Exclusive: After a US fund collapse worth billions, the German Allianz shies away from the risk of safe bonds

FRANKFURT (Reuters) simple borrowings, said people with knowledge of the matter.

The German firm’s new approach comes amid a sea change in the investment environment, with central banks raising interest rates to curb runaway inflation, leading to higher returns on mainstream assets, the people said on condition of anonymity.

They stressed that the redistribution would be gradual and would not result in fire sales, as new money would mostly go to fixed income rather than alternative investments.

The Alliance declined to comment.

The move by Germany’s largest financial firm by assets and market value is evidence of a clear shift toward the multi-trillion-dollar investment-grade bond market that keeps governments afloat and feeds retirees, and away from alternatives that are in a Era of returns bubbled extremely low and even negative interest rates.

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For Allianz, the repositioning also coincides with efforts to restore its reputation after paying around $6 billion in fines and settlements for fraud in the United States last year. This led to part of his US wealth management business agreeing to a guilty plea for the conduct, which his own lawyers said was tantamount to a “death penalty”.

One of the people noted that Allianz’s solvency ratio – a measure of financial strength – suffered in the wake of the fund debacle and that the new investment approach could help restore it.

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Allianz CFO Giulio Terzariol shed light on the company’s rethink in November when he told analysts on a conference call, “The value proposition of fixed income is a lot more compelling than it was a few years ago… it’s a different game.”

Allianz’s results, released on Friday, provide an annual overview of the company’s asset mix.

As a global insurer, Allianz ranks as one of the world’s largest wealth managers, with 2.6 trillion euros ($2.79 trillion) in assets under management through bond heavyweight Pimco and Allianz Global Investors, whose US unit managed the funds listed in The focus of the latest scandal.

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Allianz’s push for alternatives began when Michael Diekmann, now Group Chairman, was CEO. In a speech on his last day of work in 2015, he complained about potholes on the roads between Salzburg and Munich and pointed out the need for infrastructure investments. He promised Allianz would grow so-called “real asset classes,” which include infrastructure, from €80 billion to €110 billion.

Since then, Allianz has grown its alternative investments by 350% to more than 200 billion euros, while fixed income is up 40% and equities are up 30%, based on calculations by Reuters using Allianz accounts.

Big purchases included stakes in London’s new sewage tunnel and wind farms from the United States to Finland.

The properties that make up the bulk of Allianz’s alternative investments included around 700 million euros in stakes in New York’s Hudson Yards complex and a tower in Frankfurt that is part of a 1.4 billion euros real estate development.

But as the investment climate shifts, Allianz is looking at ways to reallocate new money into other assets, such as fixed income, people said.

Annette Kroeger, Allianz Real Estate CEO Europe, said her department takes a wait-and-see approach to real estate. “We, like the rest of the market, are moving forward with caution,” she told Reuters.

In a sign of changing times, even bond yields in Japan have edged up on speculation that the era of ultra-loose monetary policy is coming to an end.

Allianz isn’t the only one considering alternatives. Goldman Sachs’ wealth management arm plans to significantly reduce its $59 billion in alternative investments.

The rating agencies Moody’s and S&P, both of which give Allianz good ratings, have pointed to the greater risk emanating from relatively illiquid alternative investments in the Allianz portfolio.

Alternative assets come at a price because they’re less liquid than bonds and Allianz and other insurers have to set aside more capital to own them.

Allianz is hoping, some said, that the move will help improve its capitalization and solvency metrics, which track how the company would behave in a crisis.

Allianz’s so-called Solvency II capitalization ratio – a key indicator of financial health – has fallen from 229% in 2018 to 199% at the end of the third quarter of last year, based on Allianz’s financial statements, partly due to the fines and Settlements for the US fund scam.

The case came to light after $11 billion in funds collapsed as markets were roiled by the coronavirus outbreak in early 2020.

US prosecutors claimed the fraud involved forged documents, fabricated risk reports and altered spreadsheets.

Among the $6 billion in settlement payments and fines, Allianz paid $1.49 billion to one of its major investors, Blue Cross Blue Shield, in an effort to provide “generous” compensation, based on a presentation , which Allianz lawyers submitted to the US Department of Justice last year. published in a court filing last month.

A lawyer for Blue Cross Blue Shield declined to comment.

In the same presentation, Allianz lawyers argued that the guilty plea Allianz eventually agreed to for the US deal was “a death penalty for a registered investment adviser.”

As a result, Allianz Global Investors in the United States was forced to close, dealing a serious blow to the company.

($1 = 0.9328 euros)

Additional reporting by Alexander Hübner in Munich and Dhara Ranasinghe in London. Editing by Jane Merriman

Our standards: The Thomson Reuters Trust Principles.

Tom Sims

Thomson Reuters

Covers the German financial world with a focus on big banks, insurance, regulation and financial crime, previous experience at the Wall Street Journal and the New York Times in Europe and Asia.

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