Standard & Poor's Ratings Services considers AGCS AG, the main carrier of the AGCS group, to be integral to Allianz SE's strategy. This is owing to AGCS AG's status as the Allianz group's dedicated carrier for global industrial and specialty lines business, as the second-largest property and casualty insurer within the Allianz group; its competitive position; and strong capitalization. The core status of AGCS France stems from the company's operational integration with AGCS and management's plans for full integration. The core status of AGR U.S. is based on its operational integration with AGCS, its strategic role for the global corporate lines business, and the stop-loss protection provided by AGCS AG for AGR U.S.'s entire portfolio. The core status of AZFM reflects the comprehensive reinsurance agreement that it has with AGCS AG. AGCS is a significant contributor to Allianz SE's property and casualty operations, accounting for 13% of Allianz SE's operating profit in this segment in 2011.
In our view, AGCS' creditworthiness is underpinned by strong capitalization, strong underwriting results, and management's demonstrated ability to implement its global strategy. These factors are partly offset by the ongoing pressure on earnings from a soft pricing climate, although it has improved slightly in 2012; lower investment returns, and high investments in information technology (IT) to further optimize the integration of additional portfolios into AGCS' globally consistent platforms and improve the realization of cost synergies.
We expect AGCS' capitalization to remain strong because of its currently extremely strong capital adequacy and adequate reserving with loss reserves covering gross premiums by 1.8x. Further business expansion and exposure to catastrophes or other large loss events would require AGCS, in our view, to operate with capital adequacy above what we consider to be strong. In addition, we believe that Allianz SE is committed to maintaining AGCS' capitalization at a level commensurate with our expectations for a core operation and to support AGCS financially if necessary.
AGCS' operating performance remains strong, but is still currently hampered by a softening underwriting cycle in several lines of business and regions, as well as by lower investment returns. The company again experienced large catastrophe losses in 2011, owing to the Japanese earthquake and tsunami, the floods in Australia and Thailand, and the earthquake in New Zealand. However, strong underwriting discipline, a well-diversified portfolio, and sound reinsurance contracts enabled the company to partly offset these losses. Despite these large losses, the reported combined ratio remained stable at 93%. The return on revenues consequently remained stable as well at 16%, after 15% in 2010. In both years, the results were positively influenced by reserve releases of about 18 percentage points of the combined ratio in 2011 and 10 percentage points in 2010. We therefore estimate the underlying combined ratio to have been about 97% in 2011 and 95% in 2010, after adjusting for the natural catastrophes and a normalized reserve release of 4% each.
We think that rates might remain under pressure in 2012, although to a lesser extent than in prior years, mainly owing to a highly competitive market environment with a high level of capacity and only selective rate increases in some business lines that have been hit by large losses. Furthermore, the company's exposure to sizable catastrophe losses and the still challenging market and economic conditions may cause volatility in AGCS' earnings. However, we still expect the underlying combined ratio to reach at least 97% and the return on revenues to remain higher than 10%, leading to an operating profit of about EUR 450 million for 2012 and 2013.
We view AGCS' strong track record of strategy implementation and integration as a positive rating factor. As Allianz SE's dedicated carrier for industrial and specialty lines business, the company has been actively widening its branch and subsidiary network, taking over portfolios from various subsidiaries of Allianz SE. We think that the company will likely continue to grow organically, increasing its truly global footprint, among others things through a newly created company in South America (Brazil), which will be an affiliate of AGCS' subsidiary Allianz Risk Transfer AG (AA-/Negative/A-1+). Management has a demonstrated track record of integrating portfolios and entities into AGCS' systems and processes.
AGCS has a strong competitive position in Europe, benefiting from its ability to offer significant capacity, brand strength, and strong underwriting services. We view its position in the U.S. markets as good, and it is developing through the diversification of the business mix. AGCS' being structured within the Allianz group has further improved the customer interface and operational controls through a unified technical infrastructure, harmonized product and distribution policy, and the transfer of regional industrial and specialty lines portfolios throughout the Allianz group to AGCS' entities and branches. However, the group's full operation under the globally consistent platform requires further development of the IT platforms because of the business expansion. The investments undertaken in this respect are, in our view, necessary to improve the operational efficiency and increase the resulting cost synergies.
The negative outlook on AGCS directly reflects that on the parent company Allianz SE. The ratings and outlooks on AGCS AG, AGCS France, and AGR U.S. will therefore move in tandem with those on Allianz SE because they are Allianz SE's core subsidiaries. The ratings on AZFM will also move in tandem with those on Allianz SE, but are constrained by the sovereign ratings on Japan (unsolicited ratings AA-/Negative/A-1+).
We could also lower the ratings if, although unexpected, AGCS's strategic role within the Allianz group were to weaken. We view a positive rating action as unlikely over the next 18-24 months.