Exclusive Memoir

In Memoriam: Liam McGee

Recalling the turnaround at The Hartford, in his own words.
By: | July 1, 2015 • 12 min read
Liam McGee CEo The Hartford

Part One of an exclusive two-part memoir written before McGee’s untimely death in February.

In the wake of the Great Recession, it’s tempting to think that the surviving banks and other financial service companies have gotten a severe wake-up call.

Surely they’ve become very different companies now. They must have overhauled their controls and their strategies to prevent themselves from carrying so much risk in the future.

I’m hopeful that things have changed, but my own experiences have sobered me on this point. Organizational overhaul is possible, but it is difficult.

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When I became CEO of The Hartford in October 2009, soon after the company nearly collapsed, I was struck by the organization’s resistance to major change. I didn’t find a sense of urgency.

We ultimately succeeded in restoring the company’s strength, and it is now well positioned for future growth. But it was much more challenging than I expected.

Good Intentions Gone Bad

Founded in 1810, The Hartford Financial Services Group was one of the largest property and casualty insurers in the United States in the 1990s. That’s when the managers in the company’s small life insurance business started offering variable annuities.

Let’s start with how The Hartford got in such a mess.

Their initial success in this new product category led to a major push, to the point where the company became an industry leader and a stock market darling. But as the annuity marketplace became crowded, the company tried to maintain its growth with riskier products and expansion to overseas markets, supported in turn by a riskier investment portfolio.

The financial crisis of 2008 brought this all to an end, and the stock price fell from $100 all the way to the low single digits. Only a $3.4 billion capital infusion from the federal government’s Troubled Asset Relief Program, coupled with $2.5 billion in crisis capital from the big European insurer Allianz, kept the company going.

From the outside, the turnaround of The Hartford might look pretty simple. In the short term, we got a lift from the recovery in the financial markets.

We also had a successful capital raise in March 2010. That allowed us to pay off TARP and gain breathing room to work on the underlying problem. (We paid off Allianz a year later.)

We then determined that the company’s balance sheet was simply not big enough to absorb the risk in the annuity business, so we stopped issuing new policies. The remaining life-related activities were not strong enough to survive on their own, so we sold those off to better-capitalized companies that specialized in those areas.

We refocused around our historic expertise in property and casualty insurance, which had languished during the run-up in annuities. The company is now in a solid capital position, with much better risk-management capabilities and a more collaborative senior executive team. It’s poised for sustained growth.

Rule of thumb: Financial services firms are just not equipped to handle revenues rising much faster than the rate of GDP growth.

Like other financial services companies that sank in 2008, however, the story is more complicated. Let’s start with how The Hartford got in such a mess.

It had lots of smart, talented people who understood risk. The people in variable annuities started off doing just what they were supposed to do: exploring opportunities. When the product became a hit, they understandably built up a process to ramp up sales domestically.

Then they went overseas, including a decision to enter Japan without hedging the currency risk. Executives in headquarters, delighted at the profitable growth, encouraged them, while investors cheered.

Prompted by The Hartford’s successes, competitors entered the markets and offered even riskier annuity products. It was the same story that played out elsewhere in the run-up to the financial crisis, with subprime lending, collateralized debt obligations and other financial innovations that got out of hand.

Liam McGee CEO of The Hartford 2009-2014

Liam McGee
CEO of The Hartford
2009-2014

Soon, the company was growing faster than it could add infrastructure to support the added size. It didn’t keep up with risk management and technology platforms in the life business, because all the spare capital went directly into new annuity programs.

Rule of thumb: Financial services firms are just not equipped to handle revenues rising much faster than the rate of GDP growth.

The complexity was the biggest challenge, as The Hartford was suddenly a multi-line business, not a P&C-dominated company with a few smaller operations.

Each division was watching over its own risk in the narrow sense, but management did not develop a strong risk management function at the corporate level. It couldn’t aggregate the risks from the separate divisions.

Meanwhile the rapid growth in the company’s annuity and other life businesses meant that the company had to build up its investment portfolio quickly. It had a lot of liquidity to invest.

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But the investment management division’s incentives were geared to maximize return, not to balance risk versus reward. The division lacked the tools to properly assess the risk it was taking or to see how it correlated to risks embedded in the annuity products that were being sold.

Like a sales force rewarded for gross revenue, not profitability, the managers didn’t fully factor risk into their investments. As a result, like many investors, they went after riskier assets, especially securities backed by commercial and residential real estate — right before the real estate market crashed.

The Hartford’s organization was inevitably influenced by the mood in financial services generally. People were dazzled by complex new packages of securities that managed risk in creative new ways. So the real estate bubble didn’t bother The Hartford’s executives as much as it should have. They tolerated more risk than they would have otherwise.

When one of your businesses is thriving, it’s hard for anyone at headquarters to tell it what to do.

Still, there were certainly smart people who understood that The Hartford had bitten off more than it could chew. In 2007, the company decided not to match competitors that were adding even riskier elements to their variable annuities. And well before the crash, some executives were urging the company to cease selling annuities or to sell the life business to a better-capitalized rival.

But decisions were deferred by leaders who understandably couldn’t give up on the money machine. When the company finally accepted the seriousness of the situation, the economy tanked.

It’s easy to blame headquarters for failing to assess risk at the corporate level. But you have to remember that throughout its history, The Hartford had had a fairly narrow product line.

When one of your businesses is growing fast, you want to put your resources first into supporting that business directly. That leaves less time and energy to put into setting up new resources at the corporate level. Assessing aggregate risk is a complex undertaking that requires sophisticated tools and staff.

It’s a political as well as a resource challenge. When one of your businesses is thriving, it’s hard for anyone at headquarters to tell it what to do. And traditionally, the business unit CFOs had much more power than their corporate counterpart, who was more of an adviser than a boss.

After all, even larger insurance companies had trouble understanding their risk as they diversified. When AIG got in trouble in 2008 because of its complex financial products, regulators struggled to capture the total risk and calculate how much capital the company needed to regain its footing.

For headquarters, allowing a successful product line to keep expanding is one kind of decision, a pretty easy one. But reining in that same product line because of risk on the corporate level is a much harder decision that inevitably invites pushback from the managers whose bonuses depend on the business.

Insurance involves long time horizons, so people like to deliberate and study a problem carefully. You can always find a relevant issue to justify a delay. Combine that with a headquarters staff less powerful than the businesses it’s supposed to oversee, and you inevitably end up with a kind of “states-rights” mentality that refrains from making tough calls.

Don’t Assume You Have a Burning Platform

Turnarounds may be tough, the thinking goes, but at least people will be open to changes. They know their company is in trouble, so you’ll get less of the political resistance you usually find when you push a major initiative.

That’s certainly what I thought. When I was offered the CEO position in September 2009, the company was in such bad shape that I almost didn’t accept.

Even with the TARP bailout to cover some of the toxic assets and buy some time, I worried that the unprofitable annuity policies, especially in Japan, would destroy the company’s insurance ratings and therefore its ability to compete.

The problems were so severe, and so clear to me from the outside, that I assumed the organization shared my anxiety. I had very little background in insurance, so I figured I got the job because the directors wanted a fresh start. At least I would have a burning platform.

Boy was I wrong. Many senior executives didn’t think things were so bad. They blamed the troubles on the deep recession coupled with some excesses in variable annuities. Now that they had the TARP and Allianz money, they figured they needed to make only incremental changes and just ride out the inevitable economic recovery.

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After all, they had had such an impressive run of profitable growth until 2007. It was hard to give that up and fashion a new strategy. At a minimum, they argued, difficult decisions should be deferred to give the economy time to improve and rectify our situation.

The company’s siloed structure also kept people from seeing the big picture. Executives could focus on their individual product lines and customer bases, rather than the macro financials.

At the same time, the size of the overall company insulated them from threats in the marketplace. How could a big, 200-year-old institution like The Hartford really be in dire straits?

People weren’t outright opposed to changing the strategy. I found several plans filed away when I arrived. Almost every kind of move had been looked into. But I still remember those early meetings, where we would talk for hours about a change. And then people would want to go back and study the issue further. I wanted to move forward, but the organization didn’t share the same urgency.

Start Changing Everything

The first thing I did was to focus on the immediate challenge: boosting our capital levels in order to withstand the continuing volatility in the market. As an insurer, we had strict rules in place to protect policyholders. Once we were able to raise capital, in March 2010, I was eager to focus on the strategic issues.

We formulated a rough strategy as follows. We wanted to be in businesses with growth prospects, where we could invest and increase profits. But these businesses had to generate capital over time, not consume capital. And third, they had to lower the overall market volatility for the firm.

Which businesses should we sell, in what kind of package, and when? We needed to find a buyer at a good price. And how were we going to unload the Japan albatross?

By those standards, the life business didn’t make sense. The only way we could make the credible guarantees we needed for a competitive annuity business was through a much bigger boost in our capital ratios. That wasn’t going to happen.

The annuities really belonged in the hands of a scale player. As for individual life insurance and other products in the life division, we didn’t have a strong enough market position to expect much growth. The annuities really dominated the division.

Meanwhile, we still had a core competency in property and casualty. Parts of that business had atrophied because the company had put most of its available capital into the annuities business, but it was still performing reasonably well with a strong market position. It also came with ancillary businesses in employee benefits. So we formulated a clear strategy to return to the company’s historic focus on property and casualty.

I was eager to move forward, but we couldn’t, for two reasons. First, like most financial services companies in multiple businesses, the company’s position was so complex and market-dependent that the structure couldn’t change quickly.

Which businesses should we sell, in what kind of package, and when? We needed to find a buyer at a good price. And how were we going to unload the Japan albatross?

Second, I didn’t think the existing senior team was capable of such a major shift. They had just gotten too used to the old ways, and would have difficulty with major changes.

So we set the overall direction, but we couldn’t carry it out immediately. We were also hoping to get some short-term benefit from the “green shoots” of economic recovery that people were talking about in early 2010. Our mix of businesses wouldn’t work in the long term, but in the short term they could improve their numbers and get us a better purchase price down the road.

Meanwhile, I realized we needed to get to work overhauling the company’s culture. We needed to make the company more decisive, and make people think outside their own silos.

That latter point really came home to me when all the senior managers in the company got together to discuss the big issues. It seemed an obvious thing for a Fortune 100 company to do. But it turns out they never did.

When we held our first gathering of the top 50 or so executives, most of them didn’t understand the point of it all. Many had never met their counterparts in different business lines. “What did all of this corporate talk have to do with me?”

To get everyone focused on the whole company, we launched the “One Hartford” campaign. Executive bonuses got flipped around so people couldn’t get big payouts unless the company as a whole prospered. Division-level results still mattered, but the priorities were clear.

Without that foundation, people wouldn’t be willing to speak out on problems that affected The Hartford as a whole. We wouldn’t get the support we needed for carrying out the new strategy. We might still be able to restructure the company, but it would fall into the same kind of trap in the next recession.

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We also developed significant risk management capabilities. The board established a risk committee composed of all the directors, and it convened at each quarterly board meeting. I established a chief risk officer position, reporting directly to me as CEO.

Working through an internal committee of all our senior leaders, the CRO, CFO and I established credit, market and other risk tolerances, and presented scorecards on each at every board meeting. We now understood the risks in each of our businesses and in our investment portfolio, and how those risks correlated.

Part Two of Liam McGee’s account of turning around The Hartford will be published online by Risk & Insurance on Wednesday, July 15.

Liam McGee led The Hartford from 2009 through 2014. He passed away in February, 2015.
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Insurance Industry

Flood Modeling: A Key Property Market Challenge

Modeling will make the market, experts at a New York industry event said.
By: | June 9, 2015 • 4 min read
L'alluvione di Genova

Capacity awaits for when flood can be more adequately modeled.

As if putting a neat bow on all the major themes of the Advisen Property Insights Conference June 4 in New York, Robert Schimek, senior vice president and CEO Americas said that “within the next few weeks, AIG will announce a new risk management center of excellence in association with a major university that will be centered on engineering and technology.”

Robert Schimek, senior vice president and CEO Americas

Robert Schimek, senior vice president and CEO Americas, AIG

Although the event had its usual depth and breadth, each panel and speaker seemed to focus on different perspectives of the same essential concepts: Big data and third-party capital markets are forcing an industry that has historically sought more information and funding to restructure itself to be able to manage surpluses of both.

The AIG center is expected to provide insight on how to do that. No further details were available from the company at press time.

“There are billions of alternative-capital dollars on the sidelines just waiting to get in,” said Cory Anger, managing director of GC Securities and global head of ILS origination and structuring at Guy Carpenter.

“Just 1 percent of the pension funds is about the current size of the reinsurance market today. And that does not even count sovereign wealth funds and family offices.”

She also noted that this looming capital is becoming available at a time when several markets are in need of fresh capacity. The flood market in particular, Anger cited, “has a huge under-funded problem. We are at a very big turning point in how we deal with this. It is a sea shift as rate adequacy is moving up slowly. We are seeing increased privatization of risk that had been centralized.”

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While that might seem like an unmitigated blessing, Advisen CEO Bill Keogh, moderator of the CEO panel that closed the conference, asked the panel if reinsurance was still viable in the face of burgeoning alternative capital, and if property catastrophe margins were gone forever. Both unintended consequences.

Byron Ehrhart, CEO of Aon Benfield Americas and chairman of Aon Securities, assured the packed room that “reinsurance is still viable and is becoming more competitive.”

And Anger, of GC Securities, offered hope that “prop cat margins can get to where baseline pricing is more reliable so it can be depended on as a source of revenue.”

As with big money, big data is both a boon and a burden. “Analytics is exciting stuff,” said Thomas Lawson, president and CEO of FM Global.

“But we have been collecting data for 180 years and we know that the strength of your model is only as good as your data. And your data is only as good as your premise.”

Lawson also made a point of addressing a concern that several large owners had raised throughout the conference: the reluctance of underwriters to pay property claims in cases when the damage could be traced to some type of cyber threat, or to write coverage for data and systems.

One reason for that reluctance is that cyber security remains difficult to evaluate in traditional underwriting. So just as a theft claim would not be honored if a door were left unlocked, some carriers have been unwilling to pay for cyber losses if proper safeguards were not in use.

“You can’t keep people out of your system. But you can know when they get in, and have ways to get them out.” — Thomas Lawson, president and CEO of FM Global

“We have known that data is property for some time,” said Lawson.

“A loss is a loss, loss of data, or denial of service. The same as if a gas turbine explodes because of a virus or because of a mechanical failure.”

On cyber security Lawson added, “the current mentality is that you can’t keep people out of your system. But you can know when they get in, and have ways to get them out.”

Taking an active role, Schimek said that AIG has been investing in new capabilities to provide insights on dark networks and insureds’ vendor networks.

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“There is a real risk to physical property from a cyber attack.” Far from being a problem, he exhorted, “this is a great opportunity for the industry.”

The idea of a broader opportunity was another theme in the conference, established early by Paul VanderMarck, head of strategy and partner development for RMS, in his keynote address.

“Models make markets,” was the catchphrase of his remarks. He elaborated that the flood market in the United States “is a well known peril, but is nowhere near fully covered because it is one of the most complex perils to model. We have made much more progress in earthquake.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]
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Sponsored Content by AIG

Preparing for and Navigating the Claims Process

Be clear on what your organization's policy does and does not cover before you need it.
By: | July 1, 2015 • 5 min read
SponsoredContent_AIG

All of a sudden – it happens.  The huge explosion in the plant.  The executive scandal that leads the evening news.  The discovery that one of your company’s leading products has led to multiple consumer deaths due to a previously undiscovered fault in its design.  Your business and its reputation, along with your own, are on the line.  You had hoped this day would never come, but it’s time to file a major claim.

Is your company ready?  Do you know – for certain – how you would proceed, both internally with your own employees, and externally, with your insurance provider?  What data will you need to provide, and how quickly can you pull it together?  Do you know – and understand – the exacting wording of your policy?  Are you sure you are covered for this type of incident?  And even if you are a multinational with a global policy, how old is it, and is your coverage in concert with any recent changes in the laws of the country and local jurisdiction in which the incident occurred?

As should be clear from these few questions, if you organization is hit with a major event and you need to make a claim, just knowing that you are current with your premium payments is not enough.  Preparation before the event ever occurs, strong relationships with your insurance team, and a thorough understanding of what needs to happen throughout the claims process are all essential to reaching a satisfactory claim settlement quickly, so that a long business disruption and further damage are avoided.

Get Ready before Disaster Strikes

SponsoredContent_AIGThe Boy Scout motto, “Be prepared,” applies equally well to organizations that may suddenly be faced with the need to navigate the complexities of the claim process – especially for large claims following a major crisis.  Crises are by nature emotional events.  Taking the following steps ahead of time, before disaster strikes, will help avoid the sense of paralysis and tunnel vision that often follows in their wake.

Open up a dialogue with your insurer – today.

For risk managers and others who will be called upon to interface with your insurer in the event of a crisis, establishing open and honest lines of communication now will save trouble and time in the claims process.  Regular communication with your insurance team and keeping them up to date on recent developments in your organization, business and manufacturing processes, etc., will provide them with a better understanding of your risk profile and make it easier to explain what has happened, and why, in the event you ever have to file.  It will also help in the process of updating and refining the wording in existing policies to reflect important changes that may impact a future claim.

Conduct pre-loss workshops to stress-test your readiness to handle a major loss.

Firefighters conduct frequent drills to ensure their teams know what to do when confronted with different types of emergencies.  Commercial airline pilots do the same.  Your organization should be no different.  Thinking through potential loss scenarios and conducting workshops around them will help you identify where the gaps are – in personnel, reporting structures, contact lists, data maintenance, etc., before a real crisis occurs.  If at all possible, you should include your insurance team and broker (if you have one) in these workshops.  This will not only help cement important relationships, but it will also serve to further educate them about your organization and on what you will need from them in a crisis; and vice versa.  The value to your organization can be significant, because your risk management team will not be starting from zero when you have to make a claim.  Knowing what to do first, whom to call at your insurer, what data they will need to begin the claims process, etc. – all of this will save time and help get you on the road to a settlement much more quickly.

Know what your policy covers, before you need it.

SponsoredContent_AIGThis advice may sound obvious, but experience has shown that all too often, companies are not aware, in detail, of what their policies cover and don’t cover.  As Noona Barlow, AIG head of financial lines claims Europe has noted, particularly in the case of small to mid-size organizations, “it is amazing how often directors and risk managers don’t actually know what their policy covers them for.”   This can have dire consequences.  In the case of D & O insurance, for example, even a “global” policy many not cover all situations, because in some countries, companies are not allowed to indemnify their directors.  Obviously, these kinds of facts are important to know before rather than after an incident occurs.  So it is important to have an insurer with both a broad and deep understanding of local laws and regulations wherever you have exposure, in addition to an understanding of the technical details of working through the claims process.

Make sure your data management policies are in order.

Successful risk management depends on having consistent, high-quality data on all of your risk-sensitive operations (manufacturing, procurement, shipping, etc.), so that you can quantify where the greatest risks sit in the organization and take steps to reduce them.  Good data, complemented by strong analytics, will also help you to identify potential problems before they occur.  It will also help you to maximize the effectiveness of your insurance purchasing decisions.  Frequent, detailed conversations with your insurer will help you to identify any areas where additional data might be needed in the event of a crisis.

No one ever wants to find themselves in the midst of a crisis.  But if and when such an event does strike, if you have taken the steps above you will be much better positioned to work through the claims process – and reach an effective resolution – as quickly and as smoothly as possible.

For more information, please visit the AIG Knowledge and Insights Center.

This article was produced by AIG and not the Risk & Insurance® editorial team.



AIG is a leading international insurance organization serving customers in more than 100 countries.
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