Allianz (OTCQX:AZSEY) is one of the largest insurance companies in Europe, with relatively good growth prospects in its asset management business. It has delivered stable earnings over the past few years, and has a good profitability level and capitalization. This supports an attractive shareholder remuneration, both through its dividend yield of 4.5% and share buyback program.
Company and Financial Overview
Allianz is a global financial services company offering life/health insurance, property-casualty (P&C) insurance, and asset management products. It is one of the world's largest insurance companies and is based in Munich, Germany. It has a market capitalization of about $82 billion and trades in the U.S. on the over-the-counter market. Its closest competitors are other large European insurance companies, such as AXA (OTCQX:AXAHY), Generali (OTCPK:ARZGY), or Zurich (OTCQX:ZURVY).
Allianz has a presence in more than 70 countries, serving more than 80 million customers. It is the owner of the well-known U.S. asset manager PIMCO, making Allianz one of the largest active asset managers in the world. Measured by operating profit, its largest division is P&C generating about 46% of profit, followed by life (35%), while asset management is responsible for 19%.
Like many of its peers, Allianz's life business was heavily impacted by the low interest rates environment in Europe due to its guaranteed return to policyholders across its back book. The company has changed its business model towards capital-efficient products, and new business margin has improved recently, even though its growth prospects are quite muted as customers increasingly search for yield on other types of products.
Regarding its financial performance, Allianz has been able to report relatively stable earnings over the past few years, despite the persistent low interest rate environment and during a period in which PIMCO experienced significant outflows following its management changes. This unit was Allianz's growth engine for many years, and now, one of the company's main challenges is to find another growth sources in the coming years.
Its asset management units, PIMCO and Allianz Global Investors, should be Allianz's businesses with better growth prospects in the next few years. PIMCO, under new management, is showing good signs of business turnaround. Third-party net inflows were positive in the last two quarters of 2016 for the first time since 2013, and performance has been good with close to 90% of third-party assets under management exceeding their benchmarks. This should support net inflows in the next few quarters, being good for PIMCO's earnings growth.
On a group basis, 2016 was another year of solid results with Allianz reporting higher earnings. However, its top line was impacted by challenging conditions, and revenues declined by 2.2% to €122.4 billion ($131.6 billion). Despite this, the company was able to improve its efficiency due to its cost reduction program, improving its operating profit to more than $11 billion.
Its improved efficiency should continue to support its earnings growth in the next couple of years, given that Allianz aims to improve its annual productivity by $1.07 billion in 2018. It aims to achieve this by strengthening its most competitive businesses and scale up smaller by creating regional platforms. Digitalization and automation should also contribute to reduce costs, a trend that is increasingly referred by insurance companies as very important to adapt their business models to the current operating landscape.
Reflecting its solid business momentum, Allianz's net income increased by 4% in 2016 to $7.4 billion and its earnings per share amounted to $16.3. Its return on equity (ROE)), a key measure of profitability within the insurance industry, remained very good at about 12%. Allianz targets EPS growth of around 5% in the next few years, which should be easily achievable taking into account that Allianz should perform share buybacks and deliver higher earnings in the next quarters.
Capital & Dividends
Regarding its capital position, Allianz has an above-average Solvency II ratio and has shown good organic capital generation in the past year. Its Solvency II ratio was 218% at the end of 2016, a strong increase from the 200% ratio reported in 2015.
This organic capital generated in the past year was a very good signal for its future capital situation because 2016 was a very volatile year in the capital markets. This was one of the worries that investors had under the new Solvency regime in Europe, particularly what would be the impact of market volatility in the capitalization of insurance companies.
Therefore, with Solvency II now implemented for a full year, investors should be much more confident on Allianz's dividend sustainability over the medium to long term, given the good results achieved in 2016.
Allianz's current dividend policy was set in in October 2014, with the dividend payout ratio increased to 50% (from 40% previously). This increased payout led to a growing dividend since 2014, even though its growth has decelerated recently.
In 2016, its dividend was set at €7.60 per share ($8.20), an increase of 4.1% from the previous year. At its current share price, Allianz has a dividend yield of about 4.5%. Like many European companies, Allianz only pays one dividend per year, reducing a little bit the income appeal to U.S. investors.
Additionally, the company said in 2014 that it was targeting external growth sources, but any capital not used for bolt-on M&A during 2014-2017 would be repatriated on a three-year rolling basis, starting in 2016. This policy should be maintained as long its solvency ratio remained above 160%.
Allianz did not perform any significant acquisition during this period and recently announced that it will perform a share buyback program of €3 billion ($3.2 billion) funded from its unused M&A budget. This is a strong boost for its shareholder remuneration policy and shows that Allianz is disciplined regarding the best use of its excess capital.
Moreover, it recently changed its capital management policy and now will pay 50% of annual earnings through dividends, while the rest will be earmarked for M&A and share buybacks on an annual basis instead of three years rolling. This means that Allianz should perform several share buybacks over the next few years, as large acquisitions aren't likely. This increases its income appeal, as Allianz should distribute the vast majority of its earnings to shareholders in the coming years.
Allianz is a stable company with an interesting business in asset management, giving it some growth prospects. The insurance business is mainly a cash cow, leading to a good profitability and capitalization. Its investment case is mainly based on its shareholder remuneration policy, being Allianz an attractive income play due to its 4.5% yield and the current share buyback program of about $3.2 billion.
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