Allianz SE

Oliver Schmidt - Head, IR Dieter Wemmer - CFO

James Shuck - UBS Tariq Arif - Credit Suisse Paul De'Ath - RBC Thomas Seidl - Bernstein Vinit Malhotra - Mediobanca William Hawkins - KBW Michael Huttner - JP Morgan Sami Taipalus - Berenberg Bank Jon Hocking - Morgan Stanley Andrew Ritchie - Autonomous Nick Holmes - Societe Generale Nicola Delaparma - BNP Paribas

Thank you, Dani [ph]. Good afternoon from my side as well.

And welcome to our conference call about the results of the third quarter 2016. There is nothing specific to be added from my side today, so I keep it brief and hand over directly to Dieter.

Yes. Thank you very much, Oliver.

And also good afternoon everybody on the call or good morning because of one hotel in [ph] from the States. It’s a great pleasure for me to present to you our Q3 results.

When we start as usual using the presentation on Page 3 operating profit of €2.9 billion really supported by all areas and in particular because of Life and Health segment and I’ll then dive into the individual segment later on in the presentation. Shareholders net income close to €1.9 billion 36% up compared to a year ago, strong evidence of operating performance and also good financial market results.

Also the revenue growth of 0.5% is consolidated into internal growth that means adjusted for currency and other effect. 1.7% is a probably good and strong results on organic gross basis, here coming from P&C as well as our Life segment.

But let me first go a little bit deeper into the balance sheet increase in shareholders’ equity of more than €2 billion driven by unrealized gains losses in fixed income and equity retained earnings, but also consuming actually an increase in our pension liability because the valuation rate for the pension liabilities is down to 1.3% which is a clear evidence on how low interest rate in Europe got. And then this low yield environment, we’re defending our Solvency II ratio, was 186%, very strongly.

And I think that solvency ratio is really doing well with what you can see then on Page 7, where we have detailed in the waterfall the own fund development and also the development of the risk for required solvency capital. Own funds is in the end pretty flat in development, the earnings consumed by a little bit of market impact and some other changes and the dividend capital management number which is a positive despite that we of course have a accrued another €0.9 billion for the 50% payout ratio at year-end, as positively influenced by the hybrid €1.3 billion be raised in August.

The capital requirement on the risk side is mainly towards by market impact, well swap rates were down another 30%, but also equities up mean more risk consumption of the equities by market value. Credit spreads on property bonds was 20 basis point down, that created actually a positive impact and not a negative that means less capital consumption, but the change by EIOPA of the volatility adjuster formula and application has overall reduced our solvency ratio by 2% that is mainly in the SCR because we’re applying the dynamic VA.

Management actually better hedging our investment result, our interest rates sensitivity has reduced the risk by €0.3 billion and that is also reason what I had forgotten to mention on the previous page that interest rate sensitivity came little bit down further in the direction of our target. Overall still a very good number and before the question is being asked, Korea is still fully consolidated and included in the number.

Now let’s move to P&C segment, as I said in the beginning strong underlying growth 3% half price half of volume and you are always concerned about that some underwriting cycle is getting weaker. Actually when I look at the list at countries you see here on this Page 9, only Italy and the large corporate business show a negative rate development, all other are in the positive which is, I think a very good evidence that broadly diversified portfolio at least on a good track also deliver our next underwriting targets.

And that leads me already to the operating profit of the P&C segment €1.4 billion operating profit based on a good previous year underwriting results still a little bit improvement with 93.5% combined ratio. A little bit better expense ratio but mainly a better loss ratio driven by a low net cap.

Pretty normal large man-made losses so, so it’s actually falling in our long-term average and weather-related is actually I would say medium level, not low and not particularly high. The run-off result not the normalized.

So run-off result is 3% a bit below our long-term average was 3.5% in the quarter, but still the nine-month figure is a little bit above our long-term average. So overall, traditional loss ratio very much comparable 12-month ago and I think on a good track for our future development.

Let then move to the breakdown into little countries. Well not surprisingly the combined ratio of individual countries in particular large one are pretty good otherwise you’re not getting to 93.5% average.

Latin America it’s the last place about 100, although we’re seeing also here a movement in the right direction, profitability. Actually in Latin America we would have shown a positive operating profit but we had the one-off booking on an old Life book in run-off we have from more than 10 years ago in Brazil still a Life book in run-offs, this is protection business where we have increased reserves otherwise the operating profit would have been €5 million, €6 million positive, so that means for the quarter to come also Latin America took return to a positive.

I think it is overall a very good development in the number. So investment income in P&C, well the running interest income falling parallel to the yield environment we are living in no surprise.

But what we show under net harvesting and other was a year ago a negative number driven by FX losses and other derivative losses, so this year a small positive. So that is actually the swing sector which allows us to have a better total investment income than a year ago.

So it was also this aspect. It is 10 plus just above normal quarter, but nothing negative.

Turning into the Life business. Our execution of the new business strategy continues to play out very well, when you look at contribution of the various business classes, we move in the right direction and are able to deliver overall strong new business margin was 2.8%, but not only that we move and mix in the right direction when you look at the little table on the right-hand side.

The PVNBP is up by 8% that means also sales is growing with the right product mix. So I think our life story continues to be a real success story and the real success story is also falling down to bottom line 1,129 is a very strong operating profit for the quarter.

We have higher investment margin in the quarter and then there is a positive impact from the basis risk on the old VA block in our US Life business, but good growth in our US Life business. So that the drivers of our operating profit increase.

This 1,129 a reasonable number to uses as basis for future quarters, but we will normalize the number more at €950 million that means investment margin which in the number here included is 98 basis point, we would normalize more to 90 and then we would correct for the basis risk and then some other small figures to overall, it would be 950. Plus in the future years whatever you in growth on the size of liabilities that would of course then dynamically develop the figure into the future.

So that is the Life result and we’ll go to Page 21. Value of new business €318 million very much on last year’s level because last year we have even a slightly better new business margin but that was substantially higher interest rate level.

So in light of today’s interest rate level I think we’re defending the value of new business very strongly and you can see that actually Germany is the main driver of it, the US is fairly low in the third quarter because the fix index annuity business is very sensitive to the 10-year treasury rate, that means when we look at the screens today we are called to now back to the good new business margin in the 3% category because US 10-year is back to 2.3% where in the summer it’s a low point was at 1.4%, 1.3% so that makes a huge difference. On top we had taken end of the quarter measurements to improve the profitability so US would have been even with unchanged interest rates also show better new business margin in the last quarter.

So overall, a broad contribution for many countries and I think overall doing well. Page 23 has detailed presentation of the investment margin I think I gave already, the more relevant information.

So annualized 98 margin end of the quarter and that means 25 basis points for the quarter specifically and normalized for the quarter 3 basis points down. So that leave to the asset management, which is I think completing the positive story of the quarter.

PIMCO is reporting for the quarter net inflows of €4.7 billion. The October also ended with positive number, so I feel that our prediction we did already almost a year ago, we’re actually in last year in the third quarter presentation I said that we’re expecting small positive flows for the second half of 2016 and I think that statement is at the moment being on track.

I can’t tell you what will happen at year end, there is now a big shift in the US also and how the market use future developments, so therefore it would be a bit too naïve to say that we can exactly say what is happening, but I think PIMCO is on a good track to have overcome the problems from three years ago and are back as a well-recognized great platform and asset manager. We have also placed over the last month two private funds, where we have quite some billions of committed dollars to invest, but they will only show up as inflows then the money is being called from the investors.

AUM in total up, besides inflows good help from the market as [indiscernible] little bit spoiled the story and I should not forget to mention that also a Allianz Global Investors had another very good quarter with plus €1.5 billion, which then translates also into a good revenue development overall. Allianz Global Investors growing revenues baseline as well as performance fees and PIMCO still suffering from the outflows of the last 12 months, but I think we see pretty stable fee margin.

Allianz Global Investors I should say that dilution of the fee margin had of course something to do with the Rogge acquisition and then all the changes I explained already in previous quarters on mix and business. So when we come to the operating profits, a small positive compared to last year which is a very good development compared to the previous presentations, I did.

Cost income ratio sharp improvement on both sides PIMCO is 57, I think that is well good number and Allianz Global Investors going to 67.3 and delivering €150 million operating profit is a great step forward to really becoming more and more important in our asset management segment. Now corporate segment actually nothing special normal I would say, noise in the numbers nothing really to mention so that we can just have a short look at the net income, €2.9 billion operating profit.

Non-operating items pretty small driven by €221 million realized gains, small impairment so that we end up as 2.8 pre-tax income and 30% taxes which is, the tax rate this quarter without any special elements. It is just important with the normal tax rate applied, so that we end net with €1.855 billion for the shareholders which is, I think a very good number and makes me confident that we can deliver for the year and outlook of €10.5 billion operating profit was probably also a good number for net income when I look at the 2015 net income we delivered for the full year than our nine months figure at the moment is 78% of last year’s, full year profit so that means we have good chances for year end to come out as a nice that income figure.

And here I would stop and open for questions because I think that is probably a better use of our time.

I had three questions, please. Firstly from the change in the VA reference portfolio, you said two in the presentation, it is usually one on the actual bridge.

It is a much lower kind of impact than one might have expected. If you could just explain a little bit about the change to the reference portfolio, why it had such a limited impact particularly to the dynamic elements of the VA.

And kind of linked to that, if I compare the sensitivities, because you are the first to disclose the updated sensitivities on the new reference portfolio and there has been some big changes going on in terms of the different sensitivities. So in particular your sensitivities of government bonds has more than doubled and you are now showing zero sensitivity to corporate bonds.

If you could just explain that, that bridge to me a little bit. And kind of in the same vein, I mean what does it mean for how you actually manage your Solvency II ratio going forward if kind of overnight we have had such a big change in the perceived volatility?

My second question is a shorter one just around potential modeling changes to the Solvency II ratio itself. I think in - earlier this year you talked about things you could do to refine the treatment of negative rates and that might have a positive impact.

Could you just help quantify your visibility on that going into next year and any other things you might be contemplating? And then finally, around the combined ratio in the third quarter, so 93.5% headline over three years is a low level of net caps in the period, there is a level of PYT [ph] that is broadly in line with where you would want it to be.

And then you have large losses. Could you just give an indication of what the normalized underlying level is and how that compares with the below 94% that you are targeting for 2018, please?

Okay, James. So thank you for your question.

Let’s first start with the VA reference portfolio. In the update of the reference portfolio is one change which you can say is normal procedure and then there is one change where we are at the moment still struggling a bit, but we have applied it.

So the first change is, yes you’ve analyzed how people are invested and shifted to reference portfolio more to corporate bonds, so less government bonds, more corporate bonds. Okay, that’s fine but also the edit in the reference portfolio at least that it’s how you read it, the assets of the unit linked business and concluded that this is not interest rate sensitive, which is correct but the consequence for the VA is, that reduced implicitly the application ratio by, well if you calculate it through the application ratio for from 65% fell to 46%, that is indirect impact of enlarging the reference portfolio with unit linked business where I’m at the moment too struggling why you would at all consider unit linked.

And you’re the right the new sensitivities and the big shift came to all of us as a surprise, it’s a very hard what you can, you can certainly not adjust your investment portfolio after you’ve read the paper, however it is in the end confirming our long-term strategy to go more into corporate credits and reduced government bonds. The sensitivities you can reach in a way, that we are still too long in govies and too short in corporate bonds and that we need further to balance, that is what the sensitivity say and whether this, the volatility adjuster reference portfolio, whether this unit linked business stays in it or not, I don’t know yet but actually I hope that we can have still a discussion there with all the regulators and more understand what is the idea behind it.

Model changes, there will be nothing happening end of the year. I would expect that the model changes is more coming in Q1, 2017 and maybe what I should have mentioned on the volatility adjuster it overall dropped 8 basis point of which 6 was roughly to market changes in the credit spreads and 2.5 basis point is the change coming from the new formula of Europe.

So when this helps you, so in general model changes before Q1 nothing and I would expect that on the all model changes, we have applied for there might be a small positive overall but not, that means a few points and nothing too dramatic. The combined ratio 93.5% what is our normalized combined ratio, well I thought I mentioned that large notice are included in Q3 roughly at normal level with some 4%.

When you normalize it completely where would you put it, I think to get to our 94% target in 2018, we have still to go for another well around 50 basis points maybe plus minus. So but I think we are on a good development path that we get to our 94% target.

Just on the point, about how you managed the bonds sensitivity ratio, I mean the sensitivities change so much, you have a target level for your capital. I mean what does that mean for actually how you address, concerning that volatility.

Yes, we will further see how we can shorten certainly spread sensitivities that is what we have to look at. And obviously what is showing up more and more this all the focus on Solvency II on credit spread development it’s probably not the right approach for long-term investors.

Yes. Okay, thanks a lot Dieter.

Three questions, also actually. First one if you take out the performance fee from asset management then your cost income ratio still down, there’s a real good nominal reduction.

But Q3 tends to be obviously very much low than Q4, so just wanted to get your sense of the part of cost now and what you’re targeting and how quickly you get there. Second question is on the performance fee, you gave some kind of guidance about private funds and private equity related business how performance fee is coming.

I was wondering if you could give us another sort of bit of outlook on what you think is special, it’s going to come in the next couple years. And lastly, could you comment your Italian pricing where it was weak in P&C, just what you’re seeing into the pricing in motor and non-motor.

Thank you.

Okay, so let’s start with first Italian pricing, it’s still in motor from our perspective slightly softening, but the speed of softening is going down and it might go a little bit better. In the non-motor business we don’t see any negative price trends, I think it is a little bit up but nothing, very, very special also in commercial I think we’re holding up.

It is more, the motor liability business which is still under pressure and I think that is putting much in line with also the, all the result presentation of the two large peers which also came out yesterday and today, so that means when you’re excess three up, you have some 80% of the motor market in Italy. I think we’re holding up in profitability still quite well and I assume that we will see sooner or later the turning point also for Italian rates and then people need to turn it back to higher rates.

Taking out the performance fees we have still improvement of the cost income ratio year-over-year actually it’s still some 3.8% if we’re not mistaken, so that is a good number and I cannot give you a performance fee outlook for 2017. But you should really consider that it is from the closed funds, but it’s also from very normal institutional mandates and PIMCO has actually also, a sizable hedge fund business which we should not forget which also lives on performance fees.

What can I say about 2017? Well, November 1 that means a week, a good week ago.

Manny Roman joined as CEO. He is at the moment well I would say putting his office in place and really trying to understand the PIMCO’s business in all details and I think it is fair when we give him so days or months actually to learn how the business works and then comes with the proposal, where do we have the best opportunity from our current strong position to get even stronger.

Okay, thank you very much.

Did I cover everything, Tariq?

Yes, you did. Thank you so much.

Couple of questions if I can and firstly, just looking at the Department of Labor changes, a couple of points here firstly. Has anything changed on your view in terms of the impact on the Life business changes?

And also do you see any impact on PIMCO from the upcoming changes? Or indeed as I read earlier today, do you think that the new President might well cancel them and therefore it has all been a somewhat fruitless exercise?

And that’s kind of question one. And then the second point just looking at the Life business is - you are guiding again to the, I guess ongoing normalized level of investment margin, that is 90 basis points for the year.

And I mean going forward, given that the shift to new types of business has been so strong and the investment margin on that business is broadly double what it is on the traditional savings business, do you see the opportunity for that to grow over time or do you think the underlying lower investment return environment is going to counteract that and the 90 basis points is kind of an ongoing target? Thanks

Thank you, Paul. It’s actually good that you asked the question about investment margin.

Obviously I did not say precisely enough. I’m not guiding to an average new business investment margin of 90 basis point for the full year.

I’m guiding to the 90 basis point as expected number for a quarter, but what we have in the bank, we have in the bank. That is quite a different statement.

So it is my expectation for new quarter without knowing anything would be that we make the 90 basis points and then we see end of the quarter whether the volatility allows us to be a little bit higher or little bit lower, that is how I wanted it to be interpreted. So DOL yes that is a mystery and the mystery is certainly not getting easier this recent development in the US.

First, in Asset Management and Life we’re fully working on being prepared when DOL who starts. However we’re still all a little bit struggling with the interpretation and when you look at the large broker-dealer networks in the states.

Well-known brand names they have taken opposite directions actually how they deal with the rules that shows you that there is still a lot of uncertainty around how to go for it. So that is how is, that advice working.

Do you have to do, can you only do fee business and your first year commissions are being seen as not good enough advice so there are different interpretations at the moment and there is a lot of uncertainty around it, where we assume it would be clarified over the next month. Now with Republicans in control and all three key positions, so to speak Congress Senate and President, yes there is now I think and - the possibility that things are changing and when I look at the stock markets for last two days, the market seems to know more about it, but as an industry representatives I would say too early to say and let’s wait what is going to happen.

Great, thanks.

First question is on Life, quite impressed you grew these share of Life business is above came from 34% to 75%, I look at Western Europe it’s particularly interesting you have flat operating income but the ROE for the segment drives from 7.9% to 10.6% quarter-on-quarter, so I’m assuming you have also done some capital action to boost the ROE and I just wonder you give some color here what exactly you have done to get this strong ROE improvement investment Europe and then France in particular where ROE doubled. Second question, could you give us an update on the Asian Life’s disposals it has been a bit quiet on that one, we’ve heard PSF’s [ph] Korean Life businesses so where are we here on the process, can we still expect the closing Q4.

And finally, I think €2.5 billion is what you have in the M&A budget, you basically said this morning that cost is a biggest hurdle to M&A. for you price level doesn’t change for the rest of the year.

What keeps you basically from doing announcing the buyback that you said, indirect consequence of not doing M&A.?

Well, thank you for the question, Thomas. Yes I think our - let’s start with the Life ROE improvements, we have a nice increase in France in the operating profit and net income and also the ROE is stronger.

We are working with every country as I explained last time to get ready for the sustainable 10% ROE target by 2018, some will be a bit earlier, some will be I think that only in 2018. So therefore it should not surprise you that the numbers are getting better because we are really continuously working with all the market on this question.

So there is a mix chart and I can only repeat what I said last time, there is certainly capital actions been taken but also in improvement of the underlying operating results and both together should stand for the whole Western European portfolio bring us in the right direction. Korea closing?

Yes.

Fourth quarter it’s our anticipation and it’s besides formalities that needs regulators saying yes and giving a green light. There’s nothing else open, I think both parties have done everything what the regulator asked for and have delivered everything and all documents are clean and in good shape, so we can now only wait for the official approval.

And yes, with M&A budget, the latest day is when we announce our year end results than you will know when and how we have dealt this M&A budget, but I can only tell you we are completely sticking to our promise that means that is M&A or share buyback, not using for anything else.

If you don’t here by the end about M&A, we basically can conclude the buyback is coming.

That would be one version, yes.

And then on the ROE, sorry one follow-up question here. With this lower equity consumption between France why do we not see more benefits on these economic capital side, I would have expected that if you get France more capital efficient, you get some impact on Group capital but it’s not visible here.

I think for this we need to change even more that is also in the doing and making that it’s not being completed in 2016 that will happen more in 2017 and 2018, but it is a very good question and good observation.

Okay that means the capital impact is yet to come.

Further on, yes.

All right, thank you very much Dieter.

Just one question on PIMCO, please, Dieter. So is it a fair assumption that the institutional mandates are now sort of under controlled and it’s possible that we assume that the pressure on that side of the outflows has now abated and is expected to remain like this?

So just some more color please would help there. And second, just one very quick clarification sort of.

Thanks for clarifying again on the VA change by EIOPA. Is it a fair understanding then that EIOPA is now able to direct the industry’s asset allocation because it should have been the other way around?

But it seems that with you moving and EIOPA controlling so much through its VA reference portfolio, is it a fair understanding that they are now controlling where assets go? Or is it too much of a statement here?

Just want your thoughts, thanks.

Okay, good afternoon Vinit and let’s start with EIOPA well we ended as a mutual process because the reference portfolio they have used is really from the market data they collected in Europe so that’s more since that in the market data that our portfolio had obviously still a bit more government bonds than the average, which actually still surprised me a bit, but I think I have to accept it when this is an EIOPA statistic. On PIMCO yes, we have fairly stable inflows on all the funds and strategies these people like and that has really is on a good level quite over some quarters now.

I think the institutional decisions are yes under control maybe not a good point, when you are in a client service business you’re not - we’re servicing clients and not controlling them. But some of this mandates got also cancelled because the people just needed cash.

And can I predict who needs cash that is very difficult to say and therefore we feel comfortable and in general the acceptance of the existing clients and the satisfaction with what PIMCO is doing is high and that gives us I think the confidence that today’s development in the third quarter was not only by chance.

Sure and Dieter can I just, the reinvestment rate in P&C for example went down 30 bps in the third quarter versus second quarter, is that somehow linked to this portfolio change from you had to for EIOPA.

Its 10 basis points underlying 20 credit.

Okay.

Pretty much how the market moved in the quarter.

Fair enough, fine. Thanks Dieter.

Just a small numbers one, on Slide 7 the roll forward of own funds. The €1.1 billion from the Life business could you describe, help me understand the breakdown of that figure?

And as you’ve guided the in force run-off is about €900 million, if I were to add four or so hundred for pre-tax new business that would imply the negative operating variances, but maybe the €900 million is the wrong starting point for in force run-off so could you just give a bit color about that €1.1 billion breaks down, please. Thanks.

Yes, William. Thank you.

It is expected business contribution as this quarter only €600 million a bit more so the €400 million new business value you get to the €1.1 billion but that is - was obviously for you already easy to see. The €600 million has actually sums more variance to included.

I think we assumed before that we would probably see more ongoing contribution also from positive experience that will might have been a little bit too optimistic when we said €800 million, but I think we will see the next quarter where are we again that number is maybe a little bit weaker this quarter despite all the positive numbers we have in the overall results and it will also not be fully stable.

That’s great. Thank you.

Great numbers, really great numbers, you must be very happy. Just - really the question I have is there anything really which worries in all this, because everything seems so good.

But in a detailed manner the US NAIC proposal, pricing in German motor, I don’t know, is it - how do you see this developing particularly versus claims? And the US NAIC, I suppose the bigger question is what would the Solvency look like at year end given what we know today?

So interest rates, potentially career accretion of earnings? Why didn’t you raise your target guidance?

So €8 billion at nine months, the run rate looks like €2.7 billion, so we would be at €10.7 billion. There looks to be a few good luck factors coming from performance fees at PIMCO.

So I was just wondering a little bit. And what - I suppose it is a question on my colleagues - a competitor asked today, but I am getting very slow these days.

The issue when we met with one of your colleagues in Germany at the end of June, he explained that Allianz Leben profits are coming down which means the dividend coming from Allianz Leben will also come down and --. But then with these fantastic new numbers on the new products, there is obviously going to be - the old business decline will be offset by this new stuff.

I just wondered if you can give a feel for when Allianz Leben profits might grow again thanks to all this new business? Sorry if it is too many questions.

Yes, Michael indeed that is a long list of questions. So let me start in the order you asked it.

So NAIC proposal we look [technical difficulty] also testing we have done on the current proposal exchanges, our capital requirement in the US almost not, it’s really rounding I would say, so therefore we are relaxed. I certainly think it would, if a fairer comparison between the six index annuity writer and the VA writer and any fair comparison across the market, I’m always appreciating and it was certainly be good for the fixed index annuity specialist.

So my voice, yes well actually the fair price, still too low. And why didn’t we not change the guidance well, probably we’re more a humble German company.

So I think the 10.5 is pretty good number. Some of your colleagues, questions over December whether we would make it, I think we are well set and can reconfirm our 10.5 outlook and that is what we want to do, churn rates in motor.

Yes the increases are not as strong any more as they were, but still I think very sustainable figures in particular, a good combined ratio. And in the German Life business, I think we have tested and verify that we can keep in our German Life business and the profit margin very stable and hence the profit overall will forward the underlying business that means, then the reserve [ph] call some maybe 4%, 5% a year than the profit’s good at stable margin, do the same.

Well that was fantastic. Okay lovely.

Thank you so much and congratulations.

Yes, thank you.

Dieter, the first one really just is on the P&C pricing. There was quite a nice uptick about 1 percentage points in Q3 versus Q2.

And I am wondering if you could just give a little bit of detail of where that came from. And I think at Q2 you said pricing is running roughly in line with claims inflation.

Do you think pricing is running ahead of claims inflation now? So that’s the first question.

Second question is a bit more philosophical on the Solvency II ratio. You have taken a number of actions over the last few quarters, as the ratios kind of approached the 180 range to, I supposed to keep the ratio up.

I wonder if you would have taken these actions had you not had the adverse market movement that you have had and whether effectively your target range is influencing your investment decisions and hedging decisions there? And I am obviously not talking about the Korea sale here but more about hedges and various tweaks you have made to the investment portfolios.

Yes, I think in general, I would still well outside Italy seeing CNC [ph] pricing is in line with inflation, there are some positive aspects I think is certainly Spain, there is Australia and maybe in some pockets also the UK, where I would make a difference point that it is actually getting better. So overall, a little bit more positive picture.

The quarter-over-quarter comparison a bit tricky because you are not renewing every quarter as the same business. The mixes in each quarter are very specific it depends on which markets have strong renewal dates in December on year end or after nine months.

So therefore you have really quite a mixture and I would not look at go forward from Q2 to Q3 in the end you have only we do the Q3 comparison there we can say that is roughly as the same mix as the year ago because that renews according to local market practice. So that conclusion is a bit more difficult, but I would say in general it looks a little bit better when we discuss the same question six months ago.

The Solvency II management action, I think we would have taken some of them without the market movement because it’s just a better use of risk capital, otherwise we are always trying also to allow risk taking to make money. So we are not be risking just for the de-risking, it is a dynamic movement backwards and forwards because in the end the capital has to work and create the returns.

So therefore, we will always be dynamic in our management actions. Some of them which clearly improve things and not harm returns we would do anyway and we will do some of them going forward, but on asset allocation we are flexible.

Okay, great. So does not mean that if market movement sort of went your way we should expect some of the actions that you are taking to unwind and go the other way?

Yes, we for example always look at our equity exposures how we run it that is constantly we update it, there is certainly not a stable number. There is on one hand the equity portfolio, but on the other hand we move - put, we use also future’s either to expand risk or to reduce risk that is just depending on the specific situation.

For sure at the moment when you look at you will swap 20 as some almost 50 basis points higher than beginning of the quarter, we have seen an unbelievable volatility in interest rates in the last two weeks.

Okay, thanks very much.

I have got two questions, please. First on inflation, I wonder whether you could give us [technical difficulty] level of general inflation you’ve got baked into your P&C reserves in the sort of big geographic buckets.

And whether your view of that inflation is changing from a pricing of new business perspective. And [technical difficulty] indicates [indiscernible] driving the growth on the outflows.

Thank you

Jon, could you repeat your last question because you’re cutting in and off, your microphone was not really easy to follow.

Sorry Dieter, is that better?

That’s much better.

So second question was around PIMCO, so I was just wondered if you could give us a little bit of color about the types of products that are driving the inflows and also the residual outflows. Thank you.

Okay, your inflation question. We are analyzing in each market and each line of business the average past of five years inflation and then we do adjustments for step changes in the market more to the conservative side, when we see upswing, when it goes down we probably stick to our slower moving five-year average number.

So that is how we handle it, therefore to say what general inflation is baked in, it’s very formulaic and very precise on each business. As you know, when a line of business is driven by medical inflation then you get to different number than what [indiscernible] is looking at when he’s calculating the inflation for your Europe.

And he would use medical inflation, we would be at a different interest rate level. We had very clearly at PIMCO the shift in products is continuing and it’s not new I think, since I reported here as CFO, my first quarter in 2013 we spoke about already that the old product of PIMCO around total return fund losing in importance and all the other products income, global credit, etc.

are growing in importance and that trend actually continues. We had more than €7 billion net inflows in this new product generation and around the total return fund type of strategies we still have outflows, but that is not surprising.

And we had also a positive on the mutual fund side and I think it is also geographically very mixed where we are posing still strong in Asia and Europe and less in the US.

Thank you, can I just ask a follow-up. I noticed very early days, but it’s the curve steepness we’ve seen in the US last few days persist, do you think that product mix is going to continue, would you expect to see different products come to promise.

Well that is, in the end now the crystal ball question. I think that is much too early to make any statements about it but it seems from a market view that interest rate, the long end of the interest rates are going more up and inflation could return in the US faster.

Actually when you look at the spread curve between 10-year and two-year treasury that means look how steep this interest rate curve that is clearly rising already over the last two months that is not effect from this Tuesday it is already a trend for now more than two months that curve is steepening that has certainly accelerated in the last days, so that means people seeing a recovery of long-term rates. What impact thus this have on all the asset management product.

I believe as active fixed income player we are very well positioned to service the needs of our US customer and elsewhere, very well.

Excellent. Thank you Dieter.

Two quick questions. First of all, could you just clarify what it was when you changed the modeling of the new business value of capital efficient guaranteed products, the margin there you decided a model change for Germany, what was sort of features that you modeled better road, re-appreciators that drove that.

My second question, in the second quarter Dieter you kind of expressed the view that hit your targets in normalize, you may have to look a bit more expenses and efficiency because you were seeing a bit more margin erosion than maybe you thought. I mean it sounds like there’s been a sea change on that in Q3 and now much more confident, is that a fair comment?

I mean, I was hoping to see why pricing’s really picked up, I think you mentioned a few markets where pricing is harder, but those are our markets are also seeing the most inflation. So maybe to clarify is there a real sea change or is it just normalization and maybe you were a bit too pessimistic in Q2?

Thanks.

Well Andrew, let me start with a combined ratio question. I still think and that is unchanged that the expense ratio needs to improve and support the development even when now rate change is a bit more helpful than we thought.

I’m not sure that this is stable enough that you can fully rely on it for the year 2018 and when it doesn’t work out with the rate changes, you cannot start in July, 2018 to work on your expenses to make a target. So therefore, what I said before what we’re doing operationally is completely unchanged.

So we have to work on the expense ratio and that is clearly a must do. So the new business margin change, yes very simple.

We had in our model which was also approved by the regulator for the Solvency II model which we also as we want everything integrated new business margin and everything. We had not modeled in our new business margin the reset option on the annuity phase.

So we have in the end modeled our new product in the German old system like the traditional products. And the shortened duration and the reset of the guarantee and conversion interest rate at annuity phase was left out and that makes a huge difference that moves in the end the new business margin for the whole German new business from 2.8 to 4.2.

Okay, great. Thank you.

Because this new business makes now in retail 90% of the hope.

I thought you already, that was one of the reasons why it was more profitable, already because of the change the nature of the guarantee, but I didn’t realize you haven’t.

Yes, well it was already more profitable because it had lower guarantees that was in the model, but not this more complicated reset option which was not in the old system foreseen and that is pretty complex to get it into the model and then the approval with the BaFIN is not yet there. So actually we’re disclosing for the new business margin something which we have not yet in the Solvency II calculation included because the BaFIN and other regulators in Europe approval is still missing.

Okay, great. Thank you.

I had a couple questions on Life. First of all returning to DOL.

I noticed that your hybrid variable annuity product was selling extremely stronger. I wondered if you can give us a bit more color on what these are, are these sort of DOL friendly a very fee-based, what sort of guarantees you’re offering stuff like that and then secondly, also on Life.

I noticed you took some pretty big Dac true-ups positive true-up in US and France I think. I wondered if you could basically just give a bit more color, what’s going on?

Thank you very much.

The true-ups in the US is just a consequence of the normal formulas when the base was positive that means, when you adjust the ratio between past and future earnings, you adjust from your like the Dac is the normal true-up, in France similar and then I think also in Germany we had Dac true-ups but that is in the end the formula depending on the profits. In the US, we are developing the DOL friendly hybrids for next but they’re not yet in place.

What is - doing more is an index based VA business and that is certainly going slowly and you can of course call this also a DOL friendly because when you have a passive fund as the underlying in your variable annuity product then of course the best interest advice as one heard let to pass. That is the quite obvious.

Right, that’s sort of interesting. Can I just ask on the Dac true-up, I believe is the positive variance policyholder behavior assumptions or would it market performance and I’m just wondering what’s actually driving the positive outcome against your assumption.

You have what I said, the Dac level which you keep is determined by the ratio for a policy what profit will emerge in the future, what profit emerged already in the past. So it is in the end of ratio.

Future profits divided by past profits for a single policy or a single group of policies and then you compare this with the Dac to be amortized in the future versus the past and that ratio is the same. So that is very simple how Dac works in the Life Insurance industry and the profit stream is not stable, you have in the end two moving parts here which are then being aligned and usually, we are not doing this every quarter, so we’re usually doing this on four quarters rolling because otherwise, everybody would constantly recalculate everything and the third quarter is where most of our OEs do this calculation and then it can come from everything.

I think here in the VA book of the US that is market present that was positive base was development by at large, but then it can also be changes in less assumption mortality, whatever but it is mainly just the actual developments which is the driver and not assumption changes about the future.

Yes, that’s very clear. So for mix of market and better policyholder behavior than you would see.

Not that all because you just had less profit now and more in the future, or the other way around that is very different.

That’s great. Thank you very much Dieter.

Thanks for taking my follow-up. So sorry, Dieter, but I just want to return to the sensitivity on the credit spreads, in particular between the two periods because the change in the reference portfolio actually reduced the weighting of corporate credit in the reference portfolio.

And all other things being equal that should lower the benefit that you get from the dynamic volatility adjuster. So I am struggling to see why in Q2 you showed a 100 basis point reduction - I’m sorry, increase, in credit spreads that had a 10 point impact on your Solvency II ratio, why with less of a benefit you would now show zero impact from wider credit spreads?

No the share of corporate got bigger, so that means you’re actually getting relative to our portfolio more on corporate. The VA reference portfolio, the share on government bonds did fell more and on corporate less and that shifted the combination.

My understanding was, the government I mean we could talk offline if you like. The government bonds went from 38 to 27 and the other went from 48 to 44, so I don’t see why it would be a benefit for you in the sensitivity, but we could take it offline.

It’s probably better.

Yes, maybe we take it offline.

Thank you.

My first question is on the motor business across Europe because in the last few quarters in the US, where the focus is being on the increase repair cost on one side and some picked up in the frequency that is moving quicker than the actual profits. So I just wanted to get your views on whether you’re seeing anything similar across the European book by a large, not specifically in one country or whether it’s not really a topic on the European side.

Even though it may be temporary anyway. And the second question regarding is a follow-up on Andrew’s question regarding the model change around the reset option for the German annuity products.

You mentioned that is not yet included in solvency, can you quantify what the benefit will be of including that calculation in solvency or is that too early. Thanks.

Okay, so on the motor business across Europe, this repair situation in the US not visible. The movements in motor claims in Europe is very much dependent on bodily injuries, there was paper changes in Spain this year then also in Germany when we see movements at all that is much more bodily injury.

There is certainly an upcoming question for the whole industry is, how much bodily injury are we seeing future based on smartphone use during driving that is not a joke, that is certainly a question because we have seen over years due to the technical progress in the cars that bodily injuries are going down in frequency that is coming to a stop. You still see it in the expensive cars.

So when you look at cars €50,000, €60,000 and more there is still a reduction in large claims. However, when you look at the less expensive cars then there is really the question what drives increases in frequency and then I would say playing with the toys during driving is certainly a very serious topic.

So on the model changes that is, we will probably see some positive impact and also a little bit better interest rate sensitivity from the new model. The new model contains more changes than just the mapping, the new products correctly.

So the new business revenue is certainly supported that means you have also a more positive demand in own fund. The new model rules certainly support is that over the long run our produced solvency over consumed solvency by new business in Germany will improve further that means the five-year and 10-year outlook is much stronger also in solvency terms of cost that assumes than always that interest rates stay stable over the whole time.

So I think that were your two questions.

Yes thank you very much.

Okay, thank you very much and I wish you all a great rest of the Friday and a great weekend. Thank you for listening in.

Thank you from my side as well. Bye.