The good old days of steady investment returns are over, and insurers may need to adjust.

To Clement B. Booth, Allianz SE's (AZ) management board member who oversees the company's Anglo insurance markets, lower and less-predictable investment income is one of the key factors affecting the industry. Price increases are an inevitable consequence.

"We are at the end of the soft cycle," Booth said in an interview this week. After years of steadily falling prices for commercial insurance, prices are "starting" to harden, and will continue to do so, he said.

Insurers earn money from premiums they collect and from investment returns on money set aside for future claims or other business needs. Lower investment income affects all the business lines Booth manages - reinsurance, aviation, marine and homeowners insurance, and the company's variable annuity business.

In a recent speech investment guru Bill Gross, founder of Allianz-owned bond fund manager Pimco, called it the "new normal," a world of "stunted" economic growth that will affect investments for years to come.

In its commercial insurance lines, Allianz will stick to strict underwriting, the technical business of determining risk and setting an appropriate price, even if it costs Allianz some business. Booth said underpricing insurance risk could lead to sharp price spikes in future years, which is more disruptive than the steadier increases he envisions.

In June, Allianz began offering auto insurance in the U.S., adding to the high-end homeowners insurance it has offered for years through its Fireman's Fund subsidiary. Allianz doesn't plan to follow the current trend toward direct-to-consumer auto insurance marketing

Booth also sees no point in Allianz combining its various U.S. life and property insurance businesses, as some insurers have in order to chase a cross-selling model, adding, "that's not to say we can't take advantage of synergies."

In its variable annuity business, products will have to be revamped, but market volatility is making it difficult to develop a product that offers customers a reasonable return and Allianz a reasonable profit, Booth said. The company stopped selling its previous "unsustainable" variable annuity product in March.

Other variable annuity sellers have found themselves in the same position, and many have raised prices and cut back on features that offer guaranteed minimum rates of return.

Allianz plans to relaunch a new, pared down annuity product in the third quarter, but the continued market volatility is making it difficult to settle on pricing and features.

If the company can hit on the right balance, Booth sees a "changed attitude" among American consumers, many of whom are setting aside money rather than spending it on discretionary purchases such as new cars.

He sees "demand-driven potential" for investment products like annuities if insurers can build them with the right features and a decent return. "We will do everything we can to stay in the game."

Shares of Allianz are down 47.2% in the last 12 months, slightly outperforming the Dow Jones US Life Insurance Index (DJUSIL-DJX), which is down 50.9% over the same period.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141; lavonne.kuykendall@dowjones.com

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