Allianz SE (OTCPK:ALIZF) Q3 2022 Earnings Conference Call November 10, 2022 8:30 AM ET
Company Participants
Oliver Schmidt – Head-Investor Relations
Giulio Terzariol – Chief Financial Officer
Conference Call Participants
Andrew Sinclair – Bank of America
Andrew Ritchie – Autonomous
Peter Eliot – Kepler Cheuvreux
Will Hardcastle – UBS
Michael Huttner – Berenberg
Vinit Malhotra – Mediobanca
Ashik Musaddi – Morgan Stanley
Dominic O’Mahony – BNP Paribas Exane
James Shuck – Citi
Oliver Schmidt
Yes. Good afternoon, everybody, and welcome to the Allianz Conference Call on the Financial Results of the Third Quarter 2022.
Before we start the call, let me do the usual housekeeping and remind you that this conference call is being streamed live on allianz.com and YouTube and that a recording will be made available shortly after the call. If you want to ask a question after the presentation and to join us via web call, please click on the talk request button at the upper right-hand side of your screen. If you join us via telephone, please press star five.
All right. That was all from my side for now. And with that, I turn the call over to our CFO, Giulio Terzariol.
Giulio Terzariol
Thank you, Oliver. Good afternoon, and good morning to everybody, and I’m pleased to present as usual the results for the third quarter for Allianz. And also as usual, we start first with the view on the nine months results. Overall, we are very, very strong results for the nine months with an operating profit of €10.2 billion, which is 3% higher than the level of last year.
And we look at the driver, clearly the main driver is coming from Property Casualty, but I will say considering the market condition, also our Life segment and our Asset Management segment have contributed their fair share to our strong operating performance. The combined ratio P&C for the nine months was basically flat over the level of last year. So the improvement in combined ratio is driven by higher premium, which is also our response to the inflation that we are seeing and also we have a higher investment income.
On the Life side, you can see that the new business margin is much improved compared to the level of last year and also the VNB is slightly higher. Clearly in this kind of environment, the production level is going to be lower, but again, this is just driven by the environment and we are looking at the positively to the development of the new business margin.
Finally, on the Asset Management, yes, we have outflows. This is not surprising in a environment like this one, but when you look at the operating profit performance that’s resilient. We had an operating profit of €2.4 billion for the nine months, and this is more or less the level that we had last year when the market condition were much better. So this sign of resilience is definitely a positive message.
With that, I would say results have been really good over €10 billion operating profit. And as you see considering that we had not only strong third quarters, a strong second quarter. We see very strong underlying performance coming through. We have revised our expectation for 2022 to be in the upper half of our range.
Now, if we go to Page 5 on the third quarter results standalone, you can see an area, which is similar to the one for the nine months with an operating profit of €3.5 billion, which is 7% higher compared to the level of last year. The Property Casualty operating profit was a €1.7 billion, so 32% higher than last year. Here also, we see a stable combined ratio a little bit improved, and we clearly benefiting from high investment income and higher premium on the Life sides.
The operating profit is down compared to last year, but not so far away from our outlook divided by 4%. And the new business managing is at 4% level, which is a very strong level. And then finally, as a management within operating profit of €800 million is basically not far away from our outflow divided by 4%, so overall, strong performance also in the third quarter. And when you look at the net income, you see €2.5 billion on net income, which is the results of the strong operating performance combined also with some realized gains.
Now, going to Page 7. On the solvency ratio level, we have a comfortable level of 199% before the deduction of the dividend that we announced the buyback that we announced yesterday, if you deduct the buyback, you get to a solvency ratio 197%, so again, a comfortable level. And if you look at the sensitivity, and I’m focusing here, the sensitivity to the equity market, they reduce compared to what we had in Q2.
In Q2, we had 20 percentage points sensitivity to a drop of minus 30%. Now, we have 17 percentage point sensitivity, and we are planning to bring the sensitivity further down in the next quarter. So overall, a stable solvency ratio, a buyback, and also somewhat reduced sensitivity.
Moving now to Page 9. You can see the evolution solvency ratio for the quarter, and here you can see that we are continuously generating strong organic generational capital with 7 percentage point pre-tax and pre-dividend. So if you then take the number after-tax and after dividend, this is a good 2 percentage point of improvement that we see every quarter.
Then in the quarter, you see there was a negative impact coming from the market, which is due to higher rate volatility, to lower equity market, and also to a twisting or the credit curve. But the point here, as the market volatility comes and go, the organic generation is there to stay. So fundamentally, when the capital volatility is going either to revert or just not to be there, we are going to see the full impair to the capital generation coming through our number. Bottom line, 199% solvency ratio 197% that’s a comfortable level that’s allow us to continue also in the future with capital deployment.
And with that, we go to Page 11, which is the segment view, and we start as always with Property Casualty. In Property Casualty, you see that we had a very strong growth both on a total growth basis or on a internal growth basis. When we look at internal growth, you see 9% of growth, which is mostly driven by price. I would say 80% of that growth is driven by price development, and clearly this is a strong sign of how we are reacting to the inflation.
And also when you look at the growth by company, you can see that basically almost all companies are showing a good growth rate. Also, you are going to recognize this growth rate is stronger compared to what we had just a year or two years ago. So there is clearly a sign that we are reacting to the inflation that’s we potentially see.
And with that, going to Page 12 on the operating profit development, overall, you see that we have an improvement in the operating profit of 32% of €400 million, half of the improvement is coming from underwriting, and half of our improvement is coming from investments. Focusing first on the underwriting results. The improvement is driven partially by the increasing premium that we discussed before, and then also by the better combination by about 70 basis points.
Clearly, here we are benefited from the net cash load, which has been lower compared to last year, and also from the more positive run. But I can also tell you that there was a substantial amount of recycling into our accident year loss ratio. So there are no that we release has been then booked back into the accident year, and also we have post some specific provision for inflation. So overall, the 94% combined ratio has a very healthy level of quality. So that’s on the operating profit for the group.
And when you go to the next slide, you can see this quality also in the fact that the majority of our east – almost all our east have very strong combined ratio. If you look at Germany, France, Australia, Eastern Europe, Italy, Switzerland, AGC&S partner trade, they are all having a very strong combined ratio. We have a couple of reception. One is Brazil, where the situation is stabilizing, by the way. So we expect to see better numbers as we go into 2023. And the other one is UK, where the combined ratio is more elevated compared to what we were expecting, both in the case of Brazil and also in the case of England.
In reality, we are seeing the disease, a reflection of the market development. So it is not something specific to earlier, but that’s something that we observe in the entire market, which means also that most likely we’re going to see better results as we go into 2023, because there are strong pricing action taking place both in Brazil and in England. So overall, a very strong picture with a lot of companies delivering very strong combined ratio.
And finally, when we go to Page 17 on the investment income, you see strong improvement of over €200 million. This is coming clearly from the Fed that we are getting a high investment income due to the rate environment, and also partially we get a high investment income because of the inflation link bonds that we have. When you look at the current yield is more than 10 basis point better compared to last year and then when you look at their investment yield, you can see even 200 basis point higher reinvestment yield, which means we’re going to see strong operating investment result also as we move in the next in the fourth quarter, and also especially as we move into 2023. So overall on the P&C side, a very good picture with increasing premium, a stable combined ratio, and also a much improved investment results, so very strong operating profit performance coming from our P&C segment.
Now, we move to Page 19. On the new business margin, new business production, you can see a very strong 4% of new business margin. This is driven basically by all segments. When you look at the production, that’s down 30% here, we need to take into account there was a big corporate contract last year, so we need to adjust for that. There is also some technical effect due to the discount. And so the real drop in production is about 10%, and this is coming – is a result clearly of the environment, because in this environment selling single premium business or also selling unit-linked business is a little bit more difficult. This said, we are clearly very much focused on margin. Also, I would say, anywhere the level of production is still healthy. So from that point of view, these slides is something that confirms that our new business value franchise is pretty strong.
Now, going to Page 21. On the operating profit development, this is €200 million lower compared to last year. Here, we need also to recognize that last year, the capital markets were very benign, and so the performance in the third quarter 2021 was higher compared to our expectation. This time, clearly, the performance is a little bit softer compared to our expectation, but there is not surprising considering the volatility. And as you see, when you look at the guaranteed savings in annuity, this is the main driver of the drop in performance compared to last year. And of this drop of about €200 million, €100 million is coming from VA that in the U.S. that we know is particularly sensitive to market condition. But overall, with over €1 billion operating profit considering environment in which we are disease good result from my standpoint.
And now going to Page 23, on value of new business, new business margin, overall, you see that the improvement in the new business margin is pretty widespread across the different entities. When you look at the very new business is down, but this is down just because of the large contract that we had last year. If you are a mood at large contract, you get back to a growth rate of about 2%. And also in value of new business of over €500 million definitely a good number, which is also accretive for our Solvency II calculation. The operating profit, you can see the drop in operating profit, it’s Allianz Life USA that’s a reflection basically of the swing in variable annuity.
And then also you see a little bit of a softer performance in Germany Life. That’s also a consequence of the low amount of harvesting or negative amount of harvesting. But with €240 million operating profit, I would say, we are getting to a very, very sizable operating profit coming from our German entity.
And now we move to Page 25. The investment margin was 17 basis point, which is lower compared to the investment margin of last year. This is driven by the swing in net harvesting. This position tends to be volatile, but here the really good news is the spread between the current yield and the minimum guarantee, if you see in last year the spread was 51 basis point, and this year the spread is 57 basis point. And you can assume that this positive widening or the spread is going to continue because clearly the guarantee is going to go up and the guarantees are still going down.
So this is – in reality, the sustainable part on the investment margin calculation. The harvesting can be positive or negative. This can create some volatility. But right now, we are operating at a spread between yield and guarantee, which is significantly higher compared to the one we had in 2021 or the one that we had in 2020. So the bottom line is, yes, there is some volatility in the quarter. But when you look at the underlying drivers, which is the spread I just mentioned now, and those when you look at the new business margin of 4%, you can see that the underlying drivers or the business are really, really healthy. So once the volatility is going to subdue, we are going to see very strong results coming out of our life business. And again, with 1 billion of operating profit, even in a challenging environment. I think we have achieved, we have shown once again, the resilience of our life segment.
Now coming to asset management Page 27. In asset management, you see that the total assets under management went down by 3%, which is not reality big swing for the quarter. And what is important here if you adjust for the impact of the or transferring the assets of AGI, U.S. to Voya, [indiscernible] was just about 1%. So from that point of view, there was resilience in the quarter, and especially you can see there was resilience in the assets under management of PIMCO. And when we looked then at Page 29 at the development of the third-party assets under management in the quarter, you can see that we still have outflows. And you see that in total, we had 20 billion of outflows three quarter coming from PIMCO. And one quarter coming from AGI.
Again, based on the environment in which we are in, this is not unexpected, and we remain on the opinion that’s once the interest rate environment is going to stabilize, we are going to see a strong recovery because we’re going to see clearly flows coming back. And also we should always consider that the accretion that we have on the assets under management moving forward. It’s going to be higher compared to what we had in the past year. So yes, there is some negative flows right now. But fundamentally, we think that the conditions are going to turn for the positive when we think about the midterm implication for our asset managers, and especially for PIMCO.
Page 31, the revenue are stable. Clearly, we are benefiting here from the U.S. dollar appreciation, but still revenue are stable. And when you look at the third-party margin on the assets under management, this is slightly better compared to last year. So what we see, yes, we have some outflows, but we also see that the outflows tend to be a little bit more skewed to mandate with lower fees. So from that point of view, there is a little bit of an offsetting coming from the Fed that the fee margin tends to be a little bit higher.
Moving to Page 33, the operating profit is 800 million for the quarter, down compared to last year. Not surprising considering the environment, if you consider our outlook, however, we had an outlook of 3.4 billion for the year, which means basically 850 million per quarter. This assuming that performance fees are equally distributed during the year, in reality, we know that there are more performance fees coming at the end of the year.
So in reality, the 800 million operating profit that you see here is very much in line with the outlook which test you, that we are being kind of conservative in setting this number at the beginning of this year. So all in all, I would say numbers, which are not really deviating much from our expectation in environment, which is clearly more challenges. So overall, good sign of resilience from asset management and now coming to corporate, here, we have a significant improvement compared to last year. This is mostly driven by high investment income because of higher interest rates, because of higher income from inflation-linked bonds and also due to higher dividend.
With that Page 37 on the non-operating items. Overall, what we see here is a high amount of realized gains. This is coming basically from the Voya transaction, so the transfer of the AGI assets to Voya in exchange, we got a participation 24% in Voya. And then this is also driven by a disposal of a minority participation in a bank in Croatia. On the other side’s, impairments are a little bit higher compared to what we had last year, but this is clearly not surprising this environment, but when you look at the net between the two position, we have a lift compared to last year, which combined with increasing operating profit is leading to a gross net income of about 17%.
So in summary, strong performance in Q3, but I will say also we had a strong performance throughout the year based on the performance that we see. We have revised our outlook to be in the upper half of the target range. And with the buyback that we announced today, 1 billion, we are basically at 2 billion for the year, combined with the 4.5 billion of dividend that we paid. In May, we are 6.5 billion. And speaking about capital deployment, we also did some small acquisition the first part of the year, like we bought some book of business in Asia. We also completing now the acquisition in Greece. So overall, we are speaking of a capital deployment, both on good, healthy maintenances, but also we continue to invest in our business moving forward.
And with that, I’m ready to take your and welcome your questions.
Question-and-Answer Session
A – Oliver Schmidt
All right, thanks, Giulio. Yes, we will now be happy to take your questions. And the first question we will take from Andrew Sinclair from Bank of America. Andy your line is open. Go ahead.
AndrewSinclair
Thank you, gentlemen. Three for me, please. Firstly, it was just around the buyback. Just wondering if you could give us some color on discussions with BaFin. And are we still looking at about 4.5 billion over the three years of the plan or any changes in thinking about that? That’s the first question. Secondly, it was on PNC profits certainly seem like they’re in a very good place. But just on the 92% combined ratio target for 2024 with investment income going higher, how should we be thinking about that today? And then thirdly, was just on U.S. life. Just if we can dig into that a little bit more commentary suggest this was just a negative variance for markets on the VA business, but we have seen some tougher times for some of the U.S. life peers recently on experience and assumption changes. Just really wondered if you can give us a little bit more color of what you’re seeing there and what’s the outlook for U.S. life. Thanks.
Giulio Terzariol
Thank you. So starting from the buyback yes, no, we are taking to clearly, our buyback philosophy. So from that point of view, you can see this year we are already doing 2 billion. Then clearly we are going to see what is coming in 2023, 2024. But fundamentally, our plan is not changing the conversation with BaFin, very constructive. So from that point of view, there is no kind of particular conversation, let’s say that we need to add with BaFin.
So from that point of view, I would say on the capital deployment, everything is as we should expect in the fact that we announced today buyback 1 billion is just another confirmation of that. On the profit in property casualty, the 92 combined ratio. Look, at the end of the day, I would love to say that we are going to have a 92 combined ratio in 2024, but this is going to be a function of how the markets, the insurance markets are going to react. To a certain degree, I believe if the investment income is going to be significantly higher compared to what companies with anticipating a year ago, we might see a different level of combined ratio. But if you ask me, the ratio of operating profit to premium should be much better.
So I would almost switch the focus to if you want to sort of operating margin and I would expect that the ratio of profit to NPE could be better and especially the NPE level is going to be higher. Just give you an idea. in our Capital Market Day, we had anticipated to have about 58 billion to 59 billion of NPE in 2024. We are going to achieve that level this year. Our investment income we had anticipated to have about 2.4 billion of investment income in 2024. We are going to be over 3 billion this year. So the economics are changed significantly, which means, yes, most likely eventually the combined ratio is – most likely combined ratio is not going to be the 92% level. We will try. But even if that doesn’t happen, we are going to have, we should have a strong operating profit in 2024 compared to what we said in the Capital Market Day of last year.
So that’s our expectation. That’s also what we see as we are going through our planning right now. So that’s on the combined ratio of operating performance in PNC. Regarding U.S. life, I tell you. So this volatility is totally normal. I was a CFO many years ago and I was used to see this kind of volatility. So I can assure to you this is just volatility. There is nothing in the underlying that suggest any problem. And since you were talking of assumption, we expect to have rather positive news coming from the assumption review and not negative news.
So that’s the classical volatility that you can get in in the U.S. where last year we had in the quarter 50 million of operating profit in VA, and this quarter we do minus 50. That’s very, very normal. The point is also an Allianz Life fundamentally has more FIA business compared to some of the competitors you might be referring to. So the footprint is different. The recent volatility coming from VA, this is something which is normal. And then on your specific questions about assumption, we have seen over the last years positive impact coming from assumption review, and we expect, again, to see a positive impact in this year.
AndrewSinclair
Great stuff. Thanks, Giulio.
Giulio Terzariol
Thank you.
Oliver Schmidt
All right. We will take the next question from Andrew Ritchie, Autonomous. Andrew, please go ahead. Your line is open.
Andrew Ritchie
Hi there. I just want to explore the de-risking that you mentioned when discussing the Solvency II evolution. I think you suggested there was more to go there. Maybe you could give us a bit more clarity on that. I’m just trying to understand the motivation behind this de-risking. Is it to manage the S2 evolution better or is it a structural outcome of the fact that, the risk adjustment returns on fixed income are now much more compelling than equities or alternatives? So, really it’s just on some bit more about the motivation and what further actions you’re taking.
The other question was you suggested that there was even more attention to pricing in non-life in respective inflation. I can’t see that in the numbers. I mean, the renewal rate hasn’t really changed, the internal growth actually lower. So what – maybe just give us an update. What are the latest in terms of the pricing actions you’re taking in non-life in respect of managing pricing for inflation? A final short question is, has there been any change in surrender experience in the life business in light of the macro environment?
Giulio Terzariol
Thank you, Andrew. So maybe starting from the last one on the surrender experience, now we are not see any change in surrender experience so far? So that’s a simply simple answer. And also we don’t expect to see significant changes especially in Europe, in the U.S. it might be different if rates are going to move higher, but it should still move higher. And also in that situation, we think that considering that if you lapse the policy, you are going to lose basically the guarantee and so on. Any lapsation will be potentially moderate and especially the impact on our numbers will be moderate because there is a sort of compensation coming from the Fed that they’re guaranteed reserve, reserve will be released. So that’s on the surrender on your question about pricing. Okay, as you see, first of all, we have a basically 9% internal growth and 80% of that is due to price.
So that’s actually pretty strong number if you think that the inflation that we see is about 5% to 6%. Then one thing, because I believe we are focusing on the rate change renewable, I believe also that that number where we report the number tends to be a little bit on the lower side. But if you split basically the number between retail and commercial I can tell you in retail we have a growth of 4.1% in – for the nine months. And that growth in changing renewal was 3.5% for the six months, which means if you do an implied calculation, we are speaking basically of a lift in the quarter of 5.5%. So we are definitely moving higher and we are going to see even higher growth in changing renewal as we move into Q4. So the point is that you know, as you look at the KPI, you said the KPI, you’re going to see that definitely the, the premium changes that we are putting through are matching the broader inflation that we see.
There could be a couple of situation where this is not happening. One might be the UK, where now however, rate changes are going double digit, but just look at the combined ratio, look at the growth in MP, which is coming from volume, and then you’re going to see that clearly there is a strong reaction to the inflation that we saw so far. And the rate changes are just going up. For example, in Germany, we’re going to see more rate changes coming next year. And we look at the combined ratio of Germany was 90.6 and we feel very, very good about the situation, for example, in Germany, just making an example. So I think we have been tackling inflation very, very well. And this is reflected the numbers. And also keep in mind that our investment income is also so much higher.
So that’s also part of the equation. And then you had another question, which was about the de-risking. In reality, it’s coming from both, it’s coming – the first clearly the thought is that the – as you said before, if you want to say the ROE, return on investment, you put the capital deploy is now clearly the value proposition of fixed income is much more compelling compared to a few years ago. So from that point of view, it’s a different game. So this is clearly part of the reason why there is now a benefit in going into fixed income versus equity where you think about the capital consumption. And the other element is also we like to reduce the sensitivity of our Solvency II ratio. So the two things are both relevant, but the catalyst is definitely the change in the rate environment.
So that’s definitely a catalyst to say, okay, we can move our portfolio in a different way and this is going to contribute to a better solvency ratios, especially better solvency ratio sensitivity. One thing to notice as we are putting business with a strong distance to the guarantee, automatically our sensitivity or the solvency ratio should go down. This takes a little bit more time clearly, but right now the gap between the yield that we have on the Solvency II and the guarantee that are coming into from the new business is very wide, and this is definitely going to have also a cushioning impact on the sensitivity of Solvency II.
Andrew Ritchie
Sorry, And just to go forward, are you – is the de-risking your planning about the same magnitude in Q4 or can you say.
Giulio Terzariol
Yes, we’re going to take action in Q4 and then it’s going to be also in Q1, Q2. I just tell you overall in this idea to reduce the sensitivity, it’s a combination of it’s on de-risking on the assets side also Allianz Life in North America, they can do some model changes in reality in a way they calculate the liability. This is also going to reduce the sensitivity, plus they do, can do some adjustment to the hedges. So we are expecting to get less sensitivity coming from Allianz Life. Then we have also other management liability, liability management action that can reduce the sensitivity. And then there is this organic development they should help. So it’s a combination of things, but definitely the risk is going to happen both in fourth quarter and it’s going to happen also as we go through 2023.
Andrew Ritchie
Great. Thank you.
Giulio Terzariol
Welcome.
Oliver Schmidt
Okay, we will take our next question from Peter Eliot, Kepler Cheuvreux. Peter, please go ahead. The line is open.
Peter Eliot
All right, great. Thank you very much. Firstly, Giulio, given your comments on the spread widening in life between the current yield and guarantee, I’m just wondering if you can share any thoughts on the sort of outlook for the investment margin there. Secondly on the share buyback, I mean, I know you’ve given the deadline at the end of the next year, but you probably expect quicker. I don’t know if you can share any thoughts on how quickly you might buy back the shares.
And then finally, just wondering if you could give us a little bit more guidance on the asset management division. If I’m can be a bit greedy, I was wondering if you could give us an update on flows in the first instance. And the included 29 million of other revenues and I’m just sort of wondering how sustainable that is?
And finally, I guess it was a bit of an unusual quarter given we had one month free Voya deal, but equally no dividend from Voya. I’m just wondering if you can help us sort of think about how we should normalize that for a certain normal month, normal quarter. Thank you very much.
Giulio Terzariol
Thank you, Peter. So maybe starting from the first question, which was on the investment margin. I will say that in the absence of because there is always these volatility coming from the harvest team. I would say that in the absence of these volatility, the margin might be close to 20 basis point per quarter. So that’s – so said in another way, when we look at the annualize, and I’m focusing more really on this current yield minus the minimum guarantee, this annualized number is now basically about 2.2 to 2.3%. I expect that number to go up in 2023 to 2.5. And then when you run the margin, then I will definitely expect that we will be after the profit sharing. So on, I will expect that number to be about 80 basis point based on what we are seeing right now.
So definitely going the right direction. Just to give an idea, the spread between current yield minimum guarantee in 2020 was 1.8%. Now we are 2.2%, 2.3%. So that’s a big change in this spread. If you put this in relation to the policy reserve of a 100 billion [ph] we are speaking of 2.5 billion, clearly there is a profit sharing between, but that’s a totally different amount of buffer that we compared to a few years ago. So that’s on this one. Then on the buyback, it’s – I think your question is what is going to happen next year? So for the time being, we’re going to complete the buyback, which by the way, we expect the buyback to be completed with a normal speed. So by basically end of March this buyback should be completed.
And then as we go throughout 2023, we are going clearly to see how the situation is. And as you saw, we are being very diligent in deploying capital, so we can be assured that we will continue to do so. And then we have the last question was on AGI revenue, not AGI, on the – first, on the other revenue item, I would say this is more an effect of some consolidation that you see. Also some swings in can be a fixed swings because there is a little bit of a balance sheet in asset management tool and the interest income coming from the assets that we have there, or some swings in a fix that we have on some assets are not reporting under normal revenue, but they are reported basically outside revenue.
So from that point of view, fundamentally, we speak about volatility, but yes, in theory also as Asset Management, you see a little bit more income on the cash position they are holding, but this is not going to change the trajectory of AGI and PIMCO. But yes, the number should be a little bit higher moving forward.
And then on your question on AGI and how to look at the AGI operating profit, considering the noise if you want coming from the transfer, the U.S. business to Voya, I would say that in this number 178, there was one month where the U.S. business was still included. And if you ask me to quantify what was the impact of that, remaining month is about a good €10 million of operating profit. So you should remove that €10 million operating profit from the number on the other side, next year, we’re going to get dividend from Voya, which are not included in this number.
And I will say that the dividend that we are going to get from Voya should be a good offset to that €10 million that we are – I’m deducting now. So you could say that this number could be a proxy in reality for what could happen. And then clearly we need to see how the capital markets are going to develop. But I will say this number, it’s when you also considering the dividend from Voya, this can be a good proxy of the current performance of AGI and then clearly this number can go up and down based on market conditions.
Peter Eliot
Thank you very much.
Giulio Terzariol
Okay. Yes, I understand. There was another question about outflow for our net flows. Look, is impossible for me to give you an outflow because clearly floors can go up and down, but I will say we need to be realistic. As long as there is uncertainty in the regarding rate environment outflows are going to be rather under pressure.
I strongly – really, strongly believe that once this uncertainty is going to go away, we are going to see a lot of the influence coming our way. So I see this really more – as a timing, the same apply by the way to the assets under management. So I think it’s more a timing issue as opposed to we’re going to miss assets under management for a long period. So it’s just what we’re going through right now and to be frame between me and you if we go through this situation, booking €800 million operating profit per quarter seems to me a good starting point.
Peter Eliot
That’s great. Thank you very much, Giulio. I mean the question will close was a bit more about what your experience has been quarter-to-date so October, but maybe too early to comment on that.
Giulio Terzariol
No, I can give you the number. Sorry. Quarter-to-date for PIMCO was about – outflows are about €15 billion.
Peter Eliot
Right. Thank you very much.
Oliver Schmidt
Okay. We will take the next question from Will Hardcastle from UBS. Will, please go ahead. The line is open.
Will Hardcastle
Yes. Thank you. I think you mentioned earlier you insert an inflation load into Q3, I know you did in Q2. I’m just wondering if I heard that right and any quantification of this at that point. And perhaps any development from those put in earlier in the year, whether they’ve gone from IBNR to case or they’re still IBNR at this stage.
And the second one is really just looking at personal Allianz motor combined ratios quarter-on-quarter. We’ve seen some material margin contractions, some geographies. You – I guess you’ve called out pricing in the UK as well. We’ve seen some front books and back book issues and challenges. I guess anywhere across your portfolio, I mean without the obvious one or two that you’ve mentioned, that, that are a bit more challenging quarter-on-quarter, perhaps the market’s not getting the price required that you’d be hoping for and any update on German renewal would be interesting. Thanks.
Giulio Terzariol
Yes. So do you ask about an update on Germany? That was your question. I didn’t understand the last part. Germany?
Will Hardcastle
It’s motor in general. Any particular geography, challengers, but particularly Germany upcoming renewal.
Giulio Terzariol
Okay. Yes. So by starting from the inflation, yes, we are regularly booking if you want an extra provision for inflation, and I can tell you that number it’s sizeable. So it is not far from 2 percentage point of combined ratio. So that’s what we booked in Q3. I think the number was about 1 percentage point in Q2.
So we are constantly adding, by the way. There is no kind of release. It’s just going one direction. So we started by the way to build up this reserve already last year. So you can imagine if you start doing the math that we had some sizable provision for inflation that we believe is – it is also going to be needed, so to a certain degree, but this – there it’s a little bit the quality of the combined ratio because there was about 2 percentage point of explicit provision for inflation.
So again, when we run our claims to triangle, we get a number, we know the claims triangle might not reflect necessarily the inflation we might see in the future. And so in this quarter, we put about 2 percentage point of extra provision for that. And there is no release coming from the provision that we book in the first six months of the year of last year.
So that’s on how we are tackling the issue of inflation. Regarding your question about motor, I would say the biggest challenge of is the obvious one like the UK or Brazil. Otherwise, I would say in the rest of the countries numbers are holding up pretty nicely. So we don’t see much pressure.
And in Germany, I cannot tell you now about exactly what is going to happen renewal, but you should assume that rates in Germany are going to go up. So from that point of view, the inflation that we might see coming through in Germany now that as you see, we can said that overall, that inflations going to be definitely matched by rate increases in 2023. So overall, I – you never know what it can happen with inflation because at the end of the day could also escalate significantly. But to the extent that we continue to see what we saw so far and even some acceleration, I think we are going to be in good shape.
Will Hardcastle
That’s really helpful. Can I just check on those inflation loads and I know that provisions and loads and such, when you’re ascribing them, are you thinking they’re in particular for lines like personal motor or they’re very much broad based.
Giulio Terzariol
The reserve is almost broad based, so we are putting, then there is always maybe a sign here and there. But fundamental is an extra provision that you book is really a sort of qualitative reserve on top that that you put in the books and that’s spread across clearly the different OE, some OEs have more of a provision or the OEs less, but fundamentally we try to build up where we can this kind of extra margin, which is not going to be margin. Yes, it’s more something that is prudent to put at this point in time.
Will Hardcastle
Thank you.
Oliver Schmidt
Okay. Yes. We will take our next question from Michael Huttner from Berenberg. Michael, please go ahead. Your line is open now.
Michael Huttner
Thank you so much and I’ve been listening to all your answers, it’s lovely. I have a three and the first one is as your life back book is – your life front book is changing and the life back book is kind of maturing, is that kind of mountain of cash to come at some stage. The second is on performance fees in asset management, you said, we’ve got to kind of annualize them, but maybe you can help and give us a figure, which we can annualize anyway. I’m being very lazy here. Sorry.
And the third is, I was actually really positively surprised by the 2% net benefit to solvency from net profit less dividend. I kind of assumed that I can’t remember that maybe you were saying this could be a little bit under pressure due to the strong growth, but doesn’t seem to be any – under any pressure at all.
I just wondered if you can give us a kind of feel for it. And then the final one in the past, you’ve always said that or you’ve said, I remember that underperforming units is an opportunity to kind of factor in more profit growth going forward when you think Brazil and the UK could become more positive. Thank you.
Giulio Terzariol
Yes. Thank you, Michael. So on the back book and whether we can see more dividend coming through, but I would say that definitely right, the more you create stability by the way, we’ve been very stable already in the past. And the more we are becoming efficient capital, the more you can see stable dividend flow. I can tell you. Let’s take Allianz Leben, Allianz Leben has always been very stable.
So you can basically assume they’re going to pay a dividend. They’re going to pay an increase in dividend. In the case of Allianz Life, in reality, there is always some volatility which is a results of the accounting or the statutory accounting. So from that point of view, yes, fundamentally there should be more stability. But to a certain degree, we need also to say that considering the different level of accounting that you need to apply there could – there will be always – there will always be some volatility in the dividend remittances coming from the life business, what is good.
However, in our case, considering also the diversification of our business model, we get always to very stable cash remittances. So we are running pretty close to the €7 billion and – per annum, and this number is very, very stable. So can be some movement in one company versus the other company. But fundamentally, we have a very stable cash flow and also based on what we see this cash flow should go up as we move forward.
On the performance fees, I cannot really give you a number. So I would say in the past, if you see the performance fees after the profit share anywhere slightly not €200 million potentially we might see something stronger this year, but there is a lot of uncertainty right now in the marketplace. So we expect to see, anyway, that’s what I can tell you.
We expect to see definitely more performance fees in Q4 compared to the performance fees that we saw in Q3 that’s what, what I can tell you and then we see a little bit how the markets are going to do from here to the end of the year. But you should expect to see a lift in performance fees in Q4, not in significant compared to the Q3 numbers.
On the solvency tool, you are right, somehow the 2 percentage point is holding pretty nicely and I was expecting indeed the growth in P&C to have more of an impact. But the point is we’re getting more and more efficient life side and we are getting the very new business, the new business much is going up as you see. And this is basically then going into the solvency tool calculation also the capital efficiency in reality is becoming stronger.
So we have more consumption coming from P&C because of the growth, but on the other side, we have a better organic generation coming from the life business. That’s the reason why despite the higher growth in P&C, we still see capital generation, which is consistent with the expectation that we said about a year ago.
And then your request about Brazil and UK, we expect Brazil to be better. So we had just a meeting with the local team the other day. And you can see that severity is normalizing right now. So because severity has been gone up – going up for months and now the – for the last month, the severity has been normalizing and also the frequency, and you need to think that rate increases in Brazil being about 50% something like that. So there was a massive rate increase and now the severity and stability are stabilizing.
We should see also an improvement, significant improvement. The only question mark could only be if in a market that we know or tends to be a little bit volatile, whether we are going to have again some strange spike in severity or frequency. But to the extent that’s frequency severity are going to be kind of stable, the rate increases are definitely going to bring down the combined ratio significantly for next year.
So I would expect that the current, we are running right now over 110% next year, we should definitely be close to a 100%, according to plan we should even be slightly below 100%. Let’s take step by step, at least we should be able to go closer to a 100% combined ratio in 2023. So material improvement.
For the UK, first of all, when you look at the 99% combined ratio, in reality there is some subsidence claim that you should normalize away. So we think that’s currently we are between 97%, 98% combined ratio. There are a lot of rate increases coming through. So I would expect the next year the combined ratio is going to go down towards the 955 level.
Michael Huttner
Fantastic. Thank you.
Giulio Terzariol
Welcome.
Oliver Schmidt
Okay. Thanks, Michael. And we will take the next question from Vinit Malhotra from Mediobanca. Vinit, please go ahead. The line is open.
Vinit Malhotra
Hey, good afternoon, Giulio. Thanks, Oli. Just two questions for me, please. One is on the both kind of market related. One is on the P&C investment yield [indiscernible] which compares to 3.2% in Q2. I mean, the risk free has gone up far both third quarter. It just a question of about will earn through this or you held back or any comment on why this number probably higher. So that’s one.
The second thing is just linking the life investment margin – and all on the spread in the new business margin is 4% lowered by – is there anything to flag here? And also, the life investment margin grow and it is also tricky to work and because German Life…
Giulio Terzariol
Sorry, sorry, because you have – sorry, you’re breaking up a lot. So I think I could understand the first question, but I’m not so sure. Were you asking if the increasing investment yield is just due to rates or whether it’s due to mix? I – that was your question or was a different question.
Vinit Malhotra
It’s more clear. Sorry. Is this clearer or…?
Giulio Terzariol
Yes, it might be clearer. Let’s try this one.
Vinit Malhotra
Let’s try again.
Giulio Terzariol
Yes.
Vinit Malhotra
so this is – I see a 30 basis point increase in reinvestment yield in non-life. And given that risk free has gone up much more than that. I’m just curious why it is not higher pickup for reinvestment yield of non-life.
Giulio Terzariol
Okay.
Vinit Malhotra
The second question is on this…
Giulio Terzariol
Okay. Do the second question, yes.
Vinit Malhotra
Second question is a life new business margin?
Giulio Terzariol
Yes.
Vinit Malhotra
We saw 4.0%, but also this is down from 4.1% of Q2. And I’m just trying to link with the comments about the higher spread. But then also the life investment margin is quite low, is probably the lowest since the COVID crash we had in March 2020. So is there something more that has happened in the life investment margin or the new business margin in Q2, which we should load? Because also the German Life and U.S. was also flagged in even Q2 I think. So I’m just curious why Q3 life investment margin isn’t higher. Thank you.
Giulio Terzariol
Yes. So on the first question about the economic investment yield, if you look, there is an increase basically of 220 basis points, which is pretty much consistent with what you see as increasing risk free rates. I would say reality is basically matching one to one, what happened to the general rates environment.
So from that point of view, yes, I think it’s pretty much consistent. Your question regarding the new business margin and the difference between Q1 and Q2, you need always to consider, first of all, every time you take a quarter with other quarter that can always be some noise, could also be a model change, for example, they might lift the new business margin a quarter and maybe bring it down the other quarter, but also sometimes can be mix changes that you can see in a quarter.
And then also there can be an interesting element sometimes when rates go up, there is a point where the new business margin might not necessarily go up, but might go down. Because think of that, there are businesses where the profit is pretty stable. And eventually, there is – you do a spread and you’re going to achieve this spread – a fixed spread. And so if the rates are going up and down, you still made the same spread that you’re targeting, but the discount rate is going to make the value they spread lower. Do you understand what I mean?
So there are situations when the rates are going up to certain level, then the company, even in the best scenario is still going to be able to hold the same amount of spread. So fundamentally, you start getting into a sort of profit, which is very stable, but the higher interest rate is going to bring the present value they spread to a lower level. So there is also a little bit of that element.
But I will say, don’t, don’t, don’t, don’t look too much at the noise. That can be on a quarter versus another quarter. The point is that in this environment, we are operating at a new business margin, which is about 4%. What we expect to see next quarter, assuming there is no change in mix or there is no noise coming from model changes, we are expecting the new business margin to be slightly above the 4%. So there should be 4.3% for the quarter. So again, it can move up and down a bit depending on the noise that you capture in a quarter.
Vinit Malhotra
Okay, thank you, Giulio.
Giulio Terzariol
Welcome.
Oliver Schmidt
Okay. We will take the next question from Ashik Musaddi from Morgan Stanley. Ashik, please go ahead. The line is open.
Ashik Musaddi
Yes. Thanks, Oli, and hello Giulio. Just a couple of questions. So first of all, going on the live earning the spread where you show the current yield harvesting, et cetera. Now given that you might be sitting on an unrealized loss position on the bonds, how do we think about harvesting going forward? And does that really matter? Because you clearly gave like an indication, okay, every quarter we should be expecting 20 basis points on the net basis. So does – do we need to care about harvesting at all? That’s the first question.
And secondly, I mean, clearly there is a big debate out there in the market about how do we think about the profitability of P&C, because ultimately combined ratios have improved a lot and investment income is now going – getting much better and better. So ROEs are expanding. What would be your choice in say year’s time or something? Would you go for more volume and relax a bit of combined ratio rules or would you say that you would be better off taking more ROEs rather than relaxing combined ratio rules? Thank you.
Giulio Terzariol
Okay, so when you ask a CFO these questions always going to say low for ROE. So that’s – but clearly, so let’s put this way. Once you have combined ratio, which extremely good, then you might make sense to go for volume and which is 90% combined ratio. So clearly, otherwise, I have a preference always to make sure the margin are there, also because when you start going for volume, it depends how you do it. Because if you go for volume just by sacrificing price, eventually you’re just going to reduce the margin, you’re not going to get the volume.
If you go for volume, because you have a better business model, so you have more productivity, as you see for – you have a better service, you have better peers, and I’m totally there that’s like growth. But the idea of saying, let’s try to – let’s reduce our margin, let’s reduce our ROE to get more volume usually ends up in just having a low ROE and lower margin on more volume. So on that one, I have pretty clear philosophy that growth has to come not from compromising on pricing, but has to come from having a better value proposition.
Your question regarding the bonds, in reality, first of all, the fact that we have unrealized gains on bonds is not really an issue for the harvesting, because we are not forced to sell this bonds. So the harvesting issue that you might have seen in 2020 tool is more coming from the impairment in IFRS on equity, because there are these impairment rules.
In reality, as we move into IFRS 17, the accounting logic is going to be very different. So from that point of view, let’s take Allianz live in where most of this harvesting result is coming from, those numbers are going to be extremely stable, even more stable than we had in the past, because basically everything gets if you want absorbed into the CSM and then you have basically the release of the CSM over time.
So you’re going to see a very stable profit release coming from, for example, company like Allianz Leben. The same should apply to all these companies that have policyholder participation. So fundamentally, the topic of volatility, because – in the profit, because of the say impairments, volatility of the capital markets, you are not going to see that in the profit, you might see that in the CSM, the CSM balance sheet is going to move, but in the profit release, you’re going to see a lot of stability.
Ashik Musaddi
Thanks a lot, Giulio.
Giulio Terzariol
Welcome.
Oliver Schmidt
The next question comes from Dominic O’Mahony from BNP Paribas Exane. Dominic, please go ahead. The line is open.
Dominic O’Mahony
Hello, folks. Thanks for taking our questions. I really just got questions about capital generation. I’m looking at the – looking at Slide 9 their income generation. I just noticed that life and health is generating a lot more own funds before tax than then IFRS corporate before tax. And I’m just wondering whether there’s a particular reason for that. I think that’s particularly interesting given that your VNB is lower, so the contribution turning funds from the new business isn’t likely to be the driver there. Could you just unpack that a little bit for us and give us a sense of whether you expect own funds generation be structurally in line with IFRS contract or actually whether it should be ahead? And more broadly whether you think that own fund generation is a more economic representation of your sort of value creation than IFRS? Thank you.
Giulio Terzariol
So yes, just to make sure I understood the question, are you asking why you don’t see much of the tax impact? That’s your question.
Dominic O’Mahony
No, no, not tax. It’s just the €1.5 billion of own funds generation in life is much higher than the €1.0 billion in IFRS.
Giulio Terzariol
Yes. Okay. So the €1.5 billion, I tell you is because you need to think about – here you had the value new business, then you need to do the value new business, you need to take its protects because in this calculations protects, you need also to adjust in reality for some companies which are not necessarily including solvency tool, but basically that’s part of the what is coming through there. And then you have the basically the expected existing contribution coming from the MCV calculation.
So fundamentally, I would say their numbers should have a tendency to be a little bit higher compared to what we have in IFRS. And if you look back to our numbers, you’re going to see that there is definitely a tendency for the number to be able to be more elevated compared to the IFRS numbers.
Dominic O’Mahony
Very helpful, thank you.
Giulio Terzariol
Welcome.
Oliver Schmidt
Okay. We will take the last question from James Shuck from Citi. James, you’re last but definitely not least. Please go ahead and your line is open now.
James Shuck
Thank you. Thank you very much. Thanks to sneak in. A few questions please. On the expense ratio in P&C, I think you’ve talked about around about a 26% expense ratio by 2024. We’re closer to 27% at the moment and Giulio you mentioned that VNB is up well ahead of plan. So you could just comment about where you are in terms of your simplification and digitization and cost saving plans or whether that’s being inflated away by the current environment.
Second question on life and health, you have the target for kind of a 100% of units to have above a 10% ROE. That was pretty much the case. And so recently, if I look at the ROEs now though, you’ve got about half of them generations below 10%, and I do believe they’re annualized from the nine months in the additional pack.
So just comment a bit about the near action or temporary features driving that down. Then on the buyback at the nine months is a little bit off cycle, I would say, normally it kind of comes full year. Should we view this buyback as being an acceleration from the full year decision or should we come in for the full year? Just kind of looking at things totally fresh and a buyback is again on the table financial is promising. If you are able to just answer very quickly about that inflation load that you mentioned for one to two points you’ve been adding since last year. Just keen to see how that might reverse out under IFRA 17. Thank you.
Giulio Terzariol
Okay. Thank you James for the question. So now the inflation provision is not going to reverse out in IFRS 17. We are also having that provision in our 72 calculations. So whatever we do on the IFRS basis, we do also for 72. And whatever we do for IFRS now is going to apply also to IFRS 17. So there is no change to that because of the change in accounting next year. On the buy back, I don’t know whether it is off cycle, because once you speak me on tab here, sort of scheduling of buyback, what I can tell you is that for us to buyback that we are doing now belongs to 2022. So if you ask me, okay, now we are speaking of €2 billion buyback in 2022, and then in 2023, we’re going to think about the buyback for 2023. But this is clearly a buyback, which is assigned to 2022.
On the life and health and your question about the 10% ROE. Yes, basically almost all our entities, as you said, are perform about the 10% ROE. I understand your question was whether this is the case right now, right now might be clearly due to the volatility that some companies are going to be below. But clearly when we look at the 10% ROE disease always on a adjusting for what could be positive or negative development due to volatility. So if you ask me, managing the performance or the life business is very strong and is going to get stronger, stronger just because of the market condition that we see. And then clearly if you have volatility in a specific quarter and a specific here, the performance might be softer, but then also you have also the other side of the coin sometimes you might get very, very strong or excess ROE, when times are very benign.
And then on the expense ratio, yes, absolutely, as you see, we are – and we’re pushing down this expense ratio. Now what you see this year, you’re going to see that there is a big increase in volume at Allianz Partners and Allianz Partners has a expense ratio, which is higher compared to the rest of the group. So this is kind of – if you want hiding a little bit, what is the underlying improvement in the expense ratio that we see generally in the rest of the group, but also this year we remove Allianz Partners, we should see the 20, 30 basis point of improvement in expense ratio. We continue to push for that when we are going to get to the new accounting, the expense ratio is going to look differently, much lower compared to where we are now, but we are going to create clearly the transparency on the different level.
And we will still be targeting a reduction of our expense ratio by about 30 basis point per annum. So the philosophy is always the same. So basically on the same accounting basis, you will see this expense ratio drop into above 26 by 2024. In a new accounting basis, we are going to be already below 26. So in that case, the reference point is going to be clearly adjusted, but fundamentally you can expect us to achieve additional productivity improvement. The inflation point, because I think you ask about inflation, reality doesn’t need to be a negative for the expense ratio. Because yes, we are going to have higher cost, also higher salary cost, but the premium increases, they should indeed offset for the potentially higher expenses. So from that point of view, we don’t view inflation to be necessarily a negative for the expense ratio development.
James Shuck
Yes. Thank you very much.
Giulio Terzariol
Welcome.
Oliver Schmidt
All right. So as we do not have any further questions, this concludes today’s call. Thanks very much for joining this call. We say goodbye to everybody and we wish you a pleasant remaining afternoon. Thank you, and goodbye.
Giulio Terzariol
Thank you guys. Goodbye.
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