Hartford Financial is a classic example of how quickly even the most successful companies can fail when saddled with incompetent, pathetic leadership, a culture riddled with bureaucracy and no clear vision for the future.
At least give Hartford management credit for consistency, because for the past decade, the management has consistently made the wrong decisions for the future success of the company. And with each decision, the future of Hartford continued to slip-slide away.
The bucket-list of dubious decisions made by Hartford management is so long and egregious, that if someone had been asked a decade ago to presage the worst possible actions a company could take, even the wildest predictions would have fallen short of what Hartford management has done to threaten, if not destroy, the future of a great company. Hartford management calls to mind the oddball characters in the 1971 movie comedy, “The Gang That Couldn’t Shoot Straight.” Not that what has happened to Hartford is funny or was totally unpredictable.
The Arrogance of Success
The bottom line and lesson to be learned here is that the management of Hartford had become so inbred and comfortable with the success of Hartford as an icon in the insurance industry that they lost sight of how that success was achieved and seemed to have no idea how it could be maintained. A history of 200 years of success allowed Hartford management to fall prey to the mentality of an “arrogance of success” and a belief that because of this past success, the company was somehow “entitled” to success in the future.
This mindset allowed the management to believe that the traditional rules of sound insurance management did not apply to Hartford. Management began to assume risks they did not understand; they put the company in position to be anti-selected against by customers and took on risks that could not be managed in a shifting financial environment. In short, in search of increasing the top and bottom lines and ever-larger bonuses, the management of Hartford began to make short-term decisions in a long-term business. As a direct result of this management mentality and the irrational actions it spawned, Hartford was forced to be one of just three insurance companies compelled to plead for a $3.4 billion government bailout, just to be able to survive. In addition, the poor decisions of management forced Hartford to go on bended-knee to Allianz SE and beg for a “payday loan” advance of $2.5 billion dollars.
A Financial Recession Lays Bare Hartford’s Mismanagement
Hartford management attempted to layoff the problems of the company and the decline in the stock value from over $100 to around $8 at the feet of the “Great Financial Crisis” suffered by the country, but that is just another lame excuse for their lame actions. The financial meltdown did not cause Hartford’s crisis; it only exposed the poor judgment and inept leadership of Hartford’s management. After all, even AIG has recovered from its near mortal self-inflicted wounds.
It’s not like these poor decisions were isolated incidents at Hartford, because each one led to another – even worse – action. For example, in search of short term gains, Hartford sold billions of dollars-worth of annuities that were poorly priced and offered guarantees that violated the laws of nature; these annuities cost the company billions of dollars in losses. In response, Hartford shutdown the sale of these products and then undertook deceptive, if not unethical steps, to trick consumers into giving up the benefits they had been promised. This created a firestorm of protest and a public relations black-eye for Hartford.
To make matters worse, by the time Hartford introduced re-tooled more responsibly priced products, the distribution system had moved on to other companies and there was no one to sell the new products.
And the parade continues. This past week, succumbing to pressure from billionaire hedge fund manager John Paulson, (Hartford’s largest shareholder at about 8 percent) Hartford’s CEO Liam McGee announced that Hartford was withdrawing from the life and annuity market. The “strategy” is to sell off these portions of the company and “return to the core business of property and casualty insurance.” One should not forget that in 2009, the then-Hartford CEO Ramani Ayer, announced a “strategy” (which failed) to exit the property and casualty business by selling off that portion of the company. How’s that for flip-flopping.
There is not enough space in this blog (it would take a book) to delineate all the malapropos of Hartford management. (To get an idea of these conspicuously bad actions on the part of Hartford management, you could review some of the numerous blogs I have written on Hartford over the past few years including: “Hartford Financial is Slip-Sliding Away” and “Is Hartford in a Freefall to Nowhere.”) However, it is easy to identify the worst of the worst decisions that has been made by the Hartford board of directors in the past few years, and that is the hiring of Liam McGee as CEO. As outlined in my blog on his hiring, it was easy to foretell that the selection of McGee was a disaster waiting to happen.
As pointed out at the time, McGee had two qualifications for the job as Hartford CEO: He needed the job and was willing to take it! Beyond that, there was little reason to hire McGee. He had zero experience in insurance; he was a life-long banker (not something to generate a high level of leadership confidence in anyone) who was unemployed; having recently been forced out of Bank of America and he had never run a company – even a bank. Nice resume for someone to present for coming into and saving a failing insurance company. The only thing that Hartford and Bank of America had in common was that their management ranks were filled with incompetents and both companies had needed a multi-billion dollar government bailout to survive. So what does the Hartford board do? They take a flawed failure from a flawed bank to run a flawed insurance company. How smart is that?
But the Hartford board does deserve some slack for this hire. The board members did know they were buying a pig-in-a-poke with McGee, but had little choice. Finding a dearth of talent within the Hartford ranks (something very telling itself) the Hartford board had struggled for months trying to identify and entice a qualified outside candidate to assume the helm at Hartford. Candidate after candidate rejected the offer recognizing a sinkhole when they saw one. Alas, the Hartford board was forced to turn to a guy who admitted at the time that the only thing he knew about insurance was that he had bought some and his unemployment insurance was about to run out.
McGee may be a well-meaning, intelligent and effective executive, but with no real knowledge of or experience in the insurance business, he lacks a basic understanding as to how insurance works and should be managed; he is unable to create a real vision for the future and is forced to rely on the very members of management who made the decisions that got Hartford in the trouble in the first place. This situation creates a lack of confidence that makes McGee susceptible to pressure and influence from sources outside the company who also don’t understand insurance and usually are seeking only short term gains from a long term business. This is not a good recipe to bake up a successful future for Hartford as an independent company; if it even has one.
And the Moral of the Story …
It is difficult to predict the future for Hartford. Clearly there is opportunity and potential for the company. Hartford is still a solid brand and at $22 per share, it is currently valued by the market at less than half its book value; meaning that it clearly could be acquired on the cheap. (Although not as cheap as when Allianz missed the golden opportunity to acquire Hartford at $8 per share.) But, just as qualified candidates passed on the chance to lead the company, what qualified buyer – even at this valuation – would want to take on the risk of acquiring a hide-bound, bureaucratic company that is pockmarked by a management that has consistently proven that they are competent at only one thing – making things worse?
It is sad to see a great company such as Hartford suffer such travails; even if the wounds are self-inflicted. It reminds one of the now immortal words of Forrest Gump, “Stupid is as stupid does.” And clearly the management of Hartford has proven itself to be stupid by constantly doing stupid things.