A few weeks ago, during carnival week, many employees of Allianz, the world’s biggest insurer, were walking around with blue teeth. The company had handed its employees doughnuts featuring the corporate logo in blue icing to mark its 125th anniversary. It tasted great but the color came off.
The staff are unlikely to have minded because Allianz has reason to celebrate. The company has never been in better shape. Last year it generated revenue of €122.3 billion, or $136 billion, a 10 percent rise over 2013, and raised its operating profit by three percent to €10.4 billion, which was at the upper end of the range that outgoing Chief Executive Michael Diekmann had forecast. Net profit came to €6.2 billion, and the dividend was lifted to €6.85 per share from €5.30.
It was the first time in Allianz’s long history that revenue exceeded €120 billion. Mr. Diekmann, 60, who will step down at Wednesday’s annual general meeting after 12 years at the helm, said his aim hadn’t been to achieve records but to produce a “result that is solid overall.”
“It's a terrible problem. Insurance companies have counted on getting a certain return and they're not getting it.”
Allianz, like the whole insurance industry, benefited from an unusually low number of major natural disasters last year. For once, there were no disastrous floods, no devastating hurricanes and no car-smashing hailstorms over Western Europe. Tragic events like the two Malaysia Airlines passenger jets lost in the Indian Ocean and Ukraine made global headlines but did not result in large-scale insurance claims. And Allianz was able to raise its prices for many products.
But despite the record results, Allianz’s share price outlook is muted. Its stock has fallen five percent in the last four weeks, underperforming the blue-chip DAX index, and insurance analysts, especially in the United States, have been issuing critical stock comments. Morgan Stanley lowered Allianz from “equal weight” to “underweight,“ while fellow investment bank Jefferies cut it from “hold” to “underperform.”
Analysts polled by Bloomberg are relatively downbeat on Allianz’s share price outlook. They predict it will rise just 1.5 percent in the coming 12 months, well below a projected six percent gain for Italy’s Assicurazioni Generali and almost nine percent for Axa.
Their skepticism is based in part on Allianz’s strong start to 2015 and the modest profit outlook for this year. Despite the recent drop, the stock has gained more than 12 percent from the end of December, driven by the favorable stock market environment and the prospect of a hefty dividend.
The share isn’t overpriced yet with a price-earnings ratio of 11 based on the expected 2015 profit but investors can’t expect much growth in earnings per share this year. The dividend yield is more attractive at competitors like France’s Axa or Britain’s Aviva.
The outlook for the entire insurance sector has dimmed this year, largely due to the low interest rates that are likely to put earnings under pressure across the sector. Insurers invest their clients’ money in capital markets — as lucratively as possible, but above all as safely as possible. In the past, government bonds met these requirements and the lion’s share of premium income was invested in them.
The European Central Bank, intent on making money cheap to stimulate growth in the euro zone, has pushed down yields on government paper. German 10-year bonds, for example, at present have a yield of just 40 basis points — that’s too little to meet Allianz’s promises to policyholders in recent years.
Central banks don’t understand “the huge pain” low interest rates are causing long-term investors like insurance companies and pension funds, said Laurence Fink two weeks ago. He is the founder and chief executive of Blackrock, the world’s biggest asset management company, which owns six percent of Allianz stock.
Investment legend Warren Buffett recently told Handelsblatt: “It’s a terrible problem. Insurance companies have counted on getting a certain return and they’re not getting it. The temptation is to do riskier things to try and get more return.”
But that wasn’t the right strategy, Mr. Buffett added. Insurers should instead try to grit their teeth and get through this phase.
However, only financially strong companies can afford to do that. That’s why investors should pay particular attention to the solvency ratio of insurance companies, a measure of their capital strength which shows whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. Allianz has a ratio of 181 percent, which puts it in middle of the league table. Axa has 266 percent, Italy’s Assicurazioni Generali has 156 percent.
The new man at Allianz’s helm, Oliver Bäte, 50, will run a company that has changed radically in recent years. It employs 147,000 people in more than 70 countries and now generates three quarters of its revenue and its earnings abroad.
Analysts don’t expect Mr Bäte to make major changes in strategy. The company is, after all, well positioned.
Mr. Diekmann, who may return to Allianz as head of the supervisory board in 2017, has spent his final months as chief executive tackling problems such as the loss-making U.S. subsidiary Fireman’s Fund. The company was split up, its private clients business sold and its corporate clients business integrated into the Allianz unit AGCS. Mr. Diekmann also reorganized Allianz’s private clients operations in Russia and Ukraine.
Mr. Bäte is sure to make his mark as head of Allianz, said fund manager Ingo Speich of Union Investment, one of the group’s biggest shareholders. “But we don’t expect a radical shift in strategy,” he added.
Mr. Bäte himself said in a recent interview with Manager Magazin that he didn’t have a blueprint for Allianz in his desk drawer. “We plan to use the rest of the year with the management board and our leading executives to work up a program for the coming years,” he said.
There’s no shortage of challenges. Apart from the low interest-rate environment, there are the new capital requirements coming into force next January under the European Union’s Solvency II directive.
As a result, Allianz’s forecasts for 2015 are muted. It expects operating profit to reach a range of €10.4 billion “plus, minus €400 million,” after €10.4 billion in 2014.
The group will have to make do without the head of its German unit, Markus Riess, who has defected to rival insurer Ergo after being passed over for the chief executive post at Allianz.
Allianz’s asset management division has also been causing concern. Its U.S. unit Pacific Investment Management Co, or Pimco, made headlines for months last year, suffering fund outflows that overshadowed the group’s fourth-quarter results.
Clients withdrew assets worth dozens of billions of dollars in the wake of a management shake-up at Pimco last fall when the fund manager’s co-founder Bill Gross quit. His sudden exit cast doubt on the extent of control Allianz has over one of the world’s biggest asset managers.
The turmoil hit Allianz’s asset management division which reported a drop in operating profit to €2.6 billion from €3.2 billion last year.
Pimco’s Total Return Fund has lost the title of the world’s biggest bond mutual fund, according to statements of Pimco and rival asset manager Vanguard to news agency Reuters. At the end of April, Pimco’s flagship fund managed $110.4 billion, compared to $117.3 of Vanguard Total Bond Market Index Fund, Reuters reported, citing Pimco and a Vanguard spokesman.
Mr. Diekmann installed a new management team at Pimco and recently declared: “Despite all difficulties Pimco is one of the most profitable asset managers on this planet and is one of the most successful investments in our company’s history.” The next few months will show if investor confidence returns.
Kerstin Leitel covers banks and insurance companies. Gilbert Kreijger, an editor with Handelsblatt Global Edition in Berlin, contributed to this article. To contact the author: firstname.lastname@example.org