Michael Diekmann, the new CEO of Allianz doesn’t need much sleep. At least that’s what launching a rights issue on the day Britain and the UK start their war on Iraq suggests. Either that, or Allianz is so desperate for cash that it simply couldn’t wait. “The fact that it has come now when the markets are so depressed indicates that there’s a degree of urgency,” says Matthew Leeman, a fund manager at SG Asset Management.
And there’s nothing like a company that really needs money to turn investors right off. “You have to ask yourself, ‘what is in this for us?’ Are we just paying for the mistakes of the past?” says Henning Gebhardt, head of German equities at DWS Investments in Frankfurt. “The dilution effect is massive and the future business Allianz will have to generate to compensate for that is huge.”
Bankers working on the deal say timing is not an issue. “Many rights issues come from companies that have waited far too long,” says Michael Klein, CEO of investment banking for EMEA at Citigroup. “This is a sensible move at the right time.”
But in fact, since mid 2002 a succession of insurance companies, as well as firms in other sectors, have held out the begging bowl with varying degrees of success. Legal&General, Aegon and Zurich Financial Services managed it, Royal Sun Alliance didn’t and now faces a murky future.
Market participants knew it could only be a matter of time before Allianz followed the trend. As a result, analysts say there was a fair amount of shorting pressure on its stock in anticipation of a rights issue announcement.
What’s more, the fact that Allianz has been pipped to the post by many rivals and France Telecom is looming with a e15 billion cash call, means that the petty cash tin may be almost empty by the time Allianz makes its plea. “The issue is much wider than Allianz,” says one European fund manager. “There are a lot of companies out there with distressed balance sheets and the question is whether investors will be willing to stump up more.”
They might be more ready to do so if they knew what the money was going to be used for. Gebhardt is one of a number of fund managers who feel aggrieved at the way Diekmann and Allianz CFO Paul Achleitner seem to assume they will just cough up and not ask questions.
A stop-gap not a solution
Allianz spokesman Stefan Denig is adamant that is not the case. “Mr Diekmann said that we have seen strong organic growth in life and non-life business and in emerging markets and we expect to see more. He also made it clear we’re not targeting acquisitions.” And don’t forget, adds Denig, “we are still seen as one of the most strongly capitalised insurers in Europe”.
It is this type of complacency that really riles investors. Although Allianz boasts of an increase in life insurance premiums in both Germany – thanks to selling through the Dresdner network – and the US this year, there are doubts over how lucrative this growth is. “The ability of this business to generate profits is limited,” says Gebhardt at DWS.
Last year Allianz lost e1.2 billion, of which e900 million can be attributed to losses at Dresdner Bank. Because it is a high beta stock, in common with other insurers, plummeting share prices have hit it hard. A 24% stake in Munich Re has also amplified the effects of falling markets on its capital base.
But investors are also struggling to come to terms with the catastrophic decision by former CEO Henning Schulte-Noelle to buy Dresdner Bank for e20.5 billion in 2001. Its loan portfolio is full of holes and Moody’s gives it a financial strength rating of C- on negative review, the lowest of the German banks.
As a result of all of this, Allianz’s credit ratings have remained under pressure since it lost its AAA status in October. If it falls below its current AA-/Aa1 level then that would increase its cost of capital and put it at a significant disadvantage when it comes to winning business from large corporates which look carefully at credit strength.
Both agencies have Allianz on negative watch. Simon Harris, a senior credit officer for European insurance at Moody’s says a rights issue is crucial to maintain its Aa1rating. “If they hadn’t announced this then we would have had to look carefully at the ratings level of the company, which has major issues both in terms of capital and earnings,” he says.
But a rights issue will not be a panacea. Stephen Jones, head of European equities at Gartmore, worries that Allianz may just succeed in putting off its problems, rather than solving them. Zurich Financial Services saw its share price fall to e110 before its rights issue last year. In the aftermath it went up to e170 but is now back to e116. “Investors are worried the same thing will happen with Allianz,” he says.
The fact that the Allianz share price slid as investors began to digest the details of the issue shows that Jones is not the only one with this concern. “A deal of this size still leaves them having to work very hard to solve their problems,” says one analyst.
Diekmann and his team will have to do just that over the coming weeks to even get shareholders on board. “I think there’ll be a lot of people deciding whether or not to take part on the day,” says Jones. “The markets are very driven by sentiment at the moment so if there are a lot of body bags coming back from Iraq then that will affect the success of the deal.”
But one banker tells Euromoney Allianz will take advantage of a window of opportunity in April. When asked to explain he states confidently that “the war will be over by mid April”. Does he know something we don’t?
