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We have a price target on Allianz of €230. Allianz should be a core holding in clients’ portfolios. The increase in price target came about after forecasting an improvement in growth, a reduction in accident frequency and attractive pricing in its non-life business. We also like the shares because they are trading on an indicative gross yield of 4% and a forecasted earnings yield (2018E) of 9%. Allianz is also well positioned to benefit from a change in monetary policy stance by the ECB.
We have a 5% allocation to Allianz in the Euro Equity Fund.
About the Company
Allianz SE is a German financial services company headquartered in Munich, Germany. Its core businesses are insurance and asset management. As of 2014, it is the world's largest insurance company, the largest financial services group and the largest company. The company is a component of the Euro Stoxx 50 stock market index.
Positive Outlook for Sector
The sector has outperformed the broader European markets for five out of the past six years. Due to this outperformance, inevitably there will be investors who start to assume that the insurance sector is now expensive.
However, we believe that the sector is well positioned to benefit from increased growth in Europe and across the world.
In fact, the sector’s outperformance relative to the market has been driven by its superior EPS momentum, such that the sector’s PE discount today remains in line with the 10-year average.
Looking ahead, not only do we see a positive outlook, but we also believe there is a case for this discount to close, due to:
1) Improvement in sources and uses of earnings (for example, a potential to increase dividends)
2) increasingly strong balance sheets
Investment Rationale
We rate Allianz OW with a €230 price target for the following reasons:
1) Strong cash flow position – possibility of increasing an already attractive dividend. The Gross indicative yield is at 4%
2) Increase in forecasted earnings – earnings are expected to continue to increase in the years ahead. From €15.05 in 2016 to €15.96, €17.96 and €18.89 in 2017, 2018 and 2019 respectively
3) Attractive forecasted earnings yield – the shares are trading on a forecasted earnings yield (2018E) of 9%
4) Growth – The company is focused on growth, unlike peers, which we believe should help offset the negative impact from low interest rates
5) Accident Frequency – We believe that reduction in accident frequency will drive an improvement in motor insurance profitability
6) Non-life insurance – Allianz benefits from one strong trend, which is continuing attractive pricing in non-life in Europe, particularly in personal and small commercial lines. Non-life insurance in German core market performing well. Non-life in French and Italian markets is expected to increase contrition to revenue going forward
7) Life insurance – Life segment outperforming expectations
Concerns
Slowdown in global growth, an increase in equity frequency, greater competition and PIMCO not being able to retain and grow its assets under management.
Conclusion
We are comfortable holding Allianz in a well-diversified portfolio. It is well positioned to continue to benefit from further growth as global economic growth continues to remain supportive.
Allianz has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead.
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