Hartford Financial is Slip-Sliding Away

Whoah God only knows, God makes his plan
The information unavailable to the mortal man
Were workin our jobs, collect our pay
Believe were gliding down the highway,
when in fact were slip sliding away

Simon And Garfunkel

Judging by the spate of news reports flying around financial circles it appears that after almost 200 years of gliding down the highway of steady, solid success, Hartford Financial Services Group (Hartford) is about to slip slide away into history. And it my opinion, nothing short of an Allianz SE buyout can save it.

You may have read the latest. Bloomberg News reported Thursday (April 23) “Hartford Financial Services Group Inc. is seeking bids from rivals including Travelers Cos. for its flagship property insurance business, said people familiar with the matter, in a sign that damage from the financial crisis may lead to a wholesale breakup of the 200-year-old insurer.”

It would be sad to see a great company like the Hartford fall by the wayside, but that is the price any company (or individual) pays when it stops doing those things that made it great. As I have often said – If you are not making history, you are history!

That’s why it’s misleading for Bloomberg and others (including Hartford management) to lay the blame for the demise of the Hartford at the feet of “the financial crisis.” The financial meltdown did not cause Hartford’s crisis; it only exposed the poor judgment and inept leadership of Hartford’s management.

Rather than make history, Hartford instead began the slide down the slippery slope to oblivion when — in a short-sighted quest for higher bonuses, sales and stock prices — company executives began to violate the very principles of risk recognition and management that had been fundamental to Hartford’s two-century run of success. In so doing, these execs pushed this venerable icon to the brink of self-destruction.

Is This the End?

Hartford management will probably argue that it is not selling off pieces of the company piecemeal in hopes of delaying the inevitable. They will postulate that their current actions are simply a logical restructuring of the company in order to help it survive the ravages of the financial crisis. Balderdash! It is a clear sign of the depth of the crisis plaguing Hartford that management would even discuss the possibility of selling the crown jewel of its operations, the property and casualty division. This is akin to Boeing announcing that in order to save the company, it is going to sell its aircraft manufacturing division. Hartford has already tried and failed to sell its “dogs.” Earlier this year it was widely reported that Hartford attempted to sell parts of its life operations to Canada’s Sun Life Financial and continues to seek other buyers for its group benefits division. (Do not be surprised if AARP were to announce that it will stop offering Hartford products to its members.)

It is sad to see, but when a company becomes desperate enough to even consider the sale of its only remaining good assets, then that company is not long for this world.

Wither Thou Goest, Hartford?

On April 23 Reuters reported that Goldman Sachs has been retained by Hartford to lead the sale and that it has been calling potential bidders. Reuters indicated, “Possible contenders for the business include German insurer Allianz, which is already ($2.5 billion) an investor; Met Life Inc., Munich Re and Travelers Companies Inc.”

It is difficult to predict if such a transaction to sell Hartford’s most profitable and prized asset can be completed. As in all fire sales, price can be contentious. Based on Hartford’s financial statements, the management of the company places a value of the property and casualty division at $8 billion. That may be a hard bargain for Hartford management to garner when the current total market cap for Hartford is $3.2 billion. (Of course, such an obvious disconnect in perceived value is evidence that the other divisions of Hartford have a negative value. And, these are the remaining divisions from which Hartford would expect to survive on.)

No matter which company (if any) may end up with the bulk of Hartford, clearly Allianz SE has the biggest risk/reward bet on the table. As I wrote in earlier blogs (start here), Allianz has the most to gain by buying Hartford, and the most to lose if it doesn’t.

Last year Allianz invested $2.5 billion in Hartford. With the current market cap for all of Hartford at $3.2 billion, it is obvious that Allianz is a tad bit under water with its investment. Now, if the best part of Hartford is sold out from under the Allianz investment – to another competitor no less – then clearly Allianz would be hard pressed to ever see a return on its investment – except for a potential total loss. (One scenario mentioned in the blog was that Allianz would sit on its investment in Hartford until Hartford became desperate and then swoop in for the kill.)

The upside for Allianz to acquire the bulk of Hartford is that such an acquisition would enable Allianz to achieve a long-held desire to become a significant player in the North American property and casualty market. On the other hand, should Allianz stand idly by as an existing competitor takes the Hartford business, then Allianz would be relegated even more to being a bit player in the U.S. market. Such a scenario, combined with the current problems Allianz is facing with Fireman’s Fund and Allianz Life of North America, could potentially drive Allianz out of the North American market altogether.

Clearly the Hartford crisis is both an opportunity and threat for Allianz SE. In order to protect its existing investments in North America and to become the market leader it seeks to be, there is no real choice but for Allianz to buy Hartford. Will it happen? It should, but it is doubtful that the current Allianz SE management group – plagued by its own past missteps and its clear inability to solve current problems in North American – has the power and gumption for such a bold move.

And the moral of the story is …

Short and simple. Success has its own curse. It can lull you to sleep. If success become a pillow to rest on, then you may be asleep when reality passes you by. When a company or individual comes to view success as an entitlement and stops doing what it did to be successful, it will fail. Success is more fleeting than beauty and must be constantly tended to. If you are not making history, you are history.

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7 responses to “Hartford Financial is Slip-Sliding Away

  1. It never ends...

    Mac,
    How does Allianz balance any type of transaction when it clearly lacks leadership in it’s North American company? The VA side of the business is not even working due to not having product. How could Allianz of NA onboard such a acquisition without leadership and current failures still looming in its other lines ??

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  4. I’d agree that it’s wrong to blame the markets instead of management for Hartford’s problems. But now it is the reverse situation… survival is largely out of their hands (they bet the firm in the markets, and now it’s time to see where the wheel stops). Either market values recover for the various dubious investments backing Hartford’s (massive) liabilities, or they don’t. This is why it’s such an unattractive investment for potential acquirers, including Allianz (by the way, do you not believe there’s such a thing as “good money after bad”? If I were Allianz I wouldn’t touch HIG with a 10 foot pole). If you want to make a leveraged bet on equities or commercial RE or whatever, just do it. There’s hardly a shortage of junk assets out there, so you don’t need to take on the expenses of a big struggling insurance company in order to invest in it. The decision to sell off the one salable piece of the company seems actually impresses me with its how responsible it is. The mgmt could say all or nothing, wait for a miracle return to glory or let the place go down in flames (like Lehman Bros, for example). Instead, they’re willing to swallow a very bitter pill and do what gives the company the most chance of surviving, if not the most chance of restoring what they’ve lost.
    Maybe it is never too late to start doing the right thing…

    @commenter #1: If Allianz is having trouble entering the VA market, trust me, that can only be considered a good thing.

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  6. Insurance Vet.

    Can’t see Allianz giving away $2.3 billion. In for a penny, in for a dollar.

    They’ll buy once HIG gets re-valued which may occur after 1Q results.

    Will HIG hit 200? – in name only – bummer for such a talented, hard-working group.

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