The misery of Allianz’s US funds is only half over

The Allianz logo is seen on a building in Paris, France, April 30, 2020. REUTERS/Charles Platiau

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LONDON, Feb 18 (Reuters Breakingviews) – Allianz (ALVG.DE) may have unwittingly brought a bigger target on its back. The $103 billion German insurer has set aside $4.2 billion to compensate US savers for derivative bets gone wrong. The sum, lower than the amount sought by disgruntled investors, may result in a higher fine from the Department of Justice (DOJ) to level things out.

Managing Director Oliver Bäte wisely keeps his checkbook handy. Allianz has settled the ‘vast majority’ of claims from investors who say the insurer failed to protect pension fund investments due to inadequate coverage during the early pandemic-fueled market rout of 2020. However, Bäte warned that the total bill “cannot be relied upon. estimated” and may be higher.

Past experience justifies its caution. US regulators have spent the past decade prosecuting foreign companies like HSBC (HSBA.L), (0005.HK), Standard Chartered (STAN.L) and Deutsche Bank (DBKGn.DE) and imposing stiff fines for laundering of money and mis-selling. mortgage securities. DOJ investigators may take a dim view of the mismatch between the claims filed by US teachers, subway workers and truckers and the amount Allianz is actually coughing up. It could be an invitation to extract a higher sentence.

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Splurging on shareholder rewards isn’t helping Bäte’s case. On Thursday, he announced he would buy back 1 billion euros worth of shares and raised the dividend by 12.5% ​​to 10.80 euros per share. The risk is that the DOJ will interpret this as a sign that Europe’s largest insurer can absorb a heavier hit. After all, its 209% solvency ratio, a measure of financial health, means that Bäte has a cushion of around $25 billion before it has to cut dividends.

Uncertainty and reputational damage are weighing on Allianz’s valuation. Many pension funds are unable to hold Allianz stock until the company is under investigation by the DOJ. This explains why the insurer negotiates at only 1 times the value of its assets. Rival Zurich Insurance (ZURN.S) is on 1.8 times. With the possibility of US regulators dropping a potentially heavy hammer, the gap is unlikely to close any time soon.

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BACKGROUND NEWS

– German insurer and asset manager Allianz said on February 17 that it was setting aside 3.7 billion euros to deal with investigations and legal proceedings stemming from the collapse of a set of investment funds. investment of several billion euros.

– The provision resulted in a net loss attributable to shareholders of 292 million euros in the fourth quarter, the company said. Analysts expected a profit.

– Allianz said the outcome of the various investigations and lawsuits could not be reliably estimated and that it expected additional expense before the issues were fully resolved.

– Investors in Allianz’s so-called Structured Alpha funds have sought $6 billion in damages. The funds, which used complex options strategies, racked up heavy losses when the spread of Covid-19 triggered wild stock market swings in early 2020.

– The US Department of Justice and the Securities and Exchange Commission are also investigating.

– Allianz’s quarterly loss compares to a profit of 1.8 billion euros a year ago. The company’s net profit of 6.6 billion euros for the full year was its lowest since 2013.

– Allianz shares were down 0.6% at 221.10 euros at 08:26 GMT on February 18.

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Editing by Ed Cropley and Oliver Taslic

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