Allianz is widely regarded as one of the highest quality and most stable names in the European Financials sector. It has a broad spread of market-leading businesses in insurance and asset management and a well capitalised balance sheet.
The two largest divisions, property and casualty (P&C) insurance and life & health insurance, contributed 75% of group profits in 2020, with asset management, operating under both the PIMCO and Allianz brands, the remainder. Allianz is global market leader in P&C insurance and has top five global positions in the other two divisions.
Allianz scores very highly on ESG and Sustainability metrics, holding the highest AAA rating in ESG from MSCI. In common with other European financials Allianz trades on a very undemanding rating, despite delivering stability in profits and in particular, dividends, even through the pandemic. Year-to-date the shares are flat, significantly underperforming the broader market and insurance peers. This is largely due to US
litigation and a Department of Justice investigation into the significant losses incurred by a small number of its Structured Alpha hedge fund products in early 2020, as a result of sudden market declines at the onset of the pandemic. Analysts have forecast the fines could cost Allianz up to €7.6bn, however this one-off charge would compare to forecast operating profit for FY21 of around €13bn and should not impair Allianz’s ability to pay dividends or undertake share buybacks. Allianz hopes to be in a position to provide greater clarity on the scale of any provisions by year-end and this would likely be welcomed by investors.
In November Allianz reported Q3 results, with operating profit 11% ahead of the year-ago period and 5% ahead of analyst expectations, accompanied by guidance that full-year profit would be at the top end of the predicted range of €11-13bn. Within the three main divisions the beat was driven primarily by Asset Management, benefitting from strong fund flows to the bond-orientated PIMCO in particular, driving a 30% increase in profit versus Q3 2020. The larger Life division also performed well with profits ahead 12% year-on-year, again ahead of expectations, whilst P&C recorded a 2% decline on the 12m ago period, in-line with expectations, reflecting the impact of natural catastrophes, although much of the cost of these are underwritten by reinsurers. Allianz was unable to provide any definitive update on the DOJ investigation into the failure of its Structured Alpha funds in 2020 and this somewhat overshadowed these strong results, which reported record profitability at both the Asset Management and Life divisions. In early December, Allianz held their first Capital Markets Day since 2018, raising their previous guidance for earnings per share over the 2022 – 2024 period from 5% to 5-7% and committing to a dividend that grows at least 5% year-on-year. The group also expects to generate 12bn euro in excess capital from internal operational efficiency improvements. Solvency II target ratio of 180% is targeted by 2024 and a 13% return on equity, both of which look comfortably achievable. The CMD press release was accompanied by the announcement of a deal whereby Allianz enters a reinsurance agreement for its $35bn fixed annuity portfolio in the US, which will free up some 3.6bn euros of capital for Allianz.
Allianz is in a financial position to return significant capital to shareholders via both an ongoing share buyback programme and a progressive dividend policy. In 2020, despite the impact of the pandemic causing a 10% drop in operating profits, Allianz was able to maintain its dividend, which had increased over 25% since 2016. At its Q3 results, Allianz reported a solvency II ratio, a core measure of balance sheet strength, of 207%, comfortably above its target level of 180%, which should allow it to return to dividend growth from the current financial year. On August 5, 2021 Allianz announced a new share buy-back program of up to €750 million, representing just under 1% of its market capitalization.
Allianz offers a world-leading franchise in its three core divisions at a very reasonable valuation, with particular attraction for income orientated investors, given a prospective dividend yield of close to 5%. In terms of PE multiple, Allianz trades on around 10X for 2022. This compares to the broader European equity market forward multiple of 16X and yield of 3%. The shares traditionally trade at a premium to many of their European insurance peers given the strength of their balance sheet and market leadership, however year-to-date this premium has been eroded due to underperformance resulting from uncertainty over the Structured Alpha situation. Allianz however has the balance sheet strength to resolve this situation in a reasonably timely manner, without overly impacting the group’s medium-term profitability or ability to return capital to shareholders. Underperformance during 2021 represents an attractive buying opportunity in one of Europe’s global leaders.
James Buckley is a Senior Equity Research Analyst with Cantor Fitzgerald Ireland.
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