Allianz SE ADR (AZSEY) Management on Q3 2018 Results - Earnings Call Transcript

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About: Allianz SE ADR (AZSEY)
by: SA Transcripts

Allianz SE ADR (OTCPK:AZSEY) Q3 2018 Earnings Conference Call November 9, 2018 9:00 AM ET

Executives

Oliver Schmidt - Head of Investor Relations

Giulio Terzariol - Chief Financial Officer

Analysts

Thomas Seidl - Bernstein

Michael Huttner - JP Morgan

Peter Eliot - Kepler Cheuvreux

William Hawkins - KBW

Andrew Ritchie - Autonomous

Nick Holmes - Societe General

Vinit Malhotra - Mediobanca

Farooq Hanif - Credit Suisse

James Shuck - Citigroup

Michael van Wegen - Bank of America Merrill Lynch

Michael Haid - Commerzbank

Oliver Schmidt

Thank you, Stephie. Yes, good afternoon from my side as well, and welcome to our conference call. There is nothing specific I would like to add right now. So, I hand over directly to Giulio.

Giulio Terzariol

Hi, good afternoon and good morning to everybody. I am pleased to present to you the numbers for the third quarter. But before we go into the third quarter numbers, we can take a look at the picture as of September 2018 and we can go to Page number 3. As you see, we have very strong results for the first nine months across the board.

When you look at the revenue, we have been able to grow revenue on an internal basis by about 7% and the growth is driven by all segments, especially it’s very nice to see the growth rate in P&C which is close to 6%. On the operating profit, we are up €400 million compared to the level of last year. This is driven especially by property and casualty and you can see also a nice contribution coming from asset management.

On the life side, we are slightly down compared to the last year, but we need to consider that last year was kind of elevated because of volatility in the United States was particularly low and even more important with €3.2 billion of operating profits. We are very much in line with our outlook for the year of €4.2 billion.

When we look at the operational KPIs that combined ratio in the business margin, cost-income ratio, they are all heading in the right direction, especially you can see a nice improvement in the combined ratio which is now for the nine months 94% which is also the level that we are targeting for the full year based on our renewal agenda target.

The new business margin has slightly improved and combined with increased revenue. This is leading to a nice growth in VNB of about 9%.

Net flows year-to-date at about €30 billion. So that’s also a nice picture and then when you look at the bottom-line, so we look at the net income, we are up 7% compared to the prior period. This is driven once by the improvement in operating profit, on the other side, we have also a better tax ratio which is mostly explained by the tax reform in the United States.

So, now when you look at these pages in the picture is really compelling. We have good growth in revenue. We have operational KPIs moving in the right direction and the net income in the earnings per shares growing very nicely.

If we move to Page 5, we can now go into the third quarter numbers and also the third quarter on a standalone basis is very strong. On the revenue side, you can see always on an internal basis that we have a growth rate which is almost 10%. This is driven by all segments. So, we have a nice growth rate in property and casualty, which is consistent with the growth rate that we saw also in the prior year quarters.

We have a nice growth rate in life health, even better than what we saw in the prior quarter and we see a nice stability in the gross revenue in asset management. The operating profit has increased substantially compared to the prior period and you can see there is a swing of €100 million. Clearly in the prior period especially on the P&C side, we had the impact of the national catastrophe. But it remains that with €3 billion operating profit for the quarter we are at a very good level.

And again the net income has improved significantly compared to the prior period and this is driven by – especially by the increase in the operating profit of 20% plus. So, good picture for the quarter which is confirming the numbers that we saw also in the first half and especially in the second quarter 2018.

We can move now to Page 7 where we see the developments of the shareholder equity and on the Solvency II. I am going to focus more on the Solvency II capital cost which is about 229, it’s very stable compared to the Solvency ratio that we had in the end of last year and also at the end of July. I am going to come back in one second to describe the different driver or the movement of the solvency ratio.

When you look at the sensitivities, pretty much unchanged compared to the sensitivities that we had saw over June 2018. The only exception is the sensitivity to interest rates which is now minus 7. You should remember this sensitivity was more like minus 10 in Q2 and the sensitivity was minus 7 in Q1.

So we are going back to the level that we had at the beginning of the year and that’s because, you are going to see later you’ll have a little bit longer duration on the asset side compared to the duration of the liability. So we have a little bit of a higher duration again.

If you move to Page 9, you can see the capital drivers or the development of the solvency ratio. First we had a small change impact due to the tax reform in the United States, and that’s because with the changes in tax reform in the United States when you are under calculation you have to see capital. We have a less of a tax – if you want in the capital charges and this is increasing the capital charges. So that’s about 1% and this was also expected.

On the operating earnings you can see on a pretax pre-dividend basis, we have an improvement for the solvency ratio of 9%, which is pretty much in line with what we saw also in the prior quarter. There is one thing I’d like to draw your attention to is the business evolution which is now plus 0.2, in the last quarter. If you take aside the second quarter, I think it’s 0.1. Usually, we will see more number of data, now slightly negative.

The reason why we see a plus now is two-fold, on the one side is the P&C is growing. So, as we grow the P&C premium, we can see also there is increasing capital associated to that business. And then on the other side there is also the growth in Allianz Life is picking up and also we would not including the business evolution the Allianz Life in the past because Allianz Life is on a equivalent basis, but we are including also Allianz Life in the picture.

Market movements have been very minor. So no significant effect that’s all coming from the market movement. And then on the capital management actually, you can see the impact of dividend and the buyback of €1 billion that we paid in the third quarter and then the tax and that’s mostly grant by the tax posit ion. So the bottom-line is, if you were to adjust our solvency ratio, for the buyback the solvency ratio of 229 will be 232.

And that will be pretty much in line if you want with what we would expect in the absence of the regulatory change in the United States. So, nothing really exciting happening on the solvency ratio and again a very strong solvency ratio.

If you move to Page 11, you can see the picture of selected OEs for the growth rate in property casualty. Again, we had a very strong growth in P&C with 6%. Now, one of the driver for the compared to the past is Germany, which is growing very nicely at 4% and Germany is growing in personal and also in terms of retail business and also commercial business. It’s growing more to property. So it’s a nice growth rate across the board.

Also, Italy, you can see now positive at more than 1% growth. That’s now being the case in the past, in the last year, we were still negative and then slowly, slowly we have seen a recovery in our production in Italy. So now we are at 1.4% positive. Then you had a usual – like Australia, as the Europe and Spain and negative – only negative that you on this slide is the United Kingdom and this is somehow also shaded to the transfer of business between us and LV and clearly as we are transferring our personal line business to LV, there is a little bit of a slowdown in production.

When you look simply at the commercial business which is a core business of Allianz UK, then you can see a nice growth rate of 4% on the business too.

Then finally, just a couple of words on AGCS and Euler Hermes. You can see a growth rate of 10% for both entities. The recent seasonality in the case of AGCS is associated to the ART business. In the case of Euler Hermes, it’s more associated to the way the accounting can work.

But if you adjust for the seasonality the growth rate in AGCS and Euler Hermes is about 5% which is a growth rate and also something that we are not seeing to Euler Hermes in the past too. So, across the board, I would say nice growth rate, nice movement and nice increase again in the top-line.

Coming to Page 13, on the operating profit side, you can see a nice improvement and as I was saying before, clearly this has to do also with a swing in natural catastrophe from 4.5% last year to 2% this year. But this is not the only driver for the improvement. You can see that the expense ratios also improve compared to last year.

On the other side, the run-off has been lower, compared to the higher run-off that we had in the third quarter 2017 and then we had also that’s very important an improvement or the attrition on loss ratio. So at the end of day, the bottom-line is better productivity, lower natural catastrophe, and underlying improvement of the attrition on loss ratio pushing the combined ratio to a very good level of 93.1.

As you remember, we are 94, as of the nine months. So we feel very confident at this point in time, that we are going to hit our 94, higher throughput as you would sort of disclaim about natural catastrophe, but for the time being in the first six, seven weeks of the quarter, we didn’t see any particular activity affecting us in a way that could make our confidence to the 94% less.

Coming now to Page 15, you can see on the combined ratio, when we just look at the delta in combined ratio, compared to the prior period, you can see a lot of minus sign if you want. We have an improvement in Germany that’s driven by a – and also and especially by lower large losses and weather-related losses compared to the prior period.

Very nice improvement in Eastern Europe, where we are continuing to improve our underlying performance and on top of that, we had also lower large losses. Spain is also improving and then I will say, also in Latin America, you can see that we are constantly improving our position there.

On the company with a plus sign, Italy, just because of a slightly lower run-off, but we are speaking still of a very, very excellent, I would say, combined ratio. And now, as we see AGCS, there is an improvement early and you can see we had lower natural catastrophe compared to the prior period.

But the improvement in the combined ratio is less than the lower amount of natural catastrophe and the reason for that is that we had large losses and also weather-related losses this year which were in excess of the large losses and weather-related losses that we had last year.

So the bottom-line is that, AGCS has been running at the high combined ratio. So last year there is a loss in natural catastrophe and this year we are affected by large losses and weather-related losses. And still we have a nice large [Inaudible] coming from the natural catastrophe.

The bottom-line is, when you look at the segment, 93.1 combined ratio. So I think it’s a very, very good level and combined with a growth rate of 6% I believe both the technical excellence on the combined ratio and our commercial ability to grow the premium in my opinion clearly coming through the numbers.

Page 17, investment income, as you can see it’s pretty resilient indeed the investment income in the third quarter of 2018 is just – is less than €20 million lower compared to the prior period. So from that point of view, we see resilience in our investment results. I don’t know, if you remember the second quarter number, but they were also pretty resilient. So, overall, we see more resilience in the numbers compared to where we were expecting at the beginning of the year.

And with that, I will go into the Life segment. As you know, we have three targets at Page 19. For the Life segment, we have given three targets. One target is, we like to have a new business margin which is above 3% and you’ll see this is the case with 3.5 and we have been kind of moving at this level for a while.

Right now, the second target is that we want to add more than 80% of production in the so-called preferred products and as you see, in the third quarter, we are at 34. So this is confirming a trend that you already saw in the last quarter.

The third one also is we like to grow the revenue and when you look at the present value in the business premium on the right-hand side, in the table below, you can see there is an increase of about 12% compared to the prior period. So we also see a nice growth kicking in. This is explained by Germany and this is nothing new. Germany has been growing now for a while.

But we also see growth in Italy, which is now been the case in the first half of the year and we see also nice growth in the United States where we had sales promotion on the Fixed-index annuity side.

So, overall, I would say, very compelling case from a margin point of view and mix point of view and also growth of the revenue point of view.

If you move to Page 21, here we show the development of the operating profit, which is kind of stable compared to what we had last year. If you look at the waterfall, you can see the investment margin is slightly lower compared to the level last year. I am going to come back in one second on this number.

Otherwise, the expenses are higher, but that’s just a consequence of higher production and these are expenses where we are not backing the expenses yet, that calculation comes later. So clearly as we see more production, we are going to have higher level of expenses.

On the other side, loadings and fees and technical margin are both positive. So, all in all, when you add up all the different components or the waterfall you get toward an operating profit which is relatively stable and especially with €1.50 billion is exactly the off load divided by four.

I like to draw also your attention when you look at the protection and health, you can see that the operating profit went down by about €40 million and this is pretty much explained by a small loss in commission in the LTC business in the United States. I am sure, you are going to have a few questions later surely. These were the questions, but at the end of the day it’s a very small amounts of loss commission on the Allianz Care business.

At Page 23, we – you can see that the value of new business is accelerating to 16% and that’s clearly the consequence of a – to a certain degree also of an increased margin, but in reality, it’s mostly driven by the 12% present value in the business growth that you saw before. Overall, it’s a very compelling picture from a value of new business growth, I would say, across the board.

Now, when you look at the operating profit, just focusing on the two major OEs, Germany Life and United States. You can see they are down compared to the prior period. But in reality, that’s more of a normalization if you want. If you compare the numbers in operating profit for Germany Life and USA to their plan are very much in line, I would say, or just slightly below what we would expect for a quarter.

So, just to give you an idea in the case of the United States, last year the volatility was very low. This year it’s more normal than we had the LTC impact. But still at €220 million of operating profit, this is not fair from what we would expect for a quarter for Allianz Life, but also the resilience that we have in our operations.

And now coming to Page 25, that’s the investment margin picture. As you see the investment margin is suppressed in business points, that’s reduced by two business points. And if you do the annualization, the 21 business points is to 80, 84 business points which is below the 90 business points or 90 to 95 business point guidance that we gave to you and this is the not the first quarter, except in also believe into other quarter. One of the reason – the main reason why this is happening right now is because of the net harvesting and other.

As you’ll see, it’s now negative three business points and the reason for that is two-fold. First of all, last year, there was a benefit because of the low cost in – of the hedging way, but the other reason is, in our investment portfolio in euro, we also have U.S. dollar bonds. And we do a hedging clearly for the fixed cost and the hedging costs are going up. So this is dragging right now a little bit investment margin.

Now, on the other side, aggregate policy reserves is going up by 5%. So the margin is coming down a little bit, but the way this is going up. So, when you look at the absolute reduction in investment margin the reality is pretty small and again, we have other sorts of problems which are picking up like technical margin or loadings and fees. So, the bottom-line is, that we are comfortably making our €1 billion plus of operating profit per annum.

And with that, I would like to turn now to asset management. First of all, a change, the threshold of €2 trillion with the asset management, this includes also the assets managed for our operations. So, I think that’s more of a statistical information, but it’s actually a little bit about the scale and size of our operation, and as you know, scale counts in asset management comes in every business.

But that is we count in asset management. So that’s a nice number to have and it speaks also really for the quality of the franchisees that we have been built over the last years.

So, when we are focusing only on the third-party assets under management, you can see that there was a slight increase compared to the level of – but especially it’s nice to see that we had positive flows at both PIMCO to GI of €15 billion in aggregate.

And so, if you remember the second quarter we had some negative flow that this quarter was pretty strong. So, you can see that’s little bit dependent on the market volatility we go from having positive to having negative flows. But in general, we feel very good about the resilience of our operation in a market which is not always easy.

Another question is going to occur on what is happening to the flows that were absolutely picking up in the fourth quarter. We – in the month of October or just to say, quarter-to-date flows, net flows are down €10 billion which is not I am expecting when have this kind of volatility. We still believe customer is not really that significant if you want for the operating performance of our operation consider to the size that we have.

And I personally still believe that increasing insurance rates are long-term positive. You might get some volatility in the short-term, but eventually when the volatility reduced, we are going to be even in better shape than we are now and we are in pretty good shape by now. So, I think it’s just whether in the volatility for a few quarters. Also another information, because you are always very sensitive on this topic.

On the three and five years performance, benchmark performance, PIMCO is over 90% of the plan so fee income was 90% of the PIMCO benchmark. So when you add this kind of number, that’s in the quarterly volatility on flow shouldn’t be of any concern.

Now, moving to Page 29. Here we have a very nice development, especially when you look on a quarter-over-quarter basis, so the revenue, it’s about 10%. It’s also driven if you want on the performance is with the GI.

But even if you adjust with the performance piece of the GI the increase in basis fee is still pretty compelling. And now, also important, as you see our third-party assets under management margin is going up, both at PIMCO and with GI that’s being relatively stable in the reality over the last quarter and as you can see, we don’t see a sort of squeeze in margin because of all the things that you might be aware reading - in the publication.

So, in our case, we are capable to keep new business margins stable or indeed even to increase the new business – sorry the margin fee compared to what we had in the last year.

Moving to Page 31, the growth in profit is double-digit, where you also consider for a little bit of a push coming from the FX effects. So it’s nice growth in operating profit. If you look at the cost income ratio, this is going up 60 business points, but that’s also because of the consolidation, if you want to call it that way of ACP in our asset management ACP and in the case you either remember that is our – the company which is managing assets for Allianz and now it’s part of AGI.

If you adjust for the consolidation of ACP, then cost income ratio will be for the quarter flat compared to the level of the quarter 2017. You might be surprised with that, that’s just because we have some one-off expenses at PIMCO and then also we are investing. So, the point is we are investing in PIMCO in technology and also the GI technology, marketing expenses.

So, we are also not only growing our profit, but we are also setting up from the ratio for further growth moving forward. So, bottom-line is €650 million of operating profit is very good profit for the quarter with a very nice increase compared to the level last year.

Page 33, it’s very exciting. So I am sure I am going to get a lot of question on this page and with that, I will move to Page 35. And here you can see just the developments below the line. The reality is there is little bit of noise in these numbers, because of the impact coming from ASPI which is Autostrade per l’Italia. The point if you look at the impairment, they look pretty high compared to the last year. This is mostly driven by the impairment on Allianz on Autostrade per l’Italia.

But if you look down, you can see the non-controlling interests are positive and the reason is the majority of the impairment that we are showing here and the reality goes to minority. Bottom-line is, there is noise around the number if you remove for the noise, I did clearly the calculation if you look at the number.

There is really not much happening below the line. And so from that point of view, when you look at the net income, you can see the net income is up more or less consistent with the development in operating profit after you take into account for taxes.

And with that, I come to the last Page 37, as you’ll see and as I was saying at the beginning of the presentation, that we are very good on the way and especially when you look at the KPIs that we are most focusing on which is earnings per share growth, ROE, combined ratio in P&C also our ability to get to good ROE, nice healthy and new business margin. They are all going in the right direction. So we are pretty pleased with the performance that we have today and we are also confident for the remainder of the year.

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

Question-and-Answer Session

Operator

[Operator Instructions] We will take now our first question from Thomas Seidl from Bernstein. Please go ahead.

Thomas Seidl

Yes, hello. Good afternoon. First question on German P&C where you have this strong growth and also amazing improvement in calendar year loss ratio which I suspect is mainly POID rather than pricing-driven. My question is, I am hearing a lot that the German motor market, I think that is more competitive and so, first question is what is your outlook on Germany? Is it getting more competitive? Should we expect less growth and also some margin compression, especially in the motor space?

Secondly on Life, I mean, when I look at the Life operating result, there are three unexpected things. The hedging cost, low level of realized gains and the low policy holder share. So, maybe you can give some color on what is a normalized rate and also how long should we expect this FX hedging cost to be at this level?

And finally, I wondered, you showed at the nine months picture. It looks like as you say, what would be the ten month picture including October? So how have investments of Allianz pass in the term in October?

Giulio Terzariol

I am not sure, I understood the last one.

Thomas Seidl

The last one is simply, October, the capital market volatility, how results to it?

Giulio Terzariol

So I will start from the German P&C market and more toward development. So, all what can I tell you is, the combined ratio in motor for Allianz Germany improved and didn’t deteriorate. As of nine months, and also look at the quarter.

So, at the end of the day, based on our numbers, I can tell you that the growth rate that we are seeing is not coming from comprising on profitability. And so, we are seeing that we are in a good track and now we are going to see what that is during the renewal rates. But the fact that our combined ratio in motor in Germany is not deteriorating. It is yet a little bit better.

On the investment margin issue, I will say that, the issue - the high hedging cost is going to stay for a while, clearly. First of all, if you have higher volatility in the capital market this is going to affect – for example little bit in the United States. And also the hedging cost on the U.S. dollar you want to hedge back in euro going to be elevated.

But the point is, in this kind of environment, we are – it was below our €1.50 billion operating profit. So I would say that, this is what counts and we feel pretty good about our ability to get to this number and then clearly, we are also going to look at whether we need to deploy different strategy if this kind of hedging cost especially on the U.S. dollar bond portfolio that we are hedging back, is a very level performance that we would seem as not adequate.

But we feel pretty good overall about the resilience of our profit in Life. So, I am not concerned at all about what is happening there.

The third question was, how October looks like? Maybe you are referring to whether we had some hedge or natural catastrophe or these kind of things. No, I will say that, I would even tell you that I believe we are only slightly below the budget. So, from that point of view, there is nothing that that will particularly be – there is nothing right now. Now, as you know, December can always be kind of interesting, especially in Germany and also in Europe. But for the time being, it’s very, very calm. On the investment performance, because all of this telling me, this was your – wouldn’t say there was anything special in October, compared to what we have been seeing in the last months.

Thomas Seidl

And on German P&C, my question was also more on the outlook, you say the renewal phase is coming. Do you expect more competition or what is the outlook for Germany?

Giulio Terzariol

I would say, and I believe that motor market is always competitive. So I don’t think there is that competition is the core of capital is totally welcome, yes.

Thomas Seidl

All right. Thanks to you.

Giulio Terzariol

Okay.

Operator

Thank you. We now take our next question from Michael Huttner from JP Morgan.

Michael Huttner

Okay, thank you and well done. Lovely results. Three questions, one is, what’s Solvency II now and the second is, the – kind look at the bigger picture, big budgets digital and maybe I first have seen, how you see those developing, whether they would put your nice trend of falling costs under pressure?

And the third question, you explained that PIMCO rising interest rates and GI is positive, can you maybe, you shed some light and say what would be a kind of crossover point. However you define it i.e. some short-term pressure or sort of long-term? Thank you.

Giulio Terzariol

If I got your first question was about what is the solvency III now? If that was the first question?

Michael Huttner

Yes please.

Giulio Terzariol

So likely, I would say, as of October, I would expect the Solvency II from a market movement point of view to be unchanged and then clearly we have the business evolution picking in. The point is, there was a widening of the credit spreads in Italy, so there will be – if you want the negative, but we are underway to the Italy compared to the open reference portfolio.

So, from that point of view since we have like a basis issue between – between what that is the open reference portfolio, credit spread widening in Italy. It doesn’t affect us so much and on top of it, right now, if the spreads are staying at the level they are, the country VA will be triggered. So reality we might even have a positive impact as of now from the changing credit spreads.

But if you ask me I would say, let’s say – let’s call it a neutral impact. So, no kind of issue in our Solvency II because of the credit spread widening. It’s also very important for you to know, at the end of the day, when we are 230% solvency ratio, a couple of percentage point more or less the solvency ratio doesn’t really make a big difference, but the solvency is very strong and we don’t see anything affecting that’s in a substantial way because of the market movement as of now.

The other question was about IFR 17. And you are asking me whether this is going to have a cost impact on our group. Clearly we are paying this money, but we are a huge organization. And if we are not capable to solve the cost of implementing IFRS 17 and 9, I will be very surprised. So, on that point of view, sure, we need to also set priorities.

We are implementing IFRS 17, we are now maybe going to do other things that we would do, also because of the resource issue more than of a cost issue. But it is definitely not something which is changing our – it can have any kind of impact on our profitability. So, that’s not an issue at all.

The final point was on the PIMCO. Now, I know your question about crossover, cannot clearly answer you in a – give you a number, but that is very simple. When rates go up, clearly you can see a dry up of the flows. I just give you an idea if you had €10 billion of flows for example on that run rate assuming you do nothing, there will be mean €20 million less profit for runrate annual profit.

Then you might see a little bit of clearly when you are still increasing the – in the insurance rate, asset bases can go down. So, you can – if you want to know that way, you could also say that’s an increase of 50 basis points considering lower flows and change in asset base can make about €50 million less operating profit annual basis assuming you do nothing.

And I will say, this is very easy to recapture once the situation stabilizes because you get the flows very, very quickly and the assets under management are getting higher crediting. I strongly believe that the short-term reduction of pricing profit assuming you are doing nothing by the way can be easily compensated on a present value terms.

But expectation that the business is becoming more appealing once the rates are up and those for the accrual that you have on the assets under management and think about the amount of assets under management we have is going to be stronger. So for me, to clear positive once rates go up, but clearly first you need to go through some sort of volatility.

Michael Huttner

Okay, thank you so much. Thank you.

Operator

Thank you. And now our next question is from Peter Eliot from Kepler Cheuvreux.

Peter Eliot

Thanks very much. Three questions please. The first one, just on expenses again, I mean, Michael was asking about future cost, but if I look at your current ratios it was obviously very good again this quarter. And you said that Q2, I think that we might get a bit of sort of for lacking of discipline, since the target was sort of in the bag, but we’ve seen quite the opposite.

I am just wondering if you just sort of say, to what extent you can – this is a sort of normal level? Are there any one-offs in the short-term? Is there any reason that’s – that should also continue?

Then the second question on Life. I mean, since you invited the questions on long-term care, give you the opportunity to talk about that and yes, perhaps any comfort – I mean, it doesn’t seem a very big number this side. So, any comfort that you can give us for that probably put to bed and then, maybe finally, just on your investment strategy in general, I was just wondering if there is sort of any change in view at all even at the margin in terms of way united with Germany? I mean, what kinds of investments infrastructure being a big focus.

We had one unfortunate event over the summer and generally, whether any sort of change in strategy there, so? Thank you very much.

Giulio Terzariol

Yes, very good. So, let’s start on the expenses. Maybe what I meant in the second quarter was not the discipline is going to reduce, maybe all you have totally focused on expense –productivity expense management. So this is going to stay and it is going to stay for a long time.

The point I was making usually, especially towards the end of the last quarter, you might have the accrual kicking in, because, as much as you try to do accrual over the year, you have accrual kicking in over proportionate if you want at the end of the year and also lot of marketing activities can take place at the end of the year.

So, there is not – and also clearly, when you add such a focus in the expense ratio, companies are going to be – you need to be very sure that they can meet their target. But I wouldn’t interpret that as a – we are disciplined than we take the discipline out is more a sort of natural development that you might see. So, the discipline is going to stay.

I can give an idea, by the end of the year I believe, we have a target of 28.4. I am pretty confident at this point in time that we are going to beat the 28.4 if I should give you a guidance, I would say at this point in time, it might be even 28.2, but I know it’s very difficult to predict a number to the ten basis points. But we feel that we should be able to beat our target significantly and then, clearly want to get better as we move into 2019 and 2020.

So the idea, as we discussed several times is, to get a productivity improvement year-after-year in order to adjust a big one shot and then we go back maybe the year after in the other direction. So that’s the way we look at productivity improvement over time.

The other point was about the LTC business. Okay, first of all, I will give you some numbers, so that you have a little bit an idea what we are talking about. On a gross basis, we have about 4. €5 billion of reserves and when you look in reality at what is next, so what is our retention if you want, because we have a huge reinsurance program. We have about €1.3 billion which is retail.

That’s also very important in the past, which is re-issuer is a business before 2002. So which is indeed a business which was more challenging because there was a time – a point in time where the market realized that LTC was not pricing properly. So, all the business which is before 2002, the reality is completely reinsured.

The business after 2002 which is not necessary – what is definitely way better compared to the business before 2002. In this case, we have – on that business, we have a insurance which about 20%. So it’s mostly all retail. So, what we do, the reality we do this every year, we go through a review by the assumption. So we review the morbidity, mortality assumption.

We also review what is the improvement, the deterioration that we are assuming this assumption and this year based on the statistics and analysis that we got, we determine that we have to change the gross premium valuation or the gross premium valuation change to a level because that will change also in the past.

But now it changed to a level that has triggered a lots of commission which is about little bit below €40 million. One thing to keep in mind, we have the ability in the United States to increase tariffs. So, as we are going to look at what happens in the future and we might also see deterioration, morbidity and mortality.

In the future, we have also some ability to compensate future deterioration through rate changes. So, based on the analysis, we determine that there was a necessity to increase if you want to reserve by about little bit more than €30 million. And I will tell you it’s – from my standpoint, it’s a very small amount and I was into that before.

So, the operating profit of Allianz Life for the quarter has been pretty much in line with plan. So this tells you that even at Allianz Life level, the ability to sustain such kind of impacts very easily from an Allianz Group point of view, once speaking to this very – think about a big claim in P&C it can be easily be €40 million. So, I will say, for me this is really nothing to be concerned about.

There was another question. The investment sorry. Yes, last question, investments. We are not really changing our strategy. As you know, we have a strategy anyway to increase the allocation to alternative, which was about €110 billion in 2017 we want to grow that way up to €150 billion. So we are continuing in the next few years.

So we are continuing with this strategy. Otherwise from asset location in the sense of a much equity, we have fixed income. We are pretty much spending there in the cost. So there is no – we are not going to change our strategy based on some volatility you might have at a certain point in time in the market, because clearly, we always take a longer-term view on especially, we position our portfolio based on the level of what kind of level Solvency II.

We have the sensitivity in Solvency II. This is what is driving our strategy as in the location. Clearly, you can always say some tactical adjustment. But this tactical adjustment are not necessarily changing the big picture.

Peter Eliot

Okay. Thanks very much, of course my wording on discipline.

Giulio Terzariol

Okay.

Operator

Thank you. And now we would take a question from William Hawkins from KBW.

William Hawkins

Hi, thanks very much. Hi, Giulio.

Giulio Terzariol

Hi.

William Hawkins

I would like to – sort of question about the investment margin, Slide 25. In the past 18 months, the shareholder’s share of the gross margin has risen quite significantly. Prior to that it has been stable in about mid-30s and now it’s in the high-40s. Can you just remind us why that’s happened? And what does it means for the future? Do we expect the current level to sustain or could it be rising or falling?

And then also, your published remarks in the Slide presentation implied the investment margin could be improving in the fourth quarter to hit your 90 basis point target. But when you are answering Thomas, you sounded appropriately more cautious about the ongoing hedging costs. I am just wondering, if there another positive that offsets that that makes you optimistic in the slide comment or should we treat that was caution?

And then, secondly, can you help me on the growth on P&C, it’s very clear that you are proud of the 6% growth and that’s very good. But I spend a lot of time learning growth in non-Life, can be even number one warning signal for the outlook for profitability. I know the ratio is great. So what would you recommend that I look that on a forward-looking basis to say, yes, this growth is good quality growth rather than, you are storing up problem for the future? Thank you.

Giulio Terzariol

Okay, so the first question was about the margin, right.

William Hawkins

Yes.

Giulio Terzariol

We don’t necessarily see the trend that you are describing, but maybe I got – because when we do our calculation on what is the policy holder sharing, we are – the minimum guarantee the profit share is divided by the total yield and when we do this kind of calculation, we don’t see necessarily the trend. I understand based on what you said, maybe I do the calculation of profit sharing over gross investment margin.

If you do that kind of calculation, then clearly you are going to see a little bit of different swings, because – but that’s almost a mathematical issue. So, but the way we do the calculation, we look at the total yield and then we sum up minimum guarantee and profit sharing that is the best way to look at. If you look your way by definition, there is some compression between current yields to guarantee.

Once you keep the total participation cost out to market really, you are going to have, based on the calculation you do a little bit of a compression. But, it’s just a matter how you do the math. When we do the math in the sense of just the total yield, and this is how much we are giving to the policyholder from a guarantee plus profit share and this number is pretty consistent.

And I will say that’s also the way you know about look at the number. But the implication is yes, you are somehow giving less profit share into the policyholder if you want. But you are now giving less of the pie in total. You got my point?

William Hawkins

Thanks. Thank you.

Giulio Terzariol

Perfect, okay. So that’s one. On the other one, the 90 basis point. I will be little bit cautious on that point of view because I don’t think that we are going to necessarily reverse the trend in the fourth quarter. This said, I – the point is how do we feel about getting to our €4.2 billion outlook. We feel pretty good about that. But from a pure investment margin point of view, yes, I will be kind of cautious for the fourth quarter.

This was important to me, that’s not really a target, because, if that will be a target, we can get to the numbers. That’s more a guidance as how we are trying to explain how our numbers are coming up together. But I wouldn’t define that as a target, because if we start defining that as a target, then we can make the number.

But then we go into the conversation about how we are treating the policyholder all this kind of things. So, I would say the guidance as opposed to be a target. It’s more kind of totally number as opposed to be a target.

And the other point was on the growth in P&C. I think I have a good answer for the first part, let’s say, I don’t know what to give you to look upfront from your standpoint to – whether the growth is as good or no, we clearly, internally we are very aware that if you are chasing the wrong customer, this can be very costly. So we are very much focused on looking at what kind of businesses we are taking.

We can definitely look at the excellent tier performance. We do analysis also with our charter team in Munich. So, we internally, we have a good view on the kind of growth we are getting. Clearly, we are always very cautious about looking at this number. What that can give you to you to look at that I would say, unless I start sharing with your our internal information, that would be very, very difficult.

William Hawkins

That’s very helpful.

Giulio Terzariol

Okay.

William Hawkins

Thank you very much.

Giulio Terzariol

Okay. Time to pair, William.

Operator

Thank you very much. And we will now take a question from Andrew Ritchie from Autonomous.

Andrew Ritchie

Just first of all on P&C. I know it’s only clear, was the mandate large loss experience in the discrete Q3 above expectations or below that expectations or about in line? And just related to large losses, the required amount of large losses mandate in the market, but it doesn’t seem to have particularly affected your results. I understand you have very low risk retention. Is there additional mandate aggregate protection in place or some other additional protection on mandate losses? Second question on Italy. I appreciate the input of spread widening is minimal at the same level.

But clearly it won’t be the – currently Autostrade per l’Italia, that business has paid pretty decent dividends for the Group in recent years. At what point would that be an issue do you think about continuing to withdraw a decent dividend? Thanks.

Giulio Terzariol

Yes, so, starting from the large losses, I will say, our experience in the third quarter was – and we have also comment somehow was like about what we would expect normally, but I am not speaking of a huge deviation, but there was – I would say, some kind of deviation. In the sense of what we do from a reinsurance point of view, I wouldn’t said that we have a particular program, but we have a €150 million reinsurance protection in excess of 150. And that’s what we are doing.

But I wouldn’t say that we have a particular low, particular protection that we buy on mandate from a reinsurance point of view. So I think, it has more to do with the underwriting discipline. And so, maybe the reputation that we have really at the – because what I am referring to is sort of reinsurance program group level and then clearly you had a kind of retention that you take at the local level on single risk that you are underwriting. So, from that point of view…

Andrew Ritchie

You mean, gross retention to the two levels of protection in all of the reinsurance, but you are taking relatively small lines, it sounds.

Giulio Terzariol

Yes, that’s the point. Yes, yes, that’s it.

Andrew Ritchie

Perfect.

Giulio Terzariol

So.

Andrew Ritchie

So they wrote the experience was average, more or less.

Giulio Terzariol

Slightly above you would expect. I would say, close to average and slightly above what we expect in a quarter. But nothing substantial more than that. The other question was about Italy and the dividend, right. So, clearly, as you had increasing – in spread this is going to have an impact on the Solvency II level.

But from a dividend point of view, we see the – also and we put the plan together, the dividend plan is not affected by that. If you add then – and that’s assuming there is no change in the currency VA. Clearly, there is a reduction in the excess capital. So from that point of view, if you have some nice idea about excess capital upstreaming that can be a little bit reduced. But the dividend is a different story.

Now, that’s the beauty, when rates are going up, there is a point where you get in reality the currency VA and these would even create excess capital. So, from that point of view, it depends on where you are. It might be a little bit of a dampening on excess capital repatriation or it can also be that this dampening on excess capital repatriation is removed.

From a stable dividend point of view, I will say, at a point where we are right now, we don’t see any impacts on the expected amount of dividends. So there is a little bit of a hedging, because of the VA, currency VA.

Andrew Ritchie

Great. That’s very clear. Thank you.

Giulio Terzariol

You are welcome.

Operator

Thank you. [Operator Instructions] We now take a question from Nick Holmes from Societe General.

Nick Holmes

Hi there. Thanks very much. So, I wanted to ask with U.S. Life, how comfortable are you with the very high growth in fixed index annuity products in the U.S.? I ask because these aren’t really capital light, are they or do you disagree with that? And then, secondly, another one on U.S. Life, do you have any thoughts about the new FASB changes to U.S. GAAP? Will they make U.S. Life reporting more volatile, do you think? Thank you.

Giulio Terzariol

Yes, I will start from the second one. In reality, we don’t need to submit U.S. GAAP anymore, because we have talked to the SEC and we can – we have a special filing for some part as we can use statutory accounting. So, from that point of view, that’s not an issue for us. We have been working for many, many years.

Indeed, I was still in Minneapolis when we started together the statutory account instead of the U.S. GAAP to be utilized and now finally we’ve been able to t get this approval from the SEC. So, U.S. GAAP is now going to be relevant if you want for us. And by the way, even in the past since there was just the filing,

I was not really sensitive we were using for performance measurement and it is not relevant from a solvency point of view. In reality those numbers were not clearly impacting our decision-making. But anyway, right now, we don’t try to submit any U.S. GAAP moving forward.

On the business, and the FA business, I feel pretty comfortable obviously, of how we are doing on the FAS side. Your question was really likes or not, I would define, from a economic point of view they are capital light products. There is no doubt, because the level of guarantee is so low that if you run an economic calculation, you can see that there not much capital required that tells even more that signs that we can see in the modeling that we are doing now, you can see – and we conceded even when I joined Allianz, I would say fifteen years ago, on an economic model that kind of products is very light.

From a statutory point of view, it’s a little bit of a different story. Then from a statutory point of view, I would say, yes, sure, you have some capital intensity. On the other side, the business is so large now and enforce profitability significant that you know there is enough capacity to produce profit on the enforce to also up somewhat could be the impact on the requirement because of the growth in the business.

And then, I also like to say that as long as you price at an ROE, which is about IRR which is 13% unlevered. Honestly speaking, I think it’s a good business to put your book. So, the answer is, economically capital light from a statutory point of view. I wouldn’t define this as capital light, but we are pricing at a nice ROE. And so, I think it’s a good business.

Nick Holmes

Thank you for that. That’s very interesting. Can I follow-up just with one quick question, which is, Giulio, could you remind us what the guarantee actually is in basic form? Because I mean, they get quite compensated and I am not quite sure while you are your latest products?

Giulio Terzariol

Okay. When you look at the crediting, let’s say, the guarantee could be 20 to 30 basis points. So it’s really low. Now, you can run a calculation where you can assume what happens to the – you have like that we throw a payment, and what happens to – in the case, no policyholder going to lapse and you put in mortality assumption, in that case, you are going to get closer to – I would say, that until which is about 1.5%.

But the – what I will say could be an implied level of guarantee. In the case you are assuming really there is no obsession, nothing. And then you need to make an assumption by the mortality of people and then you can say this will be the maximum level of guarantee.

Nick Holmes

Okay. Thank you. Very clear.

Giulio Terzariol

Okay.

Operator

Thank you. We now take our next question from Vinit Malhotra from Mediobanca.

Vinit Malhotra

Yes, good afternoon, Giulio, hi.

Giulio Terzariol

Hi.

Vinit Malhotra

Two questions. Thanks. Firstly, just on the – just focusing on the P&C growth which of course amazing number. What I notice is that the Euler Hermes for example, after the minority buyout, there has been a really strong pickup in Euler Hermes. Now, what I am trying to understand is that, if this growth just because some of the competitors of yours are distracted either in global lines or the – market, and you are in a stronger positions that you can push or do you think it is just that the business is – the economy or some others.

I just want to understand how much of the growth is because, you seem to be in a stronger position and the Euler Hermes is just an example, but if any comments, that’d be great.

Second thing is that, on the Life side, again, I am just curious about one thing that the target of preferred products, for example capital-efficient products that target a new business is being met, the 80% or so, but the operating profit of the capital-efficient product as an example, if point sort of stuck in a very – like €200 million range, for several quarters now.

What should we think about – if it that the new business value growth of 16% is going to ultimately help the Life fundings in future or how should we think about that given this sort of stable capital-efficient product profits in all operating levels? Thank you.

Giulio Terzariol

Yes, let’s start from Euler Hermes. I am going to make a joke now, don’t – the difference we see now and before, before the company was listed, so the management has to do a lot of conference calls and now that we can focus on the business, makes up the joke. Now, the reality is, the economy – definitely the economy is helping, economy is pretty strong. So from that point of view, this is helping definitely the business also the franchise is pretty strong.

But I wouldn’t say that because of the getting to the rate has been upgrade, but so, then there was also an upgrading of rating as we did transactions. So these kind of things are helping. But clearly, the economy has been definitely also helping the performance on the top-line of Euler Hermes. In the case of the capital light products and the operating profit, it’s a good comment.

And the point is, but you are going to see that that number is going to pick up. In reality, what is happening right now on the capital light products that we are writing in Allianz Germany, we are not getting lot of profit and if you want this is also – it’s part of the function how the accounting works and that’s also part of the function how we do the allocation of profit between – within if you want the different segments.

So from that point of view, I didn’t say that we are most likely a little bit understating what the amount of profit could be on that line of business. Over time, we definitely will see that the performance is coming from Germany and the capital light product is going to kick in and then you are going to see more substantial numbers in that line of business. So, it’s just a matter of the patient numbers are going to come through – going to become visible.

Vinit Malhotra

Thanks, and just on the broader topic of growth and competition, is there some element of you being able to push harder, because you are in the stronger position than peers or something like that that you can see?

Giulio Terzariol

You mean, in general – in general?

Vinit Malhotra

In P&C, so, because the fact that with your size you grow 6% or whatever, that kind of range plus three quarters now. So, it’s quite remarkable.

Giulio Terzariol

Yes, you are right. If you look in the past, we were annually growing 3%. So it’s not that we were growing at zero and now we are really – a few companies which are performing better compared to the past. So, if you take Germany from two to four, this makes a difference. If you take Italy, from negative to positive, this makes a difference also. If you think in general, the economy is somehow stronger. So there is also some lift that you get on the P&C side.

So, I will say, it’s a combination clearly of – in general, some more momentum and then we are getting few companies to perform at the different level compared to how they were performing before. And then you had a company, so also push a little bit stronger. So, it’s usually when you get a combination – everything going in the same – in the right direction then you get to this kind of growth rates.

Vinit Malhotra

Thanks very much.

Operator

Thank you. And now, we take a question from Farooq Hanif from Credit Suisse.

Farooq Hanif

Hi, good afternoon everybody. On the Germany combined ratio, you had a four point improvement in your loss ratio. You made the comment then, it’s sort of lower weather-related claims and then losses. But, I just kind of want to know, what proportion of that 4.2 is that, and how much of this is going to be improvement of pricing?

How much of it is temporary? And then, second question on capital generation, the Solvency II, that struck you back up in the quarter and I suspect it’s helped by both P&C and by Life new business. I was wondering, do you think third quarter is a good reflection of how it may continue? That’s it for me. Thank you.

Giulio Terzariol

So, on the Solvency ratio question, it was really on the business evolution?

Farooq Hanif

Couple direction, yes, it’s very strong.

Giulio Terzariol

Yes, I would say, when you take the n9% and you remove dividend, taxes, we are at about 3%. I will say probably this could be also an expectation for the future. We know our guidance was about 10% per annum. So that now, I would say, this is somehow the guidance that I would still keep in mind. So, it’s about 2.5% per quarter that could be – the expectation that we have moving forward. So, we are not fairly changing what we said at the beginning of the year.

And the other question was on the German combined ratio, loss ratio. One quarter, the improvements or the four percentage point improvement is driven by attritional and I would say, three quarter driven by just weather-related large losses.

Farooq Hanif

Okay. Thank you very much.

Operator

Thank you. And we now take a question from James Shuck from Citi.

James Shuck

Hi, good afternoon everybody. Three questions from my side please. Firstly, I am just thinking about how you communicate around – the outlook around expenses, because, I think you’ve acknowledged structural expenses need to come down quite significantly, particularly in P&C I am really referring to. I guess, I am kind of just want to think about how you manage the kind of reduction in the overall combined ratio and balance that with the growth outlook.

As we’ve talked about quite a lot on this call, you are going to pose a 6% - you’ve previously guided in most of your outlook statements to kind of 3% growth. So, could you step up? I just wanted to get a feel for how you think about managing that combined ratio in the context of growth. So, is there scope for the 94 still be written down and grow or how do you manage those two things?

And the second question, as you’ve alluded to, there are some companies that are performing under different levels, Spain, CE, Germany, Italy all looking very good and showing good signs of productivity gains which is what you’ve been targeting.

I guess, from here, what are the next lines of businesses and territories that we should keep an eye on which are places to really delivering? Is it really about finding a key to each market or are you starting to leverage the scale of the group more effectively and which are the areas we should keep an eye on? Final question, just around AGCS, really, I mean, strong organic growth in the period.

I guess, there is a lot happening in terms of specialty at the moment. Some players are adopting more of an integrated insurance, reinsurance strategy. What would kind of a greater offensive capital capabilities and perhaps a bigger third-party reinsurance business, what would that actually bring to AGCS? This is organic growth that we are seeing. Is it generally sustainable? Or is AGCS going to get left behind a little bit over the medium-term? Thank you.

Giulio Terzariol

Okay, so starting from - the question was about expense ratio. We view that and combining the growth and all these kind of considerations. First of all, clearly we want to reduce the expense ratio. We don’t want to reduce the expense ratio at the cost of investing in the business, if that was your question, because that clearly we can get to an expense ratio which is way lower very quickly if we decide to compromise on building up the business for the future.

So that’s – and that’s the challenge if you want is really reduce the expense ratio and see find the ability to accommodate growth initiatives. But we are setting us a goal that we see one, the expense ratio to go down. But clearly, if you were to focus only on reducing the expense ratio without any consideration for investing in the business than we could bring this number down very, very – very quickly.

In the sense of how we are looking for – to the combined ratios for the future, I would say for that anyway we can – I am sure you are going to the Capital Market Day. So, on that one we are going to provide guidance. But you can imagine that you know we will like to get better compared to where we are right now.

But for more guidance, come to the – in the Capital Market Day, we are going to give you more specific input on this issue. And then, the other was on the P&C. How we look at performance and what we should be looking at. Any idea – we look at everything, because, I’ve just given an example, even in Spain, where we have a very good performance that you have mentioned.

They are still getting better. And we still believe we can get better even on the expense ratio and what we are doing right now, we are doing also lot of benchmarking where we are moving from benchmarking us to the average of the market and we are going for this is of course, best-in-class. So, when you do this kind of things, you can get performance improvement almost in every organization clearly depending on the quality of the organization you might have more or less of a performance improvement.

But I believe there is still potential to get better. Also I just stated there are some segments where our profitability has not been as good as other segments. I given as the improvement cost where we are now putting lot of effort to get better profitability and based on the plan that we are discussing right now, we see also better numbers for the future.

So, the franchise is very strong. This doesn’t mean that we are perfect, right. So there is definitely always the possibility to get better results. And by the way, since you were mentioning AGCS, that’s also definitely a company where we can get better ten, hundred for combined ratio just to look at the number. So, think about that we had this quarter a 93.1 combined ratio for the Group, even if AGCS was one of four and you can imagine what would be if AGCS would had a combined ratio of 96, just to put a number there. So there is room for improvement.

On your question about the offensive capital, this kind of thing, I am personally not a big friend. Every time I am thinking about alternative capital, Bermuda, I see low ROE, volatility, interest parents kind of financial engineering. So, from that point of view, it’s not necessarily the kind of business that is – it will be on top my list as I think about opportunity.

This kind I will never say never, and because it can be a section, but if we are just looking big picture, and now waking up in the morning thinking we need to some alternative capital in Bermuda.

James Shuck

And likewise, kind of no real plans to accelerate the growth of third-party reinsurance and folding that within AGCS?

Giulio Terzariol

Not really. So we do sell third-party reinsurance, definitely and also profitable, but we learn that place now to do substantial more compared to what we are doing now. So, we will continue with the strategy that we had in place. So, we do it, but not big plans to make a big change there.

James Shuck

Okay, thank you very much, Giulio.

Giulio Terzariol

Welcome.

Operator

Thank you ladies and gentlemen. [Operator Instructions] We now take a question from Michael Huttner from JP Morgan.

Michael Huttner

Thanks so much. Really, very, very light weight question. You were talking about guarantees and stuff and I just wondered whether you can say what the average guarantee is now for your Life book and what it was before to give a feeling for it? I would like to think of other questions, but I have nothing. Thank you.

Giulio Terzariol

So, maybe the way to answer the question, if you, when you look at the 49 basis points, and then you can pretty much annualize that there will be potentially from an IFRS point of view, the kind of average guarantee. This is not necessarily the economic and this is not necessarily the economic guarantee to be perfectly frank. But from an IFRS point of view, you could say, this is a kind of guarantee that is embedded in the calculation. And so, it’s about 2%.

Michael Huttner

It’s about 2% and how much this is down? Or how quickly is this coming down?

Giulio Terzariol

Oh, you see, for example, in a few years ago, just three, four years ago, it was about 2.5, so it’s coming down consistently. If I look at it – because sometimes it’s easier when you look at the book-by-book, when I look at the Allianz book, the number is coming down, I believe 20 basis point per annum.

So then, you need to also consider different kind of mix that you might have at different countries coming in. But when you look at the developments in Allianz level for example you can see that the guarantee is dropping significantly every year.

Michael Huttner

Thank you so much.

Operator

Thank you. And our next question now from Michael van Wegen from Bank of America Merrill Lynch.

Michael van Wegen

Yes, hi, good afternoon, Giulio. One quick question. On the long-term care book, the assumption changes that you’ve made, are you still assuming morbidity improvement? Or has this now being changed to a stable level? The reason why I am asking is it a number of the U.S. players have made this adjustment as t he NAIC is looking to do. So, just wondering whether that is already part of the €36 million or it might still be coming? Thank you.

Giulio Terzariol

No, we have also looked at that and we have also made the change to that. So, we have changed the assumption that we see right now, based on the experience that we see right now. But we have also changed somehow what could be the morbidity improvements implies for the future. So we looked at both.

And we made a change to both and so, now, what we are going to do anyway and we have been done this every year, we are going to continue to look at what kind of information we get and again, as I was saying before, we have the ability to increase rates. And then, we need to see how these two things are going to play out as we go through the next – in the next years. But we are looking at all assumptions. We have been changing all assumptions. So, it’s showing up to what this is now.

Michael van Wegen

So, are you still expecting an improvement in morbidity though at this stage or no longer?

Giulio Terzariol

Yes, no, we still see some improvement. Yes, with these are more completed improvement in morbidity, but we have reduced the amount of improvement that we might see in the future.

Michael van Wegen

Okay, perfect. Thank you.

Giulio Terzariol

Welcome.

Operator

Thank you. And now we take a question from Michael Haid from Commerzbank.

Michael Haid

Yes, good afternoon. Just one question from my side. On P&C, the expense ratio reduction, 80 basis points, you say that 30 basis points come from admin and 50 basis points comes from acquisition expense ratio reduction. Is that a reason why the – or what is the reason why the acquisition expense ratio reduced? Admin is clear, but acquisition expense ratio comes a little bit surprising. Any one-offs in there?

Giulio Terzariol

There is– yes, there is also with the expense in Germany on the acquisition side, but on the commission side, so this also has an impact there. And if you want to second degree for the quarter is also – as I said, there is a little bit of one-off. But the point is when we speak of acquisition expenses and the reality, acquisition expenses is not only commission.

So, we had administrative expenses and the acquisition expense is going to be the sum of commission and all the kind of expenses in the company which are related anyway through acquiring the business. So, in reality, you have also a large component if you want of expenses which are similar to what in the nature of being fixed versus variable, similar to administrative expenses.

So you need to keep in mind for that. And that’s always very important to me. When you look at ratio of Allianz, considering the mix, you just need to have a little bit more of a growth in especially on a quarterly basis. You just need to have a little bit more growth in a company as opposed to the other, you are going to have a different commission mix.

So, you should be always very cautious, especially when you start comparing ten basis points up and down, because that can be – we are spending a lot of time, I tell you in analyzing our numbers in and out. And it’s very interesting when you start looking at the numbers and you start moving what is the impact of reinsurance.

What is the impact of mix, then you can see how you might have a change in expense ratio ten, twenty basis points, which is just driven by different mix and it has nothing to do in reality with productivity improvements. So always take this number with some sort of – look at a trend over time, look at the magnitude, but don’t overemphasize ten or twenty basis points, especially in the quarter.

Michael Haid

Yes, absolutely. I feel I would say 50 basis points is quite a lot, but nevertheless, what the issue in Germany?

Giulio Terzariol

We recently changed to the commission and that’s what we did in Germany.

Michael Haid

Okay, thank you.

Operator

Thank you. And we now take a follow-up question from Vinit Malhotra from Mediobanca.

Vinit Malhotra

Yes, thanks for the opportunity. Just one thing that struck me I didn’t ask earlier. The PIMPCO outflow of €10 billion you pointed out in October, is that you think just the volatility effect or rates effect? Because rates haven’t – it’s not affecting. So, it’s important to understand your thoughts on this because rates are here to probably stay longer, but volatility could even vanish or you know change. Just wondering what you thought of between these two factors?

Giulio Terzariol

With the €10 billion just the volatility on the inflows. But, remember, last quarter was positive. The second quarter was negative. You can see this kind of volatility and the second quarter was negative, because of the volatility that we had in February, March. But that’s just flows. So, as you clearly when investors have an expectation that rates are going up they are going to wait a couple of months before they start putting the money into a bond fund.

That’s so what is happening. People taking position to say, okay, let me wait as rates are up, and then they are going to start investing. So the €10 billion I was referring to is simply lower flows and it’s not to do with the change in that basis. That was your question?

Vinit Malhotra

Yes, I was just wondering between volatility and rate expectations, which is the bigger driver of – as it looks like volatility the moment?

Giulio Terzariol

Yes, it’s volatility, yes. For me, definitely volatility, yes.

Vinit Malhotra

Yes, Okay.

Giulio Terzariol

But it is driven by, you know the fact that insurance rates are going up. This movement is driving some volatility in the flows on a quarterly basis.

Vinit Malhotra

Yes, I am referring to volatility in the market, yes.

Giulio Terzariol

Yes.

Vinit Malhotra

Yes. All right. Thank you.

Giulio Terzariol

Okay, we have time for one last question if there is any.

Operator

As there are no further question at this time, I would now like to hand back to Oliver Schmidt for any additional or closing remarks. Thank you.

Oliver Schmidt

Okay, thank you, Stephie. Yes, thank you. Thanks to everybody for joining the call and thank you for your interest we wish you a very pleasant weekend and say good bye for now.

Giulio Terzariol

Bye, good afternoon.