Allianz Risk Transfer AG - Allianz Global Corporate & Specialty
Allianz Risk Transfer AG - Allianz Global Corporate & Specialty
Allianz Risk Transfer AG - Allianz Global Corporate & Specialty
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
Primary Credit Analyst:<br />
Jean Paul Huby Klein, Frankfurt (49) 69-33-999-198; jeanpaul_hubyklein@standardandpoors.com<br />
Secondary Contact:<br />
Volker Kudszus, Frankfurt (49) 69-33-999-192; volker_kudszus@standardandpoors.com<br />
Table Of Contents<br />
Major Rating Factors<br />
Rationale<br />
Outlook<br />
<strong>Corporate</strong> Profile: The Alternative Solutions Provider Within The <strong>Allianz</strong><br />
Group<br />
Competitive Position: A Strong And Recognizable Franchise<br />
Management And <strong>Corporate</strong> Strategy: An Effective Management Structure<br />
Enterprise <strong>Risk</strong> Management: Strong <strong>Risk</strong> Controls<br />
Accounting: Reported Premium Income Does Not Reflect The Scale Of<br />
Alternative Business<br />
Operating Performance: A Sound Track Record, But Volatility And Margin<br />
Pressure Could Arise<br />
Investments: A Revised Asset Allocation Strategy After Run-Off Of<br />
Alternative-Assets Business<br />
Liquidity: Strong, And Exposure To <strong>Risk</strong> Is Reducing<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 1<br />
1006376 | 301069137
Table Of Contents (cont.)<br />
Capitalization: Strong, With A Strong Quality Of Capital<br />
Financial Flexibility: Very Strong, With AZSE's Support<br />
Related Criteria And Research<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 2<br />
1006376 | 301069137
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
Please note that the ratings covered by this full analysis apply only to entities of the group, which are listed below in<br />
the Ratings Detail section. These ratings do not apply to any noncore or nonrated entities of the group. Ratings<br />
assigned to noncore entities of the group are published individually.<br />
Major Rating Factors<br />
Strengths:<br />
• Strategically important to ultimate parent, <strong>Allianz</strong> SE.<br />
• Strong competitive position and effective management.<br />
• Strong operating performance.<br />
• Strong capitalization.<br />
Weaknesses:<br />
Operating Companies<br />
Covered By This Report<br />
Financial Strength Rating<br />
Local Currency<br />
AA-/Negative/--<br />
• Potential for volatility in new business volumes, arising from an innovative approach to risk transfer and competitive<br />
pressure.<br />
• Potential for earnings fluctuations as a result of volatility in traditional portfolios, foreign exchange effects, or<br />
challenging capital markets.<br />
Rationale<br />
The ratings on Switzerland-based <strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong> (ART <strong>AG</strong>) and its guaranteed subsidiaries, Bermuda-based<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> (Bermuda) Ltd. and Dutch entity <strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> N.V. (collectively ART), reflect the<br />
companies' strategic importance to their ultimate parent <strong>Allianz</strong> SE (AZSE; AA/Negative/A-1+). As a result of this<br />
"strategically important" status, the ratings on ART currently benefit from two notches of implicit group support. Under<br />
Standard & Poor's Ratings Services' criteria, the ratings could benefit from up to three notches of support, but are<br />
capped at one notch below the ratings on AZSE's core operating subsidiaries.<br />
In our view, ART's stand-alone creditworthiness is underpinned by its strong competitive position, effective<br />
management, strong operating performance, and strong capitalization. These factors are partly offset by the potential<br />
for volatility in new business volumes, which may arise as a result of ART's innovative approach to risk transfer and its<br />
opportunistic strategy in terms of business development. We believe earnings could continue to fluctuate because of<br />
the still challenging conditions in the global economy and financial markets, foreign exchange effects, or volatility in<br />
traditional portfolios.<br />
We consider ART strategically important to AZSE, due to its strong operational integration and business relationships<br />
with other <strong>Allianz</strong> operations, especially with its intermediate parent <strong>Allianz</strong> <strong>Global</strong> <strong>Corporate</strong> & <strong>Specialty</strong> <strong>AG</strong> (<strong>AG</strong>CS;<br />
AA/Negative/--). In addition, the company plays an increasingly important role in <strong>AG</strong>CS' expansion plans and is the<br />
competence center for alternative insurance risk transfer solutions, which, we believe, provides the wider group with<br />
the means to maintain a competitive edge with corporate clients.<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 3<br />
1006376 | 301069137
ART's competitive position is strong, in our view, and management is a positive factor for the rating. The team's<br />
success to date is a reflection of its small, manageable size and adherence to strong underwriting discipline, coupled<br />
with access to the resources of one of the world's largest insurance providers. The termination of ART's<br />
alternative-assets business in 2009 underlines ART's strategic refocus on risks related to insurance and reinsurance,<br />
which supports other initiatives of the <strong>Allianz</strong> group. We expect ART to continue to increase its share of traditional<br />
business and pursue its opportunistic approach in the alternative risk transfer segment, backed by AZSE's increasingly<br />
cohesive approach to managing relationships with key corporate and reinsurance clients.<br />
We view ART's operating performance as strong. ART has made a positive contribution in each of its 15 years in<br />
operation, providing a consistent stream of earnings to the <strong>Allianz</strong> group. ART has regularly been a top-quartile<br />
performer among <strong>Allianz</strong>'s subsidiaries according to economic value-added analysis (EVA), which is one of AZSE's<br />
main metrics for appraising the performance of its subsidiaries. We expect ART's focus on maintaining the diversity<br />
within its risk portfolio to continue to underpin a sophisticated approach to risk management. This, in our view, should<br />
enable ART to report sustainable net income of more than €40 million on its nontraditional business in 2012 and<br />
continue to exceed its parent's EVA targets. However, rising competitive pressures could dampen margins on new<br />
transactions.<br />
We regard ART's capitalization as strong and we expect it to remain at least strong because of its very strong capital<br />
adequacy as measured by our risk-based capital model. We believe that the company needs to operate with capital<br />
that is at least strong to maintain a buffer against potential earnings volatility and finance further business expansion.<br />
In addition, we believe that AZSE is committed to maintaining ART's capitalization at a level commensurate with our<br />
rating parameters.<br />
Despite what we view as ART's robust risk management framework and consistent earnings track record, the<br />
alternative nature of the deals it underwrites within the nontraditional segment means that the risk of earnings<br />
volatility remains. This can stem from asset or liability exposures, until ART has fully shifted its remaining alternative<br />
assets to lower-risk classes and reduced the relative weight of alternative-asset exposures in the investment portfolio.<br />
ART's nontraditional portfolio is also exposed to structured credit and long-tail casualty lines (for the latter there is a<br />
long time frame between claims-causing incidents and claim settlements). As a result, the continuation of a challenging<br />
economic environment could hamper the earnings of these lines. Nevertheless, we believe that ART's stringent<br />
approach to setting risk limits, the diversity within its nontraditional portfolio, and its sound record partly mitigate the<br />
downside risk to earnings.<br />
Earnings volatility can also arise from insurance risk in the traditional portfolios or from foreign exchange effects in<br />
ART <strong>AG</strong>'s profit and loss account. This is because most of ART <strong>AG</strong>'s transactions are either structured in U.S. dollars<br />
or euros, while it reports publicly in Swiss franc.<br />
Outlook<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
The negative outlook on ART reflects that on its ultimate parent AZSE. We expect that ART, in view of its strategic<br />
importance to AZSE, will continue to benefit from financial and liquidity support from AZSE and its intermediate<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 4<br />
1006376 | 301069137
parent--<strong>AG</strong>CS <strong>AG</strong>--if necessary.<br />
A negative rating action on AZSE would trigger a similar action on ART. We could also lower the ratings if ART's<br />
strategic role within the <strong>Allianz</strong> group or financial support from the group were to weaken, which we consider unlikely<br />
however.<br />
We regard rating upside as unlikely at this stage.<br />
<strong>Corporate</strong> Profile: The Alternative Solutions Provider Within The <strong>Allianz</strong> Group<br />
ART was formed in 1997 as the center of excellence for nontraditional risk management techniques to enable the<br />
<strong>Allianz</strong> group to offer holistic risk management solutions to its clients. Since the termination of the alternative-assets<br />
business in 2009, which was placed into run-off, ART has focused on three strategic business segments related to<br />
insurance and reinsurance risk: <strong>Corporate</strong> Solutions, Insurance-Linked Markets (ILM), and Reinsurance Solutions,<br />
collectively referred to as "nontraditional" business. Furthermore, ART is expanding its business share in the traditional<br />
insurance business, operating more in line with <strong>AG</strong>CS.<br />
ART is highly integrated into <strong>AG</strong>CS' operations, sharing management responsibilities in different central departments<br />
like finance or risk management. Furthermore, the company is integrated into the <strong>Allianz</strong> group's plans for an<br />
increasingly systematic approach to serving corporate and reinsurance customers. ART lends its expertise to the<br />
group's product offering in the area of alternative risk transfer and underwrites or otherwise facilitates transactions on<br />
behalf of the <strong>Allianz</strong> group. The termination of its alternative-assets business is a reflection of ART's strategic shift<br />
toward insurance-related risks. We understand that ART will continue to write traditional industrial insurance business,<br />
directly or through its subsidiaries, at various locations, such as in Switzerland, the Gulf region, and South America.<br />
ART <strong>AG</strong> is the parent company of the ART group and it maintains subsidiaries in the Bermudas and the Netherlands,<br />
which it guarantees, and is in the process of setting up a subsidiary in South America. We do not expect any changes<br />
to ART's current legal structure.<br />
Competitive Position: A Strong And Recognizable Franchise<br />
Table 1<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong>/Competitive Position<br />
--Year ended Dec. 31--<br />
(Mil. CHF) 2011 2010 2009 2008 2007<br />
Gross premiums written (GPW) 787 1,259 1,154 1,331 1,675<br />
Annual change in GPW (%) (37.4) 9.1 (13.3) (20.5) 87.5<br />
Net premiums written (NPW) 234 871 677 1,128 1,441<br />
Annual change in NPW (%) (73.2) 28.8 (40.0) (21.7) 85.1<br />
Net premiums earned 404 787 775 1,214 1,270<br />
Total revenue 444 838 831 1,308 1,336<br />
CHF--Swiss franc.<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 5<br />
1006376 | 301069137
ART has developed a strong and recognizable franchise in the nontraditional alternative risk transfer segment, thanks<br />
to its structuring expertise and reputation as a consistent source of financially strong risk capacity. We consider that<br />
ART's adaptability, which stems from its size and structure, enables it to take advantage of short-term dislocations<br />
between traditional markets and corporate customers' demand for individualized insurance solutions.<br />
ART's competitive position benefits from access to the resources of the <strong>Allianz</strong> group. ART works closely with other<br />
members of the group, mainly global industrial and specialty lines writer <strong>AG</strong>CS and a virtual reinsurance unit within<br />
AZSE, called <strong>Allianz</strong> Re. In its <strong>Corporate</strong> Solutions segment, we expect ART to further participate in, and benefit from,<br />
a "select account" initiative. In this combined initiative with <strong>AG</strong>CS, ART aims to better exploit the group's broad-based<br />
expertise to enhance its service offering to key corporate clients, with benefits for both <strong>AG</strong>CS and ART. ART focuses<br />
on multiyear captive solutions and tailored client solutions. Since the initiative started in 2007, the relative weight of<br />
deal income from this business segment has increased, reaching about 39% in 2011 after an average 23% in<br />
2004-2007.<br />
In the ILM segment, which contributes about 42% of ART's deal income in 2011, ART acts in multiple functions along<br />
the value chain of ILM transactions. This provides it with what we consider to be thorough market expertise in a field<br />
where insurance and capital markets converge. Furthermore, ART coordinates business activities with <strong>Allianz</strong> Re and<br />
contributes its expertise on investor demand (namely, the placement of <strong>Allianz</strong>'s risks into capital markets, which is<br />
ultimately executed by <strong>Allianz</strong> Re). A key focus is on products related to natural catastrophes.<br />
Reinsurance Solutions contributes about 3% of ART's deal income in 2011, which is far below our expectation of about<br />
18%. The decrease resulted from the high amount of natural catastrophes in 2011. ART underwrites, via brokers,<br />
special coverage--similar to those in the <strong>Corporate</strong> Solutions segment--for other clients that traditional markets do not<br />
cater for.<br />
Over the years, ART has built direct relationships with both intermediaries and clients. This has enabled it to establish<br />
a franchise in its own right, further reinforcing its competitive position. Moreover, ART benefits from its strong position<br />
in a variety of distribution channels.<br />
Prospective<br />
We expect ART to continue to expand its market shares in traditional business, offering products that are in line with<br />
<strong>AG</strong>CS. We also expect further integration of ART within <strong>AG</strong>CS as the company takes over responsibility for business<br />
in some growth markets. ART is in our view likely to expand its nontraditional alternative risk transfer book as<br />
appropriate transaction opportunities arise, but we believe growth will remain constrained, particularly in challenging<br />
economic conditions. This is because alternative risk transfer solutions are often rather complex, perceived as<br />
expensive, and require both clients and risk carriers to have considerable know-how.<br />
Increasing competitive pressures in the corporate solutions and insurance and reinsurance segments will likely<br />
dampen new business growth and create some margin pressure on new transactions. However, we think that the<br />
growth of the sector, at least in terms of premium volume if not deal flow, will be spurred by episodes of short-term<br />
dislocations in traditional markets and clients' increasing appetite for, and acceptance of, structured solutions. Over the<br />
longer term, ART's continued successful collaboration with <strong>AG</strong>CS and other group companies in a maturing alternative<br />
risk solutions market could further support our view of ART's strategic relevance within the <strong>Allianz</strong> group.<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 6<br />
1006376 | 301069137
We consider ART's unique entrepreneurial culture, fast response rate, and ability to innovate to be critical to its<br />
ongoing success. Consequently, an erosion of any of these characteristics is likely to have a negative impact on our<br />
view of ART's stand-alone financial strength.<br />
Management And <strong>Corporate</strong> Strategy: An Effective Management Structure<br />
We regard ART's management as a positive factor for the ratings because it is a small, strong, and closely knit team<br />
with extensive multidisciplinary experience. We consider management's adherence to ART's focused strategy and the<br />
robustness of ART's approach to risk management to be important factors for its success.<br />
Strategy<br />
One of ART's main functions is to help AZSE broaden and deepen its franchise in international industrial lines<br />
insurance. However, in our view, ART is selective in risk-taking and may occasionally act in an advisory capacity to its<br />
affiliates, without taking the underlying risk.<br />
Unlike a traditional insurance company that tends to buy and hold risk, ART uses its structuring expertise to actively<br />
manage its exposures. We view this approach as positive because it enables ART to manage its aggregate exposures<br />
within its risk tolerance, as well as to generate excess returns in certain situations.<br />
ART is selective in underwriting and structuring profitable business. ART's business acquisition strategy is<br />
opportunistic, in our view, because it tends to participate in deals that enable it to develop unique structuring<br />
expertise. The company exploits this expertise, either as the principal risk carrier or in an advisory capacity. ART's<br />
underwriting approach facilitates sound profitability, as demonstrated by its positive track record.<br />
We expect the level of integration between ART and other members of the <strong>Allianz</strong> group to increase further. We<br />
believe that ART's client focus, risk-modeling know-how, and structuring expertise will ensure its continued role as an<br />
intrinsic part of the <strong>AG</strong>CS division and the broader <strong>Allianz</strong> group. ART's know-how also supports the group's<br />
placement of insurance risk into capital markets.<br />
Operational management<br />
ART's operational management is strong, in our view, supported by a flexible corporate structure with fast response<br />
times. We understand that ART plans further improvements to systematically exploit the potential of <strong>Allianz</strong> group's<br />
customer base. We believe that, combined with a continuous enhancement of competencies and skills, this will be key<br />
to sustainable long-term growth in the alternative risk transfer segment.<br />
Key-person risk is an important factor, due to ART's small size. The company has actively worked on reducing this risk<br />
by broadening the involvement of different staff in each transaction, for example, by separating the underwriting and<br />
deal management functions.<br />
ART is well integrated into <strong>AG</strong>CS' operating model and is important as the competence center for alternative risk<br />
transfer solutions within the <strong>Allianz</strong> group, highlighting its strategic importance. Furthermore, the company is widely<br />
integrated into the <strong>Allianz</strong> group in terms of finance, accounting, investment, and risk management.<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 7<br />
1006376 | 301069137
Financial management<br />
ART's financial management is fairly conservative, in our view. The company defines its risk tolerance according to its<br />
ability to meet its planned underwriting result. AZSE's goal is sustainable profitability, so we don't believe ART is under<br />
pressure from its parent company to achieve any rapid growth targets.<br />
ART is structured for moderate growth and a low fixed-cost base, with staffing and deal costs having significant<br />
variable components. The company delegates its asset management to <strong>Allianz</strong> group affiliates, but it defines and<br />
monitors its own investment strategy. We expect the company to continuously hold a certain minimum capital volume<br />
above the requirements for its current alternative risk transfer portfolio. Therefore, we believe the transfer of some of<br />
<strong>AG</strong>CS' risks onto ART's balance sheet will consume some of that excess capital.<br />
Enterprise <strong>Risk</strong> Management: Strong <strong>Risk</strong> Controls<br />
We consider ART's enterprise risk management to be strong. As such, we regard it as unlikely that ART will<br />
experience major losses outside its risk tolerance. The high level of risk inherent in ART's business model is largely<br />
offset by the combination of strong risk controls in key areas and what we see as ART's strong risk management<br />
culture. An independent head of risk management with escalation rights into <strong>AG</strong>CS <strong>AG</strong> and AZSE, as well as<br />
underwriting and risk management committees, further strengthen ART's risk management framework. ART has<br />
adopted a sophisticated approach to risk management and strives to continuously enhance its risk management<br />
framework. In 2011, ART implemented a deal management function that allows the separation of the underwriting and<br />
surveillance functions.<br />
Before underwriting any new deals, ART assesses the impact of each additional transaction on the aggregate exposure<br />
of its portfolio, using stochastic models. We view the most significant risks relating to ART's portfolio as modeling<br />
risks, including appropriate risk-aggregation assumptions and deal-structuring issues. ART has substantially enhanced<br />
its model documentation and has embedded this as part of its underwriting process for new deals.<br />
ART's stochastic models underpin its decisions relating to risk acceptance, pricing, risk mitigation, and portfolio<br />
management. Consequently, any deficiencies in the models' parameters, particularly regarding the prediction of how<br />
individual deals will behave under exceptional circumstances, could cause ART's exposure to exceed its stated<br />
tolerance. ART continuously improves the models and is using certain proprietary models for the Swiss Solvency Test,<br />
a mechanism imposed by the Swiss insurance regulator to measure the capital required to support the risks carried by<br />
insurance companies. Legal and compliance risks are inherent in ART's business, given the types of deals it<br />
underwrites. However, we consider these risks to be partly offset by the thorough review of each deal by a legal expert<br />
before acceptance.<br />
Accounting: Reported Premium Income Does Not Reflect The Scale Of<br />
Alternative Business<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
ART's fully audited financial statements are prepared under Swiss generally accepted accounting principles, which is<br />
the basis for the financial tables in this report. In addition, in line with the <strong>Allianz</strong> group, ART prepares an abridged set<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 8<br />
1006376 | 301069137
of financial statements under International Financial Reporting Standards (IFRS) for group-reporting purposes.<br />
Fluctuations in foreign exchange rates can create volatility in ART <strong>AG</strong>'s Swiss-franc-denominated financial statements.<br />
However, we recognize that ART mainly focuses on profitability in euro terms because ART is consolidated into <strong>AG</strong>CS<br />
and AZSE in euros.<br />
The premiums reported by the alternative business won't always reflect this segment's overall contribution because<br />
many transactions create fee or investment income only.<br />
Our capital analysis focuses on an aggregate view of ART's global presence, using internal IFRS financials. We have<br />
assigned individual risk factors to each nontraditional deal (see the "Capitalization" section for further details).<br />
Operating Performance: A Sound Track Record, But Volatility And Margin<br />
Pressure Could Arise<br />
Table 2<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong>/Operating Statistics<br />
--Year ended Dec. 31--<br />
2011 2010 2009 2008 2007<br />
Gross combined ratio (%) 18.6 61.4 58.9 87.8 84.5<br />
Gross loss ratio (%) 3.8 40.9 42.6 58.4 54.7<br />
Net combined ratio (%) 44.1 91.7 95.2 100.2 100.0<br />
Net loss ratio (%) 9.1 61.1 68.9 65.3 64.7<br />
Net expense ratio (%) 35.0 30.6 26.3 35.0 35.3<br />
Acquisition expense ratio (%) 15.9 26.6 24.2 32.4 32.6<br />
Administrative expense ratio (%) 9.4 4.0 2.1 1.8 2.7<br />
Three-year average combined ratio (%) 77.0 95.7 98.5 99.7 100.8<br />
Return on revenue (%) 58.8 10.5 11.5 7.0 5.0<br />
Direct yield on invested assets (%) 2.0 2.7 2.9 4.1 3.0<br />
Yield (including realized) (%) 2.1 2.6 2.5 (0.1) 4.4<br />
EBIT on adjusted equity (%) 43.5 18.5 21.7 22.9 16.1<br />
ART's operating performance is strong, reflecting, in our view, prudent underwriting and a well-diversified risk<br />
portfolio. However, the alternative nature of the deals ART underwrites within the nontraditional segment means that<br />
the risk of earnings volatility remains. The still challenging economic and financial markets and insurance risk in the<br />
traditional portfolios can also pose a risk to earnings.<br />
Since 2001, ART's annual EVA contribution on nontraditional business has been more than Swiss franc (CHF) 25<br />
million. More importantly, ART has made a positive contribution in each of its 15 years in operation, providing a<br />
consistent stream of earnings for the <strong>Allianz</strong> group. We note however that the challenging economic and financial<br />
markets of recent years have suppressed the company's earnings in the past, but earnings have improved over the past<br />
two years in a more benign climate.<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
ART's total net income increased strongly in 2011 to €218 million from €48 million in 2010. This was mainly owing to<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 9<br />
1006376 | 301069137
unusually high reserve releases after the termination of a traditional reinsurance contract. However, even without the<br />
one-time effect, the overall results nearly doubled compared with 2010.<br />
Positive earnings throughout the financial crisis demonstrate the still sound underlying margins of ART's business and<br />
the increasing diversity of deals executed within its three areas of expertise. In our view, this allows for positive<br />
earnings even under very demanding market conditions.<br />
The traditional portfolios currently consist of relatively small industrial lines business underwritten in Switzerland and<br />
the Gulf region, which together earned net premiums of about €100 million in 2011. These portfolios contribute to<br />
potential earnings volatility and have been posting losses in the past, but made a positive contribution in 2011.<br />
Foreign exchange effects can influence ART <strong>AG</strong>'s profit and loss account because most of its transactions are in U.S.<br />
dollars or euros, whereas it reports publicly in Swiss franc. We base our analysis on euro values because ART is<br />
consolidated into <strong>AG</strong>CS and AZSE in this currency.<br />
Prospective<br />
In our view, the individual performance of various transactions demands management's close attention, given the<br />
currently challenging markets. However, the increasing number of transactions and broader risk diversity in ART's<br />
portfolio, as well as the termination of the alternative-assets business, should enhance earnings stability.<br />
For 2012 and beyond, we expect ART to achieve net income of at least €40 million on its nontraditional business. We<br />
expect the run-off process of its alternative-assets business to generate additional positive returns on average.<br />
Nevertheless, we acknowledge that individual years could be affected by adverse performance. For our ratings on<br />
ART, we assume that there will be no further material impairments on the company's alternative-asset transactions.<br />
For the traditional business, we assume a positive net income contribution.<br />
Investments: A Revised Asset Allocation Strategy After Run-Off Of<br />
Alternative-Assets Business<br />
Table 3<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong>/Investment Statistics<br />
--Year ended Dec. 31--<br />
2011 2010 2009 2008 2007<br />
Total investments (mil. CHF) 2,088 2,037 1,779 2,058 2,497<br />
Investment in affiliates (%) 4.4 4.6 6.0 5.2 3.8<br />
Loans to affiliates (%) 4.1 5.4 7.0 5.1 0.0<br />
Bonds and other fixed-interest securities (%) 78.7 70.8 72.2 39.2 35.4<br />
Equities and other variable-interest securities (%) 0.1 0.1 0.4 10.2 15.3<br />
Cash and bank deposits (%) 12.7 19.1 10.0 6.9 19.6<br />
Other investments (%) 0.0 0.0 4.4 33.4 25.9<br />
CHF--Swiss franc.<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
In our view, ART manages the assets backing its traditional insurance book prudently, both in terms of credit quality<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 10<br />
1006376 | 301069137
and asset-liability matching. We expect the exposure on its alternative-assets portfolio to reduce gradually and ART to<br />
most likely reinvest these assets in bonds. We believe these risk-mitigation measures could stabilize investment<br />
income in the future and shift ART's risk-capital requirements from investment to insurance risks.<br />
Alternative-asset investments placed in transactions as part of ART's nontraditional business have historically exposed<br />
ART to high market risk and, in the past, to substantial impairments. Given the expected underlying future profitability<br />
of the currently 15 remaining alternative-asset investments, ART is not rushing to offload them. This means that the<br />
average life of the remaining exposures is still four years, with some longer than 10 years. As this portfolio continues to<br />
reduce, however, we expect ART's alternative assets to increasingly comprise highly rated investments.<br />
As of Dec. 31, 2011, bonds formed 74% of ART's total invested assets, cash 21%, equities 1%, reinsurance deposits 3%,<br />
and the remainder, other investments. Bonds are generally of a high quality, with 62% of the portfolio rated 'AAA', 22%<br />
'AA', 7% 'A', 5% rated 'BBB', and the remainder in the non-investment grade category as of year-end 2011. ART tightly<br />
controls asset-liability mismatches by investing its technical liabilities in cash and bonds, and its investment guidelines<br />
limit mismatches within plus or minus 10% (currency mismatch) and plus or minus six months (duration mismatch).<br />
Liquidity: Strong, And Exposure To <strong>Risk</strong> Is Reducing<br />
Liquidity can be a major issue for providers of alternative risk transfer solutions. ART sets specific liquidity cover on<br />
transactions to match the most severe potential liquidity requirements. Nevertheless, certain financial transactions can<br />
also give rise to additional liquidity demands. We expect the termination of ART's alternative-assets business to reduce<br />
its liquidity needs over time. In addition, we don't expect ART to suffer any liquidity constraints because it actively<br />
manages its liquidity profile with a highly liquid investment portfolio and it has access to backup liquidity from its<br />
parent if needed. As of year-end 2011, ART's overall liquidity had remained strong.<br />
Capitalization: Strong, With A Strong Quality Of Capital<br />
ART's capitalization is strong, in our view. The company benefits from very strong capital adequacy as measured by<br />
our risk-based capital model, sound reserves, and comprehensive, tailored reinsurance protection. We believe that the<br />
company needs to operate with capital that is at least strong, to maintain a buffer against potential earnings volatility<br />
and finance further business expansion. We regard quality of capital as strong, with the majority comprising hard<br />
capital components such as shareholders' funds.<br />
Capital adequacy<br />
Capital adequacy benefits from a high proportion of shareholders' funds and risk mitigants within ART's transactions.<br />
We have assessed nontraditional transactions individually and applied conservative capital charges, based on our<br />
determination of the risk ART carries on its balance sheet. We generally reduce the exposure according to the credit<br />
quality of reinsurance or the credit quality of any security pledged or issued. Capital requirements for the<br />
nontraditional book are then input into our risk-based capital adequacy model, where we combine them with the<br />
requirements for the traditional book. The charges on ART's nontraditional portfolio amount to about 30% of the<br />
company's overall capital requirements at year-end 2011, in our capital adequacy assessment.<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 11<br />
1006376 | 301069137
Reserves<br />
We consider ART's loss reserves to be conservative, although they have not been independently certified in recent<br />
years. The company determines reserves individually for each transaction, either when it suspects losses or receives<br />
notification. This process is supported by ART's probabilistic modeling methodology. Reserves are not discounted in<br />
the financial statements, and we view ART as cautious in its recognition of revenue and earnings.<br />
Reinsurance<br />
ART purchases reinsurance on a contract-by-contract basis, and we consider reinsurer credit risk to be minimal. ART<br />
generally uses highly rated reinsurers (with a minimum rating of 'A-') or secured letters of credit to protect its<br />
transactions. We view ART's reinsurance panel as providing strong protection against the potential volatility of its<br />
nontraditional portfolio on a deal-by-deal basis.<br />
Financial Flexibility: Very Strong, With AZSE's Support<br />
Table 4<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong>/Financial Statistics<br />
--Year ended Dec. 31--<br />
(Mil. CHF) 2011 2010 2009 2008 2007<br />
Capitalization<br />
Reported shareholders' equity* 675 479 484 413 485<br />
Change in adjusted equity (%) 40.9 (1.0) 17.2 (14.8) 8.5<br />
Reinsurance<br />
Reinsurance utilization ratio (%) 70.3 30.8 41.4 15.3 14.0<br />
Reserving<br />
Loss reserves/net premiums written (%) 628.0 178.3 245.6 132.1 111.6<br />
*Excluding outstanding share capital. CHF--Swiss franc.<br />
As a strategically important member of the <strong>Allianz</strong> group, ART's financial flexibility is tied to that of its parent and we<br />
therefore consider it to be very strong.<br />
Related Criteria And Research<br />
• Principles Of Credit Ratings, Feb. 16, 2011<br />
• Management And <strong>Corporate</strong> Strategy Of Insurers: Methodology And Assumptions, Jan. 20, 2011<br />
• Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The <strong>Risk</strong>-Based Insurance<br />
Capital Model, June 7, 2010<br />
• Interactive Ratings Methodology, April 22, 2009<br />
• Group Methodology, April 22, 2009<br />
Ratings Detail (As Of September 3, 2012)<br />
Operating Companies Covered By This Report<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 12<br />
1006376 | 301069137
Ratings Detail (As Of September 3, 2012) (cont.)<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
Financial Strength Rating<br />
Local Currency AA-/Negative/--<br />
Counterparty Credit Rating<br />
Local Currency AA-/Negative/A-1+<br />
Financial Enhancement Rating<br />
Local Currency AA-/--/--<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> (Bermuda) Ltd.<br />
Financial Strength Rating<br />
Local Currency AA-/Negative/--<br />
Financial Enhancement Rating<br />
Local Currency AA-/--/--<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> N.V.<br />
Financial Strength Rating<br />
Local Currency AA-/Negative/--<br />
Financial Enhancement Rating<br />
Local Currency AA-/--/--<br />
Related Entities<br />
<strong>Allianz</strong> <strong>Global</strong> <strong>Corporate</strong> & <strong>Specialty</strong> <strong>AG</strong><br />
Financial Strength Rating<br />
Local Currency AA/Negative/--<br />
Issuer Credit Rating<br />
Local Currency AA/Negative/--<br />
<strong>Allianz</strong> SE<br />
Financial Strength Rating<br />
Local Currency AA/Negative/--<br />
Issuer Credit Rating AA/Negative/A-1+<br />
Commercial Paper A-1+<br />
Junior Subordinated A<br />
Junior Subordinated A+<br />
Senior Unsecured AA<br />
Subordinated AA-<br />
Domicile Switzerland<br />
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable<br />
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.<br />
Additional Contact:<br />
Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com<br />
<strong>Allianz</strong> <strong>Risk</strong> <strong>Transfer</strong> <strong>AG</strong><br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 13<br />
1006376 | 301069137
Copyright © 2012 by Standard & Poor's Financial Services LLC. All rights reserved.<br />
No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof<br />
(Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system,<br />
without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used<br />
for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents<br />
(collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for<br />
any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or<br />
maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR<br />
IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A<br />
PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING<br />
WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no<br />
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential<br />
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by<br />
negligence) in connection with any use of the Content even if advised of the possibility of such damages.<br />
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and<br />
not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,<br />
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to<br />
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment<br />
and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does<br />
not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be<br />
reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.<br />
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain<br />
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P<br />
Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any<br />
damage alleged to have been suffered on account thereof.<br />
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective<br />
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established<br />
policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.<br />
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P<br />
reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,<br />
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed<br />
through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at<br />
www.standardandpoors.com/usratingsfees.<br />
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 3, 2012 14<br />
1006376 | 301069137