Allianz SE (AZ), Europe's largest primary insurer by market value, Friday posted a 16% decline in second-quarter net profit on continuing operations, as contributions from its property/casualty business fell and on startup costs related to its remaining small banking business.

These drags on earnings were only partially offset by lower write-downs on the fallen value of the insurer's investments.

The company gave no concrete earnings target for 2009, saying the market environment will remain challenging.

It said, however, that it remains strongly capitalized and that its low-risk profile and good diversification allow it to withstand potential market shocks and benefit from sector upturns.

"Allianz is prepared for what we perceive as the 'new normal,' an ongoing challenging market environment with structurally lower returns," Chief Executive Michael Diekmann said.

At 1324 GMT, Allianz shares were down EUR0.08, or 0.1%, at EUR75.45, nearly erasing a loss of 4.4% but still underperforming the wider market, which was up 1.5%.

Landesbank Baden-Wuerttembeg analyst Robert Mazzuoli, who rates the share at sell, said investors were focused on the lower quality of earnings, such as high net realized gains on the investment portfolio that won't necessarily be repeated.

Allianz cut the stock portion in its portfolio to 7% from 9% in December.

The weaker contribution from the property/casualty business, Allianz's main revenue and profit driver, wasn't compensated by the record profit contribution from life/health insurance, the analyst said.

Second-quarter net profit on continuing operations fell to EUR1.87 billion from EUR2.23 billion a year earlier, above the EUR1.48 billion average forecast in a Dow Jones Newswires.

The year-earlier figure has been restated to reflect continuing operations only, after Allianz sold Dresdner Bank. Including the EUR683 million loss contribution from discontinued operations in the year-earlier quarter, Allianz's net profit was up 21% in the most-recent period.

Allianz sold Dresdner Bank to Commerzbank AG (CBK.XE) last year for EUR5.1 billion, with the closing in mid-January. Allianz has said the total burden related to the sale amounted to EUR6.8 billion, of which EUR6.4 billion was booked in 2008, and the remaining EUR400 million in the first quarter of this year.

Operating profit, which some analysts consider to better reflect operational performance, fell 33% to EUR1.79 billion from EUR2.66 billion.

The life/health insurance, meanwhile, had its strongest quarter ever, with profit rising 41% profit to EUR990 million, helped by lower write-offs on stocks and narrowing of credit spreads, which contributed to a better result of U.S. life operations.

Property/casualty took hits from the recession, a high number of small weather-related claims, a number of large claims in France and an earthquake in Italy, Allianz said.

The recession leads to higher claims in credit insurance. Allianz is the majority owner of Euler Hermes SA, one of the world's largest credit insurers, which posted an operating loss of EUR32 million. This is also reflected in the higher combined ratio, which rose to 98.9% from 93.5% a year earlier. The combined ratio compares revenue and costs; a figure below 100% means an insurer's underwriting business is profitable. Allianz said it expects that figure to improve in the second half.

On the investment side, the net of non-operating realized gains/losses and write-downs was EUR815 million, up 49% from a year ago. Allianz booked a EUR658 million capital gain on halving its stake in Industrial & Commercial Bank of China Ltd. (1398.HK) to 0.97%. Also, it received EUR242 million from its investment in Hartford Financial Services Group (HIG) that Hartford had to pay when it accepted $3.4 billion government financial assistance through the U.S. Treasury's Troubled Asset Relief Program.

After the Dresdner Bank sale, Allianz's remaining banking business will focus on Germany and operate as Allianz Bank. It booked EUR95 million in startup costs on the banking business in the second quarter.

Total revenue, which includes sales generated by the insurance and asset management operations and a small banking business, rose 3% to EUR22.2 billion from EUR21.5 billion a year earlier, above the forecast EUR21.86 billion.

The share has lost 33% over the past 12 months, bringing its market value to EUR34 billion.

Company Web site: www.allianz.com

-By Ulrike Dauer, Dow Jones Newswires; +49 69 29725 500; ulrike.dauer@dowjones.com