Good morning, ladies and gentlemen, and welcome to today's telephone conference of Allianz SE on the occasion of the publication of the financial results in the second quarter 2019. For your information, this conference will be recorded. At this point, I would like to hand the floor to Holger Klotz.
Thank you very much, and good morning also from my side. Welcome to all of you. As usual, our CFO, Giulio Terzariol, will guide you through the quarterly results and then answer your questions following that. The phone conference has a planned length of 60 minutes, and with this, I give the floor to Giulio Terzariol.
Yeah, hello, good morning.
I'm delighted to present to you the results of the second quarter, but before we enter into the figures for the second quarter, I would like to guide you to page three, where you can see the results of the first half of the year. As you see, we've had a great performance of the first six months of the year. That holds true for the revenues, which have grown by 6%, driven above all by life health insurance and P&C as well. The operating profit has also grown by a good 6%, and all these segments contributed to this growth. The shareholders' net income has grown by 7.3%, and if you look at the earnings per share, you see that we've seen a growth of 10%. That shows the effect of the growth rate of the shareholders' net income, but we also have an effect from our buybacks.
The operating figures like combined ratio of new business margin and the cost-to-income ratio in PIMCO and AGI all played a significant role and all pointed into the right direction, so we've improved the combined ratio. We've had a stable new business margin, and the net inflows were especially positive at PIMCO with USD 44 billion. So overall, we had a good first half year, a good first six months, and now turning to page five, you can see that we have a similarly good picture for the second quarter. Revenues in the second quarter grew by 4% internally, driven by P&C just as well as life and health. The operating profit grew by EUR 140 million. The main driver in this case was the development in life health, and across the other segments, we were stable if you look at them overall.
The shareholders' net income grew in the double digits, plus 13%. The reason for that being, on the one hand side, the operating development, and but on the other side, we've also seen a significantly improved tax rate compared to the level of 2018. So overall, with EUR 3.2 billion operating profit and EUR 2.1 billion in shareholders' net income, we're highly satisfied with the result in the second quarter.
Page seven shows our shareholders' equity and the solvency ratio. Shareholders' equity grew by EUR 1.2 billion compared to the end of March. The payouts for dividends and buybacks had a negative effect of around EUR 4.5 billion, but on the other hand, we had EUR 2.1 billion in shareholders' net income that flows into that. And then we've also seen the change of unrealized gains and losses, especially on the fixed interest side. We saw a clear increase of our capital investment result.
The solvency ratio decreased by 5 percentage points, mainly due to the interest rate development. Interest rates went down significantly over the quarter by around 30-40 basis points, and if we calculate the effect of market changes onto our solvency ratio, that makes up for 8% pre-tax, and after-tax, we're talking about 7 percentage points, so that is the effect that burdened us. That was countered by the positive effects from organic growth with 3% calculated after tax and dividends, so the two main factors that had an influence on the solvency ratio were, on the one hand side, the interest rate movement and countered into the positive side by our organic growth.
All in all, the solvency ratio is now at 213%, which is a very good level and is also in line with our expectations in view of the financial environment, so no surprise from our side in this regard. Page nine, I don't want to comment on this right now. These are just the same figures that I've just explained to you, and therefore, I would like to move directly to page 11, where we give the traditional overview about the development of revenues in our property and casualty business. Internal growth overall was +4%, and half of that stems from price changes and the other half from volume changes. We've seen good dynamism both when it comes to price and volume developments.
The tendency was especially positive in our corporate and industrial insurance, where we see a much better dynamism compared to what we saw a year ago, for example. So, all in all, we saw a positive and stable development in renewals, but especially when we look at AGCS, and there was definitely a hardening of the market that we saw. Then we've grown quite well in Germany and Italy, and the growth rate that Euler Hermes also sends out with 12.4% internally. And you will see later on, this is not just a good growth rate, but they also have a great, we also have a great combined ratio there. There's just one minus in Spain, especially in new business. We've become very selective in Spain. So, all in all, good dynamism with good volumes and positive price development, price movements.
So all in all, we can say that we had another good quarter with a growth rate which was above the standard growth rate of 3%. Now, page 13 shows the development of our operating profit in P&C. The operating profit declined by 5%. The reason for that being the lower investment results. Other than that, combined ratio and the runoff ratio or the combined ratio remained stable. We had a higher burden in the combined ratio from Nat Cats compared to the previous year, but the Nat Cats were in the framework of our expectations. And then we also had a lower runoff result. And these effects were then countered by a lower burden from weather-related losses and a slight improvement of the basic loss ratio and also by a decrease of the expense ratio.
So all in all, we've had a stable combined ratio, and I think especially the reduction of the expense ratio will help us to continuously improve our productivity. and that the basic loss rate has also remained stable is a sign of the quality of our technical expertise, of our underwriting expertise. Page 15 now shows, as always, the combined ratio of selected OEs and the operating profit of those OEs. In Germany, we've seen a slight decline of the combined ratio, which was due to the natural catastrophes. so with a combined ratio of 95.6%, in spite of the burden of 8 percentage points from Nat Cats, the results in Germany are really quite good, actually. In France, we've seen a normalization, a positive normalization, if you wish, compared to the level of 2018, where we were severely hit by major losses and natural catastrophes.
It's more a normalization from a low level. In Australia, we've seen a counter trend, a normalization coming down from extremely well results to still good results, but taken out especially effects that we had in the previous year. In Spain, the combined ratio for the ongoing business year has remained stable, and the increase compared to the last year stems from the development and run-off ratio. What's positive is the development in Latin America, where we've now come to 100% combined ratio. If you consider the interest rate situation, which is quite different from Germany, for example, 100% combined ratio in Latin America actually is a good combined ratio. If we look at the global units, the global lines, we can see a stable combined ratio across the board.
Of course, we like the combined ratio of 80% at Euler Hermes better than the 101% at AGCS, but overall, in the global lines, we've seen a stable, overall, a good combined ratio. But of course, we still have some homework to do at AGCS. Page 17, the investment result went down by around EUR 15 million. EUR 50 million, that is due to lower dividends from shares, and especially from our private equity portfolio, and that is due to the fact that we had extremely high dividends in the previous year. So it's more of a normalization come back to the normal level of dividend payouts. The current yield from that securities has remained stable, and I expect that in the future we will see a slight decline as the interest rates are so low.
But as you can see, we have a higher stability than you might expect in a situation like that. With this, I would like to move over to page 19 and to our life health business. Now, as I've already mentioned, or as I said before, we have three goals in life business. We want to have a new business margin of above 3%. Then we want a share of 80% or more of our preferred products, and we also want to see growth of the new business value of 5%. Now, looking at the current situation, at the situation in the second quarter, you can see that we reached all three of these goals. Growth dynamism was extremely positive in Germany and in the U.S., above all in Germany.
You can see a growth rate of close to 30% of Germany life or Allianz Leben, and 16% of Allianz Life in the U.S.. Counter to that, in Italy and France, we had declining revenues, which was due to a lower production of unit-linked insurances. The momentum has already improved in Italy compared to the first quarter of 2019. So all in all, that was a good performance in production with a growth rate of 8.5% overall. So good dynamism. And as you can see, the margin has also remained stable, increased a bit from 3.5%- 3.6%. Page 21 shows the operating profit in life health. We had a significant increase there by approximately EUR 140 million compared to the previous period. And the main reason for that was a change in the calculation of activated costs in the U.S..
If we take out this one-off effect, the operating profit would have remained on the level of the previous year, but that's still a good level if you consider that EUR 4.2 billion, that we have a forecast of EUR 4.2 billion for the year divided by four, so adjusted for the special effect, we would still be at EUR 1.075 billion, which is still slightly better than our forecast. Now, when it comes to the change of the capitalized acquisition costs there, we activate those costs and they will then be spread over the term of the contracts and then written off over this period, and now we've increased the duration in the models because the contracts will remain for longer in the books, and if we increase the duration of the contracts, that automatically means that the annual write-offs will be reduced.
And in addition to this, there's a catch-up effect for the higher impairments, which we have taken in the past. So all in all, we reduce impairments because we spread that over a longer duration. That is basically the special effect that happened this quarter and shows that we were slightly overcautious in our assumptions in the past. And now, adjusted for this effect, EUR 1.075 billion is a good result and slightly better than our forecast. Page 23 shows the value of new business and an overview of the selected units. And as you can see, the value of new business increased by 10.7%. And the main drivers for this increase were the increased production above all, that the margin remained more or less stable, as I said before, but production increased.
When it comes to operating result, you can see a significant growth rate in the U.S., but that was driven by this special, this one-off effect. Adjusted for this effect, the growth rate in the U.S. would have remained stable. You can also see a positive growth rate in Asia-Pacific due to the fact that the underlying performance improved, but you also need to take into account in this figure that we no longer have the burden from the legacy book in Taiwan. There are some countries where you see minuses in Spain or also in Germany's German health insurance, but this is a normalization of realized gains, and we had more realized gains in the past year. This year, we are more on a stable or lower level.
So all in all, a good performance in life health, quite a few plus signs, some minus signs. But all in all, the operating development in life health was good. Page 25 now, that shows the investment margin in life health. Life health, with 19 basis points, that was three basis points lower than in the past year, but unchanged compared to the level of the first quarter. And the decrease compared to the previous year was due to a higher amount of profit sharing. You can see that it went up from 35- 39 basis points. And what's also important, the balance of current yield and the technical or minimum guarantees remained stable. So, the difference between those two remained stable. And in the quarter, we had a higher amount of profit sharing, which explains why the investment margin went down a bit.
All in all, with the good operating performance and in line with this, the good development of new business in Life/Health in the second quarter, we reached a good result. Now we'll come to our next segment that also posted a positive result, and that was Asset Management. As you can see on page 27, the assets under management for third parties increased by 3%. Net inflows were positive, especially at PIMCO, with EUR 23 billion net inflows.
At AGI, on the other hand, we had a slight reduction of net inflows, but all in all, with EUR 20 billion, the performance in Asset Management was quite good, and the EUR 20 billion net inflows were even higher than the EUR 18 billion we had in the first quarter. So, all in all, close to EUR 40 billion net inflows in the first six months, that is quite a good figure, actually.
Market development was positive thanks to increasing prices, especially for fixed-term securities, and only the foreign exchange rates went against this with the weakening of the U.S. dollar, which is difficult to understand because you have the perception that the U.S. dollar is always getting strong and strong. But over the quarter, there was a slight reduction, a slight weakening. So, all in all, we have a good basis, a promising basis for the future, I would say. Now, page 29, you can see the revenues. The revenues overall decreased internally by 1.7%, but that's due to the development of performance fees, which went down from EUR 115 million- EUR 72 million. But what's more important is the increase in the base fees, and you can see the increase there, and that is the more important figure.
Performance fees are, by their nature, very volatile, whereas the basis fees are decisive for the sustainability of future profits. Margin was slightly negative with 38.5 basis points, but that was due to acquisition. And we had a slight change of the business mix in addition to this. AGI, on the other hand, here, the margin went up by 0.2 basis points, which again proves the quality of the business that AGI offers. Page 39, the development of operating profit adjusted for foreign exchange effects was more or less stable on the previous year's level, which was a high level, as we have to take into account. And we reached a stability. That is something you have to take into account, even though performance fees were lower than in the previous year. So that was a good performance as well.
The expense ratio went down 50 basis points, 15 basis points, and that was especially due to the development at AGI. So, all in all, with around EUR 700 million in profit, our asset management segment had a very good quarter, and we are highly satisfied with the results of our asset management segment. Page 33, another good development, our corporate segment. All in all, the operating loss improved by EUR 60 million. Half of that stemming from a better result at our internal IT service provider, Allianz Technology, and the other half of that stems from improved capital investments. So, all in all, significantly better results compared to the previous year, and the results are even better than we had planned originally. With this, I would like to come to page 35, where we show, as usual, the non-operating result.
In the non-operating result, you can see an improvement compared to the previous year of around EUR 90 million. As you can see, realized gains and losses net of impairments were lower than in the last year, but on the other hand, we also had a lower burden or no burden from the Taiwan transaction, which affected us last year. Last year, this had an effect of around EUR 220 million, which was reflected in under amortization of intangible assets. So, all in all, lower realized gains, but no special effects, no one-off burdens. And the restructuring charges in 2019 were also lower than in 2018, which leads to a better or improved non-operating result. And in addition to this, the effective tax rate went down 3 percentage points compared to the previous year.
There were some effects, some dissolution of tax reserves on the one-hand side and also attribution of late in taxes. And without this, the tax rate would have been at 25% and therefore at the lower end of our tax rate bandwidth. So, all in all, we had a good operating profit. We had an improved non-operating result and a better tax rate. So, all the parameters point into the right direction. And as I mentioned before, this led to a growth rate of the shareholders' net income of 13%. Page 37 is the summary of all of that. So, as you can see in property casualty, once again, we were able to improve our expense ratio in life health. We had great dynamism in the development of our new business value in asset management. We saw positive net flows.
So all in all, we had strong results for the group in the second quarter, but also in the first half of the year, and with all of this, we can say that we had a good first half of the year, which enables us to confirm that we're well on the way to reach our annual goals, and with this, I would like to thank our employees, as always, because these results are the result of the efforts of all our employees, and with this, I would like to get to your questions.
Thank you very much, ladies and gentlemen. In case you want to ask a question, please press asterisk or star and one on your keypad. Please make sure that you've unmuted the phone so that your signal can reach our devices.
Please take into consideration that while you ask your questions, your lines will need to be open and that you can only mute it once we move to the next question. So once again, just to remind you, please press star one to ask a question. We'll now wait a short moment to give all the participants the opportunity to signal their questions.
Our first question comes from Michael Fleming from Börsen-Zeitung. Please.
Yes, hello. This is Michael Fleming. Hello, Mr. Terzariol, Mr. Kloss. I've got three questions on the forecast and second on Allianz Direct and also on the run-off ratio in the P&C. So to the forecast, you confirmed, and you all know that obviously this sky may fall from the heaven may fall down, or there might be hurricanes or storms in winter under the precondition that NATCAT stays within the budget frame for the overall year.
Would you say that you have reached the overall level of your forecast, or would you see any special burdens in the other two quarters? So on Allianz Direct, where is the project going at the moment? When is it going to start? And there was a loss in the second quarter. What is your expectation as the CFO regarding the profitability of the project in the midterm? The runoff ratio, you said in Spain, it was even negative, and there are people who say it's going to be structurally lower, the runoff ratio. Would you agree to that?
Thank you very much for your question. We start with the forecast. So let's assume everything stays normal and we have normal occurrence of NATCAT, and assuming that there will be no greater distortions on the capital markets.
So, this would be the normal expectation that we could go to the upper end, but we don't want to make the assumptions yet, and I'm rather a bit more conservative. But with an operating profit of EUR 6.1 billion and an outlook on EUR 11.5 billion for the entire year, if the situation stays stable, it can be expected that we're moving into the direction, as you said it. But we're going to wait and see.
As I remember a few years ago, everything was super in August, and then all of a sudden in October, the situation looked different with the NATCAT that came in America. But like I said, since everything stays normal, we would expect that we go beyond the EUR 11.5 billion in direct. Yes, combined ratio was more than 100%, but that was no surprise because we are in the setup phase. That means the following.
First of all, we're going to have a higher cost ratio. And also, when you are in the setup phase, you always have to consider that the combined ratio of new customers and the claims ratio of new customers is mostly higher than with a booked account, which has a certain history. What are the expectations? Well, first of all, we thought of what's happening in the next few months. In November, we're going to have the launch in Germany and Holland. And then after 2020, we will also do the launch in Italy and Spain. So, we're actually where we want to be, more or less. And by the end of the year, under the brand Allianz Direct, we're going to start operations.
But when it comes to the expectations of profitability of Allianz Direct, in the first three years, I'd say in the first three years, we would expect the combined ratio to be at 100 or higher than 100. But I would say after four to five years, we should reach a combined ratio that is below 100. But what is important? First of all, we can bear that, and that is in our plan. We can cope with that. But what we're trying to do is to have a new business model, and it goes beyond. So, we have a combined ratio of 199. So, we want to build up a company where we, in the long or midterm, would work with completely different KPIs and customer satisfaction and a different cost ratio. And so, we definitely want to achieve something in the midterm that we have not achieved yet.
And the combined ratio for the first year is not that relevant in order to assess the success of this initiative. And you also had one question on the runoff ratio, and the topic was whether that is a structural topic. To a certain extent, yes. We also said that we do believe that our runoff ratio over the years will be rather at 3%. And that was, at an average in the past, 4%. It was slightly less than 4% in the past. And we believe now that it's going to stabilize at 3%. And the reason is because in the past, we had assumptions on the inflation rate that did not materialize, and that also led to a higher runoff ratio. But clearly, these assumptions on the inflation rate are embedded in the claims reserve.
This is structural, but it is no surprise either because we planned to have a lower run-off ratio in the future.
Just one more question shortly. What is the cost ratio that you would get that you expect in direct once everything has become smooth and up and running?
Our target on the capital market day was 10%, and when we achieve 10% or 11%, it doesn't make a big difference. But basically, we would definitely want to move towards 10%. So I'd say something between 10% and 12% would be a good cost ratio. But of course, we are willing to take surprises, and 10% or less could also happen.
Great. Thanks.
The next question, please. Our next question comes from Olaf Storbeck, Financial Times.
Yes, good morning. Thank you for taking me. Congratulations to the results.
I'm asking a critical question because you always look for that little detail. When you look at the run-off effect at health, and if you just consider that, do I write assuming am I writing and assuming that the results are slightly below the analysts' assumptions or estimates?
Okay. In life insurance, no. If you adjust by the special effects, then we would have an operating profit of EUR 1.75 billion. EUR 1 billion and EUR 75 million. So, our forecast is EUR 1.4 billion. So, it actually would be better EUR 25 million. So, this is a rounding error. So adjusted by the special effect, we are at on the level that I would not expect because I also saw that the analysts did not expect it better than our forecast divided by four. So, there should be no surprise.
Actually, if there was a surprise, it should be a rather positive rather than a negative surprise.
May I ask another question? So with your share purchase repurchase program, you're almost through. And anything planned for the second half year, or do you want to get some buffer for acquisitions? Can you say something on that?
Yes. The share buyback program is actually through since a few days. We have completed this program a few days ago, and forward-looking, I mean, we will simply keep our options open and look at that, and then we're going to see whether we might have potential inorganic options. If we don't have any good options, then we will, like we said already in the past, we are going towards buybacks, but it is too early to take a decision at this point.
So we're going to analyze the situation in the second half of the year. Buybacks will become probably considered early next year, and the answer will depend on what we could do potentially within the next six months.
Thank you very much.
Next question, please. Now a question from Herbert Fromme, the Süddeutsche Zeitung. Mr. Fromme, Mr. Fromme, your line is open.
Can you hear me?
Yes, yes.
Fine. My first question would be, so if the tax rate comes at the end of the year, does it come at the due time in October and in the change season or the end of the year? That's the calendar year. Second question on industrial insurance. Once the markets become tougher, an AGCS would make 4.5% more in revenues just by price increases. Because why is the technical result higher? Because there were not many major claims.
I did not understand the first question.
That was on direct.
Can you repeat the direct? We couldn't acoustically the question.
So you said that the direct insurer by the end, it's going to come on the market by the end of the year in Germany and in Holland. End of the year in the calendar or end of the year in the fiscal year or in October? So that means it would be due time for the change season in German motor insurance.
Yeah, yeah. We're going to be ready for the season. No, no. Everything is at plan at Allianz Direct with regard to that.
That means they will come in October.
Yes. I said November. Could also be in October.
So it is as expected. Definitely.
Definitely on the right point of time for the new season.
Thank you very much.
Then you ask on the industrial insurance.
Yes.
The topic is there's definitely a hardening in the industrial insurance. But obviously, the effects of this hardening will only be seen in 2020 because, first of all, the contributions have to be earned first. There's always a delay, you could say. So that's why the results in 2020 should be relevant. And 2019 is a bit too early, theoretically, that there should be a slight improvement in the second half of the year. But that would be minimal. And the topic is also you always have to evaluate the initial situation of what you have, one of the effects from the improvement in the prices. But also, you have to evaluate how good or how weak the initial situation is. But in 2020, I would expect that we get better results than that 101% combined ratio.
But structurally, there's nothing. But you thought about the merger with Euler Hermes, then there was no longer any talk. So that's finished. There's nothing planned. Yes. The idea of merger with Euler Hermes, that is no longer relevant. Although we do want to lift we're going to lift capital synergies, but we're going to focus rather on capital synergies. Otherwise, we're not going to put these two companies together operationally. There's a lot happening in HSCs. Obviously, it's not only about price increases. There's also strong re-underwriting activities that we're taking care of at the moment. There's a lot because that's happening in HSCs. But like you said, but there's no merger planned with Euler Hermes. That's definitely not planned.
Ladies and gentlemen, once again, to remind you, please press star one on your phone to ask a question. Our next question is from Alexander Hübner of Reuters.
Good morning, Mr. Terzariol.
Just one question that's remained for me regarding Allianz Global Investors. Now, time and again, they are being mentioned as a possible candidate for consolidation in the asset management industry. Maybe you could say a few words about that. Is that an issue for you, a topic, something that's still going on, or is it something we say we don't need this at all?
Okay. Let me say the following: potentially, that you might potentially see a consolidation in asset management is likely. I mean, we can see that it's not always easy for the existing passive for the existing asset managers. So economies of scale are important. The margins for passive asset managers are low, and so consolidation would be possible. And if there was a wave of consolidations, then Allianz Global Investors clearly would be rather a consolidator, if you wish.
But you need to have the right opportunities for this because in asset management, economies of scale are important. But what's just as important, or at least as important, is culture, especially in the passive area. So potentially, there could be consolidation. Consolidation potentially is a good thing. And we are also a company that could consolidate. But it's also important to take other parameters into account. And I can only say if we had any specific plans, we could talk about those. And right now, there is nothing that we have planned in this direction.
Okay. Thank you.
Once again, to remind you, please press star one on your phone to ask a question. Steffen Weyer. Steffen Weyer of dpa-AFX has our next question.
Good morning, Mr. Terzariol. Not too many questions for me left as well. Just one regarding Boeing.
You stated that you will reinsure it. If everything went wrong, the cap would be at EUR 150 million, and Allianz wouldn't have to pay more than that. That was what I've heard so far. But Boeing has now also booked billions in negative effects. What is insured of that or not? That's the question. Could you give us an update on the view of Allianz on the Boeing case and on the potential loss there? And also, how do you see this in the market? How much of that is insured even?
For Boeing, our exposure is EUR 150 million, as we stated before. And to be precise, if we say EUR 150 million, that is not the real maximum exposure. It could be a little more. But we think EUR 150 million is more or less the worst case from our point of view.
So, we had talked about the case that was in May. And at the time, we already had a good view on what's going on at Boeing in the case. So, the grounding continuing topic, we've reached the absolute limit, so that can't affect us anymore. And that was already included in this estimate of EUR 150 million. We had already included this in the worst-case scenario with the full extent. So, all in all, the risk is quite manageable from our point of view. And we've continued increased reserves a bit in the second quarter, not by a large amount, but by a bit. And the remaining exposure we could have from Boeing would be quite overseeable for Allianz.
Okay. Could you tell me how much you increased reserves?
I think it was EUR 50 million last quarter. Yeah, we went up around EUR 20 million this quarter.
Okay.
Thank you very much.
We now have a follow-up question by Olaf Storbeck of Financial Times.
Short question regarding the decline of the investment result in P&C. Would it be correct to say that this was mainly driven by the interest rate development in the second quarter, or what was behind that?
You mean in P&C?
Yeah.
Okay. P&C, that didn't have to do with the interest rate development. And if you look at the current yield, you can see that this even remained stable. The decrease of our capital investment result in the second quarter was more due to the fact that last year, we received higher dividends from the private equity area. Those were extremely high. That was especially vast last year. And this year, dividends have returned to the normal level.
So no decline due to the results from fixed interest, from the fixed interest rate side in this quarter. Of course, in the future, there will be more pressure. That is certainly true. But for the second quarter 2019, that was not a topic.
Okay. Thank you.
Ladies and gentlemen, once more to remind you, please press star one to ask a question. We have another question by Herbert Fromme of Süddeutsche Zeitung.
One more question. There was speculation about the Child Victims Act, that the decision that this might lead to high claims for insurers. Have you created reserves there? Others have created reserves there?
Well, we don't think we will be hit by the New York topic that much. But you always have to see what the effect might be on other countries. The effect could be that we would then be affected by follow-up consequences from other countries.
But so far, we haven't been hit by the decision from New York. But of course, that's a situation we have to monitor and look what other countries might potentially do.
And did you create any higher reserves for this in the second quarter?
No. No, no, no. That wasn't necessary. And all of that is quite in the haze, unclear. So there was no necessity for us to adapt any reserves to this court case in New York. We will monitor the situation. And we've come to the conclusion that we need to adapt anything. We will do so. But I mean, what happened there in New York right now has not led to any increase in reserves at the moment.
Thank you.
Another question by Michael Fleming of Börsen-Zeitung.
Yeah. Okay. Then I use the opportunity to do three follow-up questions. P&C in Germany first.
If I look at these 7.7% burden from Nat Cats and normalize this to 2%, then I would come up with a combined ratio of 90%. Is this the result you would expect over the medium term, or will that worsen over time? And then what products drive the combined ratio on the other hand? And the second question then regarding Brexit. Now, if a no-deal Brexit was to come, do you expect any special burdens on this? And then the third question, the capitalized acquisition costs where the recognition period has changed in the U.S., do you expect this in other countries as well?
Okay. P&C in Germany, well, the 95.6%. And you don't have to adjust this for the whole 7% because there are always Nat Cats. Well, I calculated it with 2%, then 95.6% - 2% - 7.7% + 2%. And then I come up at 90%. Okay.
Let's say usually we should be closer to 5% in NatCat. Then you would be at 92.6%, which would be absolutely what we see as our goal, so if you adjust the figures in Germany, I think you have to take a 5% burden from NatCat, and then you will come to the combined ratio, which we are aiming at in Germany, and all in all, we can just say we've been very satisfied with the development of P&C in Germany. Then Brexit, well, what happens or not is difficult to foresee, but right now, I assume that we go towards Brexit's scenario that might not be too nice, which for us means that you might have a little more volatility in the markets, and from my point of view, there is enough volatility in the market as it is right now.
If you look at the developments between Germany and the U.S., then also the slowdown in production in manufacturing in Germany creates certain volatility. So Brexit would be an extra element of volatility. But you could always consider whether this will create more instability in the markets. But we are prepared for the fact that the second half of the year might be a little more difficult when it comes to the developments on the financial markets. So all in all, I assume it will be a manageable effect taken into consideration that we will have difficult capital markets anyway. And what was your third question?
Yeah. In the U.S., you had this special effect with the change to capitalized acquisition costs. And we've extended the run-off period. Do you have that under consideration for other products as well or for other countries?
No, that was just for the US where the term of 20 years was a little too short. And now we see that the term of the contract is much longer. So that was specifically something for the US. And it's not a program that we've triggered by this going through all the projects and products in any way now. That hasn't been planned.
Okay. Thank you.
We'll now come to a question of Thomas Bergmann of Börsen-Zeitung.
Good morning, Mr. Terzariol. I'm of the magazine Der Aktionär. Could you give us a little outlook on the dividend? Will it be a stable tendency, an upward tendency, or whatever? A few words about this.
Well, yeah, we have to rule that 50% of the annual surplus will be paid out as a dividend.
If we're talking about an increase of 5% in share of net income, then we should have a little more than 5% in dividend increase as we had the share buybacks. If results remain flat, then dividends will be slightly higher because of the buyback effect. All in all, I can say that we will probably presumably have a shareholder's net income go beyond the level of 2018. If you then also take into account the buybacks that we've taken, you should expect that the dividend for 2019 will be higher than the dividend for 2018.
Okay. Thank you.
Ladies and gentlemen, we now come to a question from the English conference. We'll now take our next question from Catrin Shi of Insurance Insider. Please go ahead.
Hello. Two questions, if I may, on AGCS.
The first is you did say you've got some more homework to do on rectifying the underwriting result at AGCS. I just wondered how far you were going to take this and if you could give any more detail. Swiss Re earlier this week announced it would cut its gross premium at its corporate solutions unit by 20%. I wondered if you'd do anything quite as radical as that. And my second question would be, what is your long-term view of big-ticket corporate risk at Allianz? Thank you.
Yeah. Let me start with the second question, which is our view about the industrial business. I would tell you that there is more cycle in the industrial business compared to what we see in general in retail, or at least in continental Europe. So definitely, it's a business where we need to be ready that there is more of a cycle.
Also, there is more volatility because when you have big tickets, you might have also larger losses. So this is something that clearly we need to appreciate. And I would also say that over the cycle, it tends to be more competitive compared to retail business in continental Europe, which means that to run successfully an industrial business, you need to be top class, right? There are markets where you can be an average player, and you can make a good return. And there are markets where, in order to make good returns, you need to be top class. So what we need to do is to make sure we have a top-class organization from a cost point of view, from a technical excellence point of view.
This is the only way we can ensure that over the cycle, we're going to be profitable or at least maintain the cost of capital. On what we are doing in AGCS right now, clearly, we are taking rate increases as a lot of competitors are doing. But we're also looking at what kind of re-underwriting we need to do, in what kind of businesses we want to be present, what kind of businesses we are thinking they are structurally more challenging. So I wouldn't say we are going to go all the way like this competitor has been doing. But I would say that there could be something in between doing nothing and just relying on rate increases and doing what they've been doing. So it's not just about price increases. There is also portfolio review that we are undertaking right now.
So could we be seeing some shrinkage in the AGCS business?
Potentially. As we go through the review, we might even see some shrinkage.
Okay. Thank you very much.
I think we can take the last question.
I'll take our next question from Ben Dyson of S&P Global Market Intelligence. Please go ahead.
Hi there. Yeah. There were some reports that AGCS was going to securitize cyber risk. And so I was just wondering if you could say a little bit more about your plans there and how you plan to overcome the problems with correlation there.
Yeah. I read the article too. I would say this is not priority number one or something that we want to be scaled. So from that point of view, I would say we are kind of cautious regarding cyber risk and the capacity we want to allocate to that kind of business.
So from that point of view, yes, we are testing things, and we might be testing also securitization. But don't think that this would be something to be scaled.
Okay. Thanks.
Welcome.
Okay.
Then if there are no other questions.
Right now, there are no further questions. And with this, I would like to turn back to Giulio Terzariol for his closing remarks.
Thank you for taking the time to be on the call and for your participation. And we here in Munich will now go on vacation. So some of you might already be on summer holidays even. And therefore, I wish all of you a good August and good time with your families if you're on vacation. And I'm certain that we'll meet again in November for the presentation of the figures of the fourth quarter. Enjoy the rest of the day.
Thank you very much for the participation and the questions. Ladies and gentlemen, this closes today's conference. Thank you very much for your participation and enjoy the rest of the day.