P&L Check How to reboot Allianz

Oliver Bäte is on a mission to modernize Munich-based Allianz and has unleashed the biggest restructuring in its 127-year history. With the insurance industry in major crisis, he'll need all the help he can get.
Oliver Bäte is eager to change Allianz. Frank Leonhardt / DPA

Oliver Bäte isn't the bashful type when it comes to speaking about his company: "Allianz has never been as strong as it is today. We have delivered in all areas," Mr. Bäte, who has led Europe's largest insurer for the last two years, said in mid-February.

He has a point: At a time when much of the insurance industry is struggling mightily, Allianz has actually managed to gain ground. Its operating profit even rose ever so slightly to €10.8 billion ($11.8 billion) last year from €10.7 billion in 2015. That’s not bad by comparison with its peers. French rival Axa, Europe’s second-biggest insurer behind Allianz, also reported 4 percent growth in profit but others including Swiss Re sustained sharp earnings declines.

Yet Mr. Bäte knows he has to do more. Insurance is a tough, competitive business in this age of rock-bottom interest rates and mounting competition from insurance technology upstarts. To master the challenges, the 52-year-old CEO launched a 3-year plan in 2015, the so-called “Renewal Agenda,” a massive revamp that's designed to digitalize the 127-year-old venerable brand and expand it internationally.

Two years on, many employees remain skeptical about the revamp and are putting up a stiff fight. But investors, who are gathering at the company's Munich headquarters Wednesday for an annual meeting of shareholders, have so far welcomed it. Mr. Bäte, a former McKinsey consultant, is making the company more efficient and profitable. He'll need to keep shareholders on his side if he wants to finish the job.

Insurance is a tough, competitive business in this age of rock-bottom interest rates and mounting competition from insurance technology upstarts.

In many ways it is precisely what angers some of Allianz's 140,000 employees that is being cheered by shareholders. Investors like Mr. Bäte's ambitious goals, for example, in an industry that has prided itself on stability and is often slow to change. Mr. Bäte's plan calls for average annual growth of 5 percent in earnings per share in the three years 2016 through 2018. In 2016, it rose just over 4 percent to €15.14.

“We like how Mr. Bäte is equipping Allianz for digitalization, and doing so despite resistance,” said Ingo Speich, fund manager at Union Investment, one of the top 10 shareholders in Allianz. “He wants to drive the change rather than be driven by it.”

Nevertheless, Allianz hasn’t managed to convince all the experts. Barclays insurance analyst Claudia Gaspari has an underweight rating on the stock because she’s cautious about the general outlook for European insurers, given their limited earnings and dividend potential.

And Ms. Gaspari, too, has a point. Even Allianz hasn't been immune to the industry's overall struggles. Management isn’t happy with the drop in group revenue to €122.4 billion in 2016 from €125.2 billion, for example. It also needs to raise its game to achieve another target, a return on equity of 13 percent by 2018. Last year, that fell to 10.2 percent from 10.5 percent.

This is a point that Allianz itself concedes. “The very good result of the last two years may give the impression that we’ve already reached our goal,” said Allianz’s management board member in charge of strategy, Thomas Naumann. “But that’s not the case.”

02 p33 Allianz Figures-01

A look inside some of the divisions of Allianz also paints a more nuanced picture. Its property/casualty division, which accounted for almost half its profit, is doing well. The so-called combined ratio fell slightly by 0.3 percentage point to 94.3 percent, meaning the insurer retained 5.7 cents of every euro in premium income after claims and expenses. That’s not far from the 94 percent target set under the Renewal Agenda.

By contrast, Allianz’s smallest division, asset management, remains a building bloc and saw its operating profit shrink slightly to €2.2 billion last year from €2.3 billion in 2015, though it has importantly managed to stop an outflow of funds at its US subsidiary PIMCO.

Under Mr. Bäte, Allianz has tightened the reins on PIMCO and the division has enhanced its investment performance, with 88 percent of all assets managed by PIMCO for third parties last year exceeding their respective benchmarks. Mr. Bäte has admitted that there had been a “management mess” since the departure of PIMCO’s former star investor and founder Bill Gross, who was hailed as a bond guru on Wall Street. Mr. Gross abruptly left the company in September 2014 and investors withdrew billions. The fund manager has been reporting net inflows again since the third quarter of last year.

02 p33 Allianz A Dividend Machine-01

Other things are less under the insurance giant's control: The overall business environment remains challenging for Allianz. That is why Mr. Bäte has set a cautious earnings target of €10.8 billion for 2017, which would be unchanged from last year. A €3-billion share buyback program, however, should help to lift earnings per share and, combined with restructuring measures, contribute in reaching its target for average annual growth of 5 percent in the years 2016 through 2018.

The one area where shareholders may soon lose patience is on Mr. Bäte's promise to grow the firm internationally. Investors are still waiting for the big acquisition that Mr. Bäte has repeatedly hinted at. There’s been a long list of names of possible takeover targets. So far, the asking prices have been too high, said Mr. Bäte, who according to company sources would have liked to present a big deal by this week's annual meeting.

 

Time is working in Allianz’s favor and buying opportunities could arise sooner or later if competitors stumble. Ingo Speich, Union Investment

A flirt with Zurich Insurance came to nothing and Mr. Bäte also failed to reach a deal with Italian competitor, Generali. He hasn’t given up, though, despite the announced share buyback last year. Allianz could finance a major deal with ease even though it’s paying out its €3 billion warchest to shareholders.

Allianz remains mainly interested in non-life insurers because it is the life insurance sector that is under the most pressure from today's low-interest-rate environment. But Mr. Bäte has pledged to take a more patient approach and stop talking about acquisitions, after investors accused him of firing up takeover speculation.

“Time is working in Allianz’s favor and buying opportunities could arise sooner or later if competitors stumble,” said fund manager Ingo Speich of Union Investment.

Mr. Bäte will have to hope that shareholders are still on his side when that time comes.

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Even if investors have been patient, Mr. Bäte is about to get a new and powerful boss watching over his shoulder. In a few days’ time, Michael Diekmann will take over as the new chairman of the supervisory board, which has the power to hire and fire executives and set overall strategy in German companies.

Mr. Diekmann, a popular executive who retired as Allianz CEO in 2015 and is now joining the supervisory board after a two-year cooling-off period, was Mr. Bäte’s former mentor and insiders expect him to back the insurer's new strategy. Though there are some hoping he will rein in Mr. Bäte’s revolutionary zeal, sources at the company said Mr. Diekmann believes Mr. Bäte is on the right track. There can be no return to Allianz’s cozy old ways.

 

Christian Schnell is a correspondent with Handelsblatt, writing about the auto industry. He has reported out of Frankfurt for over a decade, covering finance. Carsten Herz leads Handelsblatt's asset management and insurance coverage and is based in Frankfurt. To contact the authors: [email protected] and [email protected]