Allianz: The Giant Stumbles

Can the reeling insurer regain its financial footing?

Not so long ago, Allianz (AZ ) was one of the world's mightiest financial companies--a heavily capitalized insurance colossus with a rock-solid credit rating and a balance sheet to match. Not anymore. In recent months, the Munich underwriter has been shaken by plummeting equity markets, the sorry performance of its Dresdner Bank subsidiary, and a litany of other woes that have crushed profitability and unnerved investors and rating agencies.

It's hard to believe this is the same insurer that, in 2000, seemed set to transform Europe's financial landscape. Chief Executive Henning Schulte-Noelle--assisted by his chief financial officer, Paul Achleitner, recently arrived from Goldman Sachs & Co.--was ready to expand Allianz' business in money management, pensions, and other lines. It could fuel its drive by selling slices of the stock it owned in some of Germany's top companies. Rivals worried about the havoc Allianz could wreak.

Instead, Allianz is on the defensive, in search of tactics that will see it through the bear market while patching up Dresdner and resolving the fate of its failing investment-banking operation. On Sept. 25, Leonhard Fischer, chief executive of investment-banking unit Dresdner Kleinwort Wasserstein, resigned, citing "differences in opinion" about how to run the business. As BusinessWeek was going to press, Allianz was preparing to announce more details of its cost-cutting plans for Dresdner Bank, probably including layoffs at its bloated corporate center in Frankfurt. "We've done a lot, but it ain't been enough," says Achleitner. "We need to cut more."

For Allianz, the bad news just keeps coming. S&P has put the firm's coveted AA+ credit rating on watch with negative implications. The company's stock has plunged from almost $430 a share in 2000 to less than $100. Its market cap is now about $24 billion--little more than the $22.5 billion Allianz paid for Dresdner last year. The company had expected to earn $3 billion this year, but after it lost $350 million in the second quarter, analysts now forecast only a $1.5 billion profit. "The markets are wondering just how bad things can get," says Carsten Zielke, an analyst who follows the company at WestLB Panmure.

Of course, most European insurers have been through the mill. Falling equity markets have hit earnings hard, this summer's floods cost them more than expected, and many were heavily exposed to the bonds of WorldCom Inc. and other U.S. and European companies that have gone bust.

Allianz has been hurt by those ills, and then some. On Sept. 13, the company had to pump $750 million into Fireman's Fund, a U.S. insurance subsidiary, to cover a surge in asbestos and other environmental claims. Earlier this year, Allianz' private-equity operation got burned when several investments--including planemaker Fairchild Dornier Corp.--failed. Stock turmoil and a weak dollar halted the growth in asset management. Funds managed for others fell $42 billion, to $564 billion, in the first half.

The worst blot on the books, however, is Dresdner Bank, which lost $1.0 billion in the first half. Dresdner's corporate division is in trouble on two fronts. It has billions in bad debts, stemming from heavy loans to such companies as Kirch Media in Germany, WorldCom in the U.S., and a range of Latin American borrowers. The bank has almost doubled its bad-loan provisions in the past year, to more than $1 billion. And Dresdner Kleinwort Wasserstein, its London investment bank, is bleeding money as trading revenues tank and fees from mergers and acquisitions and underwriting slump. Many say Allianz should never have bought Dresdner--and that it should sell or close DKW.

Allianz' strategy of building a financial powerhouse may be fraying, but Schulte-Noelle and Achleitner remain committed to it. Achleitner insists it was "strategically right to buy Dresdner" because Europe is shifting to private retirement plans. "That means we need the distribution power of a bank, because Germans like to buy these products through banks." He also says Allianz can now distribute its insurance policies through Dresdner. It is selling four times more insurance contracts through Dresdner than it did a year ago through distribution agreements.

At the same time, Dresdner is putting things in order, Achleitner says. It has closed 300 offices, announced plans to let 3,000 staffers go, and streamlined its structure. It has slimmed from six divisions last year to two. All told, costs have been cut 14%. At DKW, Fischer also had been paring costs. Contracts with guaranteed bonuses for bankers have been replaced by deals linked to profits. A fifth of the 5,000 staff will lose their jobs. But Achleitner insists it is logical for Allianz to own an investment bank because it can use its capital-markets expertise throughout the group.

If Allianz can sort out Dresdner, it could reemerge as a financial titan. Despite its ills, the life and property-and-casualty insurance arms are doing well. Worldwide premiums were up 12.1%, to $41 billion, in the first half. The floods and last year's terrorist attacks are encouraging more sales of property and casualty insurance. Meanwhile, most analysts agree that the downturn in funds under management is a temporary setback caused by falling equity prices. Allianz still owns the world's biggest mutual fund--the Total Return Fund of its U.S. fixed-income fund manager PIMCO. Its German offshoot, the DIT Euro Bond Total Return Fund, attracted $900 million in new money in the four months after it was launched in April. If Allianz can keep cutting costs and streamlining, says Trevor May, who follows Allianz for Schroder Salomon Smith Barney in London, "Allianz' earnings-recovery potential is huge by 2004."

But investors are skeptical. They hammered Allianz the day it announced the Fireman's Fund bailout, though they had been warned months earlier and the sum was less than the $1 billion many predicted. Allianz could soothe nerves by selling industrial stocks, worth about $29 billion, more than the group's market cap. But Achleitner rules that out. "We could have sold holdings, booked the capital gains, and achieved our original 3 billion euro [$2.93 billion] profits target for this year," he says. "But it doesn't serve the shareholders in the long term to sell those equities when prices are so low." Trouble is, shareholders need help in the short term, too.

By David Fairlamb in Munich

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