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Allianz Shores Up $19 Billion Dresdner Bank Vehicle

Allianz moved to shore up the $19 billion structured investment vehicle K2 managed by its Dresdner Bank unit and said it was rolling back its business in complex finance products hit hard by global credit turmoil.

Europe's biggest insurer also confirmed on Thursday that it made record net profit of nearly 8 billion euros ($11.79 billion) in 2007, despite earnings that nearly halved in the fourth quarter as a result of big write-downs at Dresdner.

Allianz finance head Helmut Perlet said the market situation at the end of last month pointed to possible further write-downs at Dresdner of 300-400 million euros for the first quarter after about 1.5 billion euros of subprime write-downs in 2007.

Dresdner Bank announced on Thursday it was cutting back on its activity in structured investment vehicles (SIV) and other structured products at the root of the credit crisis and cutting 450 jobs, though most had already been shed.

"Dresdner Bank will reduce its engagement in the SIV business as the model of interest arbitrage faces a tough future," Allianz Chief Executive Michael Diekmann said.

Dresdner Bank said it would offer a support facility to its K2 structured investment vehicle to ensure repayment of all of K2's senior debt. Dresdner said it had reduced the size of K2 to about $18.8 billion now from $31.2 billion in July of last year.

"Dresdner Bank believes that the support for K2 is expected to have no significant impact on the capital base of Dresdner Bank Group," it said in a statement, adding that all K2's cash assets were investment grade, with no direct subprime exposure.

Allianz added that it was not clear whether, or to what extent, it might have to take K2 onto Dresdner's books.

Allianz shares have fallen more than 25 percent over the last six months, more than the 20 percent drop in the DJ Stoxx European insurance index, as investors worried about exposure to subprime losses at Dresdner.

Allianz had already released key 2007 earnings figures last month in an effort to calm investor jitters over its investments linked to risky subprime mortgages in the United States.

As well as a record net profit, Allianz posted a 5 percent rise in operating profit to 10.9 billion euros last year, just short of its 11 billion euro goal.

That result allowed it to propose raising its dividend by nearly half to 5.50 euros per share for 2007, it said.

Consolidation Movement

Diekmann said the group was well positioned to achieve its medium-term targets but sounded a note of caution about 2008.

"Financial markets and their future development will have a stronger impact on our business results than usual," he said.

DZ Bank analyst Thorsten Wenzel said that while Allianz was sticking to its goal of raising operating profit by 10 percent per year on average, he took note of Diekmann's caveat.

"This obviously implies that the downside risk to this target has increased," Wenzel said in a note to clients.

Allianz shares closed 0.8 percent higher Thursday.

In the fourth quarter, operating profit at its main property and casualty insurance business rose over 25 percent, but life-health profit fell 12 percent while banking posted an operating loss of over 450 million euros. Net profit fell to 665 million euros from 1.372 billion in the year earlier period.

Separately, the Financial Times Deutschland newspaper reported on Thursday that Allianz may be interested in buying Germany's biggest retail bank, Postbank, and had already held talks with Postbank's owner, Deutsche Post. The paper did not cite a source for its story.

Diekmann declined to comment but welcomed the idea there was some movement toward consolidation in the German banking market.

He also said that a share buy-back was not on the cards at Allianz for the time being.