Allianz Gained $5.8 Billion From Italian Government Bonds

Allianz SE (ALV), Europe’s biggest insurer, booked a 4.5 billion-euro ($5.8 billion) unrealized gain on Italian government bonds after adding to its holdings at the height of Europe’s debt crisis, company filings showed.

After purchasing 3.8 billion euros of the debt in the first quarter, Allianz reduced its exposure by 3.3 billion euros in the second half, leaving total holdings of 31.1 billion euros on Dec. 31, it said in an analyst presentation last week.

European insurers such as Allianz, Axa SA (CS) and Prudential Plc (PRU) benefited from a recovery in financial markets last year, which helped them increase investment income and offset the impact of lower interest rates. Net income at Allianz almost doubled to 5.49 billion euros last year from 2.8 billion euros in 2011, it said last week.

The buying and selling of Italian bonds was unusual in part because Allianz is an insurer, not a hedge fund, and Italian markets were being roiled by Europe’s debt crisis at the time, according to Rotger Franz, an analyst at Societe Generale SA (GLE) in London.

“While it isn’t acting like a hedge fund, Allianz is more opportunistic than its peers,” Franz said. “We haven’t seen any other insurer adding cross-border exposure of Italian government bonds in 2012.”

‘Long Term’

The buying and selling was done by separate units of the company and wasn’t intended as a short-term trading strategy, Allianz said.

“Allianz is an investor looking for long-term returns that fit well with its long-term investment strategy,” Stephanie Rupp-Menedetter, spokeswoman for the firm, said in an e-mail. “Our investments are intended to be held for a very long period - in accordance with our business model.”

Italian 10-year benchmark bond yields fell from a euro-era record high of 7.244 percent in November 2011 to 4.388 percent in December. The average yield volatility during the year was 28 percent. Yields on the bonds rose 2 basis points to 3.51 percent at 4:51 p.m. today.

An investor that purchased an equally-weighted portfolio of Italian government bonds at the end of January 2012 would have booked a gain of more than 15 percent by December, according to Bloomberg total return estimates.

Low Prices

Allianz said it decided to boost its holdings of Italian government securities in the first quarter in part because prices were low and also because the firm wanted to increase the amount of bonds with longer maturities in its portfolio to better align with guaranteed life policies it sold.

“In Italy, in the first half of the year we increased it, our overall exposure, due to the very nice spreads and also due to the duration extension program,” Maximilian Zimmerer, board member in charge of finance and life insurance at Allianz, said in a Feb. 22 earnings call with analysts. “And in the second half we used also the tighter spreads to reduce the position.”

When Allianz first announced on Nov. 9 that it was taking profits by selling Italian bonds, board member Oliver Baete told analysts that it was “one of the smartest things I ever did.”

Allianz said it hoped the move would help match long-dated guaranteed insurance liabilities with assets of similar duration, thereby reducing sensitivity to interest-rate swings. The company has faced criticism from analysts over the size of its interest rate exposure, which is concentrated in Germany where it is a leading provider of guaranteed life savings products, which offer a minimum interest rate on savings that become more valuable when rates fall.

Ultra-Long

At the end of 2012, Allianz reported that the market- consistent embedded value of its German life business, a measure of the value of life insurance policies, would fall by 1.87 billion euros if interest rates fell by 100 basis points.

“We had to sell 9 billion euros of shorter-dated bonds and then went into the very long-dated and the mix you can see here, it was a mixture mainly of France, Italy, Austria and supra- nationals,” Zimmerer said. “These are the countries usually that provide you with the very ultra-long bonds which you really need for that overall business.”

Of the 4.9 billion euros of Italian bonds bought in the first quarter, 2.3 billion euros were bought for the German life business, according to the Feb. 22 analyst presentation. Those bonds had an average maturity of 26 years and an average yield of 6.4 percent, indicating that they were purchased at the end of January. Allianz also added 3.3 billion euros of French government bonds and 1.5 billion euros of Austrian bonds, both with average maturities of 43 years.

Of Allianz’s remaining Italian government bond holdings, 21 billion euros is held by the insurer’s Italian subsidiaries to back life policies sold domestically, according to the presentation.

The 3.3 billion euros of bonds sold in the second half of the year were short-dated securities owned by the insurer’s Italian subsidiaries, Rupp-Menedetter said. They were sold at close to purchase price and there was no significant impact in terms of profit or loss, she said.

To contact the reporter on this story: Nicholas Dunbar in London at ndunbar1@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Ted Merz at tmerz@bloomberg.net

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