Ladies and gentlemen, welcome to the Allianz Conference Call on the Financial Results of the First 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 will turn the call over to your host today, Mr. Oliver Schmidt, Head of Investor Relations.
Please go ahead, sir. Thank you, Brian. Yes, good afternoon from my side as well, and welcome to our conference call. I keep it brief and hand over directly to Giulio.
Hi, good afternoon and good morning to everybody, and thank you for joining the call. I'm pleased to present you the good results for the Q1 and we can go straight to Page 3 of the presentation. As you can see, we had a good growth internal growth with 7.5% and this was driven by the life segment and also by property casualty and asset management. We had a reduction in the revenue. I'm going to come back later on this development.
But in total, is the growth rates of the revenue for the growth rate positive. The operating profit is also up. This is mostly driven by the underwriting improvement in P and C as a consequence of lower natural catastrophe. And then when you look at the net income, it's also up compared to the level of the prior period. As you know, our outlook for 2019 is an operating profit of $11,500,000,000 So with an operating profit of $3,000,000,000 in the Q1, we are well on track to achieve the $11,500,000,000 by the end of the year.
Now if you go to Page 5, we have here the development of the IFRS equity and also the Solvency II. On the IFRS equity, clearly, we see a nice increase of $6,000,000,000 which is mostly driven by the change in unrealized gains and losses on investment because of the market development in Q1. More interesting, I think, is the development of the Solvency II ratio, which went down by 11 percentage points. If you remember, we didn't have the deduction for the buybacks in the numbers of 2018 and also we had anticipated 3 to 5 percentage point of model changes. So just adjusting for these two effects, the solvency ratio at the end of 2018 would have been closer to 2.20.
So in reality, at the moment between 2019, the Q1 and 2018 is mostly explained by these 2 development. I'm going to come back in one second anyway on these numbers. Otherwise, on these slides, I'd like to draw your attention to the sensitivity, especially to the equity market sensitivity and the interest rate sensitivity. For the equity market sensitivity, we don't see any significant change compared to what we had before. In the case of the interest rate sensitivity, you can see that the interest rate sensitivity down is more pronounced now compared to what we disclosed at the end of 2018.
And the major driver for that is the complexity on the solvency requirement. If we go now to Page 7, I can come back again on the development of the solvency ratio. As I said before, because of the model changes, we lost about 4 percentage point of Solvency. Then you can see the operating Solvency II generation, which is 6% pre tax and pre dividend. If you deduct the dividend and the taxes, you come up to a number of 2%, which is somehow lower compared to the 3% we usually would expect.
But the main driver for this is the higher growth that we are experiencing. So reality is very much in line with our expectation based on the growth that we are seeing right now in especially in property casualty. The market impact was minus 3%. If you adjust for taxes that will be minus 4%. And this is definitely a little bit higher compared to the sensitivity that we had estimated at the end of 2018.
So that will be the only thing where there was a little bit of a deviation from our expectation. And then on the capital management, the minus 7% is mostly explained by the dividend and by the buyback. So in total, we have a solvency ratio of 218, which is a very comfortable level. So from a capital flexibility point of view, we have clearly the same capital flexibility that we had before. And again, the majority of the delta compared to the end of the year was largely anticipated due to the buybacks and the model changes.
And now we can turn to Page 9, where we show the numbers for property and casualty. And we see on a total property and casualty level that we have an internal growth of 4.6%. Of this 4.6% internal growth, 40% is driven by price and 60% is driven by volume. 2nd point is, we can see practically growth across the board, I will say, except for a few entities, all companies are growing. And also when we look at the price environment moving forward, in general, we are dealing with a price environment, which is either stable or positive.
So from that point of view, the price environment should support our performance as we go through the rest of 2019. At Page 11, we show the development of the operating profit. And as you can see, the operating profit increased by 14%. And this is driven by the development of the underwriting results and to be more specific by the improvement in the combined ratio, which is driven by the net cat load, which is lower compared to what we had last year. Also we have an improvement of the expense ratio.
As you see the runoff is stable. What went against us in Q1 was the development of the large losses. When we analyze the number and we remove the impact on natural catastrophe or large losses and weather related losses, the RIIO attritional loss ratio is pretty much stable compared to the level that we had 1 year ago. So all in all anyway, a combined ratio which is positive compared to what we had last year, not just because of the natural catastrophe, but we continue to work also in our expense ratio. Moving to Page 13, We can see the breakdown, the operating performance by entities.
We had very good performance in Germany and the improvement is driven not only by lower natural catastrophe, but also a better development of the expense ratio and also lower large losses. In France, we see also numbers moving in the right direction. In the case of Italy, where you see an improvement compared to the prior period, this improvement is all explained by the removal of Genialloyd, which is now part of Allianz Direct. Adjusting for that, the combined ratio in Italy will be flat and at a very good level. Then in the case of Spain, you can see a spring and that's due to positive runoff in 2018, which is now turning negative in the Q1.
And then when you go down the list in Turkey, you can see a higher combined ratio, but this is all driven by the inflation environment, which is offset in the investment income. And then HCS looks worse compared to last year, but we need to keep in mind that last year at year end, the combined ratio AGCS was over 100%. So from that point of view, this is the level of performance that we are currently experiencing at AGCS. And then very good results both at Allianz Partners and especially Euler Hermes. So all in all, I would say there are as usual some positives, some room for improvement.
But in general, the portfolio is doing pretty fine. At Page 15, just a short comment on the investment income is resilient. In reality, it's even going up a little bit in the Q1 2019 versus the level of last year. So the resilience is something that we are welcoming because we are always anticipating some reduction of the investment results. But for the time being, we see there is more resilience in this position that usually we tend to anticipate.
And with that, I will come to Page 17 to speak about our Life segment. First of all, on the production, you can see there is a nice increase in present value, new business premium, which is about 17% 18%. This is mostly driven by Germany. And also we had a very good growth rate in the U. S.
A. Also in Benelux, we had a nice development. And just in Italy and Asia Pacific, we had some reduction of production. But in general, we are very, very pleased with the growth that we are experiencing on the Life business. What is also important is the margin is going up.
So we had also an increase in margin by 20 basis points. And as you can see, the margin is going up also or at least stable in all segments within the Life business. If we go now to Page 19, you see the development of the operating profit, which is up to 2.5%. As you might remember, our outlook for 2019 is is €4,200,000,000. So with an operating profit of €1,100,000,000 we are good on track to get to the €4,200,000,000 by the end of the year.
What you can see in the waterfall is a reduction of the investment margin, which to a certain degree is also expected. And this is more than offset by loadings and fees. And also we have a positive impact of change in DAC. Here there are clearly many drivers, but one driver is that in the benign environment of Q1, the VA business in the U. S.
Is performing pretty nicely and this is leading to positive DAC true up because of the capital market performance. All in all, EUR1.1 billion, so a good operating profit for the quarter. If you move to Page 21, on the value of new business, you can see an increase in value of new business of 25%, which is clearly the consequence of the higher production and also the improved new business margin. When you look at the similar entities, you can see widespread improvement on the value of new business. And when we look at the operating profit, I will be focusing only on the 3 largest, if you want, the 3 top companies on the table.
In the case of Germany Life, you see a small reduction. This is more a normalization because the operating profit level in the Q1 of last year was higher than what we would normally expect. In the case of the USA, it's the opposite. You've seen an increase because the operating profit was too low in the Q1 2018. And then in the case of Asia Pacific, you can see an improvement, which is once driven by the growth that we have in Asia, but then also driven by the fact that we don't have the drag of the legacy book in Taiwan anymore.
And with that, at Page 23, we have our regular, if you want, deep dive on the investment margin. When you look at investment margin, first of all, you can see that the current yield is going down just slightly and more or less in line with the minimum guarantee. So from a spread point of view, there is a lot of stability. What has gone up in the Q1 2019 versus what we had last year is the profit sharing. So to this point, this is always a metric that a certain degree we can control because we are not necessarily crediting the minimum policy we are not at a maximum policyholder participation, especially in the German business or also there is flexibility in the U.
S. Business. When we look at the 19 basis point of investment margin, this is slightly below, if you annualize the number, our guidance of 80 basis points to 85 basis points for the year. Here we need to do to see 2 things. 1st of all, how this is going to develop in the following quarters, but I would also like to draw your attention that the aggregate policy reserves is increasing substantially.
So from a volume point of view, there is an offset that we have a higher asset basis, if you want, which shouldn't be neglected because at the end of the day, what counts is the multiplication between the asset base and the investment margin. And with that, we can move to Asset Management at Page 25. As you can see, the assets under management for 3rd party have increased by about 8 percent. And clearly here, both the improvement due to the market, including the FX effect and the consolidation of Berting have played a role in bringing the number up. But also you can see we had positive inflows of about EUR 13,000,000,000 slightly negative at AGI, but largely positive over EUR 20,000,000,000 at PIMCO.
So that's a nice development. You remember that the last quarter 2018 was kind of challenging for PIMCO, but we were always confident about the flows moving forward. So we see we saw nice flows at PIMCO in the Q1 2019. When we move to Page 27, we see that the revenue are stable, but if you adjust for the FX effects, they are down 5% above 5%. This is driven by PIMCO and here we have also a one off.
I'm sure you're going to ask me a few questions about this one off in the Q and A. So I'll leave it to the questions I'm going to get. And also, we should not forget that the asset basis in 2019 in the Q1 was slightly below the level of last year because of what happened during the Q4. And then there are some other technical factor that explain the drop in revenue on adjusting for the fixed effect at PIMCO. The investment margins or the fee margin is also a little bit lower here.
There is also the impact of the technical effects and one off I was referring to. In reality, if you adjust the fee margin for these effects, it's pretty stable compared to the level of last year. With that, we can go to Page 29. So the operating profit for the Asset Management segment is about 10% below the prior level if you adjust for a fixed effect. This development is all driven by PIMCO.
And here, there are 3 effects at the end of the day. 1 is the one off, which is, by the way, a good thing, because it's going to produce revenue and profit moving forward. Then we have also the fact that the revenue basis was lower because of the lower asset basis. And then the costincome ratio in Q1 2018 was with $56,600,000 if you want a little bit too low compared to what would be a normal expectation for PIMCO. So in terms of anywhere for the segment, we have about $600,000,000 of operating profit.
Our guidance for the year is €2,500,000,000 of operating profit, and we feel pretty confident that we are going to achieve the €2,500,000,000 considering that the asset basis as we are going into Q2 is higher compared to the level that we had in Q1. Considering that the famous one off I'm referring to is going also to create revenue starting Q2 and also considering that performance fees, which are a driver of performance for our asset management operations are coming usually later in the course of the year. So we are pretty confident we are going to achieve our $2,500,000,000 of operating profit for the segment. Page 31 is just the development of the corporate segments, which is getting slightly better compared to the prior period. And I will say we can go straight to Page 33, where we are showing as usual the development of the non operating items.
I will say there is just two comments. One is realized gains and losses are lower compared to the prior period and impairment are stable. So there is no specific reason for the lower realized gains and losses compared to the prior period. And then on the tax rates, you can see it is at 25%, which is somehow the low end of our range of 25% to 20 7%. All in all, with a net income of almost $2,000,000,000 for the quarter, I think we have a very strong bottom line results, which is mostly driven by the performance or the operating performance that we discussed before.
So the last slide is just a summary for you. So good revenue growth, good operating profit growth. So we can see a lot of strength in many KPIs and in
a lot
of parts of our business. So we are looking forward to a good 20 19. And with that, I would like to open up to your questions.
Thank you.
We'll now take your first question from Peter Eliot from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you very much. I have three questions, please. The first one, Giulio, was on the solvency development. I mean, you mentioned the two reasons that I guess the ratio missed a lot of our estimates which was the convexity of the sensitivities and also the operating results. I mean on convexity the interest rate is now back up to your target of 11 percentage points.
I'm just wondering to what extent does the sensitivity increase for even lower rates? And on the operating, I was just wondering if we could have a little bit more color because I mean you mentioned the growth in non life being attributable, actually the growth is less than it was across 2018. The guidance seems to come down a little bit, but not massively considering you're basically guiding to 8 percentage points for the rest of the year. So I'm just wondering to what extent is what we're seeing in Q1 a sort of one off effect and to what extent is it ongoing? Obviously, the question is much shorter.
The second question was, I was intrigued by the impact of Allianz Technology. I was just wondering if you could elaborate on that that has helped the corporate segment. And the third question, asset management flows, just wondering if you could give us an update on Q2 to date? Thank you very much.
Okay. Thank you, Peter, for your questions. Maybe we can start from the asset management flows and then we go all the way up to the first question. The asset management flows, we are seeing good flows also in the second quarter. So on a net basis, we should be at about €10,000,000,000 net flows, which are mostly driven by PIMCO.
So we see nice flows in the ratio PIMCO. In the case of AGI, we are still not in the positive area. But in total for the group, we are speaking of positive net flows of about SEK 10,000,000,000 for the 1st 6 weeks of 2,000 or the Q2. For the Allianz Technology, you had a question about the Allianz Technology, yes, the numbers are getting better. So this is the driver for the improvement in the corporate segment.
Allianz Technology is the company that has been carried out a lot of our projects and transformation projects. And clearly, when you do these transformation projects, you cannot always capitalize all kind of expenses. So now there was a drag in the past, and now we see that this drag is coming down because now Allianz Technology is more getting the revenue out of the transformation projects instead of being heavily in the investment phase. So just as a natural development, if you want, to the business model of Allianz Technology. Then you had a question on the Solvency II or 2 questions on the Solvency II.
One was on the capital generation, organic capital generation. And on that one, I will say, first of all, there is also one one off that is included in the capital generation is the development of the risk margin, which is in the P and C side, which is going up and that's driven by the change in interest rates. We are not showing this impact neither the sensitivity and we are not showing markets impact. We are showing this in the organic capital generation. So this is definitely something which is costing a little bit of capital generation for the quarter on the operating side.
But then I would also say that we have refined our also calculation for the business evolution. So right now what we do consistently we apply a 30% charge to our premium. So also in the the growth in premium. So also in the future, we're going to be able to track very easily the consumption, the P and C side. This is consistent with how we address the issue in the Capital Market Day.
So there is from that point of view also some refinement that we are doing to the methodology. If the growth rate is going to go down from the almost 5% level that we see now to the 3% level, you're going to see capital generation back to the 3% level. This said, honestly speaking that we have a 3% capital generation per quarter or 2% capital generation per quarter, it doesn't make a difference. And if I have to choose, as long as the growth that we do is profitable, I'd rather go for the profit and having 8% percent or 10% of capital generation or 11% on the Solvency II per annum doesn't make, honestly speaking, a big difference. So we are happy to get the growth.
And if we have a little bit less capital generation, that's totally fine. And then you had a question about the complexity. Yes, I would say if rates go down further, you will see the complexity picking up. The complexity is constantly picking up as you go down as the rates are going down. The only point to notice is the boons was at minus 9 basis points at the end of Q1.
So there is most likely a limit to how much the interest rates can go down. So I will not exclude that it can go down a little bit further, but I believe we are approaching the limit to how much down they can go. But technically speaking, yes, the complexity is picking up as we go down the as interest rates are going down. You can see that also in sensitivity. Our sensitivity on the way down was minus 4 at the end of the year and now we raised down as minus 8.
That's great, Julian. Thank you
very much. And did you
agree on the capital generation? Can I just quickly clarify on the Allianz Technology, it sounds like that result is fully sustainable and might actually even improve from here going forward? Is that the right interpretation from what you said?
Yes, that's the right interpretation. In reality, yes, we want to improve the performance of Allianz Technology over the next 2, 3 years. So absolutely, the direction should be a positive direction from here.
Great. Thank you very much. Welcome. We will now take our next question from Michael Huttner from JPMorgan. Please go ahead.
Your line is
open. Thank you so much. And on the this is a bit boring for you, Toby. On the solvency, I just wanted to clarify because I missed a bit. The guidance at the moment for the year is 8% and if we were to have lower growth, we would go to 11 That's the question.
And the other one is, I'm a little bit surprised of this slightly lower guidance given the Life business is producing so much new business value, which I think is included. I think it's €100,000,000 higher this year than last. So I'm wondering if I'm missing a moving part, a negative moving part to explain this lower guidance. And then just a little bit of color on the German motor, my favorite topic. Can you say speak a bit about maybe the pricing and competition environment?
The reason I asked is I think for you the pricing was positive, but all your peers well, some of your peers, AXA and TALEX reported negative and then a bit surprised? Thank you.
Yes. So on the Solvency tool capital generation, I would say that assuming we are the current kind of growth rates and also adjusting for the risk margin, I would expect that by the end of the year, we might be at a 10% level. So that will be still my guidance for 2019. And then depending on an acceleration, deceleration of the growth rate, we might end up a little bit better or worse than that. So fundamentally, the guidance is still 14%, but eventually, it wouldn't be a drama if we end up with a coverage generation of 8% just because we are growing very strongly.
But the guidance is about 10% for 2019. Then you had a question about the German motor. So I can just tell you that definitely we saw some more competition in the German motor business. Our combined ratio, we still get anyway rates improvement. And in reality, we are pushing, if you want, less on growth because clearly, we are always adjusting our appetite depending what the market conditions are.
So if you look indeed at our growth in motor this year is less compared to the growth in motor we had last year, because we are not focused on growth for the sake of growth. At the end of the day, we want to have profitable growth and the combined ratio can tell you is pretty solid.
Thank you very much.
We will now take our next question from Vinit Malhotra from Mediobanca. Please go ahead. Your line is open.
Yes, good afternoon. Thank you very much. So just coming back on the growth topic, if I can ask, 1 on Life, one on PC and then also on a third question on AGI outflows, please. So on the growth in German Life, I mean, the kind of numbers you produce in the savings and annuities are not in capital efficient, despite remarkable, seems to be coming from corporate business, but not affecting the new business margin as well. So is this some kind of a new initiative or is this and also could you comment on this relationship with that while it is large corporate, it's not affecting NBM.
And in P&C, there is in Italy a remarkable 8.4% growth number, which to me sounds quite exciting. Could you just help us understand, because this is obviously not coming from the direct side, traditional motor looks like. So if you could comment on that? And then on AGI outflows, you said there's a small outflow, but it was one of the biggest outflows in many, many quarters now.
How
is it performance induced? Is it because equities were strong and that's where AGI is also strong. Just help us understand how the plan is going to be.
Yes. So I can start from the Life growth in Germany. It's not a new strategy and we have situation where in a quarter we might have more large contracts. So this has happened also in the past. I believe what is kind of eye catching now is that you had the combination of natural growth also in our capital light product.
And on top of that, we are getting also this large contract. But there is no new strategy. Also believe that in the course of the year, you're going to see some sort of normalization. With respect to the performance of this business, the new business margin is still healthy. At the end of the day, we are still making our target pricing, which is in this business, so we're not sacrificing performance.
And one thing that you need to consider is every time we are growing also the way we are, there is also a cost advantage, right? So we get also better cost margin. So at the end of the day, always think that the profitability of our Life business is not only driven by the investment margin, but there is also a technical component, the cost component. That's the reason why it's absolutely profitable growth where we are getting at Germany in Germany. And also think about that.
We even adjusting for this gross contract, our growth rate will be north of 20%. So what will be the reason to change big contracts if you are anyway growing a lot? So we'll not have any concern on the profitability of the new business for Germany Life. In the case of P&C and Italy, you noticed the 8% growth, which is driven by an accounting change on the way we bought the premium. And because in Italy, premium paid on a monthly installment basis were not accounted right away, but they were accounted over the time.
So this is creating clearly a growth rate for the quarter, which is exceptionally high. In the internal growth of 4.7%, we have adjusted for that effect. So when you want to look at the exclusion of Genialloyd. So that's the real number you should look at. It's exclusion of Genialloyd.
So that's the real number you should look at. It's still very good because the growth rate of 4.7 is good. And in the case of Italy is driven by motor and that's also driven by volume more than by price. But clearly when you have the combined ratio, the level that we have, I think price is more than fine. And maybe to come back also to the question, Michael, before in Germany, it's the opposite.
When you see what is driving the growth in Germany is price and not volume. So just to give an idea how we are moving differently country by country depending on the competitive environment, the level of performance, then clearly our subsidiaries are going to react subject to the market conditions. Then you had a question AGI, noticing that inflows were kind of weak for the quarter. The driver for the quarterly development of the inflows is half of the outflows are driven by Asia, where a big distribution partners didn't like the concentration they had because they were selling a lot of AGI products. And this has been clearly a headwind for us.
So half, although the outflows are driven by distribution partner trying to reduce the dependency on AGI and the rest is coming from a slowdown in sales in retail in Europe. So these are the 2 effects that are explaining the outflows. But I would say the Asian one is a little bit, if you want, of a one off and the retail headwinds in Europe, then we need to see how this is going to play out in the next months.
Okay. Thank you.
Welcome.
We will now take our next question from Andrew Ritchie from Autonomous. Please go ahead. Your line is open.
Hi, Giulio. Two quick questions. Spain used to be the golden child running in the low 90s or high 80s combined. What's happened in Q1? I'm particularly interested in reference to reserve strengthening in the commentary.
Just to maybe just give us a bit more color on that please. 2nd question, given the interest rate environment has kind of deteriorated a fair amount year to date in terms of benchmark yield curves falling, We've always been accustomed in the past to Allianz being fairly proactive in terms of management actions that you take particularly in respect to ALM positioning Solvency II model. Is there anything because of this sort of tougher back to this lower for longer forever interest rate environment, is there anything that you've done proactively as a group, particularly in Q1 to reposition for that? Thanks.
Yes. So maybe let's start from the Solvency II question. So what we are always doing that we do some always some capital management. There was nothing now very pronounced in Q1 that we did on this side. Also considering that when you have a solvency ratio, which is at 120% level, there is no point for us now to overreact to movement.
But clearly, so if you look at our position, assuming we will get uncomfortable with the level of Solvency II, which we are not, there are things that we can do. We can definitely change our duration profile. So from that point of view, always keep in mind, every time we speak about our sensitivities, we are not considering for capital a tool that we have at our disposal. And this can be also very effective to manage the Solvency II ratio, also changing the derivative strategy for equity hedging, this can be very effective. And clearly, you need to consider what is the impact on other KPIs.
But we start just from the point of view that we have a very healthy level of solvency. We expect that we're going to generate solvency capital moving forward because of the organic development. And so from this point of view, clearly, we are going to evaluate what we can do on the duration side, but we are not really agonizing here thinking that we have a Solvency II problem at all. So I would say we are very comfortable with the level of Solvency II. If the markets have changed significantly and we have a different level of Solvency II, then we must think about differentiation.
But at this point in time, we feel good about where we are. And that's also very important, all the flexibility for doing what we need to do from a capital management point of view in the sense of growing our business, doing buybacks, look at M and A opportunity has not changed a bit because of the number that we have. We were anyway expecting to have a solvency ratio closer to the 2 20 as we were adjusting for the buybacks and also for the model changes. Then you have a question on Spain. And I will say what happened in Spain is usually the I would say the excellent year performance is more or less at the same level of last year in the sense of the loss ratio is deteriorating a little bit.
This is driven by a little bit by the property portfolio, a little bit by the motor portfolio. But on the other side, the expense ratio is going down because we are taking measure on the efficiency side, although Spain was always a very efficient company. So from the extent here performance is pretty much stable. And then we see a swing in runoff, which is mostly coming from the motor business. We are looking and also from there were claims at the end of weather related claims in property at the end of last year.
And now we see that somehow we are getting some negative development out of those claims. So this is something that we are going to we are watching now. I believe that for this year, we still might have a few challenges in Spain. But by 2020, I'm rather confident we are going to be back to a good level of performance because of the actions we are undertaking.
Okay. Thank you. We
will now take our next question from James Shuck from Citi. Please go ahead. Your line is open.
Hi. Good afternoon. Thank you. Three questions from me. Firstly, AGCS, it's had another difficult start to the quarter, combined ratio close to 100%.
I appreciate that's impacted by large losses, but there's also no real impact from nat cats. In 2017 2018, also around 100 percent level. You're growing volume at about 11%. So can you shed some insight please into the future direction of travel around that combined ratio? I think it's a very low ROE business as it is.
So if you could just update on what you're doing in terms of capital efficiency on that side, please, that would be helpful. Secondly, just interested to see the new disclosure for Allianz Direct. So there's 103% combined ratio with an expense ratio of 18% or 17.8%. It sort of seems to imply you're writing to a very high loss ratio on that direct business. And most of that direct business should actually be quite mature now, particularly given Geno and Lloyd that's been there for many years.
So could you just shed some insight onto that loss ratio for me, please? And finally, really just a clarification because I think, Giulio, you mentioned that the capital set aside for P and C growth was 30% of premium. I was just looking back to the Investor Day in November. You were pretty clear then that the capital set aside was 35% to 40% of premium. So I just want to make sure if you change your modeling in terms of capital required for the growth.
Okay. Thank you for your question. Maybe you can start from the last one. Yes, we had 35, percent, and this was the pre tax number. And now we are putting the on the ACR, we are putting the directly the tax impact into the business evolution, then we will give you the number 2s anyway net of taxes from both sides.
So the 35 was pretax, the 30 at the end of the day, it's after tax number. One thing which is important for you because we are going to add this again in the future, so I want to set expectation. The way we are running our business evolution calculation is we look at the portfolio movement and then we establish a sort of based on analysis, a rule of thumb of premium are going to add this kind of premium charge, new business going to have this sort of new business charge and the runoff of the in force is going to have this kind of runoff charge. And then on a we use this charge on a custom basis and then time by time we reevaluate the charges that we do the analysis and then we might change depending on what we see the numbers. So you might have a situation where we are going to have at some point in time maybe slightly different factors and this could drive a little bit of a different development compared to what we discussed before.
But we are going to be also transparent if we have significant changes in the factors, you're going to see that. I believe this is a very good way in reality to run these numbers. It's very transparent and very easy to have a communication with you guys. But I just want to explain to you how we are doing this calculation now. This was not the way we were doing the calculation midpoint of last year.
So this is a change that we introduced to have better stability and better clarity on these figures. Then you had a question about Allianz Direct. You noticed that the combined ratio is 103. And you also made a good comment about the business of Genialloyd should be mature. Indeed, Genialloyd has a good combined ratio, but that's the only one.
And the other three companies are pretty still pretty small and the combined ratios are very, very high. But that's exactly the reason why we decided to get into a different direction, right? Because at the end of the day, it doesn't make sense to run this small operation with very high combined ratio, not just because of the scale, but also because of the kind of underwriting performance. There is one thing anyway that has to be appreciated, especially when you have companies which have mostly new business, the combined ratio is going to be higher. The new business comes always at a higher combined ratio.
So I would say in the case of General Loyd, yes, the company is between inverted comma mature, but still I would say still not as mature as the seasoned business of Allianz Italy in general. And then if you remove Genialloyd, which has anyway good combined ratio, the other entities are really not at a mature stage. That's the reason why you see the combined ratio that you see. But that's also the reason why we are doing what we are doing. Then you had a question on AGCS.
Your comment about the large losses are high, but the natural catastrophe are low is a fair comment. So at the end of the day, I just tell you the reality is that over the last 3 years, AGCS has performed at combined ratio of 100% or more. And 1 quarter might be that the large losses are high, the other quarter is going to be the natural catastrophe. At the end of the day, the bottom line is always the same. And so from that point of view, clearly, we are taking actions on the portfolio.
You might have also seen that the rate environment is getting better. I think this was overdue. And I would also tell you that what we are seeing right now is a positive development, but might not be enough because there is also claims inflation. So at the end of the day, this should just be the beginning of a journey of a stronger hardening as opposed to just a short term correction. So there is definitely improvement in the pricing, which is needed.
And this applies to the whole markets, not just to us, because our performance in reality is totally fine compared to the market. So the whole market needs repricing. And then clearly there are things that we can do also to improve our underwriting and also look at the different books. You have commented about the growth. There is no correlation between the loss ratio that we see, the combination that we see and the growth in the sense of we are having these kind of numbers because we are growing in the wrong line of business.
So from that point of view, I believe the performance you see right now is just a reflection of what the market environment is. Then you had a comment on the ROE. And yes, the ROE I would say, clearly, when you have a 99.7% combined ratio, the ROE cannot be that good. In reality, and that can be fascinating, to get to an ROE of 10% in AGCS, you need only a combined ratio of 97%, which is kind of interesting. So you can discuss with the 10% is a good ROE.
But somehow 97% will be a combined ratio where the ROE gets to 10%. And we are looking anyway at capital efficiency. Indeed, as you might have known, we have been looking how we can create more synergies between Euler Hermes and AGCS. We discussed that, I believe, also in some meetings. So I think we are going to add a possibility over the next 2, 3 years by changing some structures, some reinsurance program to get some additional capital efficiency in AGCS.
So the bottom line is, if we achieve our target to bring the AGCS combined ratio to 90% to 96%, which is still our target for 2021, and we also work on the capital efficiency, then our ROE should be definitely north of 10
Hannes from Credit Suisse. Please go ahead. Your line is open.
Hi, there. Thank you very much.
Just want to
go to, firstly, the U. K. So you're building potentially a higher stake in LV this year in Q4 and potentially getting more if LV puts to you the year after. I was wondering about your appetite now for the retail market in the U. K, particularly in the context of the regulatory review there of pricing and whether you are looking to build up further scale beyond kind of motor insurance in the market?
2nd point is, could you talk a little bit about how the European direct platform will support profitability expense ratio? And then lastly, just a clarification on Allianz Technology based on a question you asked earlier that was asked earlier. I just want to make sure you're not suggesting we take the Q1 corporate number and multiply it by 4. Thank you.
Maybe I'll start with the last one. No, I would not do that because there is not just technology in those number. I know I could set the expectation that over time because our guidance for 2019 for the corporate segment is minus $900,000,000 and that might be a conservative guidance. And over time, I can definitely see the performance of the corporate segment definitely being better than $900,000,000 guidance and going to the $800,000,000 below. So for the time being, I will not do for this year just calculation how we're going to end up significantly below the $800,000,000 threshold.
And for the time being, I will say, you should assume that we might be better than our guidance, but don't get too excited for 2019 yet on that. On the European Direct Platform, I'll just tell you, in the next year, the European Direct Platform is going to be a drag on our combined ratio. And by the way, this is something that we have known as we gave ourselves the target of being a 93% combined ratio by 2021. And definitely in the short term, the European Direct Platform is not going to contribute to get to the 93%. It's going to be a drag that we need to somehow offset with stronger performance somewhere else.
Eventually, clearly, the expectation is that the Allianz Direct platform is going to contribute to our combined ratio. And as you can imagine, once we get to 93%, we would like to at least stay there. So eventually, they need to contribute to this kind of figures. If you remember the Capital Market Day, we have indicated an expense ratio of 12%. Even assuming the expense ratio could be a little bit higher, then there is a lot of loss ratio that you can still tolerate and get to combined ratio, which are very good.
But over the next 2, 3 years, honestly speaking, Allianz Direct is going to be rather a drag. And the best way to assess the performance of Allianz Direct is going to be to see how much premium growth are we getting and also at what kind of combined ratio we're going to get that growth. So if you tell me if we can get growth with a combined ratio of about 100%, I will say that will be a very good outcome. So if we can get healthy growth and keep the combined ratio at 100, that will be, in my opinion, a good outcome. And then you had a question about the U.
K. And LV. Yes, okay, by the end of the year, we're going to be at 70% for the LV business, which means also that at that point in time, we can start thinking seriously about integration. And your question was whether we have appetite for further acquisition in the U. K.
You were referring clearly to Sandd, which is not motor. So I cannot speak too much into that because Joss is my guy, so you're asking me the question, but it's a logic question. I can just tell you that we don't need necessarily to acquire additional businesses in the U. K. But if there is a good opportunity at a good price, I think we can go for that.
Your question about how we view the U. K. Because of the regulatory uncertainty, I would just tell you that the U. K. Tends to be a little bit of a more challenging market compared to what we see in Europe.
But eventually, I believe there is more of a cycle, if you want, in the U. K. But eventually in the U. K, I believe if you have a good platform, you can create value over the cycle. But definitely, there is a little bit more volatility in the combined ratios in the U.
K. Compared to what we see in Continental Europe. But definitely, we are interested in getting a strong presence there. With the LV acquisition, I think we have accomplished the goal. And if we have some opportunities, we are going also to strengthen our franchise there.
Thank you very much.
We will now take our next question from Nick Holmes from Societe Generale. Please go ahead. Your line is open. Thank you very much. Just a couple of
quick questions or quick ish. Apologies. First on capital generation coming back to that subject. You said the reduction to 2% was my question is how much was due to business mix within that growth? I mean you've gone from 15% in 2018 to annualized 8% in Q1.
Obviously, you're expecting better than that. And would you say, for example, that more than half of that difference was due to business mix changes writing more traditional stuff than unit linked? That's the first question. Then second is just on U. S.
Variable annuity sales, CDs are doing again. Wondered, can you remind us of the guarantees that you're offering on these products?
Yes. So sorry for the capital generation. No, I don't think mix is making any significant difference. Also when we look at let's see what happened in Q1. Yes, we had more guaranteed business.
But eventually, if you run the math, we might have had, let's say, dollars 500,000,000 of present value of new business premium of additional guaranteed business. And even if you apply, let's say, to be conservative, a very conservative effect of 3 percentage points on that, that will be, what, dollars 15,000,000 So it's really not that material. So I will say the growth in P and C is definitely one of the driver. And as I was saying before, 18 months ago, we were not necessarily calculating the business evolution the exact same way we are doing now. And now we have established this kind of rule of thumb, which are giving us a better view also on the capital generation.
But growth in P and C is definitely a driver of higher or lower capital generation. Also one comment, also on the guaranteed business, even assuming that's a little bit of a conservative assumption the capital requirement is 3% of premium, we are making 3% of value on new business there margin. So from a solvency point of view, there will be even, if you want, equalization, right? There is enough capital, which is generated as much as capital absorption. You wanted to ask the question?
Yes. Sorry, no, Giulio, that's incredibly clear and useful. Just one quick follow-up, which is you mentioned P&C a lot. Would you say that P&C is more than half
of the Oh, yes. Oh, I can tell you. Sure, sure, sure. We look at it clearly.
It really is as important as that. Okay.
Yes. Okay. I'll give you the numbers. Yes, I can tell you. The $300,000,000 business evolution, over $200,000,000 are coming from P and C.
And then the rest, which is less than $100,000,000 is coming between from Life. Where also to be very specific is in the Q1 2019, we saw a little bit less release of technical provision for the in force, but these kinds of things can be chunky. But here we are speaking really about $20,000,000 $30,000,000 more or less. And so at the end of the day, the main message is of the $300,000,000 twothree is coming from P and C. And that's really a easy calculation.
You take the premium, you're on the 12 month rolling, then you apply a 30% charge. This makes sense also. P and C business is capital intensive more than people might think.
That's very clear. Thank you. And then the And then
you have a question. So it's a difficult question to answer because there are different depending on the product, you might have products with a roll up of 7%. So right now, I will tell you that I can give you just a high level answer. We're not concerned about the level of guarantees and especially the assumption that we have in our VA business. So from that point of view, I would just tell you, 1st of all, we are now selling the A now since a few years.
The majority, I will say, more than 50% of the block, maybe 60% of the block should be now the business sold after 2,008, the financial crisis. And from a guarantee point of view, there is not an easy answer like you might have for the fixing this annuity block. But fundamentally, I would tell you there is no concern about the reserve level, I will call it this way.
And you say there's no concern because you are hedged, is that right, the guarantee that hedged? That's why Yes,
because we yes, but also at the end of the day, in reality, the assumption you need to look at when you look at the VA business is the lapse assumption. Because at the end of the day, as long as you're going to get the lapses that you think you're going to get, then you have set your expectation to guarantee at the right level. Because if people are not lapsing, that's where you're going to see that there is more business, which has a guarantee compared to what you thought. So we don't see any negative development on the lapse assumption. So from that point of view, we are seeing the bookings performing as we expect.
And then in terms of the hedging, we are hedging the delta. We're hedging also the gamma. So we're also hedging for the gamma, and then we're hedging the interest rate at least for the business, which is subject to interest rate sensitivity and IFRS, which is the majority of our business. So the hedging program is functioning. And from a lapse assumption point of view or utilization assumption, all these kind of things we see they are behaving as we expect.
Also one thing to keep in mind for the business which we wrote after the financial crisis 2008, we had the possibility to increase fees, which means if we see a negative deviation in the assumption, we can increase the fees, which also means if we see a positive deviation, we can decrease the fees. And the last action from the company was indeed to decrease the fees, because the assumption were coming more favorable. And so in this case, to be fair to the policyholder, they are moving the fees down. And if we see one day that it goes in a different direction, we can change the fees up. But I would say the variable annuity business in the U.
S, our variable annuity business is kind of limited. And I would also say that we don't see any kind of negative development on this business at the moment.
That's great. Thank you very much.
Welcome. We'll now take our next question from Jonny Urwin from UBS. Please go ahead. Your line is open.
Thanks. So two quick ones for me, please. So solvency capital generation, I know the guidance is clear for 2019, but what are the moving parts that we should be thinking about beyond 2019 please? Will we stay around the 10 point mark unless growth slows? Or is there anything else picking up?
Secondly, on pricing in P and C, so we're still running at good levels at 1.8%. It's pretty robust to that sort of area. Where is claims inflation in respect to that pricing movement? You flagged higher claims inflation on the U. S.
Commercial lines. Any commentary there would be great. Thank you.
Yes. So on the first question about the 10% guidance, absolutely, I would say this could be a good level of guidance also moving forward. And then on the price environment, there was a general question, right, about the price environment in general and the claims inflation. On the claims inflation, I always look at claims inflation and also at frequency across the portfolio. Clearly, the situation is very different country by country and line of business by line of business.
But in general, I would say that we don't see a pressure coming from the loss trends compared to the pricing we are getting. So in general, right, and it's the situation can be a little bit different in one line of business versus the other. And the only thing that we might see sometimes in some of our companies, which is something slightly different, We might see a pickup in large losses in commercial business. This is something that we see in different companies. But this has, in my opinion, nothing to do with the increasing trend in severity in general.
And on these cases, clearly, we need to look deeper at the underwriting and determine whether this is an underwriting issue as opposed to be normal volatility. But fundamentally, from a claims inflation point of view, I will say that the situation is pretty stable compared to the pricing we're getting.
Is it fair to say that on average pricing is tracking largely in line with the inflation?
Yes. That will be in line.
Thank you. And then just one final question on claims inflation. Are you seeing the higher U. S. Jury awards that some of your peers are flagging?
Not at the moment, but this is we are now seeing this as an issue at the moment. But I could not exclude that this might become an issue moving forward, but we don't have this kind of development in the U. S.
Thanks very much.
We'll now take our next question from Michael Haidt from Commerzbank. Please go ahead. Your line is open.
Thank you very much. Good afternoon to everyone. Two questions on Allianz Leben and the ZZR. The Solvency II ratio, which you disclosed in the SFCR reports on the solo entity level, improved significantly to 4 78% at year end 2018 despite lower interest rates in Germany. To my understanding, this was also driven by the change in the ZZR requirement.
Maybe you do not know, but can you tell us how much the impact of the relaxed ZZR methodology was on the Solvency II ratio of Allianz Leben? My second question also on German life insurance. I read that you increased the policyholder participation in Germany. And I wonder what is the motivation of this step. Is this a step which you were forced to do or which you deliberately did?
Or is it just an IFRS accounting issue? Just interested to know.
Yes. I would say on the polysilicon participation, it's more an IFRS, the translation IFRS. And also on a quarterly basis, even local accounting can be different. But fundamentally, we are not increasing the participation to the policyholder. My point is anyway that we know that we are crediting to the policyholder.
We're giving more than what the minimum participation might be. So fundamentally, we are wrong there. But for the time being, we are keeping the same exact policy and there is no change in the participation, not negative or positive on a local basis. And then you have the question about the Solvency II ratio development at Allianz Leben. And I can tell you that the majority of the improvement has been driven by the change in ZZR.
So I will say this is pretty much accounting for the big jump in solvency ratio that you saw in 2018.
Fantastic. Thank you very much. Welcome.
We'll now take our next question from Michael Huttner from JPMorgan. Please go ahead. Your line
is open. 2nd opportunity, Jeremy. Sorry, it's really quick question. You know the and you've kind of addressed it in many different ways. The attritional loss ratio, 69% Q1 2018, 60 sorry, 63%, 63.9% Q1 2019.
After that, the large losses, the ones we know about, about 80 bps. But what I'm a little bit surprised by is there's no fundamental improvement in that ratio. So even if I strip out large losses, it's kind of flat or slightly worse. Can you talk a little bit about that, please?
Yes. So the attritional loss ratio, I would say, 1st of all, if I look at the attritional loss ratio, clearly, there is no improvement, I will say, compared right now compared to what we had at the end of the year. But I'm looking clearly at adjusting all the numbers, which makes sense. But maybe I'll give you a different perspective because clearly I see numbers that you cannot see, but I can give you a little bit of a hint. If you take our combined ratio in Q1 2019, which is 93.7%, and then you adjust for the natural catastrophe, there will be and just rounded up, that would be 95, right?
And then if you put the runoff on top, that would be about 98. So that could be the, if you want, the combined ratio before runoff adjusted for natural catastrophe. And this is exactly the level that we had at the end of 2018 if you do the calculation there, right? So from that point of view, what you see in the Q1 is a lot of consistency with the numbers that we had for the full year. So when also look at the attritional loss ratio, the one adjusted for natural catastrophe, weather related and large losses compared to the Q1 of 2018, I can tell you the numbers are very much consistent.
So if you ask me, the book is performing right now the same way we saw it perform in the course of 2018, which makes sense because we are adjusting the Q1 or the next 3 years' period. So clearly, we want to go to 93, but it is not going to happen in the Q1 of 2019. This should come over time.
We'll now take our next question from Dhruv Gallant from HSBC.
Hi, thanks for taking the question. I've just got one left. In terms of the PIMCO, could you talk a bit more about this new fund you've launched, the closed fund, how big it is and what the revenue margin is on this? Thanks.
Yes. So this is a fund is a closed end fund, which is specialized in fixed income, specialized in credits and in energy sector. And the fund is a size of about €800,000,000 and the fee margin is about 130 basis points. So at the end of the day, if you run the math about the payback period is about 2 to 3 years, that's how much we need to get our investment back. So if you ask me, it's a great business case.
The only drawback of the business case is that because of some arcane accounting, you cannot capitalize the initial expenses. That's the only drawback. And we might see some other of these kind of transactions in the future, but the business case are very strong, very solid. So from that point of view, it's that we like a lot, but they might cause again and again some sort of volatility in our quarterly results.
We'll now take our next question from James Shuck from Citi. Please go ahead. Your line is open.
Hi. Thanks for taking my follow ups. I just had a couple, please. So Giulio, I just wanted to check my understanding of what you were saying about the Life increase in SCR or the business evolution. So thank you for the split between P and C and Life.
You mentioned 100,000,000 as the business evolution for Life. There's a capital requirement of 3% of the PVMP. So that's around €500,000,000 So just filling in the gaps, should I assume that the capital release from the back book is €400,000,000 euros That gets me to a net €100,000,000 And if that is right, what is the trajectory for that capital release over time, please? And second question, just on AGI. I know you have a target for costincome ratio below 70%.
The cost income ratio in Q1 was around 73%. And I think all the explanation about the high cost income ratio in Asset Management was really relating to PIMCO. So just wondering about the trajectory for AGI, please. Thank you.
Yes. So on the new business evolution, the 3% that was quoted is that will be a number for the guaranteed business, but I also tend to be very conservative just to make a point. When we run our calculation, we are applying indeed to the entire business, present value of the business premium, we are applying a ratio of about slightly north of 1%. So that's what you can apply to the present value of the business premium. And the 3% is more me saying, okay, let's assume that on the guaranteed business, the capital consumption is way larger, let's even go for 3%.
How much can it be in reality in the numbers? But you can use more a good 1% on the present value of new business premium. To be very nitty gritty and all of you always tell me not to be very nitty gritty. In reality, you should also deduct from the present value of new business premium, the OEs, which are not included in Solvency II at all. But this is getting really integrated.
But somehow you can use about 1% of our present value new business premium, and this gives you a sense of the business evolution. Then you had a question regarding the AGI. Yes, Keep in mind that in the Q1, the costincome ratio AGI tends to be higher, also because the performance fees are usually coming towards the end of the year. So if you look at the costincome ratio of AGI in Q1, in the Q1 of 2018 was also about 73%. But then by the end of the year, I believe we were below 70%.
So you should assume that in the course of the year, we are going to see we are going to see anyway an improvement of the cost income ratio because of fees. Also keep in mind that we have been able to reduce the cost income ratio this quarter compared to the last quarter despite the asset base has been lower. So I would say that if you take a full year view, you can see that our ambition to achieve the 67% is definitely achievable.
And just quickly on the capital side of things. So if I just take 1%
of the
PVNBP that's going to be £176,000,000 or so. And you said the business evolution is £100,000,000 So I mean very and obviously there's fewer OEs in there as you just mentioned. It doesn't look like then that there's material capital release from the back book. Am I missing something on that? Yes,
it depends on how much reserves are running off. For example, in the Q1, the runoff of reserve was about $4,000,000,000 and in the Q4 2018 was about $8,000,000,000 so $7,000,000 So depending also the reserves are not running off sincerely on a linear basis. But really, look, we look at this number inside out, as you see. And I will really say that we can over analyze this number. At the end of the day, we are it's about whether we're going to have 3 or 2.5 of capital generation.
I believe what you have is it's a good capital generation. We have a good solvency ratio. Yes, we can definitely analyze this number further, but yes, I'm not so sure whether this is really helpful.
We'll now take our next question from Nicholas Dalla Palmer from Exane BNP. Please go ahead. Your line is open.
Hi. I had a question on the solvency 2020 review. Sorry, it's a little early and if it's on Q1 results. But the just if you could you share with us if you have it the impact that you would face in case the last liquid point was moved by 10 years, which is one of the options that's being looked at? And is there any other topic in the Solvency II review that in your view could be important dynamic quality to just anything that you watch particularly closely?
Thank you.
Yes. So on the solvency II review, clearly, the moving the last looking point is a key topic. And that will be, by the way, a negative impact the solvency ratio by about 10 percentage points. On the other there are positives that might come into place, which is the treatment of the volatility adjuster. That's always something that clearly we are pushing very strong because we believe that right now Solvency II is a good framework, but one of the weaknesses is indeed in the treatment of the credit spreads.
And then also there is also a conversation which is maybe less crucial, but still important, which is about the risk margin and what is the cost of capital that you apply to the risk margin. And so this could be too positive. On the other side, the last liquid point, moving the last liquid points clearly might be there will be a negative. And then clearly, the point is also not only if you move the last liquid point, but also what the convergence might be. When we put together and by the way, on the last liquid point, the negative impact might be even slightly higher than 10 percentage points.
We put the positive and negative together, there might be a wash in our case, but we don't know eventually what is going to happen.
We'll now take our next question from Michael Suttler from JPMorgan. Please go ahead. Your line is open. Thank you
very much. My last question, I promise. Thank you. And very, very simply simple questions, just numbers. And on your non life premiums, your P and C portfolio, how much of the business of these premiums would you classify as property?
Oh, how much we would classify as property? We're checking, but I will say the public might be 20% of the business. But we had the numbers, €1,000,000,000 was
said. Okay.
Yes, okay. In total, I would say, it's 20 7% will be classified as property.
There appears to be no further questions at this time. I would like to turn the conference back to you, Mr. Schmid, for any additional or closing remarks. Yes. Thank you.
I do believe you had enough questions for the day. So thanks to everybody for the participation in our call. Thanks for your questions. We say goodbye for now and wish you a pleasant remaining day. Goodbye.
Bye. Have a good day. Thank you
for your participation. You may now disconnect.