S&P Global Ratings has affirmed its ‘AA’ long-term issuer credit and insurer financial strength ratings on the core operating entities of Allianz.
S&P said it was affirming the ratings because the governance deficits related to the Structured Alpha investigations do not change its overall view on the Allianz group’s capital and earnings strength. It said that it expected the group to address the shortcomings thoroughly and move to prevent similar losses owing to governance deficits.
It said: “The provisions had a material impact on the group’s net results. For the first quarter of 2022, the claim reservation of €1.6bn net of tax led to a reduced net result of €0.6bn. With that we believe Allianz’s full-year 2022 net income will be around €6bn, around €2bn lower than we previously anticipated.
As Reinsurance News reported recently, Allianz’s US asset management unit was pleading guilty to criminal securities fraud in relation to the collapse of the Structured Alpha funds two years ago. The firm had agreed to pay $6bn in damages.
We wrote: “The settlement with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) includes a $2.33bn criminal fine, $3.24bn of restitution and a forfeit of $463 million, according to court document. The unit in question – Allianz Global Investors US LLC (AGI US)– was charged with misrepresenting the performance of the Structured Alpha Funds to pension funds and other investors.”
We added: “Prosecutors alleged that managers failed to implement measures designed to protect the fund against market volatility and overstated its returns to boost their pay. As a result, the funds collapsed amid the turbulent financial market conditions that characterized the early days of the COVID-19 pandemic, losing more than $7 billion in a matter of weeks.”
This came days after Allianz said it had booked an additional provision of $1.9bn for its Structured Alpha funds in Q1 2022.
The company said that the provision will ‘negatively impact’ the Q1 group net income by €1.6bn after tax. This will result, said Allianz, in a net income attributable to shareholders of €0.6bn. Group operating profit in Q1 amounts to €3.2bn.
The firm said it believed the provision booked is a fair estimate of its remaining financial exposure in relation to compensation payments to investments and payments under any resolution of the governmental proceedings. It also said that it was seeking a timely resolution to these proceedings in discussions with the US Department of Justice and the Securities and Exchange Commission.
S&P said: “We maintain our view that Allianz has generally very strong earnings capacity across its diverse operations. This is supported by the overall solid underlying results for the first quarter, with an operating profit of €3.2bn, despite natural catastrophe events like the Australian flood and the impairments on assets because of the Russian–Ukraine conflict. For 2023 and 2024, we expect net income to recover to around €8bn annually, supported by recovered earnings from asset management.” However, the firm said that a number of scenarios could impact and lower the rating below ‘AA’. These included continued turbulence from Russia’s invasion of Ukraine, dividend payouts or share buybacks being aggressive, or through further governance deficits.