ALLIANZ ON THE PROWL – PART II

Often the best way to predict the future is to understand the past. That certainly seems to be the case when it comes to the strategic actions of German-based Allianz SE.

In a blog posted on August 18, 2008 I wrote, “A look at the history of Allianz SE would suggest that eventually they may buy another company into which could be merged both Allianz Life and Fireman’s Fund …This approach … would bury the problems of Allianz Life within the newly acquired company …”

In the original “Allianz on the Prowl” (September 22, 2008) I wrote, ” … no one should be surprised to wake up one morning and read that Allianz SE has acquired parts of AIG or some other company and that Allianz Life of North American and Fireman’s Fund will be merged with the acquired company.”

Now on Monday, October 6 comes the news that Allianz SE has invested $2.5 billion dollars in Hartford Insurance.

It has long been rumored that Allianz had an interest in acquiring The Hartford. One of the strategic attractions being that as a large property and casualty, life and annuity company The Hartford is the type of company that could easily absorb Allianz Life and Fireman’s Fund, thus submerging any problems associated with those companies. However, Allianz has a long-standing policy of not attempting hostile takeovers, so Hartford seemed a long shot. It now appears that the current financial crisis and its impact on The Hartford have caused the company to be amenable to a significant investment by Allianz.

Of course, Allianz SE is not (at this time) making an acquisition of The Hartford, but the strategy of getting a foot in the door by making a significant minority investment in the company is eerily similar to actions Allianz SE has taken in the past.

In 1998, using a structure very similar to the Hartford investment, Allianz SE committed to investing $100 million in LifeUSA. Within 18 months, in a transaction valued at $540 million, Allianz SE made an offer to acquire all of the stock it did not own in LifeUSA. When the acquisition was completed, the management of LifeUSA was charged with turning around and resolving the problems that were plaguing the performance of the then Allianz Life.

Allianz SE now owns all of PIMCO (the huge fixed-income management firm), but the initial investment was for less than 100 percent ownership. Only sometime later did Allianz take full ownership of the company.

Could it be that we will see the same strategy employed with The Hartford?

No one should be surprised if we do. Acquiring The Hartford would go a long way toward Allianz’s goal of having a greater presence in North America and is consistent with the words of Michael Diekmann, the chairman of Allianz SE, on September 7, 2008 when he voiced a desire to invest in the US because of his belief that the market is under valued.

What would be the impact of such an action? Clearly this would mean big changes for Allianz Life and Fireman’s Fund.

The Hartford is one of the best known and largest providers of property and casualty insurance in North America. Fireman’s Fund is a niche player in the market. Clearly it would be natural and logical for Fireman’s Fund to be merged into or under the direction of The Hartford. The Hartford is a medium player in life insurance, but it is one of the largest writers of annuities. Allianz Life is also a leading producer of annuities, the majority of which are the Equity Indexed Annuity (EIA). Given these circumstances it is also logical to assume that if Allianz acquires Hartford then Allianz Life’s efforts in the annuity business would be merged into Hartford.

It appears that the Allianz SE investment in and potential acquisition of The Hartford will have the most severe impact on Allianz Life. As mentioned, the majority of annuities produced by Allianz Life are EIAs. The EIA product has come under severe attack and criticism (much of it unfounded and misplaced) from competitors, regulators and the media. In fact, the SEC has proposed (reg. 151a) that EIA annuities be deemed securities and be registered and regulated as such.

Such action would have a serious negative impact on the production of Allianz Life because most of the Allianz Life agent distribution system is not licensed to sell securities and the company has a limited number of agreements with the broker dealers of FINRA. The Hartford, on the other hand, is in the exact opposite situation. The Hartford has only about 11,000 independent agencies, but existing relationships with more than 100,000 broker/dealers.

With an annuity distribution system heavily tilted to the banks and securities dealers, it is little wonder that The Hartford has taken a position in support of the SEC effort to have EIA annuities declared securities rather than insurance products. In a letter to the SEC filed on September 10, 2008 The Hartford said, “The Hartford commends the Commission for undertaking this effort to clarify that EIAs are securities under the Act, and are therefore subject to the federal securities laws and the jurisdiction of the Commission.”

There must be some reason and motive for Allianz SE to make a multi-billion dollar investment in The Hartford, a company that has publicly supported a proposed SEC regulation that would have a dire impact on another company owned by Allianz.

As mentioned, if the SEC formally declares EIAs to be securities it could have a draconian impact on the future sales of Allianz Life. However, if the objective of Allianz SE is to eventually acquire The Hartford and merge Allianz Life into it, then The Hartford could drive the Allianz Life EIAs (as Hartford products) through their system of 100,000 broker/dealers. This strategy may be good for The Hartford and Allianz SE, but it could be devastating for the people and distribution system of Allianz Life.

It may be that Allianz SE will not make an eventual effort to acquire The Hartford, but don’t bet against it. Michael Diekmann and the Allianz Board of Management are on public record as stating that they are against a minority ownership in companies. It may take time to work through the issues, but Allianz SE is a company that firmly wants to be in control.

The Bitter Bottom Line

The sad part is that this did not have to happen. Just a few years ago Allianz Life was a vibrant, growing, successful and highly profitable company. Allianz Life was populated with hundreds of talented and experienced employees who were committed to working hard to make the company better. If the company had been allowed to grow and develop as it had in the past, then Allianz Life could easily have become the large national company Allianz SE seeks to own.

However, the management of Allianz SE made the mistake of putting the North American effort under the direction of an individual who proved to be talented only at destroying value. This error was compounded by allowing this individual to populate Allianz Life with management leaders who were little more than “water boys” for a growing bureaucratic culture. The executive managers of Allianz Life proved to have little knowledge or experience in the business and culture of Allianz Life. While these executives may have been glib and well-meaning, they were more concerned with pleasing their bosses than supporting the efforts of the people at Allianz Life. No one should be surprised that this approach caused Allianz Life to enter a downward spiral from which it may never recover—unless the management is replaced and the company is merged with a larger company that had been acquired by Allianz SE.

Now we know why Allianz is on the prowl with a target in sight.

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