Can Diekmann Plug the Leaks in Allianz?

The incoming CEO's first task is to hammer Dresdner Bank into shape

It came as a bolt from the blue. On Dec. 18, Henning Schulte-Noelle unexpectedly announced he would step down as chief executive of Europe's biggest insurance company, Munich-based Allianz (AZ ), next April, after 11 years in the top job. Then came another surprise: The 60-year-old Schulte-Noelle, long considered a kingmaker in the German business Establishment because of Allianz' vast array of industrial holdings, will be replaced by a relative unknown, Michael Diekmann, 48, who now oversees the group's businesses in the U.S. With the company bleeding red ink, however, investors want to see more than a new face. "A change at the top doesn't mean problems have been solved," says Yann Goffinet, a fund manager at Vontobel Asset Management Inc. in Zurich. "The company's problems remain."

Diekmann's first and most important task: to sort out the mess at Dresdner Bank, which Schulte-Noelle bought amid much fanfare for $22.5 billion in 2001. Acquiring Dresdner was meant to transform Allianz into a bancassurance powerhouse that would produce big revenues by selling insurance and banking products to the same customers. Instead, the bank turned into a money-losing nightmare. Dresdner, the third-largest bank in Germany, contributed almost $1 billion to Allianz' record third-quarter loss of $2.55 billion. Its bad-loan provisions topped $1.8 billion.

Since acquiring Dresdner, Allianz' share price has fallen from more than $400 to less than $110. The group's market capitalization is now less than $26 billion--not much more than it paid for Dresdner. Although Schulte-Noelle insists that the acquisition will eventually pay off, shareholders aren't so sure. The German economy is slowing, and corporate bankruptcies are mounting. The big worry now is that Dresdner will be forced to make even bigger loan-loss provisions for 2003. "The markets have been wondering just how bad things can get," says Carsten Zielke, who follows the company for WestLB Panmure.

Shareholders hope that Diekmann, a law and philosophy graduate who has worked at Allianz since 1988, will be able to knock Dresdner into shape. Described by Schulte-Noelle as "well-tried and tested," he is considered one of the most conservative members of the managing board, with a track record of resolving difficult problems. It was Diekmann, for example, who oversaw the well-received Sept. 13 move to pump $730 million into Fireman's Fund, one of Allianz' U.S. insurance subsidiaries, to cover a surge in asbestos and other environmental claims. He also oversaw PIMCO funds, Allianz' successful U.S. mutual-fund subsidiary.

But Diekmann's biggest credential is that he wasn't directly involved in the decision to acquire Dresdner. "That's why he was chosen to succeed [Schulte-Noelle] ahead of [Chief Financial Officer Paul] Achleitner," says an insider in Munich. "Dresdner was Paul's deal. And he has not gotten the top job, which we all assumed he'd get, as a result."

Even before Schulte-Noelle's announcement, Allianz had started putting Dresdner in order, slashing costs 14% by closing 300 branches, announcing 8,000 layoffs, and streamlining its structure. The bank's investment-banking subsidiary, Dresdner Kleinwort Wasserstein, has also been made over; some 1,000 of its 5,000 staff will lose their jobs. Several senior executives who opposed Allianz' cost-cutting initiatives--notably the former head of investment banking, Leonhard Fischer--have been ousted. In November, Schulte-Noelle told analysts that he expected the Allianz group to be profitable again next year. Few, however, are convinced.

The question now is what else Diekmann will do to restore the group's fortunes. It could be several weeks before he unveils a strategy. But the betting in Munich is that he will move quickly to sell DKW, arguing that there are few synergies to exploit between investment banking and the rest of the group. Then he will seek to fuse the rest of Dresdner more tightly onto the Allianz group. "We will do everything to integrate Dresdner Bank as quickly and effectively as possible," he says.

Despite its ills, Allianz' life and property-and-casualty insurance arms are doing well. So if Diekmann does manage to set Dresdner right, Allianz could soon reemerge as a healthy financial titan. That will be the best surprise of all for investors.

By David Fairlamb in Frankfurt

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