Tag Archives: Hartford Financial Group

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.

WANTED: Top-notch CEO with a firm grasp of financial services, particularly insurance. Must possess proven record of aggressive turnaround skills to position old-line insurance icon for recovery and growth. Charming Connecticut setting, three-to-five -year commitment preferred. Salary to be determined by government committee.

Who wouldn’t covet such a job? Even the outgoing CEO gushed as he announced his resignation, “Now that the company’s on a sure footing, it’s time for me to move forward with my plans…It’s time to give somebody else a chance and a crack at this fabulous enterprise.”

OK, if being CEO of The Hartford is such a fabulous job, then how come there isn’t a line around the block at One Hartford Plaza?

I think I can answer that question. There’s a lot going on behind those venerable doors that even the management of Hartford can’t understand or control. And since the potential candidates who are actually qualified to do the job know that, they welcome the opportunity to say, “No thanks.” As a result, Hartford will most likely end up with a tail-end custodian CEO who is there to keep the Hartford ship afloat as long as possible, while other alternatives are explored.

According to John Carney who writes for The Business Insider.com, Hartford reportedly approached Christopher “Kip” Condron and Bob Kelly and both declined the top job. Christopher M. “Kip” Condron is president the CEO of AXA Financial, Inc. and a member of the AXA Group Management Board. Robert (Bob) Kelly is chairman and CEO of The Bank of New York Mellon Corporation.

And who can blame them? If I were to grade the challenge facing Hartford’s new CEO, I would use the same “degree of difficulty” scale as an Olympic diving competition. In this case, accepting leadership of the Hartford would be akin to a forward 4-1/2 somersault with, say, 3 or more twists from a 1-meter springboard. (What makes it even worse is that the water is rapidly draining out of the pool.) Which is to say, the job is so impossibly challenging that few savvy execs, it seems, are willing to dive in.

Small wonder, then, that Carney’s article goes on to state that Hartford has spoken to Morgan Stanley co-president James Gorman and former Merrill Lynch executive Bob McCann. Both, according to Carney, have reportedly declined.

So what’s wrong with the Hartford job? Nothing. That is, nothing I haven’t written about before. But for starters:

  • The company is mired in a bureaucratic culture that has concentrated on cost-cutting, restructuring and organizing.
  • At the same time Hartford has failed to expand into lucrative markets in Japan and Europe.
  • To help stabilize its sinking fortunes, Hartford accepted a $2.5 billion investment from Allianz SE.
  • Still trapped for cash and unable to peddle company subsidiaries and divisions, it has accepted $3.4 billion in TARP funds, and the draconian government straightjacket that goes with this “investment.”
  • The company has completely failed in its bedrock job of prudently pricing its life products and assessing its risk.
  • Six top executives have left the company since 2007, with heavier turnovers at lower management levels.
  • Finally, here’s a company whose stock was selling for $100 a share little more than a year ago. Now you can buy a share of Hartford for the same price as a couple of Big Macs© (but the Cokes and fries will cost you extra).

All of this is not to mention the fact that big, bad Allianz SE has its nose in the door and just might be the catalyst for the eventual sale or break up of Hartford. And what really qualified candidate will want to walk into that nightmare?

Did I say “degree of difficulty” rating? Perhaps the Richter Scale is a more apt matrix to rate this job. And in this case, the corner office of The Hartford is likely situated on a little-known Connecticut fault line with a magnitude 6.5 trembler varifiably predicted for this year and next. The only thing the new CEO can bank on is that when it hits, Connecticut (and Hartford) are unlikely to fall into the Atlantic Ocean. But if things continue as they are, Hartford may crumble anyway.

Is Hartford in a Freefall to Nowhere?

Believe it or not, it is easier for a company to achieve remarkable levels of success than it is to stop the slide down once a company reaches the pinnacle of its success. There is no in-between. Once a company stops growing, it begins to decline. It may take months, years or even decades, but in the vast majority of cases, once the decline of a successful company begins it is virtually impossible to stop before the company loses its independence or actually fails and disappears. The lesson is simple: If a company is not making history, you are history. If you don’t grow, you go!

There are almost too many examples to prove the point, but Xerox, Kodak, Polaroid, Trans World Airlines, General Motors and Chrysler are but a few that can be mentioned. Even if the companies have survived, they are clearly in a form different from their heyday of success. Consistent patterns – some obvious and some subtle – plague all companies that begin the downward slide to failure. For a successful company to avoid the slippery slide to oblivion the leaders of the company must understand, resist and overcome these signs of slide.

These identifiable patterns include:

  • The company begins to lose its competitive edge. Market and technology changes become the enemy rather than the opportunity.
  • The culture of the organization evolves from entrepreneurial to bureaucratic.
  • Company management begins to exhibit an attitude of entitlement to future success for the company.
  • The company seeks to maintain rather than attain.
  • As the future becomes uncertain, management wraps itself in the certainty of the past.

Once these patterns have taken hold and a company begins to decline, it is virtually impossible for the management that allowed the decline to begin to reverse the slide into oblivion. It becomes, as they say, inexorable.

A company in decline can easily be identified by the actions of a flailing management in an attempt to save the company. Actions such as:

  • Reorganization after restructuring after reorganization. It is as if simply moving the pieces around will change the game.
  • Cost-cutting and downsizing ad nausea. Cost-cutting and downsizing were not what caused the company to grow in the past, but a desperate management acts as if such actions are the Yellow Brick Road to future growth.
  • Switching from taking known risks to making gambles on unknowns. Gamblers always lose in the end, but managed risks are opportunities for growth.
  • Seeking to change the rules of the game to make it easier for the company to compete, i.e. changes in accounting or regulatory rules.
  • Attempting to sell off parts of the company to save the whole. When a company is in growth mode it adds to the whole. When a company is in decline it subtracts from the whole.
  • An attempt to find a “strategic partner” to prop up the company as it teeters on the brink of failure.

There are three telltale signs of a company in decline:

  • Constant, pleating protestations from management that, “everything is okay and under control.”
  • When there is wave after wave of changes in the executive suite, especially the CFO and CEO.
  • When second level management and key employees begin to desert the company.

Any number of companies could be the poster child for the ersewhile successful company that barreled down the road to potential oblivion, but none more contemporary or pertinent than Hartford Financial Group. (Even though AIG and Lehman Brothers are obvious examples of successful companies that failed, their demise was more the result of greed and search for artificial growth.)

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