Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Scott Eells/Bloomberg

Sept. 27 (Bloomberg) — With two key leaders quitting Pacific Investment Management Co. in nine months, Allianz SE will need to show that Europe’s biggest insurer is capable of managing a mutual fund behemoth.

Bill Gross, 70, who co-founded Pimco more than four decades ago and rose to become manager of the world’s biggest bond fund, is leaving amid a dispute over how to move the firm forward and end record redemptions. His exit comes after Pimco in January announced the abrupt resignation of former Chief Executive Officer Mohamed El-Erian, who had clashed with Gross over management of the firm.

Gross’s departure also coincides with a U.S. regulatory probe into his Pimco Total Return ETF. The Securities and Exchange Commission is investigating whether Pimco bought many bonds at discounts then marked them up, a person familiar with the matter said.

Allianz fell 6.2 percent to 128.20 euros yesterday in Frankfurt trading. That’s the biggest drop since Dec. 12, 2011. The Munich-based insurer’s market value declined about 4.8 percent to 59.3 billion euros from about 62.3 billion euros.

“The extent of outflows at Pimco following the departure of Gross will be seen over the next weeks,” said Thomas Seidl, an analyst at Sanford Bernstein in London. “It may help if Allianz Chief Executive Officer Michael Diekmann will stay on for one or two more years, otherwise Pimco might look too much like unfinished business left for his successor.”

New Leadership

Allianz, Pimco’s owner since 1999, is expected to decide next week on the leadership of the company where six of 11 management board members are coming to the end of their contracts. Apart from Diekmann, 59, the contracts of Manuel Bauer, Clement Booth, Helga Jung, Werner Zedelius and Chief Financial Officer Dieter Wemmer expire this year.

“We would welcome it if Mr. Diekmann would stay on for one or two more years and hand over a company without legacy issues,” said Ingo Speich, a fund manager at Frankfurt-based Union Investment, which is Allianz’s 11th-biggest shareholder, according to data compiled by Bloomberg.

Pimco named Daniel Ivascyn as group chief investment officer after Gross’s departure. Mark Kiesel, Scott Mather and Mihir Worah will take over management of the $221 billion Pimco Total Return Fund, the world’s largest bond mutual fund, Newport Beach, California-based Pimco said in a statement.

Investors are closely watching developments at the asset management business, where Pimco’s main fund is trailing peers and struggling with a record streak of investor redemptions. Jay Ralph, who heads asset management at Allianz’s management board, said in an interview in July that the insurer stands by Gross.

Breaking Dependency

Allianz Asset Management, which also includes Allianz Global Investors, is “on track” to achieve a target of between 2.5 billion euros to 2.9 billion euros in total operating profit this year, Ralph said in the interview. In response to El-Erian’s departure, Pimco named six deputy chief investment officers and in May brought back Paul McCulley in the newly created position of chief economist, all reporting to Gross.

“One part of the new strategy was to turn the one-man-show Bill Gross into a normal investment subsidiary,” said Frank Kopfinger, an analyst at Commerzbank AG in Frankfurt with a buy rating for Allianz shares. “The dependency is gone, but now we’ve got to wait and see what the consequences will be.”

Diekmann defended the insurer’s oversight of Pimco against criticism at its annual meeting with shareholders in May. While redemptions at the Total Return mutual fund have continued for 16 straight months, the asset management unit’s contribution to Allianz’s earnings has increased in recent years.

Allianz said it’s confident that it can manage the situation.

’Complete Confidence’

“We wish Bill good luck,” Diekmann said in a statement on the company’s website. “The management and investment structure put in place in January as well as the thorough succession planning give us complete confidence in Pimco’s investment and executive leadership team.”

Asset management represented about 31 percent of Allianz’s earnings in 2013, up from 12 percent five years ago, turning Pimco into an earnings contributor equal to Allianz’s traditional life and non-life insurance operations. Investors will now want Allianz to show that it can keep it that way.

“The drop in share price today shows the market’s expecting asset outflow of about $200 billion,” Commerzbank’s Kopfinger said yesterday. “I think that’s a bit exaggerated. I’d expect much less outflow.”

Investment Income

Overseeing Pimco in a post-Bill Gross era is just one of the challenges for Allianz’s top managers. Others include coping with low interest rates that weigh on insurers’ investment income.

In the U.S. Allianz also took steps to put an end to years of poor results at its Fireman’s Fund property & casualty business. While the unit’s commercial business will become part of Allianz’s industrial insurance arm Allianz Global Corporate & Specialty, strategic options are being considered for the personal lines business, the insurer said on Sept. 17.

Furthermore, investors are expecting Allianz to pay out a higher share of its profits as dividend than the 40 percent of profit typically distributed in the past.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editors responsible for this story: Mark Bentley at mbentley3@bloomberg.net Cindy Roberts, Angela Cullen