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Following Allianz’s Q3 2018 results, we maintain our BUY recommendation on the stock and Price Target of €207.

We like Allianz for the following reasons:

– Very well capitalised

– Buybacks

– Strong management provides confidence

– Indicative Gross Dividend yield of 4.28%

– Sustainable earnings growth

Allianz reported a good set of results for Q3 2018. They stand out for the following reasons:

  • No unusual losses were incurred during the quarter due (eg from hurricanes)
  • Allianz's combined ratio in its property and casualty division, a key measure of profitability, was 93.1%, down from 96.9% a year ago. Readings below 100 indicate profitability
  • The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium.
  • Pimco reported strong inflows of €15bln compared to consensus expectations of €10bln

Investment Rationale

Management also confirmed that Allianz is on track to exceed the mid-point of its target range for operating profit of €10.6-11.6bn. Our model is factoring in operating profits coming in at top end of guidance.

Allianz delivered a good operating performance in the first three quarters of the year, with strong capital generation and solvency. Management has guided cautiously; however we believe that the recent pullback in global equities presents a unique opportunity to purchase a valuable stock at a discounted price.

Main points from the Q3 2018 results

  • Q3 18 net profit surged 24 percent from a year earlier
  • Management confirmed it was poised to meet its 2018 operating profit target of €11.1bln
  • The company has performed strongly across the board so far this year and productivity gains were substantial
  • Companies in the insurance sector, including Allianz, are expected to bounce back from losses incurred by hurricanes, fires and earthquakes in North America in 2017 – the industry's costliest year ever
  • Allianz's combined ratio in its property and casualty division, a key measure of profitability, was 93.1 percent in the third quarter, down from 96.9 percent a year ago. Readings below 100 indicate profitability.

Profit guidance

In 2018 Allianz is targeting operating profits of €11.1billion. Our estimates target the top range of this figure. Allianz has consistently beaten its guidance since 2012.

Price target

We value Allianz at 12x earnings, which is reasonable given the constancy of earnings growth. Based on our in-house earnings discount model we set a one year price target of €207 per share.