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Allianz CFO: Refocus Is on U.S., With Eye Toward Cutting Costs

Posted on 07 Mar 2012

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Allianz SE's "refocusing" its U.S. insurance operations is centered on cutting costs, raising prices, and withdrawing from unprofitable lines of business while looking for growth in the niche areas where it has historically found the most success, Chief Financial Officer Oliver Baete said Monday.

The move is a reversal for its Calif.-based property-casualty unit, Fireman's Fund Insurance Co., which just three years ago received tens of millions of dollars from Allianz as it looked to expand by selling coverage to less-affluent consumers than it had typically targeted in the past.

Fireman's Fund, which provides the bulk of Allianz's property-casualty insurance revenue in the U.S., has already undergone some restructuring, but the focus is now on better aligning costs with revenue, Baete said.

In the U.S., "Fireman's Fund is the place that needs the most work," Baete told Dow Jones Newswires and The Wall Street Journal in an interview.

"We've now decided not to start to venture in new areas but to [concentrate on] really getting the cost base under control, and we'll be focusing on what we really do well."

Allianz, Europe's largest primary insurer by market value and gross premium revenues, two weeks ago told analysts it intends to focus this year on improving the performance of its property-and-casualty insurance operations in Germany and the U.S., in terms of expenses, distribution, pricing, and claims management. In its U.S. life- and health-insurance operation, Allianz Life, it is also working to improve results at the variable-annuity business, the company said.

Measures underway in the U.S. include investing in information technology and a reserve review along all major business lines that caused Allianz to increase reserves, especially for workers' compensation policies in California where the insurer observed "a spike in medical inflation that's three to four times historical averages," Baete said.

Measures also include more leeway for U.S. management to rethink Allianz's regional presence in the U.S., and the appointment of a new chief executive for the U.S. insurance business, Gary Bhojwani, effective Jan. 1, 2012.

Fireman's Fund also replaced its chief executive, chief financial officer, chief underwriting officer and chief field executive in the second half of last year.

"We're basically looking at some very, very fundamental items in terms of how the operating structure will look, particularly after we've refocused on three or four niche businesses that we like to serve and be successful in," Baete said.

Business focus will be on niches such as insuring the entertainment industry, high-net-worth individuals "and a few niches in the commercial-lines business," Baete said, citing examples such as insuring hotels and highly protected property.

In early 2009, Fireman's Fund's then-CEO, Michael LaRocco, said Allianz was looking to spend $100 million to expand its commercial-insurance operations and move downmarket with its product offerings to consumers. The goal in the consumer lines was to capture a larger share of the home-insurance market and become a "major player" in U.S. auto insurance.

The refocusing of the business marks a retreat from that strategy.

Fireman's Fund sells coverage through independent agents, and selling standard auto coverage that way requires "enormous scale," Baete said. "I don't think anybody is waiting for Allianz to invest" in the U.S. auto-insurance market, he said.

Instead, Fireman's Fund will return to targeting the most-affluent consumers, who often need bespoke protection for their homes, artwork, wine cellars, collectible cars and other valuables.

"We are one of the leaders, together with Chubb [Corp.] (CB), for high-net-worth individuals both on the East Coast and West Coast, and that footprint

I'd like to expand," he said. Fireman's Fund also calls itself the leading insurer of Hollywood movies for more than 85 years.

Baete declined to provide concrete targets for 2012 revenue and the combined ratio expected from its U.S. property-casualty operations.

"We are going to make sure we do our homework on technicalities and strengthen the balance sheet, and then we worry about concrete productivity targets as of next year," Baete said, who has been the group's chief financial officer since Sept. 1, 2009.

Price increases both for natural-disaster policies and for variable annuities sold by Allianz Life are also expected to contribute to improved results at Allianz's U.S. operations.

The U.S. business contributed EUR3.4 billion in revenue to the property-casualty operations last year, or 8% of the segment's total revenue of EUR44.8 billion. U.S. revenue was up 10% from a year earlier but down 3% compared with 2009.

Still, the U.S. property-casualty business hasn't reported an underwriting profit since 2010. The unit had combined ratios of 115.5% for 2011, and 102.4% for 2010.

The 115.5% combined ratio--which was among the group's highest last year--means that Allianz spent nearly $1.16 on claims and other costs for every $1 in premiums collected.

Allianz has property-casualty and life and health insurance, an asset-management business that includes the renowned Pacific Investment Management Co., or Pimco, brand in the U.S., and a small banking operation in Germany.

Munich-headquartered Allianz reported an operating profit of EUR7.9 billion for 2011 and targets a figure between EUR7.7 billion and EUR8.7 billion for operating profit this year. Net profit was EUR2.55 billion. It is proposing a dividend of EUR4.50 a share for 2011, equivalent to a dividend payout ratio of 81% of net profit, but will return to a normal payout ratio of around 40% this year.