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. Yeah, good afternoon from my side as well, and welcome to our conference call. As you know, we have two presentations today, so I'll keep it brief and hand directly over to our CEO, Oliver Bäte.
Thank you very much, and thank you for joining on a Friday afternoon. I have a few slides to present on overall results and where we are on our journey. 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 A2. I will lead you through the pages as we are on a 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 2.0, and targets and outlook for 2020, and how do we think about that. Let me move to page A3. This has been the fifth 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 billion line to EUR 142 billion. That's 8% up, means basically more than double the growth of the global economy. Shareholders' income is up 6%, again, almost to a record level. 2007 was the highest. I hope we're crossing that, too. Our earnings per share are up 8% to EUR 18.9. Dividend per share as proposed to the AGM will be around EUR 9.6, 7% up. Our solvency ratio is back to a very strong level at 212%. Our return on equity has also reached an all-time high with 13.6%, and total shareholder return for 2019 was 30%. With that, I can hand back to Giulio. No, I'm not going to do that.
I thought it's such a pretty cool page that we can sort of end here and be fine. I know we have a little bit more to do because we are not just talking about the past today and the year but also what we're going to do going forward. Let me turn your attention to page four, and let's see how we're doing. We have targets for operating profit, earnings per share, and dividend per share. 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. Let me go through the individual 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 AGCS has clearly been disappointing, as has been, by the way, in the portfolio commercial lines at large. After many years of declining claims inflation, actually, we've seen a continuous increase in global claims inflation. It shows a little bit how industry is rattled by 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 that we have really understood what's going on. We're taking very strong action and 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 they will 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 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. The capital discipline, ladies and gentlemen, is here to stay. It's not been three years; it's been four years. It is becoming a part of our culture, and we want to get better and better at it. Are we at the end of the rainbow? No, we are not. There are more questions around. Does all of our business earn the proper returns? We are focusing on that more and more. Again, there is more to be done, but that also means there is more upside.
Dividend per share: I'm very proud of all of our people that worked very hard to deliver to you the seventh increase in dividend in a row. We also, not a small feat, show the consistency. We said we share the capital productivity with our shareholders; that's why we announced the share buyback yesterday. Now, some people say we're getting accustomed to it, 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. Due to very strong action on the solvency side after the August surprise of interest rates getting negative, we are being able to go back to numbers that are very much where we'd like to be.
I'm very happy that we are not just able but determined to bring capital back to you. Page number five 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&A and what you've been doing the last few years actually producing value? We report on that. I think we did a very fine job on the U.K. acquisitions. We have done a nice job on Latin America and what we've done in China. People said, Didn't you pay too much on Euler Hermes when you did the minority buyout? We are planning to free up about a half a billion in capital and upstream that to us.
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. That acquisition, so to speak, and that investment is surely turning into value creation over time as well. The last investments that we've done on an external side, as well 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&A transactions if and when they arrive. As I always said, we only do things that really make sense for us over time. 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. You're getting the dividend, you're getting the ratchet, and you're getting the share buyback on top of it. That you see on page number 86. We've basically paid out more than €25 billion over the last five years, and you see the components, how that adds up through dividends and share buybacks. Much for numbers, capital discipline, and how we are thinking about your money. Let's talk a little bit about how Allianz has performed.
As you know, we find it very important to balance all the stakeholders. We know that the ability to pay dividends and generate net income is dependent on how we are outperforming vis-à-vis our clients, vis-à-vis other constituents , and vis-à-vis our people. Page number seven shows you that we are working on these dimensions in parallel. As of last year, we are on all the relevant KPIs and the number one brand in our industry. We have the strongest rating in our industry. We are number one in sustainability, as seen by the major indicators. We find that very important because that talks to you a little bit about also how sustainable our business model is overall. One thing is to talk about the past and strong delivery on a consistent basis. The other one is how resilient the organization is to do that.
Now, page number 88 gives you a few more insights. One thing I'm very happy about is what we did last year. We crossed the 100 million direct customer barrier, something that's very important for us. By the way, on top of that, we have more than 200 million clients that we have through B2B2C. How do we think about the quality of our portfolio? The NPS numbers in terms of outperforming business have dropped a little bit to 70 because of deliberate decisions in Turkey to increase prices and clean the portfolio , which has impacted a bit negatively, and two companies in Eastern Europe. Overall, however, the most important number is on the lower right-hand side. We have the ambition over time that at least half of our business should be number one in terms of 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 six percentage points. 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. 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 already reached our 2021 target last year. 73 is the world benchmark, i.e. the top companies are in that range, and we're very happy to be that. I'll give you another one.
We are now the world leader in terms of using LinkedIn Learning. We are also investing in our people through digital means. Just as an example of what we're doing with our people. 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 comes to climate and climate change. Just some data on 89. Beyond our Net-Zero Asset Owner Alliance mission that we are on, which 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 they in insurance or be they investments. That is being rewarded, again, by the leading industry ratings, whether that's RobecoSAM or MSCI or FTSE4Good.
That is and will remain important to who we are and who we would like to be. Page 810. 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 AGCS. You need to really normalize for that.
You always have to assume that you cannot have those strong momentum all of the time, but we are very, very happy with 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 - 40 basis points on average is what we're trying to do 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 are so complicated, if products are not intuitive, and if you're wasting our money with very complicated processes and systems. Bringing down the number of products, the number of product variations, and the amount of paper that we send out is super important.
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 have 20% less, sorry, in our overall performance. That should immediately give us savings. EUR 100 million run rate is the minimum that we expect by 2021. 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 on a step-by-step basis. The upside is gigantic, again, both on the admin cost side and in distribution. M&A.
Everybody comes and say, You can do anything you want, but don't buy anything big. Funny that you read sort of a Newswire article that says, Allianz fails to do big deals." I think it's actually, for many of you , a big success. Let's talk about what we've actually done. Page 11. The most important ones were three: what we have done with acquiring the sort of second half of LV= in the U.K. and doing the portfolio with Legal & General. That is being executed and moved us officially to number two in the country. This is before adding in Euler and AGCS. There is even more that actually should be in the cake. The second one is what we've done in SulAmérica. We've discussed it last year extensively.
We're now in separation, which will lead us to be the number 3 P&C insurer in the country, actually number two in auto. SulAmérica gives us the scale that we need to have in the largest economy in Latin America with more than 200 million people. As you know, we were the first to have the wholly owned foreign financial holding company. Which is very important because we're going to build up our asset management and insurance asset management capabilities over time. Our joint venture with JD is working extremely well, far ahead of plan. As we go into more liberalization, once China is back in business, we'll also address the life insurance side. That's why we've been taking a stake in the largest privately held company we have in China, which is Taikang. That's all of them.
There are 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. Before we're going to arrive at very high earnings from China, a few years will go by. We need to keep on investing in what will be one of the biggest financial markets on this planet. 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, of EUR 10.5 billion and going up consistently. For 2020, we are planning a midpoint at EUR 12 billion with the usual EUR 500 million up and down range.
Again, let me, given particularly what is already happening in the first quarter; this is before major distortions around NatCat and other major economic crises. That is very important to understand. We've also been able to overachieve our midpoint and the target; we're obviously working hard to try to do that, but it cannot always be guaranteed. It's just a matter of numbers and statistics. Let me give you one last page. That is 813. It is not really the only question : what do we do in 2020, how do we think about the 2021 targets that we laid out last year? We are sticking to these targets, which is very important. The EPS growth is supposed to be larger than 5%, of which we would like to have 4% organically.
ROE north of 13% is clear and has been at a record level of 13.6 this year. We should be north of that, of course, going forward. The Solvency II ratio we've talked about. Customer sensitivity we've also talked about. We're working on getting to the 75% plus range. Again, on IMIX, as I'd mentioned before, we are already where we want to be. It's tough to stay there, so it's not going to be easy as we continue to transform this company. Overall, Allianz is very much on track to make its 2021 ambition, despite the noise we've had in the P&C segment. We will probably talk about that. There are lots of things going on in P&C to make sure that we improve the loss ratios, and everybody has hands on deck now. With that, I hand over to Giulio.
Thank you, Oliver. We can move to page three . I'm going to give you a quick update on the fourth quarter results. I'm going to speak a little bit more in detail about 2019 for the full year. When you look at page three, our results for the full quarter, 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 asset management, and when you look at the net income evolution. Clearly what is sticking out in this slide is the development of the combined ratio at 99.6. It is mostly driven by AGCS. I'm sure we're going to have time to discuss this later. Otherwise, I would say the quarter looks pretty good.
Also, I'd like to highlight the new business margin on the life side with 2.9%, despite the 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. Then also the flows in asset management have been positive again. This quarter was not just because of PIMCO, but also because of the contribution coming from AGI. A lot of good things in the quarter. Then as you see also in the headline, we had a reserve strengthening at AGCS. If we move now to page five, when we look at the full year, this comes at no surprise; our revenue has increased by about 6%.
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, by our property and casualty business. The evolution of operating profit, where we got an increase of about EUR 350 million, 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. This is again a sign of the strength, if you want, of our franchise, of our business model, of 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 share.
If we go now to page seven, 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. Now you see in the fourth quarter, when the interest rates have changed direction, at least for a quarter, the solvency ratio went up significantly to 212%; the main driver is the development of the interest rates. On top of that, we also had 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 questioned on this later also. I will use the Q&A to go into the technical explanation of what happened in the fourth quarter. What is important anyway is really to look at the 12 months.
When we look at the business evolution over the 12 months, we go to page nine, when we remove the dividend and the taxes from our business evolution, that was 7%. Adding the 1% because of the AGCS strengthening, that would be a net percent 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 forma from the 212% solvency ratio, the solvency ratio will be 209%. That's if you want the adjusted level considering the pro forma for the buyback. Moving to page 11. We can see here the growth rate in the P&C business. 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 that we got in the course of 2019 at the end of 2018. The price changes on renewal are positive across the board: 3%. These are also, I would say, price changes that are at least in line with inflation; sometimes they can be above inflation. 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 about the expectation for inflation moving forward. At page 13. The combined ratio for the year has been 95.5%.
If you adjust the combined ratio for AGCS, if you remove AGCS from the equation for one second, the combined ratio will be 93.5%. When you look at, let's say, the group performance excluding, if you want, the one-off, I will call it, of AGCS, 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 of 27.5%. Oliver mentioned that before. If you think just two years ago, we were at 28.7%, there is definitely a nice improvement. I will say we are not done with looking for further improvement in the expense ratio down the road. I will say clearly the combined ratio might look disappointing when you look at 95.5%.
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 on page 15. Germany is definitely doing very, very well. We had a combined ratio of 92.4. Sometimes, I like to go back in history, and there were times where the combined ratio in Germany was not 92.4, and that was maybe five, six, seven years ago. We should also recognize that we have been able, over the last five years, to achieve a massive improvement in a company that is making more or less 20% of our net premiums earned. This is not a small thing. Italy is always performing 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 issues in the fourth quarter. The fourth quarter was kind of challenging for France. We are very pleased with the development in Eastern Europe. That's also a region that was operating at a 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 2020. In the case of the U.K., we have some one-offs. Adjusting for that, the combined ratio will be closer to 96. AGCS, clearly, the number is very high, and the reserve strengthening is about EUR 600 million.
If you look at the accident -year combined ratio, that's slightly north of 100. We also should recognize, however, that the NatCat activity on AGCS was very low. In reality, if you normalize the number for AGCS, you might be closer to a combined ratio of about 105 on an accident year basis. All in all, I would say clearly there is some work to do at AGCS, but that's not just Allianz; those are also market issues. Most of the operations are delivered according to our expectation. Moving at page 17. Investment income. If you look at the interest in 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.
That's a good sign because despite the pressure coming from lower interest rates, we've been able somehow to maintain a stable interest and similar income. Clearly, as we move forward, we are going to see some reduction. 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. 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%. Again, the interest rate environment in 2019 has been brutal. We got a 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've been able to increase production, especially in Germany Life, but also in the U.S., we had a good 2019. Page 21, the operating profit for the life business has been very, very good. As you remember, yes, we had also a couple of one-offs, like the change in DAC in Q3 in Allianz Life. There is also a strong underlying performance. I'd like to highlight the loadings and fees, which are increasing 8%. Clearly not the entire amount of loading fees translates one-to-one into profit. I will say about half of it is operating profit that should be sticking moving forward.
From that angle, I would say that also compared to what we thought when we put together the plan on capital market day, we see definitely more traction on this position than we were thinking just 18 months ago. This is something that should support our profitability for the life of the business also moving forward. The bottom line of the story is a good development from the underlying performance, and then on top of it, we had also the DAC change. In the fourth quarter, 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 liability is getting longer. Also, the volatility in the market has been very low in the fourth quarter.
On top of that, we didn't have basically any impairment on the equity side. That's also very different from the situation that we had last year, in the fourth quarter of 2018. With that, at page 23, you can see which areas are contributing the most to the nice improvement in operating profit in the Life segment. Clearly, United States, and that's a combination of low volatility, also the DAC change, and good underlying performance. Everything went in the right direction for the United States. Since this is my former company, I also like to see that now they have the biggest contribution to operating profit, even more than Germany Life. I'm sure that the colleagues in Stuttgart are going to do all the best they can to be again number one in operating profit. In the Asia Pacific also, we have very nice development.
Just a few years ago, the profitability coming from Asia Pacific was half this profitability. When we had Korea, there was even a question mark if we were going to have a profit or a loss. Now we are in a very different situation. We see also nice development in Italy and France. In Italy in particular, the development is driven by the unit links, because clearly in a market like this, the asset basis is going up significantly. At page 25, investment margin, as you see, is stable. During the year, we guided you to something closer to 80 basis points. At the end of the year, we ended up at 36 basis points. Again, here we have the fact that the fourth quarter has been very strong because of the reasons I mentioned before.
Overall, we are pleased to see that there is overall some more resilience compared even to some of our expectations. As usual, the asset basis is growing; this is supporting , anyway, the stability of the investment margin when you look at that in absolute terms. Now we can switch to the asset management segment. We have, in total, EUR 2.3 trillion of assets under management. That's a really staggering number. When you look at the third-party assets, we are at EUR 1.7 billion. As we are going to see in a second, this is a higher basis compared to what we had in 2019, which is also promising for the development in 2020. We also give you now the pie charts where you can see the composition of our assets by different classes and also by region.
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. Even when you look at the multi -assets, more than half of them are also fixed -income related. From that point of view, I would say we are not so exposed to the pressure coming on the fee, because in fixed income, there is less pressure compared to equity. In an environment like this, clearly also where 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. This plays into the diversification element I was talking about before.
At page 29, as you see, the assets under management for third parties increased by 17%. Everything went in the right direction. The flows have been positive and also consistently positive over the quarters. As I said before, AGI had also positive flows in the fourth quarter. Also the market development was favorable, and even the exchange rate had been favorable. Where 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 first quarter of 2019, because as you remember, the fourth quarter of 2018 was very bad for the capital markets. That has dragged a little bit down the revenue in the first quarter.
Clearly we saw a different trajectory in the remaining quarters, and we should see also this play out in 2020. The fee margin is a little bit lower, both at PIMCO and AGI compared to last year. 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 closed-end fund. That's just a timing issue. Otherwise, I would say the mix has led to a little bit lower new business fee margin. Overall, we have a very strong picture, and we can see this at page 33, where we can see that the operating profit has gone up.
We're also adjusting now or showing you the adjusted operating profits if we remove the performance fee so that you can get a little bit a sense of what is the underlying trajectory is versus potential volatility introduced by the performance fees. 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, PIMCO has been able to increase the operating profit adjusted for fees by 4%. If I were to adjust also for the investment in this closing fund at the beginning of the year, the growth rate would be 5%.
In the case of AGI, you can see a small reduction of the operating profit. Also here we have this impact coming from a closing fund. Adjusted for that, the growth will be 2%. Overall, I would say a good year for asset management and also a very good basis to go into 2020. Corporate at page 35. It's a significant improvement compared to what we saw in 2018 and even the prior periods. The improvement is mostly driven by Allianz Technology. Now we are coming to a different phase. This is also something that is going to stay more or less at this level in the future. Now we are in a different situation compared to what we had just a couple of years ago. With that, I will move to page 37, where you can see all that 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&A. Now we come to 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. For 2019, let's speak about 2020. Overall, as Oliver has mentioned before, we are targeting a midpoint of EUR 12 billion± the customary EUR 0.5 billion. When we look at the different segments, in P&C, we appear to have a different performance compared to the EUR 5 billion that we posted in 2019. Clearly part of this improvement is going to be driven by different results at AGCS. On the left side, we are kind of normalizing the results of 2019, but with EUR 4.4 billion, we are definitely significantly above the midpoint that we set for 2019.
We should consider what we had in 2019, Banco Popular, the joint venture profit, and starting from 2020, we don't have this profit anymore in our operating profit. In 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. dollars stay the way they are. There is some upside potential there, but we'll always like to take a little bit of a cautious stance on this one. On the corporate side, it's more or less the level of last year, just adjusted for some volatility in the investment income. Overall, with EUR 12 billion, we are looking to another successful year in 2020.
I believe we had a very strong performance in 2019. We have all the reasons to be optimistic about this year. Thank you.
With this, we are happy to take any questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question. It comes from Michael Huttner of Berenberg Bank. Please go ahead.
Fantastic, well done, and thanks for the lovely buyback. I just have two questions. The first one you said to ask about is the organic capital generation, the -1% in Q4. You said there were two effects, AGCS and one other. The other question is for your guidance of EUR 12 billion ± what is it that you're assuming for AGCS, and where are you at? If I may, there's a last question. I was speaking to one of your well-known journalists, and he was saying that there had been IT kinds of Ausfällen, which means interruptions. I just wondered if that's included in your cost assumptions. Thank you.
Maybe I can start with the capital generation. We had two effects. One is easy: AGCS reserve strengthening. The other one is related to Allianz Leben.
That's more of a true-up, if you want, in the calculation. Just at the end of the year, we have the statutory accounting, gross margin, how much we put in the RFA, how much we have for a year declaration, and also how many unrealized gains we have. During the year, we don't have all these number because clearly this happens just at the end of the year. Clearly, we need to do a better job at trying 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 billion, even more than what we had last year.
That's just, if you want, call it this way, sort of an accounting effect in the fourth quarter, just because our model ended up producing, if you want, too much Solvency II earnings for the first nine months, and then there is a catch-up to what should be the expected level by the end of the year. We're going to work on refining that. That's also important. The reality is a switch between Solvency II earnings and surplus funds. Fundamentally, especially for Allianz Leben, the own funds are not really changing our case because of the transferability restriction. There is a little bit of an impact. Fundamentally, just, if you want, an accounting or actuarial swap at the end of the year.
The main point is our capital generation for the year is at 8%, adjusted for AGCS. That's also the level that we anticipate for 2020. The other question was on AGCS. What is our expectation for AGCS? I would say that we have two expectations for AGCS. One is potentially a combined ratio of 100; it could also be slightly above 100. I would say that this is somehow how we are thinking about the performance of AGCS in 2020. In a possible case to go to 100, that could also be slightly above 100. This will depend on, let's set aside clearly natural catastrophes. That's a totally different conversation. This is going to depend on the level of inflation that we're going to see. 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. Clearly nobody can really predict how inflation will continue to develop in 2020. Clearly, we expect to have a different level of performance for 2020. If you ask me, I would say that by 2021, I would definitely expect that we are going to be below 100. 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. I think the market is just supportive right now. I think everybody's 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, I did not understand.
I can help.
Yeah.
Otherwise, I am getting bored anyway. Because of the technical detail. By the way, the first 10 sentences were the fourth quarter, Michael; forget it. On the Solvency II earnings, it is 8% over the year. That is why we actually want no more quarterly earnings. I am just kidding. Kidding aside, sorry. On the thing you asked what the IT outages have cost us, I think this is within the normal course of operations. Sometimes the computers don't work, including at Amazon and others. On a more serious note, we had in August and October in Allianz Partners and Allianz Germany significant outages that we have been in the process of addressing, and the consequences for customer satisfaction and cost have to be taken seriously. The recent trends have been very good and very positive, and we need to keep on working on them.
It's not something that creates massive disruption on expenses or any other items.
Will it next quarter?
It's more a concern for customer and employee motivation than most other things.
Thank you. We can move to our next question. It comes from Jon Hocking of Morgan Stanley.
Afternoon, everybody. I've got three questions, please. Firstly, starting with AGCS. Looking at slide B-42, there's just a comment there that the portfolio restructuring is ongoing. I just wonder 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 and whether this is just a question of getting business past renewal dates, et cetera. Second question, AGCS. I just wonder if you could give a little bit of color in terms of how you've got the confidence that you clearly seem to have in terms of where the reserves are set now, and particularly some of the trends that you were talking about in London before the new year break in terms of some of the D&O stuff, and I think German liability was mentioned this morning.
Just finally, Oliver, at the beginning of your preamble, you made an interesting comment about if there are 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 we might not find obvious to see from the disclosure space? Thanks.
Yeah, that fits very much with your question. I start with that. That's AGCS, of course. By the way, unfortunately not just 2019, but we have now had a number of years . That's the real issue. The question is not whether we are comfortable with the reserves now or not. The cleanup we need to do there is more fundamental, and it attaches many items. It touches, first and foremost, portfolio appetite, what industries do we want to be exposed to? What lines of midlines 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 it's not just about price increases but really changing wording, changing portfolios, and getting rid of overexposures. You just mentioned one example.
In Germany, we had liability portfolios that were overall excellent. 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 recalls for OEMs, there is recall exposure in the automotive suppliers, and that has been mismanaged. 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 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? Last but not really, efficiency. When you look into the model, let's take an example.
For a quarter share, you get between 26% and 28% ceding commission. If your own cost ratio is north of 30, your incentive to reinsure is zero. We need to make sure that the productivity levels get to a level that reinsurance with the market prices actually makes sense. 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, Joachim Müller, who has transformed the German business. We have one of our most talented finance people in there with Claire-Marie. We have put up Thomas Sepp. We've systematically been changing the team. We need to move into more consequential execution. Now, the last comment I'll make is it's not just AGCS. 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 Ferraris, and the shareholders do not get a proper return, and I think that's something we need to address. Commercial lines overall, to answer your question on where the returns have to be, are 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. This is not about, okay, the U.K. makes more or less money than the other guys, but also inside of the countries, we have portfolios to fix that have been cross-subsidized by a largely very well-performing portfolio.
I would like to also reiterate, in AGCS, 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.
We'll move to our next question. This comes from Andrew Ritchie, Autonomous Research.
Oh, 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 and the latest permutations on that, and what your current view on potential impact would be, given the most recent discussions? What's going on in terms of further redesign of life products given the move down in interest rates? I think when we, 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.
What is the drag from commercial lines as a whole? You said it's being subsidized by retail. Forgetting AGCS for a minute, I am talking about the rest of your commercial lines, which I think is about 30%-40% of the rest of the book. What is the differential in terms of the combined ratio between that and retail? Thanks.
Maybe I can start with the Solvency II review. If we look now at, let's say, the idea to go with the last liquid point from 20 - 30, the impact at year-end on our Solvency II ratio will be a little bit north of 20 percentage points. There will be a significant impact. Clearly, first, 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 and 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 always have the possibility to change our duration and mitigate impact, and in general, there are things that we can do.
Also, since there is a lot of uncertainty around what could happen, we're also clearly thinking about the potential use of transitional because, especially if we have a change that is massive, like going from 20 - 30, clearly we can change the portfolio to mitigate impact, but you don't do this in one quarter, right? It's going to take a little bit of a while to change our asset portfolio. 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, which 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. We are taking a lot of action.
In the case of France, we are going to introduce it.
The media product. I will not use this as a marketing statement, but between us, we can say it with a negative guarantee. At the end of the day, the guarantee is going to be less than zero. In the case of Allianz Life, they are working. Although in Allianz USA, the interest rates are definitely north of zero. They are still working on a playbook with interest rate of zero, 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 have the same kind of conversation, and we are going to make product changes. Also, it's going to be a lot about managing the mix. We already have products, hybrid products, that clearly have, if you want a very low, extremely low guarantee; it's more a sort of protection.
What we're 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 there is no doubt on that. When I look also at the rest of the European markets, I think that's absolutely doable because everybody is in the same situation. 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 that is suitable to the environment. You might have clearly a drop in production in a single year, but eventually, the market and the system are adjusting.
I'm pretty positive that we are going to be able to have good production, also in a new environment. You had a question on commercial lines. That was a question to Oliver, but I can pick it up. At the end of the day, you really need to look company to company. If I just pull all the numbers together, and I remove AGCS from the picture, we might even argue that the differential between commercial lines and personal lines is not huge, but that's because maybe there is a country where the commercial line operations can be profitable, and they help 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.
Definitely in France, we are operating at a combined ratio that is way higher compared to what we have in retail. In Germany, we had the same situation till last year, so 2018, but we made a lot of progress in 2019. I would say the gap between commercial lines and personal lines is relatively small, so it's not significant. If you ask me, it's a lot about getting the portfolio in France to operate at a different level, making sure that the portfolio in Germany is going to be performing as it performed in 2019. Also, I will say in Spain , there is also some room for improvement. In totality, I would say the gap is not huge.
Sorry, can I just go back to Solvency II? There are various other aspects up for discussion now. Potentially, apparently rolling back on risk margin as well.
Yeah.
Have you changed your view on some of the other aspects?
There are many other things happening there. Clearly, potentially, there is margin that could be a positive. Also, there are conversations about the volatility adjuster. Clearly, moving from 20 to 30 last liquid 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 EIOPA is going to come up with is. I believe that most likely the proposal is going to be a reasonable proposal. We need always to be prepared for all kinds of possibilities.
Okay. Thanks.
Thank you. We'll take our next question from Peter Eliot of Kepler Cheuvreux.
Maybe I can help while we're getting on Andrew. The issue is very simple. The modeling only ends at the end of June. During the German Presidency, people will look at the numbers and discuss what the numbers mean. They're still in the data -gathering phase, and they will trade off various items as they're reading, for example, the change in interest rates. We'll talk about the last liquid points. They will talk about volatility adjusters, and they will look at the fact that credit spreads are at an all-time low. Who would have thought the Greek Republic finances short-term money at negative rates? Give me a break. People need to really look at the data, and we know that under the Portuguese Presidency, which is in the first six months of 2021, things come out.
Now speculating on what the outcomes may be, I think, is reading tea leaves.
I'm guessing the mic's been handed over. Can you hear me?
Yes.
Thank you very much. Peter Eliot. I had three questions, please. The first one was on the life margin. I was very pleasantly surprised to see that the basis points guidance hasn't been sort of downgraded from last year. I take your comments, Giulio, on the AUM supporting the absolute level of the margin. I was just wondering if you could give us a bit more color on your thinking behind the sustainability of the basis points, perhaps that ties in a little bit with Andrew Ritchie's question; that would be great. The second question was on asset management. I saw the comments on the tape potentially that the coronavirus shouldn't be negative and could even be a positive impact for you.
Obviously, nobody likes to benefit from things like this. I was wondering if you could just give a little bit more color on your thinking there and how asset management has started the year. I saw comments about good intros in January. I was wondering if you could just elaborate a little bit; that'd be great. 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 elaborate on your thinking there and the opportunity. 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.
Yeah. Okay, I can start from the investment margin. As you see, our guidance for 2020, 75 - 80 basis points, which is kind of stable compared to the guidance that we had also for 2019. The point is we definitely see more stability. We are working clearly on making sure that we can get what I call a spread that we like to achieve. For example, in the U.S., if you remember, at the beginning of 2019, we had some drag on our investment margin, our spread. 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 the minimum profit sharing; this gives us some flexibility. 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. Think about that clearly; the lower interest rate environment has an impact on our investment income, but it is going to come also a little bit over time, so we are trying to react. That's also why it's so important that we make the right decision on the new business. That's critical to make sure that we see stability also beyond 2020 to 2021. On asset management, my remark about the coronavirus could be helpful for asset management. First of all, that's a little bit of a cynical remark, but it's just a technical consideration.
Clearly, if you have some 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. When you combine the two things, that might be a positive for asset management. I will not anyway overemphasize this as a main drive, and that's definitely not a wish. That's just a consideration because the question was what happens to your asset management in the case of the coronavirus, and I would say that asset management will not be necessarily impacted by the coronavirus and potentially might even be a slight positive, but don't make too much out of that.
On the Microsoft, the idea of having ABS, which is a disposal for companies that are not Allianz, is 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. There is a core component, and then you have all the customization that you can do. We are not necessarily giving the entire ABS to a potential non-Allianz insurance company. It's just part of the ABS solution. Clearly, what is customized is going to stay just with us.
Okay, great. Thank you very much.
Thank you. We'll move to our next question from Farooq Hanif of Credit Suisse.
Hi there. Happy Friday, everybody. Going back to some of the comments you made on the combined ratio in 2020. In the notes, you've written 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 U.K., and particularly around synergies? Secondly, the massive growth you've had in new business in life is this. Across the board in capital -efficient products and protection, what's going on there that's better than your peers'? How does that lead into 2020? On the restructuring of AGCS going forward, what have you baked in for potential reserving risk? What about the top line? Thank you.
Starting from the U.K., clearly starting in 2020, we are going to have now the full consolidation of LV= and also the business of Legal & General. 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. In reality, we are starting already from something closer to 96, as I was saying before. When we also combine 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 necessarily the synergies flow in 2020. They're going to come later. In 2020, we are going to have rather high integration costs.
The idea will be that between LV= and Legal & General, we should be able to realize EUR 50 million of synergies. In my opinion, this number is even a little bit conservative. I think that we can do better than that. I will say at the moment we are operating with a potential synergy of at least EUR 50 million. You had a question on the AGCS, right? The reserving: what is the reserve risk? I would say the reserve risk that we have on AGCS 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 at the end of October or beginning of November.
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 differently to inflation because when we are speaking about a new business, we are not just changing price; we are also changing deductibles and we are changing limits. From that point of view, we are also getting rid of some accounts on some books. You might see some different trends in our new business compared to what we have in the past. Overall, we feel that we made a strong move in 2019 with the reserve strengthening, which is very high at EUR 600 million. There we are going to see how inflation is going to play out.
On life growth, I would 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. How many unrealized gains might you have in your statutory account? I'm referring to Germany. How big is the level of participation reserve that you have? What kind of room you have to the minimum policyholder participation? Clearly depending on if the German business works as a portfolio, if your overall portfolio is stronger, you can definitely do more than what the competition can do. This said, clearly, we need to make sure that we continue to make the right decision over time to make sure that we have the same kind of portfolio.
Don't neglect that three or four years ago, Allianz Leben made a significant change to the product portfolio, and you can see this is serving us well right now. Now I think we're in a situation where we need to make other changes. 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?
Yeah.
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 a reservation 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. Rest assured EUR 600 million was a good number already. We are taking a look at what we see. Again, I really believe the environment is very supportive. I would expect that as we go into 2020, 2021, and 2022, the pricing strength is going to be very significant.
Thank you very much.
Thank you. We'll now take our next question from Vinit Malhotra of Mediobanca. Please go ahead.
Good afternoon. Thank you very much. Two quick ones on AGCS, please, and one on life. Again, very quick follow-up. Thank you. First one on AGCS. If we go back, say, 10 years or 12 years, this used to be the EUR 3 billion portfolio, 90% and 90% combined, and a lot of businesses have been transferred to AGCS, of course, including finance, 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? Would you say that that's really not the case, that AGCS has whatever issues everybody else has as well? That's literally just a test of 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 you for AGCS in this coming year or next year? If that business is not relevant, please, I would love to hear that as well. Last thing is just that we mentioned the life growth coming from loading and fees and business mix. Also, I would like to just understand the capital-efficient products, which obviously grow very strongly for many years. We still have that, say, EUR 200 million normal run rate quarterly operating profits from this segment. In the past, you said that this could increase, but is this increase still a few years away, or are we getting to that stage where we should expect more numbers from this segment? Thank you.
Maybe I start with a bad bank. No, AGCS is not a bad bank. Not at all. What we are seeing right now is something that you can see also in other competitors. We're not the only one being exposed to the trends we are seeing. From that point of view, no, AGCS is very far away from the bad bank. I want to also, because I was thinking the other day, you mentioned 10 years ago AGCS was a very good company; now it looks to be very different. 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; we had to put in a lot of capital. Now it's going to pay a $750 million dividend as we speak.
I strongly believe that AGCS is going to return to a better level of profitability. It's far away from being a bad bank. The only thing we know is that industrial businesses tend to be more challenging than other businesses, and also the volatility might be higher. I'm pretty confident that we have a good asset. We just need to have a more supportive environment and also make sure that we made the right choices. No concern about the viability of the business. On the liability side in the U.S., our book in the U.S., honestly speaking, is not so big. From that point of view, I would say any development will be relatively muted. Also, we see in the U.S. massive rate increases. From that point of view, in reality, the U.S.
The book is a book where, fundamentally, when you look at the situation, it might be that profitability is going to be restored pretty quickly. Clearly, every time you speak about the U.S., you need to be generally cautious because we know the environment tends to be very litigious. What we see right now from a rate -increase point of view is extremely comforting. Also, another point is not on liability but financial lines in the U.S.; our numbers have been indeed not that bad at all. 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 conversations.
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. It could be done in a different way. We had a situation with the way the DAC accounting is done. 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 statutory accounting, where you cannot really defer the commission. 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 definitely see a better result in the operating profit line.
Okay. Thank you.
Thank you. Now we move to our next question. It comes from William Hawkins of KBW.
Hello. Thank you very much. First question, you've commented slightly on this already, Giulio, just to clarify. In the combined ratio, your confidence is on improving the Spanish results next year. You've sounded confident throughout 2019; the ratio has sequentially deteriorated through the courses. Maybe you're just cleaning up the book for 2020; could you clarify that? Also in France, could you talk more generally about your ability to improve? You've already talked about commercial versus retail; that just seems to be an embedded issue in your portfolio, the French combined ratio has actually been deteriorating for the past three or four years. There are some peers that are getting that ratio down to the low 90s. I appreciate what you said about commercial versus retail; it would be interesting to hear if you've actually got a solution to that.
Why wouldn't you just be doing a significantly less French commercial business? Secondly, please, could you help me understand the EUR 4.4 billion guidance that you've given for Life, how that break down between the investment margin and the other business? I appreciate you've given investment margin guidance; it strikes me that I need to take the worst case for your investment margin, 75 basis points, and assume that all the other business doesn't grow to get to EUR 4.4 billion. Either you're punching that EUR 4.4 at a very low level, or I've missed some element of the equation. Lastly, sorry, just to clarify, I'm sorry if I can get this from somewhere else: your EUR 600 million 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? Thank you.
Yeah. Maybe let me start with AGCS. The total reserve for AGCS is about EUR 10 billion, and the reserve for the liability line is about that. I sum up the liability line and financial lines because I don't want to give you too many details, but we are about close to EUR 5.5 billion. That's on the reservation for AGCS. In France, what we see in France is, and we saw that in 2019 and also in 2018, 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 like 11. If we believe that the two percentage point gap is just volatility, then one could say we are actually in a better spot compared to the 98 that we see.
We are also, I share your point; we are kind of reluctant now to say 11 is the right number. 13% is just bad luck. Because in 2018, the situation has also been kind of negative. Definitely in France, we want to take a closer look at what we can do to improve the performance. 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 anyway for France is supposed to be the expense ratio. We want to bring the expense ratio down further. I have to say that on this, the French colleagues have been very good also in the last year.
Now we want to continue to push on the productivity element. Clearly, we're going to take a closer look at the performance in commercial lines. Also, we're going to take a closer look at what the amount of loading is that we need to put for NatCat and weather-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. In Spain, yes, we're confident that we're going to get better results in 2018, in 2020. I would say the combination should be below 95%. I just want to tell you, Q1 might be challenging because of a few large losses. When we look at the underlying accident year, also here in 2019, we see that there is a good strength in the accident year.
We would definitely expect to see better results in 2020 compared to what we saw in 2019. Just for the first quarter, we had just a couple of large losses that you might not see the improvement for in the first quarter yet, but you're going to see this 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 2019. I would say if you remove Banco Popular, because you need to remove that, we are at EUR 4.6 billion. Then we had a DAC reset, which is EUR 150 million; then I would adjust the other EUR 150 million for the investment margin. Then you start from a basis, which is about EUR 4.3 billion, and this is how somehow I'm thinking about the starting point.
You need somehow to remove Banco Popular; you need to remove EUR 150, which is a DAC issue, and then you need also to adjust the investment margin towards the 80 basis points. That would be the starting point for any kind of extrapolation to the future.
That's all really helpful. Thank you.
Yeah. Welcome.
It's 25 minutes past, so we have time for one last question, please, if there is any.
Thank you.
Let's go, Oliver.
Okay. Our final question comes from Ashik Musaddi of JP Morgan.
Hi. Thank you. Good afternoon, guys. Few questions. First of all, can we get some color on the U.K. P&C outlook? What are we hearing? Most of the companies who have reported U.K. motor, U.K. home, there is a clear message that claims inflation is still running about, say, 3% or 4% ahead of, or maybe more ahead of, pricing. How should we think about U.K. motor? If I look at your guidance, you're saying 96% of your portfolio and 95% including the acquired business. 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? That's the first one. Secondly, on AGCS, can we get some color as to how we should think about net price increase?
Clearly, a 9.5% or 10% price increase is what we are seeing. What would you say is recurring claims inflation at the moment? Is it just hard to say that because you only learned about that over the year because it's just volatile at the moment? 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 three would be really helpful. Thank you.
Maybe starting from AGCS on the kind of rate increases we are seeing. I can just say in the last quarter, in Q4, when you look at rate increases, not just renewal but also new business on a written basis, you see across the portfolio something very close to the 20% range. The rate increases that we see right now are massive. It's all about what kind of inflation assumption you make. If you're making the assumption that inflation is zero, then you're going to have a very healthy and nice combination, but that's clearly not a realistic assumption. When we look at assumptions for inflation, it depends on the different countries. I would say in the U.S., we are still thinking that inflation could be at a level of about 7%. We are still thinking that inflation could be pretty elevated.
In the case of the euro, we think inflation is going to be more towards the 2%. You can combine these; for our portfolio, we say there will be something closer to 4%-5% inflation. Again, it's always hard to predict how the speed in inflation might change for the better or for the worse. In the U.K., I would say that we saw what you are referring to, and we had also a conversation with the local management team. What they are telling us is that they are getting rate increases that should be enough to offset the inflation, the claims' inflation. From that point of view, there is confidence that at this point in time, we are getting the needed rate increases that were actually pretty healthy.
This is where the kind of confidence is coming from that, yeah, we should be able to offset the inflation. In the case of life and P&C, I think the main difference is that the contribution of emerging markets in P&C is stronger compared to what we have in the life business. The life business , mostly we are speaking of investment, is mostly dominated by Europe. In the case of P&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.
Yeah. I just would like to remind us of something. When you think about the outlook, I would like to go back to 2020 and 2021. The first one is we believe we are on track for 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 the fact that probably, and we don't know the numbers for Fidelity, Allianz is by now the world's largest active asset manager, dominated by fixed income, which is almost 70% of what we do, where we have had the strongest record in history in terms of investment performance, and that is unlikely to abate. Right?
As 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. When people thought about us 10 years ago as a P&C insurer attached with some distribution financing life businesses and then some startup called "asset management," I think that picture has dramatically changed. Why do I say that? At the time when the commercial alliance industry and P&C are struggling and have to be rebooted and we are on track, we have an enormously strong and vibrant business that we've built. Second observation: our life business now, this is the third time we are transforming it. First time was 2011, 2010, 2011, after the financial crisis and interest rates coming down after the Euro crisis; 2012 and 2013. We've been doing that, working on the back books.
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. It gets ever more difficult with consumers because of negative rates, as Giulio has said. I wouldn't call that a negative guarantee. I would basically say the question is, how do you think about protecting capital after you've subtracted costs? One of the things we'd really have to look at is what is distribution cost for the product is, not just how do you address distribution cost alone and guarantee cost alone. Distribution and cost will really matter. That allows us to really work hard on the P&C portfolios that we have. You can get from, if you're nervous to look at the picture, is there something beyond AGCS Net?
To reiterate, we're working on commercial lines. There is lots more work to do. The Spanish issues and the number that you have seen are really a one-off, so you can call them a "trep." First quarter this year, there's a lot of nat cat activity that's already happened. Australia, you have seen the U.K. coming. You have seen Sabine. I don't know why storms always have a female name. I think it's men putting the names on it.
Oh.
Changes actually. Yeah, maybe that was Klaus. Yeah, no, we had Klaus. That's right.
Oh, yeah.
Had recently, yeah, Anniba]. That's right. Somebody has picked this name. Anyway, I was wondering. By the way, do we have any female analyst on the phone? Anyway, different discussion. Kidding aside, the key thing is what one really needs to believe in: that you are on board of one of the strongest ships that exists in our industry, that we are not pumping on one cylinder but on many, and that we have both the will and the ability to deliver on what we said ourselves. I think you've seen the track record over the last five years and beyond. Actually, the dividend is seven years up. 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.