The Economist 04Apr2020

66 Finance & economics The EconomistApril 4th 2020

2 commercialmbsor real-estate investment

trusts (reits). Renegotiating payments

with banks and insurers, which lend using

their balance-sheets, might be manage-

able. But a quarter of commercial mort-

gages are owed tombsholders and toreits,

which are less flexible. The commercial

mbs market is governed by rigid rules;

reits are highly leveraged and will quickly

suffer if payments stop.

Some middlemen are also being affect-

ed in unforeseen ways. For instance, mort-

gage-service providers—which originate

loans and collect payments from home-

owners for a fee—complain that they are

running short of cash. They typically bet on

rising interest rates by short-sellingmbs,

thereby hedging the risk they take when

locking in rates for new customers. But as

part of its response to the pandemic, the

Fed is buyingmbsso quickly that the pro-

viders are facing margin calls on the losses

on their hedges, before the loans for which

they have locked in the rates can be issued.

With help from the Fed and the govern-

ment, many homeowners will be able to

delay repayments. Some of the corporate

links in the chain may not be so lucky. 7

O

liver bätestill goes to his office every

day on Munich’s Königinstrasse, next

to the English Garden, but it is mostly emp-

ty. “You are always alone as a ceo,” says the

boss of Allianz, who took the reins of the

130-year-old insurance giant in 2015. And

never more so than during a pandemic,

when you are in charge of 147,000 employ-

ees in over 70 countries, who are looking

after hundreds of thousands of customers,

many of whom are in financial despair be-

cause of covid-19. “Italy is overwhelmed,”

says Mr Bäte. Only 30 of its several thou-

sand employees in Milan are at the office.

The company will support clients wher-

ever it can, says Mr Bäte. He is frequently

on the phone with officials in Brussels and

Berlin, discussing ways to help govern-

ments marshal money for programmes to

support small and midsized companies.

Thousands of firms are looking to their

insurers, as well as the state, to cover some

of the costs of shutting down. But neither

property-and-casualty nor life-insurance

policies generally cover pandemics. This is

mainly because the risk is huge and unpre-

dictable, but also because such policies

were not until now much in demand. All-

ianz covers certain elements of a pandem-

ic, such as business interruption for two

weeks. But it can only underwrite slices of

the risk, says Mr Bäte. Otherwise even the

strongest insurer would go bust.

Legal wrangles over policy exclusions

loom over the industry. State lawmakers in

America (where insurance is regulated at

state level) have proposed new laws to

force insurers to pay billions of dollars for

business interruptions related to manda-

tory shutdowns. The issue is simmering in

Europe, too—though fewer cases are likely

to end up in court. Politicians are also urg-

ing insurers to lower premiums in other

business lines, for instance car insurance,

or to divert profits from these to help

stricken corporate policyholders. Insurers

can make more money than usual from

motor policies during lockdowns, since

quieter roads mean fewer accidents.

Allianz has many more immediate con-

cerns. As the owner of Euler Hermes, a big

provider of credit insurance—which firms

buy to protect receivables from loss—All-

ianz is directly exposed to rising corporate

defaults. Mr Bäte vows to try to keep small

businesses going by not making drastic

cuts to the credit lines it offers with such

policies. France is set to offer a reinsurance

backstop to limit potential losses for credit

insurers that help keep covid-stricken

firms afloat; Germany may follow suit.

Allianz’s huge asset-management

arm—the world’s second-largest active

fund manager—is heavily exposed to the

carnage, too. The business, which com-

prises pimco, a bond-fund giant, and the

smaller Allianz Global Investors, oversees

some $2.3trn and generates up to a quarter

of group profits. It had a very good January

and February, but in March it was “like

turning a light switch off”, says Jackie

Hunt, who leads the division. Clients

rushed to redeem funds, especially in fixed

income, after stockmarkets plummeted

(Mr Bäte says Allianz beat an “early” retreat

from American equities). Hedging has be-

come more difficult. The cost of protection

for a book of variable annuities, for in-

stance, “shot through the roof”, says Mr

Bäte. “It’s a hundred million here, a hun-

dred million there.”

Allianz is exposed to markets both in its

life-insurance business, as an investor of

clients’ premiums, and as an earner of

fund-management fees. Ms Hunt thinks

the crisis will speed up the move from ac-

tive to passive management in equities and

squeeze fee margins. Yet she insists that

this is a time when active managers prove

their value, especially in fixed income.

When time allows, Mr Bäte says, he is

pushing on with a plan to slim Allianz

down and increase efficiency by embracing

aiand machine learning. He estimates that

up to half of his working day is taken up

with covid-related issues. The outlook is

unclear: for now, he says, he is not ponder-

ing a profit warning. He is preparing for an

annual general meeting on May 6th, which

for the first time will take place virtually. It

will be a lonely day for the gregarious for-

mer McKinsey consultant. 7

BERLIN

The boss of Europe’s largest insurer on dealing with market turmoil

Allianz

Lonely work