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At Allianz, Old Threats, New Risks

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Staff at Allianz's head office in Munich are preapring for the coming financial storm.
  • Why it matters

    Why it matters

    Allianz, though highly profitable, faces growing challenges from rock-bottom interest rates, financial market turmoil, political uncertainty, tighter regulations and new competition from digital services.

  • Facts

    Facts

    • Allianz achieved 6-percent profit growth and record revenues of €125 billion in 2015.
    • The outlook for 2016 is muted amid persistently low interest rates and other challenges.
    • The insurer, Europe’s largest, will hold its annual general meeting on Wednesday.
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    Audio

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“Allianz is a cool company,” its chief executive Oliver Bäte said recently in an interview with a blogger.

It’s not the first adjective that springs to mind when describing the venerable insurance giant. But the remark testifies to Mr. Bäte’s ambition to reinvigorate the 126-year-old firm. “Oli,” as he is known to his colleagues, is breaking with cherished tradition to ready Allianz for the future, and speed is of the essence.

As Mr. Bäte (pronounced BAY-tuh) put it at the annual news conference in February, a “perfect storm” is brewing, generated by low interest rates, financial market turmoil, international crises, tighter regulations and new digital competitors.

But he’s also been striking an upbeat tone, saying Allianz can weather the conditions.

To be sure, it did so last year, delivering strong results in property and casualty insurance, life and health insurance and asset management. Total revenues rose 2.4 percent to a record €125.2 billion, or $144.2 billion — in its 125th year of existence.

“That was a pure coincidence, we didn’t do any tricks, it came out of the machine like that,” Mr. Bäte, 51, said.

Results for the first quarter, which Allianz presented on Monday, were also upbeat. Net profit rose to €2.2 billion from €1.8 billion a year earlier, up 21 percent.

 

03 p30 Earners and Losers-01 (2)

 

Much has changed since Allianz was founded in 1890. The insurer has morphed from a German life insurance company into a global financial conglomerate with 142,000 employees in more than 70 countries.

Allianz now generates three quarters of revenue and earnings outside Germany.

“In the past we’ve been very patient with group companies that were worse than the average, far too patient. We’re going to change that.”

Oliver Bäte, Chief executive, Allianz

In 2015, Allianz posted profit of €6.99 billion, an increase of almost 6 percent, and its equity capital grew slightly to €63.1 billion. Shareholders at Wednesday’s annual general meeting will be asked to approve a dividend hike by 45 cents to €7.30 — making Allianz one of the top dividend payers in the blue-chip DAX index.

Property and casualty insurance accounted for more than half of earnings in 2015. Gross premiums rose by 6.8 percent and operating profit grew more than 4 percent despite a number of large claims payouts, including for explosions in the Chinese port of Tianjin last August and a massive dam failure in Brazil in November.

The combined ratio for the full year was 0.3 percentage points higher than in 2014 and stood at 94.6 percent, still safely in profitable territory. A value below 100 percent means an insurer earns more in premiums than it pays out in claims.

Life and health insurance performed less impressively, with a decline of almost 1 percent in 2015 premium income to €66.9 billion. Allianz did well in growth markets such as Asia but saw revenue decline in Germany and France. Nevertheless, operating profit rose 14 percent to €3.8 billion, amid an increased return on capital investments from profits on the sale of securities.

 

014 Allianz WTB 2015 March 14 2016

 

Allianz has so far been able to cope with the slump in interest rates, achieving a return on investments of 4.6 percent last year, unchanged from the previous year. But the low-interest rate environment is making itself felt in the reinvestment of fixed-income securities — the lion’s share of investments — where returns fell by 20 basis points to 2.5 percent.

Chief Financial Officer Dieter Wemmer has repeatedly stressed that Allianz won’t have any problems honoring its commitments to life insurance customers. Still, management expects income from capital investments to come under pressure in 2016.

Asset management, meanwhile, continues to cause headaches for Allianz. Operating profit fell 12 percent in the division last year, which consists of German asset manager Allianz Global Investors and the far-larger U.S. subsidiary, PIMCO.

For years PIMCO, which Allianz acquired in 2000, yielded high returns for customers and gushing profits for Allianz. Its founder Bill Gross was a bond guru on Wall Street. At one point Allianz’s asset management business was generating almost a third of the group’s entire earnings.

But that changed in 2013 when the Federal Reserve’s low-rate policy caused a slump in returns and prompted investors to ditch fixed-income investments such as bonds, Pimco’s specialty.

Mr. Gross abruptly left the company in September 2014 after a dispute with parent Allianz and investors withdrew billions from PIMCO.

 

Allianz Ergo Is Shrinking-01

 

In its heyday in 2013, the PIMCO Total Return Fund, the company’s flagship fund and for a while the world’s biggest bond fund, had a volume of $293 billion. It has since shrunk to $88 billion. Investors withdrew €125 billion from PIMCO’s funds.

“That’s a huge sum,” said Mr. Wemmer, adding that Allianz would have to demonstrate this year “that we can achieve the turnaround there.”

Pimco has been slow to recover.

Mr. Bäte’s predecessor, Michael Diekmann, tried to restore its fortunes by installing a new management team, broadening the product range and trying to reassure investors. Mr. Bäte continued that policy and declared in February that high withdrawals were “a thing of the past.”

It’s true that outflows have subsided. In March, PIMCO even registered an inflow of funds. But it’s too early to speak of a turnaround, and Allianz is planning for net funds outflows in 2016.

To make matters worse, Mr. Gross filed a lawsuit against PIMCO in October to recoup at least $200 million he claimed the company owed him following his ouster in 2014.

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Allianz boss Oliver Bäte is fully aware of the challenges ahead. Source: Reuters

 

Mr. Bäte said asset management would remain a central focus for Allianz in 2016. It won’t be the only one, though, because Allianz faces increasing challenges. Mr. Bäte presented his future strategy last fall to make Allianz more modern, more flexible and more customer-focused. Its progress will be measured with a so-called “net promoter score” of customer satisfaction. The aim is to reach a score of 75 percent, well up from the current level of 50.

By raising it, Allianz wants to win 5 million new customers and boost its premium income by €6.5 billion per year. The group also wants to increase its earnings per share by 5 percent on average by 2018, lift its return on equity to 13 percent from 12.5 percent, and raise its dividend by at least 5 percent per year.

In addition, Allianz plans to save €1 billion per year from 2018. And each of its life insurance companies is to generate a return on equity of 10 percent or more by 2018.

“In the past we’ve been very patient with group companies that were worse than the average, far too patient,” said Mr. Bäte. “We’re going to change that.”

In a sign that the strategy shift is underway, Allianz shed parts of its struggling U.S. property and casualty business Fireman’s Fund, sold its South Korean activities and agreed to a joint venture with Chinese search engine Baidu.

But a lot still needs to be done, and the environment is getting tougher. The longer interest rates remain at their current rock-bottom levels, the more the group’s financial cushion will deflate. And weakening economic growth in the industrial nations is making it ever harder to sell insurance products in those markets.

It’s no surprise that Mr. Bäte doesn’t want to give an exact forecast for group earnings in 2016. He’s put it at between €10 billion and €11 billion, which is a wider forecast range than Allianz has given in the past. That means it’s unclear whether Allianz’s profits will grow this year — a reflection of the increasingly uncertain environment.

“Although the operating environment poses growing risks and macroeconomic forces are unlikely to lead to an additional surge in growth, we will do everything we can to make 2016 another successful year for Allianz,” Mr. Bäte wrote in the 2015 annual report.

 

Kerstin Leitel covers banks and insurance companies for Handelsblatt and is based in Munich. To contact the author: leitel@handelsblatt.com

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