Meet Europe's biggest investor: Diethart Breipoh, Allianz


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Diethart Breipohl is a modest man. But as finance director of the Allianz insurance group he presides over Dm320 billion of investments, probably the biggest portfolio in Europe. That includes significant stakes in Germany's blue-chip firms, suggesting to some that Allianz is "the spider in the web" of corporate Germany.

A corporate culture but no monastery
Not the "spider in the web"

"We're not," says Breipohl. "We've always said clearly that Allianz does not make industrial policy." But, because Allianz has been quite secretive about its portfolio and its investment strategy, the spider image persists.

Now, to give a more accurate picture, Allianz has agreed to this exclusive interview with Euromoney. It reveals the blue giant from Munich as a conservative and largely benign player on the world's financial markets, but it also signals a quiet revolution within.

Notably since the death of its father figure Wolfgang Schieren in early 1996, influential voices inside this global group are urging a rethink of Allianz's identity. They argue that it's time to shake off the insurer's image, and to reorganize its conglomeration of separate companies. They believe the group is well-placed to break out of its narrow sector and become an integrated financial services group. Some name ING Barings as a model. A joint venture with an investment bank is not ruled out.

The advent of European economic and monetary union (Emu) gives Allianz a heaven-sent opportunity to diversify more of its investments out of Germany, into more dynamic capital markets. The insiders who fear devastating competition in the insurance and asset management business worldwide are keen to propel the company towards more creative investments with higher potential yield.

Breipohl, with Allianz for 25 years, has been in this job since 1991. A passionate fisherman and hill-walker, he prefers to rule his team by consensus. They work in Munich, close to the lakes and mountains of the Bavarian alps, away from the distractions and crazy salaries of the world's financial centres. "No, we're not a religious order," he says. But at times the Allianz philosophy sounds a little ascetic.

In this interview, Breipohl describes the group's investment policy in detail for the first time. He predicts how Emu should allow Allianz to redeploy some of the assets, nearly two-thirds of its giant portfolio, out of the straitjacket of the German market.

Previously, German institutions like Allianz could hardly avoid investing huge sums in the German market, for tax and regulatory reasons. A principle of insurance supervision ­ the principle of "congruency" ­ dictates that assets must be invested in the country or the currency where the company has insurance risks. Giant equity stakes of more than 10% benefit from useful reductions of corporate and capital gains tax. So shifting assets is a slow and sometimes painful process. It took Allianz nearly five years to reduce its shareholding in Metallgesellschaft from 9% to half that. Even when the advent of the euro allows Allianz to spread investments anywhere in Europe to match its German insurance business, change will not be dramatic. Investment managers in the group say that Allianz will probably use only new money for more diversified investments and maintain its German investments for the next few years.

With 22% of Dresdner Bank, 26% of Munich Re, and several other double-digit participations, Allianz will remain a powerful shareholder in Germany. Some argue that simply by holding those stakes Allianz wields enormous power, within companies and across sectors of the economy. There is understandable speculation about Allianz's views on the restructuring of the German banking sector, which is now regarded as inevitable. And its global reach leads to speculation about what kind of creature Allianz might evolve into.

In the mid 1980s Allianz began to diversify its insurance operations away from its German roots and it now does business in 55 countries. In 1990 Allianz bought Fireman's Fund in the US. In 1994 the Dm6 billion acquisition of Switzerland's Elvia and Lloyd Adriatico of Italy made Allianz the market leader in Europe. Expansion in Asia is slow. China is the next goal ­ the company is awaiting permission to sell insurance there.

When that happens, Allianz should rapidly become a major investor in the Chinese capital market. A new investment arm, Allianz Asset Management, was set up in Hong Kong in April last year to explore the Asian equity markets in more detail. Up to now Allianz's investment arms have not kept pace with the internationalization of the insurance business. But in Hong Kong, asset management is running ahead of the insurance side for the first time.

Allianz is proud to be a decentralized company, a collection of near-autonomous units employing 71,000 worldwide. Of its 1,300-or-so investment staff, operating in separate geographical units, only 80 are at head office in Munich. But there is a gradual integration as asset allocation and trading are drawn together for greater efficiency. Where will this process stop? Will Allianz aim to become an integrated financial institution? Will it ever dare to compete with the global investment banks?

Diethart Breipohl talks to Laura Covill and David Shirreff

Are you hampered by the investment regulations for German insurers?

We were ­ and there still are constraints. For instance, we cannot invest more than 30% in stocks and equity participations. Even if we wanted to go up to 50% we could not.

Have you already reached the limit of appropriate equity investment in the German market?

Yes. You know the statistics. If you compare it in terms of GDP, in Germany we have an equity market capitalization of about 25% of GDP compared with at least 60% in the US. This is rather underdeveloped. As insurers have had to look for congruent investment in the past, it was a difficult task to invest enough in stocks. [Allianz's investment policy rests on the principle of congruency, which says that assets must be invested in the same market where they were collected as insurance premiums. There is also a legal requirement which says that no more than 25% of an insurer's assets may be invested "outside congruency".]

Looking ahead to European monetary union, do you have plans for shifting some assets out of your German portfolios and putting new assets into particular markets?

We are not doing Emu-related arbitrage. Until the last moment you cannot be sure how Emu will turn out and how institutions should prepare for it. Even if Emu doesn't come we are focusing on the European capital market. Especially for equities that's a very good thing for us because the German stock market is far too small for big investors.

Does this mean the idea of congruency now goes out of the window?

Not exactly out of the window because it is a good principle that if we owe in Deutschmarks, we invest in Deutschmarks ­ at least for the bulk of the business. The Deutschmark hasn't been a bad choice up to now compared with other currencies but the European currency gives us a lot of new opportunities.

Think of the German stock market. If you have a macro-economic event and your analysts look at what might be the consequences for this or that sector, sometimes they cannot find the sector in a pure form and have to find it in a conglomerate. Analysts and portfolio managers don't like that. Previously we were allowed to invest up to 25% of our German assets in other countries. Now Europe is congruent and that gives us a bigger choice.

Do you include Switzerland in that?

Sure. You have to consider two aspects. One is the currency risk. The other is portfolio diversification to invest in countries not perfectly correlated and to get a better risk-return profile. In an analysis some years ago we decided it was worthwhile diversifying countrywise but when we looked recently at Europe we found so much correlation between countries that we now prefer diversification by sectors.

So you can start adapting your portfolio immediately on those lines?

Our overall portfolio is now something like Dm320 billion. We have roughly 64% in Deutschmark-denominated investments and 36% in non-domestic. This is not exactly the same ratio we have in the insurance portfolio where it is almost fifty-fifty. The reason is that the savings-intensive life industry is more strongly represented in our German portfolio. Apart from that, when we talk about portfolio diversification we ask how we should diversify each individual portfolio in each country to achieve a better risk-return profile.

Where are you still underweight?

Food is one sector, oil is another, entertainment too. There is also telecommunications. We recently participated in the big issue [Deutsche Telekom], but before that we were clearly underweight. We were invested in the United States in that sector but the weighting was light, on an overall assessment.

You are a major investor worldwide, but still lack a global approach . . .

Compared with a global money house like Merrill Lynch we're not really a global investor ­ we're a conglomeration of local entities. Each operates in a local market within its specific legal framework. The global money-houses are free to underweight or overweight one country or the other but we have to remember the very close connection between investment and local insurance business.

Maybe there would be economies of scale or greater efficiency in a more centralized asset allocation?

Exactly, this is the future. Once the euro comes, the next step will be a reorganization of our investment entities in Europe. At the moment we have central investment units in all the major countries. Only in Germany do we still have separate bond and stock trading for life and non-life insurance companies. But we have also combined all the mortgage and real estate investments in one entity. We will see all our asset management for stocks and bonds on one trading desk.

But don't the regional managers in your various companies want to hang on to control?

Any time you try to put together separate operations there is always resistance and when we tried to centralize our German real-estate business in Stuttgart and Munich it took some years of discussion. Finally we set up a new entity; the heads of real estate were appointed heads of the new company and everything was OK. Our colleagues in Westport [Allianz of America, Westport, Connecticut] are handling US dollar investments for the whole group. And when we get lucky and successful enough in the far east I can imagine that Hong Kong and Singapore could be the locations for asset management in this region. There will always be investment people in London, Paris, Milan and so on. But what we can do together we will do and we will share expertise and responsibility.

Allianz's US-dollar denominated investments still aren't all co-ordinated from Westport but are dotted around in the different investment companies all over the world . . .

Our US portfolio contains investments worth something like $15 billion. Our US dollar-denominated investments in other countries are below 10% of that. In about 1990, when we got a very good team in place and started meeting regularly, we said: "Look, why don't you manage our dollar-denominated portfolios?" But that didn't happen from one day to the next. In future we will increasingly see French franc-denominated [portfolios] in France, sterling in London and so on.

We have an investment entity in every substantial country and for every local insurance subsidiary where we have enough volume to warrant experts for investment. The main finance committee here in Munich co-ordinates the standards of our investments on quality and investment limits and portfolio structure, plus certain decisions of major importance. We have the same committees in every country headed by the local CEO, with always one representative of the finance division here in Munich.

So the regional insurance managers still take responsibility for investment too?

That's very important, not only for legal reasons. They have overall responsibility and we [the finance division and the local investment units] are only serving them. We explain the asset allocation and so on, and increasingly we have to look at the special needs of certain products, mainly in the life business but in property and casualty too. More and more the actuaries and the investment experts sit down together and discuss how insurance products should be structured. We get into conflict only if, for reasons of competitiveness in the insurance market, we are asked to run bigger risks.

You recently reallocated some investments from Europe and the US to your new investment vehicle in Hong Kong. Is that already up to the legal limit?

No, it's the first step. When we invested the first $250 million we said that in one or two years' time it will be $500 million and in the year 2000 it will be $1 billion. I mean, it also depends on the performance my colleague [Bernd] Gutting [head of Allianz Asset Management in Hong Kong] achieves. But the perception is that the sum we invested at the outset is far from sufficient.

It's a token amount compared with your total investments?

Yes, but you know why? In the past, investments followed our insurance business. But it has been very difficult to get into the insurance business in Asia. To watch the economic growth in Asian capital markets, without being able to participate in it made us extremely nervous. So this time we had to jump ahead with the investments. Also, if we invest, we get name awareness in the markets and perhaps open the door for licences, client relations and so on. But in all other countries the insurance business came first, based on our calculation of what profit we could get out of that, and the investment side followed.

Is there a maximum size to the portfolio? Would you say Dm400 billion was too much to manage?

No, there is no ceiling, that is exactly the point. It is not a case of managing investments from Munich for the whole world. You have to be there in the different markets because there are so many specialities and varying conditions. I don't think by reading research material in Munich I can get a feeling for who will perform best in the far east. Market capitalization in the far east is something like 4% or 5% of world capitalization but you have to know that region counts for more than 50% of the real estate companies' world capitalization.

You have to know all these specialities and that is why you have to share responsibility, you have to share management and you need good investment teams in all the major locations. On that basis there is no difference between Dm400 billion and Dm800 billion.

Presumably your motive with the Hong Kong venture is also to help increase your investment yield. Last year your investments earned 7.2% overall. What are your targets?

There's no point in setting an overall investment target for a group which invests in so many different countries. But for every country we have targets, we have benchmarks for every type of investment and we also regard our peer group as the leading benchmark. We compare our peers regularly on a world-wide basis and look where we are in terms of competitiveness. But the results you get are so debatable, since we're still comparing book value with market values.

Our good competitors AIG, for instance, have leasing and other financial business we don't. Or in other countries you have a much higher interest yield. The portion of realized gains differs from company to company and from country to country. So I think it's best to compare under the same conditions in the same country.

You place the highest value on liquidity in your portfolio but some of your biggest participations simply don't offer you the liquidity you want. When you restructure your portfolio after Emu, will you divest these big participations?

If you follow the principle of congruence and need liquidity, then you are stuck with 20 or 30 blue chips and very quickly you accumulate a percentage which may appear too important relative to your exposure in other countries. Because of the German tax rules we have had to give up some flexibility to optimize our tax position. We have put some participations into separate legal entities for reasons of tax optimization: you get tax exemption if you own at least 10% of the company's share capital. So in the small German market it is not difficult for a big investor to get 10% alone or together with another shareholder. This makes you inflexible.

But I think it's natural to further increase the flexibility of our trading portfolios and I think this will be the case in the coming years. Constructions like indirect participations and concealed participations are outmoded and will be abolished. They will be replaced by clear performance-orientated, index-orientated or stock-picking-orientated portfolio management.

But isn't it near-impossible for you to significantly reduce these big participations because of the punitive capital-gains tax ­ it must be over 60%?

We have absolutely not given up on realizing gains because of the tax problems. There are ways to transfer 50% of the gain on real estate. Sometimes if you have a counter position you can find tax solutions, and even if it is not possible we would not avoid a good deal for tax reasons only.

There's still a huge difference between book and market value on most of your participations.

Do you want me to give you an average so you can work out our hidden reserves? In 1997 we'll do it for you and you won't have to do any calculations. We have to publish those figures for securities for that year and for real estate for 1999, but I think we will do it for both real estate and securities for 1997.

Away from insurance

There's a debate going on within Allianz about the group's identity. Many in management believe that Allianz should remain a pure insurer, while others say you should go more down the asset-management route to generate the right returns.

Well, there are always discussions going on within Allianz. Fortunately we are not asleep and we are discussing all the time which is best for us. We have seen many big corporations in this country which diversified and diversified and now are cutting back to the core business. We always stuck to our core business because we thought we should do what we know best. In our core [insurance] business we improved our underwriting result from minus Dm1.8 billion [in 1991] to Dm85 million [in 1995]. Without the investment results we break even.

This proves we made the right decision to focus on our core business. But having said that, the definition of core business may change. That is to say a clear separation between banking and insurance can no longer be so strictly determined. We have to see clearly where our focus lies.

Is it only life insurance or might it also be asset management?

We already do asset management within the Allianz Group. In Italy Riunione Adriatica (RAS) is number six in the mutual fund business and has a special sales force just for financial products. In Germany, Allianz Asset Management operates for third parties but the business is not very significant because our exclusive sales force still does mainly insurance. We keep a close eye on the definition of our core business but we wouldn't come up with a change before we have exactly defined projects.

There's no dream of Allfinanz?

No, we are not dreamers. We think constantly about strategies. Sometimes we change them as the market changes. Up to now there have been two kinds of Allfinanz strategies: the integrated financial group and the group on a cooperation basis. We belong to the latter. But sometimes we think there may be more arguments in favour of the integrated group. We feel that we are very competent in life insurance, where we always outperform the industry average. In industrial business we are one of the few companies able to follow our clients all round the world. More and more, Allianz's risk managers are trying to devise special solutions to specific problems. I do not know whether one-stop shopping is really the client's wish. Our judgement can change from case to case: for every market we have to decide whether we should provide the whole range of products or should we share the expertise of a partner?

But your sales structure is an ideal basis for selling financial products.

Possibly. There are several possibilities for the sale of financial products as there are for insurance. We sell through our sales force as well as through banks with more than 10,000 outlets worldwide. In the pensions business it might be a good idea to bring the best of banking and insurance expertise together. And we are well placed in various countries. But before I say "this is the business of the future" or even [that one activity is] a major diversified field of business ­ we have to reach an internal decision for each market.

How would you develop such co-operation?

Through joint ventures, for instance. We have started a joint venture in Mexico with Dresdner Bank and BanCrecer.

Even by thinking about the possibility of distributing financial products you are coming into conflict with your closest banking partners, Dresdner Bank and Bayerische Hypo-Bank.

Apart from our very good co-operation in insurance and in real estate financing, we know there are some areas where the markets overlap. In every co-operation we have a clear understanding as to the limit to which each party goes but there is room enough for joint initiatives in new areas of business in Germany or other countries. There's no reason to get into conflicts. We sit down together and find efficient solutions.

Some people say you were obliged to increase your shareholding in Dresdner Bank [in 1992, from 18% to 22%] in order to strengthen that co-operation. Otherwise it might have been threatened by Dresdner not wanting to continue.

No, that's not true. Like us, Dresdner Bank receives benefits from this co-operation and we wouldn't be doing business without these benefits. I think Dresdner Bank would do the same business if we had a few per cent less and they wouldn't do it if it were it not profitable for them ­ even if we had a 30% shareholding or more.

That's not the reason. Our investment people say they like to work with Dresdner Bank, sure, but they also work with other good banks. We don't say to them "you may contract only with this or that bank". They are responsible for their performance and they go where they get the best terms and where they can best work with the people.

You are regarded as a very conservative company. There are obviously virtues in that but they are unfashionable virtues at the moment.

I know we have this image, and for me being conservative is nothing to be ashamed of. If you have seen whole industries collapse, as we have... Some insurance industries are in very bad shape because of their investment in mortgages and have had to make huge write-offs. We do big business in mortgages but we have not 1%, not one basis point, in losses. We can accept that we look less attractive in a given quarter of the year but I would always be prepared to compare our performance over one year, two years or five years.

Is that why you would not consider a joint venture with an investment bank?

No, there is no such decision. Up to now we have not done so because we wanted to focus on our core business. Concerning the rush to acquire investment banks our attitude is to look at the goodwill attached to every person we would buy. We believe that to manage a portfolio of Dm300 billion book value ­ it's not market, it's book ­ we should mainly focus on that business. I could think of good relationships with people in several places in the world where we would contribute the risk and insurance know-how and our partner would put in the investment expertise. It's not necessary to acquire an investment bank or to purchase asset managers.

Are you under the same pressure to perform as global investment houses which argue they can make 20% return on equity?

We don't think we should not try to be as good as others. We compare ourselves with the market and with the indices. We compare ourselves in every country with our peer group and we try to be a bit ahead in every country. But even then there is a difference between mutual fund business and insurance because we, like the banks, have to put together our portfolio in strict accordance with our liabilities. With a mutual fund you can get the pay-out just at the wrong moment. We have a duty to take care that this product gives really secure profitability at any time. That is why realized gains are spread over the whole period of the savings process. So people who got their insurance pay-out in 1987 did not suffer from the [stock market] crash.

But now Anglo-Saxon-type values have come into the market. You're surrounded by banks like Deutsche, which has gone the Deutsche Morgan Grenfell route, and by insurance groups in the United States whose capital-market subsidiaries are gearing up their performance.

No, I don't think we are under pressure, because we have a different core business. And up to now we have always focused on the insurance business with the constraints and the targets I talked about. I don't think Deutsche Bank or Morgan Grenfell are really an alternative to that business profile. I agree about the competition which comes from the asset management side. Insurance and several sorts of old age provision are no longer so clearly separated and of course if you think of pension funds we have to compete for the last Deutschmark or euro.

Yield enhancement

So how far are you going toward more yield enhancement and risk management on the asset side, say by using derivatives or more trading of liquid portfolio? Are these techniques you are developing or are they of lesser interest because of your long time horizon?

None of this is new to us. The trading in general will be a bigger proportion of our activity. I would be glad ­ and we regularly propose it ­ if the [German] government were to get rid of the double-taxation problem. In this case we could cut all these special legal entities and put everything into our trading portfolios. Then there would be greater trading activity; that's for sure.

What about derivatives?

We use them, But, compared with the banks, the use of derivatives does not have the same importance here because we do not need them for asset-liability management in the short term. It all depends on the investment horizon we have and the investment horizons are so different that we do not have to take care of day-to-day liquidity. We do it for our portfolio management, preparing sales and purchases. We do it to get closer to, or further from, our benchmark. We have clear regulations, we have exit limits, we have stop-loss limits, and it works.


Well, if we have a benchmark of, say, 40% stocks ­ German stocks or European stocks and so on ­ then we can adjust our strategy by using futures, sometimes better than by doing it in cash.

Do you do that in-house?

Yes, but frankly we do not have a special derivatives trading group. I have already talked about how we are bringing all our expertise together in one place. One way of achieving this is to have one single trading capacity. We also have very good centralized cash management for all group companies in Germany and also some foreign companies. After Emu we may have all stock and bond and commercial paper, money-market traders and portfolio managers in the same department. Research will be located in one place, and here too will be the specialists in derivatives. This is one advantage of our size; we can afford to have specialists in every business, and we do.

What about investing in hedge funds or funds of funds, or putting out some of your portfolio to outside managers?

Funds are not off-limits and we have invested in them in some countries. But when we found out that our own results were better than the externally-managed ones we withdrew our portfolios and did it in our own entities. Nevertheless, we are doing special funds in our asset-management company and I wouldn't resist if my managers in any country told me that investing in funds of funds was the best way. But the principle is that we want to have the know-how in-house and we don't want to give away our money. If we think that other people can do it better then we have to improve until we have the same capability. Sometimes we give funds to special-relation investment bankers in the US or the UK as a basis for discussion. Then we meet regularly ­ it's a good exchange of ideas ­ and try to compare their performance with our own.

What sort of size are these portfolios that you put out?

These are about $100 million each.

And would that be just for a short time?

Not necessarily, that depends on their success. As long as they are performing really well, the position is maintained.

How much would you say you have out like that?

These are positions that change. We had outsourced a fund in the UK but we took it back when the performance was not good. We still have something in the UK, in Italy, in the US, and in Germany. This depends also on whether there is new know-how in the market which we would like to tap on the basis of real business. I could not tell you exactly or consolidate it for the whole group but it is by far a minority part of our portfolio.

Is there a difference in philosophy between the financial mathematics you use for investments and the actuarial skills you use to predict insurance losses?

Not really, and they are coming closer together. More and more we sit down with the actuaries to get products in place and also to work out investment strategies which mesh with those products. There is another field, alternative risk, where financial and insurance people meet to find overlapping products. This will be a pattern of the future ­ that more and more these two businesses come together.

What kind of things are these alternative investments?

This is the ART [alternative risk transfer] market, which is about trying to transfer insurance risk on investment instruments. This is not yet fully developed but it is on its way and we have to position ourselves. There are professional teams in several corporations. We also put in place a team to get to grips with the needs of our clients and to coordinate the existing know-how in our group. In the industrial business too, you have to offer alternatives to the traditional products. Even if 80% of clients stay with traditional insurance coverage, the risk managers need to offer alternatives.

But this is nothing to do with catastrophe futures?

Yes, all these are instruments which are between insurance and finance. For instance, you issue a bond with a high yield, and if there is a catastrophe, like an earthquake, then you may have no yield at all, or lose part of the principal. You transfer opportunities and risks to the investor. Or you might have a substantial need for liquidity in the case of turmoil in the capital markets. For these purpose the insurer might wish to be secured and get a long-term put on the stock or bond markets.

Are you leaders in this field?

No, I wouldn't say that. This was not our initiative, others came first.

One of the problems is getting insurers to provide enough information to develop an index on certain risks which can then be turned into financial instruments and laid off.

The data on risk history is too useful to each insurer to allow it to be aggregated and put into an index, and thus made public. But in a way we reveal the risk structure in the calculation of our premiums. This is one advantage of a group of our size. In the past you had to use the official market statistics from the supervisory office. [Since the deregulation of the German insurance market in July 1994 insurance companies need no longer disclose their actuarial statistics to the supervisory office ­ and thus to competitors.] At Allianz we have enough statistical material to do it on our own databases and that is why, in a deregulated world where many people think we would have less chance under tougher competition, the contrary is the case because we have all this know-how in house and all the data you need.

In a way that is my point. You've got a competitive advantage now. But if you were to be public-spirited and make your database available to the market, you could create financial instruments for risk transfer.

Why should we make our advantage available to the market? We might do, if this was the monastery you seem to think it is (see box page 44). The fact is, if you come out with a product, after a certain time you can be imitated, but the imitators cannot find out whether they have the portfolio structure needed to achieve the mix of risk which will contribute to profitability. If you have a competitive edge by being able to calculate these alternative risk programmes, then you use them. We try to turn a profit from our experience ­ of earthquake risk for example. The fire catastrophes in California didn't touch our business, because long before we had decided to identify the sites where it's dangerous to insure villas and mansions. That's the advantage of a big portfolio, and of good research on our database.

Do you think your research on the insurance side and your research on the assets side have a lot to say to each other?

Sure. The global risk of the company is something we look at, but we could do far more in this respect. Very often we see that in the capital market one risk is followed by another. There is not always a balance, that when one market goes up the other goes down. Often they are going in the same direction and if you have large liquidity needs, just when the bond markets are performing very badly, you realize losses. So we need to think about overall risk management and thus minimize risk.

By using derivatives?

That's one way, and the portfolio theory of asset management will be applied to the overall business in a certain way, sure. But expertise is still lacking in this area. We will be sponsoring a chair at Berlin University for that very purpose.

But most of the development is coming out of the investment banks.

In this field a lot is coming out of the investment banks, true.

Banking relationships

So maybe rather than sponsoring a chair you should do a deal with JP Morgan?

The one does not preclude the other. I do not expect to get all our basic knowledge from one university chair but it is good to have the same training and thinking within the company and to exchange ideas not only with one university but with a lot of them. But you're right, the creativity of many investment banks can generate so many ideas for our day-to-day work. We could never afford not to talk to them and not to listen.

Presumably you get proposals all the time from investment bankers. What do you talk about, given that there are quite a lot of avenues that seem to be closed off to them?

That's their business but our principles are clearly known in the market. We don't follow the bankers' thinking that says "you have the money, we have the ideas, we get a fee and we manage it for you". Everyone knows this. But it doesn't prevent us from seeking advice from investment banks when we need it, for example, in the M&A business.

Are you very mistrustful of research done by brokerage houses or investment banks?

No, not at all. We try to take profit out of this professional research. But at the same time we're not limited to reading only German research. There is good research in London too on Germany. But apart from that, our people go to the corporations for talks; they do it from Hong Kong as well as from here. In the US too there are some major long-term relationships where our people know companies and their management well. We subscribe to the very individual stock-picking approach as well as all sorts of macro and see no need to invent the same things a second or third time. That is why we talk regularly with the good investment houses in London, New York, in Paris, and of course in Frankfurt.

Would you say you have a special relationship with the people at Dresdner Bank?

There are also good personal relations with other banks. Our portfolio managers go where they get the best advice and the best terms. Often there's a very personal factor. The same is true at management level.

Are there particularly good people at Dresdner Bank?

You want me to make judgements. They are good, yes, they are very good.

Although these people might be good, in global terms Dresdner Bank does not yet add up to a global firm.

Just like us, Dresdner Bank has not been ready-made and they are experiencing the same global development in their sector as we are trying to develop. That is why, if you ask them, they will tell you that they could still add a lot of know-how and activities in other fields. This is a constant process. There's no need for us to work together exclusively in every country of the world. Where there is a fit we do so, but there must be an advantage for both sides. When it is better to choose another bank or other partners, that's OK.

You seem to be doing more business with Deutsche Bank in investment banking than you did a couple of years ago. Is that true?

We do business with Deutsche Bank and although we are competitors there is no reason not to do business if it is worthwhile. They have very good people and give good advice and if there are good opportunities we will clearly do business with them.

Do you mean to say they are your competitors because of Deutscher Herold [Deutsche Bank's in-house insurer] whereas Dresdner isn't in the same way?

Yes, they are competitors in the insurance field.

Didn't Deutsche handle your recent capital issue?

The last one was handled by Deutsche, the previous one by Dresdner. It varies.

German roots

Are you happy with the way the German government is making Germany a more attractive place to run a business in, especially from a tax point of view?

I think the government's current plans to cut taxes and to reduce public consumption as a percentage of GDP are two of the best ideas one should develop. I very much hope they can be realized because it is not good for an economy to have public consumption of more than 50% of GDP. There is also the double taxation we mentioned. I think the first step will be made with the government's current tax reform.

But if it doesn't happen soon enough Allianz Holding might seriously have to consider leaving Germany altogether if you really want to reduce those strategic participations. Since you've only got 300 people working here in the holding company at the moment, it wouldn't be out of the question.

No, we have to be in the market. Germany is one of the biggest insurance markets and I don't think we could sit in Bermuda doing German insurance business. I mean, up to now we have been fairly profitable in this market. So we can't complain. Germany is in a period of reorientation and restructuring but I'm convinced that after a certain time, perhaps not as quick as other countries, but in the end we will see that there are good human resources as well as industrial resources in Germany. I believe we will also create a tax system which will enable us to remain competitive.

So the message for Allianz is to consolidate insurance and investment in Germany and to expand elsewhere?

We are not so sceptical. There is a consolidation in industrial production, and other regions are growing faster than we are. As insurance follows the production sector, this slower growth clearly has an impact on our sales figures, if not on our profits. Still, we have to go on cost cutting and we have to be active in other parts of the world where we see quicker growth.

Even if your insurance was not doing so well but your investments were doing well, would you still leave a market? Would you judge it just on the basis of the insurance business?

No, that's another way. If you believe that you should diversify your risk and get a better profit with a smaller risk then you have to do this diversification in other parts of the world. Besides Europe you have to be invested in the US, in the Far East and so on. Also, a certain proportion has to go into emerging markets. So even if a country held no interest for the insurance business this would not mean we wouldn't buy stocks there.

As far as congruency allows you to?

In such a big portfolio you have always freedom to invest a certain proportion outside congruency and this flexibility is growing.

You didn't have a rating in the past and your name has become better known, if anything, so why seek a rating now?

I believe we cannot refrain from getting rated. Where it plays a role, for instance in the US, our clients only place business with managers that have a certain rating quality. That's why we have a rating there. This may also be the case in pension fund management. We don't need it for name awareness but we need it to prove that we're not just a name.

Is this in preparation for a New York listing?

No that's not the reason, although that's probably how it will turn out in the end. But first, we have to wait for international accounting standards (IAS) to be laid down for the German insurance industry. I think it will be two years or so before that is common practice. We are convinced that IAS is a very good thing. People can compare our strengths, which sometimes they don't believe because we are labelled "very conservative and not very aggressive". Why shouldn't we show our quality when figures and developments are comparable?

Would IAS affect the way you do business?

It will lead to a greater earnings volatility. At the moment we try to translate volatility into calculable and reliable results for the client and the shareholder. With a change of market values and reserves under IAS, one day you can look rich, the next you can look poorer. This may lead to more discussions with clients.

Is Allianz coming under significant new pressure to explain itself to investors and maybe to its insurance clients too?

It's not real pressure, it is about changing behaviour in the markets and also on the demand side. I am convinced this will take some time but we should be prepared in advance. We are also prepared for a deeper level of discussion with our clients as well as with our shareholders. You can see this change in investor relations. This is rather recent. In the course of the year we hold meetings with hundreds of analysts and investors and so we get a condensed version of what information matters. There may be other companies ahead of us but we've made some significant steps forward.

You are aiming to increase net return on equity to 15% within about four years. Will investment contribute a larger share of earnings than it has in the past?

It can contribute, but I think the bulk of the performance will come out of our insurance business. There is always risk reward and we are experts in risk management on the liability side.

That's why we have to have top-quality assets, to meet our obligations to our customers without the need for extra capital reserves. We have certain quality standards. We know the yield in the market is not 20% or 30% in the long term, so if we really make a leap it will be in the insurance business.