Allianz SE (AZ)
Q3 2008 Earnings Call Transcript
November 10, 2008 5:00 p.m. ET

Executives
Oliver Schmidt – Head, Investor Relations
Helmut Perlet – Chief Finance Officer and Member of the Board of Management.

Analysts

Andrew Broadfield – Morgan Stanley
Bill Morgan – Goldman Sachs
James Quin – Citigroup
Michael Huttner – JP Morgan
Marc Thiele – UBS
Brian Shea – Merrill Lynch
William Hawkins – Keefe Bruyette Woods
Nick Holmes – [Numerack]
Stefan Kalb – Sal Oppenheim
Michael Haid – Cheuvreux

Presentation

Oliver Schmidt – Head, Investor Relations

Yeah thanks Neville. Good afternoon ladies and gentlemen. Welcome to the Allianz conference call. I think due to the magnitude of information that we would like to speak about today, including a special section on our investment I shouldn’t waste any time. So, let me hand over to Helmut right away.

Helmut Perlet – Chief Finance Officer and Member of the Board of Management

That was quick Oliver.

Oliver Schmidt – Head, Investor Relations

Yeah.

Helmut Perlet – Chief Finance Officer and Member of the Board of Management

Good afternoon, ladies and gentlemen. It is in fact a pretty large presentation and I’ll try to focus on the most important things. If we start out with the overall summary, then I think it is fair to say that Q3 was a continuous tough environment but our fundamentals by and large remained strong. We had 1.6 billion of operating profit, 6.5 billion year-to-date with all core segments contributing and what is really important from my point of view, P/C is likely unaffected by the financial market crisis. Our solvency ratio is at target level, divestment of Dresdner is on track. We had no accounting changes. There was some reclassification on the Dresdner side but it has absolutely no impact on the group’s operating profit nor net income. So, no accounting changes and the bad news is as the 6.5 billion are already somewhat short of what we have expected, we will see that by year and we fall short of our operating profit target of 9 billion and also for 2009, if we do not see a recovery in the equity markets, we cannot confirm the 9 billion plus.

Now I think on the next slide the only number I’d like to point your attention to is net income and respectively the net loss from discontinued operations, -2.5 billion and we come to that in a second which gives us together with net income from on going operations a net loss for the third quarter of 2 billion, year-to-date net income including discontinued is at 667 million of profit. Now, important I think on page #4, let us talk a little bit about the solvency ratios. Our solvency ratio was 157%. It is within our target defined target range. We have as you are certainly aware of, the BaFin has reconsidered and changed its regulations how to calculate the solvency ratio based on the financial conglomerate and that would mean that we do eliminate going forward unrealized gains and unrealized bonds from the calculation of this ratio which would put us at a level playing field with our main competitors in Europe. That was compared to the old asset improves the solvency ratio by 13 percentage points and we had also some positive impact from the Dresdner Bank divestment, where we anticipated divestment of 9 percentage points. That 9 percentage point is only a snapshot of course based on the available market conditions end of September. All things being equal as we go through closing 1 and 2, I would expect another 10 percentage points plus out of this transaction. Now two final remarks on that slide if at the end of October where we had in the months of October pretty defective equity market, our solvency ratio would stay at 152 and in both numbers 157 and 152 we had these numbers a net of accrued dividend of 1.6 billion. Now you might ask, “Why exactly 1.6 billion?” and the answer is yes we try to be somewhat consistent in line with our previous communication regarding dividend policy. What we have accrued for is 40% of the net income of continued operations. And ultimately with our level of capitalization, we are still comfortably above the necessary thresholds for a AA rating. So, that all in all we feel very well positioned based on our own requirements but also in relative terms compared to the competition.

With that let’s quickly go on to the drivers from a group perspective. Revenues was 21.1, are holding up. They are down -0.8 on a like-to-like basis, internal growth and that is basically noting new. You see the impacts in the yellow bubble. Main impact is on the life side, further shortfall in unit-linked production and in particular in countries where unit-link is distributed via bank assurance because the banks increasingly try to substitute life products by term deposits and other things in order to boost up their own liquidity positions. P/C is up 7.8% but a good part of that is specifically related to the core business at the fireman’s fund which I will come to when we talk about P/C. Adjusted for that our growth would have been 5.2% and you can rest assured that we are still putting profit first and volume second i e, trying to maintain strict underwriting discipline. I think in the sake of time I can jump over page 7, make just one remark on page 8, where you see that non-operating items end result is hit by impairments of round about 920 million with 750 million of equity impairments, that is slightly above the number of 600 I gave you when we were discussing our Q2 results but that is by and large a factor that financially Institutions have structurally and systematically underperformed and therefore we do see a higher number here.

There is another 134 million of debt impairments which I’ll come to in our special section when we talk about our bond portfolio. Now I think you can also jump over page 9, and maybe spend more time on page 10, where we talk about the Dresdner Bank transaction and how this is accounted for in our financials. If we see on the left hand side and you will surely recall the presentation when we informed about the deal in early September and has basically five components we’ve received in exchange for 100% Dresdner Bank and that is cash that is the asset manage of Commerzbank, Cominvest that’s approximately 360 million Commerzbank shares, that’s the distribution agreement and the trust fund, the trust fund which as you might remember provides a certain protection to specified assets of Dresdner.

Now, in the middle column we have the approach how this consideration or these components have to be evaluated for our financials, end of September, and obviously to describe the issue on cash for cash. Cominvest is an evaluation for IFRS opinion which translates into 700 million. There was no change. Now, the most important point is probably Commerzbank shares. Owning 28.6% ultimately in Commerzbank would mean that we have to report Commerzbank at equity now and this is reflected in this approach because this will be our accounting entry when we receive those Commerzbank shares physically and reporting at equity will mean simply we take 26.8% of the projected net asset value of Commerzbank. Now the net projected net asset value of Commerzbank is a) what they have at the end of September, that’s a known number and b) capital increases for the completion of step1 & 2 of this transaction and as the value for the large issue we have bought Commerzbank share at the end of September, ie, the Commerzbank share price ie 10.40 euro per share. Now, then we have to evaluate the distribution agreement and the trust fund. The distribution agreement is based on the agreed upon projects with Commerzbank with a certain cushion or buffer plus the margin we are making traditionally on our life products with the banking channel and the trust fund is based on a mark-to-market approach which was a very cautious valuation. You see that we have only assigned 100 million to this trust fund. So, if worst come to worst and all the assets which are in the trust that are covered by the trust would ultimately default, then there is a 100 million trust fund to this consideration but there is also some upside if those assets still perform better.

Now what that means on our books is illustrated on the right hand side in this slide. We had to start out with a carrying value of Dresdner end of September and that is 9.2 billion and if you compare this to the 7.8 I’ve just explained then the expected loss out of this Dresdner divestment is 1.4 billion. We have to add to this, we had net loss of Dresdner from Q3 which is another 1.2 billion and that gets us to that 2.6 billion net loss from this continued operations Q3. Now let me make a few more remarks on that one. A) You might ask the question, “You told us in August or in September that the carrying value of Dresdner is 10.5 or 10.6 billion.” Yes that was true, that was the carrying value end of June. Now we have to adjust this carrying value for the net loss of Q3 of 1.2 billion and there is some highly technical minor adjustments, driven by acounting regulations that gets us to the 9.2 billion carrying value end of September. Second remark is and the question obviously on this side is how likely is this number attained and what are maybe contributions further positive or negative from Dresdner? Point #1, in internal talks whatever the result of Dresdner’s is going to be in Q4 and going forward in 2009, there is no impact ultimately on our result because that is now fixed with this anticipated loss from that transaction.

Nevertheless that 1.4 billion still can change because ultimately it depends on the net asset value of Commerzbank at the time of closing and that net asset value obviously can change for two reasons. One is the results of Dresdner from October 1st onwards and secondly if the capital increase is done at a different price as I have just explained namely the 10.4%, but that is most likely only supposed to be a minor change.

Now with that being said let me move on. I think we can also jump over page 11. That just gives you the movement analysis of our reported IFRS net equity and let’s go into the group’s P/C, z I think as I have mentioned P/C is likely unaffected by the market crisis. It contributes or continues to be a reliable generator of profits and free cash flow. Now the operating profit is down from 200 million on a quarterly basis. That 200 million is caused mainly by two specific events which are somewhat related to the financial markets, one is credit insurance. As we currently observe overdue payments and those are a lead indicator for higher future losses which we already closed into or baked into our results end of September and secondly fireman’s fund had to absorb losses from the crop business following a slump in commodity prices at the end of September. Those two numbers add up to euros 160 million or euros170 million and basically explain the shortfall in the underwriting result which you can see on the right hand side. Also on a year-to-date basis, year-to-date we are at 4, 411 million. That compares with 4.65 billion for 2007, so a shortfall of roughly 230 million and that to some extent is explained by the combined ratio as we will see in a second, roughly 100 million and 150 million of investment income.