Ladies and gentlemen, welcome to the Allianz Conference Call on the Financial Results of the Third Quarter 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'd like to turn the call over to your host today, Mr. Oliver Schmidt, Head of Investor Relations.
Please go ahead, sir.
Thank you. Yes, good afternoon from my side as well, and welcome to our conference call. There's nothing specific to be added from my side for now, so I'll keep it brief and hand over directly to Giulio. Hi, good morning, good afternoon to everybody. I'm pleased to present the results for the Q3.
And before we go into the Q3 results, it's Page 3. You can see the Xevi with the key numbers for the 9 months. As you see, we had a very good 1st 9 months in the year with revenue up. This is mostly driven by Property Casualty and Life Health. When we look at the operating profit, we have also a nice increase of 4%.
This is driven by life health and asset management. In property casualty, we have a small reduction in operating profit, which is driven by lower investment income. When we look at the combined ratio in Property Casualty for the 1st 9 months, it's stable. Here we see that natural catastrophe had a lesser impact compared to the prior year. On the other side, the runoff results is lower.
And what was positive in the 9 months was the development of the Spain's ratio. So the bottom line is better natural catastrophe results and improved cost ratio have offset for the lower runoff. New business margin is stable and the revenue business is growing double digit. And in Asset Management, we see that we had very good flows with almost €60,000,000,000 which is double the volume we had last year. The net income is up 5%.
And when we run the earnings per share calculation, we see that the earnings per share is up almost 8%. So overall, I will say strong picture for the 1st 9 months. And now we can turn to Page 5, where we show the revenue and operating profit and net income for the quarter. Again, a good quarter with growth in revenue, this time not only coming from Property and Casualty and Life Health, but also coming from Asset Management. The operating profit is stable at almost €3,000,000,000 which is a very good number.
Here we see that property casualty is going down a little bit, but this is offset by the development in the other segments. And then we had the shareholder net income, which is stable compared to the prior period, also at a good level of over €1,900,000,000 So also in the Q3, you can see the kind of good performance that we were able to record in the 1st 6 months of the year. And now we can move to Page 7, where we I'm going to focus on the solvency ratio. As you can see, the solvency ratio has dropped about 10 percentage points. Clearly, the main driver for the drop is the development of the interest rates.
I'm going to come back on these numbers in a second. Then when you look at the sensitivities, the sensitivities are more or less unchanged compared to the sensitivities we had in the end of June. You might see that the sensitivities to interest rates are a little bit higher compared to what we had in June. In June, the number was minus 8%. The reason for the increase is once the complexity, when rates go down, we are going to really pick up more sensitivities.
And second, also we had some refinement to the way we calculate the sensitivity, but the primary effect is the complexity. If we move to Page 9, now we can see the development of the solvency ratio. First of all, what is interesting, when you look at the owned funds, the owned funds are not going down. In reality, the owned funds are going up, and this is after the deduction of the €1,000,000,000 dividend that we will pay out of the profit for the quarter. So fundamentally, you can see the own funds are building up.
On the other side, what you see is that the solvency requirement is going up significantly. And this is driven by primarily by the interest rate development. When we look at the different buckets, the impact of the market after tax is about 11%. And this has been partially offset by the increase in operating earnings with which was 9% on a pretax and pre dividend basis and about 3% plus on an after tax and after dividend basis. So all in all, I will say clearly a reduction of our solvency ratio, which is also in line with our expectation.
And the most important comment here is with the solvency ratio of 2:0:2, we feel we are at a very comfortable level. And this is also the reason why in the past, anyway, we were running the solvency ratio also at a high level because we know that there are times where the solvency ratio is going to drop. But again, we are significantly above the level of 180%, which is the level that we are defined as the minimum comfort level. So when we go to Page 11, we can go now into the segment. On the P and C side, we saw also in the quarter a good growth rate with almost 5%.
Half of the growth is coming from price development and half of the growth is coming from volume. When you look at the single entities, you can see there is growth everywhere with the exception of Spain, where we have a decline. And this is because of the claims that we are operating right now in Spain. On the price development, you can see the price development is stable or positive. And clearly, we are looking very carefully at the price development in AGCS.
And you can see that in AGCS, the price development is very strong with almost +8 percent of improvement. So from that point of view, I would say the picture from a price point of view looks benign as we look into the future. Moving to Page 13. Here, we show the development of the operating profit for Property and Casualty. And clearly, the operating profit reduction has been driven by the development of the combined ratio.
Now you can see that the combined ratio has increased by about 120 basis points. What we are observing here when we look first at the accident year results, we see that the natural catastrophe had a more benign impact compared to last year. So there was a benefit, if you want, of about 80 basis points. But against that, we had a higher amount of large losses and also of weather related. So in reality, the positive impact from the natural catastrophe has been compensated by large losses and weather related.
When we look at the loss ratio adjusted also for this impact, in reality, we have even a tiny improvement compared to last year. And then clearly, we see that the runoff is lower compared to the very high level that we had in 2018. So the 4.5% is definitely not the kind of level that we would expect on a normalized basis. 2.5% might be a little bit lower compared to what we usually see for the year. If you remember the slides I showed before, we are at 2.8%.
So in the Q3, there was a little bit of a lower runoff. I'm sure I'm going to get a few questions on that. So I leave for the questions. But it's also nice to see if the reality is the improvement of the expense ratio, again, 70 basis points lower compared to last year. I was checking today the expense ratio that we had a couple of years ago.
We were more than 28.5. So you can see definitely there is a strong improvement over time in this kind of KPI. With that, if we move to Page 15, we can see the development of the combined ratio for the selected companies. I will say the development in Germany is pretty good. You might see deterioration compared to the prior period, but that's driven by the amount of natural catastrophe or weather related losses.
But fundamentally, with the combined ratio of 92%, the German business is performing very nicely. The same applies to Italy, Eastern Europe, Australia and the United Kingdom. We have a couple of special effects. Otherwise, the combined ratio will be about 96%. In France, we see a combined ratio of 98.4%, percent, which is behind our expectation.
In this case, it's also driven by an amount of weather related and large losses. When you look at the 9 months for France, we are 97%, which is a little bit behind what we would expect. But for the market, it's still a kind of reasonable combined ratio. And then going down the list, Spain is not anything new. If you adjust the combined ratio of Spain for the runoff, which is currently negative, we get to an excellent year combined ratio, which is below 94.
And I expect the next year, we are going to see this kind of numbers moving forward. And then clearly, the AGCS has a combined ratio which is over 100 percent, is under 2.7%. In this case, you can see that there is a slight improvement compared to the last year, but this is clearly driven by the fact that we had much lower natural catastrophe, which means something is missing the picture. The point is last year, we had a large positive runoff in the GCS. And this year, in the case of the GCS, we have a slight negative runoff.
This explains the reason why in reality, we don't see a major improvement despite the lower natural catastrophe. And then the last two companies, as usual, are performing pretty nice. So I will say in total, it's a good combined ratio. Clearly, we have especially one company, GCS, where we need to do some homework, but we should not neglect that a lot of companies are performing very nicely. Page 17, the operating investment results is pretty stable.
I'd like to draw your attention then to the right hand side on the upper part where you can see that the reinvestment yield is going down compared to the last the quarter last year is even 80 basis points. And clearly, this is the effect of the new interest rate environment. Just for you as a point of reference, 50 basis points or lower, investment yield equivalent to EUR 100,000,000 lower operating profit. And to make up for EUR 100,000,000 operating profit, we need to improve our combined ratio by 20 basis points, which we think is possible. So from that point of view, even if we see headwinds coming from the investments for the development of the interest rates, we still believe that we can achieve our midterm objectives offset for the more challenging interest rates environment in the next years.
But clearly, it has become a little bit more challenging, but we are confident we can get there. At Page 19, we can switch to the Life business. First, you see we have a good new business margin. We already anticipated in the call of August that we are going to be at about this level. So we can see that if you take the big picture that despite having very low interest rates, we still have a new business margin, which is very resilient.
Clearly, this is the new business margin calculated based on the beginning of the quarter assumption, not on the end of the quarter assumption, but still it is calculated on a low level of interest rate. And as of now, I will say the market conditions are very similar to the condition we had at the end of June. The production is going up. This is driven by Germany. We see also a good development in the U.
S. A. And then in Italy, there is a sort of special effect adjusting for that kind of special effect, which is a renegotiation of a contract. The production level would have been flat. But again, I will say resilient new business margin and also an increase in production.
So if we move to Page 21, the operating profit development for the Life business for the quarter is actually good with an increase in operating profit of about 3%. What is important to highlight here is the development of the loadings and fees. As you see, they are going up significantly compared to what we had 1 year ago. And this is a trend that we have been seeing over the course of the year. So this is definitely boding well also for the future performance of the Life business.
Investment margin for the quarter is pretty resilient, at least on the absolute level. And then I will say the technical margin has stabilized to what our expectation will be in 2019. There was a sort of negative impact coming from the United States, and we didn't have a repeat of this negative impact this year. So all in all, with about EUR 1,100,000,000 of operating profit, I will say our Life business is performing according to our expectation, if not even slightly better than our expectation. If we move to Page 23, a couple of comments here.
First of all, we were able to achieve a value new business of about EUR 400,000,000. So it's a good number and also growing compared to what we had 1 year ago, and this despite the reduction in new business margin. Coming back to the reduction in new business margin of 50 basis points, 80 basis points of the reduction is driven by the movement of the interest rates. And on the other side, we had about 30 to 40 basis point of change in business mix or management action that has contributed to keep the new business margin above the 3% level. When you look at the single entities, you can see that with the exception of a few or 2 companies or other entities, for the time being, still above the 2% level.
So you can see there is not just a resilience on a total basis, but also for a lot of companies, we are still writing business at a level which is above 2. On the operating profit for the single entities, I will say there is, from my standpoint, nothing major to highlight. If not, the growth in Asia Pacific, which is clearly a consequence of the growth that we see in the business over there. And then you can see other few big pluses, but this is more a normalization compared to the lower results we had last year. So there is really nothing enjoys more a normalization.
So again, good numbers on the Life side. And on Page 25, we have, as usual, the breakdown of the investment margin. What is important to highlight here is something that we have seen also in the past that the current yield is going down, but the guarantees are going down as well. In this case, the guarantees are going down even more than the development of the current year. So from that point of view, we are capable to keep, if you want, the spread between guarantee and yield.
That's very important. And then clearly, we have also the impact of harvesting and of the profit sharing under IFRS. And this then leads to an investment margin of basis points, which is lower compared to the investment margin we had last year, but very consistent with the investment margin that we had in Q1 and Q2. And also something to consider is that the investment margin calculated in percent is going down, but the amount of policy reserve is going up. So from that point of view, when you multiply the 2 things, you get like you can see in this quarter to a sort of resilience of stickiness also this indicator.
But I want again to highlight that other source of profits are going to become more and more relevant as we move into the future. So now if we go to Page 27. In Asset Management, we have achieved record 3rd party assets under management with almost EUR 1,700,000,000,000. So that's a very good news, especially because higher assets under management means higher profit moving into the future. All factors have contributed to this development.
If you see flows when you put together GI and PIMCO are positive, then we had also positive impact due to the market development. And on top of that, we got also a positive effect due to a fixed. So all in all, all these things are leading to a very high or record level of third party assets under management. If you move to Page 29, clearly, this also translates in a higher revenue growth, even if the performance fees for the quarter are a little bit lower compared to what we had last year. On the 3rd party assets under management margin, you can see there is a lot of stickiness in the case of AGI.
In the case of PIMCO, we see a reduction, which is mostly explained by mix and also by the acquisition of Gertin that we did last year. But fundamentally, I will say this decrease in the margin at PIMCO, if you look at Page 31, has not really affected the results. As you see, we are very, very pleased with the increase in operating profit at PIMCO, which is above 14%. If you adjust for FX, we are still speaking of an increase, which is very, very almost 10%. So very good performance at PIMCO.
And also in the case of AGI, I will say you see a decrease in operating profit, but we are speaking of a very high level with about EUR 180,000,000 of operating profit. I will say this is a good level of operating profit. And when you put together all the numbers, we are ending up with EUR 700,000,000 of operating profit for the segment, which is clearly a very good result. So with that, we can move to Page 33. That's our corporate segment.
And as you see in the corporate segment, we have improved our results by about EUR 60,000,000 improvement is coming from Allianz Technology and the other components that flows into the corporate segments are more or less stable. So Page 35. Here, we had a usual exhibit with the non operating items. I would say you can see some movements, some pluses and minuses, but when you put all together, at the end of the day, it's more or less of a wash. So you can see that the net income is increasing with the same pace, more or less, of the operating profit.
So I will not go into details now, but I'm happy to get your questions on these slides later on. And then we turn to the final slides. For the 9 months, I would say we have very good results, very strong results. On the Property Casualty side, we have a combined ratio, 90 4.1%, which is a good combined ratio. We have a lot of companies performing very nicely.
We have a company where we have some work to do. But again, when you look at the segments, the performance is pretty strong. On the Life Health side, we see a strong operating profit and also a nice resilience of the value of new business and the new business margin. In Asset Management, we have record high assets under management. So that's also something that should be positive as we move into the future.
And then when we put all these together, we are revisiting upwards our outlook for the year. In June, we were still working on the midpoint of the outlook, and now we are working under the assumption that we are going to be in the upper half of the target range. And with that, I would like to open up to your questions.
Thank you.
The first question was on Allianz Technology. I guess this is the Q3 in a row that we've seen it boost the corporate segment. So I'm just wondering whether we should start thinking of that as a sustainable profit contributor. And I'm wondering if you can maybe just update us on your view of the sustainable results from that segment. And the second question was on interest rate sensitivity.
I guess it just seems it seems that the solvency declined by about 12 percentage points from factors that were sort of either directly or indirectly linked to interest rate falls, which is a bit more than the sensitivities would suggest, even allowing for the flattening of the curve and evening on the new sensitivity. So I guess I'm just wondering when we think about our sensitivity, should we think about that as sort of including everything? Or should we maybe sort of also include something for the knock on effect? I mean, maybe your modeling refinement has addressed that. But I was wondering if you could maybe just comment on that.
And a third question, I'll leave Spain to others. But I was just wondering if you could give us your view of what's happening to motor price in Italy. The reason I ask is because your 2 major competitors have given slightly different assessment sites. I'd just be interested in your view. Thank you very much.
Yes. So maybe I'll start with the corporate segment. I will say definitely there is an improvement. And to a certain degree, this improvement is going to be sticky. So as we go into 2020, I will say that you're going to get a guidance for the corporate segment that should be better compared to the guidance of minus €900,000,000 we gave for this year.
And also this year, we're going to be better, so I will say. I will not take the quarter and now necessarily annualize the quarter, but I will say that the numbers for the corporate segments are going to look better moving forward compared to what we had in the past. On the rate sensitivity, I will say that the model refinement can also help to get the sensitivity to be even more meaningful. But I would say our sensitivities are pretty good, if you ask me. And model refinement are going to improve them further, but they are already, in my opinion, pretty accurate.
One thing that we need to consider is, for example, let's take 2,000 in the quarter. So in the quarter, first of all, I would always invite you to And that would And there would already be about 8% of sensitivity based on the disclosure we had in Q2. Then until if you really want to get very technical, you should also look at the twist of the curve. If you look at the 10 year, the 10 year move only 30 basis points, the 20 move 50. So in reality, the movement on the spot rate on the 20 is more than 50.
So if you start also really going to the nitty gritty kind of details, you would expect in a quarter like this that the movement because of interest rate is more than 8. On top of that, we are not disclosing sensitivity. We're not necessarily calculating to the interest rate volatility. So I will say if you consider for the twist, if you consider that there are other effects coming, I will say that the sensitivity we see in the quarter are very much expected. And to be perfectly blunt, I was not surprised by the number.
So maybe last quarter or 2 quarters ago, I don't remember, maybe there was 1 or 2 percentage point surprise also for me. I can tell you that this quarter, the surprise for me was 0. So I was very, very precise in and we were very precise internally. A lot of people are doing forecasting here the solvency ratio. And somehow we landed very precisely on this number.
So the answer is, it's we give sensitivity. They can they are a good orientation, in my opinion. But clearly, there are other effects that somebody should consider like twisting volatility, and this can lead to additional positive or negative change depending on the situation. On Italy, I'm also hearing noise that our competitors believe we are pretty we're kind of aggressive and they see the pricing that we do a little bit like we might be on the aggressive side. We have intense conversation with our guys.
And from that point of view, we think that and I said that already in the call, we have introduced a very sophisticated pricing model. So we're pretty good about the situation in Italy and what our accident year loss ratio is. But clearly, we will continue to take a close look at the numbers as when you're hearing noises, you want always to be extra cautious. But we are definitely looking into that. And for the time being, I can just tell you we are comfortable with what we see.
We will now take the next question from Andrew Ritchie from Autonomous Research. Please go ahead.
Hi, there. I'm afraid it was inevitable that someone asked about ACGS. I saw Giulio that you gave a lot of color to journalists this morning. Maybe you could give us that color as well as to the expected further reserve additions in Q4. I guess just in general though, could you address the issue, the textbook for fixing these kind of operations is shrinking and focusing on profitability.
ACGS appears to be growing and growing more than pricing and still trying to fix profitability, which never raises worries about the quality of recent growth, whether you're trying to run a catch up on reserves. So maybe if you could address some of those issues and where the problem areas are and how we get comfortable with the growth. But the other topic is in the slide pack, it talks about further management actions to defend life new business profitability. What are those actions? Is this a whole suite of redesign, particularly of the capital efficient products?
Thanks. Yes.
Maybe I'll start from the last one, which is actions on the Life side. Yes, it depends on the markets. You need more or less redesign, but definitely, I even forgot to say that as I was presenting. When we define our capital light products, maybe the definition of what is a capital light product has changed. So we are also looking into that.
Clearly, with a negative interest rate environment, things are changing. And even if we see the resilience in the new business margin, we need to be prepared that rates could go even lower. So we cannot even exclude that. So from that point of view, yes, it's about looking at the products that we have. In some markets, I think the changes, they don't need to be extremely substantial, but we need to think about introducing, let's call it this way, negative guarantees.
That's something that is on the table. In other markets, one could even question whether we need really to change also the products more towards unit linked. In Italy, we already did that. So depending on the market, we are going to have different reaction and maybe even the speed of reaction might be slightly different. But there is no doubt that the products that we have right now, they might even be kind of sustainable in this environment, but we need always to be prepared even for an environment that might be even tougher.
And our idea anyway is that no matter what the environment is, we need to be capable to produce new business margin at a group level of 3%. It doesn't need to be in every single quarter, obviously. But fundamentally, we need to have a business model that can operate at that level. Just to give you an idea, in 4th quarter, based on the market condition of the end or the beginning of the quarter, our new business margin is going to be, you might have read in the comments, about 2.5 percent. As of now, we would already be back to 3%.
But again, we cannot be in a situation where 20 basis points more or less are going to free pass from being in green to being in orange. So that's what we are doing on the Life side. So you're going to see definitely changes coming through as we go into 2020. On AGCS, your questions about growing, I will say when we speak about the DCS, first of all, we speak of a sector which is kind of challenging. So I will say when we do our benchmarking to our competitors for whatever benchmarking might tell you, because honestly speaking, every benchmark is to be taken with a grain of salt.
When we do this benchmarking, AGCS is performing better than most of the competition. So we need to understand also that the market is, per se, challenging. You cannot defeat force of gravity. When we then look into the so called business cases, the area of growth that you are mentioning, we call those areas of growth the business cases. We are not necessarily getting the indication that we have a particular problem coming from there.
Indeed, indication are that the numbers are fine. Maybe we might have overestimated how good the numbers or the business cases were, but I couldn't say that the business cases are negative. What we see, however, is we see also this happening right now. We see there are more and more bad news and new information coming up. So from a certain degree, we are also getting general new information.
So I would say the situation is we have a sector, which is definitely which went through a soft market for a few years now. And then also, it looks like in some lines of business, like in liability in the U. S, there is a buildup of severity and potentially of frequency. Our book, just to speak about the liability book in the U. S, is not big.
We have about $400,000,000 of liability book in the U. S. We also believe our book is slightly different from the book that other people have, but we cannot assume that we are going to be completely new to what happens in the broader market. So my answer is I don't think we did something particularly wrong. I think the market is challenging, maybe we have not done everything right.
That's the way I would face the issue. Expectation for the quarter, yes, go ahead. I was
going to ask you, yes, what was yours because you talked
Yes, I was telling you. I know this is the real question you're asking. So this quarter, I said this morning, I said that the combined ratio for the quarter for Allianz AGCS is going to be definitely above 110. So I can tell you, when we speak about the reserving that we might see coming for a quarter, I will say we speak of a 3,000,000 digit number. And the first number is not going to be most likely a 1, it's going to be something more than a one.
And that's all what I can tell you. So it's going to be some reserve strengthening that we need to do at the GCS. And this is already included anyway in our expectation for year end.
Okay. Thank you very much.
We will now take the next question from Vineet Malhotra from Mediobanca. Please go ahead.
Good afternoon. Just two questions, please. One is on this whole the loss ratio and the expense ratio and then the target ultimately in 2021. If you see the loss ratio, the trend accretionally few quarters now has been flat to tiny improvement as you just also mentioned, Giulio. So and then we also see the runoff is getting weaker.
So the expense ratio then, does it it should have to carry a lot more on its shoulders to deliver the results. Do you feel that you're a bit more confident or similarly confident about the 93% as you were when this was launched about a year ago? So that's the first question. And any comments on these dynamics will be helpful? And the second question is just on AGI.
It's a bit interesting that there is all these outflows for now 4 quarters. But also the performance fee level has been quite high as well. So just as an example, the last quarter, the last year 3Q was an inflow, but also a performance fee. This year, we're having outflows, but also performance fee. If clients are getting the returns, then what is it that's going wrong?
And how should we do you think AGI is stabilizing? Or is there a plan or discussion regarding that? Thank you so much.
Yes. So thank you for your questions. On the 93 for 20 21, my level of confidence is the same. So what I'm seeing is on the expense ratio, I think we are going to be better compared to the 20 7.5% that we discussed. And on the loss ratio, I think eventually, we're going to get to also to the numbers that we have in mind.
So also what might help in reality on the loss ratio is when rates go down, you need to have more discipline on the underwriting. But the point is also in reality, most likely, we will need to be even slightly better than 93, so that we can get to our targets, at least for the P and C side. In reality, we might have a situation where we're going to benefit from lower interest rate in the Asset Management business for the next 2 years. So to answer your question, I would say my level of confidence that we are going to get to the 93% is exactly the same as it was 1 year ago. And also, I'd like just to say, for example, this quarter, we are 94.3% of combined ratio, and this includes AGCS, let's say, at 100 and 3.
I cannot really see how AGCS is going to be at 103 in 2021. So that's everything can happen in LIBOR now. It's not something that's let's put it this way. That's not the target, let's say it this way. So coming to AGI.
First of all, one thing which is important is when you look at the performance fees, we have also starting last year, we are including performance fees, which belong to a company, the go to company, which is managing assets, private equity alternative assets for our own insurance companies. So from that point of view, there are performance fees, but that's pretty much of a wash. So you cannot take the performance fees and translate that into profit. So you should adjust the numbers for that and then you get a different picture. So don't unfortunately for you, you cannot necessarily use those numbers to do too much analytics.
But I can tell you what's going on AGI. I would say, 1st of all, numbers are anyway pretty sticky. So when you look at your operating profit of AGI, not only for the quarter, but also for the 6 months, we are pretty generally pretty good numbers. The only thing which is not really working right now the you can see the flows have been negative for 3 quarters in a row. If not 4, let's say, this year have been negative.
And the main issue we have is our performance, especially in equity and in the U. S. So at the end of the day, most of the outflows are coming from you can give a name, a family name, it's equity, U. S. Institutional area.
As we fix that, I will say we have a nice platform. And also, since you were asking about how I feel about the 93% combined ratio in P and C, Last year, we also said that we want to bring the costincome ratio of AGI below 67% by 2021, and we feel very confident that we are going to be able to get the costincome ratio even way below 67. So a lot of things are okay. The GDI clearly, we need to get a performance up, and this is going to stabilize the flows, which is clearly critical. On the long run, you cannot be successful if you have constantly negative flows.
Yes. Thank you.
We will now take the next question from Farooq Hanif from Credit Suisse. Please go ahead.
Hi, thank you very much. Good afternoon. Going back to AGCS. If you are going to achieve the upper end of your target range with such a high reserve addition, what is going to offset it? So do you have another massive pocket of reserve release that could offset it?
So could you just comment on that? And then secondly, could you just add up for us to make it easy the net M and A spend since you announced your sort of buyback this year. So I want to get to a level of how much of the $2,000,000,000 to $3,000,000,000 budget for M and A stroke capital return you have probably already eaten into for next year? Thank you.
Yes. So I okay, first of all, we didn't say we're going to be at the upper end of the range. We said upper half. So this makes clearly a little bit of a difference. This is actually, by the way, the reason why we said upper half and not necessarily upper end because we would have to digest some of the all that I know from HCS.
And anyway, our intention is we like to keep the strength of our balance sheet. So we're not going to look necessarily for glory. So we could end up at the upper end if we really want to. Yes, most likely, yes, but that's not the idea. So that's the reason why we are speaking of upper half.
The other point is on the M and A budget. I will say when you look at what we did last year by completing the transaction for LV and also with Surla America, I will say, the $2,500,000,000 of free cash flow, we have utilized less than $1,000,000 I will say, about $1,000,000,000 So from that point of view, there is still available free cash flow coming from there. But that's also important. This is just a free cash flow that we generate on a single year. So clearly, we have more availability of cash, let's say, in our inventory, but of the EUR 2,500,000,000 of free cash flow that we generate in a year, yes, we have utilized a little bit about EUR 1,000,000,000.
And just to follow-up on that, does that include the that obviously doesn't include yet the cash back from Italian sorry Spanish JV and presumably doesn't include anything else that might be on Bloomberg about China, for example?
The China thing is not we didn't fund that through our free cash flow or M and A buyback budget. This is a general account investment. So this is coming is an investment which is covering some of the liability that we have. So it has no impact on the free cash flow situation of the group. Okay.
It's a pure financial investment, yes. Okay.
Okay, great. Thank you.
The next question comes from Nick Holmes from Societe Generale. Please go ahead.
Hi there. Thank you very much. Just coming back on low interest rates. Wondered, are you modeling negative interest rates for Solvency II? And if so, could you give us a bit of color on that?
And what do you think of EIOPA's proposals to introduce negative interest rate modeling into the standard formula? Obviously, you're not using the standard formula, but just wondered what you think the effect on the German mutual sector could be? Thank
you. So yes, we have negative interest rates. So when you have a internal model, that's what you do. And that's also the reason why there is also the conversation about introducing the negative interest rates on in the standard model. In our case, what we do, we run the stochastic, the sharp and the stochastic calculation.
We have a flow anyway at 185 negative. So interest rate can now go below 185, which seems to be a few months ago, that seemed to be a very prudent assumption. Now it still looks like a prudent assumption, but let's prove them. I feel pretty good about the way we run our models and also the amount of negative rates that we allow in our model. With regard to the proposal of EIOPA and the fact that negative interest rate should be factored in, in the standard model, I think it's hard to disagree with that.
Once you have negative interest rates and claiming that this cannot happen, it's very hard to object to this. So from that point of view, I will say we need always to be objective and technical. So from that point of view, I think that's the right proposal. Now the consequence is they might not be so nice, but then, okay, clearly, if I were a regulator, but I'm not, as I change the rules of the game, I would always give time. So then I will say, okay, if you change from a model where you don't have negative interest rate, a model where you need to apply negative interest rate, most likely, I would also say maybe I'll give you some additional transitional periods so that the companies have a possibility to react to that.
That's what I would do if I were a regulator, but I would definitely introduce negative interest rates. Then I will think about other maybe possibility to give some room to this company to react also to what the numbers are going to look like.
So you're not too worried about a crisis in the German Mutual Life sector being triggered by EOFER? Because I mean that could be negative for yourselves, couldn't it? I mean you might have to intervene to help them.
I'm not worried about that. And yes, I know there is always this issue that we should then save people. If we had to save people, we are going to do this in economic terms, right? There is no idea to save other companies under uneconomic terms. But I think the regulators are going if there is any stress coming in the system, first, they're going to find other venues to relieve the stress in the system.
And I can tell you the more if at the end of the day, we are asked to help usually people that are helping, they get at least in the long term benefit because of LP. So I wouldn't be concerned about that.
We will now take the next question from Ashik Musaddi from JPMorgan. Please go ahead.
Thank you. Good afternoon, Julio. Just a couple of questions. First on low interest rates, I mean, you mentioned that product mix shift cannot be ruled out and it would be very important tool that you look in the Life business. Can you just give some color as to low interest rates, how much it will be adjusted by doing more asset rerisking, so more asset optimization and into what particular asset class you want to do more?
I mean, is it still the same illiquid assets or anything else? Second thing is about the same IOPA review, sorry, going back to the same thing, I mean, the UFR is a big debate as well. I mean, does the change in lastly QuickPoint is important, relevant for German Mutual Industry alongside your business? And does that change any dynamic? Or any thoughts where is the debate with the regulator with Baffin on that subject?
What is Baffin proposing on last liquid point? Any thoughts on that would be great. Thank you.
So on the assets in the Life side, okay, first of all, what we need to do and what we are doing is to make sure that we have assets and liability, which are somehow in sync. We will never get to a duration, which is exactly 0, but the idea is to have a matching, which is as close as possible. And clearly, as we see rates going down because of of the liability, which is larger than the of the assets, we have always the need somehow to catch up as rates go down. So this is the first things that I think we are doing is look at our portfolio and understand the duration so that we don't have the increase in ACR. By the way, that's also something to consider.
It's we can always improve our solvency ratio by going long or short on duration. And clearly, there are other effect that have to be considered. But the primary thing is working the duration. On the other kind of assets, I will say we are not necessarily changing the philosophy. From that point of view, clearly, we like liquid assets because they are fitting well into our liability profile.
We might be a little bit more cautious right now in expanding our equity portfolio. But fundamentally, we are not necessarily changing the way we are running our assets allocation. In the case of the buffing, I think that they had a sort of proposal to understand about introducing some crisis VA, which I think is off the table. Otherwise, on the last liquid point, I believe the position above in most life is to extend to 30 basis 30 years, we will see, yes.
And how does that impact change anything for the industry and for Allianz? Does it is it material? Yes. Industry ratios of the German Life Industry, it's like 300%, 3 50%. So it doesn't matter.
No. The point is, let's say that's always important to very well my guys are telling me Bath is more about keeping the 20 years. I need to correct myself. Let's say that we move from 20 to 30. Clearly, the implication, if you do not say, would be that the solvency ratio is going to go down.
But the point is, in reality, you can extend duration. So at the end of the day, the extension of the UFR to 20 to 30, the impact that you have at least on the requirement that can be offset by the standard duration. You might have an impact on your own fund, but that's a different story. So companies have the possibility to adjust their strategy in order to if they need to, to improve the solvency ratio. I also believe anyway that if the regulators are going to come with substantial changes moving forward, I believe they are going to give some room to the companies to react.
It makes a bit different if you change the rules of the game and you see these are the new rules and this is starting tomorrow? Or if you say to somebody these are the rules, but you have 4 or 5 years to get there, this is where you can make changes.
Okay. And sorry, Wafin, you're saying 20 year or 30 year?
20. 20.
20. Okay. Thanks. That's very clear. Thank you.
We will now take the next question from Johnny Vo from Goldman Sachs. Please go ahead.
Good afternoon. Thanks. Just can you just comment on the sales increase in life in Germany? I mean, is this a sales promotion and should this continue? I guess the next question just comes back to one of the questions or one of the answers you gave before.
Do 0 maturity guarantee products still make sense, as you said when rates are negative? And as a result, all the sales force, should we see margins decline? Because I understand that you're using a trailing assumptions on new business. So can you talk about that? And the third question, just in relation to, obviously, economic yields have dropped and we have, obviously, a higher UFR drag and therefore generally lower Solvency II capital generation.
Can this be offset by further asset optimization or liquid assets? Or is there other ways that you can offset this? And how should we think of this in terms of future capital returns going forward? Thanks.
Well, if I understood, your last question is whether we can improve our solvency ratio by changing our asset allocation. Is that correct?
Yes. For the loan.
Oh, yes, absolutely. We can change that. We can also change the volatility clearly of the solvency ratio. So that's almost like double gearing because you improve your solvency ratio, you are less volatile. So the resilience is much higher.
And clearly, as you do that, you need always to look at what is the cost, right? Because there you need to look at other KPIs like what happens to your operating profit, what happens to your net income. But definitely, there is room to improve the solvency ratio. You can also improve the solvency ratio substantially by using derivatives, but then a derivative depending on what you do, might have a cost. If you use swabption, for example, if you use other instruments, might not have a cost in the sense that if you want a tissue, but you're going to have clearly exposure volatility in your P and L.
So from that point of view, yes, if you look in isolation, Solvency II. And if the job would just be to get Solvency II to be as high as possible, that will be a simple job. Once you need to have a good Solvency II, you want to have good operating profit, good net income. You don't want to have stream volatility in the net income, all these kind of things. When you put it all together, this becomes a little bit more of a challenge.
But definitely, there is depending on where you are and the trade off, which are more sensible to do, then you can decide maybe to sacrifice to put more volatility in the net income IFRS. But to stabilize the solvency ratio, you can definitely do that. This all depends on how you feel about your level of solvency ratio. So the notion and that's very important, that the solvency ratio is something that we cannot control that's wrong. We can definitely control the solvency ratio, and the desire to control the solvency ratio is going to be stronger or less 202, I will say we are not in the pressing need to get too excited about what we need to do on the solvency ratio.
Clearly, we're going to do something that's normal, but we are not in a situation where we need to do to overreact at all. So that's on this point. On the guarantee, what was the question whether there is some promotion going on in Germany? No, I will say that the growth in Germany is not driven by any specific sales promotion. So it's a growth that we have been seeing in general throughout the course of the year.
One thing to consider, which is maybe extreme if you look at the Germany Health, it's less relevant for Germany Life, but that's also important. If you have a regular premium and you apply negative interest rate right now, you have no business with regular premium. This is going to create according to the calculation that we do here, which is a present value new business premium, this is going to give you the impression that the production is even higher. You understand my point? So if I was selling €100,000,000 of regular premium 6 months ago, €100,000,000 of regular premium now as new business, €100,000,000 6 months ago was €600,000,000 maybe that.
And now that will be €1,000,000,000 So you need also to consider for these effects. If it makes sense to sell Prada with 0, guaranteeing a rate environment below 0, I will say, long term, so in a steady state, if you continue to do this for the next 20, 30 years, this might not be a good idea. Let's be very serious. And then the ability that you might have to sell still at a guarantee of 0 in this environment right now. This depends on the amount of unrealized gains you have, how your book is working.
So for the short term, yes, I will say it's possible to sell business with a zero guarantee even if the rates are below 0. The swap rate is below 0, let's put this way. In the long run, that's something that most likely will not work. So from that point of view, clearly, there is the need to make changes because we are supposed to be here for the long run. Then there was another question which Yes.
Just in relation, could you use trailing assumptions? So if you use the current assumptions of your business, what would it be? Yes.
Sure. So okay, what we yes, sure. So if we use the end of the quarter assumption, our new business margin would be slightly about 2.5. Right now, the situation is a little bit better. So I will say, yes, most likely, if we yes, stay where they are, we might get something more from the United States.
Because in the United States, we do a continuous true up, right? So every 2 weeks in the United States, we are adjusting. But I would say the point of reference, I would expect something which is north of 2.5%, maybe 2.7%. That could be the number that we're going to see at year end for the quarter.
We'll now take the next question from Farooq Hanif from Credit Suisse. Please go ahead.
Hi, there. Just a quick follow-up. So going back to the last liquid point, let's say it did move to 30 years, would you still be really, really well catalyzed in Allianz Leben? That's question 1. And question 2, quickly, just on the harvesting rate in the Life business.
It was low again. Could you remind us what's going on there given the yields went down in the quarter? Just wondering whether there's some derivative effect that's impacting that?
Can you repeat the last question? Thank you.
The harvesting in the Life business, it was low. Is that some sort of derivative effect? Or is it just low realized gains?
Yes. Okay. So on that one, I would say, so we are not necessarily realizing a lot of gains right now in the Life business. So from the and then there is always also the impact of derivative. But fundamentally, we are not taking any substantial realized gains on our Life business right now.
There's also something to highlight. If we want the investment margin to look a little bit better, we would have definitely the possibility to make this investment margin look a little bit stronger. So as you can imagine, right now just to give you an idea, right now, on a gross basis, in total, we have EUR 80,000,000,000 of annualized gains, EUR 85,000,000,000 of annualized gains between bond and equity. So clearly, if we want to deploy these annualized gains to improve our results also in the Life business, that would definitely show even better results. But we are very happy with the amount of operating profit that we are doing right now.
But there is definitely even a possibility to create more profit if we really have to. On the last liquid point, I will say, if the last liquid point will go from 20% to 30 percent. The solvency ratio of Allianz Leben will drop significantly. I don't tell you the number because all is big, it will never happen because we will never look at a change in the last looking point from 20% to 30% and say we do nothing. We will definitely then, as I was saying before, extend the duration.
So that will be the implication there. You might ask me how much we need to extend the duration. I think we should extend the duration by quite a bit, but that will be definitely possible. So in that case, we would look at management action to offset the impact of the last liquid point.
But your to the conclusion is you still think it will be lower, but you'll be okay. Is that your conclusion?
Yes. Absolutely. Yes, absolutely. Yes.
Okay. Thank you very much.
The next question comes from William Hawkins from KBW. Please go ahead.
Hi. Thank you very much. Julie, there's always going to be specifics in your reserve developments like AGCS or Spain. Could you kind of summarize what you think is an acceptable level of volatility in aggregate for the reserve developments in your normalized combined ratio? I mean around the 3.8% history that you've told us, we know very clearly that it could be 100 basis points either side.
Is that how you'd like to think about the acceptable range over the future? Or could we see I'm trying to get a feel for how low you would accept that number going? And equally, I suppose, how high it would be. So that's question 1. Could you update us a bit secondly on where Allianz is thinking is in terms of rating migration and default risk?
Obviously, all of the conversations topic are about low yields, but the background is there's a lot of credit risk building up as well. Could you kind of remind us any update work that you've done about your Solvency II sensitivity to rating migration? You talked a bit about that in the Q1. I don't know if you've done any more work. And also how Allianz is thinking about that risk because on the one hand, both of the executive board and in PIMCO, you often flag this as a risk.
On the other hand, Allianz is still a net investor in credit. And then if I may, thirdly, very small question, but your noneconomic variances seemed a huge positive for the Solvency II capital generation in the Q3. Is there anything specific to flag on that and anything forward looking? Or do we just sort of say, well, that's good news, but we'll still plug in zeroes for the future? Thank you.
Yes. Maybe yes, thank you for the questions. Maybe I'll start from the last one. Yes, the non economic variances, which are included in the new business in the organic profit generation, have been about EUR 400,000,000 EUR 400,000,000 total when you also look at the risk margin P and C on a pretax basis. Now this is more a one off.
And we do on the Life side, for example, we do calibration, and this calibration happens once a year. So this is the time where we put the calibration into the model. In this case, it's a calibration regarding the risk margin for cost lapses. And what we do, we have a 10 year view backwards. And right now, with this adjustment that we did now, the 2,008 year has dropped out of the 10 year rolling that we do.
And I can imagine that 2,008 was a special year, creating some noise even if we are speaking of non market risk. So from that point of view, that's more to be seen as a one off. Sometimes they can be positive. Sometimes they can be negative, but that's definitely a one off. On the rating migration, I will say what we have been doing is we have a system in place, which is internally we calculate the so called management ratio.
So we look at our solvency ratio. We compare the solvency ratio to what we think we need to have as a solvency ratio considering a scenario like the 2,008 crisis and also assuming that we are going to have natural catastrophe. And in the past, we will not include generating migration into this calculation. This year, we have introduced also the calculation for the rating migration. And this has changed the amount of additional solvency that we need to keep by above 5 percentage points.
So this is how I will quantify the impact of rating migration on our solvency ratio. The other question was on the runoff. When we talked last year, we said that moving forward, we expect our runoff to be more about 3%. And so I will say that as we move into 2020, 2021, this is the number that we generally expect to see. So that nothing has changed on that kind of guidance.
And clearly, we can be a little bit higher, a little bit lower. But I will say that 3% is the expectation that we have moving forward.
Thank you. Just on the rating migration to come back, if I remember correctly, you said on the Q1 that you did a scenario analysis that said that a 2,008 style scenario, which was a would be a 1 notch downgrade across your corporate portfolio, would hurt your Solvency II ratio about 10 percentage points. I don't want to inappropriately put words in your mouth, but is that a correct memory of what you said? And is that still the situation in terms of what you think will be a stress test for your Solvency II ratio?
No, that's it. So when we did the analysis at that time, we had a 9% impact because of rate immigrations and then there was a 5% impact because of spread impact. And now as we went again to running the model and including this into our management ratio. The impact of the management ratio has been determined to be 5%. I think we're overestimating some parameters in the analysis that we did at that time.
There was some sort of double counting between the rate in migration and the spread impact. But the latest information based on what we are putting now into our model is our management ratio is changing by 5 percentage points because of running this additional stress.
Right. That's great. Thank you.
The next question comes from Niccolo Dalla Pama from Exane BNP. Please go ahead.
Yes. Good afternoon. I have a couple of questions on the product side. First, you mentioned about the future redesign of some of the products. You gave some examples.
More specifically on the German Life side, could you remind us what has been done so far this year to the products structure and what may be done in German Life specifically? And secondly, on the travel insurance side, there's been a warning from EIOPA on the from a consumer protection perspective in terms of the value for money clients get. Do you think given you're a big player here, do you think this is mainly a problem for many of the small players not giving enough value for money and you're completely comfortable on your side? Or what type of claims ratios the travel insurance business is running at specifically? Thank you.
Yes. Coming from the Allianz Leibens, we are thinking about product changes. I even don't know now what is probably versus not probably, but for example, we introduced I think I can share that. We introduced a new product, which is a sort of uni linked, but the is a Unilean product with somehow some sort of alternative assets underlying this Unilean product. So that's, for example, a new product that we are introducing.
As we go into 2020 or 2021, we are going to look also at other actions that we can take there. But for the time being, we are still in the phase where we are analyzing option as opposed to make changes. But I am pretty confident that as we go through 2020, 2021, we can announce to you also some changes. But again, Allianz Cleven might be also one of the companies that has some room to maneuver. So the need to change might be stronger in other entities as opposed to Allianz Leben.
But clearly, also Allianz label has to think about changes moving forward. On the travel, I would say, yes, we've seen that, and we are clearly aware that the commission level in travel is higher compared to what you see in other products. What we do, we've been doing this since years. We have a product review committee where we look not only at the profitability, but we look also at what the value for the customer is. So that's a product and the loss ratio is below a certain level, this is not a product that we should be selling.
Now as usual, the regulator might have some different view about what is the level of acceptable loss ratio, but we had done our homework from our side. So from that point of view, we have put governance in place. So we feel that we have done what we can do from our side. And then we have if we need to engage in any conversation, we're going to engage in the conversation we need to have. But I think we are definitely not on the streams.
Indeed, I can tell you based on my personal recollection, we had let business go because we found the or we are not accepting new contracts also in Asia. There was an Asia, I believe, because we didn't find that there was enough value for the customers.
Very helpful. Thanks.
The next question comes from Michael Haidt from Commerzbank. Please Two questions, also one
on Life
and Health. The loadings and fees you mentioned are significantly up because of you've taken some actions already. You elaborate a little bit on the actions which you have taken? Where does it come from? What products are affected and what countries?
And the second, an inevitable question, maybe it's a little naive to ask, but on your Chinese investment, you spent around US1 $1,000,000,000 in this Chinese life insurance company. This costs you 2 roundabout2 percentage points in the solvency ratio, and you defined it as a financial investment. Maybe as I said, it's a little naive, but at the moment, it is a financial investment. Can it become a strategic investment? Or and is it normal that such an investment costs you 2 percentage points in the solvency ratio?
I assume there is some negative diversification or lower diversification in place.
So coming from the first question about the loading fees, You might have mispronounced something, but fundamentally, no, no. The loading fees are not going up because of changes that we do specifically now to the products. This is just a change that we are seeing over time because we have more unit linked products, for example, in Italy. Also, the markets have been kind of benign. And then overall, when we are growing also in the German business, you have more loadings because there are loadings in the German business.
So this is not related to the fact that we have been making changes now in this quarter because of the market condition that just the trend that we have been seeing over the last quarters. And this is coming from volume, which can be volume because we are selling more or can be volume because the assets under management, if you want, are going up. On the Chinese investment of the €800,000,000 I will say that it's €800,000,000 by the way to be specific. That's a financial investment, which might become one day a strategic investment in the sense also finding cooperation with Taicang. It's common to have a financial investment, which is a capital charge of, I will say, about 30 5%.
I would say it's not uncommon. So we do this kind of investment. We do private equity on these kinds of things. The point is, in this case, it's a large one instead of being maybe 3 or 4 smaller investment with EUR 150,000,000. But if you take a look from a total portfolio point of view, where we have also our allocated budget for different kind of investment, you can consider this to be an alternative investment if you want.
At the end of the day, deploying funding coming from our general accounting investment that per se can have a high risk charge. But always look at this within a portfolio. So we have right now, our investments for the insurance side are about not far from 800,000,000,000. We are investing every year about EUR 120,000,000,000 of cash into new investments. So when you take a look from that point of view, I would say it's a large investment, but it might not be as large as it looks.
That's great. Thank you very
much. Welcome.
We will now take our final question
historically and how much you spent. I was just wondering, looking forward, what your view currently is of the opportunities available. And I'm just wondering where you stand now versus where you stood a couple of years ago, whether you think there's sort of puts more opportunities, more or less opportunities to deploy capital looking forward? That was one question. And maybe a small second one.
Just wondering if I could for the usual update on asset management flows in Q4 to date and what you're seeing in the pipeline? Thank you. Yes.
So maybe starting from the second one on the Asset Management flows for the 4th quarter, they are positive. So we see positive flows at PIMCO. And I will say based on what we see, the run rates, if they continue to go this way in the quarter, they would have the same amount of flows that you saw in Q3. But clearly, we cannot speak about the future, but this gives you an idea that the RAR rate is intact at PIMCO as we go into the Q4. In the case of AGI, we are seeing that the outflows have stopped, at least for the month of November.
So from a flows point of view, at right now in November, we have a good picture, which is broadly consistent with what we saw in the Q3 or before. On the M and A, I would say the situation is not so much different compared to what we had 1 year ago. So from that point of view, I think the opportunities are more or less the same situation is more or less not very much a change compared to what we had 12 months ago.
Thanks a lot.
As there are no further questions signals, I'll now turn the call back to your host for any additional or closing remarks.
Yes. Thanks to everybody who joined the call today. We say goodbye to everybody and we wish you a very pleasant weekend.
That will conclude today's call. Thank you for your participation. You may now disconnect.