Grossed Out

Allianz, After Pimco Shake-Up, Looks Ahead

Allianz chief executive Michael Diekmann. Source: AP/DAPD
Allianz chief executive Michael Diekmann.
  • Why it matters

    Why it matters

    Allianz’ ability to restart its troubled U.S. asset management business, Pimco, will be key to restoring the German insurer’s reputation in the United States.

  • Facts

    Facts

    • Allianz is Europe’s largest insurer with a total revenue of €110.8 billion and operating profits of €10.1 billion.
    • Allianz is the world’s third largest insurer by total assets, following Japan Post Insurance and France’s Axa.
    • Allianz U.S. based businesses Pimco and Firearm’s Insurer, are currently straining Allianz performance but these are problems that the German insurer is expected to overcome.
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    Audio

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Shares of Allianz, the German insurer, rose  in European trading on Monday morning, recovering slightly after its announcement late last week that it was parting ways with the founder of its Pimco U.S. asset management business, Bill Gross.

Allianz shares rose to €129.80 ($164.51), up 1.2 percent. The shares had fallen 6 percent on Friday after Allianz, which is based in Munich, said it was parting from Mr. Gross, a legendary bond investor whose fund management company had been a profitable haven for cautious U.S. investors in the run-up to the financial crisis.

Analysts said the damage to Allianz from Pacific Investment Management Company, which is based in Newport Beach, California, would be limited. In a terse statement released Friday, Allianz said Mr. Gross had resigned effective immediately.

“Mr. Gross’ leaving Pimco on Friday was a big surprise to everybody on the market. He is an influential character and markets listen to what he says.”

Peter Eliot , Analyst, Berenberg Bank.

Pimco’s portfolio of bond funds had dominated the retail investment sector for much of  the 1990s and early 2000s, but the U.S. company began to struggle after the financial crisis, when central banks around the world lowered interest rates to near zero, which made bond investments unattractive.

The sea change in investment behavior took a toll on Pimco, with investors in its flagship Pimco Total Return bond fund withdrawing $41 billion in 2013.

Allianz has been slow to right the troubles at Pimco, which is making a transition to a broader seller of all kinds of investments, including stocks.

Mr. Gross’s departure is the second in less than a year at Pimco. In January, the Pimco chief executive and co-chief investment officer, Mohamed El-Erian, resigned. While markets reacted negatively on Friday to news of Mr. Gross’ departure, analysts three days later said the reaction had been overdone.

Allianz’s 2013 revenue from asset management, which included Pimco, represented about 7 percent of the German insurer’s €110.8 billion in 2013 revenue.

“Let’s not forget that insurance operations are driving the business at Allianz forward which is often forgotten amidst current Pimco headlines,” Peter Eliot said, an analyst at Berenberg Bank.

The new kid in town. Pimco appoints Daniel Ivascyn to replace Bll Gross, who resigned last week
The new kid in town. Pimco appoints Daniel Ivascyn to replace Bll Gross, who resigned last week

 

Mr. El-Erian remains a chief economic adviser to Allianz.

“Mr. Gross’ leaving Pimco on Friday was a big surprise to everybody on the market,” Mr. Eliot, the Berenberg analyst, said. “He is an influential character and markets listen to what he says.”

Just about how big his influence really is, was best reflected by Mr. Gross move to the investment firm, Janus Capital Group ― his new employer ―whose shares more than tripled to €12.52 from €3.77 on Friday. Mr. Gross starts his tenure at Janus Capital on Monday.

Experts have long expected Pimco to perform poorly as a natural consequence of the global financial crisis. Its core business was to sell bonds, but with the crisis and the decline in interest rates, Pimco’s problems also started to take shape.

“Pimco has changed from being a company that was led by its founder who was selling bonds, to an asset manager. It was just natural that there would also be changes at the top at some point,” said Jay Ralph, who heads asset management at Allianz’s management board.

After Mr. El-Erian left Pimco in January of this year, Mr. Diekmann promoted six deputies to Mr. Gross, one of which, Daniel Ivascyn, is now taking on the role as Pimco’s new chief investment officer.

“You have to attack problems and find solutions,” Mr. Diekmann said repeatedly ever since he first started as Allianz’ chief executive.

 

Allianz-Pimco-El-Erian-Bill-Gross
Bill Gross and Mohamed El-Erian

 

Mr. Diekmann became Allianz chief executive in 2002 after his predecessor, Henning Schulte-Noelle, left the insurer with a loss of  €1.2 billion, low capital and share price of just €50. Mr. Diekmann managed to restore the insurer’s success. Net profit rose in 2013 to €6 billion – up 15 percent from the year before.

Allianz’s supervisory board is expected to extend Mr. Diekmann’s contract by another one or two years on Thursday, according to a person with knowledge of the situation. That would give Mr. Diekmann time to right Pimco and keep Allianz’ core insurance business on an upward track.

Mr. Eliot said he would still recommend to buy the share, but reduced his price target by €5 since Friday.

The German insurer is also trying to sell the personal insurance business of Firearm’s Funds Insurance, which Allianz acquired in 1991.

Mr. Diekmann is planning to merge Firearm’s industrial insurance business with Allianz and sell the rest.

“New technologies and digitalization will further alter the way we do business,” said Mr. Diekmann earlier this year at the annual results press conference.

Mr. Diekmann started with the German insurer almost 26 years ago as regular insurance agent and worked his way up, building up its Asian business from scratch and becoming a member of the board in 1998.

When he took over as chief executive, he led a strong and often unpopular course of restructuring. He eliminated jobs, sold shares and investments and cut costs.

 

To contact the authors: f.scheven@handelsblatt.com and s.mewes@handelsblatt.com

 

Allianz share price from April 2003 - September 2014, and on 26 September 2014.
Allianz share price from Apri l2003 - September 2014, and on 26 September 2014.

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