Allianz Hedge Fund Implosion Results in $4.2 Billion Charge
Stephan Kahl
Fri, February 18, 2022
(Bloomberg) -- The price tag for one of the biggest trading debacles during the pandemic-fueled market meltdown of early 2020 is beginning to emerge.
Allianz SE, facing multiple lawsuits and regulatory probes tied to the collapse that year of its Florida-based hedge funds, took an unprecedented, 3.7 billion-euro ($4.2 billion) charge to cover a settlement reached Friday morning with the vast majority of investors in the funds.
In a sign of more pain to come, the German insurance and financial-services firm, which also owns bond giant Pacific Investment Management Co., warned that ongoing probes by U.S. Securities and Exchange Commission and Department of Justice are at a “sensitive” stage and that it couldn’t yet estimate the final price tag.
“There are still ongoing conversations with remaining plaintiffs,” Chief Financial Officer Giulio Terzariol said in an interview on Bloomberg TV Friday. “We are in conversations with the DOJ, and this conversation is very constructive.”
Investors -- including public pension funds, Blue Cross & Blue Shield and New York’s Metropolitan Transportation Authority -- claimed they lost billions of dollars from the collapse of the hedge funds, which were designed to withstand a market crash yet incurred steep losses during the tumultuous early days of the pandemic. Allianz liquidated two of the vehicles in March 2020 and has been unwinding the others.
The lawsuits accuse Allianz of abandoning a stated investment mandate and downside risk protections of its Structured Alpha Funds, and then doubling down on risky strategies in an attempt to recoup losses during the market volatility -- a move that some plaintiffs derided as an “extraordinarily risky and self-interested gamble.”
In its defense, Allianz told a judge last year that the plaintiffs are sophisticated investors that chose high-risk private funds with open eyes.
Allianz, as a result of the one-time charge, posted a 292 million-euro loss for the fourth-quarter, overshadowing an otherwise strong rebound from the pandemic. The company also announced plans to repurchase as much as 1 billion euros of stock and proposed increasing the annual dividend 12.5% to 10.80 euros a share.
“It’s a step in the right direction,” analysts at Morgan Stanley wrote in a note. “However, management did mention that it expects to incur additional expenses before the matter is finally resolved, which does imply some litigation-related overhang to persist.”
Shares of the insurer fell 1.4% at 11:41 a.m. in Munich, paring gains this year to 5.7%.
Chief Executive Officer Oliver Baete told reporters that management would see a significant impact on compensation from the hedge fund debacle. He has been tying to persuade investors that the company is strong enough to shoulder the extra legal and regulatory costs, boosting the insurer’s medium-term performance targets last year.
The firm hadn’t set aside reserves earlier because it couldn’t estimate the price tag. In a Feb. 8 note to clients, Berenberg analysts pegged the total cost at 5.8 billion euros, describing the unresolved disputes as the “main overhang” for the company.
Allianz warned in August that the hedge funds’ implosion could “materially impact” earnings, after the Justice Department launched its probe into the funds, joining the fray with the SEC and investors, who alleged losses of about $6 billion.
Asset Management
In October, Allianz appointed the CEO of its life-insurance unit, Andreas Wimmer, as the head of asset management, succeeding Jackie Hunt. Wimmer indicated in an interview last month that the company plans to push further into alternative asset classes and continue its focus on active fund management.
Senior executives have remained supportive of the unit that offered the funds, Allianz Global Investors, while pledging to take a close look at its product offerings. Of the roughly 450 active investment strategies that existed at the end of 2019 at the unit, about 140 were discontinued or merged with others in the past two years, Wimmer said in the interview.
Despite the debacle, AGI saw third-party clients add 9.5 billion euros in the fourth quarter. Its bigger sister unit Pimco recorded 11.1 billion euros in net inflows.
“It was a very isolated event at AllianzGI U.S. We are very comfortable with the current team and are happy with the trajectory the business is taking,” Baete told Bloomberg in a phone interview.
Allianz cuts bonuses, settles some lawsuits after funds debacle
Tom Sims and Alexander Hübner
Fri, February 18, 2022
By Tom Sims and Alexander Hübner
FRANKFURT (Reuters) -Allianz announced on Friday big bonus cuts for its CEO and board, and a settlement with the "vast majority" of investors, as it braces for the outcome of U.S. regulatory investigations into a multibillion-dollar trading debacle at its funds arm.
Speaking at a news conference, CEO Oliver Baete said the issue would have a significant impact on compensation for himself and all board members, but declined to give details.
Baete's pay in 2020 totalled 6.39 million euros ($7.27 million), and the entire board's was 32 million euros.
Baete also said the German insurer and asset manager had settled U.S. lawsuits with the "vast majority of investors," without giving details of the agreement.
But the fallout continues, with investigations by the U.S. Department of Justice and the Securities Exchange Commission underway, and settlements still pending with other investors.
"Ongoing governmental and litigation matters remain at a sensitive stage," Baete said.
The issue centres around Allianz funds that used complex options strategies to generate returns but racked up massive losses when the spread of COVID-19 triggered wild stock market swings in February and March 2020.
The matter has cast a shadow over Allianz, one of Germany's most valuable companies and one of the world's biggest money managers with 2.6 trillion euros of assets under management.
On Thursday, Allianz announced that it would earmark 3.7 billion euros to deal with investigations and lawsuits in the wake of the funds' collapse and said more expenses were likely.
The company as a result posted a fourth-quarter loss, and its 2021 profit was the lowest since 2013.
Investors in the so-called Structured Alpha set of funds have claimed some $6 billion in damages from the losses in a slew of cases filed in the United States.
The $15 billion set of funds catered in particular to normally conservative U.S. pension funds, from those for labourers in Alaska to teachers in Arkansas to subway workers in New York.
After the coronavirus sent markets into a tailspin early in 2020, the Allianz funds plummeted in value, in some cases by 80% or more. Investors in their lawsuits alleged Allianz strayed from its stated strategy.
Baete declined to specify which investors had settled.
Allianz shares were down 1% at 1031 GMT.
Ingo Speich, head of sustainability and corporate governance at Deka, a top Allianz investor, who once called the issue a "massive setback" for the insurer, expressed some relief.
He said the amount and timing of the provision were a positive for Allianz and investors.
Allianz has publicly disclosed the SEC and DOJ investigations. It previously said it intended to defend itself "vigorously" against the investors' allegations. Baete has said "not everything was perfect in the fund management."
($1 = 0.8794 euros)
(Reporting by Tom Sims; editing by Mark Potter and Jason Neely)
Tom Sims and Alexander Hübner
Fri, February 18, 2022
By Tom Sims and Alexander Hübner
FRANKFURT (Reuters) -Allianz announced on Friday big bonus cuts for its CEO and board, and a settlement with the "vast majority" of investors, as it braces for the outcome of U.S. regulatory investigations into a multibillion-dollar trading debacle at its funds arm.
Speaking at a news conference, CEO Oliver Baete said the issue would have a significant impact on compensation for himself and all board members, but declined to give details.
Baete's pay in 2020 totalled 6.39 million euros ($7.27 million), and the entire board's was 32 million euros.
Baete also said the German insurer and asset manager had settled U.S. lawsuits with the "vast majority of investors," without giving details of the agreement.
But the fallout continues, with investigations by the U.S. Department of Justice and the Securities Exchange Commission underway, and settlements still pending with other investors.
"Ongoing governmental and litigation matters remain at a sensitive stage," Baete said.
The issue centres around Allianz funds that used complex options strategies to generate returns but racked up massive losses when the spread of COVID-19 triggered wild stock market swings in February and March 2020.
The matter has cast a shadow over Allianz, one of Germany's most valuable companies and one of the world's biggest money managers with 2.6 trillion euros of assets under management.
On Thursday, Allianz announced that it would earmark 3.7 billion euros to deal with investigations and lawsuits in the wake of the funds' collapse and said more expenses were likely.
The company as a result posted a fourth-quarter loss, and its 2021 profit was the lowest since 2013.
Investors in the so-called Structured Alpha set of funds have claimed some $6 billion in damages from the losses in a slew of cases filed in the United States.
The $15 billion set of funds catered in particular to normally conservative U.S. pension funds, from those for labourers in Alaska to teachers in Arkansas to subway workers in New York.
After the coronavirus sent markets into a tailspin early in 2020, the Allianz funds plummeted in value, in some cases by 80% or more. Investors in their lawsuits alleged Allianz strayed from its stated strategy.
Baete declined to specify which investors had settled.
Allianz shares were down 1% at 1031 GMT.
Ingo Speich, head of sustainability and corporate governance at Deka, a top Allianz investor, who once called the issue a "massive setback" for the insurer, expressed some relief.
He said the amount and timing of the provision were a positive for Allianz and investors.
Allianz has publicly disclosed the SEC and DOJ investigations. It previously said it intended to defend itself "vigorously" against the investors' allegations. Baete has said "not everything was perfect in the fund management."
($1 = 0.8794 euros)
(Reporting by Tom Sims; editing by Mark Potter and Jason Neely)
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