Allianz takes $4.2B charge to cover hedge fund debacle

Allianz SE will take a 3.7 billion-euro ($4.2 billion) charge tied to the implosion of some of its U.S. hedge funds, bringing some clarity to months of uncertainty on the legal bill for the matter.

The provision will reduce last year’s net income by 2.8 billion euros, Allianz said in a statement late Thursday. While the insurer expects to settle with major investors in the funds shortly, discussions with other plaintiffs, the U.S. Department of Justice and the U.S. Securities and Exchange Commission are ongoing. It warned that it can’t reliably estimate the total financial impact of the legal matter and expects additional expenses.

Allianz said operating profit rose 25% to 13.4 billion euros last year, and the company announced a plan to buy back as much as 1 billion euros of its own shares.

The hedge fund debacle has overshadowed a strong rebound at Allianz from the impact of the pandemic, with higher prices and an economic recovery fueling underlying earnings. Chief Executive Officer Oliver Baete in December raised the insurer’s medium-term targets as he seeks to persuade investors that the company is strong enough to shoulder the extra costs.

The company hadn’t set aside money for the matter earlier because it couldn’t estimate the cost. Berenberg analysts saw potential settlement costs of 5.8 billion euros in a note dated Feb. 8, adding that the issue is the “main overhang for Allianz”.

Allianz in August warned that the hedge funds implosion could “materially impact” future earnings, after the U.S. Department of Justice started a probe into the funds. The investment strategy, known as Structured Alpha, suffered steep losses during the pandemic. Allianz had already been facing lawsuits by investors alleging losses of some $6 billion, as well as an investigation by the Securities and Exchange Commission.

The hedge funds offered by the AGI unit were designed to provide protection against a market crash. Two of the Structured Alpha Funds were liquidated at the end of March 2020, and Allianz has since wound down the rest.

Allianz appointed its life insurance executive Andreas Wimmer as new head of asset management in October, following the departure of Jackie Hunt. Wimmer indicated in an interview last month that the insurer plans to push further into alternative asset classes and continue its focus on active fund management, despite the debacle.