There are interesting smoke signals emanating from the Allianz SE bunker in Munich, and if I read them correctly, they suggest that Allianz will, sooner or later, buy the Hartford. And there are five good reasons why this would be a good move for Allianz, Hartford and their shareholders.
Reason #1: Methinks Thou Dost Protest Too Much
The first puffy clue to Allianz’ buying interest wafted over the media on January 20, when Reuters and a number of other financial sources quoted Allianz board member Clement Booth disclaiming any intent or interest on the part of Allianz to make any acquisitions. To be specific, Booth was quoted as saying, “I believe that to keep to our 2011 targets, we don’t need to buy anything (other companies) …we want to grow organically.”
Even though Allianz invested $2.5 billion in Hartford Insurance Group last fall and now owns 23.7 percent of the voting shares, Booth attempted to deflect any thoughts that Allianz SE might have an interest in acquiring Hartford. “If further capital was needed (by Hartford), I wouldn’t expect us to continue investment in the company when we have a sensible position,” said Booth.
Don’t be fooled. Does Booth really expect us to believe that if Hartford found itself in deeper trouble that Allianz would not seek to protect its already hefty investment of $2.5 billion? Besides, such a strategy of disclaimer is consistent with the Allianz history of seeking to complete any acquisition in the shadows of silence. Allianz has a stated policy of only participating in friendly acquisitions and not to conduct such acquisitions in public. The Allianz acquisitions of the American companies Fireman’s Fund, North American Life and Casualty (Allianz Life of North America), LifeUSA, PIMCO and Nicholas-Applegate were all signed, sealed and delivered before publicly announced.
Acquiring 23 percent of Hartford is also consistent with the established Allianz strategy of “putting a toe in the water” before jumping in. Prior to the full acquisition of PIMCO and LifeUSA (now merged with Allianz Life of North America) Allianz held significant minority positions. Taking an initial minority interest in a company is also consistent with and supports the Allianz desire for friendly acquisitions completed in private.
Having Booth go public with a denial of interest in the acquisition of Hartford is both consistent and pragmatic. Allianz has no desire to conduct this type of activity in public and if it became known that Allianz was interested in acquiring Hartford, the stock price would surely rise and the cost to Allianz increase significantly. (There is a “stand still” agreement in place between Allianz and Hartford, but such agreements are easily revoked.)
Reason #2: A Hartford Acquisition Fulfills a Long-Time Allianz Dream
Despite protestations from Allianz, I believe the company has deep-seated desires to acquire Hartford and for all the right reasons.
Allianz is clearly a dominant player in world-wide insurance operations with more than 80 million customers in 70 countries. In Europe alone Allianz has a market share exceeding 25 percent. However, Allianz is virtually invisible in the North American market. The management of Allianz has long dreamed of increasing the market and brand name of Allianz in North America (enough so it was willing to pay an estimated $200 million for naming rights to the New York Giants new stadium).
As a practical matter, I reported in my recent blog, “Allianz on the Prowl,” that the management of Allianz views North America as a market critical to the future growth and success of the company. In fact, last fall Michael Diekmann, chairman of the Allianz Board of Management, was quoted in FT.com as saying, “I don’t think you can reach satisfactory growth numbers if you are not a substantial player in the US . . . From a currency point of view, and from what I see of some of our competitors in the US, this is not a bad time to look at the US market.” That statement certainly belies Booth’s notion of not courting acquisitions.
The acquisition of a company with the size, stature and brand of Hartford would enable Allianz — in one fell swoop — to achieve its long desire to become a significant brand and player in North America. One thing I believe with certainty is that if Allianz does not acquire Hartford, it will not be because of a lack of desire to do so.
Reason #3: Solves Allianz’ Problems with its North American Companies
Allianz has serious problems with two companies it owns in North America – Fireman’s Fund and Allianz Life of North America. With the acquisition of Hartford, these two companies could be merged into Hartford and their problems submerged.
Fireman’s Fund is a good company, but its core management depth has been depleted and the morale of employees harmed by inconsistent strategies, weak senior executives and poor management decisions. In addition, the credibility of the company – both with employees and agents – has been damaged by Allianz’ lack of strong, long-term commitment to the company. It is well known by industry insiders that Allianz has either discussed or sought to sell Fireman’s Fund on a number of occasions
The real problem with Fireman’s Fund, however, is that it is a niche company – targeting higher income and specialty markets; it’s a relatively small company attempting to play in a big national market. Niche players do well in good times, but they are susceptible to being whip-sawed in bad times. This has certainly been the case with Fireman’s Fund. The irony is that Allianz SE is justifiably recognized as one of the world leaders in the property and casualty field. In most markets, Allianz is the dominant player. It is a bone in the throat of Allianz management that they have not been able to translate this expertise into a significant market share in North America.
Allianz Life of North America has also had its share of problems. A beacon of success in the Allianz universe only a few years ago, Allianz Life has been in steady decline. Triggered by the installation of weak, inexperienced, visionless and bureaucratic executives, Allianz Life has seen its sales and employee morale plummet. The company has a strong core (what is left of them) of dedicated, talented employees and an extensive distribution system of independent marketing companies and agents, but seems to be running its engine in neutral with no solid strategy to get it in gear.
Even more challenging to Allianz Life is the new SEC Regulation 151a that mandates all annuity products known as “Equity Indexed Annuities” (EIA) be registered as securities and sold only by the registered representatives of FINRA. This is a serious challenge for Allianz Life since more than half of all its business is made up of EIA sales and the bulk of its large distribution system is made up of agents who are not registered to sell securities. Unless something is done quickly, the sales of Allianz Life will fall even more precipitously than they have in the past few years. Allianz Life does offer variable annuities but it has never succeeded is being more than a bit player in that large market.
Reason #4: An Allianz Acquisition of Hartford would Strengthen Hartford and allow for a Hartford/Fireman’ Fund/Allianz Life combination that is an ideal fit.
An acquisition of Hartford by Allianz makes sound sense and would be good for both companies and their shareholders. Allianz could achieve its goal of becoming a leading player in the North American property and casualty market. Allianz could provide Hartford with a deep source of capital to rebuild its balance sheet and finance its growth. The opportunity to merge Fireman’s Fund and Allianz Life of North America into Hartford would reduce costs, increase efficiencies, improve productivity, cure problems Allianz has with these companies and even strengthen the insurance industry by assuring Hartford’s long term financial strength and stability.
Merging Fireman’s Fund into Hartford creates benefits for both companies. Hartford would benefit from increased access to higher income and specialty markets of Fireman’s Fund, along with the international experience and expertise of Allianz in the property and casualty market. Fireman’s fund would have the breath and depth of Hartford to expand on a national basis. All of this could be accomplished with the additional benefit of reduced costs and efficiencies. The combined companies of Hartford and Fireman’s fund would be a natural and stronger force in the industry while offering Allianz expanded market presence.
The merger of Allianz Life into Hartford offers even greater opportunities in the life insurance and annuity market. Hartford is strong where Allianz Life is weak and Allianz Life has strengths where Hartford is lacking.
Hartford has the experienced, deep senior management that is totally lacking at Allianz Life. (The current CEO of Allianz Life is actually a P&C, not life guy.) The downside is that both management cultures are steeped in mind-numbing bureaucracy, but you can’t have everything. Hartford is a market leader in the variable annuity business but weak in the fixed annuity business. Allianz Life is strong in the fixed annuity business but weak in variable annuities. Hartford distribution is made up of banks and individuals who are registered representatives, but has limited distribution with independent agents who sell fixed products. Allianz Life is made up of thousands of independent agents but has scant distribution through banks and registered representatives. The combination of the Hartford and Allianz Life would reduce expenses, improve efficiencies and form one of the most powerful life insurance and annuity organizations in the industry.
Reason #5 – Allianz is the Right Company to do this Deal
The current financial crisis has decimated many of Allianz’ competitors, while it has remained strong. Companies that might have been interested in Hartford – AIG, Prudential, Met Life, ING – have their own problems and are certainly in no position to consider such a transaction. However, Allianz under the strong leadership of Michael Diekmann has so far come through this crisis with reputation and balance sheet in tact. In fact, I gave Allianz kudos in my blog “Giving Credit Where Credit is Due,” as perhaps the only financial services company that can complete this transaction. In addition, Allianz has recently increased its capital base and rid itself of the problems it had with Dresdner Bank, giving it the time and resources to complete an acquisition of Hartford. Now is the time to act while potential competitors are weak.
Desire and Logic May not be enough to Swing this Deal
Despite the desire of Allianz management and the logic of the deal, there are a number of factors that may prevent its completion. The management of Hartford is not particularly entrepreneurial and does not have a large stake in the company, so they may be satisfied to gather under the umbrella of the Allianz minority ownership as a “white knight” to protect their jobs that might otherwise be at risk should another company make a run at Hartford. As a large public company, it may be difficult for the board to agree to any Allianz offer without allowing other companies an opportunity to bid, an action that is an contrary to Allianz history. Another reason this deal may not come to fruition anytime soon is the conservative nature of Allianz management that may cause them to husband existing capital due to these difficult and uncertain times, rather than make the investment needed to acquire Hartford.
IN THE END …
It may not be tomorrow, next week or even this year, but the acquisition of Hartford by Allianz is something that can, should and will happen. It may take a further weakening of the Hartford capital base and performance to drive the management of Hartford into the arms of Allianz. Such deterioration would discourage other potential bidders and play into the strategy of Allianz acquisitions. With Allianz already owing 23 percent of Hartford, the company has the leverage to block others and bide its time till the moment is right. In the end, the management of Allianz SE has the talent, intelligence, patience and resources to know a good deal when it sees one and find a way to make it happen. The acquisition of Hartford by Allianz is a good deal and is a deal that should and will be done. Keep an eye out for puffs of white smoke from Munich announcing that Allianz has acquired Hartford.
(In the spirit of full disclosure, I have no current involvement with either Allianz or Hartford. However, I do have a long history with both companies. From 1980 to 1987, I was president and CEO of ITT Life, which was owned by Hartford. In 1999 I was chairman and CEO of LifeUSA when it was acquired by Allianz SE. From 1999 to 2002 I was chairman and CEO of Allianz Life of North America. From 1999 to 2002 I served on the International Executive Committee of Allianz SE. From 1999 to 2006 I was a member of the Allianz Life of North America board of directors and was a member of the board of directors of Fireman’s Fund from 2003 to 2006.)