As might have been expected, my recent blog suggesting there were good reasons for Allianz to acquire the Hartford Insurance Group generated a high volume of comment and reaction. The blog stimulated postings, discussions on the Internet, newspaper articles, e-mails and phone calls. This reaction to the issues discussed suggests that a second blog on the subject is justified. This is especially true after Hartford Thursday announced dismal earnings and slashed dividends.
For the most part, the responses to the blog fell into four categories: 1) The general logic of the deal being done, 2) Comments on the deeper problems at Fireman’s Fund and Allianz Life of North America, 3) The depth of the current problems at Hartford, especially with its investment portfolio and 4) The difficulties Allianz SE might encounter in attempting to complete the transaction.
Let’s look at each of these points …
Everyone is Cheering
Every comment received regarding the blog agreed with the logic of doing the deal. However, several comments suggested it would be difficult to pull off such a deal in these volatile and uncertain financial times. It was universally agreed that Hartford is exactly the company Allianz should acquire if it is going to achieve its long held desire to have a substantial presence and market share in North America.
Everyone seemed to agree that the acquisition of Hartford combined with the subsequent merging of Fireman’s Fund and Allianz Life into the company would strengthen Hartford, submerge the problems Allianz is experiencing with Fireman’s Fund and Allianz Life and vault Allianz into a position of superior market strength and provide a base for future growth in North America.
We Are Going To Need A Bigger Boat
A number of those who responded to the blog work at either Fireman’s Fund or Allianz Life and they suggested that my comments regarding the problems at these companies were, in fact, understated. It was their feeling that the performance, environment and employee morale has been bad, and it only continues to worsen. From the employee’s perspective there clearly seems to be a lack of trust and confidence in the management groups of both companies.
While some respondents pointed out (with undisguised joy) that Allianz had finally expunged itself of the two individuals – Jan Carendi and Chuck Kavitsky – who they held responsible for most of the damage done to these companies, those left in their place are considered to be of much the same ilk. The general feeling of the employees seemed to be that the companies lacked any type of focus, vision or support for the customer, sales force or employees.
As one Allianz Life employee wrote, “I was witness to a colossal waste of money on an almost daily basis while literally hundreds of employees lost their jobs in the last half of 2008 due to budget cutbacks caused by mismanagement and hubris.” He concluded, “So, not only is the company suffering from bad business practices in dealing with sales, customers, and other issues mentioned in previous posts, but it is also spending money like its being printed in the basement and wasting resources that will cost us all in the long run.” Comments from employees of Fireman’s Fund were in much the same vein.
While there appears to have been a recent up-tick in sales at Allianz Life, most of this can probably be credited to funds being moved to Allianz Life from companies that have been weakened in the current financial crisis and a “fire sale” mentality rush by agents to sell as much of the Equity Indexed Annuity (EIA) business as possible before the SEC Regulation 151a comes into force, rather than a focused strategic plan on the part of management to improve recruiting, service and sales.
The bottom line is that Allianz SE is facing intractable problems with these two companies that may only get worse. Allianz SE executives are smart enough to know they are not positioned, by structure and experience, to solve these problems so the natural action would be to submerge them within a larger organization and let the management of that company deal with them. The Hartford fits the bill for this job and offers even more reason and pressure for Allianz to complete the acquisition.
(It is important to note that my comments about problems at Allianz Life and Fireman’s Fund are aimed at exposing the management, operational strategy and employee relations weaknesses at the companies and in no way do I suggest that either company is or will be unable to meet its financial liabilities and obligations to policyholders. On the contrary, I believe both companies are among the strongest in the industry and I know of no reason for policyholder concern.)
Hartford May Still Be Sinking In Quicksand
While in agreement that the acquisition of Hartford by Allianz is a sound strategically sound fit that would benefit for both companies, a number of respondents with financial expertise suggested that all the shoes may not have dropped as it relates to problems with the Hartford. Concern was expressed that the amount of liability related to guarantees and promises made by Hartford, especially with variable annuities, may not be fully understood. In addition, others believe that Hartford may still have a large amount of unrecognized “toxic investments” in its investment portfolio that may emerge as impairments and cause further write downs. Because of this situation they suggest that Allianz may be best served by sitting on its current 23 percent ownership stake until these issues are resolved.
Allianz Has Its Own Issues (Imagined or not!)
Just as those who commented on the blog raised financial questions regarding Hartford, so too did some question the financial strength and timing of this transaction for Allianz. This may be more psychological than real, but perception is sometimes stronger that reality.
To start, the entire European insurance community is under increased scrutiny regarding its liabilities and financial strength. French bank Credit Agricole has suggested that Allianz asset allocation may put the company at risk of losses and also claims there could be some risk that Allianz itself might need additional capital.
Even more pertinent to the ability of Allianz to complete a large transaction at this time is the fallout from the Dresdner bank fiasco. Allianz purchased Dresdner bank at the very top of the market, suffered years of heavy losses and then sold the bank for less than half the amount it paid for it. Total losses on the Dresdner deal ran into billions of dollars, but maybe more importantly, the management miscue damaged the credibility of Allianz management.
Wounded by the Dresdner experience and sensitive to the Allianz stock price, it may be that despite the desire to do so and the long term benefits that are to be gained, it just may be that the Allianz management does not have the flexibility, credibility or stomach to take on another large acquisition such as the Hartford, especially if there is the potential for additional problems to emerge from within the Hartford.
In The End …
Allianz has acknowledged that in order to achieve its financial and growth goals it must have a larger presence in North America. Allianz has shown that it cannot achieve this goal with small acquisitions and organic growth. The acquisition of Hartford presents the only logical and effective way for Allianz to achieve – in the foreseeable future – its goals in North America.
It seems apparent that the problems with Fireman’s Fund and Allianz Life will not go away and if anything they will be exacerbated by the current management and direction of the companies. The logical action is to merge these companies into a larger organization such as the Hartford and have that company resolve the problems. On a positive note, as mentioned in the first blog, the combination of Hartford, Fireman’s Fund and Allianz life will form a powerful force in both the casualty and life market in North America.
The Allianz acquisition of Hartford is a deal that should be done – for the benefit of both Allianz and Hartford. The deal may be done later rather than sooner, but in the long run if the deal is not done, Allianz may have more problems to deal with than they will if the deal is done.