Karina Robinson talks to Henning Schulte-Noelle, head of Allianz AG, about what shape the company is in as he plans to hand the reins to his successor.
The tone of the call to the Hotel Lorünser in Zürs was obdurate. Henning Schulte-Noelle, head of Allianz AG, the world's largest insurance group by gross premiums but only the fifth largest by market capitalisation, would only allow the interview a few days hence to go ahead if I did not ask any personal questions.
So I sat across from him in the snow-clad Munich headquarters and bit my lip. I would not ask him how tall he was, although it looked like over 6 feet 4 inches, nor about his basketball-playing days. I would not ask him about the large scar, left over from a duel during his days in a traditional German university society. I would not ask him whether he always wore striped blue shirts to match his blue eyes. I would not ask him about his passion for hiking in the mountains, nor about his organ playing.
I did, however, ask him whether he had any regrets about his 12 years leading Europe's largest financial services group - he announced last year that he will leave his post as chairman of the management board at the annual general meeting in April, probably to become chairman of the company's supervisory board. He mused about selecting the wrong men for the wrong jobs; about entering and exiting the Philippine market; about asking for stress tests a few years ago on the company's financial investments assuming a fall in the DAX 30 stock market index of 30%. Most would have dismissed the notion of a fall of that magnitude. "We should have stressed more. It fell 44% last year," he said.
The biggest disappointment
But his chief regret reveals a great deal about the current state of the company and of Germany. "The biggest disappointment was the failure of the Deutsche-Dresdner merger," he admits. With a 22% stake in Dresdner Bank and a 5% stake in Deutsche Bank, Allianz pushed for the merger of Germany's first and third largest bank in 2000. According to the intricate plan, it would have walked away with a nationwide distribution network for its products consisting of most of the retail operations of both banks, as well as consolidating its position in the mutual fund market. And, on a different front, it would have reshaped the ailing German banking sector, which has the worst record in The Banker's lending efficiency index (see page 28, February 2003).
"We did everything we could to push it through," he says in answer to allegations that Allianz did not try hard enough. "If that deal had gone through, then private [non-state] banking in Germany would be much better."
Dresdner aftermath
Instead, the aftermath of its mid-2001, €24bn takeover of Dresdner appears to be overwhelming Allianz. The most recent results for the first nine months of 2002 showed a €2bn loss for the bank, which it blames mainly on the weak economic environment while insisting break-even is still on for 2003.
Quite a few analysts and investors disagree, which is why the company's share price has plummeted. "They are being hard on expenses but the plan to stem the decline in revenues seems optimistic and too much based on hope," says Brian Shea, insurance analyst at Merrill Lynch. "Dresdner's provisions also appear light. Allianz possibly cannot afford to take the preferred medicine of significant provision strengthening," he says.
"Judgment should not be made too early," argues Mr Schulte-Noelle. "Everyone should give us enough time to produce what we promised. We are working very hard and I see progress and milestones being met."
Mr Schulte-Noelle, a 27-year veteran of Allianz who did his MBA at Wharton School in Pennsylvania, does not agree that it is an outrage that, despite a Dresdner-inspired profit warning last August, resignations from the bank's board are rather thin on the ground. He insists there have been changes to the board. In September, Leonhard Fischer, head of Dresdner's corporates and markets division, resigned. The other two resignations in late 2002 had nothing to do with the profit warning.
Peers say that the 60-year old is a loyal, principled man, who does not have the ruthlessness to get rid of Dresdner chairman Bernd Fahrholz, his negotiating partner in the takeover. It has yet to be seen whether Mr Schulte-Noelle's appointed successor, Michael Diekmann, agrees. Mr Diekmann, 48 years old and a 14-year veteran of the company, is perceived as a protégé of Mr Schulte-Noelle whose strategy will be similar. However, when he takes over he could decide to dispense with chief financial officer Paul Achleitner, a former Goldman Sachs banker who is seen as the architect of the Dresdner deal and is still "very much an outsider with no home-grown protection" in the company, according to investment bankers and lawyers.
Sticking points
Mr Schulte-Noelle refuses to be drawn on whether DrKW, the investment banking arm that has been losing value in the past few years, could be sold off - it has been integrated with the bank's corporate lending business. Or whether there is any point in Allianz's having a corporate loan book, when the reason it bought Dresdner was to do with distributing its investment products and building scale in mutual funds in Germany.
"We took over Dresdner as it was, a big German commercial bank. It is not helpful for the bank to get involved in too much strategy discussion until we have done our homework and developed options. But Dresdner Bank as a whole will not be put into question," he says, sitting in his corner office.
Surely one and a half years of ownership and a large share stake before that is long enough to get all the homework done? "The problem for him is that, as head of the Vorstand, he can no longer operate the business – although he would like to - because he is too high up," says a London-based investment banker who has worked closely with Allianz. "He flies around in private jets representing German business because that is what the role entails."
Headlines about the Dresdner predicament may dominate but they should not distract from the many other arms of the company. A few statistics are:
It is one of the five biggest asset managers in the world.
It provides insurance cover for almost half of the Fortune 500 companies.
It has operations in 70 countries.
It is the number one health insurer and one of the biggest life insurers in France through its purchase of AGF, while enjoying leading market positions in other European markets like Italy.
It has growing business in South Korea and China, while it achieved a large exposure to the US insurance business through its 1991 acquisition of Fireman's Fund – albeit along with large, unwelcome asbestos and environmental claims.
Insurance profits
On the insurance side of the business, Allianz insists the news is good. Its premium income has been steadily increasing, rising 12% to €61.5bn in the first nine months of 2002. (And here the primary aim of the Dresdner bet is paying off: sales through the branch network made the most substantial contribution to a 7.8% increase in life insurance sales in Germany).
But the number that shows the real profitability of the insurance side is the combined ratio, which is the ratio of losses and expenses to net premiums earned. Here, too, there was an improvement to 106.7%. But with this number higher than 100%, it means the basic insurance business is not profitable. In this, Allianz is not alone. The return from investing the premiums is what has saved insurance companies in the past. But this period of bad markets appears to have given insurers a hefty dose of realism. In its November statement, Allianz said that due to volatility and uncertainty, "the Group will align itself so that it can also operate profitably during flat capital markets". In other words, it will try to make its underlying business profitable.
"We do have companies in our group that have combined ratios of 90%. It can be achieved and the urgency to achieve that is obvious. The message I am giving out is that I want to see combined ratios of about 95% in 2004," says Mr Schulte-Noelle.
As for costlier disaster payments, terrorism and more frequent natural disasters from global warming such as the floods in Europe last summer, the Westphalian is not exceptionally worried. "Our business is about giving protection against catastrophic events or whatever; it is about the identification and limitation of risk; the adjustment of risk premiums as well as loss prevention," he says.
He thinks reports that one third of Germany's life assurers could disappear in the next five years are exaggerated, even though about 30% of them are having problems. Allianz does not regard this as an opportunity to buy up domestic market share because there might be issues with the cartel office. Yet, even as the market leader in life insurance, its 18% market share is far from a monopoly position.
The International Accounting Standards Board's (IASB) suggestion that fair value accounting should be used meets a frosty reaction. "It will introduce such a high volatility in insurance company results that, unless it is adjusted to the specific nature of our business, it's not the right answer," he says. US and Japanese insurers share this view. However, the existing system allows for a lot of obfuscation and needs to be clarified.
Investment management is the third arm of the business - with €1048bn under management - and one that has been growing through net cash inflows, although the dire state of the markets has taken its toll. Allianz has also been growing this arm through acquisition. It bought US asset management companies PIMCO Advisors and Nicholas-Applegate a few years ago.
In defence of investments
Allianz is also one of the largest investors in corporate Germany. Mr Schulte-Noelle says the foreign view that the company sees itself as Germany Inc. and has therefore been unwilling to sell stakes is wrong, while analyst criticism that there is a mismatch between its assets and liabilities is excessive. "We have been reducing our shareholdings in the past couple of years but, as a large capital accumulator, we will always have equity investments," he says.
He will not comment on talk that Allianz will have to access the capital markets again this year after raising €3.5bn in the bond markets in late 2002, and says the company will "do everything to make sure we keep our rating in the AA range, but times are challenging".
Allianz's stakes in banks throughout Europe are not helping because many of them suffer a battering from weak markets and slowing economies. Still, the shareholdings help to ensure Allianz has distribution agreements with many of them, such as Spain's Banco Popular in which it has a 6% stake. Also, its shareholding influence means it is due to play a role in cross-border bank mergers – as it is doing with Crédit Lyonnais and Crédit Agricole in France and may do with its 5% stake in Unicredito Italiano.
"I think there should be more cross-border bank mergers in Europe like we have seen in insurance. It is simply a question of time as this huge market integrates," he says.
His resignation announcement in late December shocked the markets, with all sorts of rumours flying around, including that he had been forced out after the Dresdner debacle and that he was, in the words of an analyst, "a bit weak to leave before guiding the ship into port".
Mr Schulte-Noelle may be called discreet. He may be called many things. But the word weak does not fit. He is not the sort of man to shirk his duty – note the scar – but it must be galling to have so many people think so.
Objective decision
In fact, he says he took the decision in early 2001 to ensure that Mr Diekmann has as many years to make his mark on the company as he has – Allianz is proud that it has only had eight chairmen in 112 years – while the fact that the supervisory board is up for election this year means he will probably slot in there. "If you have good objective reasons to resign, if you have the right man as your successor, it would be a very personal, egocentric decision to stay on for another year for better figures," he says, with a touch of regret.
He will not be going out on a high. The share price is at a nine-year low and full year results to be announced on March 20 will not be pretty – although he says he has no reason to change an earlier statement that "the low point is behind us". But the company has a winning franchise both in Europe and worldwide. If his successor manages half as well as he has, Allianz can be proud.
E-mail: karina.robinson@ft.com