Following our analysis on Zurich Insurance Group, we are back to comment on Allianz’s equity story, increasing our buy rating target thanks to the additional upside to price in (OTCPK:ALIZF, OTCPK:ALIZY). Our Allianz investment was backed by 1) an “attractive and predictable dividend” development, 2) a valuation supported by the PIMCO division (a world leader in Asset Management), and 3) a lower expenses ratio coupled with a higher reinvestment yield thanks to interest rate evolution. Here at the Lab this year, we have already analyzed the company’s Q1 (Solid Start) and Q2 results (Solid Numbers And Solvency Strengths). For this reason, we will briefly update our readers on Q3, but more importantly, we have decided to update you with a follow-up note with four additional support key takeaways.

Noteworthy Areas. In Q3, the German insurance player reported a 29.5% decline in net profit to €2.02 billion. This was mainly due to higher claims from natural catastrophes. Despite that, Allianz’s numbers beat analysts’ consensus net income forecast of €1.99 billion. Operating profit also contracted 14.6% to €3.47 billion, with €1.3 billion in reimbursements linked to natural disasters. Allianz described the level of claims as “exceptionally high.” Unfortunately, Continental Europe has been hit by unprecedented floods and hailstorms over the summer. P&C profitability declined with a combined ratio to 96.2% in the quarter from 92.5% in Q3 2022. Despite that, Allianz maintained its 2023 target. According to our estimates, and considering nat cat loss, Allianz’s operating profit was 8% higher than expected. We are impressed by the P&C revenue growth of 11% and the Asset management flow, which reached €10 billion. The Solvency II ratio rose 212% from 208% in Q2 2023.

Source: Allianz Q3 results presentation

Why are we supportive?

At the Inside Allianz Series presentation, the company showcased three units with upside in each area. In addition, we also reported Allianz’s M&A optionality and our positive view of the IFRS regulatory framework.

1. (IFRS upside) Starting with the latter, as we already reported in Zurich with an analysis called IFRS 17 Might Provide An Upside, we also believe that Allianz is set to benefit from the IFRS 17 discount benefit. As a reminder, IFRS 17 means that the claims included in the combined ratio calculation should be reduced accordingly. In detail, claims’ present value should be lower than their ultimate cost. This higher uncertainty creates a discount being deducted from the insurance investment income. Here at the Lab, we believe this new regulatory framework has been negative for non-life insurers’ valuation. Despite that, the combined ratio will be reported after discounting future claims, and Allianz is increasing its insurance product portfolio pricing. For this reason, the company confirmed its 93% combined ratio for 2023 and 92% as a mid-term outlook. The company recently provided an update during the Inside Allianz Series presentation and reduced its combined ratio by 2.6 basis points despite a higher discount in the future (Fig 1). However, this did not translate into operating profits falling. Instead, we might have an additional upside: if interest rates start to slow down, the claims discount should be reduced, providing a profit uplift for Allianz;
2. (Higher pricing activities) Post Q3 and Allianz’s latest presentation, we estimate an average increase of 10% in insurance pricing. This is also supported by the IFRS 17 view, where pricing activities are now accelerating to offset discounting dilution;
3. (Higher savings and synergies) Looking at the three units with potential upside, we note 1) Allianz RE development (Fig 2), 2) the formation of Allianz Commercial called AGCS (Fig 3), and 3) Allianz Services evolution (Fig 4). The former division’s operating profit is set to rise by 50%. The division aims to optimize Allianz’s capital allocation through internal reinsurance. Despite that, Allianz Re also used external third-party reinsurance, and the company is raising its operating profit by €150 million. AGCS also aims to increase its core operating profit from €100 million thanks to higher volumes. The latter, the Allianz Services segment, during the Allianz Series presentation, raised its efficiency savings to over 350 million in 2025. In our estimates, we now forecast €150 million higher savings to reach €500 million by 2025. Therefore, we increased the segment operating profit accordingly;
4. (M&A optionality) In Q4, Allianz agreed to acquire Tua Assicurazioni from Assicurazioni Generali. This inorganic acquisition was performed for a total value of €280 million. Tua Assicurazioni’s premium portfolio is 60% based on car policy and is distributed through a network of approximately 500 agents. Subject to regulatory approvals expected in early 2024. Allianz’s market share in the P&C insurance market is expected to grow by about 1% to 11%, consolidating its position as the third player in Italy.

Source: Allianz Inside Series presentation – Fig 1

Fig 2

Fig 3

Fig 4

Conclusion and Valuation

This year, our core operating profit is set at €14.6 billion, and we are slightly below the consensus expectation of €14.7 billion. Given the company’s supportive earnings uplift, we decided to increase our 2024 outlook with an operating profit of approximately €15.5 billion, and our 2024 EPS estimates reached €28.5. Allianz is trading at 8.8x 2024 P/E (8.3x 2025 P/E) below its >10x five-year historical average. Therefore, based on our unchanged 10x P/E multiple, we increased our buy rating target from €235 to €285 per share ($30.5 in ADR). Downside risks include credit rating downgrade, expensive M&A deals, leading to increased earnings volatility and higher leverage, and lower than expected Solvency II evolution. Additional risks are included in our Q2 update.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.