Allianz Se Unsp/Adr

Good afternoon everybody and welcome to the Allianz conference call on the financial results of the first quarter 2023, which are for the first time based on the new IFRS 9 and 17 accounting standards. You know that already before we start the call I have to do some housekeeping. So let me remind you that this conference call is being streamed live on Allianz.com and YouTube. and that a recording will be made available shortly after the call. If you want to ask a question after the presentation and to join us via web call, please click on the talk request button at the upper right-hand side of your screen. And if you join us via telephone, please press star five. All right, that was all from my side for now. And with that, I turn the call over to our CFO, Giulio Tazzariol.

Thank you, Oliver, and a good day to everybody. I'm pleased to present the quarterly results of Allianz, which are very, very good. So we had a very good start into the year 2023. But before we do that, we're going to spend some time to talk about the results of 2022, just to establish the comparison between the new method and the old method. So if we go to page... Five of the presentation, you can see that under the new method, the operating profit for the year 2022 was 13.8 billion, which is pretty close to the 14.2 billion of the old method. Here we have some offsetting effects. In the case of property casualty, we see there is an improvement. of the operating profit compared to the old system. This is primarily coming from the discounting. On the other side, you see a low operating profit on the LFL side. This has to do with some technical effects. So from that point of view, this is just related to the first time implementation of FRS 9 and 17. I'm going also to come back on these points later in the presentation. Then I'd like to draw your attention to the net income and also to the shareholder core net income. As you see, the net income is about $300 million lower in the new basis compared to the old basis. That's a reflection of the low operating profit. And also, as you remember, 2022 was pretty volatile, and the new system tends to be volatile. a little bit more volatile compared to the old system when capital markets are moving. That's also the reason why, and we discussed that already in the December presentation, we have decided to adjust the net income for volatile items. And when we do that, you get to a core net income, the way we call this, adjusted net income of about $7 billion. We adjust for the fair value swings, so for the swings on assets which are marked as fair value, where we don't have an offset coming from the liability side. And also we adjust for the P-gap swings. which are, in any case, in our case, a very small amount. So I'd like to draw your attention to the core net income because that's also the way we are going to monitor our performance. So the primary KPIs are going to be clearly operating profit, as always, and then we are going to focus on the core net income. So all in all, I would say nothing really major changes on the aggregate level. If we go now to page 7, Look at the P&C business. Here you see 600 million more operating profit. Basically, the additional operating profit is coming from the net effect of discounting and unwinding. I know that you know the mechanics by now clearly in the course of 2022. Since rates have gone up, we get a higher benefit for discounting compared to the unwinding, which is based on the insurance rate level of the preceding years, and as you know, the preceding years had a very low insurance rates environment. You see this geography also reflected in the insurance service results, which is going up compared to the old system because of the discounting, and then the operating investment results is going down compared to the old system because of the unwinding effects. The combined ratio is lower Under the new methodology, that's because of the discounting impact. Structurally, if you remove the discounting impact from the combined ratio, the combined ratio has a tendency to be higher, and that's because it's based on a gross basis. when we look at the denominator instead of being based on a net basis. So that's, in short, the story on the P&C side. Net impact of discounting is positive in 2022 due to the rate environment. Now we come to page 9 on the development on the life business. In this case, you see that the operating profit was substantially lower. We are doing here normalization. We are basically normalizing for the hedge results of Allianz Life. The point here is when Allianz Life is doing the hedges, they are doing the hedges also based on the accounting. that is in place and clearly the hedges were calibrated last year to the IFRS 4 accounting. The new accounting clearly that we need to implement retrospectively has a different sensitivity and that's the reason why we got an accounting mismatch. If we had had this kind of accounting, the IFRS 17 accounting also last year, our hedging program would have been different. On top of that, also, we refined the methodology of how we run the FRS-17 calculation, but we implemented this new methodology only in 2023 and not in 2022, so that's also leading to... part of this normalization that we do. So all in all, when you normalize the numbers, you get basically to an operating profit which is broadly in line with the whole basis, and when you look at the net income, it's absolutely in line with the whole basis, and that's because we have some geography issue between the operating profit and the below-the-line item. So the bottom line is in the neural presentation reality, when you look at the net income or core net income, but for the life business is more or less the same, you're not going to see a much different number compared to the old system. Now we come to page 11 and that's about the reconciliation between what we call the comprehensive shareholder capital, which is the sum of the shareholder equity in the CSM, and the solvency to own funds. And here we are removing the usual suspects, like the TR2 subordinate liability, the foreseeable dividend distribution, so we are removing the items which are by definition, different methodological approach. And what is relevant in reality in these slides is the last item, which is other. As you see, there is basically no major difference once we remove all the other items between the comprehensive shareholder capital and the solvency tool on fund. So the message in this slide is basically that the two bases of valuation are broadly very consistent from a technical point of view. And with that we come to the IFRS 9 and 17 leverage. This is the way we are looking at leverage, which is basically the comprehensive capital in relation to the amount of debt that we are holding based on this new methodology. The leverage ratio is about 24%, which is lower compared to the leverage ratio based on the old system. We don't know yet what rating agencies are going to do, and by the way, rating agencies are going to follow different approaches, but we think that's also a way to look at the leverage ratio, and that's also, I believe, a way to look at the leverage ratio, which is going to be pretty standard also in the industry. And that was just, you know, a very short update on the numbers for 2022 based on the new system. But I believe the best way to familiarize with a new account is to speak about current numbers. And as I said also in the press call, no matter what kind of accounting we are using, We are going to provide clearly good results. And the reason is the underlying performance and the fundamentals of the business are very strong. So any accounting system is going to reflect this strong performance. When we look at the first quarter, we had a very good start into 2023. From a revenue point of view, we continue to see strong revenue in property casualty, WDG growth. In the case of life health and asset management, revenue are subdued, but that's not clearly a surprise considering that there is still some instability in the market. The operating profit is ahead of last year, but also more important is ahead of the outlook. So if you take our outlook Divided by 4, we are basically 5% ahead compared to that number. And this is coming both from property casualty and from the life health business. In the case of asset management, we are a little bit behind. The outlook divided by 4, but that's normal because we are going to get the performance fees at the end of the year. So also in the case of asset management, we are positive that we can achieve our outlook for 2023. The operational KPIs are going in the right direction. So basically, if you take out the cost-income ratio for asset management, you're going to see an improvement in the operational KPIs. And we saw also positive flows at AGI and PINCO in Q1. And then the coordinate income is at 2.2 billion. Here we have also the impact from the potential disposal of Allianz in Lebanon. If you adjust for this impact, which is an accounting impact, it's not really an economic impact, the shareholder commodity income will be north of 2.3 billion. If you analyze the number, you get to 9.4 billion of core income for the shareholder. which is also what would be an expectation for this new KPI. So all in all, very strong performance on the operational side, and also when you look at the corn, I think a solid number, especially once you adjust it for the accounting pet coming from the potential Lebanon transaction. Also, what was positive is the development of the solvency ratio, 206, if you look at the sensitivities are pretty much unchanged compared to the sensitivities that we had at the end of the year on wednesday nights we announced the buyback so we continue to deploy capital which is clearly a sign of the comfort that we have with our capital level and also with our clearly liquidity situation so from that point of view we continue to create profit capital liquidity And that's also very important. We continue to deploy capital. If you go to page 21 on the evolution of Solvency II, basically the capital generation is in line with our expectation. The markets have been benign, so we benefited from the market environment a bit. And then also what is important under capital management, management action, you see the deduction for the accrual of the dividends. But also there was about one percentage point, a little bit less than that, of impact on the solvency ratio because of an investment that we did in innovation group. So we continue to invest basically in capabilities that should support our technical excellence on the property casualty side. So, you know, 206 solvency ratio, if you adjust for the buyback that we announced on Wednesday, the number is very robust at 202. And now we come to the segment view, starting from PNC. Overall, you see a very good growth rate of double digit, of 11%. And also you can see that overall there is a good growth rate at most entities. Also, what is important, the change in renewal is pretty solid and accelerating compared to the change in renewal that we had also during the course of 2022. So you see a constant acceleration over time. So from that point of view, what this slide is showing is that we have been accelerating. reacting strongly to the challenge of inflation, and this also bodes well clearly for the operating performance. When we look at the operating performance from a bottom line point of view, you can see that our operating profit at page 25 has gone up by about $350 million. The improvement in the operating profit is coming from the so-called insurance service results, which is if you want something similar to the old underwriting results. And this is explained by the improvement of the combined ratio by about 2 percentage points. Clearly, in the quarter, we benefited from a lower amount on net CAT compared to last year, but also you can see that Arnoff has been very conservative. So, all in all, we were extremely happy with the performance of our entity, and we didn't really push this number so that's very important 91.9 is one percentage point better compared to the number that we put forward as an outlook for 2023 we are running stronger than that and we feel very good about the underlying performance behind this number when we think also about the quality clearly of the number because one thing is the number and the level One thing is the quality, and the quality is really good. And we can see this reflected also on the performance by OE at page 27. You see a lot of good combined ratios. So a lot of our companies are performing at combined ratios which are under the new method below 90%. And then I would also like to highlight that in Brazil, Latin America, we are making good progress. And in Spain, considering the market environment, we have also solid performance. In the UK, I would say the numbers are good considering the market environment. We benefited from lower net cash. So from that point of view in the UK, the situation is still a little bit more complicated than in other countries, as you see also from the disclosure of the competitors. But overall, we are taking strong action. And again, when you look at the total portfolio, we have really a very strong performance across a lot of entities. So we are also very confident that we are continuing to see strong numbers in the following quarters. And now we come to... The investment income, page 29. It might look surprising that the operating investment results go down, but in reality, with the new method, we have a situation where the accretion of the interest rate is going somehow to compensate for the increase in investment income. coming from clearly the higher interest rate environment. So from that point of view, we need to start thinking differently about the evolution of this KPI, which is going to be more flattish year over year. In our case, then, in this case, we have a drop compared to last year, just because last year we had positive effects in the valuation. results and others. So the main message here, it's kind of a trend that you should expect to stay at that level. Based on the whole system, because I'm sure the question will come, what would have been the number? The number would have been north of 800 million. So, again, it might look surprising, but in reality it's not surprising at all, and that's very consistent with our plan. So, all in all, 1.9 almost of operating profit in property casualty. If you remember, our outlook was 7 billion. So, if you analyze 1.9, you get to something close. If you analyze the number, you get something like 7.5. So we are definitely ahead of our outlook for the year. We expect also that we will continue to see this kind of run rates in the following quarters. And now we come to... life. On the life business, page 31, when we look at the production, we see there is a drop in production of about 12%. Here, we need to consider that we had the impact of the discounting, which is a more technical impact. So if you remove that effect, you get to a growth rate of minus 6%, which is clearly much better than minus 12%. It's not surprising that in this situation where there is still some uncertainty, the production of unilinked or single premium is going to be lower. On the other side, the new business margin is going up, so we have a very strong new business margin. This is a pre-test number that's important. So if you do an after-test number, you're going to get closer to the 4% that you were used to see based on the Solvency II approach. But what is important, we are seeing an increase in the new business margin. So when you put together the Production evolution, the new business margin evolution, you get to a very new business of more than $1 billion, which is relatively stable compared to the prior period. And more importantly, it's also a healthy level of new business. At page 33, we are showing now the evolution of the CSM. And we like to focus on the so-called normalized CSM growth, which is the sum of CSM at inception, which is basically the CSM on no business. Then we have an expectation of a certain growth of the CSM. And then we add the CSM release into the profit. So we like to look at the combination of these three figures. And in our case, we have a growth rate for the quarter of about 1%. So if you analyze that number, you get basically to an annualized growth of 4%. Why we like to look at this number? Because to a certain degree, there is high correlation between the growth in the CSM and the the future growth in the operating profit. So overall, I would say a good growth for the CSM. We see here a comment on the non-economic variances and assumption change. The 1 billion is a large number, but that's all driven by a change in the way we are including Mexico. In our CSM, basically, we are excluding Mexico, the Mexican business from the CSM, because this is not necessarily a business that has to be accounted under FRS 9 and FRS 17. If you adjust for that change in approach, the economic variances, the non-economic variances and the assumption changes are a very small number of about 200 million. And with that, we can go to the next slide, which is on the operating profit drivers. The operating profit first is a bit ahead of our expectation, which is a good thing. And on the same time, it's very much consistent, I would say, when you look at the single drivers with the expectation that we set when we had the call in December. So if you go back and look at the document, you're going to see that the single drivers are within the ranges of the expectation that we gave you. Fairly a number that tends to be more volatile. We said that from the very beginning is the operating investment results. It was extremely volatile last year because of this accounting mismatch. It was referring to due to the first time implementation for Allianz Live. So definitely the number is too low compared to a normal expectation. On the other side, the first quarter 2023, new number might be a little bit on the high end of the potential range. But as you understand, it's also a new calculation for us. So in order to be able to establish what is a run rate on this dimension, we will need a little bit more experience. The bottom line is strong performance from the live segment. Again, you can see that under the new methodology, we are recording performance. a good profitability, basically at the same level you were used to in the old system. There is a KPI that we are not showing anymore, which is the difference between the current yield and the guaranteed evolution. If you remember, the spread was about 230 basis points. Last year, this number is going up by about 20 basis points. as we speak, because of the production that we have put in our system and because of the higher rates. So from that point of view, there is a nice trend underlying clearly the solidity of our life business. At page 37, we are showing the numbers for the selected entities. I would say that when you look at the normalized CSM growth, it's pretty consistent across the different entities. And when you look at the operating performance, you can see also a good level of operating performance, so no major surprises, no surprises compared to what you were used before. And on that one, I would also say For the majority of the OEs, you can see there is a tight relationship between the CSM release and the operating profit. There are two exceptions. One is Italy and one is CE, Eastern Europe, Central and Eastern Europe. And here you see that the operating profit is higher compared to the CSM release because some of the business in Italy and CE is not accounting for under FRS 17. So bottom line, strong results on the light side with good new business margin and also an operating profit which is slightly ahead of our expectation. And also from a quality point of view, you can see the consistency between what we told you a few months ago and what is happening right now. Now we can go into asset management, and I will skip directly to page 41. Here you can see that the third-party assets under management went up by about 2%, and this is driven on the one side also from the movement of the markets, net of the effects, but then there is also a contribution coming from flows. As we always said, if the situation is stabilising, we're going to see flows coming back. And especially at the beginning of the year, the situation on the capital market was more benign. And this explains also the positive flows that we saw at PINCO. So from that point of view, there is a reverse of the trend that we saw in the course of 2022. At page 43 on the revenue, it's not surprising that revenue are down. That's a consequence of the development of 2022. What is a positive, you can see that the fee margin is going up. That's the case for PINCO, and also for the segment, because PINCO clearly represents the majority of the segment. In the case of AGI, you see fee margin decreasing. That has to do with the Voya transaction. On the other side, we need also to recognize that the expenses are not there anymore. So in reality, from a profitability point of view, The transaction of oil is more or less of a wash, which is better compared to the initial expectation that we had. And now we come to page 45. On the operating profit evolution, the operating profit is down versus last year, but that's in line with our expectation. So if you remember for the year 2023, we have an outlook of $3 billion. If you take the quarterly number and you annualize that number, you get to $2.9 billion. If you think that we get the performance fees at the end of the year, it means that we are well on track to achieve that target if markets are stable or not completely erratic by the end of the year. So bottom line, solid results in asset management in line with expectations. Also, we saw flows coming back in the first quarter and also year-to-date. Page 47 on the corporate segments, I would say it's in line with the expectation to be better compared to last year. And that's because of some more profit coming from our banking operations in Italy. And then at page 49 on the net income and look at the non-operating items, you see that the realized gains and losses are lower compared to last year. Last year in the first quarter, we had the disposal of a participation. And also, we had some realized gains on bonds. On the other side, you see that the restructuring expenses are lower compared to the first quarter last year, where we had also the restructuring coming from the – partially from the Voya transaction and then – oh, sorry, from the – some restructure in Germany. And then what you see here is this volatility coming from the SS measure FA value. This is also the volatility that we remove below the line. It's not one to one. There are some elements that we are not removing from this line item, but the majority of This volatility is removed in the definition of core net income. So all in all, 2.2 billion core net income. As I said before, if you remove Lebanon and you analyze the number, it's a strong core net income of 9.4 billion as a sort of net. what could be an expectation, a normalized level for the year. And now we come to the last slide. So overall, again, a strong set of results. I would really say excellent start into the year with strong operating performance, I would say, across the board. We are 5% ahead of our average. Outlook divided by four. We also see good momentum. So we believe we are going to carry this good momentum in the second quarter and also in the remainder of the year. And also we announced a buyback just the other day of 1.5 billion. We are also at the same time investing in the business, as I was saying before. So I would say that we are very pleased with the results, but especially today. We are pleased with the momentum that we see flowing through our businesses. And with that, I would like to open up to your questions.

All right. Thanks, Giulio. Thank you for your presentation. We now will be happy to answer your questions. And we will take the first question from Andrew Sinclair, Bank of America. Andrew, your line is open. Please go ahead.