Allianz AG

Summary

-  ■■ Allianz Group is considered to be Europe’s strongest and most profitable insurance company. Although the year 2002 was very disappointing for Allianz (not only because of the worldwide recession, but also due to the acquisition of troubled Dresdner Bank in 2001) the company reversed these figures in 2003 thanks to a positive restructuring program and a number of divestments.

-  ■■ Allianz, headquartered in Munich, Germany, is one of the world's leading insurance and asset management companies, and it generated total group income of Ђ93,900 million in 2003, up on the previous year from Ђ92,600 million. Net income totalled Ђ1,616 million in 2003, up from a loss of Ђ1,229 million in 2002.

-  ■■ At the end of 2002 Allianz reported a loss of more than Ђ1.1 billion, which was over 150% down on the previous year’s income. The share price of the company slumped from a high in 2001 of Ђ237.99 down to Ђ80.76 by the end of 2002 and only recovered slightly in 2003. Allianz showed signs of recovery with stronger results in 2003; however, it is still substantially below the levels of 2001.

Overview

Allianz, headquartered in Munich, Germany, is one of the world's leading insurance and asset management companies. The Allianz Group consists of around 700 subsidiaries in over 70 countries giving the company a global presence.

The company's insurance operations comprise the core business of Allianz, including property and casualty insurance. Private and institutional clients are handled primarily through a nationwide network of full-time and part-time Allianz sales agents while the industrial risk insurance business is run through brokers and company-connected agents. Two thirds of the company's revenues are generated through its property and casualty insurance. The company is also venturing into alternative risk transfer and other avenues to expand the company's scope of operations and it established Allianz Risk Transfer (ART) with headquarters in Zurich to develop financing solutions outside of the traditional insurance market for service-based, financial and industrial corporations.

Private Provision encompasses life and health insurance, with products and services offered to the company's native Germany and the European market. The sector is designed to provide long-term financial income to clients. It also protects clients from premature consumption of capital. The company has engaged in a number of acquisitions to strengthen its position in the life and health insurance market outside of Germany. These acquisitions included the French company AGF, improving Allianz's coverage of the French market. The company also formed a joint venture between the President Group in Taiwan and Allianz First Life in South Korea, and also acquired LifeUSA. Allianz's largest health insurance provider is Vereinte Krankenversicherung AG.

Allianz generated total group income of Ђ93,900 million in 2003, up on the previous year from Ђ92,600 million. Net income totalled Ђ1,616 million in 2003, up from a loss of Ђ1,229 million in 2002.

History

Allianz was founded as an insurance provider in Berlin in 1890, and floated on the Berlin stock exchange five years later.

In 1984, it purchased a stake in its Italian subsidiary Riunione Adriatica di Sicurtа and this was followed two years later with a takeover of Cornhill Insurance. The Group moved into fourth position in the French life insurance market with the purchase of Assurances Gйnйrales de France in 1997. The company boosted its American presence with the purchases of Fireman's Fund Insurance Company in 1991 and LifeUSA in 1999.

LifeUSA has been merged with Allianz Life to exploit the synergies that the acquisition presented.

A key to the company's growth strategy is expansion into emerging markets. This began in 1990 when the company bought the former state insurer of East Germany and then began to expand into the Eastern European market. In 1999, Allianz started to expand into the Asian market with its first targets being the Chinese and South Korean markets.

In order to bolster this division, PIMCO advisors, a U.S. based company, was acquired in 2000. This increased Allianz's exposure to the world's largest capital market. In 2000, Allianz was listed on the New York Stock Exchange. In the same year, the company purchased the U.S. asset manager Nicholas-Applegate, San Diego, California. In March 2001, Allianz unveiled its most ambitious acquisition to date, Dresdner Bank. This deal creates one of the five biggest asset managers in the world and provides Allianz with exposure to the banking sector.

In May 2004, the company announced that Allianz Capital Partners was to acquire Hansen Transmissions, a Belgian manufacturer of gearboxes for wind turbines, from Invensys plc.

SWOT analysis

Strengths

Strong non-life insurance division: the property and casualty division has been growing fast and achieved profitability, mainly due to the strong growth in premium income.

Expanded product and service offerings in Europe: as part of the measures for improving service quality for its customers, Allianz Bulgaria is now offering online services in the areas of life insurance and supplementary voluntary pension insurance through its company homepage at www.allianz.bg. Allianz Bulgaria Life is now the only insurance company in the country that provides online calculators for estimating premiums for future guaranteed annuities and the additional interest resulting from endowment insurance.

 

 

Recovery after losses in 2002: Allianz Group is considered to be Europe’s strongest and most profitable insurance company. Although the year 2002 was very disappointing for Allianz (not only because of the worldwide recession, but also due to the acquisition of troubled Dresdner Bank in 2001) the company reversed these figures in 2003 thanks to a positive restructuring program and a number of divestments.

Weaknesses

Acquisition of Dresdner bank: in 2001 Allianz acquired Dresdner Bank in order to expand its product offering into banking. However, this bancassurance deal was far from what Allianz had expected. Dresdner Bank has been having problems for some time, and this acquisition meant that instead of increasing profits, Allianz faced significant losses. The insurer had to start with radical cost reductions and Dresdner still has not managed to return to profitability. Dresdner has performed four cost-cutting programs in as many years, the most recent to further cut employees by 4,700 as well as IT expenditure by roughly 50%. The company is hoping its latest 'New Dresdner' program will see the bank earn its cost of capital again in 2005.

Decreasing profits: at the end of 2002 Allianz reported a loss of more than Ђ1.1 billion, which was over 150% down on the previous year’s income. The share price of the company slumped from a high in 2001 of Ђ237.99 down to Ђ80.76 by the end of 2002 and only recovered slightly in 2003. Allianz showed signs of recovery with stronger results in 2003, however, it is still substantially below the levels of 2001.

Opportunities

Lead Dresdner to profitability: Allianz estimates that there is a potential in excess of Ђ1 billion if Allianz and Dresdner Bank develop joint products. Despite problems with Dresdner, the extensive distribution network that came with the acquisition as well as the fact that through this acquisition Allianz has entered the bancassurance market, means that in the future Allianz will profit from this deal.

Strengthen asset management position: the asset management segment of Allianz is beginning to become integrated. It was composed of Pimco, the U.S. based fund manager, Allianz's asset management operations and Dresdner's asset management operations. When these groups fully integrate, strong cost savings should be realised, particularly in back office operations. In October 2002, Allianz became the first foreign entity allowed to operate in the Chinese Asset Management sector and now the company owns 33% in a joint venture with Guotai Junan Securities. Entering Asian markets, because of their strong growth, is a positive step, and especially China is an increasingly sought after location for investors. The fact that Allianz was able to enter the Chinese market so early, means that it already has an advantage over its competitors.

Threats

Becoming too diverse: many companies have been trying to achieve a perfect model of a financial conglomerate, able to serve all areas of financial services and in turn attract more clients and ensure loyalty of the existing ones. Allianz is working to achieve this aim, trying to follow the example of Citigroup and grow the business to represent all aspects of the financial services industry, for example adding non core industries, such as investment banking. The problem here is that investment banking has a highly different management structure and culture. The Allianz board was too keen to maintain the autonomous management strategy that it neglected to monitor the actions of Dresdner sufficiently and this is the main reason why Allianz had to pay for this mistake with the losses it incurred after the acquisition of Dresdner.

Competition from foreign insurers: foreign insurance companies are currently trying to penetrate the German market, especially the personal motor market, where there is a threat from motor dealers and manufacturers, which are looking to set up their own in-house motor insurance division. Potential problems exist within the Allianz Global Risk division, which specialises in corporate risk. In the aftermath of September 11, 2001, combined ratio increased to 126.3% (end of 2002). At the time of writing, this figure is below 100%, however, a similar event/downturn could increase the ratio further.

Company activity snapshot

- ■■ According to Allianz, German government plans to toughen supervision of insurance companies will impose needless costs and bureaucracy on firms. "The supervision of holdings will place a bureaucratic burden on internationally active firms such as Allianz. We can't see any notable added value for supervisors," said Allianz in the press release issued by the company in September 2004. Allianz would have to spend a six-figure Euro sum on extra audits of some 12 holding companies within the group. The proposed regulation is part of a law aimed at bringing reinsurers within the scope of Germany's supervisory authority, BaFin. German insurers are also expected to use the hearing at the end of September 2004 to attack plans for a life insurance policy guarantee fund modelled on the country's bank deposit guarantee scheme. The fund, financed by all companies, would step in to guarantee pay outs to policyholders should the company that wrote the policy go under, which would replace the voluntary Protektor fund set up by the industry in 2003.

" ■■ In July 2004, the spokesmen from UK insurance group Allianz Cornhill and parent Allianz in Germany dismissed rumours that the company had opened talks with Britannic Group to sell its closed life business as speculation. Reports in the UK press suggested Britannic, which now specialises in run-off and policy administration, could pay up to Ј150 million ($281 million) for the closed Allianz Cornhill life business. Allianz Cornhill’s life operation was closed to new business in 2001 and currently has about half a million policyholders. The group had not stated formally that it would be open to offers from a third party but it would be likely to at least consider a sensible bid. Britannic is part of a fast-growing dedicated business for the management of discontinued life business in Europe and particularly in the UK. For Allianz, the sale of the life insurance business in the UK would mean limited presence in the UK. Such step would also send a message that Allianz is still trying to cut costs (Allianz has been cutting costs since its acquisition of Dresdner Bank in 2001) and that instead of expanding, it is selling off businesses.

-  ■■ Allianz AG agreed to sell its Mexican pension fund company to a subsidiary of HSBC Holdings plc for an estimated $29 million in July 2004. Allianz Rentas Vitalicias was founded in 1997 in the course of the privatisation of the Mexican pension system. Its customers currently receive annuities assigned through the nation's private sector social security system. The transaction follows the disposal of the Allianz pension fund company AFORE Allianz Dresdner in August 2003. Ironically, AFORE was also bought by the HSBC group. Both sales are part of Allianz's strategy to reduce complexity and costs, and focus on core markets and business.

-  ■■ At the end of 2003 Allianz recorded a net profit for the third quarter as rising premiums helped it to overcome continuing weakness at its banking operations. Allianz reported net income of Ђ372 million ($436.4 million), compared with a net loss of Ђ2.52 billion in the year-earlier period, which included a Ђ972 million pre-tax loss from subsidiary Dresdner Bank, Ђ1.9 billion to cover the reduced value of equity holdings, $750 million in provisions for asbestos claims in the United States and Ђ664 million for flood claims in central Europe.