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. 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 first quarter, and we can go straight to page three of the presentation. As you can see, we had a good 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 of the revenue. I'm going to come back later on this development, but in total is the growth rate of the revenue for the group, very positive. The operating profit is also up. This is mostly driven by the underwriting improvement in P&C as a consequence of lower natural catastrophe. When you look at the net income, is also up compared to the level of the prior period.
As you know, our outlook for 2019 is an operating profit of EUR 11.5 billion. With an operating profit of EUR 3 billion in the first quarter, we are well on track to achieve the EUR 11.5 billion by the end of the year. If you go to page five, 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 EUR 6 billion, which is mostly driven by the change in realized 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.
Just adjusting for these two effects, the solvency ratio at the end of 2018 would have been closer to 20. In reality, the movement between 2019, the first quarter, and 2018 is mostly explained by these two developments. I'm going to come back in 1 second anyway on these numbers. Otherwise, on this slide, 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 convexity on the solvency requirement.
If we go now to page seven, I can come back again on the development of the Solvency II ratio. As I said before, because of the model changes, we lost about 4 percentage points of solvency. 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. The main driver for this is the higher growth that we are experiencing. In reality, it's very much in line with our expectation based on the growth that we are seeing right now, especially in property casualty. The market impact was -3%. If you adjust for taxes, that would be -4%.
This is definitely a little bit higher compared to the sensitivity that we had estimated at the end of 2018. That would be the only thing where there was a little bit of a deviation from our expectation. On the capital management, the minus seven is mostly explained by the dividend and by the buyback. In total, we have a solvency ratio of 200/18, which is a very comfortable level. From a capital flexibility point of view, we have clearly the same capital flexibility that we had before. Again, the majority of the delta compared to the end of the year was largely anticipative due to the buybacks and the model changes. We can turn to page nine, where we show the numbers for property and casualty.
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. Second point, we can see practically growth across the board, I will say, except for a few entities, all companies are growing. When we look at the price environment moving forward, in general, we are dealing with a price environment which is either stable or positive. From that point of view, the pricing 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%.
This is driven by the development of the underwriting results, and to be more specific, by the improvement in the claim ratio which is mostly driven by the net ceded 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, we remove the impact of natural catastrophe or large losses and weather-related losses. The real attritional loss ratio is pretty much stable compared to the level that we had one year ago. 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 on our expense ratio.
Moving to page 13, we can see the breakdown of the operating performance by entities. We have 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 Generali, which is now part of Allianz Direct. Adjusted for that, the combined ratio in Italy will be flat and at a very good level. In the case of Spain, you can see a swing, and that's due to a positive runoff in 2018, which is now turning negative in the first quarter.
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. AGCS looks worse compared to last year, but we need to keep in mind that last year, at year-end, the combined ratio of AGCS was over 100%. From that point of view, this is the level of performance that we are currently experiencing at AGCS. Very good results both at Allianz Partners and especially [Europa FM]. 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. It's resilient.
In reality, it's even going up a little bit in the first quarter of 2019 versus the level of last year. The resilience is something that we are welcoming because we are always anticipating some reduction of the investment results. For the time being, we see there is more resilience in this position that usually we tend to anticipate. 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 of new business premium, which is about 17%-18%. This is mostly driven by Germany. Also we had a very good growth rate in the U.S.A. Also in Netherlands, we had a nice development. Just in Italy and Asia Pacific, we had some reduction of production.
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. We had also an increase in margin by 20 basis points. 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 $4.2 billion. With an operating profit of $1.1 billion, we are good on track to get to the $4.2 billion 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. Also we have a positive impact of change in DAC. Here, there are clearly many drivers. 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, $1.1 billion, 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 single entities, you can see widespread improvement on the value of new business. When we look at the operating profit, I will be focusing only on the three largest, if you want, the three 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 first quarter of last year was higher than what we would normally expect. In the case of the U.S., it's the opposite. You're seeing an increase because the operating profit was too low in the first quarter 2018. 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.
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. From a spread point of view, there is a lot of stability. What has gone up in the first quarter 2019 versus what we had last year is the profit sharing. To this point, this is always a metric that to a certain degree we can control, because we are not necessarily crediting at the minimum policy. We are not at the maximum policy or the participation, especially in the German business, or also there is flexibility in the U.S. business.
When we look at the 19 basis points of investment margin, this is slightly below, if you annualize the number, our guidance of 80 to 85 basis points for the year. Here we need to see two things. First of all, how this is going to develop in the following quarters. I would also like to draw your attention that the aggregate policy reserves is increasing substantially. 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. With that, we can move to asset management at page 25. As you can see, the assets under management for third party have increased by about 8%.
Clearly here, both the improvement due to the market, including the fixed effect and the consolidation of Gerling, have played a role in bringing the number up. Also you can see we had positive inflows of about EUR 18 billion. Slightly negative AGI, but largely positive, over EUR 20 billion at PIMCO. That's a nice development. You remember that the last quarter 2018 was kind of challenging for PIMCO, we were always confident about the flows moving forward. We saw nice flows at PIMCO in the first quarter 2019. When we move to page 27, we see that the revenue are stable. If you adjust for the fixed effects, they are down 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&A, I'll leave it to the questions I'm going to get. Also, we should not forget that the asset basis in 2019, the first quarter, was slightly below the level of last year because of what happened during the fourth quarter. There are some other technical factor that explain the drop in revenue adjusted for a fixed effect at PIMCO. The fee margin is also a little bit lower here. There is also the impact of the technical effects, 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.
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. Here there are three effects at the end of the day. One is the one-off, which is by the way a good thing, because it's going to produce revenue and profit moving forward. We have also the fact that the revenue basis was lower because of the lower asset basis. The cost income ratio in first quarter 2018 was with 56.6%. If you want, a little bit too low compared to what would be a normal expectation for PIMCO. In total anyway, for the segment, we have about EUR 600 million of operating profit.
Our guidance for the year is EUR 2.5 billion of operating profit. We feel pretty confident that we are going to achieve the EUR 2.5 billion, 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. 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. We are pretty confident we are going to achieve our EUR 2.5 billion 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.
I would say we can go straight to page 33, where we are showing as usual, the development of the non-operating items. I would say there is just two comments. One is realized gains and losses are lower compared to the prior period and impairments are stable. There is no specific reason for the lower realized gains and losses compared to the prior period. On the tax rates, you can see it is at 25%, which is somehow the low end of our range of 25%-27%. All in all, with a net income of almost EUR 2 billion for a quarter, I think we have a very strong bottom line result, which is mostly driven by the operating performance that we discussed before. The last slide is just a summary for you. A good revenue growth, good operating profit growth.
We can see a lot of strength in many KPIs and in a lot of parts of our business. We are looking forward to a good 2019. With that, I would like to open up to your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for a moment to allow everyone an opportunity to signal for questions. We'll now take our 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. 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 result. On convexities, the interest rate sensitivities now back up to your target of 11 percentage points. I am just wondering to what extent does the sensitivity increase for even lower rates? On the operating, I was just wondering if we could have a little bit more color, because you mentioned the growth in non-life being attributable, but actually the growth is less than it was across 2018. The guidance seems to have come down a little bit, but not massively considering you are basically guiding for eight percentage points for the rest of the year.
I am just wondering, to what extent is what we are seeing in Q1 a sort of one-off effect, and to what extent is it ongoing? The other two questions are much shorter. Second question was, I was intrigued by the impact of Allianz Technology. I was just wondering if you could elaborate on that has helped the corporate segment. 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, 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. On a net basis, we should be at about EUR 10 billion net flows, which are mostly driven by PIMCO. We see nice flow generation 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 EUR 10 billion for the first six weeks of the second quarter. For the Allianz Technology, you had a question about the Allianz Technology. Yes, the numbers are getting better. This is the driver for the improvement in the corporate segment.
Allianz Technology is the company that has been carrying out a lot of our projects and transformation projects. Clearly, when you do these transformation projects, you cannot always capitalize all kind of expenses. There was a drag in the past, we see that this drag is coming down because now Allianz Technology is more getting the revenue out of the transformation project instead of being heavily in the investment phase. Just as a natural development, if you want, of the business model of Allianz Technology. You had a question on the Solvency II, two questions on the Solvency II. One was on the capital generation, organic capital generation.
On that one, I would 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&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. This is definitely something which is costing a little bit of capital generation for the quarter on the operating side. I would also say that we have refined our also calculation for the business evolution. Right now what we do, consistently, we apply 30% charge to our premium. Also the growth in premium. Also in the future, we're going to be able to track very easily the consumption, the P&C side.
This is consistent with how we address the issue in the capital market day. 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, we have a 3% capital generation per quarter or 2% capital generation per quarter. It doesn't make a big difference. 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% or 10% capital generation, or 11% on the Solvency II tool per annum doesn't make, honestly speaking, a big difference.
We are happy to get the growth, and if we have a little bit less capital generation, that's totally fine. Then you had a question about the convexity. Yes, I would say if rates go down further, you will see the convexity picking up. The convexity is constantly picking up as the rates are going down. The only point to notice is, the bonds was at minus 9 basis points at the end of Q1. There is most likely a limit to how much the interest rates can go down. I would not exclude they can go down a little bit further, but I believe we are approaching the limit to how much down they can go. Technically speaking, yes, the convexity is picking up as the interest rates are going down. You can see that also in our sensitivity.
Our sensitivity on the way down was -4 at the end of the year, now rate down is -8.
That's great, Gio. Thank you very much. Completely agree on the capital generation. Could 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, we want to improve the performance of Allianz Technology over the next two or three years. 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 J.P. Morgan. Please go ahead. Your line is open.
Fantastic. Thank you so much. This is a bit broad for you, probably, 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. The other one is, I'm a little bit surprised at this slightly lower guidance, given the life business is producing so much new business value, which I think is included. I think it's EUR 100 million higher this year than last. I'm wondering if I'm missing a moving part, a negative moving part to explain this lower guidance. Then, just a little bit of color on the German motor, my favorite topic. Can you speak a bit about maybe the pricing and competition environment?
The reason I ask is I think for you the pricing was positive, all your peers, well, some of your peers, AXA and Talanx, reported negative. I'm a bit surprised. Thank you.
Yeah. On the Solvency II capital generation, I would say that assuming we have 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. That would be still my guidance for 2019. Then depending on an acceleration, deceleration of the growth rate, we might end up a little bit better or worse than that. Fundamentally, the guidance is still for 10. Eventually it wouldn't be a drama if we end up with a capital generation of 8% just because we are growing very strongly. The guidance is about 10% for 2019. You had a question about the German motor. 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, 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. 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. The combined ratio, I can tell you, is pretty solid.
Brilliant. Thank you very much.
Welcome.
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. Just coming back on the growth topic, if I can ask one on life, one on P&C, and also a third question on AGI outlook, please. On the growth in Germany Life, I mean, the kind of numbers you produce in the savings and annuities are not in capital efficient. It's quite remarkable. Seems to be coming from corporate business, but not affecting the new business margin as well. Is this some kind of a new initiative or is this? Also, could you comment on this relationship with that? While it is large corporate, it's not affecting NBM. In P&C, in Italy, a remarkable 8.4% growth number, which to me sounds quite exciting. Could you just help us understand, because it's obviously not coming from the direct side, traditional motor looks like?
Just a comment on that. On AGI outflows, you said there was a small outflow, but it was one of the biggest outflows in many, many quarters now. Is it performance induced? Because equities were strong and that's where AGI is also strong. Just help us understand how to comprehend.
Yeah. 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. This has happened also in the past. I believe what is kind of eye-catching now is that you had a combination of natural growth also in our capital lights product, and on top of that, we are getting also this large contract. There is no new strategy. I 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.
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? We get also better cost margins. 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 and the cost component. That's the reason why it's absolutely a profitable growth, what we are getting in Germany. Also think about that. Even adjusting for this gross contract, our growth rate will be north of 20%. What would be the reason to chase big contract if you are anyway growing a lot? We not have any concern on the profitability of the new business for Germany Life.
In the case of P&C and Italy, you notice the 8% growth, which is driven by an accounting change, on the way we book the premium. In Italy, premium paid on a monthly installment basis were not accounted right away, but they were accounted over the time. 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. When you want to look at the real growth in Italy, look at the internal growth, which is adjusted for this accounting effect, and that's also adjusted for the exclusion of General Life. That's the real number you should look at. It's still very good because the growth rate of 4.7 is good. In the case of Italy, it's driven by motor, and that's also driven by volume more than by price.
Clearly, when you have the combination, the level that we have, I think price is more than fine. 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, it's price and not volume. Just to give you an idea how we are moving differently country by country, depending on the competitive environment, the level of performance, clearly our subsidiaries are going to react subject to the market conditions. You had a question, AGI, noticing that the 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.
This has been clearly a headwind for us, half of 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. These are the two effects that are explaining the outflows. I would say the Asian one is a little bit, if you want, of a one-off, and the retail headwinds in Europe, 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 Research. Please go ahead. Your line is open.
Hi there. Hi, Giulio. Two quick questions. Spain used to be the golden child, running in the low nineties or high eighties combined. What's happened in Q1? I am particularly interested in the reference to reserve strengthening in the commentary, just to maybe just give us a bit more color on that, please. Second question. Given that the interest rate environment has kind of deteriorated a fair amount year-to-date in terms of benchmark yield curves falling, we have 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. Because of the tougher back to this lower for longer forever interest rate environment, is there anything that you have done proactively as a group, particularly in Q1, to reposition for that? Thanks.
Yeah. Maybe let's start from the Solvency II question. What we are always doing, we do 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 220% level, there is no point for us now to overreact to movement. Clearly, 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. From that point of view, always keep in mind, every time we speak about our sensitivities, we are now considering for capital management action, for management action.
Clearly, this is 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. Clearly, you need to consider what is the impact on other KPIs. 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. 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. I would say we are very comfortable with the level of Solvency II.
If the markets are changed significantly, and we have a different level of Solvency II, we must start think about different action. 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 them any 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 220, as we were adjusting for the buybacks and also for the model changes. You have a question on Spain.
I would say what happened in Spain is usually, I would say the accident 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 a little bit by the property portfolio, a little bit by the motor portfolio. 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. From the accident year performance is pretty much stable. We see a swing in runoff, which is mostly coming from the motor business. We are looking, also from there were weather-related claims in property at the end of last year.
We see that somehow we are getting some negative development out of those claims. This is something that we're watching now. I believe that for this year, we still might have a few challenges in Spain. 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 a 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 that cat. In 2017 and 2018, also around 100% level. You're growing volume at about 11%. Can you shed some insight, please, into the future direction of travels around that combined ratio? I think it's a very low ROE business as it is. If you just update on what you're doing in terms of capital efficiency on that side, please, that'd be helpful. Secondly, just interested to see the new disclosure for Allianz Direct. 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.
Most of that Direct business should actually be quite mature now, particularly given Genialloyd that's been there for many years. Just shed some insight onto that loss ratio for me, please. Finally, really just a clarification, because I think, Giulio, you mentioned that the capital set aside for P&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%-40% of premium. I just want to make sure if you've changed your modeling in terms of capital required for the growth. Thank you.
Okay. Yeah. Thank you for the question. Maybe we can start from the last one. Yes, we had 35%, and this was the pre-tax number, on the ACR, we are putting the directly detection price into the business evolution. We will give you the number tools, anyway, net of taxes from both sides. The 35% was pre-tax, the 30%, at the end of the day, it's a after-tax number. One thing which is important for you, because we're going to add this again in the future, 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, based on analysis, a rule of thumb of premium are going to add this kind of premium charge.
New business is going to add this sort of new business charge, the run-off of the in-force is going to add this kind of run-off charge. Then we use this charge on a custom basis, then time by time, we reevaluate the charges, we redo the analysis, then we might change, depending on what we see, the numbers. You might have situation where we're 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. 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 the communication with you guys.
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. This is a change that we introduced to have better stability and better clarity on these figures. You had a question about Allianz Direct. You notice 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. The other three companies are still pretty small, and the combined ratios are very high. That's exactly the reason why we decided to get into a different direction. 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. I would say in the case of Genialloyd, yes, the company is, between inverted comma, mature. Still, I would say still not as mature as the seasoned business of Allianz Italy in general. If you remove Genialloyd, which has, anyway, a good combined ratio, the other entities are really not at a mature stage. That is the reason why you see the combined ratio that you see. That is also the reason why we are doing what we are doing. You had a question on AGCS.
Your comment about the large losses are high, but the natural catastrophe are low, is a fair comment. At the end of the day, I just tell you, the reality is that over the last three years, AGCS has performed at combined ratio of 100% or more. One 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. 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. 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.
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. There is definitely improvement in the pricing which is needed, and this applies to the whole market, not just to us, because our performance, in reality, is totally fine compared to the market. The whole market needs repricing. 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 combined ratio 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.
From that point of view, I believe the performance you see right now is just a reflection of what the market environment is. You had a comment on the ROE. 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. You can discuss with a 10% is a good ROE. Somehow 97 will be the combined ratio where the ROE gets to 10. 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.
I think we're going to have the possibility over the next two, three years by changing some structure, some reinsurance program to get some additional capital efficiency in AGCS. The bottom line is, if we achieve our target to bring the AGCS combined ratio 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%.
That's very helpful. Thank you very much.
Welcome.
We'll now take our next question from Farooq Hanif 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. 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 motor insurance in the market. Second point is, could you talk a little bit about how the European direct platform will support profitability in the direct business? What tangible benefits will that have maybe on loss ratio or expense ratio? Lastly, just a clarification on Allianz Technology, based on a question that was asked earlier.
I just want to make sure you're not suggesting we take the Q1 corporate number and multiply it by four. Thank you.
Okay, maybe let's start with the last one. No, I would not do that because there is not just technology in those number. I could set the expectation that over time, because our guidance for 2019 for the corporate segment is EUR -900 million, that might be a conservative guidance. Over time, I can definitely see the performance of the corporate segment definitely being better than EUR 900 million guidance and going to the EUR 800 million below. For the time being, I will not do for this year just the calculation how we're going to end up significantly below the EUR 800 million threshold. For the time being, I would 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 just tell you, in the next years, the European direct platform is going to be a drag on our combined ratio. By the way, this is something that we have known as we gave ourselves the target of being a 93% combined ratio by 2021. 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. As you can imagine, once we get to 93%, we would like to at least stay there. Eventually, they need to contribute to these kind of figures.
If you remember the capital market day, we have indicated an expense ratio of 12%. Even assuming expense ratio could be a little bit higher, there is a lot of loss ratio that you can still tolerate and get to combined ratio, which are very good. Over the next two, three years, honestly speaking, Allianz Direct is going to be rather a drag. 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. If you tell me if we can get growth with a combined ratio of about 100%, I would say that would be a very good outcome.
If we can get healthy growth and keep the combined ratio at 100, that would be, in my opinion, a good outcome. You had a question about the U.K. and LV=. Yes, okay. By the end of the year, we are 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. Your question was whether we have appetite for further acquisition in the U.K. You were referring clearly to [Sands], which is not motor. I cannot speak too much into that because you're a smart guy, so you're asking me the question, but it's a loaded 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. 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. Definitely, there is a little bit more volatility in the combined ratios in the U.K. compared to what we see in continental Europe. Definitely, we are interested in getting a strong presence there.
With the LV= acquisition, I think we have accomplished the goal. If we have some opportunities, we are going also to strengthen our franchise there.
Thank you very much.
Very good.
We'll now take our next question from Nick Holmes from Societe Generale. Please go ahead. Your line is open.
Oh, thank you very much. Just a couple of quick questions, or quickish. Apologies. First on capital generation, coming back to that subject. You said the reduction to 2% was due to growth, but my question is, how much was due to business mix within that growth? You've gone from 15% in 2018 to annualized 8% in Q1. Obviously, you're expecting better than that. Would you say, for example, that more than half of that difference was due to business mix changes, writing more traditional stuff than unit link? That's the first question. The second is just on U.S. variable annuity sales. See these are booming again. Wondered, can you remind us of the guarantees that you're offering on these products? Thank you.
Yeah. Sorry for the capital generation. I don't think mix is making any significant difference, or 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, EUR 500 million of present value of new business premium of additional guaranteed business. Even if you apply, let's say, to be conservative, a very conservative effect of 3 percentage point on that would be, what, EUR 15 million. It's really not that material. I would say the growth in P&C is definitely one of the driver.
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. Growth in P&C is definitely a driver of higher or lower capital generation. Also one comment, also on the guaranteed business. Even assuming, and that's a little bit of a conservative assumption, that the capital requirement is 3% of premium, we are making 3% of value on the business there, margin. From a solvency point of view, there will be even a, if you want, equalization, right? There is enough capital which is generated as much as capital absorption. You wanted to ask a question?
Yes. Sorry. No, 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, yeah. Oh, I can tell you.
From-
Sure.
Right.
We look at the-
Okay. It really isn't as important as that. Okay.
Okay, I'll give you the numbers. Yeah, I can tell you. Out of the EUR 300 million business evolution, over EUR 200 million are coming from P&C, then the rest, which is less than EUR 100 million, is coming from life. Where also to be very specific is in the first quarter of 2019, we saw a little bit less release of technical provision for the in-force. These kind of things can be chunky. Here we are speaking really about EUR 20 million, EUR 30 million, more or less. At the end of the day, the main message is, of the EUR 300 million, two-third is coming from P&C. That's really an easy calculation. You take the premium, you earn the 12-month roll, then you apply a 30% charge. This makes sense also. P&C business is capital intensive, more than people might think.
That's very clear. Thank you. Then the very-
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%. Right now, I will tell you that I can give you just a high-level answer. We are not concerned about the level of guarantees and especially the assumption that we have in our VA business. From that point of view, I would just tell you, first of all, we are not selling VA now, since a few years. The majority, I would say more than 50% of the block, maybe 60% of the block should be now the business sold after 2008, the financial crisis. From a guarantee point of view, there is not an easy answer like you might have for the fixed index annuity block.
Fundamentally, I would tell you there is no concern about the reserve level. I will call it this way.
You say there's no concern because you are hedged, is that right? The guarantees are hedged.
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, they guarantee the right level. Because if people are now lapsing, that's where you're going to see that there is more business which has a guarantee compared to what you thought. We don't see any negative development on the lapse assumption. From that point of view, we are seeing the book is performing as we expect. In terms of the hedging, we are hedging the delta. We are hedging also the gamma. We are also hedging for the gamma.
Then we are 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. The hedging program is functioning. From a lapse assumption point of view or utilization assumption, all these kind of things, we see they are behaving as we expect. 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. The last action from the company was indeed to decrease the fees because the assumption were becoming more favorable.
In this case, to be fair to the policyholder, they are moving the fees down. If we see one day that it goes in a different direction, we can change the fees up. I would say the variable annuity business in the U.S., our variable annuity business is kind of limited. 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.
Hi there. Thanks. Two quick ones for me, please. 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&C. We're still running at good levels at 1.8%. It's pretty robust at 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.
Yeah. On the first question about the 10% guidance, absolutely, I would say this could be a good level of guidance also moving forward. 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. In general, I would say that we don't see a pressure coming from the loss trends compared to the pricing we are getting. In general. The situation can be little bit different in one line of business versus the other.
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. This has, in my opinion, nothing to do with the increasing trend in severity in general. On these cases, clearly, we need to look deeper at the underwriting, determine whether this is an underwriting issue as opposed to be normal volatility. Fundamentally, from a claims inflation point of view, I would say that the situation is pretty stable compared to the pricing we are getting.
It's fair to say that on average, pricing is tracking largely in line with inflation?
Yes. That would be my Yeah.
Thank you. There was 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, we are not seeing this as an issue at the moment. I could not exclude that this might become an issue moving forward. We don't have this kind of development in the U.S.
Thanks very much.
We'll now take our next question from Michael Heath 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 report on a solo entity level, improved significantly to 478% that year in 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. 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 policy participation, it's more an IFRS, the translation IFRS.
Also, on a quarterly basis, even local accounting can be different. 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. Fundamentally, we are wrong there. 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. You have the question about the Solvency II ratio development, Allianz Leben. I can tell you that the majority of the improvement has been driven by the change in ZZR. I would say this is pretty much accounting for the big jump in solvency ratio that you saw in 2018.
Fantastic. Thank you very much.
You're welcome.
We'll now take our next question from Michael Huttner from J.P. Morgan. Please go ahead. Your line is open.
A second opportunity, I'm really sorry. It's a really quick question. You've kind of addressed it in many different ways. The attritional loss ratio 69% Q1 2018, 63.9% Q1 2019. Out of that, the large losses are the ones we know about 80 basis points. What I'm a little bit surprised by is there's no fundamental improvement in that ratio. Even if I strip out large losses, it's kind of flat or slightly worse. Can you talk a little bit about that, please?
Yeah. The attritional loss ratio, I would say, first of all, if I look at the attritional loss ratio, clearly, there is no improvement I would say right now compared to what we had at the end of the year. I'm looking clearly at adjusting all the numbers, which makes sense. 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 first quarter 2019, which is 93.7, you adjust for the natural catastrophe, just round it up, that would be 95, right? If you put the run-off on top, that would be about 98. That could be, if you want a combined ratio before run-off adjusted for natural catastrophe.
This is exactly the level that we had at the end of 2018, if you do the calculation there, right? 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. 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. 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 first quarter of the next 3 years period. Clearly we want to go to 93, but it is not going to happen in the first quarter of 2019. This should come over time.
Brilliant. That's helpful. Thank you. Thanks so much.
Thank you.
We'll now take our next question from Dhruv Gahlaut from HSBC. Please go ahead. Your line is open.
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.
Yeah. This is a closed-end fund, which is specialized in fixed income, specialized in credits and in energy sector. The fund is a size of about EUR 100 million, and the fee margin is about 130 basis points. At the end of the day, if you run the math about the payback period is about two to three years. That's how much we need to get our investment back. 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. We might see some other of these kind of transitions in the future, but the business case are very strong, very solid.
From that point of view, they are transition that we like a lot, but they might cause, again and again, some sort of volatility in our quarterly results.
Perfect. Thanks.
You're welcome.
We'll now take our next question from James Shuck from Citi. Please go ahead. Your line is open.
Oh, hi. Thanks for taking my follow-ups. I just had a couple, please. Giulio, I just wanted to check my understanding of what you were saying about the life increase in SCR or the business evolution. Thank you for the split between P&C and life. You mentioned EUR 100 million as the business evolution for life. There's a capital requirement of 3% of the PVNBP. That's around EUR 500 million. Just filling in the gaps, should I assume that the capital release from the back book is EUR 400 million? That gets me to a net EUR 100 million. If that is right, what is the trajectory for that capital release over time, please? Second question, just on AGI. I know you have a target for cost income 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. Just wondering about the trajectory for AGI, please. Thank you.
Yeah. On the new business evolution, the 3% I was quoting is, there will be a number for the guaranteed business, where I also tend to be very conservative just to make the 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%. That's what you can apply to the present value of the business premium. 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? You can use more, a good 1% on the present value of the business premium.
To be very nitty-gritty, and Oliver always tell me not to be very nitty-gritty, in reality, you should also deduct from the present value of the business premium, the OEs, which are not included in Solvency II at all. This is getting really nitty-gritty. Somehow you can use about 1% of our present value of the business premium, and this gives you a sense of the business evolution. You had a question regarding the AGI. Yes. Keep in mind that, in the first quarter, the cost income ratio of AGI tends to be higher, also because the performance fees are usually coming towards the end of the year. If you look at the cost income ratio of AGI in the first quarter of 2018 was also about 73%, by the end of the year, I believe we were below 70.
You should assume that, in the course of the year, we are going to see anyway an improvement of the cost income ratio because of the performance fees. Also, keep in mind that we've been able to reduce the cost income ratio this quarter compared to the last quarter, despite the asset base as being lower. I would say that if you take a full year view, you can see that our ambition to achieve the 67% is definitely achievable.
Just quickly on the capital side of things, if I just take 1% of the PVNBP, that's going to be EUR 176 million or so, and you said the business evolution is EUR 100. Obviously there's fewer OE 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?
It depends on how much reserves are running off. For example, in the first quarter, the run off of reserve was above EUR 4 billion, and in the fourth quarter 2018 was about EUR 8 billion or EUR 7 billion. Depending also, the reserves are not running off necessarily on a linear basis. Really, look, we look at this number inside out, as you see. I would really say that we can overanalyze this number. At the end of the day, it's about whether we're going to have EUR 3 billion or EUR 2.5 billion of capital generation. I believe it's a good capital generation. We have a good solvency ratio. Yes, we can definitely analyze this number further, but, I'm not so sure whether this is really helpful.
Yeah. No. Okay. No, that was great. Thank you very much.
We'll now take a next question from Niccolo Dalla Palma from Exane BNP. Please go ahead. Your line is open.
Hi. I had a question on the Solvency II 2020 review. Sorry if it's a little early and if it's on Q1 results. Could you share with us if you haven't, 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? Is there any other topic in the Solvency II review that in your view could be important dynamic related to just anything that you watch particularly closely? Thank you.
Yeah. On the Solvency II review, clearly, moving the last liquid point is a key topic. That will be, by the way, a negative for us, which I would say that could impair the solvency ratio by about 10 percentage points. On the other side, there are positive 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 spread. Then there is also a conversation which is maybe less crucial, but still important, which is about risk margin and what is the cost of capital that you apply to the risk margin. This could be too positive.
On the other side, the last liquid point, moving the last liquid points, clearly there will be a negative. Then clearly the point is also not only if you move the last liquid point, but also what the convergence might be. By the way, on the last liquid points, the negative impact might be even slightly higher than 10 percentage points. When 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.
Thank you. Great.
We'll now take our next question from Michael Huttner from J.P. Morgan. Please go ahead. Your line is open.
Thank you very much. My last question, I promise, and thank you. Very simple question, just numbers. On your non-life premiums, your P&C portfolio, how much of the business of these premiums would you classify as property?
How much we would classify as property. We're checking, I would say the public might be 20% of the business. We had the numbers. Give me one sec, I would say.
Okay.
Okay. In total, I would say 27% would be classified as property.
Lovely. Super. Thank you so much.
Welcome.
There appears to be no further questions at this time. I would like to turn the conference back to you, Mr. Schmidt, for any additional or closing remarks.
Yeah. Thank you. I do believe we had enough questions for the day. 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. Stay golden. Thank you for your participation. You may now disconnect.