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Insurance Divisions Buoy Allianz Valuation in 1Q15

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Life and health profits

Allianz (AZSEY) generated a ~11% return for its stockholders over the past six months as of May 12. The company announced a 11% rise in net profits on its first-quarter earnings, up to 1.82 billion euros. This is a result of higher insurance product sales in Italy, favorable foreign exchange fluctuations, and higher margins in its Life and Health insurance business.

Allianz doesn’t pay dividends the way some of its peers do. Here’s a look at some of the dividend yields reported by others in the sector:

  • Metlife (MET) – 2.6%
  • Manulife Financial (MFC) – 2.6%
  • Invesco (IVZ) – 2.3%
  • BlackRock (BLK) – 2.2%

Together, these companies account for 3.88% of the Financial Select Sector SPDR Fund (XLF).

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Trading at par

Allianz is valued at 10.4x on a one-year forward-earnings basis. In comparison, its peers trade at an average 10.5x. The company’s valuation has improved in line with the sector, which was trading at 9x on a forward-earning basis in 2014.

Allianz management is guiding for an operating profit of 10.4 billion euros in 2015, similar to what the company achieved in 2014. So far, exchange rates have positively affected its margins by almost 50%.

Outlook

If it improves its assets base and the profitability of its asset management business, the company should be able to command a premium in the future. It will have to think of innovative ways to deal with low interest rates, which are impacting its bond business.

As Market Realist has already reported, Allianz’s asset management business is going through a transformation period since the exit of Bill Gross. Assets under management have declined by more than 50% at PIMCO (Pacific Investment Management Company).

This decline is being partially offset by growth and profitability in Allianz’s Life and Health insurance business. But low interest rates are forcing investors to look for alternatives to government debt. The major shift is resulting in investments in insurance products, which provide returns as well as coverage.

Allianz’s insurance business will continue to deliver as a result of structural changes in the European economy since quantitative easing. Meanwhile, it’s the company’s asset management business that will determine its valuation and premium.

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