How Clal Insurance Failed in Romania – and why. A fairytale gone bad where capitalism, Cinderella and Cruella de Ville meet each other.

For thousands of business men from all other the world, from the Austrian sheiks of finance & oil and up to the 2 hour weekly commuters from Bucharest to Tel Aviv, Romania struck the profit alarm of being an emerging market many years ago.

Whereas emerging markets bring significant return on investment, they also imply a higher risk that the investors have to accept in order to possibly realize the expected growth and profits. And in Romania, the real land of opportunity in the last few years, where Austrians generally have struck gold, many of the Israeli investors have yet to collect their golden egg expected to be found each morning under the pillow. Even worse, they got their arm disrupted when they woke up in 2009 and reached under the pillow searching for the above reward.

Headlines associated with this real business story of opportunity, risk, reward and failure were implacable as of April 2009:

Clal sold its Romanian insurance business for app. EUR 500,000

In our quest against economic amnesia, if we look back only 1 year before, in May 2008, we found Mr. Kaplan, the president of the entire Clal international group, expecting an investment of over EUR 50 Mio within 5 years for its Romanian wonder child, which was set-up with app. EUR 11 Mio of capital to take over the local insurance market.

So there we have Cinderella turning into Cruella de Ville in less than an year.

Let us first present the cold hard facts and numbers, and afterwards to get down and dirty beyond the glossy headlines, as this is the mission of moneywatch.ro.

• Year 2006 – The Israeli group Clal sets up an insurance subsidiary in Romania and pumps EUR 8 Mio of capital, out of which 75% was capital stock. The start-up was based on a feasibility study realized in 2005.  At year end, the company had app. 150 employees.

• Year 2007 – insurance premiums intermediated by Clal reached EUR 2 Mio.

• Year 2008 – the insurance premiums remained at app. the same EUR 2 Mio level

Q 1 2008: the Israeli General Manager is replaced with Mr. Valentin Tuca, former country-manager of the local subsidiary of Marsh (the largest international insurance broker). Also favors local middle management in place of former expat ones.

The company applies significant changes to its business model and strategy

Q 4 2008: a rebranding is performed

• Year 2009 – the company budgeted a doubling of premiums up to EUR 4 Mio.

• April 2009 – Clal exits the Romanian insurance market, licking its double-digit losses of app. EUR 11 Mio from what was expected to become a neverending fairytale.

There you have it, the entire timeline of events.

1. Year 2006 – The Golden Age of Capitalism

In 2006 many finance gurus assessed that we were witnessing the golden age of capitalism. And we all know that capitalism is the politically correct word for growth and profits. All investors were demanding growth, fabulous business plans, and were willing to accept profitability even only after a long array of years with losses until the business broke-even.

To be honest, almost everyone was reaching for growth on the expense of profitability.

The underlying principle was either greed or entrepreneurship, and the world has still to decide which was the root of all evils.

But bear in mind that we were still in an emerging market. Where, despite all economic theory, perhaps behavioral finance wins its battle here – and I mean the fabulous human distorted perception of reality:

If you build it, they will come.

This misperception worked for expensive websites, worked for the real estate bubble (teaser – our next analysis will target the real estate crash from Romania and Dubai), worked for business – if you build a business, someone will come to buy it from you later on. Everything is for sale, for the (perceived) right price.

Back to Clal, we think the company had indeed a healthy long-term strategy. It had tremendous expertise and know-how, it had financial power, it had almost everything but the Romanian business itself.

Nevertheless, another economic cold hard fact teaches us that eventually you cannot achieve profitability without growth. Especially in capital intensive industries, which require large manufacturing investments; tough luck here, as the insurance industry has extremely tight financial regulations which require significant capital spending by the shareholders, not in manufacturing equipments, but in actual company capital stock and reserves that support the company in times of crisis.

Therefore, Clal and all the other start-up insurance companies were actually watching the Forrest Gump movie. Instead of the famous “Run, Forrest, Run” they had no choice but to “Grow, Forrest, Grow”.

Before anybody could come, they had to actually build it.

And in order to build it, they acted responsibly. They made a feasibility study back in 2005.

While we could look back to the above study and think that it was done wrong, we still choose to give some credit back; taking into account our previously mentioned bias towards golden capitalism, almost anything was expected to work anywhere. And everything can be implemented successfully anywhere, IF you try hard enough.

Who knows, one might sell bio-products to the tribes from the Amazon jungle, if he tries hard enough (do not be ironic, sometimes BOTH Jesus and proper marketing can make wonders).

However, Forrest Gump did not really run in 2007. Nor Clal Romania grew fast enough to satisfy the scrutiny of Mr. Kaplan, the Group President.

Remember in our timeline the year 2008. It sent the most obvious signals that things were ugly back at the Cinderella banquet. That despite how much the frog and the Princess kissed each other, no prince showed up at the party.

2. BIG Mistake 1: The Sales Channel.

Clal expected to perform its sales through a sophisticated and skilled Call Center. The Groups’s experience showed positive results in the other countries where the Call Center strategy was implemented.

I don’t know what the feasibility study and Clal were expecting from US, the Romanians. I never knew that I was willing to insure myself other the phone. I never knew that I would favor it so soon, according to their business plan. Insurance over the phone indeed saves time, but insurance, and also lending, are based on something money can’t buy and phones fail to deliver, at least in Romania:

TRUST

It does NOT require a study to realize that Romanians (at least responsible ones), besides being reluctant to insurance, really want to trust someone that offers to cover them in case of risk. Yes, insurance by phone is cost effective, it is time saving, yes, we are very busy and want to have more free time. But also, when people choose an insurance policy, this means they have a higher financial education than the average Romanian guy. And the more financially educated Romanians have at least two things in common:

• They don’t insure over the phone
• They don’t marry other the phone

Because both involve trust and commitment.

Every time I hear a voice on the phone offering politely to add value to my wonderful life in exchange for my ugly, but very useful money, and would, guess what, want to sell me some insurance, I would have two issues:

1. The trust issue, as identified above. Business without the physical touch, contracts without the emotional trust can happen, but not here.
2. The procrastination issue – I want to insure my apartment against earthquakes since 5 months ago. I have a sample contract in my office. I have the insurer operating less than 100 m from my apartment, but it seems that I am a huge procrastinator when it comes to taking money out of my pocket.

For example, when Aviva entered the local market years ago, they faced the same problems – issues from cold calling on the phone, and lack of consumer awareness. Which led to lack of trust, which led to lack of business. Which led, fortunately for them, to a good marketing campaign.

Back to Clal, as they entered the race like a veritable Forrest Gump, they had to run, they had to grow. They replaced the expat CEO with a local one, experienced and competent. In our opinion, both CEOs were very competent people; probably the expat was a loyal soldier of Clal. He surely was good. Just as good as it is a soldier in taking an order.

But when he accepted the Romanian mandate, he was not good enough to avoid driving a car without wheels. Because if your sales process fails, all the castle crumbles. No more party, no more Cinderella fairytale. You can have the most shiny IT systems, the best trainers, the most expensive branding agency (no pun intended), you just really and effectively F*** it up (read the F*** as Fail, please).

3. Big Mistake 2: Failing once, failing twice.

If you didn’t realize until now, Clal was targeting the individual Romanian consumer. No significant corporate line of revenue.

There is nothing wrong in choosing individuals over companies. But yet again, you have to market yourself appropriately. Aggravated by the phone sales channel, the need that Romanians became aware of who was Clal and how it could add value to their life, and how they could trust Clal more was heavily underestimated.

Clal should perhaps have teamed up with Provident Financial. Except that it would have cost them some fat commissions paid to those British wise guys at Provident that have made a much better feasibility study than Clal’s. And the management directive towards

Clal was already very sensitive towards becoming operationally profitable. As healthy as it would sound in an Excel table, you still have to grow before you reach profitability. Meaning that you do operate with losses for some time. Meaning that Clal shouldn’t have been so demanding on profitability, not so soon, and not after you mess it up at the beginning. Nevertheless, while this would have brought them in front of the Romanians, (say better inside their houses), this still might not have been a good choice, taking into account that someone who cannot normally qualify for an EUR 300 loan couldn’t think less of spending on insurance.

Question: So how heavily misjudged Clal everything? From target market, to sales channel, to actual marketing?

Answer: Enough to pump up another EUR 4 Mio of monopoly money in the gamble for growth and profitability. Except that actually the gamble took place in 2006, and the strategy started here, at the beginning of 2008. And that there were no monopoly, but real money.

Therefore, Clal eventually targeted the corporate customers. To admit your business mistakes is a requirement for long term success. Clal admitted them. However, business mistakes are generally very costly. See the above EUR 4 Mio expected tab for playing with target markets. Over 25% of the costs were associated with the rebranding of the company.

So what happened next?

Mr. Valentin Tuca came over to save the local ship. This time, reality had showed Clal the actual feasibility study. They changed their sales channel, they changed their business model. No more call-center hype. They found out that I, together with most of the Romanians, we were looking for real-world insurance salesmen. They agreed to work together with the banks. They agreed to partner with New Kopel to achieve some business synergy. They left us, the small consumers, and with the help of the insurance brokers, turned towards companies.

A Fairytale Gone Really, Really Bad

They never saw it coming. As nobody was expecting Cruella de Ville in our fairytale.

Who did, actually?

But the world crisis came and hit the legs of the Clal Giant, which announced for 2008 losses equal to the profits achieved in 2007.

We could actually blame less the management, and more the shareholders from the entire financial and economic world. While management compensation is generally linked to business growth, every shareholder back in 2006 was demanding growth and returns and stock appreciation. But this is the subject to another article; bottom-line is that before Q 4 2008 Clal was still confident in pumping money in Romania. I don’t know how much they succeeded to spend from the added 4 Mio tab.

…

…

Guess what, again? Somehow, somewhere, the money pump was gone.

Nobody could insure himself against the disappearance of the money pump, that’s for sure.

The golden age of capitalism went into rust.

And the Romanian child of Clal had no more time to recover itself from the ashes of starting on the wrong foot in the right race.

Nobody ever came to inquire about Clal, about growth, about EBITDA. Especially as Clal was not even built yet.

Faced with supplementary capital requirements under the Romanian regulations, and with no money pump, not to mention any golden eggs to be harvested each morning, Clal made the right choice this time.

Unfortunately, in terms of odds, the right choice was also the only choice they had.

They had to exit, they had to leave. And in terms of opportunity costs, they actually saved money.

But they saved some money only after loosing a whole lot of them.

Further traps for future investors:

• The level of financial intermediation in Romania is still very low when compared to EU
• An increase in the level of financial education of the Romanian consumers is expected
• Growth expectations for the insurance industry remain strong. But this is after the crisis, of course.

A fairytale in the insurance business is still expected after the current economic crisis. But, as we have seen here, it will last only until the next one.

Thank you for trusting us with the time you read this article.

See you next week.

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