we are rather flat. You can also see that the third party fee margin is up. This is, however, more due to technical effect. In reality, if you adjust for the technical effect, it's stable, but that's still a good result. If you go to page 31, where you translate this into profit, you can see that in asset management, we had a very good operating profit performance for the first quarter with an increase of 20%, driven by PIMCO, clearly, but also in the case of AGI, at least you see resilience in the numbers. Bottom line, good results for the Q1. Clearly some headwinds at the end of March, but I would also say there is stability coming through.
Let's see what the markets are going to do. The starting point, I would say, is overall pretty solid. From that point of view, I would say that in the case of asset management, we see good results and we think we might be having still a good level of performance in the remainder of the year. Now, going to page 33. On the corporate segment, you can see a deviation of about EUR 60 million compared to prior period. This has to do with FX volatility, and also we had a payment to a solidarity fund in France. I would say all this kind of movement are relatively minor, so overall, the segment is performing according to our expectation. With that, at page 35, the shareholder net income is EUR 1.4.
As you can see, at the end of the day, the main impact on the shareholder net income is coming from the operating profit. Below the line, not so much has happened. The realized gain and losses have compensated for the impairment. The realized gains and losses are coming basically from the disposal of our joint venture with Banco Popular. We have some more restructuring expenses. We are working, as you know, very diligently on making sure that we can increase our productivity. Clearly, as we do that, you see also restructuring expenses below the line. On the tax side, there was a positive effect due to the United States. All in all, when you put all these things together, there was not much happening below the line. With that, I come to the last page 37.
Clearly, if you want to challenge a quarter, but the performance is robust. I'd just like to repeat the underlying performance in P&C. When you look at the combined ratio, it is actually pretty good and also on track to achieve our objective for 2021. The expense ratio is down, that's also a good sign. On the life side, yes, there was market volatility, the operating profit is still very sizable at EUR 800 million. Also the new business margin is resilient, 2.7%. On the asset management side, we are very good operating profit. Sure, some headwinds coming into the end of the quarter, also stability as we go into the second quarter. On the solvency ratio, the solvency ratio at 190% is a good solvency ratio, the excess capital of EUR 37 billion is a resourceful way to look at the capital situation.
I think it's a pretty big number. All in all, when you just look at the performance, both from a IFRS point of view and also our capital situation or our ability to make distribution to our shareholders, I think that's even a challenging environment, we have delivered good results. With that, I would like to open up to any questions you might have.
Thank you. Ladies and gentlemen, if you wish to ask a question, please signal by pressing star one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, to ask a question today, please signal by pressing star one on your telephone keypad. We will pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from [John Hawkins] from Morgan Stanley.
Good afternoon, Giulio. I've got three questions, please. Firstly, on trade credit, you've got a pretty small number in Q1 for Euler Hermes. I just wonder if you could give some detail in terms of how the reinsurance coverage is going to work there, particularly given the government schemes in Germany and France, because there's some big numbers flying around the market in terms of the potential size of losses in trade credit. I just wonder how you could help us dimension that, please. Secondly, staying on the COVID issues, looking at business interruption. The numbers you've given today, does that include any amounts for the sort of various goodwill schemes I think we've already seen in Germany for the hospitality industry? I think there's some talk about something similar in Switzerland.
Finally on dividends, does the EIOPA restriction on dividends, is that going to have any impact on the timing of upstreaming from the various sort of EU subsidiaries you've got around the group? Thank you.
Okay. Let's start. Thank you for your question, first. Let's start from credit insurance. I would say the following. What we have been doing, also with the agreement that we have achieved, and not just us, but in general, the credit insurance industry has achieved with the government in Germany and other countries. The agreement might be different, but fundamentally are aiming at the same, is somehow to be able to offer capacity, because we think this is important clearly for the economy, but on the other side, clearly we cannot run an exposure which will be too high. That's the idea of this agreement. What you're going to see happening in credit insurance, sure, the combined ratio is going to be more elevated. For example, within the combined ratio, we should be able to break even in most scenario on the underwriting results.
That's it, clearly, also because you are not taking the full amount of risk. Clearly what we are going to see is still a profit coming from the investment income. When you look at what is going to happen for credit insurance, I would say that the profit that you see for the first quarter is going to be more or less the profit that you are going to see by the end of the year. Otherwise, we are acting more like a facilitator in making sure that there is still credit insurance available in the marketplace, but we are not necessarily taking a significant amount of risk. As a consequence, clearly then also you should not make a lot of profit for the remainder of the year. I think it's a sensible agreement.
We could have gone the other way just to reduce capacity. When you look also the long-term relationship that you want to preserve, and when you also look at just doing something which is supporting the economy, we think that was the most sensible thing to do. That's on the credit insurance. On the business interruption, I would say that it's absolutely the agreement that we did in Germany here in that area is definitely included in the numbers. From that point of view, what we are reporting here, that's also important in general for the COVID conversation. We are not booking based on reported claims. We are booking mostly based on incurred but not reported. That's what we did. This applies also to entertainment, for example, where we have a EUR 200 million-plus loss.
This is not because we got EUR 200 million-plus of claims reported by the end of March, but that's clearly the expectation what is incurred but not reported yet. On the business interruption, if you ask me, I think that we have booked most of the losses. We are going to see some other losses coming through other country legislation. Also, let me tell you that every time we make a statement, things might change here. That's the reason also why we don't give you a guidance. We have been diligently working on understanding all the in and outs of the COVID crisis and running scenario. The point is, the environment might change. Something that we tell you today, in two, three weeks might be very different because some regulators, some other stakeholders, maybe is changing the rules of the game.
Based on the best knowledge that we have, and we will say that on the business interruption, we should have booked most of the losses, not all, but I think we booked a significant amount. On the dividend, I would say what the EIOPA statement has influenced, to some degree, a few countries. We see a few legislation where indeed dividend flows to the holding company is challenged, let's put it this way. I have to say that it's pretty limited. The number is not zero, but I would also say it's not a number which is changing materially, I would say, our liquidity position. We have already received a lot of dividends. Yes, there is some impact, but I would say it's very digestible.
Thank you. Just to come back on the trade credit, if I may. The comment you made, does that include the countries where you haven't got a government backstop in terms of reinsurance? Is there a risk that this number could be higher than you think at the moment?
I would say almost in all countries, we have this kind of agreement. Also in the countries where there is not an agreement like this, we can reduce capacity. The point with the coronavirus, you pay for a ship in transit, so you can also react to that, right? There is a point that when trade is freezing, there is not much going on. At a point in time, it's your choice as a credit insurer, as trade resumes, if you are comfortable to give capacity or not. There is a lot which is under control because here we are not dealing with giving a loan for the next 20 years, right? It's something where you can adjust capacity constantly and also think about the trade as kind of frozen.
From that point of view, it's also something that the capacity we give, we can control, and the capacity we give is a function of the schemes that we are achieving with the governments.
Very clear. Thanks, Giulio.
Thank you. We will now go to our next question from Michael Huttner from Berenberg. Please go ahead.
Wow. Fantastic. Thank you. Hang on. Just thank you. I hear you've done a really good job and you're a bit frustrated by the uncertainty still on business and stuff. I have a question which is completely unrelated to this. I apologize in advance. First, for your lovely colleague, if he could maybe explain a little bit the sensitivity to [Solvency], which is valuation, the potential impact from AGCS and not just probably PIMCO, but further, and also the valuation of unlisted or unfavorable things that remain around and how, when or what could we see them on earnings input. Then the completely unrelated question is on PIMCO. Just a bit of background. Remember in Q1 in mid-March, I think, Paul said that the market actually froze, which is unusual. I think it was probably just worth it was to that related.
My question is, what would happen if you had a combination of the big outflows you've seen, but maybe another scale larger at the same time as the market freezing, not that, which would be a very unusual event. Is it just an earnings event for PIMCO, or could it cause some knock-on effects going on for the kind of like a guarantee on sell the money invested by PIMCO? I know it's a funny question, but it's the one bit, the only bit where I thought it actually is more sensitive, but the rest I think is actually sensitive.
Hi, Michael. You're breaking up a lot.
Oh, really?
I think I just.
I'm sorry.
Yeah.
Take it.
No, I think the first Yeah, now it's better, by the way.
The first question, I understand.
Sensitivity.
Yeah.
Yeah. Because now it's much better. Yeah. Now it's done. Now we can hear you.
Now we can hear you. Yeah.
The first question was on sensitivity.
Before I was underwater. Okay. Yeah, the first question was for your colleague on form angles and any delayed impairments coming from the unlisted.
Okay. Got it. Okay. No, we don't see for the time being. That's the question regarding rating migration. I would say for the time being, we don't see much of a rating migration happening. I believe also that what governments are doing or central banks are doing are helping. We anyway run a sensitivity, just to give you an idea. In the case we have a rating migration one notch across the board, our solvency ratio would drop by 10 percentage points. That's the sensitivity that we run. I don't think we're going to see something like that. On the other side, we might have here and there clearly some rating downgrade. That would be naive to expect that nothing's going to happen. At least for the time being, we didn't see much happen.
When you look at rating agencies, they are maybe put a negative outlook out there, but there was not much movement. I would say this is not the case for the time being, and I believe this issue is going to be manageable, but it might have some impact on the solvency ratio. The other question was on, I understand, on PIMCO, but you need to repeat the question.
Yeah, if I may. If I put it in a rather brutal way, and I don't mean it like that at all, because I think it's the only tail risk Allianz really has, or I can't think of. What would happen if we had a repeat of mid-March when bond markets were closed, even the treasury market was struggling, and if at the same time you had a sudden acceleration of redemptions because people like me thought, "Oh, my gosh, I need to go and buy some food, and I need to redeem my mutual funds." How does that impact Allianz?
I would say when you have a situation like that, usually you can count on the central banks to offer liquidity. I would say, we just went through the situation, if you want, in Q1, and I think your request is aimed at liquidity risk. There was none at all liquidity concern at PIMCO. Again, PIMCO is running a stress test. Clearly, every time you run a stress test, you need to be comfortable with the level of stress test you're putting your business through. They are running a stress test to ensure that they have enough liquidity. Also, when they go through a crisis or they go through tough times, they are also going to change the parameters they use to define what is a liquid asset and what is not a liquid asset.
In a crisis situation, a liquid asset is going to become illiquid. Also, as they try to manage their portfolio, usually they try to do vertical to the extent they can do it, clearly, but they try to do a vertical. As they get redemption, they try to be as vertical as possible in reducing the portfolio. Not just reducing what are the most liquid assets, because then you get stuck just with the illiquid part, but just they try to consistently keep the liquidity as stable as possible. From that point of view, PIMCO has gone through a few tests in the last, I would say, 10 years, and every time, they've been more than capable to sustain all kind of stresses they had. From that point of view, I would say that they have a strong liquidity management in place.
There's no guarantee or sell the money from Allianz in there?
No, we don't have that. No, we don't have any kind of guarantees that we provide to PIMCO from a liquidity point of view. No, absolutely not.
Okay. Fantastic. Super. Giulio, thank you very much.
You're welcome.
Thank you. We will now go to our next question from Andrew Ritchie from Autonomous.
Oh, hi there. First of all, I wondered, Giulio, if you could clarify on the press conference call this morning, I think you gave indications about the expected COVID impact in non-life for the year as a whole. Yet you're today now telling us there won't be much more of an impact beyond what you saw in Q1. I think this morning you said something like EUR 800 million to EUR 1.2 billion in the press conference. Can you just clarify what your assumptions are for further COVID non-life claims, vis-a-vis, are you able to give a firmer number because of reinsurance retentions? Are you assuming the frequency benefits that you enjoyed in Q1 continue, and there isn't any pressure for premium refunds, et cetera? I'm just trying to tie your comments this afternoon with your comments this morning.
The second question, what additional stress tests have you performed on the U.S. Life general account assets? I'm assuming there was no impact to local stat from Q1 market movements because it lags that. Maybe just give us an update on the local statutory position of the U.S. Life business. Finally, based on market movements since the quarter end, it would look like your solvency hasn't really changed. It may have even gone down slightly. That's missing the other factors we can't model, like lower volatility, et cetera. Can you give us any indication on movements since the quarter end? Thanks.
Maybe starting from the P&C question. What we said this morning, which is, by the way, what is still applied this afternoon, is that we expect on the underwriting side 15%-20% impact compared to the outlook of 5.6. When you run the numbers, you get to something which is between, let's say about EUR 1 billion of impact. Where this is coming from, I would say definitely a big chunk of it is going to come from AGCS. In the case of AGCS, we have both in Q1, a little bit more than EUR 200 million of losses due to entertainment. We expect these losses by the end of the year to double, specifically in entertainment. Clearly, we also expect to have additional impact in AGCS, which could be also the D&O financial line.
Overall, we expect the losses at AGCS to be higher compared just to the EUR 200 million. What I was referring before is we book clearly what has been incurred by now reported, but we are clearly now booking what might be losses, claims, which are going to happen in May or in June. Clearly on Euler Hermes, we're also considering for the fact that Euler Hermes operating profit is going to be basically flat compared to the level that we have now. Compared to plan, there's also a gap that we need to consider. In the case of Allianz Partners, we're also considering that we're going to have a low underwriting profit moving forward because we're going to have lower revenue.
This is not something that you book in Q1, but it's going to impact the profitability for the rest of the year. When you add up the global lines, you get to basically the kind of numbers that we are talking about. You can open up the conversation about what is happening on motor and what might happen in other lines of business, which are now global lines. On that one, yeah, we are assuming our calculation that we are going to have a benefit from lower frequency in motor, but we're also considering that there will be rebates. In some cases, the rebates are even coming through the way the policies are written because the premium is a function of the amount of mileage. In other cases, might be pressure coming from politicians or regulators. On that one, we are reflecting an improvement.
Yeah, it's difficult to put a number, but we tend to be cautious. Clearly, as I was saying before, we're going to see also some negative in other lines of business. We are going to pick up some business interruption losses also in some other country, although the numbers shouldn't be that material. When we put all together, I would say we are kind of working under the assumption that the losses we are going to see will come basically from the deviation to plan, if you want, on the underwriting side. They're coming mostly from the global lines, where we will say on the other businesses, we would expect to be more or less flattish, maybe depending on the frequency developing in motor. We might even see a slight positive number.
Overall, for the sake of argument, I would say relatively neutral. You had a question on the general account assets for Allianz Life, and I think at the end of the day, you were referring to the RBC ratio. The RBC ratio for Allianz Life in Q1 is about 325%, which is considering that we are running the company, as long as the RBC ratio is over 300%, that's totally fine. Overall, it's a good RBC ratio. In reality, there is some volatility in more than you think in the RBC calculation in the U.S. Especially, it can be volatility because the reserving side is not on an economic basis, so this can create, depending on the situation, positive, negative volatility.
We think that the RBC ratio of Allianz Life is going to go up by the end of the year, as some of the volatility that is embedded in the number now is going to reverse. To your question, the RBC ratio of Allianz Life is 325, and this is after they paid a dividend of about EUR 700 million, just to give you the idea anyway of the capital position of the company. You had the last question that I'm not so sure.
Sir, could you repeat the Solvency II question?
Sure. I was just trying to understand, because the solvency ratio, we couldn't really model it successfully in Q1 because of the factors you talked about, Giulio, to do with the correlation and volatility.
Yeah.
What's that done since the end of the quarter?
No, sure.
I can look at the sensitivities, and it would look like your solvency ratio-
No, sure.
not moved or gone down, what am I missing?
No. Yeah. I would say, you know what we will do, and we thought about that because clearly if you look at our sensitivity, the sensitivity we gave you at the end of Q4, and you run the numbers, you don't get to 190. There is definitely no way you get there. What we need to do, and we are going to do this presumably starting Q2, we are going to provide a sensitivity that should give an idea about the cross effects. This number has never been really significant, That's the reason why we never really focus on that. It's also because we know that when we go into a rough market, usually we take action, right? We're not going to sit there without doing anything.
The assumption has always been the cost effects, and the action that we take are going to be mostly neutral. It doesn't look like it's the case in Q1. What we are going to do, presumably starting Q2, is to provide you with the sensitivity of 50 basis point interest rate down, 50 basis points spread widening, and 30% equity down. This is exactly the sensitivities that we show you for the single driver. By putting them all together, this should provide a little bit more guidance. I want to make also a point, beside the fact that I really believe that 190 solvency ratio is a good solvency ratio.
Because you are all mathematical, if you look at what, let's say, EUR 500 million, more or less of own fund can do, and EUR 500 million, more or less, of SCR can do, and we are really speaking of rounding, this can already make three percentage points of solvency ratio. Fundamentally, we need also to understand that especially when you look at the ratio, there might be also some real volatility, which is just noise in a very complex calculation. That's the reason why, yeah, absolutely we should look at the ratio, but also do the exercise a little bit to look at the excess capital, do the exercise to see what EUR 1 billion, more or less, of SCR can do to a solvency ratio. You can ask yourself, is EUR 1 billion, more or less, of SCR really relevant in the real world?
I think you can get a perspective on the Solvency II ratio, which is maybe more balanced. Look at the solvency ratio, but look at the absolute numbers, move the SCR by EUR 1 billion, then you see what this can do. It can do something. You can ask yourself what EUR 1 billion of SCR really make for a difference.
Okay, thanks.
Okay, thanks.
Thank you. We'll now go to our next question from Nick Holmes from Societe Generale.
Oh, hi there. Thank you very much. Two questions, please. The first is, at what level of solvency would you definitely cancel the second EUR 750 million share buyback? Because I think that is just suspended, isn't it, rather than canceled at the moment. The second question is, if interest rates are going to be lower for longer, could you remind us of your thoughts about whether this is a problem for you or whether you're pretty relaxed about it? Thank you.
On the solvency ratio, the buyback, at what point of solvency ratio we would definitely skip the buyback, that would be 160. At 160, we would definitely say we will skip it. I don't think we would have long conversation. If we are above 160, clearly, there are a lot of other considerations that come into play. That's also important too, in these environments, as you see, there was a lot of pushback even on dividend and buybacks on this environment, maybe the solvency ratio even higher than 160, substantially higher than 160, might lead that we are going to continue to postpone the buyback. A lot depends on how the sentiment is going to be. From a pure technical point of view, I would say the hard line would be below 160.
We will not do a buyback, there will be no different kind of consideration. Maybe we might do it, in any case, no. There will be the red line. That's on the buyback. Then on the low interest-
Sorry, just very quickly to follow up on that.
Yeah, go ahead.
Would it be correct to say that since it's suspended, not canceled, it is essentially your intention still to have that buyback? Ideally, that's what you would like to do.
Sure. That's still the intention, and it's also deductive from the Solvency II calculation. That's the intention. We're going to see how the situation develops, also how the sentiment is developing. We are going to see also if EIOPA is going to change the view on dividend payments, forget about buybacks. They have a view on dividend payment. If there is a change in sentiment also on the regulatory side, at that point in time, we clearly are going to evaluate the buyback. We need to get there first, and let's see when regulators are going to have a different view. That's on the buyback. We had a question on the low interest rates. I would say that the low interest rates environment is not a problem as long as we take action.
Clearly, if we sit here and we say that the world is the same like two years ago, that wouldn't be necessarily a recipe for success. If we are acting diligently and changing the products like we did a few years ago when rates came down, if we are accordingly doing the same this time, which we will do, then clearly we are going to be able to be successful also in a lower interest rate environment. There is no doubt that compared to the situation of 2019, the world has changed. When you go back to, I would say 12 months ago, maybe, yeah, 12 months ago, the swap rate, I always look at the swap rate because that's a relevant indicator for us. That was closer to 1.5, and now the number is basically zero.
The environment has changed, which means clearly we need to change accordingly to the new rate environment. We are making changes, as I said, in the U.S. They have a playbook, 1%. They have even a playbook, 0% interest rate. We are making changes in the U.S. They should be sustaining the new business margin, then eventually the performance of the company moving forward. We are making changes in the summer in France, and then also in the case of Germany, we expect also to have a different mix and changes. They will come at the beginning of next year.
Thank you very much. Just very quick follow-up. In the U.S. Life business, where there was quite a big loss, was that mainly due to lower interest rates or was that equity market volatility?
No, that was mostly coming from equity market volatility, hedging costs, which in a situation like this tend to be more elevated. Also business risk. Don't ask me why, but I can tell you, I was in Allianz Life many years ago, business risk should be asymmetric, right? Should be positive, negative. There is some kind of correlation when the markets are getting very nervous. Business risk has definitely a tendency to be negative. I would say the correlation tends to be one to one. It tends also to reverse, by the way. When the markets are then recovering, you see positive business risk. That's something that somehow it's happening all the time, and that's part of the volatility that you have in the Life business.
In the VA business, that's also the reason why we decided to somehow not push the VA business anymore because it was a little bit too much volatility then. What you also see a little bit is some interest rates impact because on a first basis, at the end of the day, there is still some sensitivity to operating profit to interest rate movement. In this case, there was a big drop in interest rates. I would say this is not the primary driver for the decrease in profit that you saw in Allianz Life. I stop here because I could go on and on, but if you want, we can have a separate call and I can explain even better. Fundamentally, it's due to the VA business.
Very smart. That's very clear. Thank you very much, Giulio.
Thank you. We will now go to our next question from Vinit Malhotra from Mediobanca.
Good afternoon. Thank you very much. I hope you can hear me clearly and hopefully yourself.
Yes.
Yeah, thank you. One is just the PIMCO Q1 market movement of EUR 107 billion. It felt a bit quite severe given also the risk premium went down. Is there some thinking within Allianz that the credit spread risk of these products should be reviewed? Is there some plans to bring this under control or just let them be? I just wanted to clarify how you're thinking about this quite sharp volatility in the PIMCO asset base. Second one is just on the volume. Back in 2009, I think the volume was down 1% for P&C group, so P&C and Allianz. There is obviously some thought that this year is going to be worse than that 2009 period. If volume is down, say, 2%, something like that, for the year, would it have any problems for the expenses, expense targets or expense ratios?
Do you see any scenario where that could be an issue? Thank you very much.
Maybe starting from PIMCO, the drop in market return at PIMCO was about EUR 60 billion of the EUR 107.8 billion that you see there. That's just to give you a sense about how much was at PIMCO. If you consider the size of the portfolio of PIMCO, that's not a huge number. To come to your point, because you're asking at the end of the day, are you taking a lot of credit risk there? No. You need to consider that the income funds is there to produce income. You might somehow go a little bit high on the risk spectrum, because at the end of the day, you can count that when this volatility is sorted out, you might generate a little bit more income. Also as important as typical this kind of income strategy.
When we look at what PIMCO is doing compared to competitors running similar strategy, at the end of the day, I would say it's the same kind of approach. Again, look at the number, and the PIMCO drop due to market return was EUR 60 billion. We are speaking in the case of PIMCO of EUR 1.2 trillion of third party assets. On the volume, I think your question was, does the volume impact our ability to achieve our expense ratio? I would always differentiate anyway between what might happen 2020, what is the trajectory for 2021. As I was saying before, we feel very confident about the progress that we see in our numbers, both on the loss ratio, once you adjust for what we saw with the COVID in H1, and also in the expense ratio.
If you see, we have been able to reduce the expense ratio despite a growth, which is 1.8%. It's not that we have a significant decrease in the expense ratio despite a moderate growth. I would never make a big story out of a quarterly comparison because you might have also some different way of spending expenses sometimes in a year versus another year. Still, the number is pointing out to a decrease. Also thinking that indeed a 27.3% would even be better if we adjust for COVID. Now when we look at the rest of the year, yes, we can expect that the revenue basis might be coming under pressure for 2020. We are still committed to do our best effort to get to an expense ratio of 27.5%, which is the target that we had for 2020.
We think we can get there, even if revenue are going to be lower compared to what we have assumed. This is what we are going to try to achieve. I believe for 2021, as we continue to work on productivity and eventually also the revenue basis is going to normalize from the COVID impact, then I think we'll be able to push the expense ratio further down. Yes, revenue might be a little bit of a headwind from this point of view, but I believe our productivity efforts are such that we should be able anyway to continue to show good expense ratio numbers.
Thank you.
Thank you. We will go to our next question now from Farooq Hanif from Credit Suisse. Please go ahead.
Hi, everybody. Thanks very much. Just referring to that press call that Andrew talked about in one of his questions. You also mentioned a 10% reduction to your group operating profit. Can you just remind us what your assumptions were behind that? Was that referring to P&C impact only, or was that a global view? Returning also to the EUR 800 million to EUR 1 billion roughly impacted P&C alone. Presumably, a large part of that will be revenue reduction rather than claim. I was wondering if you could just talk a little bit more about that. Secondly, on social inflation, the impression I got from previous conversations was that you were expecting maybe potentially a little bit more reserving risk in AGCS in this topic area. Is that now on hold because of what's happening? Can you update us?
Lastly, I believe, you're still in the process with the SulAmérica deal. Can you update us? Thank you.
Coming from today, a question about the 10% on operating profit for the group. This was just a translation, if you want, of the 15%-20% underwriting impact compared to the P&C outlook to scaling to the EUR 12 billion. That basically was it. It's the same number, just put in a reference to a different basis. When I talk to the price are now going to be 8.5 or 8.9, so it's a rounded number, but that's just the same number scaled to a different basis. On the question that you had about what is revenue related versus claims related, I would say most of the impact is coming from losses, I would say. Clearly in the case of Allianz Partners, where we are speaking anyway with small amounts.
In the case of Allianz Partners, we might be talking about on the underwriting results about EUR 100 million deviation, maybe a little bit high, depending how long the COVID is going to be. This is coming mostly from lower revenue. There will be a lower revenue. In the case of Euler Hermes, I almost struggle to separate what is lower revenue versus might be a little bit higher loss ratio. I would say maybe it's half and half. Fundamentally, I would say that most of the issue is coming from the claim side. On SulAmérica, I believe that the transaction might take place in the third quarter. The original plan was to have a transaction completed by the second quarter, but this might be third quarter, maybe it can even be fourth quarter because of what is happening with the COVID crisis.
I would say by the end of this year, we should complete the transaction, but it's not happening in Q2 anymore. We are working clearly anyway on preparing from an operational point of view. We are already doing the work to be prepared operationally to start with the new company once we can close the transaction. That's okay?
Yeah. On social inflation, any quick comment there?
Social inflation. Sorry, I forgot that. I would say it's a little bit too early to speak about social inflation. I would say that for what we saw in Q1, there was nothing popping up on the social inflation side, which is, that would be rather a good news. What we see in the U.S. maybe that's also relevant. What we saw is clearly a lot of price trends. That was definitely the case when you look at the price development for AGCS, we are speaking of double digit numbers. From that point of view, I would say that on the accident year results, things were going according to our expectation. What social inflation might do to the reserve base, this is something that we will evaluate later, but there was nothing happening in Q1 to suggest anything that could be relevant.
I believe the COVID crisis can create a lot of noise on a lot of drivers. One could be, could this change somehow social inflation? The other one might also be, can this change the price trends that we saw towards the end of last year, in the course of last year, and also the beginning of this year? Our answer is, doesn't look like this. At the moment, we still see price trends. When we look at what also brokers are saying or other competitors, it looks like the price trends is still there. That's clearly something that we need to watch in the next months, whether the COVID crisis might have an impact on the amount or rate increases that we are able to force through the system.
Okay. Thank you very much.
Thank you. We'll go to our next question now from Michael Haid from Commerzbank. Please go ahead.
Thank you very much. Good afternoon to everyone. Two questions, both on life and health insurance. Life new business and the lockdown. Many Allianz employees and also agents currently work from home, so do many clients. New business was marginally affected by this in the first quarter. What are your expectations for the second quarter? What is your experience so far, given that we are almost halfway through the second quarter? Second question also on life and health insurance. Your Solvency II ratio fell more than expected also because you had to deviate from the 90/10 policyholder shareholder profit-sharing rule. To what extent do you expect this higher policyholder sharing to come through in the final 2020 results? Should we also expect higher policyholder sharing for 2021 and beyond?
When you speak about the policyholder sharing, you are referring to the Solvency II calculation, to what we're going to do in this hard debate? What are you referring to? To the mechanic Solvency II?
Solvency II.
Solvency II.
Yeah.
Okay. Yeah. Sure. I would say, the topic with the policyholder participation is the following. When you have a situation like what we had in Q1, where fundamentally you have a reduction of the unrealized gains that can be on bonds because of the credit spread on shares. There is also, if you want, these unrealized gains are going down. As part of these unrealized gains, if you want, you have also a sort of a policyholder participation, a different policyholder participation there. These are all kind of buffer that can be used as you run the projection, the Solvency II model. The unrealized gains, not just the net part for the shareholder, but also what is the policyholder side. As the buffers are going down because of the crisis, you're going to have less of this cushion in the projection.
If the market are going up, clearly we're going to see also, if you want, a stronger buffer in general, and also a stronger policyholder participation offset. This, in reality, all this mechanism is part of our sensitivity. It's not that this is something that is not part of our sensitivity. The problem is that it looks like when you add up the sensitivity, you don't get to the total picture, and that's the reason why we want to provide a cross effect. Maybe from a pure modeling point of view, the way we do the model of this policyholder participation might make the estimate a little bit more complicated of this driver. This is more a modeling issue as opposed to be from a conceptual point of view.
All what we are talking about is when market goes down, there are fundamentally less buffer in the system. You need to keep in mind that we are running a risk neutral calculation there. Clearly in a risk neutral calculation, that can be kind of penalizing. When market goes up, you're going to have more buffer available, and this explains also the volatility that you can see in the Solvency II calculation. This should be reflecting our sensitivity. This is not something that should come on top. You had a question on the life side. Maybe I can, the estimate, I was looking more at what is going to happen by the end of the year based on what the risks are telling us. We think we might be about 5%-10% down compared to the level of last year.
I would say that, if you see in Q1, we were 2 percentage point up, this should revert to a negative number, and we think we might be by the end of the year, about 5%-10% down. I think it's very difficult to put a number on the production. What we see is true that agents are now visiting customers. On the other side, they are making more and more use also of digital tools. If there is a little bit of stabilization recovery, we might see indeed the production might even come back pretty strong. The working hypothesis as of now is that we're going to see, I would say more 10 than of 5, 10% drop in production compared to last year. Which is, by the way, not an issue at all.
Honestly speaking, this is not something that makes a difference. That's sometimes the beauty of life insurance, that you are not necessarily dependent on how much premium you're going to make in a single year. What is more relevant is the asset basis and then also clearly the quality of the business and the asset basis. The dependency or the profitability on the production of a single year is kind of limited.
Fantastic. Thanks.
Welcome.
Thank you. We will now go to our next question from Jonny Vo from Goldman Sachs. Please go ahead.
Yeah. Good afternoon. Hi, Giulio. Just a couple of questions. Just coming back to the business interruption and cancellation claims. Have you made assumptions with regards to how long the lockdown is from a group perspective, or are you allowing the OEs to take the decision with the assumptions they're making with regards to the losses that they're incurring? That's the first question. The second question is just in relation to the triple B portfolio. Can you just tell me the top three OE balance sheets that have the most triple B on their balance sheet? If you can let me know. Is that the U.S., is that Germany, and so forth. The last question is just the sensitivity to the U.S. life business, and the RBC ratio to downgrades of investment grade to non-investment grade.
If we saw a 20, 25% downgrade of your triple Bs into non-investment grade, how would that move the RBC ratio? Just the sensitivity there. Thank you.
Let me start from the last one. I don't have a sense for the sensitivity of the RBC ratio of Allianz Leben to a downgrade. On that one, we should come back to you. What I can tell you is that Allianz Life has already a few mitigation action in place. Even if we have a situation where we're going to see rated downgrades, that in the case of Allianz Life, have an impact on the RBC ratio. We have also mitigation action in place that we can trigger. On the question about the business interruption. Now, somehow we have been clearly giving instruction to our subsidiary about the different scenario we need to go through.
That's also, by the way, an interesting question because we can see also that depending on the line of business, what is a worst case scenario might be a good case scenario, best case scenario for a different line of business and vice versa. As you go through the exercise to think about what can happen, and as you run scenario based on different lengths of the COVID crisis, you really need to think this through, because the worst case scenario is not the worst case scenario for everybody. That was also something that we had to consider as we, or we are considering as we do the exercise. On the triple B, I can just tell you one is for sure Allianz Leben, the other one is Allianz Life. The other one is Italy. Yeah, that was it.
This is logical too, considering country. I should have thought about that. Yeah. This was the only reason why I'm here, to say Italy. Okay.
Okay. Thank you.
You're welcome.
Thank you. We'll go to our next question now from Michael Huttner from Berenberg. Please go ahead.
Thanks again. I stepped on the computer. It was just two questions, one on the solvency. I don't know if you gave us an updated figure. I think it was implicit, but I don't know if you have something or you can provide something. The other main topic is on motor insurance. You kind of indicated that the rebates would be small and, or the net impact would be small, and it wouldn't necessarily be a substantial offset. One of your competitors has almost the opposite. I mean, they haven't reported yet. I can't quite square it with the actual number of claims because they really are a lot lower. I'm not sure if I'm missing something here. Thank you.
Your question on the motor is that the amount of claims is very low. That's what you're saying?
Yeah.
Not too low.
Yeah.
Okay. Yeah.
No, no. Sorry about that.
No, I'm with you.
I'm confused. It is very low. Sorry.
Say again. Sorry?
The claims are a lot lower.
Yeah. No, the claims are absolutely. We don't say that we are not. In some situation, we're going to have rebates by definition in some countries like Germany. In other countries, we need to see what is going to happen. What we're saying is that if you just look at the pure decrease in frequency, you or we might come up also with substantial numbers. We are kind of reflecting that potentially some of these benefit, they had to go back or also we are thinking maybe we're going to have a situation where frequency is going to spike, because people, they might be very excited about being back on the road.
What we say is, if you just run the numbers and you just assume that you look at the frequency development that we are seeing up to now, and then you make some assumption that we might have also in the month of May, some nice frequency development, the number might look indeed pretty good. I think that would be a little bit naive to think that we can catch all the kind of frequency reduction. Either because of stakeholders intervention or because maybe the frequency is going to go up. Later I can also look, I can get very creative. I can also say most likely a lot of repair shops are now making a lot of business now. I don't want to see what happens to the severity once you bring your car to a repair shop. They might go up very, very quickly.
That's the reason why I will be a little bit cautious on making the assumption that eventually more of, we're going to have the big impact, positive impact. I expect that we are going to have a positive impact, but, yeah, I would be cautious. Again, we are dealing with a lot of uncertainty here, so we can maybe speculate for hours about what might happen. One thing I can tell you anyway, that in Q1, we have now reflected all the improvement in frequency that we really saw. We've been kind of cautious, and also because then we have asked also ourselves the question. It might be that we are just dealing with late reported claims because people were not reporting claims. We saw then clearly this is not the case. The frequency is very low.
Fundamentally we are taking cautious view on that, but I can speak for Q1 because that's something that we know. In Q1, definitely we are not reflected the full amount of improvement in frequency in our numbers. On the solvency ratio today, I would say it's more or less at the level of the end of Q1. If you look, equity markets are up, interest rates are down, but not down much. Credit spreads have been widening. There might be a slight negative, but I would say fundamentally not a big change. From that point of view, I would say we are kind of close to the level of end of Q1. That's okay?
Thank you, Giulio. Michael, still there?
Yes. No, no problem. Thank you very much.
Okay, great.
Thank you. We will now go to our last question today from Thomas Fossard from HSBC. Please go ahead.
Sorry. Actually, I pulled it off the queue. The question has been answered.
Okay. No problem. Any more questions?
We have no further questions at this time. I'd now like to turn the conference back over to you, Mr. Schmidt, for any additional or closing remarks.
Yeah. Thank you, Emma. Yeah, thanks to everybody who joined the call today. We say goodbye to everybody and wish you a very pleasant remaining day. Thanks.
Stay safe, guys.
Yeah.
Thank you. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.