Housekeeping is housekeeping, whether for mud huts or mansions. Allianz’s announcement that it is spending about €10bn sweeping up quoted minorities in two core insurance subsidiaries certainly appears expensive, but tidying up is the right thing to do.
Buying the 42 per cent of Assurances Générales de France it does not own is a further move towards simplifying the business, a key strategy outlined by the German financial group’s new management in 2003. Allianz is also offering €750m for the remaining 9 per cent of German insurer Allianz Leben. This follows the consolidation of minorities at Italy’s RAS back in 2005.
There are clear benefits to owning AGF outright. Removing parallel layers of governance and de-listing will improve operational efficiency. More importantly, Allianz will have greater flexibility in the use of its capital.
Some investors may be disgruntled that the probability of a big increase in the dividend this year has fallen, especially as management has repeatedly said it wishes to increase its woefully low pay-out ratio – just 18 per cent last year – to the European sector average of 40 per cent by 2008. Of the total consideration for the two deals, a whopping €7.5bn will be in cash, blowing most of Allianz’s surplus capital. Management insists its dividend strategy remains unchanged, however.
Allianz can also be criticised for not having moved earlier, since AGF’s share price has surged by 50 per cent over the past 12 months. (Alternatively, it could also have used its cash to buy its own shares now, given the valuation discount to AGF.) But a year ago a big cash deal would have looked imprudent. Far better for management to have bagged this year’s record earnings – as well as equity investment gains – before making such a play, in spite of the mild value destruction. Allianz waited until it has the money to buy out its last big minorities. In insurance, such caution is no bad thing.