Best Lowers Allianz Ratings, Company Denies Report on Asset Sales

March 24, 2003

A.M. Best Co. announced that it has lowered the financial strength rating to A+ (Superior) from A++ (Superior) of Germany’s Allianz AG and its core subsidiaries. It also lowered the ratings on Allianz’s senior debt to “aa-” from “aa+,” and said that the “outlook on all ratings is negative.”

The rating actions follow Allianz earnings announcement that it had a net pre-tax loss in 2002 of nearly $1.3 billion (See IJ Website March 20). Best said the action reflects “Allianz’s deteriorated consolidated capitalisation and weak earnings.” It added, however, that it “believes that Allianz continues to have a superior business profile, but it remains challenged to significantly improve earnings in 2003 mainly due to continued depressed capital markets.”

In an unrelated development the company issued a denial concerning rumors that it was considering selling off as much as 10 billion Euros ($10.6 billion) in under performing insurance units to raise additional capital.

Best’s report noted that “Allianz’s consolidated risk-adjusted capitalisation has deteriorated mainly due to a significant decline in unrealised gains in its investment portfolio and disappointing results from Dresdner Bank. The announced capital measures (rights issue and the issue of subordinated debt) and other initiatives (reduction of risk-weighted assets and reduction of its equity portfolio) are supportive of the current rating level. However, A.M. Best believes that in the short term, Allianz is unlikely to return to previous superior capital levels in the current economic environment.”

It also indicated that, although there had been improvements in Allianz’ “non-life underwriting performance” the “weak earnings,” due mainly to the “depressed investment income from the life segment and negative results from Dresdner Bank,” would still weigh on the company’s performance this year. Best said it “expects a further improvement in Allianz’s non-life underwriting performance in 2003. However, Allianz’s more conservative investment approach and the impact of the difficult capital market environment for the banking business are likely to limit its ability to return to previous earnings levels in the short term.”

The company is still in a strong position said Best, despite its current problems. It “maintains a superior business position in Europe, where it is one of the market leaders in a number of countries, such as Germany, France and Italy,” said the bulletin. “Life/health premiums grew by an excellent 18% in 2002, with particularly strong new business in Germany (where it benefited from the private pension reform), the United States and Italy. Non-life premiums increased by a modest 3% due to stricter underwriting in all lines of business. Dresdner Bank’s concentration of its loan book in Germany partially offsets Allianz’s excellent diversification.”

The rumors on the possible sale of assets were reported by the German financial daily Boersen-Zeitung, and were attributed to remarks made by incoming CEO Michael Diekmann at an analyst’s conference called to discuss the company’s earning performance. According to a report from Reuters Diekmann is planning to review the under performing units, but has no plans to sell any of them off.

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