ALIZY - Allianz SE (ALIZF) Q2 2023 Earnings Call Transcript
2023-08-10 12:39:10 ET
Allianz SE (ALIZF)
Q2 2023 Earnings Conference Call
August 10, 2023, 8:30 AM ET
Company Participants
Oliver Schmidt - Head of Investor Relations
Giulio Terzariol - Chief Financial Officer
Conference Call Participants
Andrew Sinclair - Bank of America
Peter Eliot - Kepler Cheuvreux
Andrew Ritchie - Autonomous Research
Michael Huttner - Berenberg
Vinit Malhotra - Mediobanca
William Hawkins - KBW
Thomas Fossard - HSBC
Ashik Musaddi - Morgan Stanley
Presentation
Oliver Schmidt
Good afternoon, everybody, and welcome to the Allianz Conference Call on the Financial Results of the Second Quarter 2023. As always, let me start the call with 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. [Operator Instructions]
All right, that was all from my side for now. And with that I turn over the call to our CFO, Giulio Terzariol.
Giulio Terzariol
Thank you, Oliver, and welcome from my side. And I'm happy to present today the results for the first half of the year and also for the second quarter. Overall, as you have already seen, we had a strong six months results and also strong second quarter results.
If we go to page three, you can see that the operating profit for the six months was EUR7.5 billion, which is 15% over the prior period, and also 6% above the outlook of 14.2 divided by two. From a general point of view, I would say, we had very solid results in P&C. And I will say the development in commercial lines was really excellent and also we have a good resilience in our retail business.
Overall, the combined ratio for the six months is 92%. We are also benefiting from higher revenue and also from higher investment income. So overall almost EUR4 billion operating profit coming from our Property-Casualty line of business.
In the Life Health business, we see results in line with expectation. And this reflects clearly, the quality of the in-force business and on the new business margin, we continue to have a strong new business margin, which broadly at 6% level. So that's a level which is even higher compared to the target of 5% that we set for ourselves.
And then on the Asset Management, in this case clearly, we know that because of the development that we observe, especially last year, the profitability has come down compared to a year ago, but we still are reporting EUR1.4 billion of operating profit. We are still confident that we can get to the outlook of EUR3 billion by year-end and also that's important that we see some momentum from an inflows point of view especially at PIMCO.
The core net income is EUR4.7 billion, which is 90% higher compare to last year. Clearly, here we need to adjust for the effect of Structured Alpha in 2022. But even if we do that we get to an increase in core income of 15%, which is consistent with the operating profit development. So overall strong set of results, I will say across the different segment, especially under the current circumstances.
And now if you go to the second quarter results at page five, you can see broadly a copy and paste of what happened in the first quarter, over the six months with strong operating profit coming from Property-Casualty, results in line with expectation with Life Health, and in Asset Management, we see operating profit which is reduced compared to last year. But pretty much in line with the operating profit that we had in Q1.
The core net income is EUR2.5 billion, 23% higher compared to last year that's a reflection of higher operating profit. Also, we had less restructuring in the quarter compared to last year and also we had some positive tax benefit. So that's also been a driver for the core net income for the quarter.
Again, we'll go more in details clearly through these numbers in a second, but as I was saying before good six months and also a strong second quarter. So, we are also confident clearly as we look into the remainder of the year.
Now getting to the solvency ratio on page seven. The solvency ratio has improved by three percentage point. And we should also remember that the numbers of the first quarter were not including the deduction for the buyback of EUR1.5 billion. So from that point of view, there is even a stronger improvement of the solvency ratio. On the other side, we had also a net issuance of debt, which had a positive impact of 2%, but when you adjust for the buyback and for the net impact of the issuance of debt. There was still a two percentage point negative impact in Q2 versus Q1. So a nice delivery of the solvency capitalization. From a sensitivity point of view, they are basically unchanged compared to what we had in Q1.
At page nine, we have as always the waterfall of the capital generation. I think what is good here is to see that the capital generation, the organic capital generation is coming up strong. And when you look at the business evolution on the requirements of EUR0.3 billion, this business evolution is all coming from basically Property-Casualty.
So right now we are in a situation and we discussed this already a few times, but basically there is no real consumption or additional consumption of SCI coming from the life business. So all-in-all, 208% of the solvency ratio, this is a clear indication clearly that we have kept the flexibility that we can deploy as we go into the remainder of the year and also as we look at 2024.
And now we come as always to the segments view. And I would say page 11 is in my opinion, very strong page. You can see that we have a very nice growth rate of double-digit. You can also see that this growth rate is widespread basically across all entities. I think also what is really good here is to see the acceleration of the rate change or renewal at 7.4%. I can also tell you that in retail business, we are close to 9% and in commercial business we are north of 5%.
So from that point of view, I think, this is a clear sign when you look at the rate change or renewal where you look at internal growth that there is a strong push in order to offset the inflation that we have been clearly seen over the last 12 months. So that's in my opinion, the most relevant page I will say. As we think about the performance of the Property-Casualty business especially as we think about the performance as we move into the second part of the year and also as we think about 2024.
At page 13, we come to the development of the operating profit, which is up EUR200 million compared to last year. Here we have higher revenue. We have also a lower combined ratio and then also as we're going to see in a second, we have a better investment income. So all the three components together has led to this 11% increase in operating profit.
When we look at the combined ratio, we can see that in commercial lines, we have a very strong performance of 86.3% and this is a reflection also the environment we know that's profitability in commercial lines is generally very strong. But that's also a reflection of all the activities that we have undertaken over the last two, three years, and our retail business, you can see that the combined ratio is holding compared to the quarter of last year.
So, here there is clearly some pressure coming from inflation, but on the other side, we're taking rate increases. So, overall the combined ratio is holding pretty nicely. If we move to page 15, we can take a look at the profitability by companies.
And clearly, there are a few companies where their performance is lagging behind like in the United Kingdom or in Australia, to a certain degree, we could say Spain. I can also say that generally, the performance is lagging behind in countries where there is some real pressure, you can see this also on the disclosure coming from public companies listed in those countries.
On the other side, we see also a lot of strong combined ratio, if I should highlight a combined ratio is clearly, the combined ratio of AGCS with 88.3% for the quarter and if you look at six months, which is always a more representative measure from my standpoint. We have a combined ratio of 90.8%. So that's a good development. And this is not only AGCS, we saw strong performance across our commercial lines in general.
So overall I would say a good combined ratio for the segment and also lot of entities performing at a nice level. As always there are a few entities where there is some room for improvement, but we're also taking actions. So we are pretty confident that we're going to see better performance pretty soon also in those entities.
Now, we come to the investment results at page 17, which is EUR80 million, up compared to the second quarter of last year. Here you can see clearly the benefit coming from higher interest rates. This benefit is partially offset by the interest rate accretion, but net-net we are still clearly ahead of the prior period.
And when you look at the economic investment yield, it is over 4%. So that's also something that's clearly should help as we move into the second part of the year and as we think about 2024. So all-in-all, I would say very strong results in Property-Casualty, good performance in commercial lines, a very good performance in commercial lines, good resilience in retail.
We have growth. We have acceleration rate increases. We have investment income picking up. So there are a lot of, clearly strength, and this helps also clearly to offset the inflation that we're currently seeing in some part of the business.
Now coming to the Life Business. I will say that the new business margin is pretty strong, 6%. This is a reflection clearly of the fact that we are not [indiscernible] sacrificing performance in order to give higher guarantee.
So we are holding definitely the line and to this point, we're getting, clearly the benefit also of a higher interest rate environment. From a production point of view, you can see that in some geography, production is down compared to what we had last year, but we're not necessarily unhappy with the absolute level of production that we are achieving. And then you can see a nice dynamic in the United States with a 20% growth coming from Allianz Life.
So all-in-all, when you put all the numbers together, we see stability or new business margin at a good level and an increase in value in our business. Then I would like to tie this conversation to the CSM development. Overall, the normalized growth in CSM and the normalized growth in CSM is the sum of the CSM on the business expected in-force return and CSM release.
Overall we see for the quarter, a growth of 1.5%. If you analyze this number that would indicate 6% normalized growth on an annualized basis. If you look at the six months, which is always a little bit more representative because it's kind of smoothing or some noise that you might have between quarters.
We'll get to an annualized growth of 5%. So from that point of view, we have now the impression that our normalized growth might be a little bit stronger compared to the 4% that we have been indicating previously. But again, this is a new measure, new metrics. So we want clearly to observe how this CSM is going to develop over the next quarters before we achieve a definitive conclusion, but based on what we see right now. It might be that our normalized CSM growth is going to be more towards 5% and not towards 4%.
Now coming to the operating profit at page 23. There is, in general, an expectation that the operating profit should be in line with the CSM release because the other elements have a tendency to offset each other. Besides for some noise coming from operating investment results, you can see that in the second quarter, this is the case, there is always some clearly volatility around the number, but fundamentally, you can see there is a strong correlation between the CSM release and the operating profit as expected.
For the second quarter 2022, this is not the case, but we discussed that already in the last quarter call that because of the first time implementation of IFRS 17 and this has created some accounting noise for Allianz Life. When you look at the six months for the Life business, we have an operating profit of EUR2.5 billion, which is exactly in line with the expectation. Now if we go to page 25, you can see the picture by companies. And again, here, what is eye-catching is the development in the United States. But again this has to do with effect on last year. Otherwise, you see stable numbers generally in the quarter-over-quarter comparison.
So all-in-all, I would say, strong results also from our Life business. We have a new accounting framework. We are learning the new accounting framework. I can personally tell you I like it. And I think that this is really a good way to get some insights in the development of the business, especially also as you look at the CSM development over time.
And also, as you look at the operating profit and the different components of the operating profit, how they are moving over time. And with that, we come to Asset Management. Asset management, the third-party assets under management are basically stable compared to the level of the first quarter and we'll compare the current level to the one that we had at the beginning of the year, we are even -- we are 2% higher.
So we can see that in general, there is some stability, which is not the case in 2022. So from that point of view, we get comfort that the kind of pressure we saw from rates going up in 2022 should not necessarily repeat in 2023 and this should bring the needed stability in our results moving forward.
And if you go to page 29, we can look at the evolution of the third-party assets under management. You can see that there were some flows at PIMCO in the second quarter of about EUR4 billion. I can also tell you that there was some sort of acceleration towards the end of the quarter and then we saw a positive loss of EUR6 billion in July.
So from that point of view, we might be at this kind of inflection point that we discussed already in prior calls. When you go then to page 31 on the development of the revenue. They are clearly down compared to last year. That's because of the basis effect of 12 months of reduction assets under management.
When you look at internal growth, in reality, it's pretty moderate. We're down with minus 2%, and this is more or less consistent between PIMCO and AGI. What is eye-catching in this slide is the development of the fee margin at AGI, which is significantly reduced compared to the level of last year, but this has to do with the Voya transaction.
So from that point of view, clearly, we have less assets and also especially assets that had high margin, but on the other side, we don't have also the cost associated to that business. So from that point of view, you need to -- you cannot take a reduction in fee margin and assume that this is a reduction in profitability one to one, but that's much less the reduction profitability that what might look based on this fee margin reduction.
On page 33, on the operating profit, we have a reduction of operating profit of 7%. This is actually in line with the expectations. So from that point of view, there is no surprise, and that's also broadly in line with the first quarter. When you look at the six months together, we have an operating profit for the segment of EUR1.4 billion, a little bit more than EUR1.4 billion.
Our outlook for the year is EUR3 billion. So we are confident that we can get to the outlook. And the reason for that is, a) we see some momentum building up. From -- also from a flows point of view, we saw stability in the assets under management in Q2 versus Q1. And also, as you know, usually, the majority of the performance fees or higher proportional performance fees is coming in Q4 compared to Q3 compared to what you have in Q1, Q2.
So when you put all this together, we should be able to achieve our outlook of EUR3 billion starting from the EUR1.4 billion that we have right now. Corporate, I will not spent much time is in line with the expectations a little bit better compared to our expectation and then I would come to the core income.
Page 37, which is up over 20% compared to last year. Here, as I was said at the beginning of the presentation, we have a contribution coming from operating profit. You can see also that the debt structure are significantly lower compared to last year. Last year we had the impact due to the Voya transaction, and they were structurally associated to it. And then also, we had some lower tax rates, which is partially due to one-offs.
Some part of it is due to seasonality, let's call it this way. So all-in-all, we get to a significant increase in core net income. If you look at the EUR4.7 billion of core net income for the six months. I think that's a good representation of a normalized level or core net income. So if you analyze that, you get to EUR9.4 billion, EUR9.5 billion. That could be an expectation based on the level of performance that we see coming through right now.
So in summary, a strong set of results for the quarter and also for the six months with growth in business volume. This is mostly coming from P&C, which is exactly where we like to see growth. It's driven by clearly rate changes that we are implementing. We see a nice development of the operating profit. We always should also keep in mind that last year, we had a record operating profit.
So we are building up strong growth on results, which were pretty good to start with and then also the solvency ratio 208% it's at a level that gives us clearly a comfort as we think about capital deployment moving forward.
So good set of results and I'm happy to get your questions now.
Question-and-Answer Session
A - Oliver Schmidt
All right. Thanks, Giulio, for the presentation. We will now take your questions. And the first question comes from Andrew Sinclair from Bank of America. Andy, please go ahead. Your line is open now.
Andrew Sinclair
Afternoon. Thanks, everyone. Three for me as usual, please. First is on P&C. I'll go to the slide, Giulio, that you're pointing to as the main one, good figures for rate changes across the board. But I just wondered if you could comment really if we're do you think that margins are now rates are now at an acceptable level that you can push a little bit more for volume where pricing has reached a suitable level? And in particular, I just wanted to dig into a little bit on Allianz Partners, where there seems to be a huge acceleration of rate in Q2, 2.3% in Q1, 11.6% for the six months. Just impressive on thoughts on that. That's my first question. Second was on Life and Health. Germany seems to have a really pretty big drop in sales. Just wonder if you can give us a little bit more color on what's happening there to the business that you'd have otherwise captured? And likewise are you seeing any impact on that please? And third question was just on the solvency I mean 208% great ratio. How should we think about that compared to say cash and ability to put that to work? That's three for me. Thank you.
Giulio Terzariol
Thank you for your question. Maybe I start from -- start from the last one, the 208% and how compares to cash. We are in a, again, on a case side, we are in a very comfortable position. So that's also important because you might have a strong solvency ratio, but if you don't have a lot of liquidity, there is not much you can do about that. And we see that we get the cash remittances that we're getting from the OEs are consistent with our plan. You're going to see also the numbers at the end of the year. And from a cash position, we are definitely in a solid position. So we don't have any particularly constrained, let's put this way in deploying capital based on the solvency ratio that we see and also based on the capital position on the liquidity position that we have. I would like also to stress something, if you look at our track record over time, you can see a very stable amount of cash remittances, and I would obviously link that to the quality of the franchise. So and also just think about asset managers. And let's forget about the incident we started off. But asset manager producing a EUR3 billion of operating profit. You put that after tax and that basically a dividend that you're going to get one to one. We have company here in Germany, Stuttgart. They are producing EUR700 million, EUR800 million of dividend. We are extremely confident we're going to get that amount to dividend. We have [indiscernible] which is a health business the other EUR150 million dividend. So you get EUR1 billion of dividend, which I would say, call it guaranteed between inverted comma, from this entity here in Germany, Germany P&C, is a strong contributor to our dividend. And so from that point of view, when you put all together, you know that we are already starting basically every year with the amount of dividend, which is basically sure. So that's something very important to remember. On the other one, which is the topic regarding Leben and what is happening with the production there. First of all, there is an element which is a little bit actuarial. So when we show the present value new business premium here, the calculation is done on a present value basis, which means when rates go high, you have basically a lower present value business premium. So if you look at the comments that we put in the presentation, the minus 18% that you see there in reality is more like minus 8%. So from that point of view, it's still a negative number, but not as negative as it might look like just by looking at the headline number. What is happening there clearly in the bancassurance channel production is currently lower. And the reason is that banks are pushing other products. So maybe they are not pushing any product at all because they're happy to get the spread on the deposit. That's the only area where we are kind of seeing lower production in the broker channel or in the agency channel actually production is coming as expected. But for me, what is important is not so much whether we're going up and down compared to prior quarter or prior year is whether the amount of production we are getting is enough in order to ensure that we have enough scale and we have enough meat on the bones. And I can tell you that is absolutely the case. I was the CFO of Allianz Life and I was used to see volatility up and down. But for me, the most important thing was to have a certain amount of production and this is the amount of production that we get in general on our Life business is enough. You can see this also reflected in the CSM where we are still creating basically a CSM inception, which is broadly in line with the CSM release. So we just need to get a little bit more growth and then the picture is going to look extremely very positive from my standpoint. On lapses, we don't see lapses, especially we don't see lapses in Germany. So in Germany, basically, there is zero lapsation. We don't see -- we saw some lapses in prior quarters in France, but they are moderating. And in Italy, you see some lapses in the bancassurance channel, but it's not the majority of our business. We have also 50% of that business only. So reality is not really problem from our standpoint. And when you look at the CSM evolution, actually, we don't see any impact on our CSM evolution because of higher lapses. So from that point of view, I would say, lapse, which was initially at the beginning of the quarter or at the beginning of the year also because of what happened in the US shouldn't be a concern as we look at our numbers. And then you had a question on the P&C margin. For me -- and the question was whether we can push now for growth as opposed to keep the profitability. First of all, as long as there is noise around inflation, and we need to second guess what inflation might be doing. We are going to be on the cautious side. So from that point of view, that's not the time where you make experiments. So that's my tactical answer to the current situation. Then fundamentally I personally always struggle with the idea to gain market share by changing profit target or change in pricing because every time you do that, you end up in very dangerous territory. So if you want to gain market share, you do that by having a superior business model by having better customer service by doing all these kind of things, but using the price element to gain market share that can be something that helps you for a quarter two, and then you pay everything back. So fundamentally, it's not a strategy that resonates, let's say, here, it's Allianz. And then you had a specific question about the health business – about Allianz Partners and the renewal change. This is coming from the health business of Allianz Partners. We have sort of it's not a long-term short business, it's more a short-term health business. But in that case, there is also some inflation coming through, and that's the reason why you see also price changes coming through in order to make sure that we can keep the profitability at the desired level. I hope this helps.
Andrew Sinclair
Okay. Very detailed. I appreciate it. Thank you very much.
Giulio Terzariol
Welcome.
Oliver Schmidt
All right. Thanks, Andy, and we will take the next question from Peter Eliot from Kepler Cheuvreux. Peter, please go ahead. Your line is open.
Peter Eliot
Thank you very much. I had a couple of questions on Life, please, and one on the corporate segment. I appreciate that Life is sort of 50% of the full year outlook and therefore in line. But I guess you're normally quite conservative in the outlook. And I'm not really aware of any sort of major headwinds in H1. So I'm just wondering whether this is a fair reflection of the run rate whether you are a bit less conservative or whether there's sort of any reason that a run rate might be slightly better than we're seeing at the moment? Just wondering if you could elaborate on that. And then second one also on Life. If I look at the slide 21 of the CSM, the expected in-force return on the CSM, even if I adjust for the true-up. We're still at 700 million for the quarter, which is much higher than Q1. So I'm just wondering if you can help me understand why that is and what the right ongoing level is? And then finally, on the Corporate segment. I appreciate you said it sort of roughly in line but -- I guess it was quite a decent beat against consensus, especially if you annualize that. And looking at it, I'm sort of thinking, well, your alternatives may be benefited from slightly higher dividends. But I'm struggling to see any other one-offs. So I'm just wondering if there are any one-offs there or if that's a sort of sustainable result? Thank you very much.
Giulio Terzariol
Thank you for your questions. Starting from the Life business, I understand the first question was about the basically the outlook with okay. The point on the profitability in the Life business and the operating profit is pretty sticky. So there are pros and cons in the sense, you should not expect this operating profit to go down. Maybe some volatility, but fundamentally, the operating profit should go up, but it's not going to go up in an accelerated way. So you can basically expect that the performance during a year is going to be pretty sticky. You're not going to see a major difference in the operating profit in Q1 versus Q4. If you want to be very technical there should be a little bit of an increase that we are speaking here really of rounding. So that's a little bit the way to look at that. The performance is going to be relatively sticky gradually increasing but we are at EUR 2.5 billion at six months. Yes, one committee argument should be a little bit higher than EUR5 billion by the end of the year, but it's not going to be EUR5.1 billion should be a little bit higher than that and then you have always the noise around the calculation. So think about a measure which is gradually going up -- and there is a lot of stickiness, and this comes with the advantage that you should not have negative surprises. Suddenly, this profit is vanishing. On the other side is something that is building up over time. This is something that if you ask me, that is definitely different cost of capital compared to what the market is doing. But I hope that over time, this level of confidence is going to come through because that's really a stable increase in profit over time, and there is not much risk that this profit. You can have volatility, but there is no risk that this profit is going to go away and then you are in a totally different situation. So that's on the Life. And then you had a question, the CSM. Yes, okay, so you are right even if we adjust for the, let's say, for the true-up, let's call it this way in Q2, we are EUR700 million for the expecting the in-force return for the quarter. Another way to look at that which is the same point you are making. You can look at the six months and basically, we get to something which is around EUR1.4 billion of expected in-force returns. So this points out that we should have more in-force return compared to what we thought in -- when we did the first release around our IFRS 17 profit, we guided to something up to EUR2.5 billion. I will say, based on what we see, it might be that we are going to be even a little bit north of this EUR2.5 billion. And the reason for that is, first of all, the Fed that rates have come up is creating any way stronger unwinding of the CSM. And then the other point is also we'll get a little bit more of a return compared to what we have modeled initially. So as of now, I will say there could be a fair expectation that we're going to be ahead of what we thought and we told you about since this is a new calculation, I will really always be cautious, and see what happens in Q3 and Q4. But as of now, yes, this will be our perception that we are going to be ahead compared to what we told you before. Then you had a question regarding the Corporate Business. Okay. On the Corporate Business, and I think we said this a few times. The outlook that we have for the year is EUR800 million. We also said this is the part where we also put some contingency or explicit contingencies. So from that point of view, I will say, it's not surprising that we're going to be better than EUR200 million per quarter. I would also anyway consider that there is always some more expenses coming towards the end of the year. But I will say the number you see there it's -- if you were to ask me, it's EUR40 million better compared to what an expectation might be. But EUR40 million is we are speaking of a nuance here. But, yes, keep in mind that there is some conservative in the outlook that we put forward for the Corporate segment.
Peter Eliot
Yes. Perfect. Thank you very much.
Giulio Terzariol
Thank you.
Oliver Schmidt
Thank you, Peter. We will take the next question from Andrew Ritchie, Autonomous. Andrew, please go ahead. Your line is open.
Andrew Ritchie
Hi, there. A couple of questions. Could you just clarify, when I look at the commercial P&C result, it's helpful you break this out consistently now. I can see it's improved year-on-year, but it doesn't look like guessing what the discount effect would be year-on-year ex-discounting has improved year-on-year. So just give us a bit of color as to how you judge it? Or maybe there's some additional conservatism, particularly in the commercial reflected on the undiscounted basis? So that's the first question. Second question on solvency, I can see, looking at your sensitivities, particularly in the full stress scenario that, that continues to sort of trend down as in the downside is falling. Is that just a reflection of market conditions? Or are you still doing some underlying de-risking or optimization? And the final question, do you have any updates. You provided us some color back in Q1 around the group's real estate and alternative exposure in light of there's more debate on those assets. I've seen, I think, only one reference to a small negative impact from real estate in the French CSM development. But have -- what's the latest in terms of the group having looked at overall at your latest thinking on any stress areas in real estate/alternatives and any update on the things to think about there? Thanks.
Giulio Terzariol
Yes. So thank you for the question. And so starting from commercial lines. I will say that clearly, there is also some benefit coming from the discounting. And I will say -- if you look at the six months, you can see there for the group in total, we have about two percentage points of higher discounts. I would say this is also something that you can imply for the commercial segment. But regardless of discounting and impact coming from that performance that we see right now in commercial lines is very strong. So from that point of view, as you know, we put a lot of effort in improving the performance of CMS. We always told you that we were kind of conservative on disclosing the RIO combined ratio of AGCS. I can tell you that we still put some reserves on top in the course of the second quarter. So from that point of view, we see very good performance at AGCS. And also, this is not only AGCS. Keep in mind, we did a lot of cleaning in Germany, mid-corp last year. We did a lot of cleaning in France too. So now you see basically the benefit of all these actions coming through. And that's explained basically the performance that we see now in commercial lines. On the de-risking, I would say, we are not necessarily doing any additional major de-risking as we speak. So from that point of view, there is no major change that we are making compared to the situation in Q1 or the situation at the end of the year. So from that point of view, I will say, what is also happening somehow is that clearly the markets are on a positive trajectory and this usually tends to have a positive impact on the solvency ratio and also clearly then on the sensitivity. To certain degree sensitivity, solvency ratio level are related as the market is more positive, you get more solvency ratio, you get better sensitivity and the other way around. And now to -- with reference to the real estate valuation. I will say there is a reference that we made regarding France. I can also tell you the sensitivity of the CSM to a 10% decrease in valuation of real estate is about 1.5%. So it's not really meaningful. And the point is we have a substantial future discretionary benefit. And that's something very important because usually, when we put alternative assets, we put some of the alternative assets also clearly in our Property-Casualty business on the surplus on the net asset value side. But the majority of the assets that we are holding as alternative assets are going to be on the policyholder accounts. And always keep in mind that there is a significant amount of discretion in the way we clearly then benefit the policyholder. So from that point of view, yes, we might see some pressure coming from real estate, to a certain degree, we have already seen some reduction in the valuation of the real estate. But as you look at our numbers in reality there is not much happening and that's again because of the remarkable amount of future discretionary benefit. If you go into our, at the interim report, I don't remember which page. You remember, Oliver?
Oliver Schmidt
I think 48. Page 48.
Giulio Terzariol
48. You're going to find a small footnote where we say what is the amount of future discretionary benefit that we had. That's EUR100 billion plus. And in the future, don't be surprised, we're going to start emphasizing these amounts strong also in our presentation because I think this is a critical component to understand really the economics of the Life business. I hope this helps.
Andrew Ritchie
Great. Thank you. Cheers.
Giulio Terzariol
Thank you.
Oliver Schmidt
Thanks, Andrew. And we will take the next question from Michael Huttner from Berenberg. Michael, please go ahead. Your line is open.
Michael Huttner
Thank you very much. Thanks, Oliver. Thanks, Giulio. I had one general question because you seem so generous today, while you're always generous. On cash, so I don't have all numbers and I've got them wrong anyway. But I just wondered, maybe you can explain in very broad terms how you think about cash and because you mentioned capital management, I always get very excited. So the impression I have is cash flow in the year somewhere between EUR7.5 billion and EUR8 billion on a sustainable basis. Then you have the dividend and I'm guessing here a bit over 400 million shares maybe consensus somewhere around 12 billion to somewhere around 4.9 billion left. So you've got 1.6 billion, so 2.6 billion less. And then you've done a buyback or you have a buyback of 1.5 billion lead to 1.8 billion clearly here. Is that it or is there when you think about deals, you can think we have 1 billion for deals or potential extra capital management? Or is there something I'm missing here that would be really real. And then the second question, which is kind of related, the 3% normalized organic capital generation net of dividend up from 2% in Q1. Can you say is it sustainable? Can we put 12% for the year or something? And maybe you can say where it's coming from? Thank you so much.
Giulio Terzariol
Thank you for your question. And coming from cash, first of all, we like cash, and we like cash immunity. So that's fundamentally the starting point. In terms of number, if I look at the flows of cash, in the Capital Market Day, we guided you to EUR23 billion of cash remittances. This is after the deduction of holding cost and interest -- and this EUR23 billion is for the three years period, we are pretty confident that we're going to get this EUR23 billion of cash remittances coming from our company. So that's the way you need to think about remittances. So it's pretty much consistent with what we told you in the Capital Market Day of 2021. And then you need always to assume that clearly, we have also cash here at the holding level. So from that point of view, I believe between the cash that we have at the holding level and also the floors that we can rely on. We feel very good about our liquidity position. I will say that's indeed one of the strength that we have. And also keep in mind that since we are running the insurance or the reinsurance operation, together with all the operation and reality we have always access also to other element of cash. From a risk management point of view, we don't do that. But in reality, there is a lot of additional cash that could be available at the group level if needed, but I don't think we will ever need to go there. So the position is actually pretty comfortable. And on the capital generation, your question is good. Should we see more than 10%? I believe eventually, yes, because on the life side, there is no reason why we are going -- we are not going to get even slightly better, if you want, although you're not going to see a massive change from one year to the other, right? So there is nothing which is tectonic here is always kind of steady. But fundamentally, one might expect the development on the Life business is going to incrementally be positive. And then on the P&C business, it's a matter of growth. Right now, we're growing pretty strongly. So you see a premium growth of 10%. If that growth is coming down because inflation is coming down automatically and we will keep the margin clearly at the level that we want. Automatically, we should see a higher generation. So fundamentally I will say, yes, one could expect that the 10% is going to become higher. But okay let's see what happens. But I don't think this number is going to become 15% within one year. I can go gradually up, and there will be the expectation. What is relevant really is the growth in P&C. There is always this notion that P&C is not capital intensive. But at the end of the day we need to put about 25% of ECR for one premium growth that we have. So keep always in mind if we are growing EUR1 billion we will put EUR250 million of ECR on top of what you had before. Does this help?
Michael Huttner
Superb. Thank you so much. Yes. Thank you.
Giulio Terzariol
You're welcome.
Oliver Schmidt
Thank you, Michael, and thanks for the compliment. We will take the next question from Vinit Malhotra from Mediobanca. Vinit, please go ahead. Your line is open.
Vinit Malhotra
Yes. Good afternoon. Yes, thank you very much, Giulio. So for me, two questions on the non-Life please and one on PIMCO. Just on the non-Life. If I go back to the combined ratio slide by market. So slide 15 today. I mean the Germany seems to have some bit of a more cautious commentary. It seems to be suggesting [indiscernible] exact the inflation in motor property also more favorable runoff in NatCat that seem to have helped. So I just want to just see your thoughts on Germany. That's the first question on this slide. The second one is AGCS when I see 88%, my mind goes back to you're struggling to get to 100%. I know this is excluding the captives in fronting, but there seems to be a lot of improvement from mid-corp, where you presented somewhere a 79% combined ratio. Could you comment on mid-corp, is it because a lot of the peers as well want to do mid-corp. And is there more competition? Is it something that has driven this AGCS numbers materially. So any thoughts on mid-corp and AGCS. Then last one is I think you probably missed it. The PIMCO has high performance fees and you did answer to Andy Sinclair earlier, but also you said that the PIMCO flows in July sorry flows in June were turning around. Do you have a number for July for PIMCO by any chance? Thank you very much.
Giulio Terzariol
Yes. Okay. For PIMCO, the number for July is EUR6 billion of inflows. And I can also tell you in May, we had EUR1 billion of inflows in PIMCO, the pickup was EUR3 billion, more or less in June, and now we see EUR6 billion in July. So you might say this might be the beginning of a trend like to think this way. Let's see what happens in August. But definitely, we saw basically over the last three months we saw basically almost EUR10 billion of flows coming from PIMCO. So there is a nice momentum there. And then we see clearly what happens in the following months. It is logical to assume that there should be momentum coming through because the anxiety about rates going up should be much reduced compared to a few months ago. Now if you buy a fixed income portfolio, I would say, you invest in the fixed income portfolio, you get some nice return. And we should never forget that PIMCO is really a strong franchise. So if you want to put your money in fix income, definitely, you want to consider PIMCO as a strong option. I'm not sure about the question of performance fees. So there was a question regarding performance fees.
Vinit Malhotra
I mean it felt a bit high for so early in the year.
Giulio Terzariol
Yes. I understand . Okay. Good point. Yes, there were some more performance fees in Q2, which is a good sign fundamentally. So from that point of view, you are right. I would say the performance fees in Q1 is something that we saw already in the past. The performance fees in Q2 are a little bit stronger to certain degree there could be also in anticipation of some performance fees that we might see later, but we're still kind of positive that generally the strong amount of performance fees is going to come towards the end of the year. There is always some uncertainty around that. But when you look at the market conditions and so on, they seem to be supportive for a good performance fee level for the year 2023. Now to your question regarding, I think there was a question regarding Germany and the AGCS. On Germany, I'm not so sure I got the question, but I can speak in general about Germany. We see -- when you look at the quarter, you will see a combined ratio of 90%. If you look at the six months, we see a combined ratio of 89%. So it's pretty stable around 90%. I would say what we see -- so it's a good performance. What we see in Germany, there is some pressure coming on the retail side. So from that point of view, clearly, on the retail side, we need to pay attention that we're going to make the right moves in order to preserve profitability. And then we see good performance in the commercial lines, which is also the results, as I was saying before, the action that we are taking basically last year in 2021. So that's the reason why you see basically this level of performance, which is pretty good with a combined ratio of about 89% to 90%. But there is definitely some work to do in order to make sure that we can keep the performance at this level in a country which is clearly very important for us considering the size. On your question regarding AGCS and mid-corp. I would say the profitability that you see in the mid-corp, which is very good, it's not just the AGCS part which is mid-corp and AGCS is the US part of the business. And they are also performing nicely in this environment. But, in general, we see strong performance in mid-corp. And that's been an area of focus over the last few years. When I'm referring to the actions that we have been taking in France or the actions that we've been taking in Germany. I'm referring exactly to the mid-corp business. And there's also -- so we see good performance -- and as you know, we are now also putting together if you want from a steering point of view, from a management point of view, AGCS together with our mid-corp business, and we think this should help us in the future to get more growth because we can be more consistent in the approach to the brokers. We can also tap more into some markets that we were not servicing before. And also we believe we might get some efficiency, again, if you ask Oliver Bates, he is going to -- there is an expectation we're going to get a lot of efficiency gains coming from putting together things. And then also, we believe that we can get to a better also technical results and we're also investing actually in infrastructure, if you want to make sure that we have a state-of-the-art business in our mid-corp and corporate business.
Vinit Malhotra
Thanks very much, Giulio.
Giulio Terzariol
Thank you.
Oliver Schmidt
Thank you, Vinit. All right. We will take the next question from William Hawkins, KBW. Will, please go ahead. Your line is open.
William Hawkins
Hi, Giulio. Thank you for taking my questions. First of all, are there any noteworthy changes in investment allocation that you've been making through this year. Generally, the disclosure on that side is quite quiet. So I'm just wondering if there's anything interesting happening? Secondly, please, I'm sorry if I'm missing some detailed disclosure somewhere, but in your financial supplement, you're confirming that there's been a positive reversal of net flows for the Life business. So we're back in positive territory after three quarters of negative flows. I can't see the breakdown of that. I'm sorry if I missed it. So -- can you just be a little bit clearer about what's driving that return to positive flows. Some of your peers are still seeing outflows in places like Italy and France. So I'm not sure if you're actually in a better place in those markets or if you're still having outflows there, but there's good stuff going on elsewhere. So a bit more color around the shift from negative to positive flows in the Life business, please? And then lastly, third question, I'm sorry about this old chestnut, but can you just remind me how you're managing Allianz from the point of view of the combined ratio that you care about. In the first half, is it the 92% headline or is it the 95% if we ignore discounting? And from that baseline, do you have a general view, there's a lot of moving parts, some positive, some negative over the next few years. Is this combined ratio a figure that should be improving from here or could you be allowing it to get a bit worse in inverted commas because you've got -- it's already pretty good and you can have growth and higher interest rates and that kind of thing. So the outlook beyond this year for the combined ratio, please?
Giulio Terzariol
Yes. Thank you for your question, William. So on the investment allocation, there was basically no change in investment allocation. So that's answer is very simple. Nothing really material happening. On the net flows, I would say, they are coming, especially from USA, where you see there is a strong growth rate there. Also Asia. Asia is a geography where we have a tendency anyway to see flows. And there was, I would say, to a certain degree, a little bit of an acceleration coming from Asia. And then we see also flows basically in Germany. So these are the three geographies basically, which are somehow showing a dynamic which is explaining the positive flows. But I would say the primary driver is the development in the United States. This is what is clearly making a little bit difference compared to what we had in prior quarters. On your question regarding the combined ratio, I would say, look, we look at combined ratio on an undiscounted basis. We look at combined ratios on a discounting basis. So there is a lot of thinking clearly about how this combined ratio is moving. I will not discount the combined ratio because to a certain degree, if you want, that's the right economic view. And to a certain degree, actuaries were used anyway to put into the price in the potentially increase in the insurance rates from that point of view, I think you need really to look at both dimension, and then you need to think, right? And then there is also a reality coming from the marketplace. So that's how we do it. So I will not give you an answer one way or the other. Clearly, in an environment, we're looking at the undiscounted combined ratio. Stress in the undiscounted combined ratio might lead to a better outcome. We are going to stress the undiscounted combined ratio. But I can tell you internally, I can tell you, I can see a situation that goes the other way around where we're going to stress the discounted combined ratio. So you want to be also a little bit tactical clearly as you manage the relationship and the targets with the OEs from expectation point of view. We are going definitely to have conversation with our subsidiaries, how we can improve our combined ratio moving forward. So from that point of view, our ambition will be anyway to be able to improve this combined ratio moving forward. But before we make statements about 2024, I think it's fair to go through the planning cycle with the OEs, but you can imagine that our ambition is anyway to move forward and not to go backwards.
William Hawkins
Thank you. Giulio, may I just clarify, sorry. Italy and France. Again, I'm sorry if this is disclosed somewhere and I missed it, but are Italy and France still having outflows in the second quarter? And if they were, are they better or worse than the first quarter?
Giulio Terzariol
So I know that we have outflows in France and I will say they are broadly in line with the development that we saw in previous quarter.
William Hawkins
Okay. Thanks.
Oliver Schmidt
Thanks, Will. If you like, I have all the details for you later, okay? All right. We are running out of time. So I will take questions from two more analysts who did not have the chance to ask them yet. That's Thomas and Ashik. And we start with Thomas Fossard from HSBC. So Thomas, please go ahead. The line is open for you.
Thomas Fossard
Yes, good afternoon, everyone. I've got two questions on the UK market. Slide 16 and you can see your comment saying that actually the UK market is still -- the environment is still difficult. Do you see some improvement already? And I was seeing your 17% price increase. Can you talk a bit about the direction in terms of momentum and what we should expect now going forward in terms of combined ratio development in the UK? And related to the question and any comments you could offer on the FCA consumer duty and the implication on the ancillary income, if you got any? Thank you.
Giulio Terzariol
I can tell you on the second question, I'm not capable to give an answer right now. So on this one, we should do some follow-up maybe Oliver can follow up on that one. And on the first one, which was regarding the UK, we are getting clearly looking for substantial rate increases in the UK. You saw that rate change or renewal 17% and we can tell you that in the case of retail, we are basically approaching the 20% rate changes. So from that point of view, I think we are coming to a point where clearly the rate changes are going to be enough to offset the inflation that we see and the expectation for the year is still to be more or less in line with the 96.8% that you see here for the quarter. So we might be slightly better and trend toward 96% for the full year. And then next year, clearly, we expect to be at a combined ratio of 95% or below. But it all depends on the inflation amount that we see in the UK has been pretty pronounced. So what I can say that rate changes were pushing through a substantial. So it's hard to imagine that we are not going to see stability at least we start from there and then also an improvement as we go into 2024.
Thomas Fossard
Okay. Thank you.
Giulio Terzariol
Thank you.
Oliver Schmidt
All right. We will take the last question for today from Ashik Musaddi from Morgan Stanley. Ashik, please go ahead. The line is open.
Ashik Musaddi
Thank you, Oliver, and hello, Giulio. Just a couple of short questions, again, related to the P&C rate change. I mean, see, you delivered a fantastic growth in P&C, so nothing -- not complaining that your growth was low. But a big part of the rate -- a big part of the growth is just rates basically. So it feels like organic growth in terms of volumes was still low. When do you think that you will pick up on volume growth as well? So that's the first question. And the second one is, I mean, you mentioned that on the rate change, retail was 9%, and I guess it is probably flattered by UK, but I mean 9% is certainly a number that I have not heard from anyone except some of the UK names. But can you just give us some color what is this rate change ex-UK because it is a very good number. And would you say there is any excess margin in that 9% or is it mainly just covering inflation? Thank you.
Giulio Terzariol
Yes. Okay. Absolutely. So maybe because it's hard for me now to do the math and move in the UK. But I can give you some ideas. So I would say between -- I will not give you a specific number by country, but between Germany, France and Italy, we see rate increases between 5% and 7%, when we go to Australia for the six months, we had about 10%. Then there was a question before coming you know you see partners at 11.6%. So this gives you an idea about the rate changes that we have in the countries. So Spain, you can also, we see 7% rate increases in Spain. So you can see that broadly there is a nice momentum rate increases. I'm quoting here, the retail business, so you can see rate increases basically that are between 6% and 7% for a lot of European countries. And we expect this, by the way, to not necessarily to go down. So from that point of view, if we see that there is pressure coming from inflation, we are going to even accelerate modest rate increases. So that's on the second question. The first question is when we are going to see growth in customer in an environment like this where you had to increase price and I'm sure everybody is doing that. To a certain degree is kind of maybe challenging to see really customer growth because anyway, it's a very, very -- it's an environment where clearly, conversation with the customer, it might be a little bit more complicated. This said, we are putting a lot of effort on our branding we have been now for a few years, the brand number one, we think this should eventually pay off. We put a lot of emphasis also on the bottom-up voice of the customer. So you have the Net Promoter Score, which is something we show you all the time. That's also KPI that has been improving, but we also put a lot of effort on the voice of the customer. So all this, which is improving. So all these kind of things eventually should translate in growth. My personal belief also based on my experience as a CFO of the company a few years ago, you cannot really predict when growth is going to kick-in, but you can put action in place that you can basically control what you can manage and then eventually in the right constellation these actions and the right circumstances are going to create also growth in customer. But there is no sense that you can easily put in a presentation like in a plan like you can put an improvement of the combined ratio. But I believe that we are taking all the actions that we need to take. And eventually we should be able to get also to higher customer growth.
Giulio Terzariol
Thank you. Great results today. Thank you.
Ashik Musaddi
You're welcome.
Oliver Schmidt
Thanks, Ashik. All right. This concludes our today's conference call. We say goodbye to everybody. We wish you a pleasant remaining afternoon and a relaxed summer break. Goodbye.
Giulio Terzariol
Thank you, guys. Enjoy the summer break. Bye.
For further details see:
Allianz SE (ALIZF) Q2 2023 Earnings Call Transcript