S&P, Moody’s Lower Allianz Ratings

October 10, 2002

Both Standard & Poor’s and Moody’s Investors Service announced Wednesday that they have downgraded their ratings on Germany’s Allianz AG, Europe’s largest insurer. S&P also announced that the ratings had been removed from CreditWatch, “where they were placed on Aug. 1, 2002, following Allianz’s profit warning,” but said it had a “negative outlook.”

S&P lowered its long-term insurer financial strength and counterparty credit ratings on Munich-based Allianz and various related entities by one notch, mainly to double-‘A’ from double-‘A’-plus, citing the group’s “weakened risk profile, disappointing earnings performance, and weakened (although very strong) capitalization.”

Moody’s lowered its ratings on Allianz senior debt by two grades from ‘Aaa’ to ‘Aa2’ and on subordinated debt from ‘Aa2’ to ‘A1.’

Allianz has essentially been adversely affected by its problems with Dresdner Bank. It announced that it would take over control of Germany’s third largest bank last March, and had largely completed the formal process by the end of May. Losses, however, have continued to pile up at Dresdner, even as Allianz has made the cost cutting moves that it expects will eventually return the bank to profitability.

While Dresdner has profited from having Allianz as a parent, Allianz has seen its capital depleted by having to shore up Dresdner. This is the principal reason for the downgrade, as Allianz remains a very well capitalized company, even though as S&P credit analyst Wolfgang Rief stated, “it is no longer the extraordinary strength that it has traditionally been.”

Rief noted that “Allianz’s operating performance, although historically very strong, has deteriorated recently, reflecting the very unsatisfactory performance of Dresdner Bank AG, Allianz’s global industrial insurance business, and some key foreign insurance subsidiaries in the property casualty business.”

The report also found some deterioration in the group’s business outside Germany. It indicated that “Although the Allianz group’s German insurance operations are extremely successful, ” a large proportion of revenue is sourced abroad, where the U.S.-based Fireman’s Fund Insurance group (main entities are rated A+/Watch Neg/–) and the French AGF group (main entities are rated AA/Negative/–) underperformed in their property/casualty business. Global industrial insurance is a difficult market, and Allianz’s prominent market position has not protected the group from poor underwriting results.”

Allianz p/c operations are expected to improve. S&P in fact expects a significant rise in operating profit in 2003, and a rebuilding of the group’s capital. It indicated that Allianz should “generally benefit from improved rates and conditions and a more stringent underwriting approach resulting in combined ratios of about 102% in 2002 — excluding the effect of extra reserve strengthening required at Fireman’s Fund group and for the floods — and in 2003.”

In conclusion Rief explained the negative outlook as reflecting S&P’s “concerns about the challenges that Allianz faces in restructuring and improving earnings for subsidiary Dresdner Bank AG, and in restoring profitability in the property casualty business for some of its major foreign subsidiaries in the U.S., France, and its global industrial business.”

He added, however that “The outlook also reflects Standard & Poor’s belief that earnings for the group will rebound significantly in 2003 after a disappointing 2002.”

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