Allianz SE warned of a potentially material hit to its earnings, announcing the U.S. Justice Department has opened an investigation into its Structured Alpha Funds, which are at the center of lawsuits in the wake of steep losses during the pandemic.
Europe's largest insurer slumped in Frankfurt trading after disclosing late Sunday that it received a "voluntary request for documents and information" from the Justice Department and is cooperating with the investigation, as well as with an investigation launched last year by the Securities and Exchange Commission. It has also started its own review of the matter.
The company now sees a "relevant risk that the matters relating to the Structured Alpha Funds could materially impact future financial results of Allianz Group," it said in the statement. However, it's not feasible to estimate the "amount of any possible resolution including potential fines. Therefore, no provision has been recognized at the current stage."
Allianz fell the most since March of last year, when the pandemic first hit, as the new investigation blindsided investors. The company's asset manager Allianz Global Investors has been defending itself from lawsuits by large pension funds and other investors challenging how it invested client money during the covid-19 market downturn. Allianz told a Manhattan federal judge in February that the plaintiffs are sophisticated investors that chose high-risk private funds with their eyes open.
Plaintiffs include the Arkansas Teacher Retirement System. Allianz Global Investors last year rejected claims by the Arkansas pension fund that a "reckless strategy" led to $774 million in losses in a matter of weeks. The funds in the Structured Alpha portfolio "did not diverge from their investment strategy," Global Investors said in July 2020.
The Florida-based hedge funds were buying and selling equity options to beat the S&P 500 Index. Two funds have already been liquidated, and Allianz is in the process of winding down the rest.
The potential hit from the lawsuits adds to head winds as the insurer is recovering from its first annual drop in profits in nine years. Last week, the Munich-based company said potential claims from the deadly German summer floods will likely amount to more than $590 million.
The news will have a longer-term impact on the stock as legal disputes with U.S. authorities can be uncomfortable, NordLB analyst Volker Sack said in a note, downgrading his recommendation to hold from buy.
Allianz fell 7.7% Monday in Frankfurt trading, the worst performer among the large European insurers. The stock is down 3.6% for the year.
In its 2020 annual report, Allianz said plaintiffs in the pending actions have alleged losses of several billion dollars. "Allianz intends to defend vigorously against the allegations contained in the complaints," it added.
The investors that sued Allianz also include a Milwaukee municipal pension fund, Blue Cross & Blue Shield, a Chicago Teamsters pension, New York City's Metropolitan Transportation Authority, and Lehigh University.
AllianzGI is the sister unit of Pacific Investment Management Co. Both firms are owned by Allianz. The parent company is due to report earnings for the latest period on Friday.