Best Affirms Allianz ‘A+’ Ratings

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) of Germany’s Allianz Aktiengesellschaft and its core subsidiaries. It has also affirmed the “aa-” ratings on Allianz’ senior debt issued by Allianz Finance B.V. and guaranteed by Allianz.

“These ratings reflect the expected improvement in Allianz’ consolidated risk-adjusted capitalisation and gradual improvement in earnings,” said Best. “The ratings also recognise Allianz’ superior business position as one of the leading insurers world-wide. The negative outlook reflects A.M. Best’s concerns on the challenges Allianz is still facing with Dresdner Bank. In addition, further improvements of margins in life business are highly dependent upon the continuous recovery in equity markets.”

In discussing Allianz risk-adjusted capitalization, Best noted that the company has “partially restored its capital base through a rights issue,” raising 4.4 billion euros ($5.61 billion) in March 2003. It also cited the “current recovery of the equity markets–expected to continue throughout 2004—” as partially offsetting Allianz’ unrealized capital losses of the past two years. Best said it “expects Allianz to maintain a risk-adjusted capital level commensurate with the current financial strength rating through retained earnings.”

It also indicated that the company’s “financial flexibility remains excellent.” Its debt issues have usually been successfully placed, “reflecting investors’ confidence.” Best said it doesn’t foresee Allianz raising further subordinated debt in excess of 1.5 billion euros ($1.91 billion) earmarked in March 2003. “The current relatively low interest coverage is expected to improve as the strengthening of earnings materialises.”

Best also singled out the gradual improvement in Allianz’ earnings, which have returned it to profitability (It posted net income of 421 million euros (($537 million)) in the first nine months of 2003), as “reflecting the implementation of stricter property/casualty underwriting targets and the absence of major catastrophes. The combined ratio improved substantially to 96.9 percent from 106.7 percent during the same period in 2002.”

The rating agency also indicated that it expects “a further increase in the overall profit.” It noted that the 2.9 billion euros ($3.7 billion) realized gain from the sale of most of its stake in Beiersdorf, a cosmetic manufacturer, “is expected to be partially offset by building up provisions for the ‘New Dresdner Program’ and by very prudent valuations in the balance sheet.”

Best said that “operational profitability will be mainly driven by positive results from the property/casualty segment. Life earnings remain marginal due to low investment returns but continue to improve, reflecting the recovery in the equity markets and reduction in terminal bonuses. Allianz’ banking operations remain unprofitable, albeit on a smaller scale, as the restructuring efforts at Dresdner Bank are expected to gradually positively impact earnings and significantly decrease the expenses for loan loss provisions. In addition, the sale of the company’s stake in some strategic investments will yield substantial non-recurring capital gains over the next two years.”

Commenting on Allianz’ superior business position, Best noted that it remains “one of the leading insurers world-wide. The company experienced strong new business growth in the life sector in the first nine months of 2003, particularly in Germany, Italy and the United States. A.M. Best expects Allianz to maintain the organic growth of its non-life business to a minimum (2 percent) as rates begin to soften. In the life sector, A.M. Best believes the strong growth experienced in 2003 is unlikely to be repeated in 2004 and forecasts a premium increase of approximately 5 percent, reflecting the relatively high market share in gradually maturing markets.”