Allianz: Total Return Play For The COVID-19 Environment (OTCMKTS:ALIZF)

Allianz (OTCPK:ALIZF) is an insurance stalwart. Not only does it provide insurance, but it’s the home to PIMCO, one of the most renowned asset managers in the world. Its performance is in the top bracket of European insurers, with an ample and extremely well-covered dividend.

Source: Allianz Investor presentation 2020

Our investment case for Allianz is simple. It is a company that is very well-managed, having delivered consistent and solid results under the current leadership, and it trades at a discount to both other insurers and asset managers despite owning a leading asset management firm and being well-positioned to weather the COVID-19 storm. As such, Allianz is both a reliable income and capital appreciation opportunity on a sum-of-the-parts basis.

A High Performance Business

In 2014, Oliver Bäte was appointed head of CEO office. Thanks to his “Simplicity wins” strategy, the company reshaped its structure with simple and intuitive product offers across various geographies and proved to all the stakeholders to combine the customer potential of a multi-liner with the efficiency of a mono-liner insurance (Figure 1). Lower admin expense was the result of a simple structure and higher investments in productivity and efficiency (Figure 2).

According to the latest earnings call, another proud metric reached by Allianz is its high degree of customer loyalty. Recurring clients moved from 30% to 46% of its customer base. Its products strategy should be able to grow or at least maintain this level of recurring interaction, thus positioning Allianz well to generate stable cash flow for the future.

Figure 1 – source: Capital Markets Day presentation on November 30, 2018

Figure 2 – source: Allianz Investor presentation 2020

We do not anticipate any significant impact from COVID-19 on Allianz’s targets. According to our analysis, we believe that P/C and mortality claims are likely to be limited. We think that the main area where COVID-19 will have an impact is on business interruption and travel insurance, where Allianz is less exposed than AXA (OTCQX:AXAHF). Moreover, there is an upside of COVID-19 for insurers which is that the prolonged lock-down should limit auto claims over this period.

Solid capital position

Solvency ratios are particularly important in the COVID-19 environment, as a high ratio indicates a quality balance sheet and capacity to continue to pay the dividend if it chooses. Allianz is in the upper bracket among its peers with its strong capital position. In 2020, its Solvency Ratio II is expected to be at 202% vs. 191%, 182% and 213%, respectively, for AXA, Zurich (OTCQX:ZURVY) and Assicurazioni Generali (OTCPK:ARZGF).

Source: Allianz Investor presentations February 2020

Valuation and dividend

Allianz trades at ~7x 2021(E) P/E, a relative discount to the continental European composite insurers. PIMCO, Allianz’s asset management division, despite its great results, has become significantly ignored to the point where we see an unambiguous undervaluation on a sum-of-the-parts basis. Consider that pure-play asset managers like Brookfield Asset Management (BAM) trade in the 18-19 P/E range, while Allianz trades in the single digits. This goes for a lot of the asset management businesses integrated into insurance operations, implying that they are not given any emergent value by the market. The icing on the cake for Allianz is that PIMCO is one of the best asset managers in the world, making this undervaluation even more absurd to justify. What’s more is that Allianz’s insurance business is probably also undervalued, with Allianz trading at a discount to peers like Generali.

After the EIOPA statement to suspend the dividend payment and the share buyback in progress, we have seen different approaches from the single country regulator. BaFin, the German regulator, has not insisted on dividend cuts and is making a case-by-case assessment by looking at insurer dividend-paying ability. Allianz’ forward dividend yield is at 6.03%, and given its excellent and relatively insulated cash flows, it should easily be able to resume its dividend payments as soon as possible.

Risks and Concluding Remarks

Source: Allianz Investor presentations February 2020

All insurers are sensitive to macroeconomic indicators like credit spreads, interest rates and baseline levels of economic growth. Overall, with its sufficient solvency ratio, Allianz should be able to withstand rather substantial adverse shifts. However, if the economic impact of the coronavirus ends up being prolonged and substantial, its solvency situation could end up deteriorating by impacting the performance of its reserve portfolios.

Nonetheless, we see limited dividend risk in the short/medium-term horizon given its financial strength. In light of the stock’s valuation risk-reward and its total capital return potential from the dividend, Allianz is our preferred DACH pick and probably our preferred stock in European insurance.

Disclosure: I am/we are long ALIZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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