We have commented before that the cross holdings of Munich Re and Allianz at sub-holding level are historical anomalies. Allianz and Munich Re have now announced that the smallest four of these will be unwound by the end of 2001.
This year Munich Re will buy out Allianz's 39% in assistance company Mercur, bringing Munich Re's stake to 63%. In 2001, Munich Re will also buy Allianz's 36.1% in Karlsruher Leben, bringing its stake to about 90%, while Allianz will buy Munich Re's 45% of Bayerische Versicherungsbank (taking Allianz's stake to 90%) and 49.9% of Frankfurter Versicherung (taking Allianz's stake close to 100%).
The net recipient in these transactions will be Munich Re. The German accounting standards book value of Bayerische V-Bank for 1998 was DM531 million, of Frankfurter V DM614 million and of Karlsruher Leben DM213 million. Mercur is smaller still. Munich Re will be the clear net recipient.
The two companies will also reduce their holding level cross-holdings to “about 20%” by the end of 2003 through sales into the market. This will obviously be beneficial to the free float and liquidity of both companies. Again, the net proceeds to Munich Re will be greater than those to Allianz.
Why “around” 20%? Perhaps because this is the threshold for accounting as an associate under IAS (and, therefore, at share of IAS book value, rather than at market value). We do not have an instant feel for which treatment the companies might prefer. 20% is also the threshold in the EU directive on supervision of financial conglomerates.
None of these transactions represent value which is not already in the share prices of the two groups following announcement of the German government's plans to abolish tax on capital gains on equity stakes.
The latest announcement was of course driven by those plans, and depends upon their being substantially implemented. There is no risk of that not happening and, with every day that passes, the political risk that a low rate of tax will finally be implemented falls (though it has not disappeared entirely).
What is missing from the announcement is any mention of Allianz Leben, the largest and most valuable of the remaining cross-holdings, in which Munich Re owns 40.6% and for which Allianz has nothing left to swap except shares in Munich Re itself. As we have pointed out, a substantial proportion of the long-term investment portfolio of the Allianz Group is held by Allianz Leben, including most of its largest (10%+) stakes. We do not believe that the proceeds can be fully attributed to the group without resolution of the interest of Munich Re (leaving aside the question of whether the Allianz Leben policyholders have any prior claim on any gains.
As expected, the German government has confirmed that capital gains on the disposal of equities will be tax free in accounts published in 2001covering 2000 (assuming accounting years ending on 31 December). This was what had been expected until the Ministry's confusing announcements of 17 February. Tax free capital gains will now be possible in 2001 covering 2000. Whether this will be accomplished by amending the transition regulations, by making such tax free gains dependent upon companies making an earlier transition to the new system, a general earlier transition to the new system, and/or further administrative measures to prevent companies cherry-picking tax benefits from each system, the government has not yet made clear.
The finance committee of the lower house of the German legislature approved the draft on 10 May and the final reading was set for 18 May. The benefits to the non-life insurance industry should go some way to redressing the disproportionate tax burden placed on it by the 1999 tax reform, and in the case of Munich Re and Allianz more so, but the actual benefits will be harder to crystallise than stock market enthusiasm assumes.
We consider that the political expediency of eventual imposition of a tax on capital gains far lower than the current level (say 10% to 15%) is still
too great for it to be ruled out, but these compromises certainly increase the chances of eventual passage as originally proposed.