Allianz SE

Thank you. Yeah, good afternoon from my side as well and welcome to our conference call.

There is nothing specific to be added from my side for now. So I keep it brief and turn it over directly to Giulio.

Hi, good morning, good afternoon to everybody. I’m pleased to present the results for the third quarter and before we go into the third quarter results at Page 3, you can see the exhibit with the key numbers for the 9 months.

As you see, we had a very good first 9 months in the year with revenue up. This is mostly driven by Property-Casualty and Life/Health.

When we look at the operating profit, we have also a nice increase of 4% driven by Life/Health and Asset Management. In Property-Casualty, we have a small reduction in the operating profit, which is driven by lower investment income.

When we look at the combined ratio, in Property-Casualty for the first 9 months is stable. Here we see that natural catastrophe had less impact compared to the prior year.

On the other side, run-off result is lower. And what was positive in the 9 months was the development of the expense ratio.

So the bottom line is better natural catastrophe results and improved cost ratio have offset for the lower run-off. New business margin is stable and the revenue business is growing double digits.

And in Asset Management, we see that we had very good flows with almost €60 billion, which is double the volume we had last year. The net income is up 5%.

And when we are on the earnings per share calculation we see that the earnings per shares are up almost 8%. So overall, I will say a strong picture for the first 9 months.

And now, we can turn to Page 5, where we show the revenue and operating profit net income for the quarter, again, a good quarter with growth in revenue, this time not only coming from Property-Casualty and Life/Health, but also coming Asset Management. The operating profit is stable at almost €3 billion, which is a very good number.

Here we see that profit set by the development in the other segment. And then, we have the shareholder net income which is stable compared to the prior period, also at a good level of over €1.9 billion.

So also the third quarter, you can see the kind of good performance that we were able to record in the first 6 months of the year. And now, we can move to Page 7, where I’m going to focus on the solvency ratio, as you can see the solvency ratio has dropped about 10 percentage points.

Clearly, the main driver for the drop is the development of the interest rates. I’m going to come back on these numbers in a second.

Then when you look at the sensitivities, the sensitivities are more or less unchanged compared to the sensitivities we had in end of June. You might see the sensitivities to interest rates are a little bit higher compared to what we had in June – in June, the number was minus 8%.

The reason for the increase is once the convexity, when rates go down we are going to really to pick up more sensitivities. And the second also, we had some refinement to the way we calculate the sensitivity.

But the primary effect is the convexity. We move to Page 9.

Now, we can see the development of the solvency ratio. First of all, what is interesting, when you look at the own funds, the own funds are not going down.

In reality, the own funds are going up and this is after the deduction of the €1 billion dividend that we will pay out of the profit for the quarter. So fundamentally, you can see the own funds are building up.

On the other side, what you see is that the solvency requirement is going up significantly. And this is driven by, primarily by the interest rate development.

When we look at the different buckets, the impact of the market after tax is about 11% and this has been partially offset by the increase in operating earnings which was 9% in the pre-tax and pre-dividend basis is about 3%-plus on an after-tax and after-dividend basis. So all in all, I will say clearly a reduction of our solvency ratio, which is also in line with our expectation.

And the most important comment here is with the solvency ratio of 202%, we feel we are at a very comfortable level. And this is also the reason why in the past anyway we were running the solvency ratio also at a high level, because we know that there are times where the solvency ratio is going to drop.

But again, we are significantly above the level of 180%, which is the level that we have defined as the minimum comfort level. So when we go to Page 11, we can go now into the segments, in the P/C side, we saw also in the quarter a good growth rate, with almost 5%, half of the growth is coming from price development and half of the growth is coming from volume.

When you look at the single entities, you can see there is growth everywhere with the exception of Spain, where we have a decline and this is because of the claims in area operating right now in Spain. On the price development, you can see the price development is stable or positive, and clearly, we are looking very carefully at the price development in AGCS.

You can see that in the – in AGCS, the price development is very strong with almost plus 8% of improvement. So from that point of view, I will say the picture from price point of view looks benign as we look into the future.

Moving to Page 13, here we show the development of the operating profit for Property-Casualty. And clearly, the operating profit reduction has been driven by the development of the combined ratio.

Now, you can see that the combined ratio has increased by about 120 basis points. What we are observing here, when we look first at the accident year results, we see that the natural catastrophe had a more benign impact compared to last year.

So there was a benefit if you want of about 80 basis points. But against that we had a higher amount of large losses and also of – with the related.

In reality, the positive impact from the natural catastrophe has been compensated by large losses and weather related. When we look at the loss ratio adjusted also for this impact, in reality we have even a tiny improvement compared to last year.

And then, clearly, we see that the run-off is lower compared to the very high level that we had in 2018. So the 4.5 is definitely not the kind of level that we would expect on a normalized basis.

2.5 might be a little bit lower compared to what we usually see. For the year, if you remember, the slides I show before, we are at 2.8.

So in the third quarter, there was a little bit of a lower run-off. I’m sure I’m going to get a few questions on that.

So I leave for the questions. What is also nice to see is the – reality is the improvement of the expense ratio.

Again, 70 basis points lower compared to last year. I will check into the expense ratio that we had a couple of years ago, we were more at 28.5%, so you can see definitely there is a strong improvement over time in this kind of KPI.

With that, we move to Page 15. We can see the development of the combined ratio for the selected companies.

I will say the development in Germany is pretty good. You might see deterioration compared to the prior period.

But that’s driven by the amount of natural catastrophe over the related losses. But fundamentally, with the combined ratio 92% German business is performing very nicely, the same applies to Italy, is then Europe.

Australia. In the United Kingdom, we have a couple of special effects, otherwise, the combined ratio would be about 96%.

In France, we see a combined ratio 98.4%, which is behind our expectation. In this case is also driven by an amount of weather related and large losses.

When you look at the 9 months for France, we are 97%, which is a little bit behind what we would expect. But for the market, it’s still a kind of reasonable combined ratio.

And then going down the list, Spain is not anything new. If you adjust the combined ratio, Spain, for the run-off, which is currently negative, we get to an excellent year, combined ratio, which is below 94%.

And I expect that next year we are going to see this kind of numbers moving forward. And then, clearly, the AGCS has a combined ratio, which is over 100%, it’s 102.7.

In this case, you can see that there is a slight improvement compared to the last year, but this is clearly driven by the fact that we had a much lower natural catastrophe, which means something is missing in the picture. The point is last year we had a large positive run-off in AGCS.

And this year, in the case of AGCS, we have a slight negative run-off. This explains the reason why in reality we don’t see a major improvement despite the lower natural catastrophe.

And then the last two companies as usual are performing pretty nicely. So I’ll say, in total, it’s a good combined ratio clearly we have especially one company, AGCS, where we need to do some homework, but we should not neglected a lot of companies are performing very nicely.

Page 17. The operating investment results is pretty stable, I’d like to draw your attention into the right hand side on the upper part, where you can see that the reinvestment yield is going down compared to the last quarter, last year is even 80 basis points.

And clearly, this is the effect of the low interest rate environment. Just for you as a point of reference, 50 basis points or lower investment yield equivalent to €100 million lower operating profit.

And to make up for €100 million of operating profit we need to improve our combined ratio by 20 basis points, which we think is possible. So from that point of view, even if we see headwinds coming from investments for the development of the interest rates, we still believe that we can achieve our mid-term objectives that we discussed last year, so there is now change in our expectations that we should be able to offset for the more challenging interest rate environment in the next year.

But clearly, it has become a little bit more challenging, but we are confident we can get there. At Page 19, we can switch to the Life business.

First, you see we have a good new business margin, we are already anticipated in the call of August that we are going to be at about this level. So we can see that, if you take the big picture that despite having very low interest rates, we still have a new business margin, which is very resilient.

Clearly, this is the new business margin calculated based on the beginning of the quarter assumption, not on the end of the quarter assumption, but still it is calculated on a low level of interest rate. And as of now, I will say the market conditions are very similar to the condition we had at the end of June.

The production is going up, this is driven by Germany. We see also a good development in the USA.

And then in Italy, there is a sort of special effect adjusting for the kind of special effect, which is a renegotiation of the contract, the production level would have been flat. But again, I would say resilient of business margin and also an increase in production.

So if we move to Page 21. The operating profit development for the Life business for the quarter is actually good with an increase in operating profit of about 3%.

What is important to highlight here is the development for the loadings and fees. As you see, we are growing up significantly compared to what we had one year ago.

And this is a trend that we’ve been seeing over the course of the year. So this is definitely boding well also for the future performance of the Life business.

The investment margin for the quarter is pretty resilient at least on the absolute level. And then, I will say the technical margin has stabilized to what our expectation would be in 2018.

There was a sort of negative impact coming from the United States and we didn’t have a repeat of this negative impact this year. So all in all, with about €1.1 billion of operating profit, I’ll say, our Life business is performing according to our expectation, if not even is slightly better than our expectation.

If we move to Page 23, a couple of comments here. First of all, we were able to achieve value of new business of about €500 million, so it’s a good number, and also growing compared to what we had one-year, and this despite the reduction in new business margin.

Coming back to the reduction of business margin of 50 basis points, 80 basis points to the reduction is driven by the movement to the interest rate. And on the other side, we had about 30 to 40 basis points of change in business mix or management action that have contributed to keep the new business margin above to 3% level.

When you look at the single entities, you can see that with the exception of a few of 2 companies or other entities for the time being still above the 2% level. So you can see there is not just a resilience on a total basis, but also for a lot of companies, we are still writing business at a level, which is above 2.

On the operating profit for the single entities, I would say, there is from standpoint, nothing major to highlight, if now the growth in Asia-Pacific, which is clearly a consequence of the growth that we see in the business over there. And then you can see the few big pluses, but this is more a normalization compared to the lower results, we had last year.

So there is really nothing major is more a normalization. So again, good numbers on the Life side.

And on Page 25, we have as usual the breakdown of the investment margin. What is important to highlight here is something we are seeing also in the past.

That the current yield is going down, but the guarantees are going down as well. In this case, the guarantees are going down even more to the development of the current yield.

So from that point of view, we are capable to keep, if you want the spread between the guarantee and yield is very important. And then clearly, we have also the impact of harvesting and of the profit sharing on the IFRS.

And this then leads to an investment margin of 19 basis points, which is lower compared to the investment margin we had last year. But very consistent with investment margin that we had in Q1 and Q2.

And also something to consider is that the investment margin calculated in percent is going down. But the amount of policy reserve is going up.

So from that point of view, where you multiply the 2 things, you get, like you can see in this quarter to a result of resilience of stickiness also this indicator. But I want again to highlight that other source of profits are going to become more and more relevant as we move into the future.

So now, we go to Page 27. In Asset Management, we have achieved record third-party assets under management with almost €1.7 trillion, so that’s a very good north, especially because higher assets under managements means, higher profit moving into the future.

All factors have contributed to this development. If you see flaws when you put together AGI and PIMCO positive then we had also positive impact due to the market development.

And on top of that we got also a positive effect due to FX. So all in all, all these things are leading to a very high or record level of third-party assets under management.

If we move to Page 29, clearly, this also translates in a higher revenue growth, even if the performance fees for the quarter a little bit lower compared to what we had last year. On the third-party assets under management margin, you can see there is a lot of stickiness in the case of AGI, in the case of PIMCO, we see a reduction, which is mostly explained by mix and also by the acquisition of Gurtin that we did last year.

But fundamentally, I would say, this decrease in the margin at PIMCO. If you look at Page 31, has not really affected the results.

As you see, we are very, very pleased with the increase in operating profit at PIMCO, which is above 14% if you adjust for a FX, we are – we still speak of an increase, which is very – almost 10%. So very good performance at PIMCO, and also in the case of AGI, I will say, you see a decrease in operating profit, but we’re speaking of a very high level with about €180 million of operating profit.

I would say, this is a good level of operating profit. And when you put together all the numbers, we are ending up with €700 million of operating profit for the segment, which is clearly, very good results.

So with that, we can move to Page 33, that’s our Corporate segment. And as you see in the Corporate segments, we have improved our results by about €60 million.

Improvement is coming from Allianz Technology and the other components that flows into the Corporate segments are more or less stable. So Page 35.

Here, we had the usual exhibit with the non-operating items, I will say, you can see some movements, some plus and minuses. But when you put all together at the end of the day, it’s more or less a wash.

So you can see that the net income is increasing with the same pace more or less of the operating profit. So I will not go into details now, but I’m happy to get your questions on these slides later on.

And then, we turn to the final slide. For the 9 months, I’ll say, we have very good results, very strong results.

On the Property-Casualty side, we have a combined ratio of 94.1, which is a good combined ratio. We have a lot of companies performing very nicely.

We have a company, where we have some work to do. But again, when you look at the segment performance is pretty strong.

On the Life/Health side, we see a strong operating profit, and also a nice resilience of the value of the business and the new business margin. In Asset management, we have record high assets under management, so that’s also something that should be positive as we move into the future.

And then, where we put all these together, we are revising upwards our outlook for the year. In June, we were still working on the midpoint of the outlook and now we are working under the assumption that we’re going to be in the upper half of the target range.

And with that, I’d like to open up to your questions.

Thank you very much. Thanks, Giulio.

The first question was on Allianz Technology. I guess, this is the third quarter in a row that we’ve seen it boost the Corporate segment.

So I’m just wondering whether we should start thinking of that as a sustainable profit contributor. And I’m wondering if you can maybe just update us on your view if this was just the sustainable result from that segment.

The second question was on interest rate sensitivity. I guess, it just seems – it seems that the solvency declined by about 12 percentage points from factors that were sort of either directly or indirectly linked to interest rate falls, which is bit more than the sensitivities would suggest, even allowing for the flattening of the curve and even on the new sensitivity.

So I guess I’m just wondering, when we think about our sensitivity, should we think about that as sort of including everything or should we maybe sort of also include something for the knock-on effects? I mean, maybe your modeling refinement has addressed that, but I was wondering if you could maybe just comment on that.

And then the third question, I’ll leave Spain to others, but I was just wondering if you could give us your view of what’s happening to motor pricing in Italy. The reason I ask is because your two major competitors has given slightly different assessments, so I’m just interested in your view.

Thank you very much.

Yeah, so maybe I’ll start with the corporate segment. I will say that definitely there is an improvement.

And to a certain degree this improvement is going to be sticky. So as we go into 2020, I will say that you’re going to get a guidance for the Corporate segment, that should be better compared to the guidance of minus €900 million we gave for this year.

And also this year, we’re going to be better. So I will say – I will not take quarter and now necessarily annualize the quarter.

But I will say that the numbers with the corporate segments are going to look better moving forward compared to what we had in the past. On the rate sensitivity, I will say that the model refinement can also help to get the sensitivity to be even more meaningful.

But I will say our sensitivities are pretty good if you ask me. And model refinements are going to improve them further, but they are already in my opinion pretty accurate.

One thing that we need to consider is, for example, let’s take 2,000 in the quarter, so in the quarter, first of all, I would also invite you to look at the 20 years swap movement. That’s the point of reference that I will choose.

And that the swap rate on the 20 years moved by about 50 basis points. And that would already be about 8% of sensitivity based on the disclosure we had in Q2.

Then in theory if you really want to get very technical you should also look at the twist in the curve. And if you look at the 10 year, the 10 year move only 30 basis points, the 20 move 50.

So in reality, the movement on the spot rate on the 20 is more than 50. So if you start also really going into the nitty-gritty kind of details you would expect in a quarter like this that the movement because of interest rate is more than 8.

On top of that, we are not disclosing sensitivity. We are not necessarily calculating to the interest rate volatility.

So I will say if you consider for the twist, if you consider that there are other effects coming. I will say that the sensitivity we see in the quarter are very much expected.

And to be perfectly blunt, I was not surprised by the number. So maybe last quarter or two quarters ago, I don’t remember, there was 1 or 2 percentage points, surprise also for me.

I can tell you that this quarter the surprise for me was 0. So I was very, very precise in – and we were very precise internally.

A lot of people are doing forecasting here, the solvency ratio. And somehow we landed very precisely on this number.

So the answer is it’s – we give sensitivity, they can – they are a good orientation my opinion. But clearly, there are other effects that somebody should consider like twist and volatility and this can lead to additional positive or negative depending on the situation.

On Italy, I’m also hearing noise. That our competitors believe we are pretty – we are kind of aggressive and they see the pricing that we do a little bit like we might be on the aggressive side.

We have intense conversation with our guys. And so from that point of view, we think that – and I say that already in the call, we have introduced a very sophisticating pricing model.

So we feel pretty good about the situation in Italy and what our accident year loss ratio is. But clearly, we will continue to take a close look at the numbers as when you’re hearing noises, is you want always to be extra cautious.

But we are definitely looking into that. And for the time being, I can just tell you we are comfortable with what we see.

Okay. Yeah, thank you very much.

So, hi, there. I’m afraid it was inevitable that someone asked about AGCS.

I saw, Giulio, that you have a lot of color to journalists this morning. Maybe you could give us that color as well, to the expected further reserve additions in Q4.

I guess, just in general though, could you address the issue, the textbook for fixing these kind of operations is shrinking and focusing on profitability. AGCS appears to be growing and growing more than pricing and still trying to fix profitability, which inevitably raises worries about the quality of recent growth, whether you were trying to run a catch up on reserves.

So, maybe if you could address some of those issues and where the problem areas are and how we get comfortable with the growth. But the only other topic is in the slide packet talks about further management actions to defend Life new business profitability.

What are those actions? Is this just a whole suit of redesign particularly of the capital efficient product?

Thanks.

Yeah, maybe I’ll start from the last one, which is actions on the Life side. Yes, it depends on the market.

You need more or less revision. But definitely – I even forgot to say that it was presenting.

When we define our capital-light products, maybe the definition what is a capital-light product has changed. So we are also looking into that.

Clearly, with a negative interest rate environment things are changing. And even if we see the resilience in the new business margin we need to be prepared, that rate could go even lower.

So we cannot even exclude that. So from that point of view, yes, it’s about looking at the products that we have.

In some markets, I think the changes they don’t need to be extremely substantial. But we need to think about introducing, let’s call it this way, negative guarantees.

That’s something that is on the table. In other markets, one could even question, whether we need really to change also the products more towards to unit-linked.

In Italy we already did that. So depending on the market, we are going to have different reaction and maybe even the speed of the reaction might be slightly different.

But there is no doubt that the products that we have right now. They might even be kind of sustainable in this environment.

But we need always to be prepared, even for an environment they might be even tougher. And our idea anyway is that, no matter what the environment is, we need to be capable to product new business margin at a group level of 3%.

It doesn’t need to be in every single quarter obviously. But fundamentally we need to have a business model that can operate at that level.

Just to give you an idea, in the fourth quarter, based on the market condition of the end – of the beginning of the quarter that our new business margins going to be – you might have read in the comments, about 2.5. As of now we would already be back to 3.

But again, we cannot be in a situation where 20 basis points more or less are going to keep us from being in green to be in orange. So that’s what we are doing on the Life side.

So you are going to see definitely changes coming through as we go into 2020. On AGCS, your question is about growing.

I would say, when we speak about AGCS, first of all, we speak of a sector, which is kind of challenging. I will say, when we do our benchmarking to our competitors.

Well, whatever the benchmarking might tell you, because honestly speaking, our benchmark is to be taken with a grain of salt. When we do this benchmarking, AGCS is performing better than most of the competition.

So we need to understand also that the market is, per se, challenging. If you know this is for also gravity.

When we then look into the, so called, business cases, the area of growth that you’re mentioning, we call those areas of growth, the business cases. We are not necessarily getting the indication that we have a particular problem coming from there.

Indeed, indication are that the numbers are fine. Maybe we might have overestimated how good the numbers of the businesses were.

But I couldn’t say that the business cases are negative. What we see however is, when we see also this happening right now, we see more and more bad news and new information coming up.

So from a certain degree, we are also getting new information. So I will say the situation is we have a sector, which is definitely, which went through a soft market for few years now.

And then also it looks like in some lines of business like in liability in the U.S., there is a buildup of severity and potentially of frequency. Our book, just to speak about the liability book in the U.S.

is now big. We have about €400 million of liability book in the U.S.

We also believe our book is slightly different from the book that other people have. Now, we cannot assume that we are going to be completely immune to happened in the broader market.

So my answer is I don’t think we did something particularly wrong. I think the market is challenging and maybe we have not done everything right.

That’s the way I would phrase the issue. Expectation for the quarter – yeah, go ahead.

So I was going to ask, yeah, what was yours – because you talked to…

Yeah, I was coming up. I know this is the real question you were asking.

So this quarter I said – this morning I said that the combined ratio for the quarter for Allianz, AGCS is going to be definitely above 110. So I can tell you, when we speak about the reserving that we might see coming for quarter, I will say we speak of a 3 million digit number.

And then first number is not going to be most likely 1, it’s going to be something more than 1. And that’s all what I can tell you.

So it’s going to be some reserve strengthening that we need to do to AGCS. And this is already included anyway in our expectation for yearend.

Okay. Thank you very much.

Good afternoon. So two questions please.

One is on this whole, the loss ratio and the expense ratio and then the target ultimately in 2021. If we see the loss ratio, the trend attritionaly few quarters now has been flagged to tiny improvement, as you also mentioned Giulio.

So – and then we also see the run-off is getting weaker. So the expense ratio then, does it – it should have to carry a lot more on the shoulders to deliver the results.

Do you feel that you’re a bit more confident or similarly confident about the 93, as you were when this was lunched about a year ago. So that’s the first question.

And any comments on these dynamics, that would be helpful. And second question is just on AGI.

It’s a bit interesting that there is all these outflows for now four quarters, but also the performance fee level has been quite high as well. So just as an example, the last quarter, the last year 3Q was an inflow, but also performance fee.

This year, we’re having outflows, but also performance fee. If clients are getting the returns and what is it that’s going wrong and how should we – do you think AGI is stabilizing or is there a plan or discussion regarding that?

Thank you very much.

Yeah. So thank you for the questions, on the 93 for 2021, my level of confidence is the same.

So what I see is, on the expense ratio, I think, we are going to be better compared to the 27.5% that we discussed. And on the loss ratio, I think eventually we’re going to get to the – also to the numbers that we have in mind.

So also what might help in reality on the loss ratio is when the rates go down you need to have more discipline on the underwriting. But the point is also, in reality, most likely we will need to be even slightly better than 93, so that we can get to our targets at least for the P&C side in reality.

We might have a situation where we’re going to benefit from lower interest rates in the asset management business for the next three years. So to answer your question, let’s say, my level of confidence that we are going to get to the 93 is exactly the same as it was one year ago.

And also, like just to say, for example, this quarter we are 94.3 of combined ratio. And this includes AGCS, let’s say, at 103.

I cannot really see how AGCS is going to at 103 in 2021. So that’s – everything can happen in Life.

But now it’s not something that’s – let’s put this way, that’s not the target, let’s put it this way. So coming to AGI, first of all, one thing which is important is when you look at the performance fees, we have also in – starting last year, we are including performance fees, which belong to a company, they go to a company which is management assets, private equity, alternative assets for our own insurance companies.

So from that point of view there are performance fees, but that’s pretty much of a wash. So you cannot take the performance fees and translate that into profit.

So you should adjust the numbers for that and then you’ll get a different picture. So on – unfortunately for you, you cannot necessarily use those numbers to do too much analytics.

I can tell you what’s going on AGI. I will say first of all numbers are anyway pretty sticky.

So when you look at the operating profit of AGI, not only for the quarter, but also for the 6 months. We are pretty – generally pretty good numbers.

The only thing which is not really working right now is – you can see the flows have been negative for 3 quarters in a row, if not, 4. But let’s say this year have been negative.

The main issue we have is our performance especially in equity and in the U.S. So at the end of the day, most of the outflows are coming from.

You can give a name, a family name is equity, U.S. institutional area.

As we fix that, I will say we have a nice platform. And also, since you were asking about how I feel about the 93 combined ratio in P&C, last year, we also said that we want to bring the cost to income ratio of AGI below 67.

By 2021, we feel very confident that we are going to be able to get the cost income ratio even well below 60, 67. So a lot of things are okay.

At AGI, clearly, we need to get the performance up. and this is going to stabilize the flows, which is clearly critical.

On the long run, you cannot be successful if you have constantly negative flows.

Yeah. Thank you.

Hi, thank you very much. Good afternoon.

Going back to AGCS, if you are going to achieve the upper end of your target range with such a high reserve addition, what is going to offset it? So do you have another massive pocket of reserve release that could offset it?

So can you just comment on that? And then secondly, did you just add up for us to make it easy, the net M&A spend since you announced your sort of buyback this year.

So I won’t to get you a level of how much of the €2 billion, €3 billion budget for M&A/capital return, you have probably already eaten into for next year? Thank you.

Yeah. So I – okay, first of all, we didn’t say, we’re going to be at the upper end of the range.

We said upper half. So this makes clearly a little bit of a different.

It’s exactly, by the way, the reason why we said upper half and not necessarily upper end, because we would like to digest some of the runoff from AGCS. And anyway, our intention is we like to keep the strength of our balance sheet, so we’re not going to look necessarily for glory.

So we could end up with the upper end, who really want to, yes, most likely, yes, but that’s not the idea. So that’s the reason, why we are speaking about upper half.

The other point is on the M&A budget, I would say, when you look at what we did last year by completing the transaction for LV and also with SulAmérica, I would say the €2.5 billion of free cash flow, we have utilized less than €1 million, I would say, yeah, about €1 billion. So from that point of view, there is still available free cash flow coming from there.

But that’s also important. This is just a free cash flow that we generate on a single year.

So clearly, we have more availability of cash, let’s say, in our inventory. But the €2.5 billion of free cash flow that we generate in, yeah, we have utilized a little bit about €1 billion.

And just to follow-up on that. So does that include the – that obviously doesn’t include yet the cash back from Italian – Spanish JV and presumably doesn’t include anything else that might be on Bloomberg about China, for example.

The China thing is not – we didn’t fund it through our free cash flow M&A buyback budget. This is a general account investment.

So this is coming, if – an investment, which is covering some of the ability that we had. So has no impact on the free cash flow situation of the group.

Pure financial investment, yeah. Okay.

Okay. Great.

Thank you.

Hi, Giulio. Hi, there.

Thank you very much. Just coming back on low interest rate, I just wanted, are you modeling negative interest rates for Solvency II?

And if so, could you give us a bit of color on that? And what do you think of EIOPA’s proposals to introduce negative interest rate modeling into the standard formula?

Obviously, you’re not using the standard formula. But just wondered what you think the effect on the German mutual sector could be.

Thank you.

So, yes, we have negative interest rate, so you have any kind of model, that’s what you do. And there’s also the reason why – there is also the conversation about introducing the negative interest rates on in the standard model.

In our case, what we do, we run the stochastic, the shotgun stochastic calculation, we have a floor anyway at 185 negative. So interest rate cannot go below 185, which seems to be a few months ago, there seemed to be a very prudent assumption, now still looks like a prudent assumption, but let’s prove them, but I feel pretty good about the way we run our models and also the amount of negative rates that we allow in our model.

With regard to the proposal of EIOPA, and the fact that negative interest rate should be factored in, in the standard model. I think, it’s hard to disagree with that.

Once you have negative interest rates and claiming that this cannot happen, it’s very hard to object to this. So from that point of view, I would say, we need always to be objective and technical.

So from that point of view, I think that’s the right proposal. Now the consequence is they might not be so nice.

But then, okay, clearly, if I were a regulator, but I’m not, as I change the rules of the game, I would always give time. So then I would say, okay, if you change from a model where you don’t have negative interest rate, a model where you need apply negative interest rate, most likely, I would also say, maybe, I’ll give you some additional transitional period so that the companies have a possibility to react to that.

That’s what I would do if I were regulated. But I would definitely introduce the negative interest rates, then I would think about other maybe possibility to give some room to this company to react also to what the numbers are going to look like.

So you’re not too worried about a crisis in the German mutual life sector being triggered by EIOPA? Because I mean that could be negative for yourselves, couldn’t it, I mean, you might have to intervene to help them?

I am not worried about this. And yeah, I know, there is always this issue that we should then save people.

If we had to save people, we’re going to do this in economic terms, right. There is another idea to say other companies under economic terms.

But I think, the regulators are going, if there is any stress come in the system, first, they’re going to find other venues to relieve the stress in the system. And I can tell you, the more – if at the end of the day, we are asked to help usually people that are helping they get at least in the long term, some benefit because of that.

So I wouldn’t be concern about that.

Okay. That’s great.

Thank you very much, Giulio.

Thank you.

Thank you. Hello, good afternoon, Giulio.

Just a couple of question. So first on low interest rates, I mean, you mentioned that product mix shift cannot be ruled out and it would be very important tool that you look in the Life business.

Can you just give some color as to low interest rates, how much it will be adjusted by doing more asset derisking, so more asset optimization? And into what particular asset class you want to do more, I mean, is it still the same illiquid assets or anything else?

The second thing is about the same EIOPA review, sorry, going back to the same thing, I mean, the EIOPA is a big debate as well, I mean, does of the change in last liquid point is important relevant for German mutual industry alongside your business? And does that change any dynamic?

Or you – any thoughts where is the debate with the regulator with BaFin on that subject? What is BaFin proposing on last liquid point?

Any thoughts on that would be great? Thank you.

So on the assets in the Life side, okay. First of all, what we need to do and what we’re doing is to make sure that we have assets and liability, which are somehow in sync.

We will never get to a duration, which is exactly 0. But the idea is to have a matching, which is as close as possible.

And clearly, as we see rates going down, because of the convexity of the liability, which is larger than the convexity of the assets. We have always to need somehow to catch-up asset as rates go down.

So this is the first thing that in reality we are doing, is look at our portfolio, understand the duration so that we don’t have the increase in SCR. By the way, that’s also something to consider it, we can always improve our Solvency ratio by going long or short on duration.

Then clearly, there are other effects that have to be considered. But the primary thing is working regulation.

On the other kind of assets, I will say, we are not necessarily changing the philosophy. From that point of view, clearly, we like illiquid asset, because they are fitting well into our liability profile.

We might be a little bit more cautious right now in expanding our equity portfolio. But fundamentally, we are not necessarily changing the way we are running our assets allocation.

In the case of the BaFin, I think, that they had a sort of proposal, if I understand, about introducing some crisis VA, which I think is off the table, otherwise on the last liquid point, I believe the position BaFin most likely is to extend to 30 basis – 30 years, we will see. Yeah.

Okay. And how does that impact change anything for the industry and for Allianz?

Does it – is it material…

Yeah. It’s just – yeah.

It’s all changing.

If I look at the solvency ratios of the German life industry, it’s like 300%, 350%. So it does it matter?

Yeah. The point is, let’s say that that’s always important to – and by the way, my guys are telling me, BaFin is more about keeping the 20 years.

I need to correct myself. Let’s say, that’s we move from 20 to 30.

Clearly, the implication if you do nothing would be that the solvency ratio is going to be down. But the point is, in reality, you can extend duration.

So at the end of the day, the extension of the UFR took from 20 to 30, the impact that you have at least on the requirement that can be offset by extend duration, you might have any impact on the own fund, but there is a different story. So companies have the possibility to adjust the strategy in order to – if they need to improve the solvency ratio.

I also believe anyway that if the regulators are going to come with substantial change is moving forward. I believe, we are going to give some room to the companies to react.

It makes a big different, if you change the rules of the game. And you say, these are new rules, this is starting tomorrow, or if you say to somebody, these are the new rules, but you have 4 or 5 years to get there.

This is where you can make any changes.

Okay. I’m sorry, BaFin is saying, 20 year or 30 year?

20.

20. Okay.

Thanks. That’s very clear.

Thank you.

Hey, good afternoon. Thanks.

Just – can you just comment on the sales increase in Life in Germany, I mean, is this a sales promotion and should this continue? I guess, the next question just comes back to one of the questions – one of the answers you gave before.

Do zero maturity guarantee products still make sense, as you said, when rates are negative? And as a result, all the sales push, should we see margins decline?

Because I understand that you’re trailing assumptions on new business. So can you talk about that?

And the third question, just in relation to, obviously, economic yields have dropped and we have, obviously, a higher UFR drag. And therefore, generally lower Solvency II capital generation.

Can this be offset by further asset optimization or liquid assets or otherwise you can offset this? And how should we think of this in terms of future capital returns going forward?

Thanks.

So if I understood, your last question maybe it’s whether we can improve our solvency ratio by changing our asset location. That’s correct?

Yeah.

Oh, yeah, absolutely. We can change that, we can change the volatility, clearly, the solvency ratio.

So that’s almost like double gearing because you improve your solvency ratio, you are less volatile. So the resilience is much higher.

Clearly, as you do that, you need always to look what is the cost, right. Because there you need to look at other KPIs like what happens to your operating profit.

What happens to your net income? But definitely there is a room to improve the solvency ratio.

You can also improve the solvency ratio substantially by using derivatives. But then derivative depending on what’s you do might have a cost, if you use a [swaption] [ph] for example.

If you use other instrument, might not have cost in the sense that if you want a [tissue] [ph], but you’re going to have clearly exposure volatility in your P&L. So from that point of view, yes, if you look in isolation, Solvency II.

And if the job, who just be to guide Solvency II to be as high as possible there would be simple job. Once you need to have a good Solvency II, you want to have good operating profit, good net income, you don’t want to have extreme volatility in the net income, all this kind of things.

When you puts all together, this becomes a little bit more of the challenge. But definitely, there is depending on where you are, and the trade off, which are more sensible to do then you can decide maybe to sacrifice to put more volatility in the net income, IFRS, but to stabilize the solvency ratio, you can definitely do that.

And these all depends on how you feel about your level of solvency ratio. So the notion, that’s very important, that the solvency ratio is something that we cannot control, that’s wrong.

We can definitely control the solvency ratio, and the desire to control the solvency ratio is going to be stronger or less strong depending on the level where we are. When we are 202%, I will say, we are not in the pressing need to get to excited about what we need to do on the solvency ratio.

Clearly, we are going to do something, that’s normal. But are not in a situation, where we need to do to overact at all.

So that’s on this point. On the currency – what was the question whether there is some promotion going on in Germany, no, I’ll say that the growth in Germany is not driven by any specific sales promotions.

So the growth that we’ve been seeing in general throughout the course of the year, one thing to consider, which is maybe extreme if you look at the Germany health, is less relevant for Germany Life. But that’s also important.

If you have a regular premium, and you apply negative interest rate, right now. You have no business with regular premium.

This is going to create according to the calculation that we do it here, which is a present value of business premium. This is going to give you the impression of the production is even higher.

You understand my point. So if I were selling 100 of regular premium 6 months ago 100 of regular premium now with new business.

The 100, 6 months ago was 600, maybe it’s up. And now that will be €1 billion.

So you need also to consider for this effect. If we may, say, to sell product with 0 guarantee rate environment below 0, I will say, long-term, so in steady state if you continue to do this for the next 20, 30 years, this might not be a good idea.

That should be very serious. And then the ability that you might have to sell still at a guarantee of 0, in this environment right now is depends on the amount of unrealized gains you have, how your book is working so far the short-term, yes.

I will say, possible to sell business with 0 guarantee even if the rates are below 0, the swap rate is below 0, let’s put it this way. In the long run that’s – something that’s most likely would not work.

So from that point of view, clearly, there is the need to make changes, because we are supposed to be here for the long run. Then there was another question.

Yeah. Just in relation, because you use trailing assumptions.

So if you use the current assumptions on you business, what would have been – what would the margin be?

Yeah. Sure.

Okay. So if we use the end of the quarter assumption, our new business margin will be slightly above 2.5.

Right now, the situation is a little bit better. So I will say, yeah, most likely, if they stay, yeah, stay where they are.

We might get something more from the United States, because in the United States, we do a continuous true-up, right. So every 2 weeks in the United States, we are adjusting.

But I would say, the point of reference, I would expect something, which is north of 2.5 maybe 2.7 that could the number that we’re going to see at year-end for the quarter.

Okay. Thank you.

Hi, there. I just a quick follow-up.

So going back to the last liquid point, let’s say, it’s move to 30 years. Would you still be really, really well capitalized in Allianz Leben?

Question 1. And Question 2, quickly, just on the harvesting rate in the Life business.

It was low again. Could you remind us what’s going on there, given the yields went down the quarter.

I was just wondering, whether the sort of derivative effect that’s impacting that.

Can you repeat the last question? I didn’t get the second one.

Harvesting in the Life business. I was low.

Is that some sort of derivative effects? Or is it just low realized gains?

Yeah. Okay.

So on that one, I will say, so we’re not necessarily realized a lot of gains, right now, in the Life business. So from – and then there is always also the impact of derivative.

But fundamentally, we are not taking any substantial realized gains on our Life business, right now. There is also something to highlight, if we want the investment margin to look a little bit better.

We would have definitely the possibility to make this investment margin look a little bit stronger. So as you can imagine, right now, I think, just to give an idea, right now, on a gross basis in total, we have €80 billion of unrealized gains.

The €85 billion of unrealized gains between bond and equity, so clearly, if we want to deploy these unrealized gains to improve our results for the Life business that would definitely show even better results. But we are very happy with the amount of operating profit that we’re doing right now.

But there is definitely that even possibility to create more profit, if really have to. And the last liquid point, I will say, if the last liquid point, we’ll go from 20% to 30% solvency ratio of Allianz Leben will drop significantly.

I don’t tell you the number, because we always speak, it will never happen, because we will never look at the change in the last liquid point from 20% to 30%, and say, we do nothing. We will definitely then, as I was saying before, extended duration.

So there will be the implication. But you might ask me how much will need to extend the duration, I think, we should extend the duration by quite a bit.

But there will be definitely a possible. So in that case, we will look at management action to offset impact of the last liquid point.

But your – so conclusion is you still think it will be lower, but you’ll be okay. Is that your conclusion?

Yes. Absolutely.

Yes. Absolutely.

Yeah.

Okay. Thank you very much.

The next question comes from William Hawkins from KBW. Please go ahead.

Hi, thank you very much. Giulio, there is always going to be specifics in your reserve developments like AGCS or Spain.

Could you kind of summarize, what you think an acceptable level of volatility in aggregate for the reserve development in your non-Life combined ratio? I mean around the 3.8% history that you told us, we know, clearly, that could be 100 basis points either side.

Is that how you’d like to think about the acceptable range over the future? Or could we see – I’m trying to get a feel for how low you would accept that number going.

And equally, I suppose how high it would be? That’s question 1.

Could you update a bit secondly on where Allianz is thinking is in terms of rating migrating and default risk? Obviously, all the conversations topically are about low yield.

But the background there is a lot of credit risk building up as well. Could you kind of remind us any update work that you’ve done about your Solvency II sensitivity, so rating migration?

You’ve talked a bit about on the first quarter, I know, you’ve done any more work. And also, how Allianz is thinking about the risk?

Because on the one-hand, both at the Executive Board and in PIMCO, you often flagged this as a risk? On the other hand, Allianz is still a net investor in credit?

And then if I made thirdly, very small questions, but your non-economic variances seem to huge positive for the Solvency II capital generation in the third quarter. Is there anything specific to flagged on that and then I think forward looking?

Or do we just sort of say, well, that’s good news, but we’ll still plug-in 0 for the future? Thank you.

Yeah. Thank you for the question.

Maybe, I’ll start from the last one. Yeah, the non-economic variance is which are included in the new business in the organic profit generation, have been about €400 million, €500 million in total, when you also look at the risk margin P-C on a pretax basis.

Now this is more than one-off, and we do on the Life side, for example, we do a calibration, and this calibration happens once a year. So this is time where we put the calibration into the model.

In this case, it’s a calibration regarding the risk margin for cost lapses and what we do we have a 10-year view backwards. And right now, with this adjustment that we did now the 2008 year is drop out of the 10-year all in that we do.

And I can imagine that 2008 was a special year, creating some noise even if we speak on non-market risk. So from that point of view, that’s more to be seeing as a one-off.

Sometimes, they can be positive. Sometimes, they can be negative.

But there is definitely a one-off. On the rating migration, I’ll say, what we’ve been doing is we have a system in place, which is internally we calculated so called management ratio.

So we look at our solvency ratio, we compared the solvency ratio to what we think we need to have as a solvency ratio considering stress and annualize the 2008 crisis, and also assuming that we’re going to natural catastrophe. And in the past, we were not including the rating migration into the this calculation.

This year we have introduced also the calculation for the rating migration. And this has changed, the amount of additional solvency that will need to keep by – above by 5 percentage point.

So this is how I will quantify the impact of rating migration on our solvency ratio. The other question was on the runoff, when we talked last year we said at moving forward, we expect our runoff to be more about 3%.

And so I will say that, as we move into 2020, 2021, this is the number. That’s we generally expect to see.

So there’s nothing has changed on that kind of guidance, and clearly, we can be a little bit high or a little bit low. But I will say that 3% is the expectation that we are moving forward.

Thank you. Just on the rating migration to come back.

If I remember correctly, you said on the first quarter that you did a scenario analysis that said a 2008-style scenario, which was would be a one notch down grade across your Corporate portfolio, would hurt your Solvency II ratio about 10 percentage points. I don’t want to inappropriately put words in your mouth, but is that a correct memory of what you said and it’s not still the situation in terms of what you think will be a stress test for your Solvency II ratio?

Yeah. That’s – yeah, yeah.

So when we did the analysis at that time, we had a 9% impact, because of rating migration, and then there was 5% impact, because of spread impact. And now, as we went again to running the model, and including this into our management ratio, the impact of management ratio has been determined to be 5%.

I think, we always estimated some parameters in the analysis that we did. At the time, there was some sort of double counting between the rating migration, the spread impact.

But the latest information based on what we’re putting now into our model is our management ratio is changing by 5 percentage points, because of running this additional stress.

Right. That’s great.

Thank you.

Yes. Good afternoon.

I have a couple of questions on the product side. First, you mentioned about the future redesign of some of the products, you gave some examples.

More specifically on the German Life side, could you remind us what has been done so far this year to the products structure? And what may be done in German Life specifically?

And secondly, on the travel insurance side, there’s been a warning from EIOPA and from a consumer protection perspective in terms of the value for money clients get. Do you think that given you are big player here, do you think this is mainly a problem for many of the small players, not getting enough value for money and you’re comfortable on your side?

Or what type of claims ratios that travel insurance business is running at specifically? Thank you.

Yeah, coming from the Allianz Leben, we are thinking about product changes. And I even don’t know now what is [pubic one] [ph] for example, we introduced that thing.

I can definitely share that. We introduced a new product which is a sort of unit-linked, but the – it’s a unit-linked product with somehow some sort of alternative assets, underlying this unit-linked product.

So that what it is – new product that we are introducing. As we go into 2020 or 2021, we are going to look also at other actions that we can take there.

So – but for the time being we are still in the phase where we are analyzing an option as opposed to make changes. But I’m pretty confident that as we go through 2020, 2021, we can announce to you also some changes.

But again, Allianz Leben may be also one of the companies that has some room to maneuver. So the need to change might be stronger in other entities as opposed to Allianz Leben.

But clearly, Allianz Leben has to think about changes moving forward. On the travel, I will say, yes, we’ve seen that.

We are clearly aware that commission level in travel might be higher compared to what you see in other products. What we do, we’ve been doing this since years, we have a product review committee, where we look not only the profitability but we look also what the value for the customer is.

So that’s the committee and we sit down and we have to determine that if you are selling business with a commission ratio and the loss ratio is below a certain level, this is not a product that we should be selling. Now, as usual, the regulator might have some different view about what is the level of acceptable loss ratio.

But we have done our homework from our side. So from that point of view, we have put governance in place.

So we feel that we have done what we can do from our side and then we are – if we need to engage in any conversation we are going to engage in the conversation we need to have. But I think we are definitely not on these streams.

And I can tell you based on my personal recollection, we have let business go, because we found the – or we have not accepted new contracts. It was in Asia, that was in Asia, but it’s because we didn’t find that there was enough value for the customer.

Super helpful. Thanks.

Thank you very much. Good afternoon.

Two questions, also one on Life/Health here. The loadings and fees you mentioned there are significantly up because of you taking some actions already.

Can you elaborate a little bit on the actions which you have taken? Where does it come from?

What products are affected and what countries? And the second, an evitable question, maybe it’s a little naïve to ask.

But on your Chinese investment, you spent around US$1 billion in this Chinese life insurance company. This costs you around about 2 percentage points in the solvency ratio.

And you defined it as a financial investment. Maybe as I said, it is a little naïve.

But at the moment, it is a financial investment, can it become a strategic investment or – and is it normal that such an investment costs you 2 percentage points in the solvency ratio. I assume there is some negative diversification or lower diversification in place.

So coming from the first question about the loading and fees, I might have mispronounced I think, but fundamentally, no, no. The loadings and fees are not going up because of changes that we do with this specifically now to the products.

It is just a change that we are seeing over time, because we have more unit-linked products. For example, in Italy also the markets are being kind of benign.

And then overall, when we are growing, also in the German business you have more loadings, because there are loadings in the German business. So this is now related to the fact that we have been making changes now in this quarter because of the market condition that’s just a trend that we have been seen over the last quarters and this is coming from volume, which can be volume because we are selling more or it can be volume, because assets under management if you want are going up.

On the Chinese investment of the €800 million, I will say that this €800 million, by the way to be specific. That’s the financial investment, which might become one day a strategic investment in the sense also finding corporation with Taikang.

It’s common to have a financial investment, which has a capital charge of, I will say about 35%. I will say it’s not uncommon.

So we do this kind of investment. We do private equity, all these kind of things.

The point is in this case it’s a large one instead of being maybe 3 or 4 smaller investment with €150 million. But if you take a look from a total portfolio point of view, where we have also our allocated budget for different kind of investment, you can consider this to be an alternative investment if you want.

At the end of the day, this might be a little bit larger. But it’s not unusual that we are deploying funding, coming from our general accounting investment that, per se, can have a high risk charge.

But always look at this within a portfolio. So we have – right now, our investments are, for the insurance side are about not far from €800 billion.

We are investing every year about €120 billion of cash into new investments. So when you take a look from that point of view, I would say it’s a large investment.

But it might not be as large as it looks.

That’s great. Thank you very much.

Welcome.

Thank you very much for the follow-up. I guess, we discussed the M&A historically and how much we spend.

I was just wondering looking forward what your view currently is at the opportunities available. And I’m just wondering where you stand now versus where you stood at couple of year ago, whether you think there is sort of some more opportunities, more or less opportunities to deploy capital looking forward.

That was one question. And maybe a small second one, just wondering if I could ask for the usual update on asset management flows in Q4 to date, what you’re seeing in the pipeline?

Thank you.

Yeah, so maybe starting from the second one on the asset management flows for the fourth quarter, they are positive. So we see positive flows at PIMCO.

And I will say the reason why we see there are rates, if they continue to go this way then in the quarter they would have the same amount of flows that you saw in Q3. But really we cannot speak about the future, but this gives you an idea that there our rate is intact at PIMCO as we go into the fourth quarter.

In the case of AGI, we are seeing that the outflows have stopped at least for the month of November. So from a flows point of view, it’s right now in November we have a good picture, which is pretty consistent with what we saw in the third quarter or before.

On the M&A, I will say the situation is not so much different compared to what we had one year ago. So from that point of view, I think the opportunities are more or less the same.

The situation is more or less not much very much changed compared to what we had 12 months ago.

Thanks a lot.

Yeah. Thanks to everybody who joined the call today.

We say goodbye to everybody and we wish you a very pleasant weekend.

Bye.