Allianz's (AZSEY) CEO Oliver Bäte on Q4 2015 Results - Earnings Call Transcript

| About: Allianz SE (AZSEY)

Allianz SE (OTCQX:AZSEY) Q4 2015 Earnings Conference Call February 19, 2016 8:30 AM ET

Executives

Oliver Schmidt - Head, Investor Relations

Oliver Bäte - Chief Executive Officer

Dieter Wemmer - Chief Financial Officer

Maximilian Zimmerer - Member, Management Board

Analysts

James Shuck - UBS

Peter Eliot - Kepler Cheuvreux

Paul De’Ath - RBC

Farooq Hanif - Citi

Vinit Malhotra - Mediobanca

Michael Huttner - JPMorgan

Andrew Ritchie - Autonomous

Thomas Seidl - Bernstein

Nick Holmes - Société Générale

Michael Haid - MainFirst Bank

Jochen Schmitt - Metzler

Operator

Ladies and gentlemen, welcome to the Allianz conference call on the financial results of 2015. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Oliver Schmidt, Head of Investor Relations. Please go ahead, sir.

Oliver Schmidt

Yes. Thank you, Alex. Good afternoon from my side as well and welcome to our conference call. As you know, we have three presenters today. Oliver will kick it off and share his views on the results of 2015 and our way forward. Then as always, Dieter will give you all the details, and finally, Max will talk about our investments. We have scheduled 2 hours for the call. That should give us about 1 hour for Q&A. In case that’s not enough to cover your questions, please come and see us at one of our analyst meetings next week. We have scheduled one for Monday in London and one for Wednesday in Frankfurt. That’s all from my side and with that, I hand over to Oliver. Thank you.

Oliver Bäte

Yes, good afternoon everybody, good evening to Asia and good morning to those in the U.S. that are listening in. I am going to keep it fairly quick before I hand over to Dieter who in his usual high quality will deliver you the details of the financial numbers.

Let me start out on Page A2 of the document that you should have been able to download or see on the net, where we are giving an overview of the 2015 key figures and we didn’t manage for that, but coincidentally, we had the highest revenues ever at €125 billion in the 125th year of our existence, so that was a nice coincidence up 2.4%, an all time record. And we recorded €10.735 billion operating profit, up 3% from prior year. Shareholder income grew even more strongly, 6.3% to €6.6 billion, which we consider to be a very strong result given the environment and particularly given how peers in our sector are performing. Dividend per share is up 6.6% based on the proposal that we are making of €7.30. We rounded it up to €7.30. Our solvency ratio stands at a very strong 200% at the end of the year, up about 9 points.

The returns have been good for those that had invested in Allianz properly last year that you see on the right hand side, but that is the past. But what I would like to summarize looking at the page, you see a very resilient company, very resilient numbers and significant growth potential going forward.

Now, let me give you my fifty cents on the performance of the group as highlighted on Page A3. Both for the group and the individual segments that is property, casualty, life, health, and asset management. From an overall perspective, we are happy to record 2.4% growth. Why? It doesn’t look like a big number, but you should remember that we had announced last year that we would like to restructure our life business, in particular, the new business very consistently in an environment where interest rates are falling. And therefore, you see in the life segment a decline in the top line. Given that, you see strong growth in property, casualty and very strong number that I have hardly seen since I joined Allianz in 2008. And based on the strong U.S. dollar, even asset management up despite the outflows of PIMCO, so overall, a positive number from my personal point of view.

On operating profit, we have been careful, reached the upper end, 3.2% up, and that is a mix of 4.1% growth in P&C and outstanding 14% growth in Life and Health and as expected, a decline of profitability in asset management in line with the outflows particularly at PIMCO. The return on equity remains strong. This is computed on average equity, and mind you, it’s down from 13% to 12.5%. On a consistent basis, it basically remains unchanged and is the target which also gives you an indication that we would like to focus on earnings growth in the future to make sure that earnings and dividends per share are growing from three sources underlying organic growth, external growth and if need be, share buybacks or other capital measures if that is required. However, that is not our preference. The preference is to have organic business growth and then selective external growth.

Now when you look in terms – at the segments in terms of returns, the P&C segment is at target and I believe personally that is further upside in terms of managing capital efficiency even in P&C. So you should see over time potentially stronger returns on invested equity. In the Life and Health segment, we are at 10.8%. That is, as we discussed in the Capital Markets Day, a mix of very good numbers in Germany and some further improvements that are necessary in the rest of the life portfolio. We are working vigorously on improving the return on invested capital in the life segment and you can expect further improvements. And the return on equity in the asset management segment remains excellent at 15.2%.

So overall, from my point of view and the board of management, very solid results in the P&C segment driven by very strong results in core Europe, where we can really play our scale advantages, where we can play our strengths across all channels. But we also have to bear in mind that we have some challenges in the year: number one, slow progress in LatAm, but I would also like to mention what is not on the page that we had to end the Fireman’s Fund saga with some additional results strengthening in the beginning of the year that is impacting the AGC&S results. Dieter will address that when he gets to the presentation.

Now, you may have seen in the press announcement that we are getting rid of €1 billion of our long-term results in the U.S. That is, by the way, happening at book values which tells you that the results level that we have achieved in the U.S. now are strong enough to be accepted for transfers, which tells you we have really fixed the reserve issues. And that should give you a lot of comfort that, that is under control. In LatAm, we have to make significantly more progress next year, but there we are also confident that we are turning the dial.

On Life and Health, let me reiterate that we are very proud to have successfully executed our new product strategy. There is more to come, but all the budgets in terms of shifting business from traditional products and new business have been over-performed. Let me really compliment our German colleagues, our Italian colleagues and our French colleagues. In France, we now have 50% unit-linked share on new business that was unthinkable a few years ago. So, at this point in time, thank you to our colleagues and that will continue.

The second thing that we are addressing is the in-force business and particularly where we have negative spreads, we are working very actively to address these books. This is just not an issue of profitability drag, but these books consume a lot of solvency capital and have a lot of interest rate sensitivity that we are trying to get rid of, because that makes capital management more efficient and that is really the objective of us addressing our bank books, to make capital more efficient, make solvency more stable and be able to lift capital out where we can.

On asset management, Allianz Global Investors’ operating profits, it is at a new high. Let me compliment the colleagues here, therefore, also supported them in the latest acquisition of Rogge. They are I think doing a great job. At PIMCO, the net outflows are stabilizing. We have to further work on profitability, but that is on the way and recent outflows are more or less in line with the industry. And as you can see from the performance fees that we were able to collect that in effect means that we are doing really well on our alternative strategy and we are only getting performance fees, of course, if we are over-performing relative to investor expectations. So, that is good news and there are more performance fees to come this year. So overall, a solid year that prepares us well for this very volatile environment that we believe offers great opportunities for a stable company like us that can balance volatility across the segments and across the markets.

Now, let me also remind you on Page A4 that we do have an attractive dividend policy that is payout ratio that we increased to 50%. Let me also remind you of the ratchet that we have introduced and that we will pay out unused M&A budget if we don’t use it. And just as a general comment, because there are lingering questions all the time, no, we are not planning outsized acquisitions. We are not planning to do M&A that is not accretive or doesn’t meet our return hurdles, whether that is cost of capital or long-term 13% ROE question, in case you have that on your mind, that is however long-term average. We are looking, if we do something for bolt-on consistently with a record that we have built over the last few years. And therefore, we would also like to point our dividend per share growth has been 6.6% and is proposed to be €7.30 as you can see on the page.

Page A5 gives you the overview of where we are relative to the original ranges that we have provided, while asset management is more towards the lower boundary, life has outperformed and P&C is exactly in the middle, so that overall, the group was trending towards the upper boundary. Now, some people have said that, historically, we have always outperformed our lower boundary. Let me remind you the laws of physics hold you cannot continuously just go over the top. We have a boundary and we have these corridors, because given financial markets and given the economic environment, there is volatility and we need to take care of that. That’s why our outlook for the next year is also more cautious. It would be absolutely not prudent if we would not reflect in our outlook what’s going on in the outside world and I am going to talk about it in a second.

We are aiming at €5.5 billion as a middle ground for P&C, €3.6 billion at the middle of the band and €2.2 billion in asset management. So on asset management, given the volatility in the markets, we are more cautious. That is not a mistrust in the businesses that is just reflecting volatility and impact of lowering asset values that we are taking into account. Again, everything else would be not professional.

Why do we believe that? Page A7 gives you an overview. If it wasn’t enough that in our industry we are challenged through digitalization, low interest rates, the change of the business model and increasing consumerism, conduct is a major issue that we are debating with regulators on top of all of the things that we continuously around Solvency II, by the way, as a side comment, it would be great if we could stop continuously inventing new charges, new risk capital ideas, but just let’s move on after 10 years and apply the model. But we also have significant political regulation uncertainty not just within Europe and the Middle East, but in many parts of the world, tensions are rising. In particular in commodity-dependent countries, the social environment is not benign. Therefore, the expectations for growth are rather moderate and we expect that volatility in financial markets is going to continue. While we believe equity markets should recuperate and interest rates have to go higher, we saw an all-time low in the bund today, which has nothing to do with underlying economics. It’s just reflecting fear.

We need to expect that markets will remain challenging both from an interest rate perspective and an equity market perspective. And I would also like to remind you as we told in November that is our base case. We are not seeing this as a tail scenario. Allianz is planning and is basing its strategy on an environment of ultra-low rates and high volatility going forward. We believe that is providing huge opportunities for us. As you look around in the sector, you see a lot of people that are weakened and that should provide us with opportunities in many ways.

So therefore, let me turn your attention to Page A8. Just think about three core elements of our strength that are very important as you consider investment recommendations or investment decisions. The first one is scale. We absolutely believe this industry will prove that scale matters both nationally but globally as well. Digitalization is the true force behind it. The ability however, to also command outstanding performance in investment management, Max is going to talk about it. We will make all the difference in the future. We are outperforming our peers in terms of providing better than benchmark returns to our clients and our global lines are growing in importance with €3.3 billion operating profit in ‘15. It’s a major source of future growth.

On top of that, you have resilience. We have three segments with multi-billion euro earnings power. That is very important as we had the boom on the asset management side that nicely balanced temporary weakness we had in Germany and other places on P&C. Now that we had the changes on asset management, the P&C and life segments are picking up. You rarely see that in other places. And our capital is extremely strong. It’s not just Solvency II in our rating. Please take a look at the source and the quality of our capital. We are one of the few companies that do not need huge amounts of interestingly computed value in-force to support our capitalization. We have a very high quality of core capital. And while we are having equivalents, we are one of the companies that have the lowest benefit from equivalence rules for our overall capitalization as compared to most – almost any peer. So it’s not just the level of capital, but also the quality of capital that is stronger in Allianz than in almost – most of the places that I know.

On top of that, we have really top global brands. We just mentioned in the brand finance Global 500 ranking as the only one in the top 50 that is an insurer and we are very proud of that. So if scale and resilience were not enough, we also outperform on skills. We have changed the order. Historically, we would have talked about underwriting and claims excellence that remains important. The number one thing we are looking at the key steering metric is going to be customer satisfaction and centricity. That’s the transition we are making because in the world that is moving from a push industry to a pull industry that will separate the winners from the losers. We aim for a top quartile position here and I am confident we will achieve that.

On top of that, technical excellence will be at the forefront of what we do, we have very low combined ratio volatility. And mind you again, we have with our real program, taken a lot of the external reinsurance and internalized it. And despite that, our volatility on the combined ratio has been fairly low. And last but not least, our people are outstanding and the motivation of our people is outstanding as we showed you on the Capital Markets Day. Therefore, our ambition for the next 2 years remains unchanged despite all the volatility as you can see on A9, 19% ROE which means capital has to be used efficiently, earnings per share growth as a fee average of 5%, by the way the number for ’15 was 8% and the health of the business is as important as the financials may be not for you and at least for some people’s spreadsheets but for the long-term success of Allianz customer satisfaction to have 75% of our business being better than market and having employees that get ever more motivated will make the difference for us in the future.

On Page A10 gives you a couple of details that I would like to reiterate both around performance and around health. We have a strongly pronounced regional and sectorial diversification with a number of very important leadership positions. We have low earnings volatility. I mentioned capital strength is not just in terms of its level, but also the high quality of its components, a conservative yet very innovative investment policy. Max is going to talk about it. Our ability to access alternative assets, I think is almost unmatched. We have very limited exposure to peripheral sovereign debt, commodities, energy and banking sectors, very unlike it was in the early 2000s. We are pushing for innovation. The Baidu joint venture, Allianz1 and many things are coming online now and we are really moving our balance sheet, we are changing the life and health business mix and we are working on the back book. So that gives you a lot of trust that performance in the future will be even better than in the past. But at the same time, we are banking on strong health of the company as a strong brand, focusing on customer satisfaction, having performance management moving from top down to a horizontal approach and making sure it’s consistent and making sure that leadership in Allianz is tied to how well we run our people not just our numbers and making sure that our people stay motivated.

And with that, I thank you for listening and turn it over to Dieter.

Dieter Wemmer

Thank you very much, Oliver and also from me, good afternoon, good morning to everybody on the call. The B section of the presentation that is what we use every quarter starts with the qualitative page on the renewal agenda and finish with the quantitative page on the renewal agenda, just that you have more time for questions. I will directly jump to Page B5 and go into the numbers. So you have already heard all the headline figures. The P&C segment certainly contributed to a good increase in 2015 and then the stellar performance comes from the Life and Health segment, where actually asset management shows anticipated reduction in profitability and the corporate segment that is mainly an internal accounting issue with – coupled with our own pension, which I will talk about later.

So net income at € 6.6 billion, 6.3% up, we had a non-cash item in Q4 to book that is Korean or Asian life goodwill, which amounted to €171 million and then wiped out all life goodwill we had for our Asian operation. That is probably the number you were looking for and which created the mess. So let’s look at the fourth quarter, actually a very good quarter in total on operating profitability despite the fact that we had some headwinds to overcome in particular on the P&C side with man made losses and some more cat events I will talk about later.

Let’s go to Page 9, shareholders’ equity, €63 billion. It’s actually a new high for our net asset value. The average return on equity excluding the unrealized gains, a small drop of 40 basis points more explained by the strong growth of average equity and not the movement of the net income, which you have seen went up more than 6%. Sticking to our 50% payout ratio, so actually we are paying – proposing to pay slightly more than the 50% because 7.3% is the rounded number up. So I think we are – when you look just on the first pages, I would call it delivery on all promises and I said actually in the third quarter earnings call that I would expect a good single-digit increase in dividend and net income.

So Page 11 shows the Solvency II capitalization actually stayed completely flat compared to Q3. Why did it not go up where interest rates slightly moved up in Q4, that’s a very relevant question and also the right question, I asked the same question and we got some last minute changes in the calculation format driven by Euribor technical paper. Number one was the change in the interest rate curve for Korea, so they moved to the last liquid point earlier. The next one was the same change for the Swiss franc interest rate growth. And certainly, they adjusted calculation methodology for the risk margin. And all three changes together, they cost us about all equally the same. So in total, we lost four points in our solvency. So one of you who would have expected 203, 204, we are right to the spot because that was also my back of the envelope calculation. So sensitivities are unfortunately on the interest rate curve, up compared to our Q3 number and that has exactly the same explanation. The up-tick in the interest rate sensitivity is driven by Switzerland and Korea life and the change of the underlying interest rate curve.

So probably a lot of you are now trying to guess what happened in the first six weeks, seven weeks of year 2016 when you just use all the disclosed sensitivities, you can say, well, equity markets obviously, down, interest rates down, credit spreads up on government bonds, credit spreads up on other bonds. The only offsetting element is the volatility adjuster is also up which offsets a little bit of the impact. But still without doing anything. So that means when you assume we are a sleepy management, then it would go about 20 points that we are working every day and not sleepy. We are working on compensating for it. And you will then see with the Q1 disclosure how awake we were.

So on Page 13, the internal growth figure at 2.9%. That’s actually almost 3%. Our mid-term strategic target internal growth of 3%, pretty great achievement, in particular what I think is a great start into ’16. The price effects in Q4 were stronger than in previous quarters so that even the average moved from the 0.5 we had before to the 0.8. I believe that is a very good start, good for most of our key markets, still not good enough for some of the underperforming markets, which Oliver addressed already. And here, I think Latin America I will touch on also a little bit later.

Let’s move on to Page 15, the operating profit of the P&C segment and the combined ratio. Underwriting results more or less flat, well actually, our underlying net and premium is more than 6% up, so certainly a good driver of profit. In particular, when you still see that we have a small upside against our 94 targets in the combined ratio. Combined ratio at 94.6, I believe it is a very good one. The last quarter ended at 96.3, so some of you might have been disappointed. But actually, compared to other announcements, I think that is a great result and I don’t want to hide behind the peer comparison. That is also a great result on a standalone basis. We had 6.4% of large losses of man-made nature in Q4 and a couple of more than two percentage points in cat losses. The cat losses are obvious. It’s the Irish flooding, two UK floodings and hailstorm in Australia. The man-made losses is one large Southern European credit loss and a Brazilian water dam and an up-tick in the Tianjin port fire, which seems to become one of the largest manmade insurance events in history.

Run-off results, 4.1%, is this a big number? Yes, it is clearly above our long-term average of 3.2%, but we are ending the year with a very strong balance sheet, so we are not harvesting our future. And actually, it is not so far off from last year when you compare it OE by OE. We had in 2014 more Fireman Fund reserve increases. And in ‘15, we had a substantial catch-up for Brazil and Russia. The catch-up for Brazil and Russia did not repeat. So, when you actually do the negative OEs out, the other who contribute with positive run-off, pretty much same level as the year before and as I said, very strong balance sheet on December 31 also being confirmed by the announced Enstar deal from yesterday. We have quota shared at 50% of our long-tail liabilities in the U.S. that includes run-off from Fireman’s Funds, asbestos, workers’ comp and some other lines, and it was quota shared at book value. That means also the external provider likes our reserving strengths and both together in this partnership we hope that in our joint work, we can run-off the old claims slightly better than anticipated, so that we both create a win-win out of the transaction.

So, if we move on to the page showing the individual countries and their property casualty results, clearly, Germany reconfirming its strong last year combined ratio. Actually, Q4 has started with or ended the year with a 90% combined ratio, which is really positive and also the pricing environment is still friendly. Italy, another strong year, €1 operating profit out of our Italian P&C shop is really a fantastic result, but France also catching up in size.

AGCS looks at first glance poor with 102.9% combined ratio, but please remember that they have taken up the cleanup work of Fireman’s Fund. And the Fireman’s Fund combined ratio standalone actually worsened because we sold the stable personal lines business and we have only now half of the portfolio in commercial. We have strengthened reserves there. We have built a lot of restructuring charges and we are really cleaning up. So, the old Fireman’s Fund commercial business ended the year with 124% combined embedded in this 102.9% of AGCS. If you carve it out, the AGCS business, as you have seen it before, is at a 94% combined, which is actually a very strong result in a very difficult market and they continue to do a great job here.

Latin America, a very disappointing result altogether, €150 million loss, the only thing what has changed compared to the previous year, the worst country moved from Brazil further south and it is now Argentina. Brazil is in a turnaround – slowed down turnaround, because of the poor economic environment and Argentina, we are doing a reset for the business we are doing and have really cleaned it up in Q4 very strongly.

Let me also point out that actually the worsening in Spain is explained that, for Baremo, that has new tables for bodily injury in Spain, we have already put this in our existing reserves for all open claims, which might potentially be affected by Baremo tables in future, so another demonstration of sound balance sheet work.

Short overview of the investment results, Page 19 of the P&C segment. Yes, current yields going down as expected in the interest rate environment. However, average assets up, as you have already seen in previous quarters and the non-interest rate items adjust smaller negatives in the year before, so that the overall investment income is up.

Moving to the Life segment, same story as last quarter, continued progress in the mix change of new business, hence 5% less revenues and 1.5% less new business volumes than the year before. However, in better quality, as I will show you on the new business margin page in a minute. Therefore, we are happy with all the numbers, of course. For the U.S., we would really like to see even more growth than we have. We just couldn’t repeat the great sales campaign of our FIA product. We are still running at a very high volume as you will also see in a minute.

When we look now on the operating profit, Page 23, €3.8 billion is a very big operating profit, and in the last quarter, it was a contribution of €1.1 billion. Well, is there actually a lot of one-offs in it? Yes, but the one-offs in real life gains was pretty much in the first quarter. Q3 and Q4 saw quite some offsetting effects on trading results, on FX and other derivatives. So, when you look at the last 6 months in total, it looks much more stable. And an important driver actually of our investment margin is actually the U.S. In the meantime, we are making in fixed index annuity alone close to $1 billion of operating profit, $1 billion of operating profit that is a double-digit growth over the year before. And additionally, the dollar, 20% higher valued than the year before. So, in our investment margin, you see really a clear boost from our U.S. life business and now you understand even more why we like fixed index annuity more than other products and that we want to continue.

The other movement in the profit by source is not a lot to mention. Sure, when you have as we did in Q1, more realized gains, in particular in Continental Europe. You will always get the offsetting impact from change in deck. That is a faster amortization of your deferred acquisition cost. Hence, despite the high volume of new business, we don’t have a growing deck. We have actually a shrinking deck as you can see in the table of minus €332 million. And I think that, well, probably the next question is what would you say is the normal outlook for 2016? Well, when I take out the investment margin back to normal, I would say it probably goes down to 3.5. Then we have the year end new business and the new business of the year ‘16, so around 3.6 would be, for me, the midpoint for the following year as I assume that the strong contribution from the U.S. continues with further growth.

Now, moving to the new business margin, the value of new business in-force around at 1,200 and that is the number post tax and post cost of capital. So, when you compare this to the operating profit number, we have actually a pretty high replacement value of our operating profit. This operating profit is roughly 2.5 to 3 years of pre-tax value of new business, so that should certainly be a strong positive outlook for the future. If we look at the new business margin, completely different story between the first 6 months and the second 6 months, first two quarters we are running at 1.5% new business margin, Q3 at 3.0%, Q4 at 2.8%, so with an average of 2.1% and in particular, the last six months, a very good starting point for our 3% commitment in our strategic renewal agenda. So I think overall, the life business in good shape. Yes and maybe I should also have mentioned that in the operating profit, we had to consume more than €200 million loss recognition in Korea and that is in the operating profit outside of the goodwill impairment which I mentioned, but that was earlier quarter, not Q4. Q4 was – had no special elements.

Page 27, it’s always the demonstration that our investment margin and our current yields are big enough to cover our guarantees because there is always the fear of everybody that we are running out of investment income and can’t service the guarantees anymore. I think when you follow this page over the last year’s we could demonstrate quarter-after-quarter that we are in very good shape here and this fear is not justified. And as I said before, a normalized margin I would say at 85 bps, higher than we said in the past, we had it more at 80 bps, but that is the higher rating of our U.S. business, which drives this normalized number up.

And now we move on Page 29 to the first step into the asset management sector. Asset management – well, U.S. dollar is compensating for the high outflows altogether, where the high outflows I think are clearly going down. I told you in the last earnings call that PIMCO had even a small positive month in October. For the full quarter Q4, PIMCO saw €11 billion outflows with €3 billion to €4 billion inflows at Allianz Global Investors actually for the segments net outflows were €8 billion, still a big number, but I think where we started 15 months ago, great progress. And therefore, we are quite happy that we achieved what we achieved for the year. Now looking at revenue development, continuing pretty much the story of previous quarters, PIMCO’s fee margin has stabilized at the 39 level. We are dancing around the 39 and ended the last quarter with 39.2, so slightly lower than the previous quarter. Also, Allianz Global Investors stable between 53 bps and 54 bps, so resulting for Allianz Global Investors in 12% internal growth and 20% nominal and at PIMCO 20% drop or corrected with dollar, a 4% drop.

On Page 33, yes the normal fee income is down almost €1 billion just following the outflows at PIMCO and that is before currency movement. Performance fees up to €607 million, not only that we had some individual performance fees also the payback of the private fund. Bravo I is clearly going at continued – continues as predicted. And with €600 million, I think we have reached a very good level of performance fees resulting in the overall expected number. We probably would have expected from a timing that more of the performance fees would already occur or realize in ’15, but I would say are not lost in the rest will occur in 2016. As you have seen already in previous quarters, we are summarizing the whole FX effect in the last column, which gives us then the additional €300 million. And we are, overall – we see asset management sector within our target range.

So the page on the corporate segment, that was €100 million lower in the quarter than the previous two quarters now resulting into a loss of 945. That is actually more an internal accounting and consolidation issue because additional €100 million for pension accruals is then offset in the other German OEs across all segments, because in the consolidated statements, that is all covered under the IFRS 19 and there is no P&L impact. So it is more how we account for inter-company transactions. So I would hence expect for the year 2016 that we are getting closer back to our 2014 number. Also, I should mention that our Indian operations, which contributes close to about €40 million operating profit, we had in the past in operating on the corporate segment, they are ‘15 in the Asia-Pacific region. So altogether, banking also slightly up, also I think holding and treasury nothing very spectacular, pretty much business as usual.

Now coming to the summary page, how to move from operating profit to shareholders net income, I think I should highlight here, the amortization of intangible assets. There is a small ongoing increase in this line coming also from the Unipol acquisition, but otherwise the one-off of €171 million of goodwill impairment for the cash generating unit Asia-Pacific, Life and Health. And that is the biggest event. Therefore, when you would have expected a tax rate of around 30% instead of 31%, well the write-down of goodwill is of course, tax exempt, so you are not making any tax reimbursement on this one, hence the tax rate is one notch higher. And this explains already most of the figures.

And then I would like to close the presentation with the future page we are using to give you on a one page of the overview of where we stand with our 2018 ambition. Left hand side all the sequence, right hand side all the health indicators and I consider the Solvency II interest rate sensitivity also a health indicator because that is the demonstration of how fast we move the mix of our life new business and how fast are we getting out of long-term guarantees. And this is and then I refer actually to the Page 40 with detailed definitions, but I think that it’s for your reading. We use exactly this definition to define the numbers. And I hope we can talk in the future more about it here that is just establishing the starting point.

Last page and then I am done, financial reporting from 2016 on, we want to make use of the EU transparency directive and adjust our quarterly releases. We will continue every quarter with an analyst presentation, a press release and of course, the analysts call and our call with journalists. However, we will stop producing interim reports for Q1 and Q3 that means we will only do half year accounts then with all the footnotes and disclosures. I hope that finds your agreement, but happy to get your feedback on this also on the road show.

And with this is one, I hand over to Max.

Maximilian Zimmerer

Good afternoon. I would tell you something about the investment side to start with a very boring page, that’s C3 where you can see the segmentation of the overall investment portfolio, nearly no changes but there were a lot of changes behind the curtain. On the Life business, as such, has grown by 4% and P&C by 2%. Debt instruments by rating is nearly the same, only gradual changes. On the duration, Dieter already explained some changes on the liability side. Due to moderate changes, overall, there was an increase of 0.5 years. And what we did on the asset side, we really go for a longer – went for a longer duration overall. That means we increased it by active measures a little bit by more than 0.5 years overall.

Now going to Page C4 and what you can see here that overall, we coped very well with the declining interest rates, by extending the duration, that’s a safeguarding measure for our Solvency II position in general and that allowed us in general also to increase our share in alternative assets and I will come to that in a moment. I see that’s a more – most interesting part on the investment side in general, because that’s the part where you can earn some extra money. And if you think of the very low interest rates, that is very much needed overall.

Now, getting to Page C5, that is now showing the overall Allianz investments, but not according to IFRS but according to the real market values, that means it includes also real estate own use, real – the hidden reserves on the real estate portfolio and some accrued interest on the debt portfolio. That means, size wise, it’s a little bit, let’s say, €30 billion higher than the IFRS view. Overall, what you can see that we have now invested €92 billion in so-called alternative investments. What do I mean by alternative investments? These are all investments which are not listed in the stock exchange, which is important. That means it includes real estate infrastructure, equity and debt renewals, but also private equity and also the mortgage part.

What are the expected returns? You can see them on the right hand side. That is very much important. If you do not see these kinds of returns, we will not grow overall these assets. But we can say right now, although there is some tightening going on, it’s still possible to earn a decent extra return there and that made it possible to grow the overall portfolio by €18 billion. Only, to remind you that last year we had only an increase of €10 billion. That means right now the production is really up and running. We have very good portfolio managers, especially on the Allianz Capital Partners side, but also at AGI. And it means it’s now possible really to differentiate also against the competition.

Going to Page C6, there you can see which parts of the business we have grown significantly, and as you can see, nearly everything. Private equity is a little bit more difficult. We invest in private equity funds. But as you know, unfortunately, there are some paybacks over time. And therefore, it’s more difficult to grow that part overall of the business. Then in the very long-term holdings, we have, for example, on the infrastructure side where every new deal usually is also growing the overall portfolio. That is a lot of work, I can tell you, because it cost us around 100 transactions. And you do them not in one second, as buying an equity stock it’s more that you need a head time of 6 to 12 months. And that means it’s really important that you start early with this kind of business. There are some examples you can see on the right hand side of our investments. Only what I would like to mention, on the renewals part, we have concentrated mainly on Europe, but now we are also going to the U.S. It’s a very interesting market for us. It is a totally different regime. That means you can see also some diversification in that respect and it’s very often possible to even work without the subsidies from the state if you have a long-term buyer in the form of energy that means you can already lock in the prices for the energy.

Now going to Page C7, what you can see, we tried to come up with a comparison versus our peer group, the peers which are best compared against us. By that, I mean the European peers, Generali, AXA insurers. I think that’s a very interesting exercise. We have to rely mainly on the public numbers, but also the numbers for the analysts if we have access to them. And because since 2007, you are obliged to publish also the market value of the assets, you can try to calculate also the investment performance of total return. That is very interesting. That means not only book yields, but also changes in hidden reserves on the assets. That makes it possible at least to come up with an assessment of the overall investment performance.

And as you can see, in the years 2007 to 2014, in the 8 years, we have achieved an overall total return of 5.2% and the competition of 4.7%. I think that’s a large difference. I can’t promise that for the future, but I think it’s at least very promising. What is important that we have not achieved this wonderful performance with a lower credit quality, we also compare the credit quality by rating and the loss ratios, which are behind the credit rating. We are a little bit above the average of the peers in general. Our current yield is higher than those of competition was also very nice. And I think the main reason is that we have advantages due to the very professional in-house asset management that’s not only PIMCO and AGI, it’s also Allianz Capital Partners and Allianz Real Estate. And what we can see and what’s very difficult to compare, we are also way better diversified also to think of sovereign bonds, we really worked against these clusters the last years and I think that we have made a lot of progress in that respect, too.

Now, coming to Page C8, this is now the yield that is measured by IFRS. That means what we take into account is the current income of the group and then the realized gains and losses, but also the changes in the book reserves. And if you add that up, overall, you come up with a total performance of 1.2%. Is it a nice number? It could be higher, but to be frank, the year before, we had a total performance of 11.8%. The main reason was that in 2014 the interest rates have fallen significantly. That means a lot of funny money being formed from reserves, unrealized reserves. Now, it went the other way around. In the year 2015, there was a small increase in interest rates, especially on the longer term bonds. That means you had some losses on the bonds as such. And therefore, the total performance of 1.2% is okay. If we measure against benchmark indices, what we do internally as bund is relevant for us then you would see there was also an outperformance but only a small one.

Now, coming to Page C9, there you can see the new investment yields, a little bit lower than the year before, but still strong if you think of the current investment environment, on the P&C side, an average 2.2%; on the life side, 2.5%. Only to compare that, the bund yields right now, it’s 22 basis points for 10 years. Hopefully, they will go up a little bit during the year. But if you compare against the risk-free rates, it’s still – I think, these are attractive yields overall.

Now, coming to Page C10, you know this comparison very well. We always compare for the Life and Health business the total yields, what we achieve on the assets but more so on the reserves, because we hold more assets than reserves. It brings us in the year 2015 to 5.1% and that compares with a minimum guarantee of 2.3%. That means still a very nice spread. That means all the guarantees are very much secure and the same holds true if you think of the new business. The new business guarantees for the business with any guarantees is at 0.8% and the reinvestment yield, as already explained, at 2.5%. Also, there is still the nice buffer.

Now, coming to Page C11, that’s more for the Q&A. Perhaps that leaves me not with much – as many questions to that. The overall question is right now what is our exposure to the oil and gas sector? That is not so much interesting because of ESG I think, but more because of the very low oil prices and at least there is the assumption that we will see more defaults on the oil sector, as such, an ambiguous sector. And what you can see, our overall exposure is pretty small. It’s only 2% of the overall investment portfolio. That means 5% of our equity portfolio. That’s €1.6 billion. And on the fixed income side, it’s €10.7 billion. Even lower, that means 2% overall. And if you think of the ratings, they are pretty much okay, too. That means, in general, no large risk on oil exposure.

To summarize that, more interesting, I think was the development of the market this year? We have seen a lot of volatility. And in this – in oil market segments that means on the equity side, the maximum was a minus depending on the index between 10% and 18%, right now still we have at minus 10% to 12% in most of the equity markets. And on the interest rate side, unfortunately very low interest rates, bond yields already mentioned with 22 basis points, 10 year swap rates at 56 basis points right now. That means also very, very low. And in addition to that, also higher credit spreads. What I like very much, but Solvency II-wise, it means all three things are working against the Solvency II numbers. That means we have to make sure that we can stand these kind of perfect storms. And overall, I think we implemented some measures also to lower the overall volatility, but as Dieter already mentioned, there is something what we plan to do in that respect.

Overall, my outlook for the year is still a positive one. I think equity markets are too cheap. Therefore, I am optimistic that we could see some recovery that goes also for the interest rate, but to be fair that can last a little bit longer because of the things that Mr. Draghi already had announced at least some expectations around the market. But it could also happen similar thing what we have seen last year until April, very low interest rates and then a very big shock on the interest rate markets where the markets went up by nearly one percentage points in three months, but let’s wait for that. We have to prepare for all these scenarios, it’s for sure. What we would like to do in general is to invest more in alternative assets to also get some additional liquidity spreads I think that’s very much important for us too.

Thank you very much.

Oliver Schmidt

Alright. Thank you, Oliver, Dieter and Max. And with this we are now happy to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we would take an opening question from James Shuck of UBS. Please go ahead. Your line is open.

James Shuck

Good afternoon everybody. Thank you for taking my questions. I had two questions please. Firstly, could you just talk me through the – sort of what your expected level of capital generation would be in any normal year, I am kind of thinking about the pre-dividend accrual level of capital generation. And in particular, I am kind of – if you are able to split that out for me and tell me what the life and health contribution is in euro terms. Obviously, we transitioned from the old Solvency I basis, the capital generation, which you can see from the MCEV disclosure into the Solvency II world, I am interested to see how the life and health side of things in particular compares under the new basis, that’s my first question. Second question just around the roll out of the digital agency, at the time when you presented on the German digital agency, you talked about the potential for 25% increase in productivity, and I came to know where you are with that, whether those productivity levels are holding up as you had initially visits and also the status of other countries as you rolled out digital agency in the latter part of 2015 and into the first part of this year please? Thank you.

Dieter Wemmer

James, it’s Dieter here, the expected level of capital generation, that is a very difficult question to answer, because even when we now create a formula, I bet with you, there will not be a single quarter where we can demonstrate that it works like this because there is so much volatility for many parameters. So actually, any number we give to you is then always being offset by the reality. And I am afraid that I would actually create a misled to all of you and it is much better when you just focus on our 2018 financial targets, because we are committed to manage the balance sheet and the growth of the business in the right direction. Maybe over the years when we have more average quarters to produce, we can distill it down to a more useful guidance. But at the moment, I think that would be too early. On the digital agency, I think we have so far not yet a lot of experience how the first pilots are running and we would give in summer, when we have the Capital Markets Day about the digital only, we would give then some more details on this one.

James Shuck

Okay. Thank you very much.

Operator

We will take our next question from Peter Eliot of Kepler Cheuvreux. Please go ahead. Your line is open.

Peter Eliot

Thank you very much. I guess you highlighted the reasons of being a bit prudent on the growth outlook for operating profits and obviously the midpoint of your outlook is I guess 1% higher than it was last year. So I am wondering if you could help us on the translation to EPS. Obviously, it’s going to only access capital which will help bridge the gap to 5%, but I was just wondering if you could share your expectations on developments for the non-operating profit and also the impact of recent market volatility on the starting point there. Second question was just on the non-life, underperforming non-life businesses, you highlighted the Brazil might take a bit longer to turnaround, but on Fireman’s fund, where you are able to take restructuring charges in Argentina where there has been the reserve increases, would it be too optimistic to assume something quicker, just wondering if you could share your thoughts there? Thank you.

Dieter Wemmer

Sure. On Argentina and Fireman’s funds, we look for a quicker resolution. On the outlook and EPS growth, well I think that is equating with the EPS that it has more input parameters than just operating profit. I think I pointed already a little bit towards the tax rate, but also look we have promised that we will either use our M&A budget or return it. The M&A budget unused end of ‘15 is some €1.67 billion, M&A budget end of ‘16 assuming we wouldn’t buy anything as close to € 3 billion. When you take €3 billion and whether you use it for M&A or you will return it to shareholders creates already an EPS enhancement of some 4 points or 5 points. So actually, I think we are well set to deliver the number. And please we said clearly, our EPS growth target is in aggregate is 5% a year. That means we are interested to move the current €14.6 earnings per share to close to €16 – close to €17 in 2018. We are not planning to show 1.25% progress by quarter. So that is certainly not in a strategic plan that you really schedule it like a Swiss plane. And then I think I have answered both questions.

Peter Eliot

Thank you.

Operator

We will take our next question from Paul De’Ath of RBC. Please go ahead. Your line is open.

Paul De’Ath

Thanks for taking my questions. And a couple of points of please. Firstly, on the kind of life business and new product development, I know you obviously had great success in the U.S. with the FIA product and you talked previously about potentially trying to build an FIA product for Europe, just wondering how that’s going and if there is anything you can talk about on how that is progressing. And then the second point is just on the asset management business and the purchase that you have made recently in AGI of their Rogge business. And I am just wondering if you could expand a bit on the thinking behind that, because obviously it’s fixed income and it’s also – it wasn’t necessarily the greatest business in Old Mutual’s portfolio. So, I was just wondering sort of why you think it’s going to be better under AGI than it was under Old Mutual? Thanks.

Maximilian Zimmerer

Hello, it’s Max. Only to start the question on the Life side, fixed index annuities, we do not sell only in the U.S., we sell it also successfully in Germany and in Austria and the name is IndexSelect. And there is also now – we are seeing growing interest into these products. But right now, it’s around 10% of the overall production then and the main reason for that is that the base rates are very small and therefore there is also a yearly guarantee on that one. That means it’s really attractive also to get some upside result without this big risk for the customers. It is not so easy to copy that product for other OEs, because the main importance is you have also a very sound bank book to start with this kind of product. What we are doing, because we think most of the customers do not want only pure unit-linked products and want to carry all the risk, what we do is coming up with other hybrid products with some forms of guarantees included. And also there is a new product we are planning for Southern Europe is a unit-linked product with guarantees at least where the overall risk per year is limited to a maximum of 10%. And because we think that is the future overall of the market and usually a traditional product is pure fixed income investments. At the very low rates you have right now, after cost, there is nearly nothing in it for the customers and therefore you need some upside. That means the overall idea of fixed index annuities, we try to copy that one and bring that all to other markets, but these are mostly other forms of products.

Dieter Wemmer

Okay. And then the Rogge question. Well, first of all, Allianz Global Investors needs to see that they are establishing a global footprint. UK is so far one of our weakest markets. So with the acquisition, I think we expand in the UK. That means we see also there then cross-selling opportunities on the top line. That is maybe less a point Old Mutual can claim, where they have such a strong footprint in the UK, so quite a different situation. And I think also the global fixed income strategies which are being added by this RGP are filling a right spot in AGI’s capability profile, and you can be assured that the past performance has been reflected in the purchase price. So therefore, I think we are ticking all three boxes.

Paul De’Ath

Okay, great.

Operator

We will take our next question from Farooq Hanif of Citi. Please go ahead. Your line is open.

Farooq Hanif

Hi, thank you. I am assuming that you haven’t been asleep year-to-date as markets have fallen. So, I was wondering if you could give us a guide to the kinds of management actions that you have been taking, because naturally what’s going to happen is as you get into the 180 to 190 range, everyone is going to speculate that, what’s the risk Allianz falls below 180, etcetera, etcetera. So, I wondered if you could talk about that? Secondly, in the alternatives portfolio, how much of that is – can we think of being allocated to life, and how much to non-life? Is that important, because – just want to understand the – kind of the yield implications of where the alternative portfolio is allocated in the business. And I guess lastly partly to Paul’s question, we see no deceleration of net flows. Sales as well have been weak in life and that’s understandable given what you are doing in that business. But are we going to be facing this for a few years now as you shift the new business mix or can we see sort of revenue top line net flow recovery happening by the end of the year? Thank you.

Dieter Wemmer

Well, when I start with your last point, actually, when you see that ‘15 over ‘14 on average, our life reserves that means the basis for the earnings is 8% higher. So we have a natural source also here of income even when the net inflows were very strong in the unit-linked space, but we had outflows in traditional, which is actually not so bad. The volatility in Solvency II that is actually – and here, it simplifies our organization that is really a one segment topic. So, we are only dealing with our Life and Health segment in this question. P&C is clearly not very material and therefore not relevant to do it. We do a full suite of activities. And as usual, we really like to talk about it when we have done it and when there is next reporting date with the Q1 results. We are not making any announcement of what we are doing and not doing, because also why would we set up a financial market on movements we might plan that if it’s the volume we are acting on, that would be really a bad message to the market. But I can also tell you that we are a pretty quiet investor and not panicking over the current volatility of the market.

Maximilian Zimmerer

Yes, it’s Max. Only to add to that, at least I can give you the ratio of puts we have in place for the equities, which is 28% only. So, as you know that in overall, that means there are some measures in place. That is not new. Only to say that we are always working with puts overall, but only to prevent us if there is a real crash that we have to fire sale something. Then to the question of the alternatives, I do not have the number here in front of me. I can give you only some guidance in that respect. If you think of the mortgage business, mortgage business is usually long-term, 10 years plus. That’s mainly with the life business. Private placement, it’s also the same, mainly life business, not P&C, infrastructure debt. There is some short-dated debt, but most of that is also long dated and long dated goes always into the life portfolios. In real estate, we have both. That means on P&C and on the life side and that’s where it’s split. Private equity also, we do it in the P&C and in the life business. Infrastructure equity is usually also purely for the life business. In renewals, it’s the same. That’s mainly of course only with the life business only to give you an idea, yes.

Farooq Hanif

Okay, thank you.

Operator

We will take our next question from Vinit Malhotra of Mediobanca. Please go ahead. Your line is open.

Vinit Malhotra

Good afternoon, hi. Thank you. So just on the life, the first question is on the technical margins. It seemed to me that the quarterly run-rate hasn’t been really going as high as the outlook is progressing. And Dieter, I just wanted to double check, you did try to suggest that it wasn’t really investment income driven, I mean, this increase in outlook. So – but we aren’t really seeing the trend in the technical margins. So, I just wanted obviously to understand a bit more about the outlook increase, but also whether it is technical margin driven or loadings driven or investment margin driven? That’s the first question.

The second question is just on the alternative assets again for Max, I remember in the Investor Day, a slightly smaller number, maybe €86 billion was shown and we certainly see €92 billion. Is it all mark-to-market or has there been a lot of activity in the last few months at Allianz? Lastly if I may just ask on the M&A strategy, is it a fair understanding that there is a bit more – not emphasis, but a bit more talk about it at the Investor Day when this target was presented? And is it in the volatile markets, which has caused you to tore them down a bit? So just a very quick comment. Thank you.

Dieter Wemmer

Okay. I start with the life outlook. Well, the technical margin will certainly grow also. I’m foreseeing an improvement there in 2016 if everything goes to plan. However, the big swing factor in investment margin, as I said before, is a higher rating of our U.S. business because all the profits of a fixed indexed annuity policy are showing up in the investment margin. There is no technical profit, so to speak. It’s all investment income over expenses and capital market return. And that is I think the biggest waiver for the higher base point number I mentioned. And the rest, we have normalized to a normal flow of turnover in our portfolio, which we had also – in the last two quarters, we had I think realized gains of around €1.2 billion. And that is just what you almost automatically create with the size of the portfolio and some active management.

Maximilian Zimmerer

Yes. Coming to the question to the alternatives, at the Capital Markets Day, I think I have shown the portfolio in the third quarter 2015 that was at €86 billion. Now we are at €92 billion. The €6 billion, I can’t tell you whether that’s only transactions or also some additional returns coming from market and valuation. I assume so because overall, for the total year, we do that – the valuations for part of the assets also quarterly. The overall performance of the alternatives in the real estate in this year were double digits, that means also some price increases not only new transactions. But I can’t tell you from the €18 billion of increase of the alternative investment portfolio how much was performance and how much was transactions. What I only can say a little bit more than 10% was the overall yield on the alternatives last year.

Vinit Malhotra

Thank you.

Oliver Bäte

Let me – Oliver here, Oliver Bäte, not Oliver Schmidt, talk a little bit about M&A because that’s lingering on the minds and investors have mentioned that to us and to me specifically. Let me reinforce the following item. We have I think built nicely over the last few years a record of being disciplined on acquisitions. We have said we want to invest in property, casualty, particularly in countries where we have strong operations and want to build further scale. And therefore consolidate and reinforce our positions over time and where we have management teams that can actually integrate, that remains unchanged. The second question we get is, what are the return hurdles, we have the same return hurdles for acquisitions that we have for our in-force. We want over time to have 15% RoRC or 13% ROE. That is also the case for our acquisitions. That is obviously a long-term average and we want to make accretive acquisitions. That’s also important. And we are certainly not interested to acquire something against issuing huge amounts of stock. So just let me reiterate. So going out and buying a gigantic company at this point in time is not on the agenda. So you don’t need to be worried about that. At the same time, we believe this environment will separate the strong from the weak ones. You will particularly, I think see a lot of conglomerates that have strong home markets, but very weak portfolios outside of the home market, disposing of peripheral operations that might be good in the core and might be fit to us. And we are systematically looking at that. We have been looking at that. In many cases, over the last few years, prices were too high, but with valuations coming down and companies being under pressure to clean up their portfolios to meet solvency calls and all the other things, we feel we are in a position to take advantage of our relative strength. And that is what we are intending to do, again applying strict discipline on the financial criteria. And we expect and hope for your support in that strategy. Thank you.

Vinit Malhotra

Thanks Oliver. Thanks for the clarification. Thank you.

Operator

We will take our next question from Michael Huttner of JPMorgan. Please go ahead. Your line is open.

Michael Huttner

Fantastic. Thank you very much. On the solvency theme [ph], I am a bit puzzled because you have huge buffers in Germany, so you have this 300% solvency there, 200% at the group level. And I just wondered why these buffers are not helping moderate the volatility we are seeing with the ratio now excluding management actions of about 180%, which is at the bottom end of your target range. So I just wondered if you could talk about that. On the mega deals and you just said, Oliver that you would look forward to our support there and Vinit said yes. What does support mean, does it mean you would like us to write nice things about it or does it mean you will ask shareholders for money. And then if I may, a last question, so in your presentation Oliver, you repeated or said again what I understood from the Investor Day, which is that the life business would shrink the capital allocated or make it more efficient in some way. And I think Mr. Zimmerer presented a figure of €3 billion, which is not in the kind of budget for the group, so this would help EPS on top, can you talk a little bit about that? Sorry, it’s three questions. Thank you.

Oliver Bäte

Michael, Oliver here. I will take the easy questions. I will leave the difficult ones to Dieter and Max. Let me – what I wanted to say is I assume that based also on our investor perception study and support that staying disciplined on the things we have been doing that that is also meeting your expectations. The reason why I am mentioning that, we occasionally have – get a question around under all circumstances to pay dividends or do share buybacks. If you take this to an extreme and say that’s the only way to run the company, you put a company into runoff. So you need to get the balance right between appropriate returns on capital and we have clearly said that, earnings growth, i.e. and again the way how do you deal with capital that is building up and that you are not using. And we are absolutely committed to not have capital sitting idle in the company, but we also don’t want to waste it on M&A. Now we cannot wish for the right M&A targets to come at every point in time when it would be perfect in terms of timing. So we need some flexibility over time. But as we have said between now and the end of 2018, we will not accumulate money and have it lying around. So that discipline you can expect. But as Dieter said earlier, we are not managing these numbers by the day, the month or the quarter. We are in a long-term business and we are managing for the long-term growth of the business. So that is what I wanted to say. If you get consecutive systems or people say we don’t know what to do with your capital and we are therefore, just paying it out or buying it back, that’s short-term, a great method to long-term, that’s a disaster, I think. Sorry to say.

Michael Huttner

That’s a very good point. Thank you.

Dieter Wemmer

Michael, you are fully right. It’s a dampening effect from the standalone solvency of Stuttgart, our life business in Germany to the group numbers. However, that is already included in the sensitivities we have disclosed so that in the end the net figure which we have calculated for the sensitivities and therefore it’s already all-in, so to speak. And when you see that two mid-sized OEs, Korea and Switzerland actually, it was a change of EIOPA’s view how the interest rate curve should be designed. Actually, we have shown with a lot of capital market material and a lot of base data that the Swiss interest rate curve published by EIOPA is much too conservative and they are actually not following their own rules they apply for other currencies, that these two markets are actually moving our interest rate sensitivities three points up. That shows you only how sensitive the Solvency II models are and this calibration question. And I really hope that we can focus on working with the model and have not to face every now and then an interference from the regulator coming up with some new formula because the people as the regulator have been hired to write technical papers and otherwise, they are running out of job. So and that is something we have certainly to manage going forward.

Michael Huttner

You could and I suppose make their job lighter by instead of letting them be employed by EIOPA, by employing them at Allianz. Sorry, about that. So just on the €3 billion?

Dieter Wemmer

Yes. That was the number which you picked up from Max’s Capital Markets Day slides. We have not explicitly integrated it in any of the targets but it is actually for us, a number which we have demonstrated that 5% EPS growth over the 3 years is not completely unrealistic and that is a view which has probably not completely transpired in all analysts’ reports.

Michael Huttner

So I take this to mean that although we might not see any of the €3 billion this year, we will definitely see something next year so that it will kind of boost EPS. Is that fair?

Dieter Wemmer

Whenever it comes, yes.

Michael Huttner

Whenever it comes, okay.

Dieter Wemmer

We will – I will mention it when we see it.

Michael Huttner

Okay, that’s fair. Thank you very much. Thanks for answering my questions.

Operator

We will take our next question from Andrew Ritchie of Autonomous. Please go ahead. Your line is open.

Andrew Ritchie

Hi, there. First question on P&C, Dieter, I think you mentioned that large man-mades were 6 points in Q4, discrete Q4. Maybe just for the year as a whole, can you tell us where you think man-made losses were versus some kind of normalized level, where you would have expected them to be? Again, we have asked this question several quarters, is there a trend here in large losses? Is this random? Obviously, it’s come up for debate a bit more in 2015. But basically, I want to know where they are versus a normal year. Second question, Oliver, you mentioned you are more cautious on the outlook for asset management given the market. Can you just give us any sort of qualitative information as to how the market turmoil has affected PIMCO year-to-date? Has there been a necessity to build more cash buffers? Has it significantly affected flows? Is there significant mark-to-market issues for some of your liquid credit? Just some color there will be useful.

And a very short question for Max, Max, just looking at the unrealized gains on corporate bonds, even though your energy exposure is quite low, I noticed that the stock of unrealized gains fell 25% in the quarter, which seems quite high when spreads didn’t do an awful lot. Did you realize a lot of gains in corporate bonds in Q4 or is there some sort of asset shift? I am just surprised the stock of unrealized gains on corporate bonds fell so much. Thanks.

Dieter Wemmer

I start with man-made losses, because I can give you here a man-made answer. So 6.4% were the large losses in Q4. Our average for the year was 4.4% and it’s actually 0.1% lower than 2014 where we were at 4.5%. And our 10-year average is 4.0%. Is there a trend in it? I don’t think so. We had in Q4 concentrated two losses together of €200 million and an uptick of the Tianjin port loss. It seems now that the Tianjin port loss is becoming one of the largest losses ever. Some people are talking that it could in total in short losses coming close to September 11, which is an unbelievable size, I feel. And then our share in it, it’s really, really small. So, I think that is – and then we had – well, in ‘14, we had more of this some spectacular airline losses, which made the headings for quite some time. So is this a trend? No, I don’t think so.

Andrew Ritchie

And so basically, then for the year as a whole, man-mades were not particularly unusually high then?

Dieter Wemmer

0.1% lower as a percentage. It is slightly up in absolute number, but our net earned premium grew by more than 6%. So, when you divide man-made losses by net earned premium, it moved from 4.5% to 4.4% in 2015.

Andrew Ritchie

Okay.

Maximilian Zimmerer

Okay. Coming to the question about unrealized gains and losses and also how you manage this kind of volatility especially on the asset management side. It’s true, for example, for PIMCO it’s not so easy to cope with that one. If you have a large mutual fund and there is outflows and especially driven by market development, you have to hold more cash than usually necessary and that’s a drag on your overall performance. But what I can tell you at least at PIMCO, although as you are seeing it for the total return fund, they have these outflows managed it very well. Well, because they last year saw an outperformance in that respect. Now coming to the unrealized gains and losses, I can’t tell you the split of the minus €17 billion and change in unrealized gains and losses. In that number, there is also €3 billion coming from U.S. business and let’s say €14 billion. But I can assure you, we haven’t sold a lot of corporate bonds in the last quarter. There was no necessity to do so. Overall, if you think of the corporate spreads and also of the interest rate movements, the last quarter of 2015 was a pretty quiet one. That means no special actions in that respect.

Andrew Ritchie

Which is why I am surprised the unrealized gains fell so much on your corporate bond portfolio?

Maximilian Zimmerer

You say in one quarter, where did you pick that number?

Andrew Ritchie

I am looking at the disclosed unrealized gains on corporate bonds that you gave in your appendices every quarter.

Maximilian Zimmerer

Okay. I have to look it up and then let’s see whether I find something special in there. You are right it can’t be only the oil exposure that’s for sure, because our exposure is not very large.

Andrew Ritchie

And just on PIMCO, I am just trying to understand the additional caution, is that because of the experience to-date in PIMCO or is it more I think your bets for the year as a whole?

Oliver Bäte

No, it’s just for the year as a whole. The markets are down 10%. What does that do to AUM in the active asset management piece, how they are being compensated? So that is a general caution if volatility goes up and markets go down. That has an effect now. We have some counter effects on bond portfolios having increased in value. We believe that the precision with which you can make forecast is just lower in this environment than we have had in the past, nothing in particular about the first six weeks.

Andrew Ritchie

Okay, thanks. And so Max, for reference, it’s Slide C18, but I am interested in a follow-up on.

Maximilian Zimmerer

Sorry, you mean C18, that’s a complete year?

Andrew Ritchie

The stock of unrealized gains on bonds.

Maximilian Zimmerer

And you compared – you take only the numbers from C18 or you take also some numbers from the Capital Markets Day otherwise, it’s...

Andrew Ritchie

I am judging now versus the Q3 reported results.

Maximilian Zimmerer

Oh no, that’s a little bit complicated.

Andrew Ritchie

I can follow up. It’s fine.

Maximilian Zimmerer

The Q3 results, at least I need some time to check it, okay?

Andrew Ritchie

Sure. Okay. It just looks like a big move, but I can follow up.

Maximilian Zimmerer

Okay, thank you.

Andrew Ritchie

Thanks.

Operator

Thank you. We would take our next question from Thomas Seidl of Bernstein. Please go ahead. Your line is open.

Thomas Seidl

Yes, thank you. Good afternoon. Three questions. First two on the targets, I come back to the €3 billion life capital release target. At the Investor Day, I think you showed us because of de-risking that the required capital had fallen. Yet when I look at the numbers now, year-on-year, it has grown by 9.5% from €20 billion to €22 billion. So, my first question is what keeps you confident that with management action you can really produce the €3 billion given the headwinds from the macro side? Second question is on the combined ratio on the P&C, the target is 94. It seems like it’s creeping up now, 94.6, pricing at 1, claims frequency up and slow turnarounds in LatAm. Can you give us a flavor or color on how these actions you presented at the Investor Day are coming through in terms of impact? In other words, is the combined ratio over the next 2 years actually more rising and then only towards ‘18 falling or what is sort of the dynamics you have in mind there? And the third question is on the asset side, you showed theoretically a modest exposure to energy, but I think you still have quite an exposure to the financial and the bank sector. And I wonder given the weakness of the bank sector in Europe what you think about the contagion risk Allianz has to some of the weakness in European banks via bonds and equities?

Dieter Wemmer

Okay. I am starting with all three and then my colleagues might adjust and complete my answers. Yes, for sure, the risk capital consumption for the Life segment increased Q4 over Q3 and I gave you already the explanation with the changes driven by EIOPA technical changes, which we did not expect when we prepared our Capital Markets Day. However, I believe that our de-risking plans over the years should still hold up. And on something like this, in the end, we can only prove it by delivery and not by now showing you a list of actions we might consider. So, it is really proof point dependent and that is what we continue to do. On the 94% combined ratio I mean with 94.6%, you can say overall, we are not this far away. Latin America is the first place to pick. But we are working in general on every sub-portfolio, which is above 100 combined. And when we tackle all of them and are only halfway successful on these, then I think you see already enough improvement in the combined ratio. So I would not be concerned about this target. And actually, I also would argue that dependency on combined ratio improvement in our industry, looking at the recent announcement of big competitors, they are all under pressure to improve combined ratios, which should help from a market competition point of view. On the asset side, yes it is true that we have a bigger number against the financial sector banks. But you have to subtract from this all the covered bonds, which I would exclude from direct exposure to the quality of the bank balance sheet and our exposures on subordinated against banks or also equities that are fairly modest in relation to the size of our portfolio. But maybe Max can add to this one.

Maximilian Zimmerer

First, I would first come back to the unrealized gains and losses on the corporate portfolio. It was the number from 30 September, 2015 was €4.7 billion of hidden reserves and then it went down to €3.5 billion. That is not very large if you see the overall size of the portfolio. This was mainly driven by interest rates hikes in the U.S. because we have there very long-term corporate bonds. And due to the interest rate impact in the last quarter, some of the hidden reserves went out – overall out of the portfolio. So it was nothing special that we have sold something or something like that. Banking. Yes, banking. Coming back to the banking, 16% of our banking – of our corporate exposure is in the banking side and this is €32 billion overall. And if you think of the quality in general, it’s mainly – what is it, 95% is investment grade. 17% is in BBBs and 52% that means the bulk of it is A. The main reason for that is that most of the banks are in that bucket and therefore also nothing special in that. What I really can say and I am really proud of that we are continuously really decreasing our banking exposure. That means within the corporate segment, we try to reduce the banking exposure. As such, the main reason of that is not that we do not have trust in the banks but that banks seem to be some kind of cluster risk.

Thomas Seidl

Alright. Thank you.

Operator

We will take our next question from the line of Nick Holmes of Société Générale. Please go ahead. Your line is open.

Nick Holmes

That’s great. Thank you very much. Two questions, the first is realized gains in the Life business, your policy of extending durations this year has obviously generated a lot of gains, really boosted your operating earnings. Now, I know you have already guided that you don’t expect the Life segment to grow very much, but I wanted to ask how should we expect you to manage the realized gains this year, I mean the comparative obviously is a very difficult one, which you must therefore bear in mind for your investment strategy. The second question is looking at your energy exposure, most of it’s in the Life segment and wanted to ask what sort of guidance would you give to us as to the shareholder exposure, I mean a lot of that is going to be on a 90-10 basis, but would it be unwise of us to take something like 90-10, should we be taking more like 50-50, just your thoughts on that would be very much appreciated? Thank you.

Maximilian Zimmerer

Okay. Coming to the last question – it’s Max. No, it’s the same split as usual. There is nothing special in that one. And if you think of the 2% only, the quarter of the overall portfolio, it would have a minor impact in general. And that means there is no reason why we could not pay any guarantee because there is a default on energy stock or bonds. But that is not what I expect. I provided you also with the rating numbers. That means there is nothing special. And only to remind you, there are very large players in this bucket. Take Royal Dutch or Exxon. And I do not see that there is really default risk in general. I only wanted to say that the overall impact of the energy crisis on our portfolio will be a very, very small one in general. Now coming to the question and that is more difficult to answer, how much we would usually realize on the bond reserves – the hidden reserves on the bond side, it’s true usually, this is not driven by let’s say going for higher operating profit numbers, it’s more driven by actions on the fixed income portfolio. And if you do a duration lengthening, usually you have to sell some bonds. There is no other possibilities. We do not hold so much cash. And because we did that last year, lengthening by 0.5 years to 0.6 years actively, you have to sell some bonds. And as you know, we have still high hidden reserves on the bond side. I would not expect the same amount for every year, only to say that – but I cannot exclude it in general because what we are usually very much fearing is the current yields in our portfolio and we do not want to spoil the current yield. Overall, every year, the current yield on the life cycle is down by, let’s say around 0.1. And I think that’s a steady pace and we would not like to increase it by taking too much hidden reserves out of our portfolios.

Nick Holmes

Thank you very much for that. Just a very, very quick follow-up, so is it – would it be right to say that your policy of extending durations is sort of still happening, it’s not something that was an event that took place last year, it’s still something that you are looking to do as appropriate?

Maximilian Zimmerer

In general, we would like to have a matched approach for the new business. You know that this is our overall target, but it doesn’t mean that we close every time the duration. It’s very much depending on the situation of the companies as such and what are the risks from the duration gap. And it’s also depending on our interest rate outlook. Therefore, I can’t say or make a general judgment on that one.

Nick Holmes

Okay, that’s great. Thank you very much.

Dieter Wemmer

And Nick, it’s Dieter here. You have also to remember that we have also a lot of normal maturities in the life portfolio. That means duration lengthening you can also do with new investments. You don’t need to sell always old papers to achieve it. And the guidance I have given for the average investment margin is assuming a normalized flow of realized gains. That means also no special action that you would get more realized gains due to lengthening activities.

Nick Holmes

Okay, that’s very clear. Thank you very much.

Operator

We will take our next question from Michael Haid of MainFirst Bank. Please go ahead. Your line is open.

Michael Haid

Thank you very much. Michael Haid from MaineFirst Bank, good afternoon to everybody. Three questions, first question on the operating profit target 2016. As you mentioned, it includes some degree of prudence also owed to the low interest rate environment. I wonder how much has the first six weeks of this year affected this operating profit target, the recent market turmoil. Second question on AGC&S, the combined ratio of 94% in a very competitive environment, to what extent is that driven by reserve releases or abnormal reserve releases and why can you perform so well in this competitive environment. Last question on the fixed index annuity, you mentioned close to $1 billion of operating profit come from the fixed indexed annuity book, that is very strong in my view. How resilient is this figure to lower sales, not that I expect this, but I would like to get a feeling for the sensitivity of declining sales to this operating profit?

Dieter Wemmer

Well Michael, let’s start backwards. The profit in fixed indexed annuity, we make on the reserves, so on the accumulated investments and that is a more than $100 billion portfolio, mainly corporate bonds BBB that is – maybe also an additional answer to the question why the unrealized gains on the portfolio did move because these are 10-year bonds. I would say it is a very stable source of operating profit. Only when the customer would all run away then the profit falls apart. As long as the customers are staying and we don’t see any movements in surrender or lapse rates, so it looks to be a stable portfolio where we have more net inflows than maturities. So, it is still a growing number.

AGCS had indeed quite some runoff, but we have the same runoff in previous years. So, it is a very stable number. Why is it better than the competition? Well, I think we have maybe missed some growth opportunities. And with the missed growth opportunities, we miss also chances for some higher man-made losses. So it is an underwriting and bottom line focused approach. And I think AGCS has delivered since it started a year-by-year improvement in its underwriting discipline and it is certainly within the Allianz organization one of the leading organization or the leading organization for writing complex and commercial business. Is our OP target 2016 affected by the current volatility? Yes, for sure, we have increased the range around it, because we feel that’s a year that still might have more surprises than the first 6 months. When it’s getting back to a more stable environment, then we have certainly plenty of time in the upcoming quarters to refine the outlook for the year.

Michael Haid

But not the absolute level, it’s more the volatility of the operating profit, which has been affected.

Dieter Wemmer

Well, I would say both. I think we have left the upper end stable.

Michael Haid

Okay, thank you very much.

Operator

We will take our next question from Jochen Schmitt of Metzler. Please go ahead. Your line is open.

Jochen Schmitt

Thank you very much. Good afternoon. I have just one question on digitalization, could you provide a figure for online distribution in your German operations in 2015 as well as the comparison with 2014? That’s my question. Thank you.

Oliver Bäte

I think Oliver will dig it up and then send it out, because I think it takes a minute to find it. Correct? Yes. We are digging it up. It will come to you in a few minutes.

Jochen Schmitt

Okay, thank you.

Oliver Bäte

Maybe it’s a good time before we get to very much the fine details of the numbers that I would like to give you a little bit of a top-down view reflecting on your very good questions and thank you for those. I think the question we just had on the outlook and the level and volatility is nicely summarizing really the questions that you may have looking at our disclosure. Maybe we could give you the following feedback. Allianz has had a very strong year and we are looking to capitalize on the number of strong years and a very strong balance sheet. We believe the volatility in the markets around, as I said a little earlier, will create significant opportunities for us and we would like if I may say so point out to the fact that we want to keep our powder dry for the opportunities that are coming. And if you are to interpret the way we’re communicating today and the way the numbers have come out, please keep in mind that we are taking a measured approach to earnings per share growth, that we want to make sure that nothing we are doing is threatening the stability and the strength of our balance sheet and we want to be able to move when the time is right. Maybe that helps you in an environment that is increasingly getting nervous and concerned about where to put the money. Max had said it very nicely. If you can get zero for investing in a bond and 5% minimum dividend yield in Allianz, I have my money here if that is of any consideration for you. That’s the better investment.

Oliver Schmidt

Alright. Thank you, Oliver. I think with that we should close the call. Thank you very much for your time and for your interest. We wish you a very nice remaining afternoon and we hope that we will see you next week on one of our analyst meetings. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!