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Allianz could miss ROE target but CFO 'highly confident' of underwriting goal

Allianz Group may just miss its 13% return on equity target for 2018, according to CFO Giulio Terzariol, who is nevertheless "highly confident" that the German insurer will hit its 94% combined ratio target for the year despite a €220 million claims bill from storm Friederike in the first quarter.

Speaking to journalists during the company's first-quarter earnings call, he added that Allianz is also "well on track" to hit its expected life and health operating profit for 2018 of €4.2 billion even though first-quarter operating profit fell 7.4%.

'Slightly below' ROE target

Allianz reported a first-quarter ROE of 13.8%, but Terzariol told journalists that the group's 13% ROE target "cannot be reached completely" in 2018.

"We will be getting close to the 13% ROE, but [will be] slightly below," he said.

However, the company remains on track with its nonlife underwriting target, he added. Allianz revealed in its first-quarter results that the storm bill had added 2.6 percentage points to its combined ratio, a key measure of nonlife underwriting performance, compared to a natural-catastrophe impact of just 1.6 percentage points in the first quarter of 2017.

Nevertheless, Allianz's combined ratio improved to 94.8% from 95.6%, leaving it just 0.8 percentage point short of its target. A combined ratio of 100% indicates a breakeven underwriting result, while anything below is an underwriting profit, so the lower a combined ratio, the better.

The combined ratio position was helped by higher reserve releases from old run-off years, which shaved 3.2 points off the first-quarter 2018 combined ratio compared to 2.8 points a year earlier. The company also said it had benefited from better underlying-claims experience, an improved expense ratio and lower large losses other than natural catastrophes.

Terzariol said natural-catastrophe levels would have to remain at an "average" level for the 94% combined ratio target to be achieved, but added that he was "quite optimistic." According to the CFO, Allianz usually allows for a 2.1-percentage-point natural catastrophe impact on the combined ratio, in which case the first-quarter ratio would have been 94.4%.

"Usually, the runoff result is a little higher towards the end of the year compared with what we have in the first quarter, and that should bring us down to 94% overall," he said. "We also have to take into account that in winter, the conditions are always a bit more difficult, and that always means the basic claims ratio is a little higher in the first quarter than the rest of the year."

L&H hit

On the life and health side of the business, operating profit fell to €1.07 billion from €1.16 billion. Part of the reason was a €39 million foreign exchange hit, but Allianz's U.S. guaranteed savings and annuities business also suffered because of volatile financial markets, contrasting with stable markets in the year-ago period. Overall, the U.S. life and health operating profit was down 47.4% to €171 million.

But Terzariol said the operating profit achieved meant that Allianz is "well on track to reach our outlook of €4.2 billion for the overall year." He added: "The operating profit development is good and is in line with our expectations."

At group level, Allianz's operating profit was down 6% to €2.76 billion, largely as a result of foreign-exchange effects, but net profit attributable to shareholders was up 6.8% to €1.94 billion from €1.82 billion because of a lower tax charge and lower restructuring costs.