ALLIANZ SE

ALV
Temps Différé Xetra - 17:39:17 03/02/2023
220.75 EUR -0.43%

Transcript : Allianz SE - Special Call

22/11/2022 | 14:00

Presenter Speech
Oliver Bate (Executives)

Good afternoon, everybody, and welcome to the Allianz conference call about the wonderful world of accounting. Our topic today is IFRS 9 and IFRS 17 at Allianz, and we have scheduled about 1 hour for the call.

Before we start, let me do the usual housekeeping and remind you that this conference call is being streamed live on allianz.com and YouTube, and that a recording will be made available shortly after the call. [Operator Instructions]

All right. That was all from my side for now. And with that, I turn the call over to our CFO, Giulio Terzariol.

Presenter Speech
Giulio Terzariol (Executives)

Thank you, Oliver, and good afternoon, and good morning to everybody. Today is not about the quarterly numbers as when we usually meet. Today is about accounting, and we decided to keep the presentation from a pure technical point on a higher level, but we are providing also some quantitative information.

The information is illustrative. What does it mean illustrative? I would say it's informed, illustrative. So clearly, the numbers that we are disclosing here are supposed to provide some sort of guidance how you need to understand the profitability in the numbers of Allianz moving forward.

So if we go to Page 4, I would say the following that we view this change as a positive. From a pure number point of view, we are not going to have significant changes. So the solvency clearly too is not impacted. From a cash flow point of view, there are no major changes or not changes, at least not in the short term. The dividend policy is not changing. Operating profit, net income are going to be basically the same level. The ROE is going to be little bit higher. So fundamentally, anyway, there is not a significant change. But we believe from a disclosure point of view, there is definitely a benefit because we think there is more transparency, especially on the Life business, and this can give a better appreciation of the value creation.

There can be some complexity at the beginning. As always, when there is a change in something, there is some complexity coming with it. But I can tell you, I remember when I learned U.S. GAAP many years ago, and I was going through the white book which was above 100 pages, there was a lot of complexity there, too. I would even argue that from a conceptual point of view, IFRS 17, it's easier compared to U.S. GAAP. There is some technical complexity, more on the accounting side, when you do the booking at the posting level. But from a consumption point of view, I would even argue that IFRS 17 is easier compared to U.S. GAAP, we just need to get clearly used to this kind of standard. But fundamentally, we are excited here about the introduction of this accounting standard.

Now if we move to Page 5. We should keep in mind that it's not just about IFRS 17, it's also about IFRS 9. IFRS 17 is clearly the new standard for the insurance liability measurement, but we have also IFRS 9, which is the new measurement from -- for the asset side. Clearly, for an insurance company, ALM is critical. So assets and liability have to talk to each other. So from that point of view, the implementation of IFRS 9 is clearly also dependent on how the liability is moving. That's very important to understand that these 2 accounting standards have to talk to each other.

And now if we move to Page 6, starting from IFRS 9. You can see that about 80% of our investment portfolio is in fixed income, including loss and evaluation basically here is still a valuation at fair value with the majority of the changes going basically through the balance sheet, OCI. So there is just a small portion where we have a fair value with changes going also through the P&L. On the equity, we have valuation fair value for the balance sheet, but basically, the changes in the public equity going through the balance sheet. So they are not reflected into the profit of the company.

In the case of the nonconsolidated funds, there is no other way to account for them. They're not in the -- through the P&L. So it's a fair value, and that's a fair value through the P&L. And then we have real estate and participation. In our case, most of this category goes through the P&L in order to achieve a better match with the liability because basically most of these assets are on the Life side. In the case, we have these assets on the Property Casualty side, there is more inclination to use the amortized cost. So that's, in a nutshell, how the new accounting standard for the investment works.

If we go to Page 7, we can see what are the implication for us. You can see that in the current IFRS, we have about 6% of our assets or investment portfolio classified as fair value through P&L. In the new accounting standard, this number is going to be 18%. If you run the math, we are talking of about EUR 100 billion of assets, which are going to be fair value through P&L.

Now the majority of these assets are going to be in the Life side. So from that point of view, there is a mirroring or a matching with the liability side. So this is not creating accounting volatility, but we have a good EUR 10 billion of additional fair value assets through the P&L in our Property Casualty segment. And this EUR 10 billion of additional fair value assets through P&L are going to create some amount of volatility moving forward. Otherwise, for the rest, I will say there is -- there are no implication for basically the way the P&L or the volatility of the P&L is going to be. That's on the IFRS 9.

Now moving to Page 8, coming to the liability side, I will say that in a nutshell, the technical liability are going to be more similar to Solvency II. There are some differences sometimes in the allocation also in the scope because not all entities are part of Solvency II calculation. There can be some difference in the contract boundaries. There can be some difference in the discounting rates. But fundamentally, we are talking of 2 frameworks which are very similar. So I wouldn't say they are twin brothers, but they are definitely not twins, but they are definitely siblings. So from that point of view, that's a little bit of a simplification because now we are dealing with a framework in IFRS which is definitely getting very close to what we have under Solvency II.

Also, in IFRS 17, there is a risk margin similar to what we have in Solvency II, and the overall level is similar, slightly lower under IFRS 17, but basically almost the same level. And then we have the CSM, the contractual service margin. The contractual service margin is basically the present value of the future profit or the future in-force profit. And if you want, this would be part of the own fund and Solvency II. There is a difference between the own fund or Solvency II and the CSM. I'm going to come back later on this, but fundamentally think about this like future profit coming from the in-force business.

And then we had the equity position, which is clearly the sum of the paid-in capital, the return and profit, and also there are some -- there is always an OCI component there, which is much smaller compared to this OCI component that we had in IFRS 17 because there is a better matching between assets and liability. There are also some new items, which are allowing to get to this better matching. And that's something that I view as a positive because we're going to have less volatility under Solvency -- under IFRS 17 compared to IFRS 4 with respect to the equity position.

Now coming to Page 9, and we can get here into some numbers. You can see that currently, currently means at the end of 2021, our shareholder equity was about EUR 80 billion. And now when we run an illustrative calculation where we are as of beginning of the year, the shareholder equity is closer to EUR 60 billion. It's a little bit higher than EUR 60 billion. And the main driver for the difference between the EUR 80 billion and the EUR 60 billion is basically the movement in the OCI. If you remember, we had about EUR 17 billion of OCI with a lot of OCI coming from fixed income. Now due to this better matching that we have under IFRS 9 and IFRS 17, clearly, this big OCI position that can also go negative as we saw in the course of 2022 is basically removed. So from that point of view, the major change is coming from the OCI. As you remember also when we are doing the ROE calculation, we have always excluded this OCI component because there was just clearly noise. It's not really reflecting what could be more, if you want, a core kind of equity.

Then on top, we have the CSM, which is about the level of EUR 35 billion. This represents the CSM that we actually think we are having. So that's a little bit of a view of the current level of the CSM and this is a number which is after tax because the CSM that you see in the balance sheet is pretax. So that's an after-tax number. And also here for the calculation of the CSM, we have deducted the attributable costs, which are not included in the CSM calculation. So in the CSM calculation, the standard has to include only the direct cost but in reality, there are additional costs that have to be considered to measure the profitability of the contracts, and we have deducted these attributable cost from the calculation.

So when you add up the EUR 60 billion plus the EUR 35 billion, you end up EUR 95 billion of what we call comprehensive shareholder capital, which is, if you want, some of the paid-in capital, the return on earnings and also the future profit that we expect to get out of our Life business. This number is also close to what we have for on fund and the Solvency II. If you run all the kind of adjustment, you're going to get to a number which is very close to the Solvency II owned funds.

And then one final comment on the leverage. Overall, the leverage is 23%. The leverage you see are calculated summing up the shareholder equity and also the CSM. This, on the capital side. Now if we move to Page 10 on the operating profit. Overall, the operating profit is expected to be at the same level that we have right now. There is, in the short term, some upside coming from the Fed that rates have gone up, but this is more like of a short-term impact over time. In reality, the profitability between the old accounting standard and the new accounting standard on the Property Casualty side should not be in reality much different, it's more of a profit pattern point of view. So fundamentally, same level of profit with some additional profit in -- as we have seen higher rates right now, the old IFRS would have catch up to these higher profits over time anyway.

And now moving to Page 11 on the net income. Also, the net income is expected clearly to be on a similar level. Here, again, we have the operating profit with some sites in the short term. The nonoperating items, we might see, in reality, a little bit higher nonoperating items coming from the other position, but that's more of a technical issue, and it's not going to be extremely material, but we might have a little bit of a lift there. But in total, I would say the shareholder net income is going to be close to the level that we have right now.

What we're going to see is more volatility coming from the point that I was mentioning before, which is the market value change or the assets which are going through the P&L. And to this point, clearly, in the future, we are going to also provide an adjusted net income, which is going to remove further volatility coming from the fair value through P&L assets, and this is going to be also the starting point clearly for the calculation of our dividend. So just expect that as we are going to officially introduce IFRS 9 and IFRS 17, we're going to provide also an adjusted net income, which is going to exclude this market value changes, and maybe we're going to do also some other adjustment, but we are still thinking about the final calculation.

And with that, we can move now into the segments, I'm going to Page 13, starting from the Property Casualty segments. As you see, basically, almost the entire business has been accounted using the premium allocation approach. When you look then at the insurance liability, they are very similar, basically to the insurance liability that we have under Solvency II. And the difference between this insurance liability and the insurance liability under the old system is basically the discounting, which is usually leading to clearly, as long as discounting, the rates are positive. It's going to lead to a lower level of technical reserves compared to the current level.

What is important, the valuation curve is locked in which means somehow the balance sheet on the liability side was a little bit like a bond. Right now, when you had swings in the -- due to rate level changes in the balance sheet, but what you see in the P&L is basically the locked in effective interest rates. So that's very important. Think of a liability as the opposite of a bond and the mechanics is basically the same with swings in the OCI and the current income, if [ you won't flow ] in through the P&L.

The risk adjustment is also calculated in IFRS 17. It's a little bit lower compared to the risk adjustment that we have under Solvency II. Here, we need to consider that, in theory, implicitly there is some risk adjustments included in the annual premium results. So fundamentally, if you're considering entire balance sheet, one could argue that the amount of risk adjustment is similar under Solvency II and under IFRS 17.

The equity is basically the same level as the equity under IFRS -- current IFRS, if you adjust for the OCI. So once you adjust for the OCI, there is no real difference in the equity under IFRS 9 and IFRS 17 versus the equity that we have in the current accounting standard.

Now moving to Page 14. Coming to the underwriting results. Maybe I'll give you first the baseline, the way we have estimated EUR 3 billion of current IFRS underwriting result is basically taking our 9 months profit and annualizing the 9 months underwriting results, and then we rounded the number down. So we get basically to this EUR 3 billion. And the difference between this EUR 3 billion and what we're going to see under IFRS 9 and IFRS 17 is coming from the discounting where we expect to have in according -- based on the current rate level to have EUR 600 million to EUR 900 million more profit coming from the discount in 2022.

I will say that based on the rate level that we are seeing right now, the number could be on the high end of this range, then we had a loss component, which is, in reality, a number which is very close to 0, can be slightly positive or potentially also slightly negative if you see a reverse of it. There is not really much happening there. The same apply to the risk adjustment is also a number that can create some noise especially [indiscernible] gradually to be creative, but fundamentally, there is no much happening because of the risk adjustment. So overall, I would say, a higher underwriting results compared to what we were used to in IFRS 4 and that's coming from the discounting. And clearly, this level of higher underwriting results is a function of the amount of insurance rate that you have in the system.

Now coming to Page 15 on the combined ratio. The combined ratio is expected to be at the same level, a little lower, but I can give you, first of all, maybe an idea how the combined ratio works. First of all, set aside discount, let's forget about discounting for a second. We need to think that the calculation of the combined ratio is the sort of gross net calculation in the sense for the denominator, we are using the gross earned premium, and for the numerator, we are using claims, expenses, all these kinds of things, but fundamentally, it's a net view. So that's very important. There is -- the denominator is based on a gross view, and the numerator is based on the net view.

This means that by definition, as long as you have a positive underwriting results, the combined ratio is going to be higher. And in our case, I can tell you that this means about a good 50 basis points of higher combined ratio just because of going from the net view that we have right now to this gross net view.

Then clearly, you have the impact coming from the discounting, and this can bring the combined ratio to a lower level compared to what we used before. This math for you, and I tell you that we need to have about 70 basis points of discounting in order to get to a combined ratio, which is equivalent between the current IFRS and the old IFRS. So that's important. There is a mechanic which brings the combined ratio up, and then you have a discount which is going to bring the combined ratio down. And depending on the amount of discount, you might have a lower combined ratio.

Technically speaking, if you have no discount at all because rates are at 0, you might end up even having a higher combined ratio compared to what we have been seeing so far. The expense ratio is going to be lower compared to what we have under the current accounting. That's because of the change from the net view to this kind of gross view. So we're going to see an expense ratio, which goes more towards the 25% level.

And with that, moving to Page 16 on the investment results. Here also the proxy from the investment results, we have used basically our investment results for the 9 months, and we have annualized this number. And I will say, under the new IFRS 9 and IFRS 17 approach, the investment income coming from bonds, equity is pretty much the same in the balance sheet -- in the P&L. But then you had a reversal of the discounting, so the unwinding of the discounting. And this is clearly a negative number, which is about EUR 400 million to EUR 600 million, in our case. So this is bringing basically down the operating investment results compared to what we have been seeing so far.

So when you put it all together, in Page 17, we have a higher operating insurance service results subject to the amount of insurance rates. The operating investment results, it's lower because of the unwinding. In this situation, the unwinding is going to be stronger. The discounting has a large impact compared to the unwinding. So from that point of view, there is a higher profit under IFRS 17 compared to IFRS 4. IFRS 4 will just catch up over time. So fundamentally, this is just bringing some profits upfront, but fundamentally, the IFRS 4 will just catch up over time. So there is not really the change eventually in the amount of profit that we are going to book. That's on the P&C side.

Now coming to the Life side, starting always at Page 19 from the balance sheet. Here, we have the present value of future cash flow, which is basically the discounting or the expected cash flow to policy holder and also their attributable expenses. So again, here, we are not including all costs, but just if you want the cost which are attributable, directly attributable to the policy. So that's a little bit of a difference compared to what you have in Solvency II. Then we had a risk margin. There is not much of a difference at the end of the day between Solvency II and IFRS. And then we had the CSM.

I believe at this time, you are kind of familiar with the CSM concept, but maybe the best way to look at the CSM is to think about a policy at inception. So if everything goes according to plan, the premium that we get, they should be higher compared to the cash flow that we give back to the policyholder. So the difference between the premium that we get and the cash flow is a positive number. This positive number under Solvency II will be on funds. Under IFRS 17, you need to store this positive number in the CSM. You're going to release this number over time. But think about this as basically future profit which is stored, and then there is a mechanist to release this profit into the equity over time. That's the reason why it make sense to look at the equity and CSM together. And this will be also in a presentation, which is basically consistent with the Solvency II logic.

And now moving to Page 20. Here, we had a movement of the CSM. Basically, EUR 55 billion is more or less the CSM level that we would expect to have currently. We have an increase in the CSM coming from the new business, that's about EUR 4 billion to EUR 5 billion, can be also taken as potentially higher or lower depending on the profitability of the business and also depending on the volume, but we think the EUR 4 billion to EUR 5 billion, maybe the upper end of the range is the expectation that we should have under the current condition.

Then we have a positive impact in the CSM coming from the expected in-force return. That's on the one side, the unwinding. There is an unwinding clearly of the CSM because you need to think a balance sheet is always discounted. So you need to unwind back the position. And also, we got some additional return because in the calculation of the reserve, we are basically using valuation rate, which is lower compared to the yield that we really expect. So from that point of view, there is always a benefit coming from the pacing of time and the fact that we are getting -- we expect to get a higher yield compared to what is considered in the valuation rates.

Experience and assumption changes. Here, we have potentially changes from actual assumption, changes coming from the variances of the year, also economic changes. Fundamentally, these numbers should be in average 0. Clearly, sometimes it's going to be positive or negative. We might see some volatility coming from the economic variances. We would not expect to see a lot of volatility coming from actuarial or from operating variances, but this I think can clearly be volatile because of the market development. And then we had a CSM release, which is in the amount of EUR 4.5 billion to EUR 5 billion, which is basically how much of the profit which is stored in the CSM gets released into the profit every year.

Now you end up basically to a CSM, we said, of EUR 54 billion to EUR 60 billion. If you take the midpoint, it's EUR 57 billion. And indeed, we would expect accrual of the CSM, if you want, to be about EUR 2 billion per annum. But here, we want to reflect the fact that there is volatility around this number subject to market conditions.

Now as I was saying before, the CSM is calculated before the attributable cost. So from that point of view, we think that from an economic point of view, we need to reintroduce the attributable cost into the calculation. And CSM is also pretax and then also pre-minority number. So when you adjust for attributable costs, taxes and minorities, you end up with a CSM -- net CSM of EUR 35 billion, if you take the midpoint, which is a number that you saw before. So that's on the development of the CSM.

Now moving to new business. Here, we are providing the reconciliation of the new business that you are used to see when we do our disclosure every quarter to the new business based on the IFRS 17 logic. We start from EUR 2.5 billion of VNB. That's basically, if you want, the annualized number that we expect for 2022 rounded down to EUR 2.5 billion for the sake of simplicity. Now we have to add back tax and minorities because under IFRS 9 and IFRS 17, basically the number that you're going to see is before tax and minorities.

There is some difference due to the risk adjustment calculation and also to a different valuation curve. And this explains then the IFRS VNB of, let's say, EUR 4.5 billion versus the EUR 2.5 billion that you have under Solvency II. And when you look at the new business margin, we start from a 4% new business margin under the VNB Solvency II logic. And under this IFRS 17 logic, we will be more, but something between 5 and 6, we're clearly -- the majority of the impact coming just from the fact that the view is pretax instead of being after tax.

There are a couple of other items which are minor. Let's explain the difference between the VNB and what is the CSM at inception, but we are speaking very minor items. So fundamentally, I think this gives you a good idea of the reconciliation between the different level of VNB and again, the major driver is basically the fact that the calculation is on a pretax basis versus being after tax.

When we go to Page 22, speaking about the P&L. We can see that the P&L consists of the following items: We had a CSM release, which is expected to be between EUR 4.5 billion and EUR 5 billion. That's supposed to be a very stable number. So we are not going to see a lot of volatility around this number because the volatility coming from economic condition is going to be in the CSM, but it's not -- it's going to clearly, over time, be reflected in the release of the CSM. But fundamentally, since we are speaking of volatility in reality, things -- market go up and down. So fundamentally, the CSM release is going to be stable.

Then we had the release of the risk adjustment. This number is also supposed to be stable on the loss component and variances. That's also a number that should be stable. Attributable cost is also a stable number. And now we come to the investment results, which is relevant for the entities where we don't use basically the VFA approach or, let's say, Allianz Life, for example, is a company for which this line item is relevant.

Here, we are going to see some volatility. This volatility shouldn't be higher compared to the volatility that we see right now. Potentially, it could be lower, but I would be cautious to say that. We're going to see how this volatility plays out. But that's the only item where I would say we are going to see some volatility moving forward. But again, that shouldn't be much different from what we saw so far.

One thing I want to say right now where we're going to do the -- disclose the numbers next year regarding IFRS 17. We need to consider that in IFRS, when we do the hedge at Allianz Life, we are doing the hedging based on economics, statutory accounting and also IFRS 4. Now so the hedges that we have right now, they are geared to stabilize the IFRS, the current IFRS to a certain degree. So we're going to do the restatement next year, we're going to see clearly liability moving according to IFRS 17, which is not necessarily the logic that has been used from a hedging point of view. But -- so we're going to see some more volatility in 2022 compared to the volatility that we are going to see then once we go live with the numbers in 2023. So that's on the Life side, and now we come to basically the end of the presentation.

As I said at the beginning of the meeting, the fundamentals are basically broadly unchanged. Solvency II has clearly not impacted cash flow. They are not impacted. We might see, down the road, some more cash flow. There will be -- once Asia is going to implement IFRS 17, that could be a little bit of a positive, but it's not going to be that material, but that could be a positive for us.

Dividend policy is not changing. Operating profit, net income, as I was saying before, they are basically the same level. There is a little bit more volatility coming from IFRS 9 that we're going anywhere to remove by showing also in adjusted net income. The shareholder equity, including the CSM, it's about EUR 95 billion. This number is close to the Solvency II on fund.

And also, we expect to have a bit -- a little bit of a higher ROE. And the main item there for me is also this improvement, in our opinion, the disclosure where we think that on the Life side, especially once we're going to see the pattern over time or the numbers, you're going to get a better appreciation for the profitability of the Life business, going to be also easier, in my opinion, to do some estimate of the profit, understanding how the profit or the CSM is moving. So that could be helpful as we move into the new framework.

And now coming to the last page on the time line. On -- in February, we're going to have our annual conference. In that conference, clearly, we're going to provide the outlook for 2023. And the outlook for 2023 is going to be based on IFRS 9 and IFRS 17 for sure. Then in March '23, we are going to have the annual reports disclosed. And in that annual report, we're going to have the opening balance sheet for IFRS 9 and IFRS 17, and that's the opening balance sheet for January 1, [ 2023 ].

And then when we are going to have our meeting about Q1, in May 2023, then we're going to show clearly the Q1 results based on IFRS 9 and IFRS 17, but we're going to show also the financial statements for 2022 results based on IFRS 9 and IFRS 17, so which means our meeting in May next year is going to be a little bit longer. So we're going to have to run through the explanation for 2022 and also for Q1 2023.

And with that, I would like to open up to the questions you might have.

Presenter Speech
Oliver Bate (Executives)

Okay. Thanks, Giulio. One quick comment from my side before we move to the Q&A session. I've been told that we experienced some technical issues at the beginning of the transmission that some of you may not have had sound for the first couple of slides.

First of all, apologies for this, of course. And second, we will try to fix this if it comes to the recording of the call. So if you want to listen to the call later, please go back to the recording. And I think we were fine in the YouTube channel anyway. So this would probably be the quickest way to go back to Giulio's comments regarding the first couple of slides.

Answer
Oliver Bate (Executives)

So again, apologies for this, but now we come to the Q&A session, and we will take our first question from Andrew Sinclair from Bank of America. Andrew, please go ahead. line.

Question
Andrew Sinclair (Analysts)

I really appreciate the presentation. 3 questions for me as usual, if that's okay. Firstly, it was just on the EUR 95 billion figure of shareholders equity or CSM or net CSM in IFRS 17 world. Just really want to -- wondered if you can give me kind of a waterfall between that and the EUR 81 billion Solvency II own funds? I suppose, particularly given the own funds figure also includes qualifying debt, which won't be in the shareholders' equity or CSM. Just if you can walk me between those 2 figures, please?

Secondly was just on the combined ratio. Just wondering if you can talk to us about the 92% combined ratio target for 2024. Now that we're moving to an IFRS 17 world, does that target still stand as it was? Or does that get adjusted? Just how should we think about that?

And thirdly, apologies if you missed this -- sorry if I missed this. But just in terms of reserve releases, what should we be expecting on an IFRS 17 world in terms of reserve releases?

Answer
Giulio Terzariol (Executives)

Thank you for your questions. So starting from the first question on the kind of reconciliation from the EUR 80 billion to EUR 95 million, there are a few items that you need to consider, for example, and from the -- sorry, for EUR 86 billion, I would say from Solvency II to the EUR 95 billion of IFRS 9 and IFRS 17.

There are a few items you need to consider in Solvency II; all the intangible are not considered, so you need to add an intangible. Then yes, you had a subordinated debt, but on the other side, you have also the dividend accrual that is deducted on Solvency II, but it's not clearly deducted from IFRS 9 and IFRS 17. So when you do all the calculations, we're not going now in the call to the plus and minuses. I can -- we did the validation, we come to a number which is very close to [ EUR 90 billion EUR 95 billion ]. So depending -- because it's doing the validation can be tricky.

You need to do a lot of calculation. We end up to a number with a number which is very much in line with [ EUR 95 billion ] or sometimes when we do the validation the other way, we end up with a couple of billion, EUR 2 billion, EUR 3 billion less of Solvency II own fund compared to the [ EUR 95 billion ]. So the 2 numbers are extremely close. And depending on how you try to do this validation between the 2 numbers, you might get to an identical number just to a little bit of a lower Solvency II owned fund compared to IFRS 9 and IFRS 17, but the magnitude is extremely similar.

Then on the difference between Solvency II and IFRS 9 and IFRS 17. Then on your question about the target, I would say that fundamentally, we can think about the combined ratio on an undiscounting basis. And then subject to the amount of rates that we're going to have in 2024, this number can be higher or lower. As of now, we would expect the number to be lower because of the rate level, but if things are changing, we might end up being back at the same level.

Fundamentally, I would say that if you think on an undiscounted basis, there is not really a difference in the way we are thinking about the target, now then we can have always a conversation about business performance, all these kind of things, but that's a completely different conversation just because of the discounting. I would say, as of now, I will tell you the combined ratio will be lower, but things can change very quickly. I'll just tell you that if we had introduced Solvency IFRS 17 two years ago, the conversation would have been different from the conversations we are now, from the point of view of the impact of implementing IFRS 17.

So things can move very quickly. Now we believe rates are going to be high forever. Maybe in next year, we're going to be back to 0 insurance rates, and then we are going to speak about the transition from one accounting to the other in a different way.

On the reserve releases, this doesn't change our reserve releases. The only thing that you're going to see, because at the end of the day, nothing changes in the fundamental of the business in our reserving basis. The only thing you're going to see is that the risk margin is somehow there is an unwinding of the risk margin in the runoff, which is basically reducing -- increasing the runoff that you're going to see, but we are going clearly to provide some information so that you can appreciate what is really the runoff, excluding the impact of the risk margin.

But fundamentally, there is no change in the way we are setting reserves. We will have -- always had the identity within the reserves that we're holding under Solvency II and the reserves that we are holding under IFRS. So clearly, these are the entity that is going to stay with the new approach. So there is no difference for us. And then clearly, you had a discount, you had the risk margin, but there is no difference in the technical provision from an undiscounted point of view.

Answer
Oliver Bate (Executives)

All right. Thanks, Andrew, and we will take the next question from Michael Huttner from Berenberg.

Question
Michael Huttner (Analysts)

I'm really sorry, Giulio. I didn't understand your answer. I'm really, really sorry and maybe I will make my normal plea, I'm getting really old now, so I need to be explained very slowly. I think the answer you gave to Andrew Sinclair on the technical provision on the underlined, it just felt too quick. I couldn't make out from what was happening there. If you wouldn't mind just going through the step-by-step, that would be really so helpful.

And then the only other question I had is why the time line difference. You noted yourself this is going to cause a headache, but I don't think you understand the headache it causes here on this side. Effectively, you're going to give us a target for 2023. And we will have no comps to judge the target when you set it on 17th of February until the 12th of May. So for 3 months, we have to guess. I mean we normally have to guess, but this seems such a long time. I just wondered whether you could maybe help us out here a little bit.

Answer
Giulio Terzariol (Executives)

So yes. So the first question on the technical provision, the question was whether we're going to see different reserve releases under IFRS 17 versus current IFRS. No. So we're going to add the same reserve. We had the same amount of undiscounted reserves. So we're going to see the same amount of runoff. There is no difference because of going from IFRS -- current IFRS to IFRS 9 and IFRS 17. The only thing is there is the risk margin. And the risk margin when you are -- there is an unwind of the risk margin, which is a positive number. This positive number is going to go through the runoff.

So we need them to be able to tell you, look, so the runoff is going to be higher, but we need to show you, if we remove the risk margin from the runoff, this will be the equivalent runoff that you saw in the past. Then you need to consider that you have a risk margin going through the accident year. So you have a risk margin going through the accident year. So this is basically, if you want, increasing the loss ratio. And then you had the release of the risk margin coming from the past, and this is bringing up the positive runoff or net, you get to the same point. Was it clear?

Question
Michael Huttner (Analysts)

Yes, that's very clear. And aligned to that point, at the beginning, I think you said the combined ratio, because the denominator is bigger, would be higher. And I was thinking, no, if the denominator is bigger, these numbers should be lower, but I think I missed something here?

Answer
Giulio Terzariol (Executives)

Yes. You need to do some Excel spreadsheet. I'll tell you something. I had a love affair on the weekend with an Excel spreadsheet, and that's the best way to understand the mechanic. But think about that. The best way -- let's say that you have a positive underwriting results, and the underwriting result doesn't really change. Forget about discounting. The only things you are changing is basically you go from a net premiums earned basis to a gross earned basis. If the underwriting results is always the same, right, because fundamentally, that's always the same, it means that the underwriting results divided by the denominator is lower, the ratio; the combined ratio is the reverse of it. So think about that.

Question
Michael Huttner (Analysts)

Yes, makes sense.

Answer
Giulio Terzariol (Executives)

But do as I said. You need Excel to help you out to visualize a few things. Yes. And then on your question about May and that you're going to have a very tough May. Look, first of all, I would say, the comparability in -- of Q1 2023 versus Q1 2022 might be limited. You need to take everything with a grain of salt because you are going from one accounting standard to another accounting standard, but we are managing still based on the current account. So from that point of view, I will say, comparability might be a little bit more limited first.

I believe we're going to be able to give you enough information to, anyway, to come up with good estimate, understanding the business. We're going to add time from here to there to discuss this numbers again and again, where we do the outlook in February. We can have another conversation about the numbers. So I'm pretty confident that we are going to be able to give you all information you need in order to do your job. I have no doubt about that.

Answer
Oliver Bate (Executives)

Thanks, Michael. We will take the next question from William Hawkins, KBW.

Question
William Hawkins (Analysts)

Can you hear me?

Answer
Oliver Bate (Executives)

Yes, very well.

Question
William Hawkins (Analysts)

Great. Could you help me clarify a couple of your remarks from the presentation? The calibration of the risk adjustment relative to the risk margin, roughly speaking, how have you based that?

And I think you said that it's going to be slightly lower. Could you help me just be a bit more precise. I think the risk margin for Solvency II is EUR 7 billion. So if it's slightly lower, are we talking EUR 5 billion? Or have I misunderstood?

And then secondly, similar clarification, please, on the other comprehensive income. I think you said considerably lower than EUR 17 billion. That EUR 17 billion itself is a big number. And other companies have actually showed that it could be a negative OCI. So could you help me sort of slightly clarify what the OCI is in your EUR 60 billion of shareholders' funds?

And then lastly, please, because those are quite nerdy questions. If this -- why can you not apply the variable fee adjustments to Allianz Life? Because it seems at the end of the day, these rules have become so slack that you can do almost whatever you want. So I don't really see why Allianz Life can't be captured by the VFA like any other business. And I know you always say accounting doesn't matter, but if this is going to be something that generates volatility in the future, even headline accounting volatility can be a nuisance. So is there a risk that, at some point, this affects the way you look at a perfectly decent business?

Answer
Giulio Terzariol (Executives)

Yes. So on the -- no, thank you for the question. On the -- what kind of accounting standard we are applying for Allianz Life. I am the Head of Accounting here. Somehow there are rules. So we cannot unilaterally decide what kind of bucketing we're going to use for Allianz Life. There is also a point because variable annuity is under the VFA method. But somehow reflecting the -- what is going to go into OCI versus CSM versus operating variance, it's also dictated somehow by the accounting rules. So from that point of view, there is some volatility which is staying with Allianz Life.

What I could also say this is volatility, which is also reflective of some economics because fundamentally, if the hedging costs are going up and down, you're going to have more or less profit at Allianz Life. So from that point of view, I would say, it is based on the accounting principles that we need to adopt. And to a certain degree, we need also to accept that there is some volatility in Allianz Life coming from the, for example, on the hedging cost of VA. The -- I agree with you, the real volatility is less compared to what the accounting standards usually are trying -- are kind of describing. So that's on Allianz Life.

On the OCI, I can tell you at the OCI that we have in the EUR 60 billion plus is about EUR 2 billion, EUR 3 billion. So that's the number. So it's a very tiny number compared to the EUR 17 billion that we had under IFRS 4.

And then on your question about the risk margin difference. In reality here, we have used German precision because the difference between the risk margin of Solvency II and the risk margin that we have under IFRS is like 0.5, something like that. It's a very tiny number. We need, however, to consider that there is also a little bit of a different scope because in the case of IFRS 17, we have also the risk margin on Allianz Life. When we do Solvency II, Solvency II is calculated with equivalents. So from that point of view, there is no risk margin in Solvency II calculation because it's coming with a different accounting standard. But when you look at the balance sheet and you look at the difference between the risk margin that we have in Solvency II and what we have in IFRS 17, in reality we're speaking of rounding, with basically the same number rounded up or rounded down.

Answer
Oliver Bate (Executives)

Thanks, Will. We will take the next question from Andrew Ritchie, Autonomous.

Question
Andrew Ritchie (Analysts)

First question, Giulio, just to clarify, I think you said you expected, looking at Slide 20, the CSM to accrete by about EUR 2 billion a year. I mean that's basically just the effect of the unwind. So I guess I expected some of the additions from new business to exceed the release over time. I appreciate there's a present value effect here, to some degree. But the hope was that the bath would generally fill up with more new business than what was being released? Do you think that would happen over time? Or are we just -- is there a snapshot this year we're looking at it right now where you're not adding more than what's being released. That's the first question.

Second question, why is none of your life protection business [ PAA ] accounted? I thought you were selling stand-alone pure protection business?

Third question, finance function. Some of your peers have talked about peer synergies with Solvency II massive improvements in the finance function as a positive outcome from IFRS 17. Are you seeing the same thing? And could we expect some cost saves in the finance function in coming years?

And the final question, I'm not sure which bits of your P&C business generate the volatility with respect to onerous contracts or the loss component? Maybe to clarify what types of contract that is?

Answer
Giulio Terzariol (Executives)

Okay. So 1 question was whether we're going to add savings in the finance function? Understood. No, we are not going to add saving in the finance function. But no, but you are right in the sense, yes, we should because clearly, there was an investment for implementing IFRS 9 and IFRS 17. But in our case, we are basically redeploying this budget to -- because we are flipping -- we are upgrading to the new accounting system. So yes, in theory, there is a saving but we are not going to see the savings in our P&L because we are going to basically recycle the budget for the new accounting system that we're going to have up and running in a few years down the road.

Then on your question about the PPA for protection business. We have some cases. One will be, for example, France, but my majority of our business is not subject to PPA after we did the analysis, but we have a couple of cases. And if you look at the VNB, that's also where we had this kind of scope adjustments because some of the business being accounted as PPA, so that's not basically included in reality in the calculation of the CSM and then we need to bring it back when we want to do a VNB calculation. But that's a small part of our business, but we have a few cases.

Then you had a question regarding basically unwind of the CSM. Yes, I think it's a little bit of a reflection of where we are right now, from a production point of view. So from that point of view, depending on the level of production, we might see a CSM at the inception which is higher compared to the CSM release. But as of now, consider anyway that clearly this is not the most favorable environment from a production point of view, we are seeing these kind of numbers coming together, but that can clearly be different in a different environment.

And then you had a question about the number of onerous contracts. In reality, we don't have many of onerous contracts. So from that point of view, that -- I can tell you that we are speaking, if I take, for example, a company like Germany, I would say that less than 10% of contracts can be defined as onerous. So from that point of view, we don't see a lot of noise coming for this implementation, but that's also consistent with the fact that usually you don't see in our case premium deficiency reserves. So that's one of the reasons why this is not a major issue for us.

Question
Andrew Ritchie (Analysts)

Sorry, can you clarify that the CSM you are showing us on the roll forward is what period, is that annualized from 9 months?

Answer
Giulio Terzariol (Executives)

Yes. What we have here is basically the -- this number, I would say, it's basically annualized 6 months, something like that. That's what we use. But I always think, we try to be illustrative here. So on -- it's a good proxy, but don't get overly precise on the number. I will say the number anyway is supposed to be closer to the upper end and not to the lower end of the range. Let's put it this way. So we...

Question
Andrew Ritchie (Analysts)

And sorry, just to check on the nonattributable cost that you deduct, is that modeled forward? Or do you just capitalize the current run rate of those nonattributable costs?

Answer
Giulio Terzariol (Executives)

Yes. How much is impact. Basically, when you look at Page 20, when you add the EUR 21 billion to EUR 23 billion of deduction, I would say the attributable cost is about EUR 7 billion to EUR 8 billion of that number. That was the question. I have not heard how much.

Question
Andrew Ritchie (Analysts)

And just capitalizing the current run rate of those nonattributable costs.

Answer
Giulio Terzariol (Executives)

Yes, there will be -- yes, if you take the present value, the attributable cost that we have in the future is EUR 7 billion to EUR 8 billion, yes.

Answer
Oliver Bate (Executives)

All right. Thanks, Andrew. We will take our next question from Dominic O'Mahony from BNP Paribas Exane.

Question
Dominic O''mahony (Analysts)

If I can just pass off with Giulio, your near final comment about Asia. I have been under the impression that cash flow is a measure or a function of local capital, and the local capital was on local stat accounts which tended to be sort of in parallel to IFRS. Are you saying that you're expecting some of those countries to use IFRS 17 as a basis for the capital -- regulatory capital, and so that free cash flow will be linked to IFRS 17. I'd love to have a bit more detail on that, if you can share it.

Second question, back to Page 20. I'm a bit embarrassed to ask this, but is the CSM the discounted value of future profits? On my understanding, actually, if you invested in assets yielding the discount rate, and if everything went to plan, then actually the CSM would manifest in profits, but it wouldn't be the discounted amount of future profits, it would just be the sum of future profits. Is that right? Or actually, is it the discounted profits?

And then last question, just on Page 16, I'm surprised that the investment income remains so high in P&C. Again, am I understanding the investment return that remains in P&C is essentially the bit of credit spread that isn't in the discount rate and any excess in risk asset return in equities and fixed income above the discount rate. It looks here like there's only a small amount being deducted. So I wonder if you could help us understand why it's a little this thing deducted.

Answer
Giulio Terzariol (Executives)

Okay. So I'm not so sure I understood the second question. I go with the first. I'll go with the third, and then we -- maybe you ask me again. I can give you an answer to the second question, but I might not give you the answer you're looking for. And then you can tell me whether I understood the question or not.

So starting from the number one question regarding Asia. It's not so much that the calculation of the solvency in Asia, the solvency requirement in Asia is going to change, or the way they are measuring maybe the own fund in the solvency, the local regulation, but you might have a restriction on paying dividend based on the amount of local profit. So one thing is the solvency calculation, but there are again and again restriction on how much profit you can pay based on the local profit. And when Asia is going to implement IFRS 17, that should be 2025, depending on [ current view ] later. Then IFRS 17 is going to be more beneficial compared to the statutory accounting. So what we see, at least for us, we see that the dividend capacity might go up because there are less restrictions coming from this local statutory cap, if you want. So that's on Asia.

On the investment return, you were referring to Property Casualty. At the end of the day, there is no change in investment income. It's all about the discounting. And so you have this discounting which is unwinding over time, then clearly, what we are using for the calculation of the discounting is a yield which is lower compared to the yield that we get on our portfolio to a certain degree. So there is a little bit of that element. But fundamentally, nothing changes in the investment income. And then you adjust this amount of discounting and unwinding that equalizes over time.

Also one point to consider. We have locked in rates. So for the balance sheet, for the P&L, in reality, it doesn't really matter what is the rate level for the unwinding that you have right now. What matters is that the rate level that you had when you set up the discounting. So let's say that you set up reserve in 2000 and there was a 5% yield. That reserve is going to unwind at 5% in the P&L. Then it's tiny in this case because it's a long time ago. But what is relevant is the amount of locked-in rates. So you need to think we are going to have years back in the past where this effective interest rate is pretty high. And then we have the latest years are going to be very low, and then you need to do a sort of average across the portfolio.

And then the last -- the second question, I understood you. You are trying to understand how the CSM logic works. I will say that if you remove -- I'm not so sure I understood the question, but if you remove...

Question
Dominic O''mahony (Analysts)

Would it help if I repeat it, Giulio?

Answer
Giulio Terzariol (Executives)

Sorry?

Question
Dominic O''mahony (Analysts)

Would it help if I repeat it?

Answer
Giulio Terzariol (Executives)

Yes, yes, repeat the question, yes.

Question
Dominic O''mahony (Analysts)

Yes. Sorry, I wasn't clear the first time. So is the CSM best understood as the present value of future profits, i.e., a discount of future profits? Or is it just a representation of the future profits? I understand the liabilities are discounted, but I'm just wondering whether the profit is discounted or not.

Answer
Giulio Terzariol (Executives)

Yes, everything is discounted. Everything is discounted. We actually like to discount everything. So everything is discounted, and everything gets undiscounted. So in theory, if you remove the CSM at the inception, what you get should be the unwinding the discount rate and you had a release of risk margin. So you should get basically the change in CSM plus equity, should be equal to the implied cost of capital that you have in the calculation, which is a function of how you discounted the cash flow stream and then also the release of risk margin, that will be also part of the calculation. So fundamentally, you will get back to a number which should be closer to the implied cost of capital in the calculation.

Answer
Oliver Bate (Executives)

Welcome. Thanks, Dom. All right. We already past the hour, so we will take one last question, and then we will close the call. And the last question, we take from James Shuck from Citi.

Question
James Shuck (Analysts)

Yes. So first question, on the ROE target. So the -- above 14%, can you just tell me mechanically, what the ROE uplift is under IFRS 17? I think you said operating profit is similar on the NAV is below us is just keen to see that in absolute terms?

Secondly, do you expect any drag on the ROE going forward from essentially kind of the upgrades or the locked-in assumptions because you're going to -- or the assumption as we base at the beginning of this year and interest rates have moved a lot. So in theory, that should have some kind of a drag on the ROE.

The next question, as the final one is, please, can you tell me what percentile you are reserving to, particularly on the P&C [ side ] ?

Answer
Giulio Terzariol (Executives)

Yes. Thank you for your questions. So starting from the last one, we are basically about 70 percentile on the Property Casualty side.

Regarding your question about there is a drag in ROE because of the lock-in rate, all these kind of things. In reality, the balance sheet is assets and liability and moving. So from that point of view, you have less volatility coming from the movement of the balance sheet. And then from an income point of view, I would say it's -- it's basically -- eventually, the profit pattern is going to be -- the amount of profit is still the same. So I wouldn't see any drag coming from the fact that we are -- that we might have this locked-in rate. So from that point of view, no, I would say, no drag.

And then on your question regarding the ROE. At the end of the day, we expect the lift in ROE to be a good 1 percentage point, high ROE moving forward compared to what we have been seeing so far.

Answer
Oliver Bate (Executives)

All right. Thanks very much to everybody for joining our call. We say goodbye for now and wish you all the pleasant remaining afternoon.

Answer
Giulio Terzariol (Executives)

Thank you, guys. Have a good day. Bye.

© S&P Capital IQ 2023
Copier lien
Toute l'actualité sur ALLIANZ SE
02/02
01/02
31/01
31/01
31/01