Ladies and gentlemen, welcome to the Allianz conference call on the financial results of the second 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 would like to turn the call over to your host for today, Mr. Oliver Schmidt, head of investor relations. Please go ahead, sir.
Thank you, Christian. Good afternoon from my side as well, and welcome to our conference call. Normally, our quarterly calls are conducted by the CFO and investor relations. Today, we have a treat for you. Our CEO, Oliver Bäte, has joined us as well. He won't be able to stay for the entire call, that is why we start directly with him.
Thank you, Oliver. Hello, everybody. Thank you for joining today, on a day that is ugly in the market. Good news is Allianz is keeping it up, at least for those that are invested in our stock. I would congratulate those investors having had the right nose in this environment. Why I'm talking to you is, number 1, I missed you for the Inside Allianz series in Munich. I was in London at the time, trying to understand what Brexit means. I'm still not much smarter, we'll find out very soon. What we are much smarter on is that on Renewal Agenda 2.0 that we have launched in last November, Allianz is fully on track.
I would like to have you look through the quarterly numbers and think about what we had said in the strategy session and how we are keeping to deliver on those and keep an eye on the delivery against the strategy. What we told you is that the environment is going to get very ugly, that the trade dispute is not going to go away, that that will result in rates going further down. Now we have the Bund even at 30 years being negative, and we are less than half of where we were a year ago. Because we knew that, we have started to tighten the ship early and make sure that we're prepared for the storms that are ensuing. Let me talk about that in a little bit, and then I hand over to Giulio.
The first one is that we have made sure we transform our life business as we've done the last 3 years and keep on changing the business mix on the new business side and maintain discipline on capital deployment on the in-force. Giulio is going to talk about how we, given a declining investment income, are strengthening the earnings power of Allianz nevertheless, because we are growing market share, not just in Germany and in the U.S., but also in Asia, at very good levels of profitability despite the massive decline in interest rates. We're going to continue to pursue other earning sources than just investment income and making sure capital is being redeployed where it does meet our objective. As we stand today, we have very strong return on invested capital.
As many of our competitors are fleeing the life business, we are growing and we are improving profitability. That is not to be seen in many other places. The second one is the asset management business. After the turnaround of PIMCO numbers in the past, we are back to full strength. Many of you had questions about the fourth quarter of last year and some of the flows. I think PIMCO is demonstrating extremely strongly that we will strive in very difficult markets, different than other companies can do, and you see that in our earnings. The businesses that are most exposed to capital markets are showing enormous strengths. That leads us to property casualty, where we have had very good results despite the ensuing headwinds in commercial lines. I want to be very clear, the global markets and commercial lines are not yet where they are.
There are signs of rate hardening, but we need to look through short-term aspect that says there is work ahead of us, for all of us in the industry, to make the profitability rise. Allianz is doing exceptionally well on retail, both in margin and in growth, and we have some further work to do on commercial lines, which means there is significant performance uptick that we can gain for our shareholders in driving the commercial lines business forward. That will take time and hard work, and we're on it. In the meantime, Allianz is focusing on controlling the levers that do not depend on financial markets to go well. Very importantly, trying to grow organically our business and being extremely disciplined on the productivity. We have had yet another quarter.
We're delivering on productivity gains, and we are not letting it go, and we will deliver on that in an environment where that is one of the key levers next to underwriting discipline and risk controls on the investment side to make sure that we stand when others will get weaker. Now, last comment I'll make sure in terms of transformation delivery. We are not just delivering extremely strong result in this really difficult environment. We are continuously working on transforming the business. That then allows us to also grow inorganically. I would like to reiterate the point that we are not planning any large acquisitions anytime. We were sticking to bolt-on, very well priced acquisitions. In difference to many other people, we don't see and feel the need to buy something large to camouflage problems that we may have strategically.
That will remain a discipline for the time to come. We will guard your capital very carefully. As we have said in the past, if we cannot reinvest the capital into our businesses for profitable growth, be it organic or inorganic, we will not sit on it. Given that the times are getting tougher, we'll make a very careful trade-off between capital usage and how we invest it. I think it's time to invest it in the core business and not in overpriced assets. These are the message for today. Thank you for your trust, and with that, I hand over to Giulio.
Thank you, Oliver. I'd like now to go Good morning and good afternoon to everybody. I'd like now to go into the results for the second quarter, before we go into the results of the second quarter, I'm going to give you a view on the very good results, as Oliver was saying, for the six months. If you move to page 63 of the presentation, you can see that we have been able to grow our revenue by 6%, and the growth in revenue was driven both by property and casualty and life health. Again, in property and casualty, we had a growth rate, which is in excess of the 3% we were used to see a few years ago. The operating profit is also following a nice increase with a 6% plus of EUR 367 million of additional operating profit.
All segments have contributed to the increase in operating profit. When you look at the net income, it's up 7%. If you do the calculation of the earnings per share, we are up double digits compared to the six months of 2018. A very strong story. When you look at the KPIs, on the operational KPIs, you can see that our combined ratio is stable at 94%. What is also very important, our productivity gains are coming through, and we were able to improve our expense ratio in the first six months of 2019 versus the six months of 2018. That's an additional improvement. On the new business margin, you can see that we've been able to keep the new business margin stable, and this combined with an increase in production has led to an increase in value in our business of 17%.
On the asset management side, you can see that the net inflows are very strong. Over the six months, we had about EUR 40 billion of net inflows. This is mainly driven by PIMCO, but I think the number is very strong. It doesn't matter whether you look at the revenue, whether you look at the operating profit or at the net income or at the operational KPIs, I think there is a very strong picture. You can see a similar kind of good picture also for the second quarter standalone. On the revenue side, again, we had a positive growth of 4%, also driven by P&C and Life Health. You can see an increase over the level of 2018. Here, the increase is mostly driven by the life business.
I'm going to come back on this one. When you look at the other segments on aggregate, we also see a lot of stability. Just to keep in mind, the level of EUR 3 billion of 2018 was already a very good level. Again, a very good quarter. On the shareholder net income, you can see that we have an increase in shareholder net income of 13%. This is a consequence of the increase in operating profit. As we are going to see later, the non-operating results was a little bit better compared to last year. Finally, the tax rate has been lower compared to the tax rate in 2018. All in all, with EUR 3.2 billion of operating profit and EUR 2.1 billion net income, I think we have a very strong picture also for the second quarter standalone.
At page seven, we are showing the shareholder equity and the Solvency II capitalization. I'm going to focus on the Solvency II capitalization because that's the most relevant metric. As you see, our Solvency II declined from 218% to 213% in the second quarter. The main driver for the decline is the change in interest rates. I would say that the credit spread movement, there is some business risk on the credit spread movement, has also caused a little bit of a reduction in our solvency ratio. What is important, however, the organic capital generation is at 3%, which is a very good number because this is eventually the number which is going to stay and support the capital generation moving forward. One comment on the sensitivity. As you see, the sensitivity in the downward direction had been pretty stable compared to the sensitivities that we had in Q1.
The only sensitivity which is now stronger is the sensitivity up to interest rates, where we have now a plus six percentage point. The point is, as we go down the curve of the interest rate, the convexity, if you want, is changing. That's to a certain degree, also kind of normal, but we need just to be prepared. The sensitivity can change over time as we are moving up and down the curve. At page nine, I know you're always very interested in the topic of the Solvency II generation. I can be a little bit more specific. As you see on a pre-tax and pre-dividend basis, the organic generation was plus 7%. If you take out the dividend and the taxes, we are back at 3%, which is pretty much in line with our expectation.
On the market, you can see on a pre-tax basis, a minus 8% percentage point of movement. After tax, it's minus 7 percentage point. Here again, I want to stress the following. First of all, we have a movement of the interest rates for the quarter, which was between 30 and 40 basis points. There was a strong movement of the interest rates. The second point, when we show the equity sensitivity, we are showing the equity sensitivity, assuming that the non-public equity are going to move to the same level as the public equity. This is not necessarily the case. Eventually, our sensitivity then In actual, we can see different results depending on the movements of the non-public equity. Also something to consider is our portfolio has a higher quality, if you want, from a bond point of view.
We are more focused into, let's say, bonds compared to BTP, compared to the mix of the Europa portfolio. For example, we saw a widening of the volatility, a narrowing in the volatility adjustment. When you look at what happened to the spreads, you can see that in the case of the bonds, there was a widening of the spread. In the case of the BTP, on the long duration, there was a narrowing. When you look at the short duration of the BTP, there was indeed also a sort of widening. There is some basis risk there that can also cost a little bit of solvency. The final point is we have repurchased one subordinated loan in Q3, and the impact of the repurchase of the subordinated loan was about 1%.
All in all, a 5% decline, but I would say under the market condition, totally explainable, and we are very comfortable with the level of Solvency II that we have now, and it is by no means any sort of restriction to our capital flexibility. Moving to page 11. We come here to the segments, and we start as usual with the growth rates for our P&C entity. As I said before, a good growth rate of 4.3%. When we look, by the way, the growth rate for the six months, 50% of the growth is coming from price and 50% is coming from volume. If you then look in isolation to the second quarter, you can see there is even an acceleration of the improvement coming from price, and that's especially because of the development in the industrial lines.
When you look at the change on renewal, we are pretty stable positive, especially in the case of AGCS. We see a strengthening of rates. We saw this to a certain degree already in Q1, but definitely we see more momentum in Q2, and we expect this momentum to continue also in the second part of the year. When you look at the single entity, I would say we had a very good dynamic of growth in Germany, in Italy, and generally, you see plus signs. The only exception is Spain. In Spain, we are very focused on the profitability, especially in the new business, we are kind of cautious. In general, again, I would say a good picture on the growth side, and this is not the first quarter that we have good numbers on the top line. Coming now to page 13.
We show here the operating profit, which has decreased by 5% compared to the prior period. This is driven by the investment income. When you look at the combined ratio, the combined ratio is more or less stable compared to the prior level. What we see here is a higher load from natural catastrophe of about 60 basis points. Also, we see there is a lower runoff of 90 basis points. Offsetting these two developments, we see a more benign impact from the weather-related losses. Also, we see some improvement in the pure attritional loss ratio, and then more important, we see a further improvement in the expense ratio. All in all, I would say a good picture for the second quarter with an improvement of the attritional basis, the attritional loss ratio, and also a further improvement in the expense ratio.
In this case, I would like also to spend a second on page 14, because I believe that when we see the numbers, sometimes it's better to look at the numbers on a six-month basis. They can be more telling. When we look at the development of the combined ratio for the six months, you can see an improvement of 40 basis points. Here we see that the net CAT has been positive compared to the development of last year. On the other side, the runoff is 50 basis points lower, so the two things are offsetting each other. On the attritional loss ratio, we are pretty much flat, and then we see an improvement also for the six months on the expense ratio. Again, a sign that also in a six-month picture, we are making progress on our priority to bring the cost ratio down.
With that, let's move to page 15. Here we show the operating profit, the combined ratio for the selected entities. I would say we have good results, very good results indeed in Allianz Germany. This might look counterintuitive because you see 95.6, but you have to consider that we had a 7.7% load from natural catastrophe. Indeed, I would say almost the only real natural catastrophe that happened in the second quarter, more or less happened here in Germany. If you adjust the numbers for the extra load on natural catastrophe, I would say the performance in Germany is very good. In the case of France and Australia, you see a movement compared to the prior period. This is more of a sort of normalization compared to the either high level of last year or extremely low level of last year.
As you go into down the list, you can see in Spain, we have a significant deterioration of the combined ratio. Important here to note is the accident year combined ratio is stable, is stable at a good level of 93. What we see here, however, is a swing from a positive runoff in 2018 to a negative runoff in 2019. The underlying accident year performance is pretty stable at 93. Clearly, AGCS, it's a combined ratio of 101% is a business that has a few challenges at the moment, we also see there is a correction coming in the rates, there is definitely a strong hardening. We think that moving to 2020, 2021, we should see better results.
Then I like to highlight also the outstanding performance of Euler Hermes, where we see good growth rate, and also we see a very good combined ratio at about 80%. Also the way these guys are managing the business in an environment which is not necessarily easy, in my opinion, is best class. All in all, I would say good picture on our underwriting results. With that, we move to page 17, where we show the investment results. You can see a decline by about EUR 50 million on the investment results. I would say the main, there are two factors. One is just some kind of volatility that we might see on the net harvesting. In this case, it's primarily driven by a fixed effect and the other effect that you see on the interest and similar income.
We got this year less dividends, especially on private equity, compared to what we had last year. This is more a normalization because last year the dividend were a little bit higher. I would say all in all, in reality, a stable or resilient result. I would also point out to the current yield, which is pretty much stable compared to the level of last year. From a bond point of view, from the income on the bond portfolio, we didn't see any substantial change in the second quarter. With that, I'd like to come to page 19, where we are discussing the life business. As you know, in the life business, we have, at the end of the day, three goals. One is to keep a new business margin over 3%.
The other one is we want to have at least 80% of our production in capital-like products. I believe this strategy is extremely important in this kind of environment. Also we want to have a growth in VNB. Since fundamentally the margin is not going to go so much higher compared to where we are now. At the end of the day, the growth in VNB has to come from growth in production. What we are showing these slides is that we have been able to meet in the quarter our objectives. When you look at the growth in production, that has been 8.5%. Mostly it's driven by Allianz Leben and by the USA. In a few countries, like Italy and France, we had a reduction in the production because of the unit linked business.
Fundamentally, when you look at the total portfolio, we were able to grow our production almost on a double-digit level. On the preferred product, we have more than 80% of our production preferred products. As you see, we have been able also to grow our margin by 10 basis points, and this despite the environment being kind of challenging already in Q2. At page 21, we are showing the operating profit. As you see, the operating profit is up about EUR 160 million compared to the level of Q2. Now, here we have a special effect coming from Allianz Leben, where we changed the duration for the amortization of the DAC. We had a duration up to 20 years, and now we are extending the duration to 25 years to calculate the AGP, the amortization of the acquisition cost.
By definition, when you are extending the duration, you are going to add more profit into your model, and this is going to lead to a different DAC depreciation. This is a special effect that we had in Allianz Life to recognize the longer duration of the products. If you adjust the numbers for the one-off, we go back more or less to the, or exactly, I would say, to the level of the operating profit of last year. The operating profit will be EUR 1 billion, 75 million. If you take our outlook for the year of EUR 4.2 billion divided by four, that would be EUR 1 billion, 50 million. I would say even adjusted for the one-off, we are well on track to achieve our outlook, and the second quarter has been a confirmation of this. With that, we can move to page 23.
Here we are showing, as usual, the value new business, new business margin, operating profit for the different entities. On the value new business, I like to highlight that we achieve double-digit growth in value new business, mainly because of the increase in production. As I was pointing out before, we were able to increase also the new business margin. The reason why we have been increasing the new business margin is mostly due to mix. Indeed, if you go back a couple of page, you're going to see that we have a higher mix in capital efficient products, and the capital efficient products have a higher new business margin compared to the products in other, at least in the savings or in unit links. On the operating profit side, clearly you see a nice growth at Allianz Life.
This is mostly driven by the impact of the change in DAC. You see also nice growth in Asia Pacific, where we don't have the drag from the legacy book in Taiwan anymore. There you might see a couple of minor signs, but these are related mostly to lower realized gains in the second quarter compared to the realization in the second quarter of 2018. All in all, again, a strong operating profit for the second quarter. At page 25, the gross investment margin is stable, but the policy owner participation, the profit sharing is up. This leads to an investment margin, which is three basis points lower compared to the level of last year, but is flat compared to the level that we had in Q1.
What is important here is that the gross investment margin, which is the difference between the current yield and the technical guarantee, this margin is stable. As the current yields are coming down, also the guarantee are coming down, clearly, we can credit more or less to the policyholder, and this can lead to a higher or lower investment margin. I want to point out that we have changed for 2019, the guidance from 80-85 basis points of investment margin to 75-80 basis points, just to recognize that in this moment we have higher credit into the policyholders, especially in Allianz Life. This is not a change to the guidance of our operating profit. We stick clearly to our outlook for 2019 and also clearly we stick to our outlook for the future.
The reason is that we have also other profit sources, which are clearly getting more and more important. Also, I would say we see also a little bit of a higher growth in the amount of business. This is also creating additional profit. Changing the guidance on the margin doesn't mean that we are changing the guidance on our expectation for the profitability of the business. With that, I'd like to go into asset management, where we have also a very good story. As you see at page 27, we have about EUR 1.6 trillion of assets under management. I'm referring here only to the third-party assets. You can see also a nice dynamic on the flows, especially at PIMCO, you can see EUR 23 billion of flows in the second quarter. We had also substantial inflows in the first quarter.
I would say the flows dynamic at PIMCO is very good. In the case of AGI, we see some outflows, but I would say they are kind of moderate. When you put PIMCO and AGI together, the flow situation asset management is very healthy. Also, we have benefited from the change in the market value of the assets because interest rates have gone down. As we always think about the impact of interest rates, and we think about the negative impact that lower interest rates might have in, for example, on the life side, on the other side, we need to recognize that they can also create additional value in asset management because we have a higher asset value.
All in all, I would say good flows, favorable market condition from an asset management point of view are leading to record third party assets under management, which is also something which can help as we go into the second part of 2019. At page 29, the revenue are broadly flat compared to the level of last year. Indeed, if you exclude the performance fees are a little bit higher compared to last year. Once you include the performance fees, which went down a little bit, then the revenue is slightly negative. Overall, I would say a good result on the revenue side, too. When we look at the margin, you can see that the margin at PIMCO is 0.7 basis point lower.
This is driven by the acquisition of Gurtin, also there was a slight change in business mix between retail and institutional, fundamentally, we are speaking of small movements. In the case of AGI, you see even an improvement compared to the level for the second quarter of 2018. I would say fundamentally also from a margin point of view, we see rather stability. We don't see any significant change compared to the prior period. At page 31, the operating profit is flat if you adjust for the fixed effect. Here we need to consider, however, that it's flat despite lower performance fees. The performance fees are by nature a little bit volatile. The point is with an operating profit of about EUR 700 million for the quarter, I think the line of business has performed very nicely.
In general, you can also see that the cost-income ratio is going down. This is mostly driven by AGI, the cost-income ratio at PIMCO is very good with 57.5. I would say good flows, stable margin, and also a nice operating profit of about EUR 700 million. With that, at page 33, our Corporate segment is also improving. Here you see an improvement of the operating profit of about EUR 60 million. Half of the improvement is driven by better results at our IT company, providing internal services for our operation. The name is Allianz Technology, we have better results there. Also we have better results on the investment income because we, differently from the situation in property and casualty, we got here more dividends compared to last year. All in all, a good development also in the Corporate segment.
At page 35, just a few comments on the non-operating items. As you see, they are better compared to last year by about EUR 90 million. If you look at the numbers, the realized case net of impairment are below last year, but on the other side, last year, we had a negative impact due to the transaction in Taiwan, and also the structural expenses are a little bit lower this quarter compared to what we had in the second quarter 2018. All in all, I would say a little bit of an improvement, especially driven by the fact that we didn't have the impacts like in last year from the Taiwanese transaction. On the tax rate, we see an improvement of three percentage points. Here we have a couple of effects.
First, we have an increase in deferred taxes, and the second point is also we have a release of a reserve for tax uncertainty. When you adjust the effective tax rate for these two impacts, we will be at 25, which is at the low end of our range. All in all, good operating profit, better non-operating items and lower tax rates are leading, as I was saying before, to a 13% increase in our net income. With that, I come to the last slide. Again, strong results for the quarter, and I would say strong results for the six months. In Property and Casualty, we are making progress on improving the expense ratio. In Life Health, we saw again a double digit in VNB.
In asset management, we are seeing positive net flows for the first quarter, for the second quarter, and also in reality for the July month has been positive. All in all, we have a strong position at the half of the year. At this point in time, we are clearly confirming our outlook for the remainder of the year. With that, I would like to welcome your questions.
Ladies and gentlemen over the phone, if you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, it's star one if you wish to ask a question. We will pause for just a moment to allow everyone to signal. Okay. Our first question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you very much. I'll try and limit myself to three questions. The first one was on the expense ratio. The obvious question is whether that's fully sustainable. It's obviously a very strong number. I guess, even though it's strong on an absolute basis, on a relative basis, it's perhaps even stronger given that a lot of your peers are sort of seeing expenses creep up largely through the acquisition expenses. I know you can't comment on those, but as well as the absolute ratio, I'm just wondering whether you can say whether you're sort of immune from those industry trends. Secondly, on the life investment margin, to take all your comments, Giulio, I discussed it with IR this morning as well. I guess there's a bit of a change in message between Q1 and Q2.
I'm just wondering, is there anything in particular that's happened that sort of caused a slightly higher policyholder participation and caused you to change that guidance? I'm hoping you can add maybe some comments about where we should expect it to go beyond 2019. The final one is on Allianz Technology. I guess, we had a very good result last quarter, and I came away from the Inside Allianz Series thinking that that was maybe a little bit of a one-off, but you've delivered again, and the investment result is also looking quite sustainable. I'm sure you're expecting the question, but is it time to revisit the outlook for the corporate segment going forward, or are these genuine sort of one-off results? Thanks a lot.
Okay. Thank you for your questions, Peter. Maybe I start from technology. We expect technology to run better this year compared to what we saw in the past. I would say the performance we are seeing at technology is also more or less in line with our expectation. In the sense of changing the outlook for the corporate segment, I would say I don't do that, but you are free to do that if you want. For the time being, I will keep the outlook at the same level. This said, it shouldn't be a huge surprise if we are going to be better than our outlook of EUR 900 million at the end of the year. For the time being, I like just to keep the numbers stable.
Definitely the trend that we see in the corporate segment is going in the right direction. On the investment margin, yeah, it's a little bit of a change in what we said before, but I would say we had already kind of anticipated that that's a metric that we need to always take a look. I would say what has changed. One could just say that we had 19 basis points in Q1, and we see 19 basis points again in Q2. When you see that, you're sticking to the 19 basis points, then there is a point where you're going to say this is not going to necessarily revert. I tell you even more, it's not even needed, the reversion, because we are anyway confident we can get to our operating profit also with this kind of investment margin.
What is happening anyway, especially in the U.S., we see a lower investment margin compared to what we had before. This is a combination of two things. First of all, because of the tax reform, we can do a lower spread and still get to the same kind of IRR after tax. Clearly, how much of this, let's say, tax reform benefit are we keeping for us and how much are we giving to the policyholder. This is something that we can somehow adjust also based on market condition. There is a little bit of that point that with a lower margin, we can still get to the same kind of returns that we expect to have on a after-tax basis in the United States. The second point is also as rates are going down, there is always a little bit of a catch-up effect.
You need to change your products, your crediting rates. You are always catching up a little bit. This is also something that can, in the short run, cost some basis point in investment margin. All in all, I would say we are feeling pretty confident about the level of profitability that we have in our life segments right now. The last point was on the expense ratio. I would look at the six months, because every time you look at a quarter, I would say it's a little bit too limiting. When you look at the six months, we are at 27.6%, and we said that we want to be below 28%. I would say that it's very likely that we are going to be below the 28% threshold by the end of the year. Your question about sustainability, absolutely. This is supposed to be sustainable.
In reality, our intention is to bring down this expense ratio over time. That's exactly the point. It's not the idea to decrease expense ratio one year and maybe to have a huge decrease in the expense ratio in one year, and then maybe to go back up. Our idea is to bring it consistently down over time in a steady fashion. You were referring to competitors or industry trend. On the expense side, I would say it's not so much about industry trends. It's not something like frequency or severity of claim losses. This is really a matter of how much emphasis are you putting on productivity. I can assure to you that in the last 24 months, we have become obsessed with the idea to reduce the expense ratio. I would say it's a matter of attitude.
We are totally committed to bring this expense ratio down, and it looks like it's working, and I'm pretty confident that in the future we are going to see a further reduction of the expense ratio compared to the level that we had last year or the 28% minus that we want to have this year.
Great. Thank you very much.
Thank you. Our next question comes from Michael Huttner from JPMorgan. Please go ahead. Your line is open.
Thank you so much. I think you've covered most of your points in your introduction with the details, thank you, Giulio. AGCS, no reserve release, what does the unchanged outlook kind of imply? AGCS, you know I'm seriously worried because my colleague who sits next to me covers property, which is Corso. Corso, of course, has your ex-manager now running it. They've had big adjustments. Whenever I hear the word adjustment or focus or something in commercial lines, I think, "Oh, my gosh. I hope this is not going to be the same scale." I wonder how you can reassure us here. Maybe you can give something a little bit more specific. There's a CVA thing in the U.S. The second point is on the low reserve release.
Here, I'm guessing, I didn't do all the math, so I'm sorry, that Spain cost you EUR 50 million in the quarter. That's half of the EUR 100 million, the HBIP lower reserve runoff in the quarter. I just wondered what other moving parts are there or what can we take away here. Is there something that's because the combined ratio is fantastic, but you worry about every moving part. Then in terms of operating profit, if you've done EUR 6.1 billion for half-year, you leave the guidance, and I'm here, I'm taking the midpoint of EUR 11.5 billion. It kind of implies EUR 5.7 billion for the second half. Sorry. My math. It kind of implies a runway, which is about 12%, something like that, low in the second half.
Here I'm wondering, is there stuff that you're seeing, particularly on the investment income side, that we should think about? Thank you.
Perfect. Let's start with AGCS. I'm not so sure what kind of country menu we're referring to. Talking about AGCS, in our case, I would say, first of all, clearly the 101% combined ratio for the quarter is not the level that we like to see. We can start from there. Also considering, to be perfectly honest, that we didn't have significant natural catastrophe in Q1 or in the second quarter of 2019. The starting point clearly is not the starting point we like to see, but the good news in the case of AGCS is that we see a hardening of the markets, and also, clearly we are reviewing in what kind of lines of business we want to be.
We are not just thinking about price strengthening, we also think about potentially the underwriting lines of business and making choices about the portfolio. From that point of view, I would say there is work to do, but a good part of the story is that at least now the rate changes are going in our favor, and we don't need to fight against the tides anymore. This can help definitely a lot. I think you had a question, if I understood you right, on the child abuse. Based on what happened in New York right now, we didn't see the necessity to do any change in our reserving. Clearly, as the New York position might extend to our states, this might lead to a different conclusion.
I would say that in our case, the exposure should be considering the diversification of our business, should be always relatively modest. I can just tell you that based on the information we have now, we didn't see the reason why we should increase the reserve. Clearly, this assessment might change in the future. You had a question on the Spain situation, the runoff. I can give you the number there. If you look at the swing in runoff as the combined ratio of Allianz Spain, I was mentioning this is all driven by the runoff. If you take the seven percentage point and you run the math based on the NPE, net premium signed of the company, you have an impact for the group of about 20 basis points.
I would say that when you look at the runoff for the six months, and you run the math, you can see that you have about 20 basis points lower runoff at the group level because of the development in Spain. I think this issue is going to go away next year. We are not necessarily going to revert to positive runoff in Spain in 2020. I'm pretty confident that in 2020, we are not going to see a negative runoff in Spain. Your last question was on the outlook for the operating profit and why we are not changing our outlook. I would say, when I look at the outlook, I always look at the EUR 11.5 ± EUR 500 million. I would say as long as it's not completely unreasonable that we're going to stay within this range, I don't change the outlook.
When you have EUR 6.2 billion of operating profits for the first six, EUR 6.1 operating profit for the first six months, I wouldn't say that it's unreasonable to expect that we could be below the EUR 12 billion threshold. That's a little bit the philosophy that we are using here. I answer your question, AGCS, because I could not really understand.
Yeah, no, sorry. It's a deeper worry, simply because Swiss Re has had such challenges on its industrial lines unit, which is called Corporate Solutions. I was worrying if there's something like that with AGCS. If you start re-underwriting, do you have to take big reserve adjustments or anything like that? That's really the background.
I wouldn't expect that we should have big reserve adjustment. I could not exclude that we might have some minor reserve adjustments, I would never say never because in life you should never say never. I would be surprised if we would have significant reserve adjustment in AGCS.
Thank you so much. Thank you.
Thank you. We will now take our next question from Jon Hocking from Morgan Stanley. Please go ahead. Your line is open.
Thank you. Good afternoon, everybody. I've got three questions, please. Firstly, on France. I wonder whether you're happy with your P&C combined ratio in France. You've got quite a big gap to some of your peers now. I wonder if you could talk a little bit about what's happening in the French P&C business. Secondly, just to come back on AGCS, can you give us some color, please, in terms of what you're seeing there in terms of rate momentum on different lines since the turn of the year, whether that's changed your appetite for any particular parts of that business. Just finally on the LV business, could you give us some idea of what the appetite is in U.K. Motor and what your philosophy is going to be there in terms of market share versus profitability? Thank you.
Okay. Maybe we start from France. I would say the 97.9 combined ratio that you see for the second quarter is clearly not the level of combined ratio we like to see. This said, in France, we see large losses. That's a driver for the performance that we are seeing right now. This has been, by the way, a topic also for a few quarters. We are taking a look into that. Especially we see a large loss in our property portfolio. We are taking a look at that. Fundamentally, I would say, we think we can definitely put action in place to bring this combined ratio to a better place, because 97.9 is definitely not the level of expectation that we have for France.
The main reason for the numbers you're seeing is the amount of large losses, and clearly, as usual, you need to determine how much of these large losses is because of volatility, and how much might be that we need to refine the underwriting. There was something that Oliver mentioned before. We know also that we have some work to do on the commercial lines, and that's definitely one of the topics that Oliver was mentioning. This will be definitely the case also for France. I would say this is something that we need to tackle. I'd like also to make a comment. These are also all opportunities, because as you see, we have a very strong combined ratio, and that's good sometimes to have also some area where we have some room for improvement, because this allow us also then to improve in totality our combined ratio.
On the Allianz Global Corporate & Specialty side, I would say we see rate increases more or less across the board. I would say the only exception would be in the liability business, we see less of rate increases. You see significant rate increases. When we put all the math together, we are at about six percentage point of rate increases. The point is how long we are going to see these rate increases. That's for me the most critical factor. The second question would be, are we going to see inflation in the loss trend or not? My expectation is that rate increases are going to go for a while. I believe this is the beginning of a hardening, not necessarily the end. The process of the hardening will be too quick.
In general, we see a different momentum right now, and that's definitely going from a correction. That's the way I define what was happening in the industrial business at the beginning of the year. Now, I would say we are going to a real hardening from my point of view. The last question was on the LD business. I would say definitely we are going to look for profitability, especially in a situation where you are bringing two companies together. It's not about chasing market growth or market share. That's more about consolidating the business in a way that you create a very good franchise. In general, I would say we are not strong believer that you should go for market share, market growth. I strongly believe that if you go for market share, market growth by pricing differently, this is a recipe for disaster.
Market growth, you get there because you have better customer service, all these kinds of things. In my opinion, this happens, right? It's not something. You work hard to get a better customer service, to do all the right things, and eventually this is going to translate into a higher market share. That's more the results of hard work, and this is something that is not even easy to claim, if you ask me.
Thank you. Very clear.
Thank you. Our next question comes from William Hawkins from KBW. Please go ahead.
Hi. Thank you very much. Giulio, can you hear me?
Yeah.
Yeah. Cool. Hi. First of all, can you just summarize, you talked about some of the key points, but the one percentage point improvement in your combined ratio that you still need to achieve to get to your business plan. Can you just help me understand the balance now of where that's coming from, expenses versus claims? You just said that your expense ratio could have further to improve. You are already in the first half, close to the 27.5% that was part of your target already. Either you're going to carry on blowing through your target or that figure's going to be normalizing and we get some further improvements on the loss ratio side. If you could just summarize for me the walk from 94 to 93 from here, that would be helpful. Secondly, within the combined ratio, I'm sorry to come back to Spain.
I know you talked about this in the first quarter. I'm still a little bit confused about what exactly has gone wrong. You've talked about weather from last year deteriorating. You talked about the motor book. I understand sort of the facts, but I don't really understand the why it's gone wrong in Spain. I guess the reason I'd like to just get a bit more color on it is, so far Allianz has been using Spain as a test case for excellence that the rest of the group needs to learn from. Now all of a sudden, there seems to be some reserving volatility that implicitly could point to some pricing uncertainty or whatever. I'm just not sure the extent to which I should be worried that the shine is coming off Spain, if you like.
Then lastly, just briefly, forgive me if I misheard you. In terms of the investment margin, to Peter's question, you talked about what's happening in the U.S. I thought during your prepared remarks, you talked about increasing allocation to German Life policyholders in the investment margin. I wondered if you could just give a bit more detail on that, because the general trend I've heard in the low yield environment is decreasing what you're allocating to policyholders. How come your German Life policyholders are ending up so lucky? Thank you.
Okay. Maybe we start from the expense ratio and from the improvement of the combined ratio, much will come from the expense ratio, much will come from the loss ratio. What we said is, when you start from 2018 as a reference point, our combined ratio was 94%. Somehow in the combined ratio, we had a full percentage point of runoff. We always said the runoff is going to go down to 3%. At the end of the day, we need to improve the underlying by two percentage points. The idea is that one percentage point should come from the loss ratio, one percentage point should come from the expense ratio. I would say, as we go through the quarters and so on, you can see some movement in the expense ratio, loss ratio.
Fundamentally, I would say this is still the kind of guidance that we have. At the end of the day, we would expect that we are going to have an expense ratio which is approaching the 27%, in reality even better, compared to the 27.5% that we discussed in the Capital Markets Day. That's something that clearly we are striving to achieve. The rest of the improvement should come from the loss ratio. I would say start almost from a 95%, because you want to adjust for the one percentage point less runoff, and then assume that 1% is coming from expense ratio and the other half is coming from the loss ratio. Is this clear? Does that answer your question?
Crystal clear as always. Thank you.
Perfect. Then on Spain, I would say, what went wrong? I just tell you, sometimes it's overconfidence, I would say. At the end of Q4, by the way, there were weather-related claims in Spain affecting the numbers, and somehow we didn't recognize the impact of these weather-related claims. Also, we have been a little bit too aggressive in the estimation of the loss ratio for models. These two things have led that we have been too confident on our numbers for 2018, and now clearly we need to catch up on that. As I was saying before, the combined ratio, the accident here is at 93. I would tell you the following. I believe next year we are going to see what the numbers of Spain are.
If I'm right, Spain is going to be back to the 93% combined ratio that we see, and there will be no negative runoff, I can tell you that will be a great story, because at the end of the day, we are a company that has performed very nicely for many years. Somehow, sometimes you can also get something not right. If we had the ability that I believe we have to go back to 93%, in my opinion, the story of Spain is even stronger than before. I will not throw the baby with the bathwater here and then start assuming that because of what happened in 2018, now all the good things of Spain are not valid. This is a company running at an expense ratio of below 20%. This is something clearly that is telling you about the quality of the company.
Now we just need to fix a little bit this issue coming from last year. Let's wait for 2020. I really hope I'm right because that would be a really good story to tell in just a few months. You had a question on the investment margin, on the policyholder. I need to look at. I think I would always distinguish anyway between the IFRS logic compared to the HGB logic. I would say the two things are not necessarily the same, also because, for example, the investment income recognition can be differently between German GAAP and IFRS accounting. From that point of view, you shouldn't draw conclusion from HGB that you transfer into IFRS. When I look at the investment margin of Allianz Leben in the IFRS view for the quarter, that margin was pretty stable.
That's great. Thank you.
You're welcome.
Thank you. Our next question comes from Jonny Irwin from UBS. Please go ahead. Your line is open.
Hi there. Thanks. Just two from me, please, both on P&C. AGCS, I guess there's some concern today around performance, given we've seen two companies over the last five years just consistently underperform in this line with your commentary from management that there's going to be a gradual correction. It never really worked until there was a sort of big remedial action taken across that book. I guess why, similar to Michael's question, why is it different for you guys? How can you give us some reassurance, I guess, that the pricing environment is better at the moment? Secondly, a very quick one, where is claims inflation running at the moment across the book versus your price increases of 2.4%? Thank you.
Yeah. On AGCS, I would like to say that we have a combined ratio of 101. It depends how you define success, but we wouldn't define this as being successful. To a certain degree, I would say we are sharing the pain that you see in the market at a different level. We have been seeing that in general, in the last years, we have been able to outperform our competition, but clearly, somehow we are exposed to the same dynamic. I would tell you even more that sometimes you get comfort because you are outperforming the competition, but eventually your combined ratio is also above 100%. I don't think that we are seeing anything differently from what our competitors are seeing. We just see this at a lower level because up to now, we've been able to outperform what our competition has done.
We have a couple of things. In our case, you need to consider that we had a drag out of the old FFIC business, where we are now somehow transferring. We are doing a migration from the old system to the new system. This is about one percentage point for the combined ratio of the company. It's about one percentage point. This is going to go away anyway by 2021, latest 2022. We should see a little bit of an improvement coming from there. Clearly there is some hardening going on right now that's also not to be underestimated, because a continuous hardening in a couple of years can lead to very different results.
As I was saying before, we put a lot of emphasis also on looking at the portfolio, what kind of portfolio we want to keep, what kind of portfolio we think is not structurally profitable for us. We are going to take a clear look, especially the U.S. Again, we are somehow exposed to the same dynamic. We are just running at a better level. You had a question, I believe, on claims inflation, and I think you're referring to claims inflation in general. I would say that what we see in continental Europe, I would say we see this in a few markets. We see that severity in motor is going up a little bit, and that's because the cost of spare parts is going up. We see this in Germany, we see this also in Italy.
On the other side, there are other parameters which are moving in the opposite direction, so we don't necessarily see an increase in frequency. When you look at the totality, I would say there might be some pressure here and there. I would say in general, the price increases should be definitely able to compensate for this kind of pressure. Maybe just a little bit more, an uptick in severity this year compared to what we saw 12 months ago. Again, in general, I would say the situation is pretty much under control.
Okay. Thank you.
Thank you. We'll now take our next question from James Shuck from Citi. Please go ahead. Your line is open.
Hi. Good afternoon, everybody. Three questions from me, please. First, Giulio, the liability duration on the life side, it increased by practically a whole year, actually, in the course of year-over-year. Can you just explain a little bit about what's happening there to lengthen that? Second question. Interested by the opening remarks from Oliver, really talking about commercial lines and the need to do more on that side of the business. Are you able just to split the P&C business into how you would see it between kind of retail, maybe SME, and larger lines of business, and perhaps give some insight into the combined ratios on those bases, please? Final question, again, returning to France, but more on the life side, really. Operating profit in life was down 18%. You talk about lower protection and health result in particular.
Keen to know what the moving parts were within that, please. Thank you.
Yeah. On the liability duration, yes. If you look, it went up, and also now we are longer on the liability compared to the duration we have on the asset side. Here, I would say just the effect of rates going down and the convexity of the liability is stronger compared to the convexity of the assets. We are catching up. At the end of the day, we don't want necessarily to be short duration. That's not the position we like to have. Clearly, we are constantly catching up because the interest rates are constantly going down. You need also to consider it's not so easy to move the duration one to one right away. Fundamentally, this is just a consequence of rates going constantly down and our ability to adjust the duration accordingly. There is always a sort of time lag.
On the commercial lines, I tell you something. I was looking at the commercial lines profitability in the different countries, and I would say when you look at commercial lines in general, and you look at the retail business, I could tell you it's not evident that the commercial lines are so much worse when you look in totality. Maybe, I would say a couple of percentage points worse compared to retail in general, the combined ratio commercial lines. Here we are not speaking about GCS. I'm speaking of France, Italy, Germany. The point is within the commercial lines books, you might have really interesting portfolios, and we have portfolios where once you speak in the combined ratio can be even 110%. That's the issue.
You need to go very granular, then you're going to see that somehow we are definitely losing some profitability because of some businesses which are portfolio, which are severely underperforming. When you look at the commercial book in general, if you don't go granular, you're not going to see all this kind of disparity between retail and commercial. The last question was about the protection. On the protection side, yes. Yeah?
Sorry. Yeah, no. Is this the other reduction in the operating profit in the life side in France, which was driven by a low technical result from protection and health?
Yeah. That's a deterioration of the loss ratio protection. Just to give you an idea, if you have a two percentage points deterioration is about EUR 800 million of premium. In the quarter, this is already making EUR 16 million of operating profit. There is a little bit of a deterioration. I wouldn't call it a trend. It's just some volatility in the quarter. To be more specific anyway, just to give you an idea about the French book, we are very happy with the performance in general in individual health. I would say on the corporate health, that's a book which is a little bit more challenged. The deviation you see here in the quarter, I would say this is more volatility, quarterly volatility.
Okay. Thank you very much.
Welcome.
Thank you. Our next question comes from Farooq Hanif from Credit Suisse. Please go ahead. Your line is open.
Hi, everybody. First question on AGCS. We have seen others talking about not only pricing but pricing in different lines and areas where they want to move out of and areas where they want to grow. For example, marine and aviation has been an area that a few of your competitors have talked about pulling out of. I was wondering if you could talk about mix and also excluding Fireman's Fund portfolio, when do you see a return to profitability? Second question is, to what extent you think you can offset some of the yield pressure with your liquid investment strategy? Third question is a confirmation on the Ogden rate. When you make the comment that it doesn't affect Allianz, does it affect LV? Thank you.
Let me start for the last one, the Ogden rates, it doesn't affect Allianz, including LV. We are also considering for LV. I'm not going to speak about LV, in general, when we put together our books and the effect on the LV side, we get to a very immaterial amount. By the way, the amount is slightly positive, not even negative. I'm clearly considering also for the effects coming from the equity consolidation of LV into our numbers. That's on the Ogden rate. On AGCS, I just tell you. As I was saying before, we see fundamentally a hardening across the board. When you are asking when we are going to be at profitability, if you define profitability as being below 100 combined ratio, I really hope that we're going to be below 100 next year. This would be definitely the idea.
Personally, I'm not giving up on the idea that we try to get to 96 by 2021. I don't say we're going to be able to get there, but personally, I'm not giving up on that idea. At least I'm not giving up on that right now. The drag from the U.S., I think is pretty significant, especially in MidCorp in the U.S., we are running with a combined ratio which is well above 100. This is also something that we need to consider to what extent this is a business where we want to do a stronger pruning, let's put it this way. The issue we have in the U.S. is also an expense ratio issue. We are running at a high expense ratio, also because of the double cost of integration, but also because the scale we have there is limited.
I would say this is definitely an area of focus. In reality, if you run the numbers of AGCS without our U.S. business, you get already now to a combined ratio below 100. That's the situation right now by adjusting AGCS for the U.S. business, we are below 100. Otherwise, from a line of business point of view, you were mentioning marine. In marine, indeed, the line of business has been performing at about 100% combined ratio for the last years. Now we see rate increases that should bring this performance more in line with our target. In reality, marine, we are exactly getting the rate increases that we need to get to a profitable place. Then you had a third question that I'm not sure I captured. Can you repeat, please? You had it all.
I-
I think we're done.
That was it.
Okay. Sorry. I thought you had another question. Sorry.
It was illiquid.
The liquid.
Can you materially kind of change the decline in yield through investment strategy?
I would say there is a point where I believe you can always do something on the investment income to try to cushion the decline in yield. As Oliver was saying before, sometimes you need to open other fronts in a sort of war. We are going to work a lot on technical excellence, on the productivity. I think the idea that we are going to fight a low interest rate environment or the extremely low interest rate environment just by changing our strategic asset allocation and getting more illiquid and getting more risk. That would be a bad idea. There is definitely something we can do there, but I believe we need to work on really even hard on the fundamental of the business. The good thing is it's not new.
Honestly speaking, interest rates have come down for years now, and now we were thinking maybe they are going to stop to go down, and looks like they're going down further, but the recipe is always the same. Working on the combined ratio, working on the underwriting results in P&C. On the life side, making sure that our liability matching is there, which has been the case for our in-force. Making sure that we are constantly adjusting the products to the environment, that we are constantly adjusting the crediting rates to what we see in the market. The recipe is always the same. I think we have been training over the last four or five years, and now we will continue to deploy our skill set in this area.
Thank you very, very much.
Welcome.
Thank you. Our next question comes from Vinit Malhotra from Mediobanca. Please go ahead, your line is open.
Yes, good afternoon, everybody. Giulio, even in your Bloomberg interview and in your opening remarks as well, you were talking about, and even just now actually, you're talking about how the low interest rates, you want to work more on the life new production, for example, and how to change it. When I look at the VNB, for instance, even in Germany, it's up 24% in 2Q, in the group it's 11% up 2Q, and even over a longer term, it's up substantially, maybe even doubling in the last eight to 10 years. Is there more room left to change these products mix? I'm conscious that Allianz has surprised us before, but is there room left? The second topic related to this is that, ultimately the VNB will translate into profits in future, but it's based on series of assumptions.
Do you think that any of the low interest rate, or lower for longer interest rate concepts are going to challenge some of your assumptions in new business values? Just basically focusing on that. Thank you very much.
Yeah. I would say the following. Clearly, as you see, the new business margin is holding. I would also say that when we calculate a new business margin for the European country, we always calculate a new business margin with a quarter lag. Next quarter, we are going to use the assumption as of end of Q2. You're going to see that there will be, or we expect some decline in the new business margin. We are still going to be above three. You need to think, okay, maybe we're going to have a Bund, or right now we have a Bund at -50. Just consider that there was a Bund at -33 at the end of Q2. You need to prepare that the situation can get even worse.
For me, I would say, regardless of what the model is going to tell you, there is also common sense kind of view. When you see that the Bund is at the level that we have right now, I think you always want to take action to create some room before the yield you can get and the guarantees you are giving to the policyholder. From my point of view, when we see this kind of trajectory, is always very prudent to look. First, we need to take a look at the products, and if we see that somehow the economics are different, then we need to clearly adjust the features. I didn't mean today that we have to change the product, but I meant today that we need to take a close look and potentially we need to be prepared to change the products.
Which I believe personally wouldn't be a problem, because depending on the market, you might get a different answer. I believe that we can still offer competitive or interesting features and still change a little bit the level of guarantees that we are giving. I think there is definitely room for maneuver. I think it's prudent, clearly, to take a look at the situation, considering that the rate environment is substantially different compared to the beginning of the year.
Can I just ask one second one on asset risk? I appreciate the illiquid asset answer, but do you think that there is more room for credit risk in Allianz Group to offset some interest rate yield pressure? It's not your focus, I know, but is there room, do you think?
I would say that on the margin, there might be always room, but our strategy will really more always look into the liquidity or illiquidity spectrum, as opposed to look into additional kind of credits, getting a credit premium. I believe that, again, the answer is not going to be so much on the investment side. Again, we can do something, but I believe the answer is to be on the technical part of the equation.
Sure. Thank you very much.
You're welcome.
Our next question comes from Andrew Ritchie from Autonomous. Please go ahead, your line is open.
Oh, hi there. Just some short ones I think. I think Oliver was, in his opening remarks, besides positioning the group medium term for low rates, reiterating that you could hit your EPS target, near-term target, despite low rates. I think, just on that, I'm just trying to judge how much harder you have to work in the near term. What is the maturity? How much of your non-life bond portfolio matures in the next couple of years? Is there a skew to that? I'm just trying to work out the degree of headlining specifically in non-life from low reinvestment rates. Second question, mutual, your net inflows were very concentrated into mutual funds, judging from the new disclosure you've provided. Is that retail mutual funds? Presumably, that's a fairly high margin net flow then. Maybe just clarify that. Finally, it's a very simple one.
I should probably know the answer to this. When ACGS reports rate increases in its report and accounts, which they publish, they say plus 6.3, but your slides say plus 4.8. What's the difference? Thanks.
Okay. Starting from the non-life. On the non-life side, we are reinvesting per annum about EUR 20 billion of assets. If you think you have a 10 basis point decline in the investment income, that will be about EUR 20 million. From that point of view, clearly this is going to roll over the period, but let's put it this way. On the P&C side, if you ask me, I would say it's manageable. It's definitely a headwind, but I would say it's a headwind that can be manageable, considering that to offset EUR 15 million, let's say, lower investment income, you need to have improvement in the expense ratio, let's put it this way, of 10 basis points. That's the number. From that point of view, I would say on the P&C side, it's definitely manageable.
On the asset management side, by the way, in the short term, it can even be an advantage. From that point of view, even if you get some drag on the P&C side at the beginning, that will be compensated by better results potential on the asset management side. In the life side, clearly is a different kind of game. In that case, you need to lower the claims generation, you need clearly to manage the book over time. I would say it's technically, if you ask me, a headwind. I would say it's a headwind that we have been having to a certain degree over the last three, four years. From that point of view, I believe we have the skill set to manage this kind of a headwind. That's also the reason why we are still sticking to our expectation for the future.
Clearly, as we go through this time, we are going to reevaluate the situation. Fundamentally, we should have the confidence that we can manage this kind of situation. You had a question on the mutual funds. Yes, they are mostly retail mutual funds. From that point of view, usually the margin we get on that business are higher compared to the margin that we get in institutional account. You always have to look whether it's equity versus fixed income, because in equity, you're going to get higher margin compared to fixed income. There are a lot of things going into that. Fundamentally, in the retail space, we have a different kind of margin. I tell you also more, that the difference in margin between a mutual fund or an institutional kind of mandate can be different in Europe versus the United States.
You see more of a gap sometimes in Europe compared to the gap you might see in the U.S. Then you had a question of the difference between the numbers that we have in the renewal versus another number that you saw. The 4.8 is more coming almost from our accounting kind of system, where the other number is more, I would say, the real number that can be used for the real view coming from the underwriting about the price trend. That's the difference between the two numbers.
Okay. Great. Thank you.
Okay, before we continue, we have time for one last question, if there's any.
Thank you. We will now take our last question from Michael Haid from Commerzbank. Please go ahead, your line is open.
Thank you very much. Good afternoon. Two questions. First, on the life and health new business margin, 3.6%. You mentioned that if you had applied the yield environment at the end of the second quarter, that it would still be above 3%. Can you provide a breakdown of what would happen to the new business margins of your various types of products on page 19? Protection and health, unit linked, and so on. Especially the guaranteed savings and annuities, 2.3%. Where would that be with current interest rate environment? Second question on the low interest rate environment. I assume many fixed income securities you have in your portfolio currently trade at a negative yield.
Probably it makes sense to sell them before they mature. What should we think of realizing capital gains from this in this year? Should we expect some more to come? How would that affect your net profit? Should we think about some compensating items? These are my two questions.
Yeah. On the first question about the new business margin, how to split it in the different buckets. We didn't do the excess, I didn't look at the excess in this way, but I can tell you eventually the drop is coming both from the guaranteed savings and annuity and from the capital efficient product, because I wouldn't see the unit-linked moving much because in reality you get a lower, if you want, a lower projected rate to say there, but the discount is also going down. I would expect that on the guaranteed savings and annuity, you see right now 2.3, the number could go below 2.
In the case of the capital efficient product, I would expect that we're going anyway to be above 3%, but that might be the movement more or less consistent with the 3.6 becoming 3.2. I would expect protection net to be stable. I would expect even to go up potentially because you have lower interest rates. Unilink guarantees also to be fairly stable. In capital efficient product, I would say we are going to get below the 3.5, I would expect. In the case of the guaranteed savings and annuity, I would expect they were going potentially to be below two. That would be my.
Below two.
Below two.
Yeah, below two. The guaranteed savings and annuities, is that basically group life Germany or what is it?
It's mostly Germany. We have also some. It's not necessarily group life, it's mostly Germany. We have also something France. We have small blocks here and there. It's basically Germany, definitely a big chunk. We have also France.
Okay.
The other question about selling bonds. I'm not a Chief Investment Officer here, I would say I leave this to the Chief Investment Officer. As a CFO, I would say, we are matching our liability. If you start selling the bonds, yes, you create realized gains, you have a lower income going forward. From that point of view, I would say that selling bonds, at least for an insurance company, might not be the best action. If you are clearly a trader, you have a view that interest rates can just go up from here, you might decide to sell bonds. In our case, I think we need to stay to our asset liability kind of matching. In reality, this makes the difference.
The fact that we have been buying the bonds, and these bonds are there producing a nice current income to match our liability. This makes a difference compared to somebody who's going to sell. I don't know what you do. You go short, you go long, and then you end up maybe making a wrong bet, and then you have a problem down the road. I think we stay to our approach, which is asset liability management, and we are not going to speculate on the direction of interest rates.
Can you say how many of your bonds currently trade at negative yield?
I don't know.
On the volume.
I would expect that the entire German bonds, we have all the bonds is going to be below. I would say, if you give me a second, I can even tell you how much bond we had. At the end of the year, for example, we had about EUR 30 billion of bonds. That's on sovereign. This is below for sure, because everything is below. I would say French bonds, we had about EUR 40 billion. That's almost also below. Slowly, slowly, I would say Italy is the only one that's still positive. Slowly, slowly, it's going to be risk-free, too. I would say a significant number now that they are trading below the negative yield, definitely.
At the corporate bonds, I think they are still a positive yield, but on the government side, you see easily EUR 70 billion, EUR 80 billion of bonds below the yield, a negative yield.
Okay. Thank you very much.
Okay.
Okay. At this time, I would like to hand the call back over to you, Mr. Schmidt, for any additional or closing remarks.
Thank you. This concludes our call for today. Thanks to all of those who have joined us today. We wish you a very nice weekend, and for some, perhaps even a long and peaceful vacation. Thanks and goodbye.
This concludes today's conference call. Thank you all for your participation. You may now disconnect.