Michael Diekmann, chief executive officer of Allianz SE, Europe’s biggest insurer, said capital rules that encourage financial companies to invest in sovereign bonds are thwarting a solution to the continent’s debt burden.
Investments in infrastructure can revive productivity and boost growth in nations struggling to meet obligations to creditors, Diekmann said. Regulations instead promote bets on government debt that are distorting markets and contributing to a cycle of borrowing, he said.
“We’re getting to a sort of artificial pricing of risk,” in bond markets, Diekmann, 58, said in an interview yesterday at Bloomberg headquarters in New York.
Insurers are working to maintain returns on bond holdings as stimulus efforts depress yields and regulations limit investing options after the financial crisis. Allianz had 456 billion euros ($617 billion) of fixed-income investments tied to insurance units as of June 30. That’s 90 percent of a portfolio that also includes equities and real estate.
Of the insurer’s 170 billion euros in government and government-related debt securities, France represented 20 percent, Italy 17 percent and Germany 16 percent, according to a presentation on the Munich-based company’s website.
“The facts are more pessimistic for Europe, because there’s not much done about state debt,” said Diekmann, who was named CEO in 2003. “At some point in time, people will have to give a clear answer. So far the answer is we’re going to grow out of the problem.”
‘Highly Unlikely’
That would mean a country like Germany would need 3 percent to 4 percent growth with inflation increasing at the same rate, he said. Spain or Italy would need growth of at least 5 percent and “that’s all highly unlikely,” he said. Economic growth is projected to be 1.8 percent next year in Germany, 0.6 percent in Spain and 0.5 percent in Italy, according to economic estimates compiled by Bloomberg.
Diekmann said so-called bail-in laws, which could enforce creditor losses in bank failures, are discouraging his company from investing in lenders as well.
“Bond prices are not reflecting the risks,” he said. “Everything that can get bailed in, we have to pull out, be it nations or even the whole banking systems,” Diekmann said.
Allianz has instead turned to corporate debt issued by industrial companies that will benefit in growing markets, he said. The insurer has also made investments ranging from wind parks in northern France to parking meters in Chicago.
Axa, Generali
France’s Axa SA, Europe’s second-biggest insurer, has been increasing bets on corporate bonds and infrastructure debt, helping hold the company’s portfolio yield steady, CEO Henri de Castries said in an interview in September. Infrastructure can include bridges, toll roads and airports.
Italy’s Assicurazioni Generali SpA, Europe’s third-biggest insurer, plans to boost its investments in infrastructure debt and real estate as it cuts liquidity to raise profitability, Chief Investment Officer Nikhil Srinivasan said in an interview this month.
Diekmann, who was in the U.S. to meet with investors, said he will discuss with shareholders how requirements tied to some of the company’s favored investments, such as real estate and infrastructure financing, can make it harder to lift dividends.
The insurer kept the payout for 2012 stable at 4.50 euros a share, representing 40 percent of profits. The insurer’s next dividend is expected to be 5.20 euros per share, according to Bloomberg projections.
Regulators also need to be persuaded about the benefits of infrastructure financing, according to Diekmann. He suggested that banks could be counted on for short-term lending while insurers and pension funds could provide funds for longer durations.
“There’s a void now for these long investments, and that’s a huge opportunity to get the interest of life insurers and the taxpayers in sync,” Diekmann said. “Unfortunately we’re not there yet.
–With assistance from Zachary Tracer in New York. Editors: Dan Kraut, Dan Reichl