Digging Out At Allianz

The German financial-services giant is back in the black -- but still struggling

When Michael Diekmann took over as chief executive of Allianz (AZ ) last April, the sprawling Munich financial-services empire was mired in its deepest crisis since World War II. The company's mainstay insurance business had been hammered by payouts for claims related to terrorist attacks and natural disasters, its assets were withered by a plunge in equity markets, and its Dresdner Bank subsidiary was swimming in red ink. Critics questioned Allianz' financial stability after it posted a huge $1.45 billion loss for 2002. There were skeletons everywhere. "Whenever they pulled open a drawer, they'd find another problem," says Sven Janssen, who follows Allianz for Metzler, the private bank in Frankfurt.

A year later, Allianz still faces huge challenges. But analysts say it's on track to emerge as a much stronger competitor to global rivals such as France's Groupe AXA and even American International Group Inc., the world's largest and most profitable insurer. On Mar. 18, Allianz, with $115 billion in annual revenues, reported that net earnings had swung back into the black, reaching almost $2 billion for 2003. That's just under half the record $4.3 billion the group chalked up in 2000. The U-turn comes after Diekmann & Co. cut $2.3 billion in costs by slashing head count, auctioning off noncore holdings such as its stake in British insurer M.I. Assurance and AGF Life & Pension Brazil, and revamping key subsidiaries such as U.S. property-and-casualty underwriter Fireman's Fund Insurance Co. Investors have taken notice of the changes: Allianz' share price has risen 77% in the past 12 months. "We have made significant progress," says Diekmann, 49. "And the capital market has acknowledged our efforts."

Still, much remains to be done before Diekmann can claim ultimate victory. Dresdner, acquired by Allianz in 2001, continues to lose money -- more than $1.5 billion in 2003, just slightly better than the $1.7 billion net loss reported for 2002. And Allianz management still hasn't decided what to do with Dresdner's London-based investment banking unit, Dresdner Kleinwort Wasserstein, which is now turning a small profit but is not a natural fit for the group.

Allianz took a first step toward tackling its problems even before Diekmann, a 16-year company veteran who studied law and philosophy at Göttingen University, moved into the CEO's office. In April, 2003, faced with mounting investor concern over the strength of its balance sheet and the security of its AA- debt rating and A+ financial strength rating, the company went cap in hand to its shareholders with a $5.4 billion share issue just as its stock price was hitting rock bottom -- a measure that could have further diluted the value of its shares. It then raised $1.8 billion more through a subordinated bond issue. "Naturally, you can take the position of a Monday [morning] quarterback and ask whether it wouldn't have been better if we had waited for share prices to improve," says Chief Financial Officer Paul Achleitner. But he argues that nobody knew what effect the Iraq War was going to have on markets. "We asked our shareholders for more money, and they responded by making sufficient funds available," he says. As a result, the group retained its rating, and its share price started to recover.

With its capital shored up, Diekmann was set to restructure. He targeted Allianz' corporate culture for an overhaul. Under his predecessor, Henning Schulte-Noelle, now chair of Allianz' supervisory board, the company spent freely building up its asset management and banking operations. It also took on major risks by rapidly expanding its insurance underwriting operations to some 70 countries. That move soured amid lax risk assessment controls and a consensus-based management structure that put off hard decisions.

Diekmann has changed all that. He introduced a more aggressive management style, setting up clear targets for subsidiaries, which now must compete against one another for capital. "Only the company that presents the best business plan and provides proof of the greatest value added will qualify for additional capital," Diekmann says.

That makeover is already showing results. Two of the group's biggest money-losing subsidiaries -- Fireman's Fund and Allianz Global Risks, which handles insurance for international companies -- are back in the black. French insurance underwriter Assurances Générales de France is heading in that direction. Where he doesn't see synergy, Diekmann gets the ax out. Allianz sold off stakes worth almost $10 billion from its industrial portfolio last year. And Diekmann isn't done yet. "We will be divesting ourselves further of marginal activities and risks," he says.

CROSS-POLLINATION. The big question mark remains Dresdner Bank. Under Diekmann, the bank last year was able to stanch the bleeding somewhat -- new loan-loss provisions totaled $1.2 billion, vs. $2.6 billion in 2002. Now the troubled bank has to slash bad loans further -- no easy task given Germany's sluggish economy -- and at the same time start generating new business. Diekmann's hope is to better integrate Dresdner and Allianz by allowing customers of the group's 10,000 insurance agencies to open bank accounts, apply for credit cards, set up overdraft accounts, and buy or sell mutual funds. So far, the program has generated 10,000 new customers in just three months. On the other side of the equation, during 2003 some 84,000 property-casualty policies and 92,000 life-insurance policies were sold through Dresdner. Diekmann thinks he can double the size of Dresdner's market share in Germany, to 10%. But analysts figure that if the bank doesn't start generating a decent profit by 2005, shareholder pressure to spin it off will become irresistible. Troubled Allianz has come a long way under Michael Diekmann. Clearly, however, it has a long way to go.

By David Fairlamb in Munich

    Before it's here, it's on the Bloomberg Terminal.