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Allianz’s new takeover a sign of things to come

The logo of France-based credit insurance company Euler Hermes Group SA is seen on the company tower at La Defense in Courbevoie near Paris
Like Paris it's expensive, but a nice fit. Source: Reuters

Oliver Bäte apparently wasn’t kidding back in the spring when he said that “those who don’t grow, die.” It’s a pressure the Allianz CEO has faced from investors ever since he took over Europe’s largest insurer in October 2014. Over the past few months, Mr. Bäte seems to be finally getting out of the starting gates.

In August, Allianz said it planned to acquire Britain’s Liverpool Victoria by 2019 for €770 million ($916 million). On Monday, the Munich-based insurer went one better, announcing plans for a complete takeover of Paris-based Euler Hermes, of which it already owns 63 percent, for up to €1.85 billion.

These two deals came after a long and painstaking search. In a statement, Allianz said the takeover of Euler Hermes, which was founded in Berlin and primarily offers trade credit insurance for exporters, was a “logical step.” Both insurers have already been working together closely. Analysts point to plenty of synergies between the two companies, and shares rose slightly.

That may be true, but strategically the takeover doesn’t get Allianz much further towards its goal of “investing in growth,” as Mr. Bäte has put it. Germany’s flagship insurer has been on the lookout for accident and damage insurance firms over the past few years, and most of all for ways to expand into US and Asian markets. Given Euler Hermes’ European focus, that suggests Allianz still wants to make an even bigger splash abroad.

In the meantime, Euler Hermes will fit nicely into Allianz’s existing product line. A century ago, the former pioneered trade credit insurance and now controls about one-third of this lucrative market. Germany, with its well-known stock of exporting companies, has long been one of its biggest customers, even if the company is now listed and headquartered in Paris. With just 5,800 employees and revenues of €2.6 billion, last year it managed a respectable return on equity of 10.8 percent.

Allianz certainly has the cash – both for a full buyout of Euler Hermes and for further acquisitions down the line.

The acquisition does come at a cost. Buying out the company’s remaining shareholders will be “pretty expensive,” according to Daniel Bischof, an insurance analyst with Baader Bank. The buyout comes at a premium of about 20 percent compared to its closing price last Friday, but Mr. Bischof acknowledged it’s still a “good idea.” Markus Riesselmann of Independent Research said the synergies alone should make up for the high price tag. UBS analyst Arjan van Veen even switched his recommendation for Allianz shares to “buy” on the back of the announcement.

Allianz certainly has the cash – both for a full buyout of Euler Hermes and for further acquisitions down the line. Its solvency ratio, a key measure of regulators to gauge insurers’ financial health, is currently at 220 percent, just above the European median of roughly 210 percent. Even the hurricane season has done little to dampen that cushion. Allianz’s ratio will fall about four percentage points once the latest takeover is complete, bearing in mind it has already announced plans to buy back €2 billion worth of shares in 2018.

Allianz’s board still believes it’s sitting on more capital than it needs. That will put more pressure on Mr. Bäte to produce more deals, even if the market for prospects has tightened. A survey by consultants Willis Towers Watson found that while the number of mergers and takeovers fell in 2016, the value of those transactions has risen. In other words, takeovers in the insurance sector will need to make more sense than before – whether because of synergies, or expanding into profitable markets or new technologies – to be worth the expense, according to Marcel Schmitz, Willis Towers Watson’s M&A expert for the German insurance business.

Allianz’s investors are giving Mr. Bäte leeway for now. The insurer’s share is up nearly 15 percent over the past six months on expectations that he will deliver growth. More deals will help keep that upward trend going.

Carsten Herz covers the insurance industry for Handelsblatt out of Frankfurt. Christopher Cermak adapted and contributed to this article for Handelsblatt Global. To contact the author: herz@handelsblatt.com

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