Ladies and gentlemen, welcome to the Allianz Conference Call on the Financial Results 2019. For your information, this conference call 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, Ian. Yes, good afternoon from my side as well and welcome to our conference call. As you know, we have 2 presentations today. So I keep it brief and hand directly over to our CEO, Oliver Beate.
Thank you very much, and thank you for joining on a Friday afternoon. I have a few slides to present an overall results and where we are on our journey. And then Giulio will, in high quality as always, go through some of the numbers. The content of what I would like to present to you is highlighted on Page 82. I will lead you through the pages as we are on our call.
First, a quick overview on the achievements for the year 2019, then a little bit of a stocktaking on where we are in our journey, Renewal Agenda 2.2 and targets and outlook for 2020 and how do we think about that. Let me move to Page A3. This has been the 5th year of another record in operating profit, and we are at 11.93%. You may say only up, but it's quite something to continuously go up. On that number, revenues have crossed the EUR 140,000,000,000 line to EUR 140 2,000,000,000, that's 8% up, means basically more than double the growth of the global economy.
And shareholders' income is up 6%, again, almost to a record level. 2,007 was the highest. I hope we're crossing that too. And our earnings per share up 8% to 18 0.9%. Dividend per share as proposed to the AGM will be around €9.6 7% up.
Our solvency ratio is back to a very strong level at 2 12%. Our return on equity have reached also an all time high with 13.6% and total shareholder return for 2019 was 30%. So with that, I can hand back to Giulio. No, I'm not going to do that. But I thought it's such a pretty cool page that we can sort of end here and be fine.
Now I know we have a little bit more to do because we are not talking about the past today and the year, but also what we're going to do going forward. So let me turn your attention to Page 4, and let's see how we're doing. We have targets for operating profit, earnings per share and dividend per share. And you see relative to what we are trying to do on our targets and what the implicit absolute targets are, I think we are overall fine. But let me go through the video components.
Operating profit relative to what we are trying to achieve, I personally assess us to be good. The issue is and we'll talk more about it that AG CNS has clearly been disappointing as has been by the way in the the portfolio commercial lines at large. After many years of declining claims inflation, actually we've seen a continuous increase in global claims inflation and it shows a little bit how industry is rattled by many, many things and also by particular events in the liability lines and we'll talk more about that later. However, the reason why I'm confident is we have really understood what's going on. We're taking very strong action, have been taking very strong action and we are really seeing the benefits whether that is from price increases or portfolio increases or changing wordings.
So the improvement will be measurable. The issue is only how quickly will they sort of come into the earnings on the one hand and declining losses over the next few quarters. Earnings per share, I think, is fine. There's something that we really, really established in 2015 that is very strong discipline around the use of your capital. I think that's something that we want to continue to communicate.
We've had very good internal growth And the capital discipline, ladies and gentlemen, is here to stay. It's not been 3 years, it's been 4 years. It is becoming a part of our culture and we're going to get better and better at it. Are we at the end of the rainbow? No, we are not.
There is more questions around do all of our business earn the proper returns. We are focusing on that more and more. So again, there is more to be done, but that also means there is more upside. And dividend per share, I'm very proud of all of our people that worked very hard to deliver to you the 7th increase in dividend in a row. We're also not a small feat and also sold consistently.
As we said, we share the capital productivity with our shareholders and that's why we announced the share buyback yesterday. Now some people say we're getting accustomed to it and is that good enough. I think being good enough is never good enough, but we are very consistent. We have no incentive to keep the money that we don't need to run the business. And due to very strong action on the solvency side after are very much in what where we'd like to be, I'm very happy that we are not just able but determined to bring capital back to you.
Now Page number 5 gives you a few details in terms of how we think about that. The one thing I'd like to mention is on Page A5 to the lower left. Often you ask, Oliver, Giulio and team, is your M and A and what you've been doing the last few years actually producing value and we report on that. I think we did a very fine job on the UK acquisitions. We have done a nice job on Latin America and what we've done in China.
But Peter said, didn't you pay too much on Olehamis when you did the minority buyout? We are planning to free up about $500,000,000 in capital and upstream that to us. And when you then look at what this will do to ROE just for Euler, it will improve ROE by a whole of 2 percentage points from 12 point something to 14. So that acquisition, so to speak, and that investment is surely turning into value creation over time as well. So the last investments that we've done on an external side as much as the internal one are producing value and that is very important for you to know.
We will apply the same discipline on future M and A transactions if and when they arrive. As I always said, we only do things that really make sense for us over time. And I don't want to spend any more time on the other things that we have on this page, not even on the share buyback. Remember, our dividend that we continuously increase comes with a ratchet. Again, most investors do not remember that.
It is very important to remember in 2011 when we had the surprise around Greece and the euro crisis, we moved to an 85% or something payout ratio because we had the ratchet in. So you're getting the dividend, you're getting the ratchet and you're getting the share buyback on top of it. And that you see on Page number A6. So we've basically paid out more than €25,000,000,000 over the last 5 years and you see the components how that adds up through dividends and share buybacks. So much for numbers, capital discipline and how we are thinking about your money.
Now let's talk a little bit how Allianz has performed. As you know, we find it very important to balance all the stakeholders, and we know that the ability to pay dividends and generate net income is dependent on how we are out outperforming vis a vis our clients, vis a vis other constituents and our people. Page number 7 shows you that we are working on these dimensions in parallel. As of last year, we are on all the relevant KPIs, the number one brand in our industry. We have the strongest rating in our industry and we are number 1 in sustainability as seen by the major indicators.
And we find that very important because that talks to you a little bit about also how sustainable our business model is overall. So one thing is to talk about the past and strong delivery on a consistent basis. The other one is how resilient is the organization to do that. Now the Page number 8 gives you a few more insights. One thing I'm very happy about is what we did last year.
We crossed 100,000,000 dollars direct customer barrier, something that's very important for us. By the way, on top of that, we have more than 200,000,000 clients that we have through B2B2C. How do we think about the quality of our portfolio? The NPS numbers in terms of outperformance business has dropped a little bit to 70 because of deliberate decisions in Turkey to increase prices and cleaning the portfolio that has impacted a bit negatively and 2 companies in Eastern Europe. Overall, however, the most important number is to the lower right hand side.
We have the ambition over time that at least half of our business should be the number one in terms customer loyalty in their market. We moved this number over the last few years from about 30 to now 46. So we're getting close alone last year, this number improved by 6 percentage points. Now it will never be fully stable and only go up. There will be the odd year where you go up or down, but the trend is pretty clear.
The same is on the employee side. So the way, as you remember, we measure employee satisfaction and motivation is through our Inclusive Meritocracy Index. It's based on an annual survey we do with all of our people and is comparable to hundreds of large corporations around the world. We have already reached our 2021 target last year and 73 is world benchmark, I. E.
The top companies are in that range and we're very happy to be that. I'll tell you give you another one. We are now the world leader in terms of using LinkedIn Learning. So we are also investing in our people through digital means. Just as an example of what we are doing with our people.
So a healthy company has a healthy customer base and a healthy employee base. Now in the case of Allianz, you all know that we have a very specific mission when it gets to climate and climate change. Just some data on A9. Beyond our Net 0 Asset Owner Alliance mission that we are on that we really believe in. We have had a neutral carbon footprint since 2012 and we are actually generating more and more revenues from sustainable solutions, be it in insurance or being at investments.
And that is being rewarded again by the leading industry ratings, whether that's Robeco, Sam or MSCI of FTSE Good. So that is and will remain important to who we are and who we would like to be. Page A10. So you may ask, so where are you actually in your transformation on the customer side? We've told you it's a decade long journey, and it's very important that we know it's a very long journey.
We need to deliver results, and we have already achieved our 2021 target for the expense ratio this year. Now there were some one offs in that, for example, the canceling of the bonus pool at AG CNS. So you need to really normalize for that. You can always you always have to assume that you cannot have those strong momentum all of the time. But we are very, very happy how we've been able to move both the admin expense ratio and acquisition cost down over time.
And we intend, as we said, 30 to 40 basis points on average is what we're trying to deal year over year. Now what is driving that? The key thing is trying to simplify what we do. The first is to do that at the customer end because the key feedback from our consumers is it is hard for us to trust you if you're so complicated, if products are not intuitive and you're wasting our money with very complicated processes and systems. So bringing down the number of products, the number of product variations, the amount of paper that we send out is super important.
And then of course, to bring the number of IT applications down. We've given you some numbers. Just by the end of 2020, we want to have 10% fewer IT applications in the group. And by 2021, we want to move to more than less to have than 20% less, sorry, in our overall pro form a. That should immediately give us savings.
EUR 100,000,000 run rate is the minimum that we expect by 2021. And to be honest, we need to accelerate that as much as we can. That is based on a simple notion, we would like to harmonize products and product process design across countries in a step by step basis. The upside is gigantic, again, both on the admin cost side and in non distribution. Now M and A, we talk about it all the time.
Everybody comes on, so you can do anything you want, but don't buy anything big. Funny that you read sort of a Newswire article and says, Allianz fails to do big deals. I think it's actually for many of you would say that's a big success. Now let's talk about what we've actually done, Page 11. The most important ones with 3 was what we have done with acquiring the sort of second half of LV in the United Kingdom and doing the portfolio with legal and general that is being executed, has moved us officially to number 2 in the country.
By the way, this is before adding in Euler and AG CNS. So there is even more that actually should be in the cake. The second one is what we've done in Surla America. We've discussed it last year extensively. Maybe now in separation and that will lead us to be the number 3 P and C insurer in the country, actually number 2 in auto.
And Motorhome gives us the scale that we need to have in the largest economy in Latin America with more than 200,000,000 people. And as you know, we were the first to have a wholly owned foreign financial holding company, which is very important because we are going to build up our asset management and insurance asset management capabilities over time. And our joint venture with JD is working extremely well far ahead of plan. And as we go into more liberalization, once China is back in business, we'll also address the life insurance side. And that's why we've been taking a stake in the largest privately held company we have in China, that is Taika.
So that's all of them. There's many more strategic ideas we have. We can't talk about them today, but China will remain on our priority list very high also for Asset Management that may even be a bigger opportunity than insurance, but it is going to take time. So before we're going to arrive at very high earnings from China, a few years will go by. But we need to keep on investing in what will be one of the biggest financial markets on this planet, or already is in many ways.
Now Page 812 gives you a nice little record on where we are and where we have been in terms of our ambitions over time. We had a target range coming from 2016, dollars 10,500,000,000 and going up consistently. For 2020, we are planning a midpoint at €12,000,000,000 with the usual €500,000,000 up and down range. And again, let me give particularly what is already happening in the Q1. This is before major distortions around Nat Cat and other major economic crises.
And that is very important to understand. We've also been able to overachieve our midpoint in the target, and we're obviously working hard to try and to do that, but that cannot always be guaranteed. It's just a matter of numbers and statistics. Now let me give you one last page, that is a 13 because it is not really the only question whether we and what we do in 2020, but how do we think about the 2020 targets 2021 targets that we laid out last year. And we are sticking to these targets, very important.
So the EPS growth is supposed to be larger than 5%, of which we would like to have 4% organic. ROE north of 13% is clear and has been at record level 13.6% this year. We should be north of that, of course, going forward. The Solvency II ratio we've talked about. Customer centricity we've also talked about.
So we're working on getting to the 75 percent plus range. And again, on IMX, as I've mentioned before, we are already where we want to be, but it's tough to stay there. So it's not going to be easy as we continue to transform this company. So overall, is Allianz is very much on track to make its 2021 ambition despite the noise we've had in the P and C segment. And we will probably talk about that.
There's lots of things going on in P and C to make sure that we improve the loss ratios, and everybody has hands on deck now. And with that, I hand over to Giulio.
Thank you, Oliver. And we can move to Page P03. And I'm going to give you a quick update on the 4 quarter results, and then I'm going to speak a bit more in detail about the 2,009 for the full year. So when you look at Page 3, our results for the Q4, I would say the quarter was strong or solid when you look at the revenue development, when you also look at the operating profit development in Life, Health and management and also when you look at the net income evolution. But clearly what is taking out in this slide is the development of the combined ratio with 99.6 percent.
And this is mostly driven by AGCS. I'm sure we're going to have time to discuss this later. But otherwise, I will say the quarter looks pretty good. And also like to highlight the new business margin on the Life side with 2.9% despite negative interest rate. That's a very strong message about the work that has been done over the last years to make sure that our production is profitable, also in a difficult environment.
And then also the flows in Asset Management have been again positive. And this quarter was not just because of PIMCO, but also because of the contribution coming from AGI. So a lot of good things in the quarter. And then as you see also in the headline, we had a recession strengthening at GCS. If we move now to Page 5, when we look at the full year, and this can't surprise our revenue has increased by about 6%.
So you just see what we discussed already in the last quarters and the growth in revenue has been driven by the Life business and also which is nothing new also by our Property Casualty business. The evolution of the operating profit, where we got an increase of about EUR 350,000,000 sees a deterioration due to the reserve strengthening at AGCS. On the other side, you can see the other segments have contributed to our operating profit. And this is again a sign of the strength, if you want, of our franchise, of our business model or the diversification that we can bring to the table. On the net income, you can see very good results.
I think you know the number now. We are very pleased with the ROE of 13.6%, and we are also very pleased with the development of the earnings per shares. If we go now to Page 7, the capitalization is strong. We discussed in the last quarter as always a reduction of the solvency II ratio because of the interest rate environment. And now you see in the Q4 when the interest rates have changed direction, at least for the quarter, the solvency ratio went up significantly to 2 12 percent.
The main driver is the development of the interest rates. And on top of that, we had also a model change. The business evolution in the quarter has been negative because of the AGCS strengthening and also because of a catch up effect. I'm sure I'm going to get question on this later also. I will use the Q and A to go into the technical explanation of what happened in the Q4.
What is important anyway is really to look at the 12 months. So when we look at the business evolution of the 12 months, if we go to Page 9, when we remove the dividend and the taxes from our business evolution, that was 7%. Adding the 1% because of the GCS strengthening, that would be a 0.8% of business evolution, which is a good number. That's also the guidance that we are giving for 2020. One thing to highlight, if we deduct the buyback pro form a from the 212% of solvency ratio, the solvency ratio will be 209.
That's if you want the adjusted level considering the pro form a for the buyback. Moving to Page 11. We can see here the growth rate in the P and C business. And as you see, the growth rate adjusted for FX and also for consolidations has been 4.7%. The growth rate is driven 60% from price changes and 40% of the growth is coming from volume.
All entities have posted a positive growth with the exception of Spain. As you know, we've been cleaning the portfolio in Spain after the surprise of 2,000 that we got in the course of 2019, at the end of 2018. The price changes on renewal are positive across the board, 3%. And these are also, I would say, price changes that are at least in line with inflation, sometimes can be above inflation. Clearly, the development at AGCS is particularly important, and we think that the price increases that we are getting as we go into 2020 are in excess of the inflation that we are predicting.
We are kind of cautious anyway on the expectation for inflation moving forward. Page 13, the combined ratio for the year has been 95.5%. If you adjust the combined ratio for AGCS, so if you remove AGCS from the equation for one second, the combined ratio will be 93.5 percent. So when you look at, let's say, the group performance excluding, if you want, the one off, I will call it, of the GCS, we are indeed at a very good level, 93.5%. Also, what is important is the evolution of the expense ratio.
As you see, we have an expense ratio now 27.5%. Oliver mentioned that before. If you think just 2 years ago, we were at 28 point 7%. So there is definitely a nice improvement. And I will say we are not done with looking for further improvement in this base ratio down the road.
So I would say, clearly, the combined ratio might look disappointing when you look at 95.5%. But again, if you look at how the majority of our OEs have performed, in reality, we have a lot of things to be very proud of. And we can see this at Page 15. Germany is definitely doing very, very good. We had a combined ratio 92.4.
Percent. Sometimes, I like to go back in history, and there were times where the combined ratio in Germany was not 92.4 percent. There was maybe 5, 6, 7 years ago. So we should also recognize that we have been able, over the last 5 years, to achieve a massive improvement in a company which is making more or less 20% of our net premiums earned. So this is not a small thing.
Italy is performing always at a very good level. In France, I will say there is some work to do. But to be frank, there was also a lot of volatility, large losses and weather related in the 4th quarter. So the 4th quarter was kind of challenging for France. And then we are very pleased with the development in Eastern Europe.
That's also a region which was operating at very different level of combined ratio just a few years ago, and now we are below 90. Spain, we discussed during the year the results of Spain. We expect to have better results as we move into 20 20. In the case of the United Kingdom, we have some one off. Adjusting for that, the combined ratio will be closer to 96%.
And then AGCS, clearly, the number is very high and the reserve strengthening is about €600,000,000 If you look at the accident year, combined ratio, that's slightly north of EUR 100,000,000. We also should recognize, however, that the net cat activity on AGCS was very low. So in reality, if you normalize the number for AGCS, you might be closer to a combined ratio of about 105 on an excellent year basis. So all in all, I would say clearly some work to do at AGCS, but that's not just Allianz, that's also market issues. And then most of the operations are delivering according to our expectation.
Moving at Page 17. Investment income, if you look at the interest and similar income, because in the position at Harvesting, we have some volatility. When you look at the core of the investment result, that's very stable. And that's a good sign because despite the pressure coming from lower interest rates, we have been able somehow to maintain a stable interest and similar income. Clearly, as we move forward, we are going to see some reduction.
But this also shows that we are not just exposed to the market dynamic. There are also things that we can do in order to mitigate the challenge coming from the low interest rate environment. And now we can switch to the Life business at Page 19. First of all, we are very pleased with the new business margin, over 3%. And again, the interest rate environment in 2019 has been brutal.
So let's we got negative interest rate for the majority of the year. Despite this development, we ended up at a good level of new business margin. The business mix is consistent with our target. And also, we have been able to increase production, especially in Germany Life, but also in the U. S, we had growth twenty 19.
Page 21, the operating profit for the Life business has been very good. As you remember, yes, we had also a couple of one offs like the deck, the change in deck in Q3 in Allianz Life. But there is also a strong underlying performance. I'd like to highlight the loadings and fees, which are increasing 8%. And clearly not the entire amount of loadings fees translates 1 to 1 into profit, but I will say about half of it is operating profit that should be sticking moving forward.
So from that angle, I will say that also compared to what we thought when we put together the plan in the Capital Market Day, we see definitely more traction on this position that we were thinking just 18 months ago. And this is something that should support our profitability for the Life business also moving forward. So the bottom line of the story is a good development from the underlying performance. And then on top of it, we have had also the DAC change. And in the Q4, the amount of realized gains has been a little bit more elevated than normally, and that's because of the changes that we had to do to extend duration in an environment where the duration of the liabilities getting longer.
And also the volatility in the market has been very low in the 4th quarter. And on top of that, we didn't have basically impairment on the equity side. That's also very different from the situation that we had last year, Q4 2018. With that, at Page 23, you can see which OEs are contributing the most to the nice improvement in operating profits in the Life segment. Clearly, United States, and that's a combination of volatility, also the deck change, good underlying performance.
So everything went in the right direction for the United States. And I since this is my former company, I like also to see that now they had the biggest contribution operating profit, even more to Germany Life. And I'm sure that the colleagues in Stuttgart are going to do all the best they can to be again number 1 in operating profit. In Asia Pacific also, we have a very nice development. Just a few years ago, the profitability coming from Asia Pacific was half, this profitability.
And if we when we had Korea, there was even a question mark if we're going to have a profit or a loss. So now we are in a very different situation. And then we see also nice development in Italy and France. And in Italy, in particularly, the development is driven by the unit links because clearly in a market like this, the assets basis is going up significantly. At Page 25, investment margin, as you see, is stable.
And during the year, we guided you to something closer to 80 basis points. So at the end of the year, we ended up at 80 6 basis points. Again, here we have the fact that the 4th quarter has been very strong because of the reasons I mentioned before. But overall, we are pleased to see that there is overall some more resilience compared even to some of our expectation. Then as usual, the asset base is growing and this is kind of supporting the stability of the investment margin when you look at that in absolute terms.
So now we can switch to the Asset Management segment. So we have in total, dollars 2,300,000,000,000 of assets under management. So that's a really staggering number. And when you look at the assets, 3rd party assets, we are at €1,700,000,000 And as you're going to see in a second, this is a higher basis compared to what we had in 2019, which is also kind of promising for the development in 2020. We give you also now some the pie charts where you can see the composition of our assets by different classes and also by regions.
One thing I'd like to highlight is not new to you, but maybe now it's even more evident. We are very much, if you want, geared to fixed income. 80% of our assets are in fixed income. And even when you look at the multi assets, more than half of it is also fixed income related. So from that point of view, I will say we are not so exposed to the pressure coming from the on the fee because in the fixed income, there is less pressure compared to equity.
And in an environment like this, clearly, also when rates go down, clearly, we are benefiting from this development, which might offset some of the negative impact that low rates have on other parts of our business. So this plays into the diversification element I was talking before. Page 29, as you see, the assets under management for 3rd party increased by 17%, and everything went in the right direction. The flows have been positive and also consistently positive over the quarters. And as I said before, AGI had also positive flows in the 4th quarter.
And then also the market development was favorable and even the exchange rate had been favorable. So when you get a situation like this, clearly, we have a nice increase of the assets. At page 31, the revenue went up 6%. If you adjust for the exchange rate, the growth was 2%. Here, we had the effect coming from the Q1 2019 because, as you remember, the Q4 of 2018 was very, very bad for the capital markets.
And that has dragged a little bit down the revenue in the Q1. But then clearly, we saw a different trajectory in the remaining quarters. And we should see also this play out in 2020. The fee margin, it's a little bit lower both at PIMCO and AGI compared to last year. But half of the reduction in fee margin is due to investment that we have done in closed end funds, and this acquisition cost cannot be deferred.
In reality, that's a positive because clearly, when we look at the business case, we make a nice IRR out of this closing funds. So that's just a timing issue. Otherwise, I would say the mix has led to a little bit lower new business fee margin. But overall, we have a very, very strong picture. And we can see this at Page 33, where we can see that the operating profit has gone up.
We also adjust in our or show you the adjusted operating profits if we remove the performance fees so that you can get a little bit of sense what is the underlying trajectory versus potential volatility introduced by the performance fees. And when you look at 2019, you can see that the underlying performance was pretty much similar to the total performance that we see on the operating profit. PIMCO has been positive. Clearly, we have also a fixed effect here. But overall, PINK has been able to increase the operating profit adjusted for FX by 4%.
And if I were to adjust also for the investment in this closing fund at the beginning of the year, the growth rate will be 5%. In the case of AGI, you can see a small reduction of the operating profit, but also here we have this impact coming from our closing front. Adjusting for that, the growth will be 2%. So overall, I will say a good year for Asset Management and also very good basis to go into 2020. Corporate, Page 35, it's a significant improvement compared to what we saw in 2018 and even the prior periods, and the improvement is mostly driven by Allianz Technology.
Now we are coming to a different phase. So this is also something that is going to stay more or less at this level in the future. So now we are in a different situation compared to what we had just a couple of years ago. And with that, I will move to Page 37, where you can see what happened below the line. I will not go into this slide.
If you have any questions, I'm happy to get your questions in the Q and A. And now we come to page the last one, which is maybe the most interesting page for you because I'm sure that you know our numbers by heart, by time, so for 2019. So let's speak about 2020. Overall, as Oliver has mentioned before, we are targeting a midpoint of EUR 12,000,000,000 plusminus the customary €500,000,000 When we look at the different segments in P and C, we want to have a different performance compared to the €5,000,000,000 that we posted in 2019. And clearly, part of this improvement is going to be driven by different results at AGCS.
In the Life side, we are kind of normalizing the results of 20 19. But with 4.4%, we are definitely significantly above the midpoint that we set for 2019. And we should consider that we had in 2019 Banco Popular, say the joint venture profit. And starting from 2020, we don't have this profit anymore in our operating profit. On the Asset Management, we are kind of keeping the forecast for 2020 flat over 2019.
This is definitely on the conservative side if the markets are staying the way they are. And if the U. S. Dollar staying the way they are, clearly, there is some upside potential there, but we always like to take a little bit of a cautious stance on this one. And then on corporate, it's more or less the level of last year, just adjusted for some volatility in the investment income.
So overall, with $12,000,000,000 we are looking to another successful year in 2020. And again, I believe we had a very strong performance in 2019. So we have all the reasons to be optimistic about this year. Thank you. Yes.
With this, we are happy to take any questions.
Thank
you.
And we'll take our first question. It comes from Michael Huttner of Berenberg Bank. Please go ahead.
Fantastic and well done and thanks for the lovely buyback. I just have two questions. The first one you said please ask, so this is the organic capital generation, the minus 1% in Q4. You said there were 2 effects, AGCS and one other. And the other question is for your guidance of €12,000,000,000 plus minus.
What is it that you're assuming for AGCS and where you're at? And if I may, that's the last question. I was speaking to one of your to one of your journalists and he was saying that there had been IT kind of alfeta, which means interruptions. And I just wondered if that's included in your cost assumptions. Thank you.
So maybe I can start with the capital generation. So we had 2 effects. 1 is this AGCS reserve strengthening. The other one is related to Allianz Leben. That's more of a true up, if you want, in the calculation.
Because just at the end of the year, we have the statutory accounting, gross margin, how much we put in the LSP, how much we have for a real declaration and also how much unrealized gains we have. So during the year, we don't have the oldest number because clearly this happens just at the end of the year. And so clearly, we need to do a better job, try to estimate what the year end could be. This said, when you look at the 12 months, the generation coming from Allianz Leben, including the new business, is about EUR 2,000,000,000 even more than what we had in last year. So that's just, if you want, call it this way, sort of accounting effect in the 4th quarter just because our model ended up produce, if you want, too much Solvency II earnings for the 1st 9 months.
And then there is a catch up to what should be the expected level by 2000 by the end of the year. So we're going to work on refining that. That's also important. Reality is a switch between Solvency II earnings and surplus funds. So fundamentally, especially for Allianz Flavin, the reserve the own funds are not really changing.
In our case, because of the transferability restriction, there is a little bit of an impact. But fundamentally, just if you want an accounting or actual hedge for up at the end of the year. The main point is our capital generation for the year is at 8% adjusted for the GCS, and that's also the level that we anticipate for 2020. The other question was on AGCS and what is our expectation for AGCS. I will say that we have 2 expectations for AGCS.
1 is potentially combined ratio of 100, could be also slightly above 100. And so I will say that this is somehow how we are thinking about the performance of AGCS in 2020. So in a possible case to go to 100, but that could be also slightly above 100. And this will depend on let's set aside purely natural catastrophe. That's a totally different conversation.
This is going to depend on the level of inflation that we're going to see. So we are still a little bit cautious on the inflation level. We clearly see massive rate changes coming, especially in the U. S, but also in Europe. There is a lot happening, but clearly nobody can really predict how inflation will continue to develop in 2020.
But clearly, we expect to have a different level of performance for 2020. And if you ask me, I will say that by 2021, I would definitely expect that we are going to be below 100%. And indeed, I personally still stick to my idea that we should be able to get to 97% combined ratio by 2021, which was more or less the old plan. So I think the market is just supportive right now. I think everybody is recognizing the issue.
And I believe this is going to help to get to a very different performance moving forward. The last question, honestly, speaker did not understand.
I can help. Otherwise, I'm getting bored anyway. Because of the technical detail, by the first ten sentence words, it's noise in the Q4, Michael, forget it. On the Solvency II earnings, it's 8% over the year. That's why we want actually no more quarterly earning.
I'm just kidding. Kidding aside, sorry. On this thing, you asked what the IT outages have cost us and I think this is within the normal course of operations. Sometimes the computers don't work, including at Amazon and others. But that on a more serious note, we had in August October in Allianz Partners and Allianz Germany, significant outages that we have been in the process of addressing and consequences for customer satisfaction and cost have to be taken serious.
The recent trends have been very good and very positive, and we need to keep on working on them. But it's not something that creates massive disruption on expenses or any other items. It's more a concern for customer and employee motivation than most other things.
Thank you. And we can move to our next question. It comes from John Hocking of Morgan Stanley.
Good afternoon, everybody. I've got three questions, please. Firstly, starting with AGCS. Looking at Slide B42, this is a comment that the portfolio restructuring is ongoing. I was wondering if you could give a little bit more color about that in terms of where we are in that process and what the parameters are, whether this is just a question of getting business past renewal dates, etcetera.
And then second question on AGCS. I was wondering if you could give a little bit of color in terms of how you've got confidence that you clearly seem to have in terms of whether reserves are set down, particularly some of the trends that you were talking about in London before the New Year break in terms of some of the D and O stuff? And think German liability was mentioned this morning. And then just finally, Oliver, at the beginning in your preamble, you made an interesting comment about if there's still business units within the group that aren't earning acceptable returns. I wonder if you could give a little bit more information on that.
And are there any particular areas that you might not find obvious to see from the disclosures?
Yes. That fits very much with your question. I'll start with that. That's AGCNS, of course. By the way, unfortunately, not just 2019, but we have now had a number of years of and that's the real issue.
So the question is not are we comfortable with the reserves now or not. The cleanup we need to do there is more fundamental. And it touches many items. It touches 1st and foremost portfolio appetite, what industries want to be do we want to be exposed to, what lines of net lines are we offering these, what type of wordings are we offering. I think there has been a lot of negative inflation that we need to get out of the system.
And therefore, would be it's not just about price increases, but really changing wording, changing portfolios and getting rid of overexposures. You just mentioned one example. So for in Germany, in Germany, we had liability portfolios that are overall excellent. But when you go deeper and deeper, you find that we had a huge market share in automotive suppliers and anybody with a brain should have thought through that if the industry is in trouble, while we don't cover recall for OEMs, there is recall exposure in the automotive suppliers and that has been mismanaged. So there is a lot of work going on.
The other area that I'd like to mention is reinsurance. I think we have a number of pieces of homework to do on how do we protect our earnings better. And that then feeds into the question of capital efficiency, how do we do that in a way that is capital efficient? And last but not real, real efficiency, when you look into the model, let's take an example for a quarter share, you get between 26% 28% ceding commission. If your own cost ratio is north of 30%, your incentive to reinsure is 0.
So we need to make sure that the productivity levels get to a level that reinsurance with the market prices actually makes sense. So we need to have a different level of productivity. Now why are we confident that we are going to get there? We've put one of our best managers on top, Jochen Muller, who has transformed the German business. We have one of our most talented finance people in there with Claire Marie.
We have put Thomas Seppen. So we systematically been changing the team. And now we need to move into more consequential execution. Now last comment I'd make, it's not just AG CNS. I think as an industry, we need to really work harder on commercial lines.
It's both in terms of processes, still a bit archaic. We have a joke, all the brokers drive the fairies and the shareholders do not get a proper return. And I think that's something we need to address. So Commercial Lines overall, to answer your question on where the returns have to be and they're often hidden in national portfolios where the retail side is hugely profitable and we have some cross subsidy to commercial and we're working also on that. So this is not about, okay, the UK makes more or less money than the other guys, but also inside of the countries, we have portfolios to fix that have been cross subsidize by a largely very well performing portfolio.
So I would like to also reiterate, in AGC and S, we have many portfolios that are actually making very good money, but we need to make sure that we focus on those and stop doing the nonsense. Thank you.
Okay. We'll
move to our next question. This comes from Andrew Ritchie of Autonomous.
Hi, there. A couple of questions. First of all, Giulio, could you just update us on what your current view is on the Saga, which is the Solvency II review the latest permutations on that and what your current view on potential impact would be given most recent discussions? Secondly, what's going on in terms of further redesign of life products given the move down in interest rates? I think Q3 and the inside Allianz Day, you said you were looking particularly at a further new permutation of products in Germany to align with an even lower yield curve environment.
Can you just update us on that and the kind of feasibility of keeping the new business margin over 3% while still generating sales growth? The final question, Oliver, you've referred several times to Commercial Lines as a whole. So what is the drag from commercial lines as a whole? I mean, you said it's being subsidized by retail. Forgetting ACGS for a minute, I'm talking about the rest of your commercial lines, which I think is about 30% to 40% of the rest of the book.
What is differential in terms of combined ratio between that and retail? Thanks.
Okay. Maybe I can start with the Solvency II review. So if we look now at, let's say, the idea to go with the last liquid point from 20% to 30%, the impact at year end on our Solvency II ratio will be a little bit north of 20 percentage points. So there will be a significant impact. Clearly, 1st, we don't think this is going to happen.
As you know, there is already a different potential approach, the Dutch approach. We also believe that the last liquid point should stay at 20%, but somehow between 20%, 30%, there are other potential ideas that are more benign, clearly. Also, in the case we get a change in the last liquid point, we have always the possibility to change our duration, mitigate the impact. In general, there are things that we can do. But also, we are since there is a lot of uncertainty around what could happen, we also clearly think about the potential use of transitional because especially if we have a change which is massive, like going from 20 to 30, Clearly, we can change the portfolio to mitigate the impacts, but this is going to you don't do this in 1 quarter, right?
It's going to take a little bit of a while to change our asset portfolio. So from that point of view, clearly mitigation action that we are definitely discussing is also the potential use of transitional. What is very important as we think about the new business that was your question is to make sure that the new business production is as good as we had in the last years under the new conditions. So we are taking a lot of action. In the case of France, we are going to introduce by the media product.
I will not use this as a marketing statement, but between us, we can say with a negative guarantee. So at the end of the day, the guarantee are going to be less than 0. In the case of Allianz Life, they are working. Although in Allianz Life USA, the interest rates are definitely north of 0. They are still working on a playbook with interest rate of 0, and this should give them the possibility to have a new business margin of 3% even in a very tough environment.
For Allianz Leben, clearly, we had the same kind of conversation and we are going to make product changes, but also it's going to be a lot about managing the mix. We have already products, hybrid products that clearly have, if you want, a very low extremely low guarantee, it's more a salt protection. And what we are going to do is clearly to see how we can steer the mix in that direction. Are we going to be able to sell despite the product changes? I strongly believe in Germany for sure.
I have no doubt that our German organization can definitely sell a different set of products. So no doubt on that. And when I look also the rest of the European markets, I think that's absolutely doable because everybody is in the same situation. I would and also in the U. S, I've been there for many years, and we have always been able to manage to get to a product portfolio, which is suitable to the environment.
So you might have clearly a drop in production a single year, but eventually, the market and the system is adjusting. So I am pretty positive that we are going to be able to have good production also in a new environment. And then you had a question on commercial lines. That was a question to Oliver, I can pick it up. At the end of the day, you really need to look company by company.
If I just put all the numbers together and I remove the GCS from the picture, we might even argue that the differential between commercial lines and personal lines is not huge, but that's because then maybe there is a country where the commercial line operations can be profitable and they had the entire segment to look better. I can just tell you where we definitely have room for improvement is in France. That's a significant block of commercial business. And definitely, in France, we are operating at a combined ratio, which is way higher compared to what we have in retail. In Germany, we had the same situation until last year, so 2018, but we made a lot of progress in 2019.
So I will say the gap between Commercial Lines and Personal Lines is relatively small, so it's not significant. So if you ask me, it's a lot about getting the portfolio in France to operate at a different level, level, making sure that the portfolio in Germany is going to be performing as it performed in 2019. And also, I will say, in Spain also, there is also some room for improvement. But in totality, I will say the gap is not huge.
Sorry, can I just get back to Solvency II? There's various other aspects up for discussion now, potentially apparently rolling back on risk margin as well. I mean, I think that's your view on some of the other aspects.
There are many other things happening there. Clearly, potentially, the risk margin could be a positive. Also, there are conversations about the volatility adjuster. So but clearly, moving from 20 to 30 last week's point, there will be a big impact compared to what the benefit could be from the other. Reality is we don't know what is the final proposal that IOP is going to come up with.
I believe that most likely the proposal is going to be a reasonable proposal, but we need always to be prepared for all kind of possibilities.
Okay. Thanks.
Thank you. And we'll take our next question from Peter Elias of Kepler Cheuvreux.
Maybe I can have while we get in on Andrew, the issue is very simple. The modeling only ends at the end of June. Then during the German presidency, people will look at the numbers and discuss what the numbers mean. So they're still in the data gathering phase and then they will trade off various items as they read, for example, the change in interest rates and then we'll talk about last liquid points and they will talk about volatility adjusters and then they will look at the fact that credit spreads are done all time low. Who would have thought the Greek Republic can finance short term money at negative rates?
Give me a break. So people need to really look at the data and then we know that under the Portuguese presidency, which is in the 1st 6 months of 2021, the things come out. So now speculating on what the outcomes may be, I think, is reading to you, it leaves.
I'm guessing the mic has been handed over. Can you hear me? Yes. Yes. Thanks very much.
So, Peter, I had three questions, please. The first one was on the Life margin. I mean, I was very pleasantly surprised to see that the basis points guidance hasn't been sort of downgraded from last year. And I mean, I take your comments Giulio on the AUM supporting the sort of the absolute level of the margin. But I was just wondering if you give us a bit more color on your thinking behind the sort of the sustainability of the basis points.
And I mean, perhaps that ties in a little bit with Andrew's question, but that would be great. The second question was on Asset Management. And I saw sort of the comments on the tape that I mean potentially that the coronavirus shouldn't be negative, could even be a positive impact from obviously nobody likes to benefit from things like this. But I was wondering if you could just give a little bit more color on your thinking there and how asset management has sort of started the year, right? I mean, I saw comments about good inflows in January.
So I was wondering if you could just elaborate a little bit, that would be great. And finally, I saw recently that you struck a deal with Microsoft to provide ABS services through the cloud to other insurers. I'm just wondering if you
could sort of elaborate on your thinking there
and the opportunity. I mean, I guess at first sight, it looks like you're sharing a digital edge, but maybe people are going
to get this anyway and
you want to benefit. Just wondering if you could talk about that space a little bit. Thank you very much.
Yes. Okay. So I can start from the investment margin. As you see, our guidance for 2020 is 75 to 80 basis points, which is kind of stable compared to the guidance that we had also for 2019. And the point is we definitely see more stability.
We are working clearly on making sure that we can get, I call it, a spread that we like to achieve. And for example, in the United States, if you remember, at the beginning of 2019, we had some drag on our investment margin, our spread. And somehow, we have been working during the course of 2019 to restore the kind of spread that we like to see. Clearly, when we also work with our European companies, we are making sure that we can secure the amount of investment margin after profit sharing that we think is adequate. Keep in mind that we are not necessarily at a minimum profit sharing.
So this give us some flexibility. So overall, we had a sort of push to see what we can do to keep the margin as stable as possible despite the challenge coming from the lower interest rate environment. Also think about that, that's clearly the low interest rate environment has an impact on our investment income, but this is going come also a little bit over time. So we are trying to react. And that's also why it's so important that we make the right we make the right decision on the new business.
That's critical to make sure that we see stability also beyond 20 20 to 2021. On the Asset Management, my remark about the coronavirus that could be helpful for Assimilian. First of all, that's a little bit of a cynical remark, but it's just a technical consideration. Clearly, if you have sort of tension in the capital markets, you might argue that in this case, the interest rates are going to go down. Also, you might see an appreciation of the U.
S. Dollar. So when you combine the two things that might be a positive on the Asset Management. I will not anyway overemphasize this as a main driver, and that's definitely not a wish. So that's just a consideration because the question was what happens to your asset management in the case of coronavirus.
And I will say that Asset Management will not be necessarily impacted by the coronavirus. And potentially, it might even be a slight positive. But don't do too much out of that. On the Microsoft, yes, and the idea that to have ABS, which is a disposal for companies which are not Allianz, that's definitely something that we are pursuing because we think we can also create additional revenue out of it. What is important is when you look at ABS, there are different components.
So there is a core component and then you have all the customization that you can do. So we are not necessarily giving the entire ABS to potential non Allianz Insurance Company. It's just part of the ABS solution then clearly, what is the customized part is going to stay just with us.
Okay. Great.
Thank
you very much.
Thank you. And we'll move to our next question from Farooq Hanif of Credit Suisse.
Hi there. Happy Friday, everybody. Just going back to some of the comments you made on combined ratio in 2020. So you in the notes, you mentioned strong progress expected in the U. K.
In 2020. Is there some more guidance you can give with some examples on what to expect in the UK, particularly around synergies? Secondly, the massive growth you've had in new business in life business. So across the board in capital efficient products and protection, what's going on there that's better than your peers? And how does that lead into 2020?
And then on the restructuring of AGCS going forward, what have you baked in for potential reserving risk? And what about top line? Thank you.
Yes. So starting from the UK, clearly, starting 2020, we are going to have now the full consolidation of LV and also the business of Legal and General. So our expectation for 2020 is of a combined ratio close to 95%. And that's very important when you look at the combined ratio of 2019, which is just the Allianz UK, you need to normalize that combined ratio for a few effects. So in reality, we are starting already from something closer to 96%, as I was saying before.
And then when we combine also the other two businesses, we should be able to get to a 95% combined ratio. At least this is the plan for 2020. In terms of synergies, you're not going to see the synergies flow in 2020. They are going to come later. So in 2020, we're going to have rather some integration cost.
But the idea will be that between LV and Legal and General, we should be able to realize €50,000,000 of synergies. And in my opinion, this number is even a little bit conservative. So I think that we can do better than that. But I will say, at the moment, we are operating with a potential synergy of at least EUR 50,000,000 Then you had a question on the AGCS, right? And the reserving, what is the reserve risk?
I would say the reserve risk that we have on the GCS is the development of inflation. You saw that we made a big movement at the end of 2019. And you also saw that somehow we were not expecting that level of inflation when we had just our meetings or the conference call in at the end of October, beginning of November. So now we think that we made a good move to reflect inflation, but you never know what could happen. That's also very important.
The new business is going to be most likely exposed to differently to inflation because when we speak about new business, we are not just changing price, we're also changing deductible, we're changing limits. So from that point of view and we are also getting rates of some accounts on some books. So you might see some different trends in our new business compared to what we have in the in force. But overall, we feel that we made a strong move in 2019 with the reserve strengthening, which is very high with EUR 600,000,000. So there we are going to see what inflation is going to how it's going to play out.
On the Life growth, I will say the main difference is the balance sheet that we have. It makes a big difference clearly if you have significant the so called hidden reserves, if you will. So how much unrealized gains you might have in your statutory accounting? I'm referring to Germany. How big is the level of participation reserve that you have?
How what kind of room you have today, minimum policyholder participation? So clearly, depending on the German business works as a portfolio. If your overall portfolio is stronger, you can definitely do more than what competition can portfolio. But make sure that we have the same kind of portfolio. But don't neglect that 3, 4 years ago, Allianz Leben has made a significant change to the product portfolio.
And you can see this is serving us well right now. And now I think we're in a situation where we need to make other changes. But history has shown that we can be successful, and I believe that history in this case is going to repeat itself.
Can I ask one question quickly? So on the AGCS reserving that you've done, have you added reserves to lines and books where you may not have seen the deterioration, but you've kind of guessed that systemically there may be areas of risk?
No. We booked reserve where we saw that the trends were getting out of line. Otherwise, we didn't book reserves for potential things that we are not seeing. The rest of the year, dollars 600,000,000 was a good number already. So we have taken a look at what we see.
And again, I really believe the environment is very supportive. So I would expect that as we go into 2020, 2021, 2022, the pricing strength is going to be very significant.
Thank you very much. Thank
you. And we'll now take our next question from Vinit Malhotra of Mediobanca. Please go ahead.
Good afternoon. Thank you very much. So two quick ones on AGCS please and one on Life. Again, very quick follow-up. Thank you.
First one on AGCS, I mean if we go back, say, 10 years or 12 years, this used to be a €3,000,000,000 portfolio, 90% 90% s combined. And a lot of business mix businesses have been transferred to AGCS, of course, including Simon and Son, but even others through the last decade. Would you say that AGCS has sort of been treated like a bad bank and now that's why the problems are becoming much bigger? Or would you say that that's really not the case, HCS has whatever issues everybody else has as well? So that's literally just a test of just a question to ask that.
Second question would be again on AGCS specifically. Would you consider that in the U. S, for example, any juror thought behaviors could potentially pose a risk for yourselves for AGCS in this coming year or next year? And if that business is not relevant, please, I would love to hear that as well. And last thing is just that you mentioned the life growth coming from the loading and fees and business mix.
But also I would like to just understand the capital efficient products, which obviously grow very strongly for many years, but we still have that, say, EUR 200,000,000 normal run rate quarterly operating profit from this segment. Is that and in the past, you've said that this could increase. But is that still a few years away this increase? Or are we getting to that stage where we should expect more numbers from this segment? Thank you.
Yes. Maybe I'll start with a bad bank. No, AGCS is not a bad bank, not at all. And what we are seeing right now, it's something that you can see also in other competitors. So we are not the only one being exposed to the change we are seeing.
So from that point of view, AGCS is very far away from the bad bank. I want also because I was thinking the other day, you mentioned 10 years ago AGCS was a very good company and now it looks to be very different. And it's still a good company, by the way. I was thinking the other day, 10 years ago, Allianz Life didn't look to be a very good company, and we had put a lot of capital now. It's going to pay USD 750,000,000 dividend as we speak.
So I strongly believe that CGC is going to return to a better level profitability. It's far away from being a bad bank. The only thing we know, the industrial business tend to be more challenging than other businesses and also the volatility might be higher. But I'm pretty confident that we have a good asset. We just need have a more supportive environment and also making sure that we made the right choices.
But no concern about the liability the business. On the liability side, in the U. S, our book in the U. S, honestly speaking, is not so big. So from that point of view, I would say any development will be relatively muted.
Also, we see in the U. S. A massive rate increases. So from that point of view, in reality, the U. S.
Book is a book where fundamentally, when you look at the situation, it might be that profitability is going to be restored pretty quickly. Then clearly, every time you speak about the United States, you need to be generally cautious because we know the environment tend to be very, very prestigious. But what we see right now from a rate increases point of view is extremely comforting. So we and also another point is not liability, but financial lines in the United States, we our numbers have been indeed not that bad at all. So I wouldn't say that the U.
S. Must be a main source of concern for us. On the capital efficient product, the issue that we had there, and I don't want to bore Oliver because he doesn't like long accounting conversation. The point is how our German colleagues are somehow also splitting the profitability and operating profit between capital light products and if you want the old products. You could have it could be done in a different way.
We had the situation of the way the deck accounting is done. So we have a sort of drag happening. You would not expect to have a drag in IFRS, but the way they do the calculation leads towards the same effect that you could see in a statutory accounting where you cannot really defer the commission. And so that's since they are growing that business in a substantial way, you can see this drag there. We could change the methodology and just allocate the profit based on the assets under management.
And then you will see definitely a better result in the operating profit line.
Okay. Thank you. Thank you.
Thank you. Thank you. And we move to our next question. It comes from William Hawkins of KBW.
Hello. Thank you very much. First question, you commented slightly on this already, Giulio, but just to clarify. In the combined ratio, your confidence on improving the Spanish results next year, you sound confident throughout 2019, but the ratio has sequentially deteriorated through the quarters. Maybe you're just cleaning up the book for 2020, but if you could clarify that.
And also then on France, could you talk more generally about your ability to improve? You've already talked about commercial versus retail, but that just seems to be an embedded issue in your portfolio. And the French combined ratio has actually been deteriorating for the past 3, 4 years. And there are some peers that are getting that ratio down to the low 90s. So I appreciate what you said about commercial versus retail, but it'd be interesting to hear if you've actually got a solution to that.
I mean, for example, why wouldn't you just be doing a significantly less French commercial business? Then secondly, please, you help me understand the €4,400,000,000 guidance that you've given for Life, how that breaks down between the investment margin and the other business? I mean, I appreciate you've given an investment margin guidance, but it strikes me that I need to take the worst case for your investment margin, 75 bps, and assume that all the other business doesn't grow to get to €4,400,000,000 So either you're punching that €4,400,000,000 at a very low level or I've missed some elements of the equation? And then lastly sorry, just to clarify, I'm sorry if I can get this from somewhere else, but your €600,000,000 reserve charge in AGCS, what were the total reserves in AGCS? And what were the reserves for liability and financial lines before you added EUR 600,000,000?
Thank you.
Maybe the step by step with AGCS. The total reserve for AGCS are about EUR 10,000,000,000 and the reserve for the liability line are about EUR 2 point yes, I sum up liability line and financial lines because I don't want to give you too many details, but we are about close to EUR 5,500,000,000. That's on the reserve for AGCS. On France, what we see in France is and we saw that in 2019 and also in 20 18, we see that when we add up all the large losses weather related, we have let's say, in 2019, we had about a load of about 13 percentage points. When we do our plan, we are more at 11%.
So if we believe that the 2 percentage point gap is just volatility, then one could say we are actually in a better spot compared to the 98% that we see. But we are also, I'll share your points, we are kind of reluctant now to say 11% is the right number, 13% is just bad luck also because in 2018, the situation has not been it's been also kind of negative. So definitely, in France, we want to take a closer look at what we can do to improve the performance. And that's what we are doing indeed with the management team of France. And then we will see where we land.
A major driver of improvement anywhere for France is supposed to be the expense ratio. We want to bring the expense ratio down further. And I have to say that on this, the French colleagues have been very good also in the last year. So now we want to continue to push on the productivity element. And clearly, we're going to take a closer look at the performance in Commercial Lines, but also we're going to take a closer look at what is the amount of loading that we need to put for nat cat and with the related and large losses and making sure that our pricing is going to maybe reflect a higher level compared to what we have assumed in the past.
On Spain, yes, we're confident that we are going to get better results in 20 18 in 'twenty and with, I would say, combined ratio should be below 95%. I just want to tell you, Q1 might be challenging because of the fuel loss losses. But when we look at the underlying accident here also at year in 2019, we see that there is a good strength in the accident year. So we would definitely expect to see better results in 2020 compared to what we saw in 2019. But just for the Q1, we had just a couple of large losses that you might not see the improvement fully in the Q1 yet, but you're going to see this in the as we move throughout 2020.
On the investment margin, okay, The way I'm looking at our Life business, we had an operating profit of EUR 4.7 billion in 20.19. And I will say, if you remove Banco Popular because you need to remove that, we are at 4.6%. And then we had the deco set and which is 150. And then I would adjust another $150,000,000 for the investment margin. So then you start from a basis, which is about 4 point 3%.
And this is how somehow I'm thinking about the starting point. So you need somehow to remove Banco Popular, you need to remove EUR 150,000,000 which is a DAC issue. And then you need also to adjust investment margin towards the 80 basis points. So that will be the starting point for any kind of extrapolation to the future.
That's all really helpful. Thank you.
So it's 25 minutes past. So we have time for one last question, please, if there's any.
Thank you. Thanks for holding there. Thanks. Our final question comes from Ashik Musaddi of JPMorgan.
Just a few questions. First of all, can we get some color on the U. K. P and C outlook? What are we hearing?
Because most of the companies who have reported U. K. Motor, U. K. Home, when there is a clear message that claims inflation is still running about say 3%, 4% ahead of maybe more ahead of pricing.
So how should we think about UK motor? Because if I look at your guidance, you're saying 96 your portfolio and 95 including the acquired business. So it feels like you're talking about 93, 94 for the acquired portfolio. Are you comfortable with that number given what's happening here and given the pressure from FCA reserving sorry, the review that they are doing? So that's the first one.
Secondly, on ATCS, can we get some color as to what how should we think about net price increase, like clearly 9.5% or 10% price increase we are seeing? What would you say is a recurring, say, claims inflation at the moment? Or is it just hard to say that because you only learn about that over the year because it's just volatile at the moment. So that would be the second one. Thirdly, I was a bit surprised to see that
your
Can you just explain that dynamic a bit? These 3 would be really helpful. Thank you. Maybe starting
from some kind of rate increases we are seeing. I can just say in the last quarter and the Q4, when you look at rate increases, not just renewal, also new business on a written basis, you see across the portfolio something very close to 20%. So the rate increases that we see right now are massive. And so it's all about what kind of inflation assumption you make. If you make the assumption that inflation is 0, then you're going to have very healthy and nice combined ratio, but that's clearly not a realistic assumption.
When we look at assumption for inflation, it depends on the different countries. And I will say in the U. S, we are still thinking that inflation could be at a level of about 7%. So we are still thinking that the inflation could be pretty elevated. In the case of euro, we think inflation is going to be more towards the 2%.
So then you can combine this. And for our portfolio, we'll say there will be something closer to 4% to 5 percent inflation. But again, it's always hard to predict how the speed in inflation might change for the better or for the worse. On the UK, I will say that we saw what you are referring to, and we had also conversation with the local management team. And what they are telling us is that they are getting rate increases that should be enough to offset inflation, the claims inflation.
So from that point of view, there is confidence that at this point in time, we're getting the needed rate increases that were actually pretty healthy. So this is where the kind of confidence is coming that we yes, we should be able to offset the inflation. In the case of Life and P and C, I think the main difference is that the contribution of emerging markets in P and C is stronger compared to what we have in the Life business. The Life business is mostly we are speaking of investment, is mostly dominating by Europe. In the case of P and C, we have growth coming also from emerging markets or Turkey, and this makes a difference.
That's the reason why in reality, you need to adjust the yield for the different geographical mix.
That's very clear and very helpful. Thank you.
I just would like to remind us something. When you think about the outlook, I would like to go back to 2020 2021. So the first one is we believe we are on track to 2021 also because we really do have strong diversification in the portfolio. Now as a critic, you could say we have been benefiting from very strong investment markets. I would just like to point out to the fact that probably we don't know the numbers for Fidelity Allianz is by now the world's largest active asset managers dominated by fixed income, which is almost 70% of what we do, where we have had the strongest record on history in terms of investment performance, and that is unlikely to abate.
So Giulio has nicely said, we obviously don't know whether that will continue. So we are more market exposed, but that gives us a very strong bench. So when people thought about us 10 years ago as a P and C insurer attached with some distribution financing life businesses and then some startup called an asset management, I think that picture has dramatically changed. Now why do I say that? Because at the time when the commercial lines industry in P&C is struggling has to be rebooted and we are on track.
We have an enormously strong and vibrant business that we've built. 2nd observation, live business now, this is the 3rd time we are transforming it. First time was 2011, 'ten, 'eleven after the financial crisis and interest rates coming down after the euro crisis, 'twelve and 'thirteen. And we've been doing that working on the back book. It's like we didn't talk about that today.
We are still working on the in force book massively, not just on the new business. We are going to address the new business. By the way, it gets ever more difficult with consumers because with negative rates, as Giulio has said. And I wouldn't call that a negative guarantee. I would basically say the question, how do you think about protecting capital after you subtract costs?
So one of the things we'd really have to look at is what is distribution cost for the product, not just how do you address distribution cost alone, but and guarantee cost alone, distribution and cost will really matter. And that allows us to really work hard on the P and C portfolios that we have. And you can get from if you're nervous to look at the picture, is there something beyond AGC net? To reiterate, we're working on commercial lines. There is lots more work to do.
But the Spanish issues and the number that you have seen are really a one offs and you can call them a trap. Now Q1 this year, there's a lot of Nat Cat activity that's already happened. Australia, you've seen you have seen UK coming, you have seen Sabina. I don't know why storms always have a female name. I think it's men putting the names on it.
No.
It's dangerous, actually.
Yeah. I mean, no, it's Klaus. Yeah. I know we had Klaus. That's right.
But recently, yes, Niebaud, that's right. So somebody has picked this name. But anyway, I was wondering, by the way, do we have any female analyst on the phone? Anyway, different discussion. But kidding aside, the key thing is what one really needs to believe in, that you are on board of 1 of the strongest chips that exists in our industry, that we are not pumping on 1 cylinder, but on many and that we have both the will and the ability to deliver on what we set ourselves.
And I think you've seen the track record over the last 5 years and beyond. Actually, dividend is 7 years up. So you make your pick. We are confident that we can do what we've been promising. Thank you very much for listening.
All right.
Thank you
very much. We wish everybody a very nice remaining afternoon and a relaxed weekend. Goodbye. This concludes today's call.
Thank you all for your participation. You may now disconnect.