Tag Archives: Fireman’s Fund

Fireman’s Fund Insurance Ravaged by Allianz Bureaucracy

Once again bureaucracy is shown to be the most efficient way to snatch defeat from the jaws of victory.

A German newspaper recently reported that insurance giant Allianz, owner of California based Fireman’s Fund Insurance Company (FFIC), is planning to dismantle the company and sweep it into the dustbin of bureaucratic failures. Allianz has tacitly confirmed the report but only complaining that the planned action became public before intended by the company. As with any bureaucratic failure, the hope of those responsible is that no one will notice.

The newspaper (Sueddeutsche Zeitung) article revealed that Fireman’s Fund commercial business is to be folded into another German industrial insurance company owned by Allianz, while the “personal lines business” of FFIC will be allowed to “runoff” until it is gone or FF2offered to another company interested in scavenging the the tattered remnants of the deceased company.

This is a sad and totally unnecessary ending for Fireman’s Fund; a valued, 150-year-old company that had survived the 1906 San Francisco earthquake, but could not withstand the upheaval heaped on it by the bureaucratic management minions of Allianz who virtually squandered the $3.3 billion in cash Allianz paid to acquire Fireman’s Fund in 1991.

Good Idea Soiled by Bureaucracy

When Allianz purchased Fireman’s Fund the transaction seemed (and was) a sound strategic move that would provide Allianz – the largest casualty insurer in Europe – with an entrance into the American market that it had heretofore desired but lacked. For Fireman’s Fund the affiliation with Allianz promised to offer the resources, credibility, expertise and capital of one of the world’s largest insurance companies; providing it with the capability to become a substantial player in the American market. But the relationship was star-crossed from the beginning.

The timeline of activity and actions following the Allianz acquisition of FFIC offers the mother of all examples of how a bureaucracy-riddled company can ravage the value of any investment and kill the opportunity to leverage it to success. In the interests of transparency, I both worked for Allianz as the CEO of a company (LifeUSA) it acquired in 1999 and served on the board of directors of Fireman’s Fund; so I had a front row seat to observe (and experience) how a bureaucratic company functions. In fairness, the vast majority of those I dealt with at Allianz in Germany were extremely intelligent, highly ethical and well-intended; it’s just that they were raised to be bureaucrats and excelled at practicing that art. Even more revealing to me was that the most senior executives of Allianz – especially the CEO – recognized and were frustrated by the inadequacies of a bureaucratic culture, but felt powerless to change it.

The conundrum is that when bureaucracy ridden companies – such as Allianz – are able to scrunch up the courage to make a strategic decision such as an acquisition, they immediately retreat into a bunker mentality, trying to protect their investment, rather than leverage it. Bureaucrats are dedicated to analysis, but terrified by action.

Bureaucratic companies seem incapable of understanding that an investment to acquire a company is the start of the process, not the ending. The clear message given to those leading the acquired company is, “Okay, we took the risk of putting up the money to buy the company, now it is your job to grow the company, but we are not going to risk any more capital to help make that happen.”

This mentality triggers a chain of events that invariably emasculates the culture of the acquired company, leading to the diminution of the initial investment, if not the outright destruction of the company. This inevitable process starts when the bureaucrats of the parent company, begin to impose their stifling bureaucratic rules and controls on the acquired company; limiting the actions and strategies that made it an attractive acquisition. The suffocation of the entrepreneurial culture of the acquired company soon begins to trigger the departure of those individuals capable of creating the desired growth. This leads to a string of increasingly less capable executives charged with running the acquired company. These executives are hired, not for their creativity and independence, but rather for their acquiescence of and compliance with the bureaucratic culture.

It is noteworthy that in the past nine years alone, Fireman’s Fund has had seven different CEOs; all hired and fired by the Allianz bureaucracy. (Believe it or not, one of these CEOs, in the midst of downsizing the company and laying-off hundreds of employees, purchased a Rolls-Royce and parked it at the company for all employees to see.) In the end, the acquired company is populated by managers with the same attitude, aptitude and recalcitrance to action as the bureaucrats who hired them. And then the executives of the parent company wonder why the company fails!

Fireman’s Fund also serves as a classic casebook example of how a bureaucratic culture will send good money chasing after bad money. To comprehend this process it is critical to understand that a bureaucrat will do almost anything to avoid acknowledging and accepting responsibility for failure. As failure looms the bureaucrat will become more and more frantic and irrational in their actions to hide the failure.

Despite investing $3.2 billion to acquire Fireman’s Fund as an entrance into the American casualty insurance market, Allianz was unwilling to allocate the additional capital necessary to bring FFIC up to the competitive levels of the other players in the market. AllianzPressed for growth, but lacking the necessary capital and falling deeper and deeper into the catacombs of the Allianz bureaucracy, Fireman’s Fund was forced to take risks that became gambles, that turned into losses. As the losses at FFIC mounted the bureaucrats at Allianz had the choice of acknowledging the failure of its initial investment or to hide the fact by pouring in additional funds to keep the company afloat. Soon good money was chasing bad money in a bureaucratic effort to avoid the inevitable. But this money was only intended to cover past mistakes, not invest in the future. As such it only accelerated the downward spiral that ultimately destroyed both Allianz’s investment and Fireman’s Fund.

Over a decade ago Allianz executives internally acknowledged that the investment in Fireman’s Fund was a failure and sought to sell the company. Unfortunately, the bureaucrat culture at Allianz had already triggered a decline at FFIC that made the company unmarketable—at least at a price anywhere near what Allianz initially paid. Not wanting to publicly admit failure, the Allianz bureaucrats hung on, but in so doing they took actions that made the situation even worse. Allianz not only refused to invest the capital necessary to build up the capabilities and competitiveness of FFIC, they began to suck as much money as possible out of the company. (One year Allianz required FFIC to pay a dividend of $1 billion dollars to the parent company.) Having reached the conclusion that it would not be possible to sell Fireman’s Fund without exposing the failure of Allianz management and the loss of the company’s investment, it was decided to let the company “bleed-out” and die. What we are witnessing now are the attempts of Allianz bureaucrats to dispose of the decaying body.

And The Moral of the Story …

Don’t let your kids grow up to be bureaucrats! If success is what you seek, then you must do anything and everything to keep bureaucracy at bay in your company. Recognize bureaucracy as the Ebola virus of management that ultimately destroys all it infects.

The comments expressed here are not an attack on Allianz, but on bureaucracy. Allianz is one of the largest companies in the world, but it is also the epitome of a bureaucratic culture. Just imagine how much more successful Allianz could be and how effective Fireman’s Fund could have been as an entrance into the American market, had it not been for the ravages of bureaucracy. Instead, the investment has been wasted, Allianz is still not in the American casualty insurance market and Fireman’s Fund is dead. It is a lesson anyone in any company needs to learn and remember.

Allianz SE “Timidity” Triggers Blunder in Failure to Acquire Hartford

Timidity in the presence of opportunity is the business equivalent of cowardice in the face of danger. Nothing good results. The timid see opportunity pass by and cowards lose a life worth living. Opportunity is often brightest in the darkness of uncertainty, volatility and change. Likewise, uncertainty, volatility and change also shine a light that exposes timidity. The bold embrace the opportunity created by the uncertainty of change, while the timid are intimidated by it and constantly lag behind.

Almost exactly a year ago – at the depths of the worldwide economic upheaval – I posted two blogs (Jan. 26, Feb. 4) suggesting that such times presented Allianz SE with a unique opportunity to achieve its long-held dream of becoming a significant player in the North American insurance market by acquiring a floundering Hartford Insurance Group. I had also written a previous blog lauding the foresight and courage of the Allianz SE leaders for not following the herd over the cliff and also for a conservative approach to financial management that positioned Allianz to sail through the financial upheaval, virtually unscathed.

Conservatism in financial services is a good thing, but sometimes it can be used as a disguise for timidity. Only strong, visionary leadership is able to tiptoe along the line and balance between the two. Unfortunately, in failing to seize the opportunity to acquire a wounded Hartford, the Allianz SE management crossed the line from conservatism to timidity. As a result, Allianz may have seen its dream of prominence in the American market fade or at the very least become prohibitively more time consuming and expensive. It is even possible that Allianz could eventually be forced out of the North American insurance market altogether.

At the time, due to inept management and a complete disregard for risk, there were serious questions regarding the very survival of the venerable Hartford. The future looked bleak, with losses running in the billions of dollars and a stock price that approached $3. (Against a stated book value of $30 per share.) Ironically, it was the financial strength of Allianz SE that enabled it to loan Hartford $2.5 billion and the largess of the government that chipped in another $3.5 billion that gave Hartford the breathing space to refocus. The stock price has rebounded to as high as $29.

Do you think it makes sense that when you covet a larger share of the market and see your dominant competitor fall on hard times and become vulnerable, that you step in and loan them money so they can continue to dominate you in the market? Allianz management obviously recognized the opportunity in the Hartford, but their timidity to act in the face of opportunity was exposed.

As a result, Hartford is back in the market, the cost of any potential acquisition has probably tripled, while Allianz remains a bit-player in the North American property insurance market; still saddled with its problems at Fireman’s Fund and Allianz Life of North America. It is amazing the price we often pay for timidity!

Clearly, as was written in the previous blogs, there were extraordinary benefits to be derived by Allianz in the acquisition of Hartford. The acquisition of a company with the size, stature and brand of Hartford would have enabled Allianz – in one fell swoop – to achieve its long held desire to become a significant brand and player in the North American market. Instead, Allianz remains only a bit-player in the market.

Allianz continues to have serious problems with two companies it owns in North America – Fireman’s Fund and Allianz Life of North America. Fireman’s Fund which has been plagued by a past top management that could only charitably be described as incompetent and self-serving. At the same time, its capital for potential growth has siphoned off to pay dividends to Allianz SE and now has little hope or resources to rise above being merely a niche player in the market.

Meantime, Allianz Life of North America has settled into a haze of bureaucratic management that allows it to only bumble along on a receding wave of past success and it has become vulnerable to existing or potential new competitors. If Allianz SE had seized the opportunity to acquire Hartford, these two companies could have been merged into Hartford and the problems submerged.

There were a number of other benefits – both for Allianz and Hartford – that an acquisition would have triggered, but it is suffice to say, they have been squandered as well.

The defenders of Allianz SE lack of action (timidity) will say that, at the time, Allianz lacked sufficient capital to acquire Hartford, but that is just an easy excuse. The reality is that Allianz could have found the required capital if it had so desired, but during those uncertain times it is apparent that Allianz decided to husband its capital for what might happen, instead of investing the capital to make something happen.

In truth, it was probably the psychological challenges rather than a resource limitation that exposed the timidity of Allianz management. At the time, Allianz was just emerging from the stigma of a terribly botched acquisition of Dresdner bank, which cost Allianz billions of dollars in losses. (The irony of course is that Allianz purchased Dresdner at the very height of the market and they would have purchased Hartford at the very bottom of the market.) Also, the depth of Hartford’s investment and liability problems had not been fully exposed. (The Hartford’s management didn’t even know what they were!) However, the market had driven the stock price of Hartford to about 10 percent of stated book value and that certainly would have given some protection to Allianz in an acquisition.

Allianz defenders would argue that Hartford management did not want to sell and that Allianz did not want to participate in a hostile or auction acquisition. Of course, Hartford management did not want to sell, but I am willing to bet the real owners of the company would have been willing.

Of course, all of these points and counterpoints are mute now. The indisputable fact is that the management of Allianz SE – signaled by their $2.5 billion investment – clearly recognized the opportunity that uncertainty, volatility and change in the financial market that had brought Hartford to its knees, but their exposed timidity prevented them from taking the bold steps needed to take full advantage of the moment. And for that timidity, Allianz will always pay a price far more expensive and lasting than the cost of acquiring Hartford.

And the Moral of the Story …

Confidence in one’s ability to make the right decision in difficult times is the precursor for any achievement. It is not the false confidence of conceit or vanity, but the confidence of knowing from personal experience, knowledge of the situation and the understanding of the potential opportunity that provides the strong leader with the confidence for boldness. Conversely, there are those who possess the experience, knowledge and understanding that should bring forth confidence, but who fail to act. For them, thy name is timidity and opportunity is forever lost.

Allianz Acquisition of Hartford – Part Zwei

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. Continue reading