Blue Cross Blue Shield’s national employee benefits committee filed a lawsuit against Allianz Global Investors and its investment consultant Aon Investments USA, charging both with breaches of fiduciary responsibilities and breach of contract regarding more than $2 billion in losses in the insurer’s defined benefit plan trust.
The lawsuit, filed Wednesday in U.S. District Court in New York, alleges that AllianzGI took “reckless actions” in the management of three funds the manager had said offered downside protection against market declines and volatility, according to the court filing.
As of Jan. 31, the National Retirement Trust of the Blue Cross and Blue Shield Association had a total of $2.9 billion invested in the AllianzGI Structured Alpha Multi-Beta Series LLC I, AllianzGI Structured Alpha Emerging Markets Equity 350 LLC, and the AllianzGI Structured Alpha 1000 LLC, according to the filing.
After the funds experienced heavy losses in February and March, the investments were liquidated and redeemed, and the committee received about $540 million, according to the filing.
As of Dec. 31, 2018, the Blue Cross and Blue Shield Association National Retirement Trust had $4.6 billion in assets, according to its most recent Form 5500 filing.
The lawsuit, which includes claims breach of fiduciary duty and breach of contract against both AllianzGI and Aon, alleges that AllianzGI “caused the (benefits) committee to believe that structured alpha’s risk profile was consistent with Allianz’s stated investment strategy rather than the actual risk profile, either by making false or misleading representations about structured alpha or failing to disclose information necessary to correct prior representations that were inconsistent with how Allianz was actually managing the strategy.”
The suit alleges Aon breached its obligations by “failing to monitor and inform the committee of breakdowns in Allianz’s risk management protocols, learning only after the catastrophic events of March 2020 that Allianz had inadequate risk management in place.”
AllianzGI’s structured alpha strategies have historically been designed to be both long and short volatility, according to a September 2016 presentation: Taking range-bound spread positions, to sell options that were most likely to expire worthless (short volatility); hedged positions designed to protect against market crashes (long volatility); and directional spread positions designed to generate returns when equity indexes rise or fall more than usual during multiweek periods (long/short volatility).
The lawsuit alleges that “when equity markets declined, volatility spiked and the funds’ option positions were exposed to a heightened risk of loss in February and March 2020, those promised protections were absent.”
The lawsuit seeks relief including restoration of all losses, actual damages and accounting and disgorgement of fees and profits.
John Wallace, AllianzGI spokesman, said in an email: “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. We will defend ourselves vigorously against these claims. Blue Cross Blue Shield was advised by a sophisticated investment consultant to evaluate the Structured Alpha strategy. These funds sought to deliver substantial returns of as much as 10% 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 and their consultant determined that the Structured Alpha Portfolio fit with their overall investment goals and risk tolerances.”
The $15.3 billion Arkansas Teacher Retirement System, Little Rock, filed its own lawsuit against Allianz Global Investors and subsidiaries in July, regarding its own losses in structured alpha strategies.
Robert Elfinger, Aon spokesman, said the company does not comment on pending litigation.
Sean W. Gallagher, Adam L. Hoeflich, Nicolas L. Martinez, Abby M. Mollen and Mark S. Ouweleen, partners at Bartlit Beck, attorney for the plaintiffs, could also not be immediately reached for comment.
Alignment between CEOs and CFOs has become even more essential during the pandemic.
Many health systems halted elective surgeries earlier this year at the height of the pandemic to conserve resources while caring for COVID-19 patients. Now, in many areas, those procedures are returning and hospitals are slowly resuming more normal operations. But damage has been done to the hospital’s bottom line. Moving forward, the relationship between top executives will be crucial to make the right decisions for patients and the overall health of their organizations.
During the Becker’s Healthcare CEO+CFO Virtual Forum on Aug. 11, CEOs and CFOs for top hospitals and health systems gathered virtually to share insights and strategies as well as discuss the biggest challenges ahead for their institutions. Click here to view the panels on-demand.
Here are six takeaways from the event:
1. The three keys to a strong CEO and CFO partnership are trust, transparency and communication.
2. It’s common for a health system CEO and CFO to have different priorities and different opinions about where investments should be made. To help come to an agreement, they should look at every decision as if it’s a decision being made by the organization as a whole and not an individual executive. For example, there are no decisions by the CFO. There are only decisions by the health system. The CFOs said it’s important to remember that the patient comes first and that health systems don’t exist to make money.
3. Technology has of course been paramount during the pandemic in terms of telehealth. But so are nontraditional partnerships with other health systems that have allowed providers to share research and education.
4. When it comes to evaluating technology, there’s a difference between being on the cutting edge versus the bleeding edge. Investing in new technology requires firm exit strategies. If warning signs show an investment is not going to give the return a health system hoped for, they need to let go of ideals and stick to the exit strategy.
5. Communication and transparency with staff and the public is key while making challenging decisions. Many hard decisions, including furloughs or personnel reductions, were made this spring to protect the financial viability of healthcare organizations. These decisions, which were not made lightly, were critiqued highly by the public. One of the best ways to ensure the message was not getting lost in translation and to help navigate the criticism included creating a communication plan and sharing that with employees, physicians and the public.
6. The pandemic required hospitals to think on their feet and innovate quickly. Many of the usual ways to solve a problem could not be used during that time. For example, large systems had to rethink how to acquire personal protective gear. Typically, in a large health system amid a disaster, when a supply item is running low, organizations can call up another hospital in the network and ask them to send some supplies. However, everyone in the pandemic was running low on the same items, which required innovation and problem-solving that is outside of the norm.
As Warren Buffett turns 90, the story of one of America’s most influential and wealthy business leaders is a study in the logic and discipline of understanding future value.
Patience, caution, and consistency. In volatile times such as these, it may be difficult for executives to keep those attributes in mind when making decisions. But there are immense advantages to doing so. For proof, just look at the steady genius of now-nonagenarian Warren Buffett. The legendary investor and Berkshire Hathaway founder and CEO has earned millions of dollars for investors over several decades (exhibit). But very few of Buffett’s investment decisions have been reactionary; instead, his choices and communications have been—and remain—grounded in logic and value.
Buffett learned his craft from “the father of value investing,” Columbia University professor and British economist Benjamin Graham. Perhaps as a result, Buffett typically doesn’t invest in opportunities in which he can’t reasonably estimate future value—there are no social-media companies, for instance, or cryptocurrency ventures in his portfolio. Instead, he banks on businesses that have steady cash flows and will generate high returns and low risk. And he lets those businesses stick to their knitting. Ever since Buffett bought See’s Candy Shops in 1972, for instance, the company has generated an ROI of more than 160 percent per year —and not because of significant changes to operations, target customer base, or product mix. The company didn’t stop doing what it did well just so it could grow faster. Instead, it sends excess cash flows back to the parent company for reinvestment—which points to a lesson for many listed companies: it’s OK to grow in line with your product markets if you aren’t confident that you can redeploy the cash flows you’re generating any better than your investor can.
As Peter Kunhardt, director of the HBO documentary Becoming Warren Buffett, said in a 2017 interview, Buffett understands that “you don’t have to trade things all the time; you can sit on things, too. You don’t have to make many decisions in life to make a lot of money.” And Buffett’s theory (roughly paraphrased) that the quality of a company’s senior leadership can signal whether the business would be a good investment or not has been proved time and time again. “See how [managers] treat themselves versus how they treat the shareholders .…The poor managers also turn out to be the ones that really don’t think that much about the shareholders. The two often go hand in hand,” Buffett explains.
Every few years or so, critics will poke holes in Buffett’s approach to investing. It’s outdated, they say, not proactive enough in a world in which digital business and economic uncertainty reign. For instance, during the 2008 credit crisis, pundits suggested that his portfolio moves were mistimed, he held on to some assets for far too long, and he released others too early, not getting enough in return. And it’s true that Buffett has made some mistakes; his decision making is not infallible. His approach to technology investments works for him, but that doesn’t mean other investors shouldn’t seize opportunities to back digital tools, platforms, and start-ups—particularly now that the COVID-19 pandemic has accelerated global companies’ digital transformations.
Still, many of Buffett’s theories continue to win the day. A good number of the so-called inadvisable deals he pursued in the wake of the 2008 downturn ended paying off in the longer term. And press reports suggest that Berkshire Hathaway’s profits are rebounding in the midst of the current economic downturn prompted by the global pandemic.
At age 90, Buffett is still waging campaigns—for instance, speaking out against eliminating the estate tax and against the release of quarterly earnings guidance. Of the latter, he has said that it promotes an unhealthy focus on short-term profits at the expense of long-term performance.
“Clear communication of a company’s strategic goals—along with metrics that can be evaluated over time—will always be critical to shareholders. But this information … should be provided on a timeline deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise,” he and Jamie Dimon wrote in the Wall Street Journal.
Yes, volatile times call for quick responses and fast action. But as Warren Buffett has shown, there are also significant advantages to keeping the long term in mind, as well. Specifically, there is value in consistency, caution, and patience and in simply trusting the math—in good times and bad.
The coronavirus pandemic has shown the healthcare industry that it needs to decide whether it’s playing basketball or soccer, journalist and author Malcolm Gladwell said.
Gladwell, the opening keynote speaker at America’s Health Insurance Plans’ annual Institute & Expo, said the two sports exemplify the differences in thinking when one tackles problems using a “strong link” approach versus a “weak link” approach.
In basketball, he said, the team is as strong as its strongest, most high-profile players. In soccer, by contrast, the team is only as strong as its weakest players.
For healthcare organizations, that means making investments in the “weakest links”—such as harried clinicians who may need more training and low-income communities that cannot afford or access coverage—rather than the stronger links, like building out teaching hospitals and physician specializations.
“In healthcare, this is a chance for us to turn the ship around and say we can benefit far more from making health insurance more plentiful and more affordable,” Gladwell said.
Gladwell emphasized that healthcare is far from the only industry to largely follow a “strong link” approach to improvement. In higher education, for example, much of the investment and funding goes to Ivy League institutions and other wealthy, top-performing universities.
Meanwhile, the education system could see significant benefits if it invested in the “weak links” like community colleges and bringing down tuition, Gladwell said.
It’s a similar story in national security—and that “strong link” thinking led to two of the largest security breaches in American history, Gladwell said. Both Edward Snowden and Chelsea Manning were relatively low-ranking people within the security apparatus, but they were able to access critical files and release them.
“I would argue that ‘strong link’ paradigm has dominated every part of American society,” Gladwell said. “We have really put our chips down on the ‘strong link’ paradigm.”
How could a “weak link” approach have impacted the response to the COVID-19 pandemic? Gladwell argues that, for instance, widespread testing is hampered by a lack of supplies like nasal swabs. Investment in the supply chain could have mitigated that challenge, he said.
The virus also disproportionately impacts people with certain conditions, notably diabetes. A broader focus on preventing and treating obesity could have had a large impact on how the pandemic played out, he said.
“With this particular pandemic, I think we’re having a wake-up call,” Gladwell said.
Professional investors have largely abandoned the stock market amid the coronavirus pandemic, but sports bettors and bored millennials have jumped into the retail stock trading market with both feet.
Why it matters: They may be a driving force pushing U.S. stocks to their recent highs — and potentially driving them further.
What’s happening: Online brokerages have seen a record number of new accounts opened this year, and the big four — E-Trade, TD Ameritrade, Charles Schwab and Interactive Brokers — executed as many trades in March and April as in the whole first half of last year, per public disclosures.
- Equity strategists at Deutsche Bank note there is “plenty of evidence” that new retail investors have been buying since the stock market began to crash and that professional money managers are “now chasing” them.
Between the lines: Robinhood, whose easy-to-use app makes the transition between sports betting and trading seamless, boasts a similar customer base to most sportsbooks, notes Marc Rubinstein in his newsletter, Net Interest.
- “43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that’s the same group that has flocked to Robinhood,” Rubinstein writes.
- “On the basis that their customers love sports betting, there’s something meta about DraftKings itself having worked its way into more Robinhood portfolios than practically any other stock over the past month.”
The big picture: Sports betting and stock trading aren’t all that different. In fact, most online betting platforms are modeled on stock exchanges, and Nasdaq itself provides sportsbooks with technology that was born in the financial markets.
- The comparisons between the two have only increased with the rise of legal sports betting and the surge in mobile stock trading, two activities that cater to the thrill of short-term gains and losses.
- “For a gambler, investing has a ton of similarities,” said Barstool Sports founder Dave Portnoy, who has begun streaming his day-trading sessions for an audience that normally consumes sports betting content.
- Barstool also changed its daily gambling radio show from “Picks Central” to “Stocks Central” — further evidence of the crossover between the two.
Meanwhile, most professional investors were sitting on the sidelines.
- Nearly $5 trillion now sits in money market funds, which are effectively savings accounts, the largest total on record and about $1 trillion more than the record high during the global financial crisis.
- In its note to clients, Deutsche strategists add that for “large swathes of the equity market in the U.S. as well as globally … positioning is still extremely low.”
Professionals have also been buying bonds rather than stocks as U.S. equity indexes raced back from their lows over the last two months.
- Data from the Investment Company Institute shows equity funds saw six straight weeks of outflows from the week ending April 22 to the week ending May 27, totaling $78.2 billion. Bond funds, on the other hand, have had seven straight weeks of inflows through May 27, totaling $91.7 billion.
- Professional traders have finally started dipping their toes back into the stock market in June, according to Bank of America’s data, which showed $6.2 billion into stocks last week, compared with $32.5 billion into bonds.
- BofA’s Bull & Bear indicator rose from its lowest possible level — 0.0 — where it had been since March 25 to move to 0.4 last week, still indicating a paucity of institutional investors buying stocks.
The bottom line: Day trading has replaced sports betting as a form of entertainment for many Americans during the shutdown, and this phenomenon could partly explain the current disconnect between the economy (down) and the stock market (up).
At least 13 hospitals in Oklahoma have closed or experienced added financial distress under the management of private companies. Some companies charged hefty management fees, promising to infuse millions of dollars that never materialized.
Revenues soared at some rural hospitals after management companies introduced laboratory services programs, but those gains quickly vanished when insurers accused them of gaming reimbursement rates and halted payments. Some companies charged hefty management fees, promising to infuse millions of dollars but never investing. In other cases, companies simply didn’t have the hospital management experience they trumpeted.
Click on link above for examples of rural hospitals that pinned their hopes on private management companies that left them deeper in debt. They are based on interviews, public records and financial information from the Centers for Medicare and Medicaid Services and the American Hospital Directory.