S&P Affirms Allianz ‘AA’ Ratings after Dresdner Sale

September 2, 2008

Standard & Poor’s Ratings Services has affirmed its ‘AA’ long-term counterparty credit and insurer financial strength ratings on Germany’s Allianz SE (AZSE) and related core entities, along with the ‘A-1+’ short-term corporate credit rating. The outlook on the ratings remains stable.

“The affirmation follows AZSE’s announcement that it will sell its banking subsidiary Dresdner Bank AG (Dresdner Bank; A/Negative/A-1) in 2009 in a two-step transaction to Germany-based Commerzbank AG (Commerzbank; A/Negative/A-1) for a total consideration of €9.8 billion,” said S&P (See also related article). “The purchase price includes a protection of up to €975 million [$1.4 billion] that AZSE is providing to cover losses on certain asset-backed securities assets of Dresdner Bank. Following completion of the transaction, which is expected by the end of 2009, AZSE will hold a stake of close to 30 percent in the combined entity.”

Credit analyst Karin Clemens added: “The affirmation reflects our expectation that the transaction will have a slightly positive impact on risk-based capital adequacy, as measured by Standard & Poor’s based on pro forma figures. It also reflects that Allianz will benefit from exclusive distribution cooperation in insurance and a preferred partnership in asset management with the combined Commerzbank/Dresdner Bank group. A further positive factor is the likely improvement in long-term earnings quality.”

S&P did note that the deal “represents a significant discount to the carrying value (including goodwill) of Dresdner Bank in the group and AZSE’s standalone accounts, and will likely have a sizable negative one-time effect on earnings upon completion.” As noted above, Allianz is selling Dresdner for around $6 billion less than it paid for it in 2001.

However, S&P said it does not “consider the loss on sale a significant factor in our analysis of capital adequacy because we already deducted the goodwill and because the capital needed to support the group’s banking activities will decline. Group solvency under the financial conglomerate directive is expected to increase by about 14 percent, from currently 145 percent.

“Dresdner Bank has been a persistent drag on AZSE’s consolidated earnings and a drain on its management resources,” the reprt continued. “We therefore expect the disposal to improve AZSE’s long-term earnings quality. A certain risk of earnings volatility remains, however, given AZSE’s sizable stake in the combined entity, which will be consolidated on an at-equity basis. Compared with 2007, Commerzbank’s and Dresdner Bank’s 2008 earnings will suffer from material markdowns and impairment charges on critical securities holdings, and from restructuring charges and loss of revenues due to the planned downsizing in 2009.”

Clemens explained that the “stable outlook reflects our expectation that the transaction will complete successfully in line with the terms outlined and that capitalization will remain at least comfortably strong.” It also reflects S&P’s expectation that Allianz will “perform in line with previously articulated targets.”

Source: Standard & Poor’s – www.standardandpoors.com

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