Oliver Bäte knows he has a lot to live up to. The Allianz chief executive, at the helm since May of 2015, was able to report record revenues in his first year in charge. Despite a whole range of uncertainties facing the insurance world, he’s promised to do everything possible for 2016 to be another success.
Allianz’s second-quarter results released Friday paint a very different picture.
Burdened by a negative interest-rate environment and a high number of natural catastrophes, net profit at Europe’s largest insurer almost halved in the April-June quarter from €2 billion to €1.1 billion, which was less than the projections of market analysts for €1.5 billion.
Shareholders responded by sending Allianz’s stock down more than 3 percent, making it Friday’s worst performer on Germany’s blue-chip DAX index. Some analysts are now predicting Allianz will post a profit decline for the entire year.
Allianz has attributed the fall in profits to higher damage claims stemming from a spate of natural disasters, as well as lower returns on investments from its fund division – led by U.S. bond giant PIMCO.
“In Munich it is raining this morning,” Mr. Bäte said during a conference call Friday. “The weather seems appropriate for our second quarter,” he quipped.
“In Munich it is raining this morning. The weather seems appropriate for our second quarter.”
Allianz’ total revenues went down by 2.5 percent year-over-year to €29.4 billion. Its operating profit decreased by 17 percent to €2.4 billion in the period between April and June.
Much of this isn’t of Allianz’s own making. Similarly to other insurers, Allianz has had to deal with increased damage claims this year, the result of severe storms and floods in many European countries, especially Germany, during the spring. French peer Axa already reported weaker quarter results Wednesday and its net profit grew by just 4 percent to €3.2 billion in the first six months of 2016, despite benefiting from real estate sales.
In addition to natural disasters, record low interest rates in Europe, forced down by the European Central Bank, have massively depressed earnings across much of the insurance world. Life insurance divisions in particular are finding it hard to earn a profit when they can’t earn a decent yield on their reserves. The plight of insurers the world over is being watched closely by regulators, who fear a collapse of the industry could be on the cards if left unchecked.
So far, Allianz has managed to weather the storms that have faced many of its rivals. But there are other problems that are more specific to the German insurer. The Munich-based company had to incur a write-down of some €352 million on its underperforming South Korean business, which it had put up for sale.
More importantly, Allianz’s U.S. fund management subsidiary PIMCO still hasn’t fully turned the corner after its founder and star investor Bill Gross left it in September 2014, prompting clients to withdraw billions from PIMCO’s funds.
In a move to change course at PIMCO, once the second most important business pillar for Allianz after insurance, Mr. Bäte has recently sought to keep a tighter leash on the California-based company. He appointed Emmanuel “Manny” Roman, chief executive of London-based Man Group, one of the biggest listed hedge funds in the world, at its helm.
PIMCO’s assets under management have fallen to $1.5 trillion at the end of March 2016 from $2 trillion at the beginning of 2013. Mr. Bäte is determined to put a stop to the outflows in the second half of this year.
Mr. Bäte said he remains optimistic that Allianz is on the right track to achieve its targets, but investors aren’t quite as impressed.
After the release of the first-half financial results Friday morning, the company’s shares fell by more than 3 percent, before recovering slightly in the afternoon. Shares were down 1.5 percent to €126.30 at 5 p.m. local time in Frankfurt.
Mr. Bäte has set ambitious goals for the coming years. By 2018, he plans to boost annual earnings per share by 5 percent on average. Return on equity should improve to 13 percent from 12.5 percent currently, while he’s also pledged to raise dividends every year by at least 5 percent.
Despite the natural disasters and low interest rates, the company insists it can take the first step towards achieving its plan this year. Management on Friday reiterated its forecast for an operating profit of between €10 billion and €11 billion for 2016.
That would roughly match last year, when the insurer registered profits of €10.7 billion.
Some analysts are skeptical. Philipp Häßler, an Frankfurt-based financial analyst with Equinet, said he expected operating profit likely to match the lower end of Allianz’ prediction. That would mean a decline compared with 2015.
There are increasingly cautious voices within the management itself. Dieter Wemmer, Allianz’s chief financial officer, said during the conference call that if the midpoint of €10.5 billion was taken as guidance, the year would have gone very well.
It looks like Allianz’ shareholders may have to wait a little bit longer before they can reap the first fruits of Mr. Bäte’s restructuring strategy.
Carsten Herz leads Handelsblatt’s asset management and insurance coverage since the start of this month and is based in Frankfurt. He previously led Handelsblatt’s London bureau. To contact the author: firstname.lastname@example.org