After allegedly incurring over $2 billion in losses, yet another retirement system has sued investment and insurance giant Allianz for allegedly mismanaging and misrepresenting volatility investments.
The Blue Cross Blue Shield Association National Employee Benefits Committee filed a lawsuit Wednesday against both Allianz and its consultant Aon for allegedly downplaying the risks involved with investing in Allianz’s Structured Alpha products.
In February and March, volatility spiked, and the markets fell precipitously. So too did Allianz’s Structured Alpha products, some of which lost significant value before liquidating, according to the lawsuit.
“While the losses sustained by the Structured Alpha portfolio during the market downturn in late February and March were disappointing, AllianzGI believes the allegations made by Blue Cross Blue Shield are legally and factually flawed,” a spokesperson for the company said via email Thursday. “We will defend ourselves vigorously against these claims.”
This lawsuit is the latest in a string of such complaints filed against Allianz, starting with a late July suit filed by the Arkansas Teacher Retirement System. At the time, it was thought that the retirement system had made one of the largest investments in the Structured Alpha products — $1.62 billion — which incurred a loss of $774 million.
But Blue Cross Blue Shield’s investment eclipsed that by nearly two-fold: the fund poured $2.9 billion into the strategy and was only able to recoup $540 million after Allianz’s Structured Alpha products were liquidated, according to its lawsuit.
Blue Cross Blue Shield began investing in Allianz's Structured Alpha products in 2011 at the direction of its consultant Aon, according to the lawsuit. The products were allegedly meant to generate returns through options strategies, which were hedged to cap downside risk.
According to the lawsuit, Allianz allegedly claimed that these hedges would “eliminate” the risk of a margin call. But in March, the investment committee faced exactly that.
The employee benefits committee alleged that it raised concerns with Aonin 2018 and 2019 about the concentration of its assets in the Allianz funds, and how those funds would perform in a downturn.
In June 2019, according to the lawsuit, Aon told the committee that the Structured Alpha products were some of its “highest conviction strategies.” The committee contends that had Aon informed it of the actual risks, it would have avoided such “staggering losses.” A spokesperson for Aon declined to comment on the news.
“Blue Cross Blue Shield was advised by a sophisticated investment consultant to evaluate the Structured Alpha strategy,” the spokesperson for Allianz said via email. “These funds sought to deliver substantial returns of as much as 10 percent above, net of fees, the returns of the fund’s benchmark, an index like the S&P 500. As was fully disclosed to Blue Cross Blue Shield, the Structured Alpha strategy involved risks commensurate with those higher returns.”
Blue Cross Blue Shield alleges that Allianz had started to deviate from its strategy in an effort to “juice” returns without notifying its investors. According to the lawsuit, Allianz charged a 30 percent fee for any gains relative to the benchmark, incentivizing it to bolster returns.
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The investment committee is specifically suing both Aon and Allianz for breach of fiduciary duty and breach of contract, and Allianz only for prohibited transactions, all under ERISA laws. The committee is seeking restoration of losses, damages, attorney fees, and disgorgement of fees and profits, the lawsuit said.
“Blue Cross Blue Shield Association is committed to maintaining the benefits promised to our employees who are beneficiaries of the pension fund,” a spokesperson for the company said Thursday. “We are well-positioned to follow through on our financial commitments and mission.”
Before this lawsuit was filed, the Securities and Exchange Commission asked Allianz for information related to its Structured Alpha products. Allianz said at the time that it is cooperating fully with the SEC. Public pension funds for Fairfield, Connecticut, and Lehigh University’s endowment have also filed lawsuits against Allianz over the Structured Alpha products.