Moody’s sees ‘very strong earnings’ for Allianz despite headwinds and looming inflation

Moody's Investors Service expects global insurer  Allianz to maintain “very strong earnings”, both in terms of levels and volatility, despite the pressure from macroeconomic headwinds, reflecting its improving capital efficiency and “prudent management” of asset risk exposures.

The ratings agency has the outlook to positive from stable and affirmed its financial strength rating of Aa3 of  Allianz SE, as well as its trade credit entity Euler Hermes, and  Allianz Life North America.

The affirmation of the ratings reflects  Allianz's very strong market position and diversified business model, the reduced pressure from low interest rates on the Group's life business, very strong earnings, which Moody's expects will withstand pressure from macroeconomic headwinds, as well as  Allianz's very strong capitalisation.

Allianz enjoys a leading positions in many of the property and casualty (P&C) and life markets it is operating in and the group has taken steps to further strengthen its franchise in local markets via a number of transactions. According to Moody's, Allianz's strong presence in asset management via PIMCO and  Allianz Global Investors differentiates the Group from most of its peers and further strengthens the diversification inherent to its business profile.

"As a result,  Allianz has built a very strong earnings track record, based on its proven ability to offset negative result drivers in part of its business with stronger performance in other parts. We expect  Allianz will continue to report very strong operating profits over 2022-2024, despite some anticipated pressure from potentially lower economic growth, inflation and heightened financial market volatility," the agency said.

Allianz's exposure to interest rate risk has reduced materially, it noted, thanks to “proactive new business and back-book management”. The share of unit-linked and protection products is said to have increased and the average inforce guaranteed rate has fallen to 1.8% at year-end 2021 from 2.7% at year-end 2011 and the Group has been able to preserve investment margins over this period.

In addition, Moody's believes guaranteed rate commitments are well covered for the foreseeable future thanks to very strong asset-liability management.

The Group's capitalisation is very strong, as reflected in a Solvency II ratio of 199% at the end of the first quarter of 2022. However, Group Solvency has weakened somewhat recently due to the resolution of the Structured Alpha Funds issue, financial market volatility and high shareholder returns via dividends and share buybacks. Based on the Group's capital management policy, Moody’s expects  Allianz will maintain its Solvency II ratio at levels of about 200% going forward.

"While the issue around the Structured Alpha Funds clearly highlights governance, risk management and compliance challenges associated with the complexity of the Group, Moody's believes that the financial implications have been digested and that Allianz has taken steps to further strengthen its control functions, reducing the likelihood of breaches occurring," Moody's said.

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