Allianz Posts $1.28 Billion 2002 Loss; Cites Write-downs, Dresdner, Flood Losses

March 20, 2003

Germany’s Allianz AG joined the parade of big insurance companies that had a very bad year in 2002. For the first time since the end of the Second World War Europe’s largest insurer posted an annual loss, and not a small one – 1.214 billion Euros ($1.287 billion) pre-tax, 1.167 billion Euros (1.24 billion) net.

“Weak capital markets, natural catastrophes, the increase in reserves for asbestos claims in the USA and earnings problems at Dresdner Bank have led the Allianz Group to close the fiscal year 2002 with a loss,” said the company’s announcement. “Significant improvements in operating insurance business – a strong rise in premium income and a consistent reduction in the combined ratio – were unable to compensate for the loss,” it continued.

The main sources of the losses were the poor performance of Dresdner Bank, which posted a 935 million Euro ($991 million) loss for the year; write-downs in the value of investments that totaled a whopping 5.5 billion Euros ($5.83 billion); catastrophe losses – this summer’s floods cost the company around $700 million, and the need to increase reserves at Fireman’s Fund by $750 million, mainly to cover asbestos related liabilities.

Allianz bought 100 percent control of the bank, just as the weakness in the German economy accelerated, and it has been hemorrhaging money ever since. In December Henning Schulte-Noelle, longtime Allianz CEO and one of the most powerful figures in the German business community, announced that he would retire at the end of April. His replacement Michael Diekmann, 48, currently heads Allianz U.S. operations, including the PIMCO asset management fund and Fireman’s, but is not well known. He’s indicated that there are “no taboos” in restructuring the giant insurer, which may well mean that a good portion of Dresdner, including Kleinwort, its investment banking operations, may be for sale.

“The fiscal year 2002 was a bad year for us,” said Schulte-Noelle in written comments on the company’s results, “but by no means a wasted year: in recent months we have succeeded in making some decisive moves for increasing the value of the company.” The bulletin noted that “the chain of negative influences is offset by improvements, particularly in the operating insurance business. Total premium income for insurance business rose by 9.9 percent to 82.6 billion Euros [$87.5 billion].”

P/C premium income rose by 2.7 percent from 42.1 to 43.3 billion Euros ($44.63 to $45.9 billion). “This development was primarily due to rate increases. At the same time the Allianz Group withdrew from unprofitable customer segments and partly refrained from renewing contracts, particularly in the area of international industrial insurance business and in business contacts in the USA,” said the announcement.

“The combined ratio in property and casualty insurance business was reduced to 101.7 percent – adjusted by the special factors of the flooding catastrophe and provision for asbestos claims. Administrative expenses of Dresdner Bank were reduced by 12.3 percent,” it continued. Diekmann stated “We will continue what we started in 2002 and we will bring our strategy to a consistent conclusion. We have the right strategy and we intend to focus fully on implementing our corporate decisions.”

Allianz has already taken some steps it hopes will improve earnings. It announced plans to raise five billion Euros ($5.31 billion) in new capital, 3.5 to 4 billion Euros ($3.7 to 4.24 billion) in a new rights issue and around 1.5 billion Euros ($1.6 billion) in debt.

On Wednesday it announced that Deutsche Bank’s Herbert Walter had been named to head Dresdner Bank, replacing Bernd Fahrholz. It also named Jan Carendi, formerly with Skandia, as the new head of U.D. operations, replacing Diekmann. In a joint announcement the same day Allianz and Munich Re AG said they would reduce their reciprocal shareholdings to around 15 percent.

“As far as the current 2003 fiscal year is concerned, Allianz is anticipating significant improvements in earnings from operating business. A further reduction in the combined ratio for insurance business and in the cost income ratio in asset management are planned, as is ongoing implementation of the ‘Turnaround 2003’ Program at Dresdner Bank,” said the earnings announcement. “However, if the uncertainties in the financial markets continue and the economy fails to recover significantly, write-downs on investment and loan loss provisions will continue to exert a strong negative influence.”

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