Insurance Industry Allianz Tries to Shake Off Pimco Woes

Allianz posted another profit in 2015 but is still wrestling with its U.S. fund-management arm Pimco, not to mention a challenging overall environment of low interest rates, declining stock prices and political uncertainties.
Battling Pimco: Allianz's CEO Oliver Bäte.

At his first big press conference as the head of German industry giant Allianz, Oliver Bäte would have preferred to talk about his vision for the company, his plans for expansion. But he knew he first had to get the thorny subject of Pimco out of the way.

Allianz bought California-based Pimco in 2000, when it was a star investment firm. Its founder Bill Gross was considered a bond guru, who had grown the company from humble beginnings into the world's largest bond manager.

But the good times ended in 2013 when the U.S. Federal Reserve's announced that it would soon begin ending its easy monetary policy and start raising interest rates. As the price of bonds – which profit from low interest rates – began to fall, customers began to withdraw their money from Pimco's investment vehicles. The Total Return fund managed by Mr. Gross lost its status as the world's largest investment fund. Mr. Gross departed in September 2014, but the fund continued to lose money.

Mr. Bäte now insists that the large outflows of capital that Pimco has had to stomach for more than two years are "a thing of the past."

"We prefer to see the glass as half full," he said in his press conference last week detailing the insurer's annual results. He noted that he had seen other investment management firms that faltered in the financial crisis and took up to four years to get back on their feet. "Given the fact that we are in year two," he said, "our colleagues are doing an excellent job."

His chief financial officer, Dieter Wemmer, echoed the sentiment. He argued that things were still tough, but getting better.

"For us, the fourth quarter went well, in that the outflows at Pimco were reduced to €11 billion ($12.2 billion)," he said. "That's still a huge number. But when you consider that €125 billion were withdrawn from the fund in all of last year, the outflows have in fact become much smaller."

All insurance companies are operating in a difficult environment. Mr. Bäte warned of a perfect storm of low interest rates, sharp declines in stock markets and political uncertainties.

It's not as if Pimco is the insurer's only source of income. Allianz on the whole recorded operating profits of €10.7 billion in 2015, up slightly from the previous year.

But Mr. Wemmer admitted the problems at Pimco are still having a strong impact on the insurer's annual figures. The operating profit of Allianz's asset management division, of which Pimco comprises the lion's share, declined by a significant 12 percent year-over-year. The other two major divisions – life insurance and indemnity/casualty insurance – were clearly in the black.

But he also sounded optimistic: Pimco now has new products, stronger internationalization and new managers to speed its recovery, though it still needs to cut costs. "I believe Pimco is in a good position, and in 2016 we will have to furnish proof that we are also reaching a turning point here," said Mr. Wemmer.

Mr. Bäte confirmed there is still a lot to do at Pimco. He will travel to California again this week to see that everything is going smoothly.

All insurance companies are operating in a difficult environment. Mr. Bäte warned of a perfect storm of low interest rates, sharp declines in stock markets and political uncertainties affecting bottom lines.

Because of these factors, he prefered not to get too specific with predictions for 2016 results, saying that the group will generate between €10 billion and €11 billion in revenue, which is a significantly wider range than in the past.

The company was also vague on the issue of earnings growth. Allianz ended 2015 with an operating profit of €10.7 billion. Only once in its 125-year history did the insurer make more money: in 2007. At the time, however, Dresdner Bank, which was sold a year later to Commerzbank and became one of the banks worst affected by the financial crisis, was still contributing to the operating profit of €10.9 billion.

Since then, much has changed in the insurance industry, which is struggling with low interest rates. Mr.Bäte, who took charge in May, is now expected to implement new regulations to deal with digitization.

In the fall Mr. Bäte, a former manager at consultancy firm McKinsey, announced his plans for the coming year. The insurance group wants its 142,000 employees to focus more heavily on customers. In the past, Mr. Bäte repeatedly emphasized, customers were nothing but a number, a policy, but added: "That will change dramatically in the future. We can and must understand what our customers expect from us."

All processes are currently being put to the test.

"Will everything change now?" Mr. Bäte asked, as he described the processes. "No. In fact, it doesn’t have to. Much of what we do has been tested for the last 125 years and is really good." But, he added, the individual country subsidiaries will need to cooperate more closely, in both products and investment. Acquisitions are also a possibility, he said, but no "giant acquisitions."

The dividend is rising to €7.30 for 2015. This is a clear increase, and yet less than many had hoped. The Allianz share price dropped sharply on Friday on the announcement, a clear sign that shareholders appear to have no appetite for large acquisitions, and would prefer cash back instead.

 

Kerstin Leitel covers banks and insurance companies for Handelsblatt and is based in Munich. To contact the author: leitel@handelsblatt.com

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