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Allianz back in profit but fails to convince

A turnaround from 2002’s record EUR1.2bn loss to a healthy net profit of EUR1.6bn for 2003 failed to convince the markets as German insurer Allianz admitted it still had some way to go in the struggle to reverse the fortunes of its ailing banking arm Dresdner.

Allianz shares dropped 3 percent after Thursday’s announcement, despite strong underlying performance in the property casualty insurance business, with an 8.7 percent improvement to a 97 percent combined ratio, and turnaround stories at Allianz Global Risks (AGF) and Fireman’s Fund (FFIC) in the US.

Chairman of the board Michael Diekmann highlighted the group’s strengths, commenting: “We achieved an upswing in operating earnings of EUR4.5bn during the course of the fiscal year 2003 and placed the group back on a solid capital base. This proves that our ‘3 plus 1 Program’ is successful.”

“It indicates that Allianz is again becoming a force to be reckoned with. We are convinced that by 2005 at the latest, we will be back where we belong – in the premier league of companies with strong earning power,” he continued.

But Diekmann conceded: “We know that we still have some way to go in order to achieve projected profitability goals, particularly in banking business and in some insurance units.”

Restructuring expenses at Dresdner totalled EUR840mn, as the bank continued to struggle to break even after being hit by huge provisions for bad loans arising from worsening economic conditions in Germany and a rising tide of bankruptcies.

Along with a number of its compatriots, Allianz was hit by changes to the German business tax regime. Its life and health business incurred a EUR428mn charge, dragging down positive performance that saw total sales increase by 5.3 percent to EUR42.3bn in the division. But, also at home, Allianz’ life business significantly outstripped the market, recording growth in premium income from new policies of 25.9 percent.

The group’s property casualty division saw a 4 percent rise in premium income to EUR43.4bn, as Allianz operated a pricing policy “more commensurate with the risk involved”, but trimmed back unprofitable business.

Allianz looks likely to continue its policy of discarding unprofitable business, as Diekmann divulged: "We want to reduce complexity even further. That's why we will be divesting ourselves further of marginal activities and risks that lack corresponding opportunities for income."

The group’s CFO Paul Achleitner added that, over the longer term, the company would seek to reduce equity stakes in other companies to around 5 percent.

However, revealed Diekmann, with turnaround now “complete”, AGR and FFIC will stay in the group’s stable, as will French company AGF Assurances.

At AGR, combined ratio showed a remarkable improvement from 126.3 percent to 93.8 percent, while ongoing business at FFIC returned an impressive 88.3 percent combined ratio.

Ratings agency Standard & Poor’s left its financial strength rating unchanged at AA- with a negative outlook, commenting that although net earnings were “broadly in line with expectations”, Dresdner’s results continue to be a “major weakness”.

“Management at AZAG remains challenged to extract the full value of its bancassurance model and to return Dresdner Bank back to profitability. In addition, Standard & Poor's believes that AZAG's ability to deliver its ambitious turnaround program across the group, although well under way, still presents an execution risk, and is partly dependent on a further improvement of the economic environment,” said the agency.

AM Best also held its rating constant, but concluded that “life earnings are highly dependent upon a further recovery of equity markets, and the restructuring of Dresdner Bank remains a significant challenge for Allianz's management”.

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