Category Archives: Allianz/Hartford

Fireman’s Fund Insurance Ravaged by Allianz Bureaucracy

Once again bureaucracy is shown to be the most efficient way to snatch defeat from the jaws of victory.

A German newspaper recently reported that insurance giant Allianz, owner of California based Fireman’s Fund Insurance Company (FFIC), is planning to dismantle the company and sweep it into the dustbin of bureaucratic failures. Allianz has tacitly confirmed the report but only complaining that the planned action became public before intended by the company. As with any bureaucratic failure, the hope of those responsible is that no one will notice.

The newspaper (Sueddeutsche Zeitung) article revealed that Fireman’s Fund commercial business is to be folded into another German industrial insurance company owned by Allianz, while the “personal lines business” of FFIC will be allowed to “runoff” until it is gone or FF2offered to another company interested in scavenging the the tattered remnants of the deceased company.

This is a sad and totally unnecessary ending for Fireman’s Fund; a valued, 150-year-old company that had survived the 1906 San Francisco earthquake, but could not withstand the upheaval heaped on it by the bureaucratic management minions of Allianz who virtually squandered the $3.3 billion in cash Allianz paid to acquire Fireman’s Fund in 1991.

Good Idea Soiled by Bureaucracy

When Allianz purchased Fireman’s Fund the transaction seemed (and was) a sound strategic move that would provide Allianz – the largest casualty insurer in Europe – with an entrance into the American market that it had heretofore desired but lacked. For Fireman’s Fund the affiliation with Allianz promised to offer the resources, credibility, expertise and capital of one of the world’s largest insurance companies; providing it with the capability to become a substantial player in the American market. But the relationship was star-crossed from the beginning.

The timeline of activity and actions following the Allianz acquisition of FFIC offers the mother of all examples of how a bureaucracy-riddled company can ravage the value of any investment and kill the opportunity to leverage it to success. In the interests of transparency, I both worked for Allianz as the CEO of a company (LifeUSA) it acquired in 1999 and served on the board of directors of Fireman’s Fund; so I had a front row seat to observe (and experience) how a bureaucratic company functions. In fairness, the vast majority of those I dealt with at Allianz in Germany were extremely intelligent, highly ethical and well-intended; it’s just that they were raised to be bureaucrats and excelled at practicing that art. Even more revealing to me was that the most senior executives of Allianz – especially the CEO – recognized and were frustrated by the inadequacies of a bureaucratic culture, but felt powerless to change it.

The conundrum is that when bureaucracy ridden companies – such as Allianz – are able to scrunch up the courage to make a strategic decision such as an acquisition, they immediately retreat into a bunker mentality, trying to protect their investment, rather than leverage it. Bureaucrats are dedicated to analysis, but terrified by action.

Bureaucratic companies seem incapable of understanding that an investment to acquire a company is the start of the process, not the ending. The clear message given to those leading the acquired company is, “Okay, we took the risk of putting up the money to buy the company, now it is your job to grow the company, but we are not going to risk any more capital to help make that happen.”

This mentality triggers a chain of events that invariably emasculates the culture of the acquired company, leading to the diminution of the initial investment, if not the outright destruction of the company. This inevitable process starts when the bureaucrats of the parent company, begin to impose their stifling bureaucratic rules and controls on the acquired company; limiting the actions and strategies that made it an attractive acquisition. The suffocation of the entrepreneurial culture of the acquired company soon begins to trigger the departure of those individuals capable of creating the desired growth. This leads to a string of increasingly less capable executives charged with running the acquired company. These executives are hired, not for their creativity and independence, but rather for their acquiescence of and compliance with the bureaucratic culture.

It is noteworthy that in the past nine years alone, Fireman’s Fund has had seven different CEOs; all hired and fired by the Allianz bureaucracy. (Believe it or not, one of these CEOs, in the midst of downsizing the company and laying-off hundreds of employees, purchased a Rolls-Royce and parked it at the company for all employees to see.) In the end, the acquired company is populated by managers with the same attitude, aptitude and recalcitrance to action as the bureaucrats who hired them. And then the executives of the parent company wonder why the company fails!

Fireman’s Fund also serves as a classic casebook example of how a bureaucratic culture will send good money chasing after bad money. To comprehend this process it is critical to understand that a bureaucrat will do almost anything to avoid acknowledging and accepting responsibility for failure. As failure looms the bureaucrat will become more and more frantic and irrational in their actions to hide the failure.

Despite investing $3.2 billion to acquire Fireman’s Fund as an entrance into the American casualty insurance market, Allianz was unwilling to allocate the additional capital necessary to bring FFIC up to the competitive levels of the other players in the market. AllianzPressed for growth, but lacking the necessary capital and falling deeper and deeper into the catacombs of the Allianz bureaucracy, Fireman’s Fund was forced to take risks that became gambles, that turned into losses. As the losses at FFIC mounted the bureaucrats at Allianz had the choice of acknowledging the failure of its initial investment or to hide the fact by pouring in additional funds to keep the company afloat. Soon good money was chasing bad money in a bureaucratic effort to avoid the inevitable. But this money was only intended to cover past mistakes, not invest in the future. As such it only accelerated the downward spiral that ultimately destroyed both Allianz’s investment and Fireman’s Fund.

Over a decade ago Allianz executives internally acknowledged that the investment in Fireman’s Fund was a failure and sought to sell the company. Unfortunately, the bureaucrat culture at Allianz had already triggered a decline at FFIC that made the company unmarketable—at least at a price anywhere near what Allianz initially paid. Not wanting to publicly admit failure, the Allianz bureaucrats hung on, but in so doing they took actions that made the situation even worse. Allianz not only refused to invest the capital necessary to build up the capabilities and competitiveness of FFIC, they began to suck as much money as possible out of the company. (One year Allianz required FFIC to pay a dividend of $1 billion dollars to the parent company.) Having reached the conclusion that it would not be possible to sell Fireman’s Fund without exposing the failure of Allianz management and the loss of the company’s investment, it was decided to let the company “bleed-out” and die. What we are witnessing now are the attempts of Allianz bureaucrats to dispose of the decaying body.

And The Moral of the Story …

Don’t let your kids grow up to be bureaucrats! If success is what you seek, then you must do anything and everything to keep bureaucracy at bay in your company. Recognize bureaucracy as the Ebola virus of management that ultimately destroys all it infects.

The comments expressed here are not an attack on Allianz, but on bureaucracy. Allianz is one of the largest companies in the world, but it is also the epitome of a bureaucratic culture. Just imagine how much more successful Allianz could be and how effective Fireman’s Fund could have been as an entrance into the American market, had it not been for the ravages of bureaucracy. Instead, the investment has been wasted, Allianz is still not in the American casualty insurance market and Fireman’s Fund is dead. It is a lesson anyone in any company needs to learn and remember.

Defending the Future of Independent Marketing Organizations: Part Two

The future for IMOs is bright, but only if they are willing to step up and control it

Last week’s blog suggesting that IMOs have it in their power the choice to “live free or die,” created quite a stir. The general reaction seemed to be: The idea of IMOs buying an insurance company future seems like a great idea, but could it really be done?

Probably the most telling comment came from one IMO who said, “I like this idea, but I am concerned about what my company would do [to me] if they discovered that I was involved.” If that does not capsulate the current intimidating environment, nothing will. Many wondered, “This seems like a simple solution, but if it is so good: why hasn’t it already been done?” The answer to that question is that too often there is a tendency to believe that the solution to a complex problem can be found in complicated answers, when in reality the solution is simple; it just has to be recognized.


For example, it is believed that the wheel was invented in the late Neolithic period, around 3500 BC. The idea for luggage was invented shortly after women determined that they needed 10 pairs of shoes for a three-day trip. Ever since then, travelers have lugged and dragged their luggage around – straining tempers, backs and arms. Believe it or not, it was not until 1989 that a guy named Bob Plath came up with the idea of mating wheels with luggage. And, as they say, “the rest is history.” This was the ultimate simple idea that was right in front of everyone for centuries, but no one recognized it.

A Good Offense is the Best Defense

There is no doubt that defending against the efforts of the companies to reduce the options and independence of the IMOs is a difficult task. Companies seem to hold all the leverage and have only one interest at heart– the interests of the company. Worse, those who work  for companies owned by foreign powers have scant gumption to challenge the bureaucratic corporate line because they have become little more than timid toadies, perched precariously on the lily pads of their next paycheck.

To push back  against company actions, a number of IMOs have banded together is a loose affiliation attempting to gain leverage when dealing with the companies. There is even a movement among some IMOs to consider litigation against these companies. Unfortunately these approaches seem destined to fail. Aside from the fact that it is futile to negotiate with the devil, these approaches are too fractured and complicated; they address neither the heart of the problem nor the simple solution needed to level the playing field with the companies.

To understand the solution, it is important to understand the problem. The insurance business is divided into three parts: manufacturing, distribution and service to the distribution system and policyholder. The insurance companies already control two of the parts – manufacturing and service – and they now seek to control the final distribution piece. The path for IMOs to protect their control of distribution is not to fight the companies on their terms, but to diminish the strength of the companies, which is in manufacturing. If the IMOs can gain access and control of manufacturing the product, they will nullify the leverage used by companies in an effort to contain and control distribution.

Another factor the IMOs should take into account as they consider becoming involved in the manufacturing process is this: Just how much backing and service are the companies providing to the IMOs today? Aside from commissions, do the companies offer financial assistance to help fund growth? Are the companies doing anything to assist and protect in the recruiting and retention of agents? Sure, they have meetings with PowerPoint presentations that tediously explain product details, but are companies doing anything positive to assist the IMOs in teaching the agents to prospect, present and close? If the IMOs are hard-pressed to identify value being provided by the companies, they have another reason to question why they put up with the shenanigans of the companies.

The path for IMO control of their future and enhanced value of their organizations is to take actions that give them options and reduce their dependence on a single company. The way to do that is to turn the tables on the companies and take control of the manufacturing piece of the insurance equation. The crucial question is: How can that be accomplished?

Mighty Oaks from Acorns Grow

To start, a group of leading IMOs needs to unite with the common purpose of protecting their future. These IMOs should  demonstrate their seriousness by agreeing to put some “skin in the game” by investing a portion of their own capital as part of an acquisition of a company. It does not have to be a huge amount of capital, but enough to demonstrate to investment companies that the IMOs are committed to the venture. Once the group has been assembled and an appropriate amount of capital pledged, the group should identify an experienced, credible core group of management that would manage the acquired company.

When these two steps have been completed, investment bankers could be retained and they in turn would put the group in front of private equity firms that have experience or interest in investing in the life insurance and annuity business. Once the investment firms have been brought on board, the process of identifying a target can begin.

With the power of distribution held by the IMOs, there is no need for huge amounts of capital to acquire a large company. (The IMOs will quickly make it large!). The best guess is that an acquisition of a company in the $50 to $100 million range would meet the initial needs of the IMO. (The irony here is that for the investment firms, the larger the acquisition the better.) Once the company has been acquired and the IMO management team in place, product development, support services and administration can be quickly developed.

This process may seem complicated and time-consuming, but it would not be. With the control and power of distribution that IMOs offer to the investment firms, they will find that this is just as simple and easy as attaching wheels to luggage, with the same revolutionary results.

And the Moral of the Story …

Many go through life frustrated with the lack of control they have over their future. They feel trapped and constrained when their future is held hostage to the whims and actions of others. Even most of those who rise to the heights of the corporate world often lack control over their future. Real power is the power to control one’s future. It does not assure future success but it does assure a future in which success can be attained.

Due to their proven ability to recruit, train and motivate individuals to sell insurance products, IMOs are in a unique position to control their future. Intimidated by this power, some insurance companies are attempting to denude the IMO by limiting their options and creating a dependence on the company.

The good news is that the IMOs have the power to get “mad as hell and not take it anymore!” The bad news is that if the IMOs meekly allow the companies to succeed if their efforts to control the future of IMOs, then that is the future they will deservedly reap. Unlike others, IMOs have the power to control their future and how they respond will determine if they live free or die.

Insurance Companies and Regulators Working in Concert Prove Greed Always Trumps Reason

Insurance companies and regulators are in bed again, but it is the consumer who could get screwed

In a recent front-page article in The New York Times headlined, “Seeking Business, States Loosen Insurance Rules,” writers Mary Walsh and Louise Story effectively brought to light the dark actions of insurance regulators and companies that could lead to financial turmoil in the insurance industry even greater than that experienced in the Great Recession of 2008 and 2009.

The Times article revealed that states – desperate for revenues – are allowing insurance companies to establish “captive subsidiary companies.” With the promise of lighter regulation and less stringent requirements for reserves needed to cover potential losses, these states are allowing (encouraging) the insurance companies to transfer huge risks off the books of the primary company – making them appear more profitable and less risky – and allowing the companies to shield their true financial strength from scrutiny. If that high-risk accounting  strategy seems faintly reminiscent of Enron’s ill-fated “Raptor” and “LJM2” subsidiaries, it should.

As the Times exposé pointed out, “This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more leverage than policyholders know, raising the possibility that in the future, insurance companies might find themselves without enough money to pay claims.” Some of the companies taking advantage of this “look-the-other-way, see-no-evil” type of regulations are the very same companies – MetLife, Hartford Financial, Swiss Re, Aetna and AIG – that found themselves in a precarious financial position or needed government help to survive the last time around.

This collusion among some state regulators and insurance companies is the classic “I scratch your back, you scratch mine” type of mentality that mocks the very concept of state regulation of insurance companies. The states receive a needed boost in revenues based on premium taxes collected on business moved into the state. In exchange insurance companies are allowed to operate in the shadowy world of financial wizardry and tricks. Unfortunately, the ones who could end up paying the price for this abdication of regulatory responsibility and financial chicanery will be those who look to insurance companies to protect them against risk. (That is, if we don’t have another government bailout.)

How Insurance Companies (should) Make Money

Insurance is all about risk, but not the type of risk that most people think. There is the general assumption that insurance companies are in business to assume the risks of others, i.e. dying, being injured, experiencing a fire, but that is an incorrect assumption. Insurance companies are in the business of managing not assuming the risks of others. Insurance companies manage risk by pooling those who face a risk, i.e. getting sick, together in a single group and charging a fee (premium) from each member of the group. These collected premiums are held by the company in a reserve to pay for the costs of those who actually experience a loss.

So, it is not the insurance company that takes the risk. Instead, savvy insurers use their expertise to spread the risk among a large group, so that those at risk of loss share that risk with others. For this service the insurance company earns a fee. If the insurance company manages the risk efficiently and effectively, then the fees collected become their profit.

As we have seen in the past, well-run insurance companies can turn these fees for managing the risks of others into billions of dollars of profit; creating huge financial institutions. However, when insurance companies are poorly run or when greed enters the picture, the risk is that these companies will assume the actual risk and ultimately fail. The result will be real losses for shareholders and those who contracted with the company (policyholders) to effectively manage their risk of loss.

A good, but certainly not the only example of this type of scenario is the American International Group (AIG). For decades AIG was a well-run company that efficiently managed a multiplicity of risks worldwide. For its efforts, AIG earned billions of dollars in profits and became one of the largest and most respected financial institutions in the world. Then greed set in causing AIG to change its business model and violate the most basic precept of insurance by starting to assume, rather than manage risk. Instead of spreading the risk of “credit default” or the risk of mortgage failures, AIG assumed the risks inherent in these activities. In short order this great giant of a company AIG was teetering on the cliff of bankruptcy—only to be saved by a $100 billion dollar lifeline from American taxpayers who wound up owning 80 percent of the company.

A similar bailout occurred when the management of Hartford Financial – seeking to increase sales and bonuses – began to assume the investment risk for customers who had purchased variable annuities from the company. By promising to cover investment loses within the policies, Hartford lost hundreds of millions of dollars. Only a $2.5 billion charitable investment by Allianz SE and $3.4 billion in government TARP funds saved the company from bankruptcy.

The Fatal Flaw of Permissive Regulation

Insurance companies begin to fail when they begin to assume, rather than manage risk. And the most effective counterbalance we have to protecting ourselves from insurance companies that forget that simple formula is effective regulation.

The purpose of state regulation is to protect the consumer by preventing companies from taking risky and stupid actions, which they seem to have a proclivity to do. One of the primary functions of insurance regulators is to make sure the companies are safely putting aside enough of the collected premiums (called reserves) to pay claims when losses occur. (From the standpoint of the company, the smaller the reserves required to be established, the higher the profits; at least in the short term. Of course, in the long term, to the degree that these reserves are insufficient to pay the claims when they arise, the company will fail.)

For the past decade, as insurance products have become more complex and the financial structure of insurance companies more obscure and convoluted, state regulators have been criticized for lacking the resources and expertise to effectively protect the consumer and determine the financial integrity of insurance companies. Consumer groups have sought to rectify this weakness by proposing federal regulation of insurance companies, but strong lobbying by the National Association of Insurance Commissioners and many of the companies has blocked the proposal.

Now, with states attempting to increase revenue by promising even less regulation of reserves and financial overview for companies that move large blocks of risk into their state via captive companies, the very concept of regulation – not to mention protecting the consumer (most of whom are not in the state accepting the business) – is made a mockery.

This attitude and approach is something that we can expect from the greed of insurance company executives, but for state regulators to get in bed with the insurance companies and sacrifice their responsibilities on the altar of short-term revenues, boarders on criminal. But, what else is new?

And the Moral of the Story …

Insurance companies are in the business of managing not assuming risk. When they stick to their knitting, it is an easy business and they can make enough money to keep most potentates happy. But when enough is not enough and the insurance companies begin to stray from what their business should be, it is the responsibility of regulators to keep them on the straight and narrow.

However, when the line between risk and regulation is blurred or even erased as is happening in the current environment of loosened insurance rules, then a new risk emerges—one is destined to repeat rather than learn from the mistakes of the past.