Analysts at Berenberg have estimated that the ongoing investigation by the US Department of Justice (DOJ) into the Structured Alpha Funds of Allianz Global Investors could entail a base-case loss of around €3.5 billion, with the potential for a worst-case loss of €6.8 billion.
Allianz has already acknowledged that the investigation could “materially impact future financial results” of the group, and the company’s share price has fallen sharply since news of the probe broke.
The US Securities and Exchange Commission (SEC) launched an investigation into the Structured Alpha Funds in 2020 after pension funds said Allianz had failed to safeguard their investments throughout the financial volatility caused by the pandemic.
And the DOJ has now begun its own investigation, with Allianz having received requests from both government bodies for documents and information relating to the Funds.
Given the level of cooperation from Allianz, Berenberg expects the investigation to conclude quickly and has confidence that the group will focus on turning around the negative situation quickly.
That said, analysts expect a €3.5 billion, or US $4.1 billion, base-case loss to be a reasonable outcome from the investigation, consisting of $1.1 billion for a possible DoJ fine and $3 billion for the claims from the fundholders, on the basis that a settlement is likely.
Berenberg notes that the $1.1 billion estimate for the DoJ fine is equivalent to just over 4% of the total funds under investigation, which was $25 billion at the peak.
“While €3.5bn would clearly impact Allianz’s cash and solvency, it would be manageable as we believe that it would be earned back in well under a year,” Berenberg stated.
However, analysts added that there is still the potential for a much more severe loss scenario to emerge from the investigation, potentially up to around €6.8 billion, or US $8 billion, consisting of payment in full for the $6 billion claims from the US fund holders and a DoJ settlement equivalent to one third of this, or $2 billion.
Berenberg acknowledges that this outcome would be a bigger challenge for Allianz, as it would be equivalent to 10 months of remitted cash flow, or 16ppt in terms of Solvency II ratio.
Panic due to the pandemic negatively affected many investors last year but Allianz is so far the only top-tier asset manager to face numerous lawsuits over the issue in the US. The lawsuits allege that the insurer’s investment unit did not stick to a strategy of using options to protect against a short-term financial market crash.
The investigation into the Structured Alpha Funds also follows the closure by Allianz of two private hedge funds last year following severe losses.