Allianz Investors Find New Cause to Rue Dresdner Deal
Allianz SE shareholders have a new reason to rue the almost $21 billion purchase of Dresdner Bank six years ago: the collapse of the U.S. subprime mortgage market.
Europe's largest insurer is trading at the lowest valuation in four years on concern subprime losses at Dresdner will erode profit. Dresdner had 575 million euros ($852 million) of writedowns in the third quarter when the bank accounted for just 6 percent of Allianz's total revenue, the Munich-based company's reports show.
``Allianz is quite cheap at the moment, but investors are very suspicious that there are problems that we don't know about,'' said Adrian Darley, who helps oversee about $130 billion at London-based Resolution Asset Management and owns Allianz shares. ``There are suspicions about Dresdner.''
Allianz trades at 7.2 times estimated earnings, the second- lowest multiple among the world's 25 largest insurers after Zurich-based Swiss Reinsurance Co. at 6.4, data compiled by Bloomberg show. The stock has declined 23 percent in Frankfurt trading since the beginning of July, exceeding the 16 percent drop in the Bloomberg Europe 500 Insurance Index.
Thirty-two of 37 analysts have recommended buying Allianz since July and the Dresdner writedown equaled only 2.5 percent of Allianz's third-quarter revenue, Bloomberg data show. Deutsche Bank AG analysts Mark Cathcart, Spencer Horgan and Oliver Steel in London reiterated their ``buy'' rating on Allianz last week and said the decline in the stock has been ``driven by an overreaction to subprime losses at Dresdner.''
Allianz fell 2.26 euros, or 1.7 percent, to 134 euros in Frankfurt today, valuing the company at 60.2 billion euros.
Subprime Risk
Allianz gets about 90 percent of its income from insurance and 3.5 percent from asset management, including Newport Beach, California-based Pacific Investment Management Co., which runs the world's biggest bond fund.
Dresdner has been a drag on Allianz since the 117-year-old insurer bought it in 2001 with the aim of selling more insurance products through its branches. Mounting loan losses at Dresdner and falling stock markets led to the insurer's first annual loss since World War II in 2002.
Allianz has cut more than 18,000 jobs at Dresdner, or about 40 percent of the workforce, and unloaded about $48 billion of bad loans to revive profit at the Frankfurt-based bank.
Dresdner lost 52 million euros in the third quarter and held 7.9 billion euros of asset-backed securities at the end of September, after hedging, and about 2 billion euros of subprime- related debt. Chief Financial Officer Helmut Perlet told reporters this month that Allianz's insurance business has ``virtually no'' subprime risk.
Reassuring Investors
Led by Chief Executive Officer Michael Diekmann, Allianz stuck to a forecast for a 14 percent increase in full-year profit to about 8 billion euros when it reported third-quarter results on Nov. 9. While Allianz may face more writedowns this quarter they probably will be smaller than in the previous three months, Perlet said at that time.
``Allianz has repeatedly reiterated its strong full-year outlook and the shares still keep falling,'' said Dieter Ewald, who helps manage about $22 billion at Frankfurt Trust, including Allianz shares. ``That's a clear sign that management hasn't succeeded in reassuring investors while confidence in the financial services industry has been wrecked by others.''
Total losses stemming from falling values of subprime assets may reach $300 billion to $400 billion worldwide, Deutsche Bank analysts said on Nov. 12. The world's biggest financial institutions, including New York-based Citigroup Inc., UBS AG of Zurich, and Charlotte, North Carolina-based Bank of America Corp., have so far announced about $66 billion of trading losses and writedowns linked to the U.S. subprime crash.
Ignoring Fundamentals
Swiss Re, the world's largest reinsurer, surprised investors last week by announcing a 1.2 billion-Swiss franc ($1.1 billion) loss on derivatives in October, just 13 days after reporting profit that beat analysts' estimates.
``Swiss Re has dealt a heavy blow to the entire industry,'' said Markus Engels, who helps oversee about $90 billion, including Allianz, at Cominvest Asset Management in Frankfurt. ``Currently nobody looks at valuations or fundamentals: the market panic doesn't allow it.''
What happened at Swiss Re was an isolated case, and shouldn't become an industrywide issue, Joerg Schneider, the chief financial officer at Munich Re, the world's second-largest reinsurer, said in an interview at a conference in Munich today.
Swiss Re Chief Executive Officer Jacques Aigrain, who was also attending the conference, declined to comment.
For investors, sentiment toward banks and insurers probably won't improve until January at the earliest because ``no fund manager would want to report at year-end that financials are among his top-five holdings,'' Engels said.
``Transparency is the key,'' said Ernst Konrad, who helps manage about $38 billion in assets as head of equities at BayernInvest in Munich. ``Allianz shares will only become interesting again if the company provides that. People want to have facts.''
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