ALLIANZ SE – IFSR AFFIRMED AT Aa3, STABLE OUTLOOK
The affirmation of Allianz SE's rating and stable outlook reflects the group's (1) very strong franchise as well as business and geographic diversification (2) very strong and stable profitability and (3) very strong capitalisation and financial flexibility. Partially offsetting these strengths is the sensitivity of Allianz to the low interest rate environment, which hampered its capitalisation over the first nine months of this year and which we expect to put some pressure on the group's profitability going forward, in line with European peers. While Allianz' exposure to Italian assets and, more specifically, to Italian sovereign bonds, has meaningfully reduced over recent years, there remains some concentration risk. Furthermore, Allianz is taking on more asset risk in response to low interest rates.
Allianz benefits from a very strong franchise in its core markets, including its domestic German market, where it has further strengthened its market share over the last four years, and more recently in the United Kingdom, where Allianz will move to be among the three largest property-casualty (P&C) insurers following a series of acquisitions in 2019. Through PIMCO and Allianz Global Investors, Allianz also owns one of the largest asset managers globally, with approximately €2.3 trillion of assets under management at Q3 2019. Earnings diversification is very strong, as reflected by a balanced contribution across property-casualty, life/health and asset management, respectively representing 46%, 33%, and 20% of reported operating profits in 2018.
Allianz profitability continues to be very strong, with a five-year average return on capital (ROC, Moody's definition) in excess of 6% paired with very low volatility in earnings, as evidenced by the group's elevated Sharpe ratio of Return on Capital (over 3000% on a five-year average at year-end 2018). In the first nine months of 2019, Allianz reported an increase in shareholders' net income by 5% compared to prior year period to €6.1 billion. With a combined ratio of 94.1%, P&C underwriting profitability continued to be strong in the first nine months of 2019, similarly to the prior year (94.0%), reflecting a lower expense ratio resulting from improved cost efficiency, and lower natural catastrophe claims offset by lower reserve releases. Life and health operating profit increased by 6.7% to €3.4 billion due to higher loadings and fees offsetting the lower investment margin and higher acquisition expenses. Asset management operating profit was slightly up by 3.0% to €2.0 billion.
Going forward, Moody's anticipates that the ultra-low interest rates will continue to gradually reduce Allianz's investment returns. In 2018, Allianz reported a spread between the current yield (3.3%, based book values of assets) and the average guaranteed rate (2.0%, based on technical reserves) of c.130 bps, compared to c.150 bps in 2014. Yields on re- and new investments have further deteriorated in year-to-date 2019 and Moody's anticipates the spread to reduce further going forward. This will likely prompt Allianz to take on additional asset risk in search for yields, although Moody's expects this to occur only gradually and under strict observation of asset-liability management and capital management requirements.
Looking forward, Moody's expects that Allianz will be able to maintain its claims ratio close to the current level and to further gradually reduce its expense ratio, allowing for higher P&C underwriting profitability. In asset management, Allianz is reporting good progress in terms of 3rd party inflows, assets under management as well as in cost-income ratio and this will likely result in moderately improving profitability levels going forward. Moody's expects these moderate improvements in P&C and asset management results will partially offset the negative effect of lower investment returns on profitability and that Allianz will continue to report returns on capital close to 6%.
Allianz's capitalisation, as measured by the group Solvency II ratio, continues to be very strong, despite a meaningful weakening seen in 2019, when the ratio fell to 202% at Q3 2019 from 229% at year-end 2018. The sharp fall was mainly driven by the negative impact of the decreasing interest rates. Allianz's ability to generate capital continues to be very strong, but it currently pays out a significant portion of it to shareholders via dividends and share buy-backs, for a combined amount of approximately €5.3 billion in 2019 compared to shareholders' net income of €7.5 billion reported for 2018. Moody's expects that Allianz will maintain its Solvency II ratio close to the current levels, in line with the recently revised capital management approach which aims at a Group Solvency II level of at least 180%.
Allianz's financial flexibility continues to be very strong and supportive of the credit profile, reflecting healthy leverage and earnings coverage ratios as well as proven access to funding from financial markets. Allianz's adjusted financial leverage and total leverage stood at approximately 26% and 31%, respectively, at year-end 2018 and Moody's expects Allianz to maintain leverage similar to these levels, while earnings coverage should move in line with the earnings expectation, benefitting from moderately lower interest expenses as a result of recent refinancing operations.
Allianz continues to have a high, but reducing concentration risk to Italy, which has a moderate negative impact on its overall credit profile. Allianz exposure to Italian sovereign bonds has significantly reduced over past years, from 52% of the group's reported shareholders' equity at year-end 2014 to 31% at year-end 2018. More positively Allianz's Italian operations continue to perform strongly, benefitting from very strong P&C underwriting profitability, and contributed approximately 11% of the group's reported operating profit in 2018.
ALLIANZ DEUTSCHLAND – IFSR AFFIRMED AT Aa2, STABLE OUTLOOK
The affirmation of the ratings and stable outlook on Allianz Lebensversicherungs AG (Allianz Leben) and Allianz Versicherungs-AG (Allianz Sach), collectively referred to as Allianz Deutschland, mainly reflects their very strong position and franchise in the German insurance market, strong business diversification, as well as their currently very strong profitability and capitalisation. These strengths are partially offset by the still high risk profile of Allianz Deutschland's life product portfolio, notwithstanding the company's actions on new business, pressure from very low interest rates on profitability and capitalisation and a gradual increase in asset risk.
Allianz Deutschland continues to strengthen its market leadership position in the German market. In life, Allianz Leben has further increased its market share to now approximately 25% in terms of gross written premiums, whereas its share in terms of new business is significantly higher. In P&C, Allianz Sach holds a market share of approximately 14% and for 2018 reported topline growth of 4.1%, higher than the market average (3.3%). Moody's believes that Allianz Deutschland benefits from its strong and diversified product offering, a very strong franchise, and access to very strong distribution channels and that it will be able to conserve these strengths going forward.
Allianz Leben has taken significant strides in moving its new business to capital-efficient products with lower and shorter-duration guaranteed rates, unit-linked and protection products, which combined accounted for approximately 90% of new business in 2018. This notwithstanding, Allianz Leben's inforce book continues to be concentrated in non-unit-linked technical reserves (98% of total technical reserves at year-end 2018) with an average guaranteed rate of approximately 2.6% at year-end 2018 (excluding the impact of the Zinszusatzreserve). Moody's believes that Allianz Leben's guaranteed interest rate commitments are well covered for the foreseeable future thanks to its very strong asset liability management. However, Moody's also thinks that with current negative interest rate in Germany even the very low guaranteed rates currently offered on the new business will result in pressure on economic capital adequacy under Solvency II.
So far, low interest rates have not meaningfully reduced Allianz Deutschland's profitability which Moody's attributes mainly to the increase in the earnings base resulting from the significant top-line growth, higher investment risk and very strong investment management capabilities, and the steady improvement in underwriting profitability, especially in P&C. In addition, Allianz Leben has some flexibility to align policyholder bonus rates with decreasing investment returns, as it has recently demonstrated by reducing the bonus rates for 2020 by 0.3%points. Going forward, however, Moody's expects that Allianz Deutschland will be challenged to fully offset the pressure from low interest rates, that have fallen to new record lows over 2019, despite the expectation of further improving underwriting profitability.
Given the sensitivity of Allianz Leben's Solvency II ratio to a fall in interest rates, Moody's expects that Allianz will report a significantly lower Solvency II ratio at year-end 2019 than the 478% (excluding transitionals, including the volatility adjustment) reported at year-end 2018 - similarly to most other German life insurers – but still at very strong levels. Allianz Sach's Solvency II ratio was very strong at year-end 2018 and we expect no material weakening at year-end 2019, given the limited sensitivity to movements in interest rates.
Allianz Deutschland's exposure to risky assets has been increasing gradually over past years, reflected in an increase in Moody's high-risk asset ratio. Moody's notes that this increase is driven by Allianz (1) shifting the relative composition of its asset allocation to riskier assets, and at the same time (2) significantly increasing the size of the investment portfolio, particular in life insurance, not equally counterbalanced by an increase in adjusted shareholders' equity (Moody's definition, including free RfB reserve and hybrid capital).
WHAT COULD CHANGE THE RATINGS UP/DOWN
Upward pressure on Allianz SE's ratings could develop in case of: (1) Group Solvency II ratio sustainably in excess of 220% and proven resilience to a prolonged low interest rate scenario, (2) Return on Capital (Moody's definition, with capital comprising shareholders' equity, free RfB reserve and hybrid capital) of at least 6% through the economic and underwriting cycle, and (3) Maintaining current levels of earnings diversification and reducing the product risk inherent in the group's life product portfolio.
Downward rating pressure on Allianz SE's ratings could arise from: (1) Group Solvency II ratio sustainably below 180%, (2) deterioration in profitability as evidenced by a Return on Capital (Moody's definition, with capital comprising shareholders' equity, free RfB reserve and hybrid capital) below 5%, or (3) significant increase in risk taking, either in terms of product risk or in investment risk.
There is very limited upside potential on the Aa2 ratings of Allianz Deutschland although significantly lowered exposure to the interest rate risk of the life portfolio while maintaining a very strong solvency position could place upwards pressure on the ratings.
Downward rating pressure on Allianz Deutschland's ratings could result from (1) a consistent reduction in operating profitability, (2) deterioration in Allianz Deutschland's capitalisation (e.g., with a life entity's Solvency II ratio consistently below 250% without transitional measures) or failure to reduce the interest rate sensitivity of Allianz Leben's Solvency II ratio, (3) a weakening in its asset quality, and/or (4) a deterioration in the credit quality of Allianz SE.
LIST OF RATINGS
The following ratings have been affirmed:
Allianz SE -- insurance financial strength rating at Aa3
Allianz SE -- subordinated debt rating at A2(hyb)
Allianz SE -- junior subordinated debt rating at A2(hyb)
Allianz SE -- commercial paper at P-1
Allianz SE -- senior unsecured MTN programme rating at (P)Aa3
Allianz SE -- subordinated MTN programme rating at (P)A2
Allianz SE -- junior subordinated MTN programme rating at (P)A2
Allianz Finance II B.V. -- backed senior unsecured debt rating at Aa3
Allianz Finance II B.V. -- backed subordinated debt rating at A2(hyb)
Allianz Finance II B.V. -- backed junior subordinated debt rating at A3(hyb)
Allianz Finance II B.V. -- backed senior unsecured MTN programme rating at (P)Aa3
Allianz Finance II B.V. -- backed subordinated MTN programme rating at (P)A2
Allianz Finance II B.V. -- backed junior subordinated MTN programme rating at (P)A2
Allianz Finance Corporation -- backed commercial paper at P-1
Allianz Versicherungs-AG -- insurance financial strength rating at Aa2
Allianz Lebensversicherungs AG -- insurance financial strength rating at Aa2
Issuer: Allianz SE
…..Outlook, Remains Stable
Issuer: Allianz Finance II B.V.
…..Outlook, Remains Stable
Issuer: Allianz Versicherungs AG
…..Outlook, Remains Stable
Issuer: Allianz Lebensversicherungs AG
….Outlook, Remains Stable
The methodologies used in these ratings were Life Insurers Methodology published in November 2019, and Property and Casualty Insurers Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.