June 22 (Bloomberg) -- Allianz AG plans to cut about 7,480 jobs, or 4.2 percent of the workforce, as Chief Executive Officer Michael Diekmann overhauls Europe's largest insurer.

Allianz, less profitable than European rivals, will shed 5,000 workers at its German insurance unit and about 2,480 jobs at Dresdner Bank, said management board member Gerhard Rupprecht on a conference call with reporters today.

Diekmann has already cut about 17,000 jobs at Dresdner and gotten rid of more than 35 billion euros ($44 billion) of bad loans to revive profit at the nation's fourth-largest bank. Now he's reshaping the insurance operations in Germany to reduce costs and stem a loss of market share.

``Allianz have had more fat on their bones than competitors,'' said Reiner Kloecker, who helps oversee about $164 billion, including Allianz shares, at Frankfurt-based Union Investment GmbH. ``There was a lot of room for this, and it will bring them closer to their European rivals in terms of efficiency.''

Allianz's return on equity, a measure of profitability, was 12.6 percent in 2005, lagging behind Paris-based Axa SA's 13.4 percent and Trieste-based Assicurazioni Generali SpA's 16.5 percent, data compiled by Bloomberg show.

Shares of Allianz climbed 1.80 euros, or 1.5 percent, to 121.42 euros in Frankfurt, valuing the company at 49.2 billion euros. The stock is down 5.1 percent this year, compared with a 4.3 percent decline in the 30-member Bloomberg Europe 500 Insurance Index.

`Warning' Strikes

Diekmann is merging Allianz's German life, health and property and casualty insurers under one holding company and cutting the number of administrative offices to 10 from 21. Allianz plans to book most of the estimated 500 million euros of costs related to the insurance reductions in 2006. Savings of as much as 600 million euros are expected by 2008.

Allianz said the reorganization won't lead to any firings at its German insurance unit until the end of next year. Job losses could result as Allianz shuts offices and employees decide to leave rather than move to another city, said Frank Lehmhagen, an official at Ver.di, Germany's biggest labor union, and a member of the supervisory boards at Allianz's German insurance units.

Unions criticized Allianz for slashing jobs after net income almost doubled to a record 4.4 billion euros last year. Ver.di said in a statement today it's preparing warning strikes to protest the reductions and will seek more job guarantees.

`Essential Decisions'

``What we are initiating now will lay the foundation for our companies' future profitable growth in Germany,'' Diekmann, 51, said in a statement today. ``Anyone who puts off essential decisions until some distant point in time will find themselves coming under far greater pressure.''

The savings will allow Allianz to hold onto clients by lowering prices ``after it continuously lost market share in Germany'' in recent years, said Rupprecht, the Allianz management board member responsible for German insurance.

Intensifying competition is leading other European insurers to cut jobs as well. Old Mutual Plc, the U.K.'s No. 3 insurer, plans to shed as many as 800 jobs at its newly acquired Skandia unit, while London-based Royal & Sun Alliance Insurance Group Plc will eliminate 1,550 jobs over the next two years.

Axa, which announced plans last week to buy Credit Suisse Group's Winterthur unit for 7.9 billion euros, said it foresees ``significant efficiency opportunities'' in Germany, where it already owns insurer Axa Konzern AG.

Shutting Offices

Allianz plans to cut 3,300 jobs at the property and casualty unit in Germany, 1,000 at the life unit and 700 at the health insurance unit. Allianz earlier this year announced the reduction of 700 jobs at its sales organization in Germany.

The benefits from the changes should be fully in place by 2009, Rupprecht said on the conference call.

Allianz said in February that it expects the reorganization of the German insurance units will boost operating profit by 200 million euros in 2007, 400 million euros in 2008 and 600 million euros in 2009.

The insurer will close its regional headquarters in Cologne and the property and casualty unit's offices in Mainz, Aachen, Hanover, Augsburg, Freiburg, Mannheim, Nuremburg, Magdeburg and Ulm. It will also close the life unit's office in Frankfurt and the health unit's office in Dortmund.

``This is an important step for Allianz as competition is increasing in the German insurance industry,'' said Karsten Keil, an analyst at Helaba Trust in Frankfurt, who recommends buying Allianz shares. ``Finally they stabilized Dresdner enough to take on the reorganization of their insurance units.''

Dresdner Profit

At Dresdner, the reductions are expected to help the lender meet a target for return on equity of 12 percent by 2008, Allianz said. The job cuts amount to almost 9 percent of the bank's workforce, which stood at 28,397 at the end of March.

Dresdner expects the reductions to cost 400 million euros and to yield savings of 250 million euros by 2008 and boost revenue by 350 million euros.

Allianz, which has already slashed more than a third of Dresdner's workforce since buying the Frankfurt-based lender in 2001, has struggled to squeeze cost savings from the purchase and boost revenue. Dresdner spent more than 89 cents of every dollar earned last year, 22 cents more than Commerzbank AG.

Dresdner CEO Herbert Walter, 52, last year announced plans to combine the investment-banking and corporate-banking units and in November hired Stefan Jentzsch, a former Goldman Sachs Group Inc. banker, from HVB Group to run the combined unit.

Dresdner expects to cut about 300 jobs in its investment banking division and is reducing proprietary trading, or trading for the bank's own account, Jentzsch told journalists on a conference call today. The bank is still examining what reductions to make in New York and London.

Allianz in March forecast the bank's profit would decline 25 percent to 750 million euros in 2006 on higher loan provisions.

Allianz's staff in Germany fell by 3,472 to 72,195 at the end of last year, according to the insurer's latest annual report. Allianz currently has about 36,000 jobs at its German insurance units and employs about 178,000 people worldwide.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

Last Updated: June 22, 2006 12:02 EDT