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Allianz could shrink industrial insurance unit as remedial work continues

Allianz Group could reduce the size of its industrial insurance unit as it continues work to restore underwriting profitability, group CFO Giulio Terzariol has said.

The unit, Allianz Global Corporate & Specialty SE, or AGCS, reported a 15.8% drop in operating profit to €79 million in the second quarter of 2019, and a 0.6-percentage-point deterioration in its combined ratio, a key measure of underwriting performance, to 101.1%, meaning it made an underwriting loss for the quarter.

Allianz has been working to improve AGCS's results, and Terzariol has previously said that there should be a "clear improvement" in its results by 2021 and that if improvements don't materialize "we will have to take a decision what else we need to do."

AGCS, one of the group's largest nonlife units, wrote €8.2 billion of gross premium in the full 2018 year, and €4.9 billion in the first half of 2019.

Re-underwriting

Speaking to journalists about Allianz's second-quarter earnings, Terzariol said "we might see some shrinkage" as AGCS conducts a review of its portfolio. Terzariol suggested that the action Allianz takes on AGCS would not be as drastic as Swiss Re AG's $900 million of planned cuts to its Corporate Solutions commercial insurance division, announced July 31. He said Allianz could do "something in between" simply relying on rate increases to improve profitability and what Swiss Re had done.

He added: "Clearly we are taking rate increases as a lot of competitors are doing but we are also looking at what kind of re-underwriting we need to do and what kinds of businesses we want to be present [in], what kinds of businesses we are thinking they are structurally more challenging."

AGCS' gross written premium increased by 4.8% in the second quarter of 2019, which Allianz said in its earnings presentation was "entirely price-driven," with "strong" rate increases seen particularly in property, aviation, marine and engineering.

Terzariol said that to make more money than its cost of capital, AGCS needed to be a "top-class organization" in terms of costs and technical excellence. He said: "There are markets where you can be an average player and make good returns, and there are markets where in order to make good returns you need to be top class."

Cyber securitization

Terzariol also played down AGCS' interest in passing cyberrisk to capital markets investors.

AGCS Chief Underwriting Officer Hartmut Mai told Börsen-Zeitung in July that the division wanted to enter the cyberrisk securitization market over the next few years, but Terzariol said that it was not "priority No. 1." He said that because the company was "cautious" about taking on cyberrisk it was "testing things, and we might be testing securitization." But he added: "We don't think this will be something big scale."

As a group, Allianz reported a 31.3% increase in second-quarter net profit to €2.14 billion, beating analysts' mean consensus estimate of €2.02 billion, according to data provided by the company.

Despite this, Allianz's share price on the Frankfurt stock exchange was down 1.6% to €206.20 per share at 11 a.m. Frankfurt time.