EUR 850.00 For Business Accounts Only

Morningstar | Allianz's FY 2018: Expenses Drive Non-Life; Low Investment Margin Pulls Down Life and Health

Allianz reported a very good set of fourth-quarter and full-year 2018 results. The division that has not performed that well within these results has been life and health, but that comes down quite specifically to one product line. The non-life division continues to really impress us, and management has delivered on its underwriting target. While the asset management results are mixed with base-line profitability up, there are encouraging signs for the business unit. We maintain our EUR 175 fair value estimate for the time being until the business publishes full balance sheet data on March 8, and we maintain our no-moat rating.

For the full year, Allianz essentially delivered total revenue growth of 3.5%, above our expectations. And on the back of quite a stellar non-life result, returned EUR 11.5 billion and EUR 7.5 billion in operating profit and net income to shareholders, above management's top end of guidance. The management team remains conservative for the full-year results of 2019, estimating EUR 11.5 billion in operating profit give or take EUR 500 million. On the back of these results, the team has announced a further EUR 1.5 billion in share buybacks, continuing on from the two programs completed in 2018 that amounted to EUR 3.0 billion. And a final dividend of EUR 9 per share has been announced, taking yield to a little over 5.0%.

We think the one thing that investors need to be aware of in these results is that while management claims the performance of the non-life division that has dragged up, the overall result has been driven by an improved underwriting result on the back of a more benign natural catastrophe environment, i.e., 180 basis points of natural catastrophe impact within the combined versus 280 basis points the year prior, this has not fully fed through into the loss ratio. Admittedly, combined ratios have improved across the business for almost all divisions, or geographies, as the way in which Allianz segments its non-life business. However, loss ratios have barely moved, and in cases where we spot a significant delta, have shifted the other way. The exception is Germany, Allianz’s largest non-life geography, where the business has taken 80 basis points out of claims where we think the near 200-basis-point increase in pricing has been having an impact, primarily in motor and property. The biggest percentage improvement has come from the expense savings, and this seems to be a more consistent geographic theme. We think this will continue to be one of the driving forces for this business as management continue with a strategy of "simplicity."

Asset management has turned in a decent performance against difficult trading conditions that culminated in the fourth quarter. So while total assets under management have declined from EUR 1.96 trillion to EUR 1.88 trillion, the business unit has offset this decline in revenue generating assets with an increase in its fee and commission margin from 32.7 basis points to 35.8 basis points, which excludes, by our calculations, static performance fee margins. And while the cost-income ratio moved up a little higher, better ordinary fee and commission income improved the operating result from EUR 2.4 billion to EUR 2.5 billion.

The main disappointment within the business has come from life and health, but we attribute this to one specific line of business. The investment margin within guaranteed savings and annuities has fallen by 12 basis points, and this is because with the higher market volatility the business has suffered a higher amount of impairments and lower gains realisations. We don't view this as normal profitability and stand by a 75 to 80 basis points investment margin within this line of business. This drop almost wholly accounts for the near EUR 250 million drop in life and health operating profit. Present value of new business is being driven higher by sales of capital efficient products in Germany and fixed index annuities in the United States. We see little sign of the global "slowdown" affecting new business margins with 20 basis points of improvement.