reinventing insurance Germany's Allianz eyes revamp after weathering storms

After a horrific year of natural disasters, Europe's largest insurer aims to revitalize its business with a makeover, and possibly takeovers.
Clouds gathered over the insurance business last year.

In Munich on Friday morning, Allianz boss Oliver Bäte declared his intentions: To revamp Allianz' property and casualty division to reverse a steady decline in market share in recent years. His comments came as Europe’s biggest insurer announced what amounted to a narrow escape in 2017, when profits edged up despite a spate of natural disasters, the effects of a US tax overhaul, one-off charges and a weakening US dollar.

"We are much too complicated," said Mr. Bäte, speaking at a press conference to announce the company’s annual results. Allianz needs to simplify its products and cut costs, he said, and it needs to do all this while also undertaking a “cultural change” at the company. "That will be a long journey," the CEO said.

Mr. Bäte said he plans to present a long-term business plan in late November, but was short on details. At its core, it will likely be a digital revamp of the property and casualty operations, analysts say. But the CEO said the company is also toying with the idea of making acquisitions in the sector even though prices are high. “So far, we haven’t found anything that suits us,” Mr. Bäte said. He declined to comment on reports Allianz is interested in the Bermuda-based reinsurance and property insurer, XL Group, which operates primarily in the US. XL is valued at about $11 billion (€8.8 billion) on the New York Stock Exchange.

Last year, Allianz spent €3 billion on acquisitions, but about half of that sum was to increase its stake in trade credit insurer Euler Hermes. In early 2017, the German insurer was reported to be interested in Australia's QBE, but a bid never materialized.

We are much too complicated. Oliver Bäte, chief executive of German insurer Allianz

Allianz's net profits totaled €1.43 billion, a drop of 22 percent from a year earlier and generally below analysts’ forecasts. Earnings were dented by a €210 million charge from the sale of Oldenburgische Landesbank in northern Germany, and an elimination of near-term tax credits in Donald Trump’s reform of the US tax system, which cost the company €135 million in profit in 2017. But the tax reform will add about €300 million in profit this year, Allianz said.

For 2017 as a whole, Allianz posted net profit attributable to shareholders of €6.8 billion – a slight drop of 2.3 percent – and operating profit of €11.1 billion, 0.4 percent above the previous year and in line with the company’s own target. Mr. Bäte said operating profit would have been €200 million higher without the effect of a weaker dollar, which fell 14 percent against the euro last year.

Brisk inflows into its asset management division and growth in life insurance offset declines in the property and casualty business. Last November, Allianz forecast operating profit in the “upper half” of its target range of between €10.3 billion and €11.3 billion; for the current year, Mr. Bäte predicts €11.1 billion, plus or minus €500 million.

“The group met its performance targets, maintained an extraordinary level of capital strength and returned €3 billion to shareholders through share buybacks in 2017,” Mr. Bäte said. Allianz also made important strategic strides, and had started 2018 on a strong note, he added.

The biggest surprise came from Pimco and Allianz Global Investors, which attracted €150 billion in fresh investment last year.

Last year, global insurers had to pay damage claims of around $135 billion for 2017 - the most ever - following earthquakes, hurricanes Harvey, Irma and Maria, as well as wildfires in California and storms in Europe. Claims linked to national disasters surged 57 percent at Allianz last year, to €1.1 billion.

The insurer’s total revenue – premium income and commissions from asset management – edged up 3 percent last year to €126.1 billion. Once again, its key property and casualty insurance division made up nearly half of operating profit, despite a 7.5 percent drop in income. But the biggest surprise came at Pimco, its US fund management unit, and Allianz Global Investors, which together registered inflows of €150 billion in fresh investment last year, including €45 billion in the fourth quarter alone.

The figures stand in stark contrast to 2016, which was marked by outflows following the departure of Pimco’s founder Bill Gross. Together, the two subsidiaries have €1.96 trillion in assets under management, of which around €500 billion are the insurer’s own investments. The division now accounts for one-fifth of Allianz’s earnings.

In life insurance, Allianz proved it has successfully shifted to underwriting more policies with higher returns, with premium income rising 4 percent and operating earnings up 3 percent. The company sidestepped the woes of other insurers that have ceased underwriting new life policies altogether. After two lean years in life insurance, Allianz is now ready to “step on the gas,” Mr. Bäte said.

Despite a slight drop in 2017 net profit, Allianz kept its shareholders happy by increasing its annual dividend to €8, a 5 percent rise from the year before. The insurer is forecasting another payout increase this year, to €8.40.

On the Frankfurt Stock Exchange, investors initially sold Allianz stock on the earnings news, but the price recovered and was little changed towards the end of the trading session.

Jeremy Gray is an editor at Handelsblatt Global. To contact the author: [email protected]