Steady as she goes-Axel Theis

AL: What kind of a year was 2009 and were you pleased with your performance? AT: “Overall we were positively surprised by the group performance which was very good in this tough market. I can also say that, within the group, AGCS did quite well and was one of the best performing non-life companies in the Allianz group in 2009. We are now the third largest non-life company in Germany and Italy and hope to be number two soon. Year to year the growth was 33%, but, the real growth was 5% (driven by around €400m in new business) which is still not bad in a challenging market environment. The combined ratio was very, very strong at 87.2% but you can’t expect that every year.”hideAL: How did you manage this result and what were the positives and negatives? AT: “2009 was challenging in aviation but in other lines the year was pretty calm. There were no large catastrophes and the result was supported by positive run off developments and reserve releases which were assessed as necessary by our actuaries and auditors. One other area where there have been negative results is financial lines (D&O) where we have increased reserving to reflect possible losses from the financial crisis and so the 2009 results look challenging. “The rate on line for financial institutions overall has increased from 0.5% in 2009 to 1.7% plus at the beginning of 2010. That represents an increase of over 100%. We expect further increases because of the losses [from the financial crisis] that will go through the system and this is when people will reduce capacity and will pull out. Some carriers like us have taken care of it, others still book planned loss ratios of 60% and I do not believe that they will get away with it.” AL: What about property and catastrophe lines? AT: “The property market was very calm in 2009 and I do not expect huge rate increases there. The interesting thing is how will the market react to lower revenues and business interruption amounts. We expect more consolidation on the client side in 2010 and the unknown is how this will have an impact on available capacity. On the other hand no-one can expect 2010 to be such a low year in large loss terms, as we have already seen with the Chilean earthquake and with Xynthia in Europe as well as the hailstorm in Melbourne. We may well see the reinsurance market reacting to the increased level of Nat Cat activity so far in 2010.” AL: What is your outlook for 2010 and beyond? AT: “The economists, central banks and our own expert, Professor Michael Heise, predict that at the beginning we will have a soft level in inflation terms and therefore investment income will definitely not increase in 2010 against 2009. The average return may be about 3-3.5%. But, we will not see the 5-6% that people used to see. This will also put pressure on the long tail lines and in the medium term people would expect higher interest rates. I expect the European Central Bank will raise rates because of rising inflation. This will have an impact on the market value of assets, positive or negative depending upon the maturity of the assets.” AL: What are your expansion plans? You have spent the last four years consolidating and building the AGCS business by incorporating various Allianz units into your operation around Europe and further afield. What is next? AT: “We have now taken responsibility for Allianz’s Property & Casualty business in Japan and we have now received an AA rating for this company from Standard & Poor’s. Allianz Japan becomes a subsidiary of AGCS at the end of the first quarter of this year. In Brazil we are putting an AGCS team together under Angela Colombo within Allianz Brazil and we have a reinsurance license and so are able to cede business out of the country. This is great for multinational clients and those with captives. This is one of the BRIC countries that has huge potential. “In Dubai we have set up a branch. For example, Engineering is a key strength for us in the Middle East, Asia and North African areas and we see very important opportunities here. Closer to home, we are close to concluding our negotiations with the Belgian regulator and are confident that this will be closed by the end of the first quarter. We are also in advanced negotiations in the Netherlands. When this is done Europe will be complete. In Asia we believe we can double our premium over the next five years from 3% of the total book to 6%. So 2010 will see the completion of our global network. If I had said to you back in 2006 when this restructure began that we would now be a €4bn company you might have not believed it. But we have achieved that which is fantastic.” AL: Insurance buyers all over Europe, particularly in complex and challenging markets like telecommunications, pharm-aceuticals and energy, keep telling me that insurers con-sistently fail to deliver capacity for new risks because you need too much time to model and assess risks. Is this fair? AT: “Risk managers are right and wrong in this respect. We can only insure something that is predictable and can be calculated. Otherwise you cannot attract the capital to finance that. We are therefore not able to cover entrepreneurial risk because to do that I would buy shares not insurance. Also, I need a certain portfolio to collect risks for diversification to pay losses for the clients. This is key because even big oil companies and telecommunications companies buy insurance to transfer risk because even if they transfer only a small amount it leads to capital relief. Banks that are regulated by Basle II buy insurance to reduce capital on layers in excess of €1bn for example and they buy it at rates and terms and conditions that are quite interesting for us. Because of the capital relief gained, it is quite a good deal for them. Therefore, my answer is that when people say insurers avoid emerging risks, consider that companies with much bigger balance sheets than ours still transfer their risk through insurance at a fair price for us because it makes sense for them. If they are not willing to pay a fair price they are looking for innocent capacity that may write the business for the revenue, but, ultimately see no return.” AL: If this is a perception problem how do you overcome it? AT: “I agree that we can do more to work with clients on special issues and we do carry out alternative risk transfer through a specialist unit that syndicates risks that do not fit the traditional portfolio approach. But, to do this you need to work closely with clients, share data and they need to take a significant share of the risks. If you do this then you can deliver significant solutions. With deep sea rigs the likelihood of a sizeable loss may be greater. So, if the buyers want capacity, they have to be prepared to pay a price. I am not saying all risk can be covered but look at the coverage provided for wind farms and other new renewables. The insurance market will provide solutions, just not for all risks.” AL: Global programmes remain a concern for buyers because uncertainty remains over compliance and consistency because of the patchwork of national requirements. Is there potential for an international solution? AT: “In 80-90% of countries this is not a problem because they have rules that stipulate requirements including financial needs and tax issues. It is clear that there are still challenges and these tend to emanate from certain countries where international bodies have no influence. So I do not believe an international effort would necessarily work. Also, remember that this is one of the big differentiators for us. We have a network and the best way to manage a network is to own it. Therefore, would Allianz, Zurich, Chartis and others create a platform so that others have access to the same thing and do not have to pay for it? We will continue to invest in the parts of the world where we do not have comprehensive coverage. We will invest in people on the ground so that we are all working for the same goals but, there are only two or three competitors that can offer that.” AL: Does the cost of Solvency II worry you? AT: “It is a major project. But, it is not only a burden; it also forces you to really focus on what you are and totally rethink the way you price and calibrate risk and allocate capital. It really is quite a healthy exercise and you have to train your organisation to be solvency compliant. Leading executives have to understand the process and auditors and regulators will check it. They will ask: “So Mr. board member how do you price your risks and model them?” and this is very positive. “Solvency II will definitely lead to a higher cost of capital for certain carriers, but not all. For big companies like Allianz that are able to have their internal models approved we should see a benefit. AGCS is a very well balanced and diversified company, spread regionally and by line of business. We are already using the internal model and do not expect higher capital requirements.”

Steady as she goes-Axel Theis

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