Best Affirms Allianz, Subsidiaries Ratings

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) of Germany’s Allianz AG and its core subsidiaries, and has assigned an issuer credit rating of “aa-” to these companies, which reflect its opinion, “expressed on the credit market scale, of each of these companies’ overall ability to meet their senior obligations, which are insurance policies; hence both ratings (issuer credit and financial strength ratings) are at the same level.”

Best also noted that it has affirmed the “aa-” ratings on senior debt, assigned an “a+” rating to three new subordinated debt issues and an “aa-” to two new senior unsecured debt issues guaranteed by Allianz AG.

“The ratings reflect A.M. Best’s view that Allianz’s efforts to strengthen earnings as part of its ‘3 plus one’ programme are likely to lead to a further improvement in operating performance in all business segments as well as enhanced risk-adjusted capitalisation,” said the announcement. “The ratings also factors Allianz’s superior business position, particularly in Germany and other European countries. The outlook remains negative and is likely to remain so until Allianz proves a track record of sustained profitability.”

Best pointed out that the German giant’s earnings have improved significantly in the first six months of 2004, “compared to the previous period.” P/C, life/health and even the banking segment (mainly Dresdner Bank) recording post-tax profits totaling 1.3 billion euros ($1.6 billion).

“The increase in profitability reflects a decline in the combined ratio to 94.3 percent in the first six months of 2004, partially from the absence of large catastrophe losses and Allianz’s success in turning around problem cases, such as AGF and Fireman’s Fund,” said Best. “Life/health earnings benefited from higher investment returns and lower expense levels. Dresdner Bank’s expense-cutting exercise and lower loan loss provisions resulted in a profit of EUR 231 million (USD 283 million), compared to a loss in the previous period. However, the asset management division’s earnings are likely to remain negatively impacted by high acquisition related expenses. On a consolidated level, these positive developments in the first six months led A.M. Best to forecast a post-tax profit in the range of EUR 2 – 2.5 billion (USD 2.5 – 3.1 billion) for the full year 2004. Allianz will remain challenged by Dresdner Bank’s exposure to the macroeconomic situation in Germany and the structural problems of the German banking sector. Allianz’s exposure to the recent hurricanes is unlikely to significantly impair year-end earnings.”

Best said it “expects Allianz’s strong risk-adjusted capitalisation to be supportive of its current rating for which it is expected to retain earnings. In addition, Allianz carries approximately EUR 17 billion (USD 20.8 billion) revaluation reserves on and off its balance sheet, which are expected to stabilise in 2004, as long as interest rates remain stable. The successful issuance of the EUR 1.5 billion (USD 1.8 billion) subordinated bond in February 2004 supports Allianz’s capital base and proves investors’ trust in the company.”

The rating agency also indicated: “Allianz is likely to benefit from a higher demand for life products in 2004, particularly in Germany, where recent changes in the taxation of life policies are likely to see an increase in sales of tax-beneficial products in the second half of 2004.” In the P/C sector Best said it “expects a stabilisation of Allianz’s strong business position in its main markets. Overall life premiums are expected to grow by approximately 5 percent, whereas property/casualty premiums are likely to remain flat as Allianz restricts its underwriting in segments where rates have started to soften, such as global risks and aviation.”

Concerning its ratings on Allianz’ subsidiary companies, Best gave details of its rating analysis in separate bulletins.

The rating agency affirmed the financial strength rating of A+ (Superior) of Italian insurer Lloyd Adriatico S.p.A. (Italy) with a negative outlook, which it said was “in line with the outlook for Lloyd Adriatico’s parent company, Allianz AG.” Best noted that the company is seen as “a core subsidiary of its ultimate parent. Lloyd Adriatico underwrites more than 25 percent of its parent’s total gross premium income in Italy and is the eighth-largest Italian composite insurer with a distinctive position in the motor and unit-linked life business.”

Best added: “The rating reflects Lloyd Adriatico’s superior underwriting performance. A.M. Best believes that a combined ratio below 90 percent is likely to be achieved in 2004, supported by the company’s effective risk selection for motor business, where the company has its greatest exposure. This is likely to offset expected downward pressure on tariff rates in the Italian motor market as a result of the general decline in loss frequency experienced in the sector since the introduction of the point system driving license. Lloyd Adriatico’s consolidated risk-adjusted capitalisation is expected to remain at an excellent level, incorporating the impact of substantial dividends to the parent company.”

Best also affirmed the financial strength rating of “A+” (Superior) of Riunione Adriatica di Sicurtà S.p.A. (RAS) (Italy), also with a negative outlook. The company is also a core subsidiary in Italy, underwriting 75 percent of Allianz’s total gross premium income in Italy. It also acts as holding company for several continental European subsidiaries.

Best said it “believes a combined ratio below 100 percent in 2004 is likely (compared with 101.3 percent in 2003) as a result of enhanced risk selection for those foreign operations that have yet to match RAS’s domestic performance (combined ratio of 99.4 percent in 2003). Although the property and casualty operations accounted for over 40 percent of gross premium income in 2003, the life and asset gathering activities are expected to be the driving force behind the company’s future growth with an average increase in revenues anticipated to be more than 10 percent in 2004.

“RAS has optimised its risk-adjusted capital profile through the reduction of its equity investments notwithstanding a major reduction (EUR 800 million [USD 980 million]) of nominal capital through a share buyback and subsequent annulment in 2003. A.M. Best believes the company is likely to further enhance its risk-adjusted capital by selling less capital-intensive products in the life sector.”

Lastly, Best announced that it has “placed the financial strength rating of “A+” (Superior) of Allianz Marine & Aviation (France) under review with negative implications. This action reflects that A.M. Best no longer deems Allianz Marine & Aviation (France) as core to its parent, Allianz AG, and it is currently assessing its stand-alone financial strength and issuer credit ratings, as well as discussing any likely explicit parental support.”

For a complete list of Allianz AG’s financial strength and debt ratings, please visit A.M. Best Co. http://www.ambest.com/press/091404allianz.pdf.