A. M. Best Company - AMB Credit Report

Allianz SE

K?niginstrasse 28, D-80802 Muenchen, Germany

AMB #: 085014 Phone: 49-89-3800-0

NAIC #: N/A Fax: 49-89-3800-3425

AIIN#: AA-1340026 Website:

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Credit Analysis 085014 - Allianz SE

Allianz SE

Credit Report

Report Release Date: September 5, 2018

Group Members Rating Effective Date: August 30, 2018

Disclosure Information: Refer to rating unit members for each company's Rating Disclosure Form

Analytical Contacts

A.M. Best Europe - Rating Services Ltd.

Timothy Prince Director-Analytics Timothy.Prince@ +44 207 397 0320

Catherine Thomas Senior Director-Analytics Catherine.Thomas@ +44 207 397 0281

Associated Ultimate Parent: 085449 - Allianz SE A.M. Best Rating Unit: 085014 - Allianz SE

Best's Credit Ratings for Group Members:

Rating Effective Date: August 30, 2018

AMB# Company

Best's Financial

Strength Ratings

Rating Outlook

Action

085014 Allianz SE

Rating Unit

085449 Allianz SE

A+

Stable

Affirmed

002268 AGCS Marine Insurance Company

A+

Stable

Affirmed

093686 AWP Health & Life S.A.

A+

Stable

Affirmed

078025 AWP P&C S.A.

A+

Stable

Affirmed

087997 Allianz Global Corp & Spec SE

A+

Stable

Affirmed

093335 Allianz Global Corp & Special

A+

Stable

Affirmed

000407 Allianz Global Risks US Ins Co

A+

Stable

Affirmed

073713 Allianz Risk Transfer (BM) Ltd

A+

Stable

Affirmed

077703 Allianz Risk Transfer AG

A+

Stable

Affirmed

085309 Allianz S.p.A.

A+

Stable

Affirmed

002618 Allianz Underwriters Ins Co

A+

Stable

Affirmed

002176 American Automobile Ins Co

A+

Stable

Affirmed

002177 American Insurance Company

A+

Stable

Affirmed

002178 Associated Indemnity Corp

A+

Stable

Affirmed

002266 Chicago Insurance Company

A+

Stable

Affirmed

002097 Euler Hermes NA Insurance Co.

A+

Stable

Affirmed

001892 Fireman's Fund Indemnity Corp

A+

Stable

Affirmed

002717 Fireman's Fund Ins Co of HI

A+

Stable

Affirmed

Rating

Best's Issuer

Credit Ratings

Outlook

Action

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Upgraded

aa

Stable

Affirmed

aa

Stable

Affirmed

Page 2 of 18

Print Date: October 24, 2018

Credit Analysis 085014 - Allianz SE

Best's Credit Ratings for Group Members: (Continued...)

AMB# 002179 002267 004001 002182

Company Fireman's Fund Insurance Co Interstate Fire & Casualty Co Jefferson Insurance Company National Surety Corporation

Best's Financial

Strength Ratings

Rating Outlook

Action

A+

Stable

Affirmed

A+

Stable

Affirmed

A+

Stable

Affirmed

A+

Stable

Affirmed

Rating

Best's Issuer

Credit Ratings

Outlook

Action

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

aa

Stable

Affirmed

Rating Rationale:

Balance Sheet Strength: Strongest

? Balance sheet strength is underpinned by the strongest level of risk-adjusted capitalisation, as measured by Best's Capital Adequacy Ratio (BCAR), as well as a sophisticated and conservative capital management approach.

? Strong liquidity and sound asset-liability management, enhanced by the capabilities of the group's asset management division. ? Financial flexibility is considered excellent, due to a track record of strong capital generation, moderate financial leverage, good

coverage ratios and a good standing in capital markets.

? Prudent reserving practices and a sophisticated reinsurance programme for tail risk reduction.

Operating Performance: Strong

? Track record of strong and stable operating performance, demonstrated by a ten-year (2008-2017) weighted average return on equity of 9.6% (as calculated by A.M. Best).

? Diversified earnings profile by line of business and geography. Results are enhanced by asset management and investment income. ? Strong performance in 2017 and the first half of 2018 from the three main business segments. ? In spite of the high occurrence of natural catastrophes in the year, the property/casualty segment demonstrated a robust performance

in 2017, reporting a combined ratio of 95.2%.

? Despite pressure from the persisting low interest rate environment, operating performance is expected to remain strong over the medium term.

Business Profile: Very Favorable

? Allianz SE (Allianz) is one of the largest insurance groups in the world, and it has excellent diversification by product and geography, with a mix of property/casualty, life/health and asset management businesses.

? Despite a competitive environment, the group maintains leading positions in its core markets, helped by its vast scale, strong brand and technical excellence.

? Solid revenue growth, with a 10-year compound annual growth rate of 2% over the period 2007-2017. In 2017, the group grew its revenue by 3% despite a significant negative foreign exchange translation effect.

? The insurer is expected to remain one of the leading groups in the global insurance market, supported by its forward-looking business strategy and its drive to enhance the insurance value chain through digitalisation.

Enterprise Risk Management: Very Strong

Page 3 of 18

Print Date: October 24, 2018

Credit Analysis 085014 - Allianz SE

? Sophisticated enterprise risk management (ERM) framework embedded throughout the organisation, resulting in a risk-aware culture at all levels.

? Risk strategy and appetite form an integral part of business strategy formulation and planning, supported by forward-looking risk identification and stress testing.

? Allianz is considered to have a relatively high risk profile, which is matched by its excellent risk management tools and capabilities.

Outlook

The stable outlooks are underpinned by the expectation that risk-adjusted capitalisation will remain at the strongest level as measured by BCAR, supported by conservative capital management and excellent financial flexibility. The insurer is expected to remain one of the leaders in the global insurance market and to continue demonstrating a strong operating performance, supported by superior diversification by line of business and geography.

Rating Drivers

A sustained improvement of operating performance would result in positive rating pressure. Significant weakening of risk-adjusted capitalisation would put negative pressure on the ratings. A sustained deterioration of operating performance could result in negative rating actions.

Financial Data Notes:

Time Period: Annual - 2017

Status: A.M. Best Quality Cross Checked

Key Financial Indicators: Key Financial Indicators (000)

Premiums Direct Premiums Written - combined Direct premiums written - non life Direct premiums written - life Gross premiums written - combined Gross premiums written - non life Net premiums written - combined Net premiums written - non life Net premiums written - life

Capital & Surplus Total Assets

Source: Bestlink - Best's Statement File - Global Local Currency: Euro US $ per Local Currency Unit 1.19804 = 1 Euro (EUR)

2017

... ... ... 77,345,000 52,263,000 72,433,000 47,821,000 24,613,000 65,553,000 901,300,000

2016

Year End 2015

... ... ... 76,331,000 51,535,000 71,430,000 47,138,000 24,291,000 67,083,000 883,809,000

72,186,000 47,638,000 24,548,000 76,724,000 51,597,000 71,188,000 46,664,000 24,524,000 63,144,000 848,942,000

2014

70,253,000 45,238,000 25,015,000 73,883,000 48,322,000 69,420,000 44,361,000 25,058,000 60,747,000 805,787,000

2013

68,772,000 43,967,000 24,804,000 72,051,000 46,579,000 67,510,000 42,597,000 24,913,000 50,084,000 711,079,000

Page 4 of 18

Print Date: October 24, 2018

Credit Analysis 085014 - Allianz SE

Key Financial Indicators: (Continued...)

Key Financial Indicators - A.M. Best Ratios (%)

Combined Ratio Net Premiums Written to Equity Liquidity

Liquid Assets to Total Liabilities Total Investments to Total Liabilities

Source: Bestlink - Best's Statement File - Global

2017 95.2 110.5

79.0 93.5

2016 94.3 106.5

Year End 2015 94.6 112.7

78.6

78.2

93.4

93.5

2014 94.3 114.3

77.7 93.4

2013 94.3 134.8

74.1 91.4

(*) Data reflected within all tables of this report has been compiled from the consolidated financial statements of this company (Source: Company Financial Statement).

Best's Capital Adequacy Ratio Summary AMB Rating Unit (%)

Confidence Level

95.0

99.0

99.5

99.6

BCAR Score

62.0

51.0

47.0

46.0

Source: Best's Capital Adequacy Ratio Model - Universal

Credit Analysis:

Balance Sheet Strength: Strongest

The balance sheet strength of Allianz is underpinned by risk-adjusted capitalisation, which is comfortably at the strongest level, as measured by the BCAR. The group's high exposure to market risk (interest rate, equity and credit spread risk amongst others) is addressed by conservative capital management and sound asset-liability management practices, enhanced by the capability of its asset managers. Financial flexibility is considered excellent, due to a track record of strong capital generation, moderate financial leverage, good coverage ratios and a good standing in the capital markets. Balance sheet strength is also supported by prudent reserving and a sophisticated reinsurance programme for tail risk reduction. An offsetting factor is some constraints on capital fungibility - a typical regulatory impediment for life insurers - which is, however, mitigated by the group's strategy of maintaining excess liquidity at the holding company.

Capitalization:

The BCAR scores presented under the "Best's Capital Adequacy Ratio Summary" section of this report are based on Allianz's year-end 2017 consolidated audited financial statements.

Allianz's risk-adjusted capitalisation (RAC) is expected to remain at the strongest level, as measured by the BCAR, with strong earnings generation and retention likely to offset an increase in capital requirements due to business growth. As a result of Allianz's considerable life operations in Europe and the United States, it manages a large balance sheet and is exposed to considerable market risk, which subjects RAC to potential volatility. However, the group's conservative capital management approach, which incorporates significant capital buffers, as well as its prudent risk management practices, reduce the likelihood of RAC falling below the strongest level.

The overall quality of the group's capital is supportive of the strongest balance sheet strength assessment, in spite of the significant volume of soft elements included in adjusted capital and surplus in BCAR, such as a credit for the value of in-force business.

Page 5 of 18

Print Date: October 24, 2018

Credit Analysis 085014 - Allianz SE

Capitalization: (Continued...)

In 2014, Allianz revised its dividend policy to allocate net income after tax as follows: 50% for regular payment to shareholders, 20% to fund external growth, 20% to fund internal growth and 10% as a buffer for corporate purposes. This was modified during 2017, with the regular pay-out remaining 50% of net income, but with the use of the other 50% of net income becoming more flexible. The group has committed to maintain the dividend per share at least at the level paid in the prior year. In line with its dividend policy and due to the external growth budget being largely unused, the company implemented several share buybacks in 2017 and 2018, totaling EUR 6 billion.

Allianz has a robust record of capital growth over its recent history, with its total capital (including minority interest) increasing at a 10-year compound annual growth rate of 7% over the period 2007-2017. Financial flexibility is considered excellent due to Allianz's track record of successfully accessing capital markets, its moderate debt leverage and good interest coverage ratios. As at 2017 year-end, Allianz held EUR 8.5 billion of senior debt and EUR 13.3 billion of subordinated debt on its balance sheet.

Allianz retains the vast majority of its underwriting risks. The group's outwards reinsurance largely relates to fronting business and to coverage for reduction of peak risks. Outwards reinsurance purchasing is relatively sophisticated and is centralised through Allianz Re, a business unit within Allianz SE.

Sophisticated capital management is a positive factor for the balance sheet strength assessment. Capital management guidelines relating to its Solvency Capital Requirement (SCR) under Solvency II (SII) are published, with the group defining its target range as between 180% and 220%. According to its guidelines, a dip in the SCR ratio below 160% would trigger an adjustment to group's dividend policy, and a fall below 145% would lead to capital actions. As at second quarter of 2018 Allianz's SII ratio was above its target range at 230%.

As a part of the group's capital management strategy, additional capital is maintained at the group level in liquid funds. These funds fluctuate between EUR 4-5 billion and are available to support subsidiaries when their individual RAC is under pressure.

Over time, A.M. Best expects the group's SII ratio to benefit from discontinuation of capital intensive business.

Capital Generation Analysis (000)

Capital & surplus brought forward Change in share capital Change in non-distributable reserves Change in other reserves Currency exchange gains Profit or loss for the year Capital gains or (losses) Dividend to shareholders Other changes Total change in capital & surplus Capital & surplus carried forward

Source: Bestlink - Best's Statement File - Global Local Currency: Euro US $ per Local Currency Unit 1.19804 = 1 Euro (EUR)

2017

70,135,000 ...

41,000 -3,340,000 -1,986,000 7,207,000

344,000 -3,661,000

-138,000 -1,533,000 68,602,000

2016

66,099,000 ...

2,000 35,000 164,000 7,329,000 910,000 -3,646,000 -758,000 4,036,000 70,135,000

Year End 2015

63,702,000 ...

63,000 243,000 1,050,000 6,987,000 -2,997,000 -3,382,000 433,000 2,397,000 66,099,000

2014

52,849,000 59,000 -1,000 -41,000

1,336,000 6,603,000 7,176,000 -2,716,000 -1,563,000 10,853,000 63,702,000

2013

52,963,000 55,000 -2,000 -20,000

-1,239,000 6,343,000 -3,381,000 -2,303,000

433,000 -114,000 52,849,000

Asset Liability Management ? Investments:

In line with the geographical split of its insurance business, the majority of Allianz's fixed-income portfolio is invested in European bonds and loans, the vast majority of which are of investment-grade. Allianz's exposure to sovereign bonds issued by Spain, Greece, Ireland, Portugal and Italy has significantly reduced in recent years. Of these countries, Italy and Spain represent the largest exposures with shares of 3.9% and 1.9% respectively of the overall debt instruments portfolio as at 2017 year end.

Page 6 of 18

Print Date: October 24, 2018

Credit Analysis 085014 - Allianz SE

Asset Liability Management ? Investments: (Continued...)

In A.M. Best's view, Allianz has ample resources to meet its liquidity needs. The majority of its investment portfolio consists of highly rated fixed income securities, which are easily marketable. Cash flow requirements are constantly monitored on a group-wide basis, and the group's subsidiaries benefit from access to a group-wide cash pooling facility. Allianz's active asset-liability management minimises its liquidity risks.

Reserve Adequacy:

Allianz prudently sets its reserves in line with best market practices. Over the last ten years, P/C reserves for the majority of the group's accident years have developed positively.

Operating Performance: Strong

Allianz has an excellent record of strong and stable overall results over an extended period of time, supported by highly diversified operations. The group has failed to report an overall profit on only two occasions in the past fifteen years and only once in the past ten years. During this period the group has been exposed to numerous large insured losses and severe macro-economic crises. In 2017, the group reported a return on equity (RoE) (including minority interest) of 10.8%, which is higher than its 5 year and 10 year average RoE of 9.6%. Net income for the year slightly decreased to EUR 7.2 billion while its capital decreased by 2% to EUR 68.6 billion (including minority interests) following share buybacks. This resulted in a relatively flat RoE compared to the prior year. Allianz has set itself a target RoE for 2018 of 13% (excluding unrealised capital gains/losses on bonds), and, based on the financial results for the first half of 2018, is on track to achieve it.

The group's operating profits are typically well diversified by business unit. In 2017, the group's net income after tax of EUR 7.2 billion was divided between P/C 56%, L/H 44%, asset management 23%, and corporate and other (including effects of consolidation) minus 16%. The prolonged low interest rate environment is having a negative impact on Allianz's investment yield, which continues to fall. However, strong performance of its insurance operations partly alleviates pressure to increase risk appetite in order to improve investment yield. Allianz's asset management operations provide solid cash flows and operating profits that are not directly correlated with the results of its insurance businesses.

A.M. Best expects Allianz to continue to report a strong performance for the foreseeable future. Challenging conditions in one of the group's major markets has the potential to negatively impact the group's overall earnings in the short term, with Europe-wide economic volatility likely to have the largest impact. However, over the longer-term, diversified and uncorrelated revenue streams are expected to support the maintenance of strong and relatively stable earnings.

Underwriting Results

Allianz's P/C and L/H divisions have both generated a good level of underwriting earnings in each of the past fourteen years. Owing to the group's focus on profitability, A.M. Best expects underwriting performance to remain at a strong level for the foreseeable future. Modest positive and negative variations are likely due to the group's wide-ranging exposures, but these are not expected to be material.

- - Property / Casualty - -

Allianz's P/C combined ratio of 95.2% in 2017 was slightly above the 5-year weighted average combined ratio of 94.6%, but remained under the 10-year weighted average combined ratio of 95.8%. Profitability was slightly affected by natural catastrophe losses, which contributed 2.4 percentage points to the combined ratio, above the 5-year average of 1.8. The entities making the largest contribution to operating profit included Germany, Italy, France and Euler Hermes, which together accounted for 56% of overall P/C operating profit.

The majority of Allianz's reported business units generated favourable combined ratios during 2017. Of note were Germany and Italy, which together accounted for over one-quarter of P/C GWP and recorded combined ratios of 95.3% and 80.8%, respectively. AGCS was notably affected by natural catastrophe losses and reported a combined ratio of 105.2%. The United Kingdom also reported an underwriting loss, with loss reserve strengthening associated with the personal injury discount rate change pushing the combined ratio up to 100.4%.

The expense ratio has been stable in recent years at approximately 28%. This is not expected to change materially and prospective variation in the group's combined ratio is most likely to come from the impact of large claims, catastrophe events or sustained improvement in pricing.

Page 7 of 18

Print Date: October 24, 2018

Credit Analysis 085014 - Allianz SE

In recent years, Allianz has had only a small number of P/C business units with poor performance track records. Of these the US, Russia, Turkey and Latin America (LATAM) have been the most significant. Allianz has taken action to address its under-performing business units either by selling them, closing them or by instructing new management. Challenges with the group's LATAM operations, which represent only a small proportion of Allianz's business, are due to macro-economic issues in various countries and may take several years to address. In the US, a significant restructuring of the group's Fireman's Fund business unit took place during 2015 and improved results are expected over the coming years.

- - Life / Health - -

Allianz's L/H operating profit increased by EUR 0.1 billion in 2017 to EUR 4.4 billion. This follows an increase of EUR 0.3 billion in the prior year. The improvement was driven by a better technical margin and higher fee income. The group's L/H results are heavily reliant on the performance of its business units in Germany, France and the US, which together have accounted for above two thirds of L/H operating profit in each of the past four years. These are distinct mature life markets where the group has a strong and sustainable competitive position.

Persistence of the low interest rate environment would add negative pressure to the profitability of Allianz's L/H operations. Although the group is actively selling new capital efficient products with lower guarantees, it carries reserves for a large volume of business with material embedded guarantees.

The basis of Allianz's Market Consistent Embedded Value (MCEV), a measure of the shareholders' economic value of in-force life and pension business, changed in 2015 to better reflect Solvency II principles. In 2017, MCEV increased by 14% to EUR 36.2 billion driven by a 42% increase in the Value In Force (VIF), largely relating to business in the German speaking countries and the USA. This was largely a result of a higher contribution of new (more profitable) business mix and narrowing of credit spreads.

The group's Value of New Business (VNB) increased by 30% to EUR 1.8 billion in 2017, driven by improvements from most operating entities. The New Business Margin (NBM) increased by 70 basis points to 3.4% in 2017, due to the group's strategy of steering away from traditional savings towards capital efficient products, as well as lower rates of guarantees in the new traditional business. In addition, the NBM benefited from slight recovery of interest rates and reduction of volatility across all regions during the year.

Investment Results

In recent years Allianz has lowered the risk of its fixed income portfolio by actively managing its sovereign bond investments and reducing its investment exposure to the banking sector. At the same time, the group has increased its exposure to real assets (including equities, real estate, infrastructure and renewable energy). Allianz's investment strategy is coordinated by Allianz Investment Management (AIM), which seeks to enhance the group's capability to invest proactively on a global scale. AIM aims to contribute to capital efficiencies by achieving optimum risk-adjusted returns. AIM sets guidelines for the whole group regarding maximum exposure. Of the group's invested assets, approximately 15 to 20% are expected to be placed into real assets over the medium term. While these assets are generally more risky and are likely to attract higher capital changes than traditional fixed income investments, they allow the group to match their liabilities with assets that generate relatively high returns.

Principally as a result of declining global interest rates, Allianz's investment return (excluding capital gains) declined to 2.8% in 2017 from 2.9% in 2016, 3.0% in 2015, 3.2% in 2014 and 3.3% in 2013. This downward trend is expected to gradually flatten as interest rates edge up in developed markets. Capital gains have been beneficial to Allianz's overall investment return in each of the past 5 years. Although an increase in global interest rates is likely to benefit the group's reinvestment rate, it may have a negative impact on its shareholders' equity in the short term, through unrealised losses on available-for-sale securities.

Financial Performance Summary (000)

Pre-Tax Income

Net income (after noncontrolling interests)

Source: Bestlink - Best's Statement File - Global Local Currency: Euro US $ per Local Currency Unit 1.19804 = 1 Euro (EUR)

2017 10,148,000

6,803,000

Year End

2016

2015

10,413,000 10,196,000

6,962,000 6,616,000

2014 8,848,000 6,222,000

2013 9,643,000 5,996,000

Page 8 of 18

Print Date: October 24, 2018

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