German insurer Allianz SE said Friday first-quarter net profit fell 65 percent due to difficult market conditions as it wrote down $1.3 billion tied to the U.S. subprime crisis.

Allianz, which also owns Dresdner Bank, said net profit for the January through March period came in at 1.1 billion euros ($1.69 billion) compared with 3.2 billion euros in the same quarter a year ago.

The news sent Allianz shares down nearly 2 percent to 128.48 euros ($197.18) in Frankfurt morning trading.

Allianz said it marked down 845 million euros ($1.3 billion) at its banking business as a result of its asset-backed securities, which combines various slices of mortgage-backed securities. The market for subprime mortgages, those made to people with less than stellar credit, began to collapse last summer. Banks have written of billions as a result as they revalue holdings.

The company also profit figures reflect a decision not to realize gains from capital investments because of jittery stock markets, whereas last year the company booked 2 billion euros in such gains.

Total revenues were down 6 percent to 28 billion euros ($43.1 billion) compared with 29 billion euros a year ago.

“Although we are seeing somewhat lesser tension in U.S. residential mortgage prices as well as cautiously rebounding equity markets, it is hard to predict when the stormy weather will end,” said Helmut Perlet, Allianz’ chief financial officer.

“While 2008 will remain a challenging year, the longer this environment persists, the harder it will also be to achieve our medium-term outlook. We will remain optimistic, as the fundamentals of our business are in very good shape and we are very well-positioned for the return to normal market conditions,” Perlet said.

The Munich-based company said its property and casualty business posted strong performance in the first quarter with an operating profit improvement of 17 percent to 1.5 billion euros ($2.31 billion) compared with 1.27 billion euros in the year-ago quarter.

Life and health insurance businesses remained flat at 12 billion euros ($18.48 billion) in total premium income, but operating profit decreased by 22 percent to 589 million euros ($907.06 million) from 750 million euros.

Allianz said the company’s Dresdner Bank also saw a 65 percent decline in operating revenues to 719 million euros ($1.1 billion).

The asset management segment’s third-party assets decreased 4 percent to 736 billion euros ($1.1 trillion) from 765 billion euros at the end of 2007.

“We believe our asset management business did very well, given the extremely difficult market environment,” Perlet said.

“Taking into consideration strong net inflows and stable margins, the segment is poised for future growth as markets go back to normal.”

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