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By CYRIL TUOHY, managing editor of Risk & Insurance®

For The Hartford Financial Services Group Inc., one of the oldest surviving independent insurance companies in the United States, the last two years have tested its mettle.

"During the last two years, I've spent some time playing defense along with my teammates," said Gary Thompson, executive vice president and chief underwriting officer for The Hartford's commercial markets unit. "Quite frankly, it has given me an even better appreciation of the game, so to speak. That said, I wouldn't want to go through it again, but having gotten through it, it was actually very fulfilling."

Sounds like someone who is an eternal optimist, or supremely confident, or a glutton for market challenges.

The Hartford, having survived to mark 200 years in business in May, has elements of all three.

Lest one forget, this is .. an insurer whose president rode in a horse-drawn carriage through a snowstorm from Hartford to New York to ensure claims would be paid in the 1835 fire of Comstock & Andrews .. an insurer that covered property belonging to Abraham Lincoln and Robert E. Lee ... an insurer that paid $2 million in claims in the 1871 Chicago fire ... an insurer that paid $11.6 million in claims to make whole victims of the 1906 San Francisco earthquake ... an insurer that learned a lesson about risk concentrations on Sept. 11, 2001 ... and an insurer that has learned to deal with long-tail asbestos claims from business written during the 1940s and 1950s.

Now, strapped in the saddle to lead the company into its third century, sits Chairman, President and CEO Liam E. McGee, who last year replaced Ayer. Following a top-down review of the company's assets, one of McGee's primary goals for The Hartford is to build on its commercial middle and small-business market strengths.

"The middle market is a good sweet spot for them," said Paul Bauer, vice president and senior credit officer with Moody's. "The customer is large enough for them to take advantage of economies of scale, but it's not quite as competitive as the large commercial lines."

From the inside looking out, aligning The Hartford's many siloed units seems daunting. From the outside looking in, McGee and his lieutenants are in an enviable position.

The company already sells insurance to one in six businesses in the United States, and the phalanx of agents and brokers selling property/casualty and benefits on behalf of The Hartford is 18,000 strong.

That doesn't include the affinity partnerships the company has with some of the most profitable groups in the United States, such as AARP, for example, where premium growth is three times the market average.

Nor should competitors overlook the built-in opportunity from having 20 percent of commercial clients with business owners who belong to the affluent class of consumers; that's an $18 billion market ripe for The Hartford's portfolio of annuities, mutual funds, individual life and retirement products.

Of the roughly 6 million businesses in the United States, The Hartford does business in one way or another with 1 million of them, which means The Hartford's commercial client portfolio is one of the broadest of any insurance company in the nation. That's even before factoring in its 18 million consumer customers.

Ironically, though, because of the extreme fragmentation in the middle and small-business market, no carrier has more than a 5 percent market share in any product segment, and that means a golden opportunity for The Hartford to deepen its existing relationships with a clientele that is more powerful, wealthier and more sophisticated than it used to be.

"The way we're thinking about the business owner is as one customer with multiple needs," said Mike Concannon, executive vice president of sales and distribution for The Hartford. "We're thinking about how we can best serve that business owner by taking a holistic approach to addressing their needs rather than focus on a single product."

Commercial insurance buyers large and small, of course, will be the judge of that.

In the meantime, though, The Hartford's managers are excited about what's to come.

At the company's booth at the annual conference of the Risk and Insurance Management Society Inc. in Boston in late April, the feeling of renewal was palpable. Among managers and employees, "there's a spring in our step," and "we have a lot of wind at our back," Thompson said, as the company moves ahead with new strategies.

Massive losses are shrinking quickly, from $13.9 billion in net unrealized losses on March 31, 2009, down to $3.2 billion on March 31 this year, as management makes haste to "de-risk" the company's investment portfolios, said Christopher Swift, executive vice president and chief financial officer.

And profits are back. From the shocking $1.2 billion net loss registered in the first quarter of 2009, the company reported a gain of $319 million in the first quarter of this year. In March, the company said that it had repaid its U.S. Treasury loan under the Troubled Assets Relief Program (TARP).

For all the times The Hartford stood by policyholders in the last 200 years, the time had come for policyholders to reciprocate and stand by the stag, the iconic logo the company has used for 135 years.

"I didn't realize just how good and how tough we were as a company, and the full depth of the reservoir of goodwill we had with most of our agents, brokers and end-buyers," Thompson said. "We tapped into it a bit, but we did not even come close to draining it by any means."

REBUILDING FROM MIDDLE

An important part of McGee's reorganization plan has moved group life and disability, and commercial property/casualty under one roof, the commercial markets group.

Gone is the traditional silo approach of selling property/casualty products to one set of customers, and life and retirement products to a different set of customers.

The Hartford now has three "customer-centric" units, roughly defined as consumer risk protection for affinity groups, risk protection and benefits for business, and wealth management. It's an approach that Bauer called more "evolutionary than revolutionary."

The key is to approach the market from the perspective of the customer not the product, though the goal is to sell more than one product to the same buyer.

Middle-market risk managers are serious buyers with a ton of spending power. They represent companies with at least $15 million in annual sales generated from multiple locations in different states, and they pay The Hartford anywhere from $50,000 to $2 million a year in premiums.

Middle-market buyers have a lot more clout, and are more demanding, than at any time in the past, Thompson said. "Today's buyers are less willing to accept a general answer," he said. "They want a specific answer. They want 24/7 responsiveness."

Thus the introduction last year of Hartford Productivity Advantage, which integrates the insurer's short- and long-term group disability and workers' compensation with its leave management administration services.

"If you're a midsize buyer in particular, you're faced with understanding what is required (by the government), being in compliance with regulations, capturing the data and having to report in an accurate and timely manner," Thompson said.

Productivity Advantage, designed to manage and track occupational and nonoccupational absences, is off to a good start, Thompson said. "We're already cross-quoting the group benefits and workers' comp for large accounts, and we expect to be doing it soon in the midsize account space." Productivity Advantage could do for the middle market what the carrier's Spectrum product did for the small-business clientele--create demand across different categories.

Analyst Brian C. Schneider, senior director, insurance, for Fitch Ratings in Chicago, said the recent changes in management and strategy indicate the carrier is in the property/casualty market for the long haul. "They are staying in that market and even more so with middle market and the small business," Schneider said.

Spectrum, a property and liability line targeted at small-business owners, has also been revamped, and Thompson said the company has "high hopes" for Spectrum's latest, more flexible iteration.

"There are a lot of new data and analytics variables, and we've been able to price accounts with greater precision, which improves our competitiveness in the marketplace," Thompson said. The data allows the company to determine what coverage can be written as a business owners policy, he said. With more than a million small-business policies in force, The Hartford can achieve efficiencies of scale not possible in the past.

How much of an effect the changes at The Hartford will actually have on the bottom line and the customer experience remains to be seen.

Analysts are more circumspect. "The Hartford is still selling all the same products, and the way they are sold will stay the same," Bauer said. "The number of products may change somewhat, but the basic products remain the same and the company standing behind those products is still there."

Whether selling to the middle market or small-business buyer, McGee's cross-selling strategy is going to be put to the test, not by the ability of The Hartford to offer different products to customers, but by the behavior of customers themselves.

Customers are happy buying their property/casualty coverage from P/C insurers, and their life and retirement products from entirely different companies, Bauer said. "It makes sense for The Hartford to try to do that, but they are going up against some pretty established customer behavior so it's going to be interesting to see how it turns out."

Skeptics of cross-selling also point to the limited success with which banks have had selling insurance to depositors, and the checkered success of selling banking products to insurance policyholders.

A soft market also means it's going to be hard to evaluate whether the cross-selling strategy stands up on its own merit. "It's a difficult time to be coming out with a new type of strategy," Schneider said.

The Hartford, however, is no superregional bank. It's far more. Outside of banking products and healthcare coverage, the carrier can address 85 percent of the needs of business owners. McGee, no less, is a former Bank of America executive and no stranger to the banking industry's challenges with cross-selling. Nor is the company engaged in the traditional cross-selling model. The company is instead developing what it calls a "joint sales approach," in which product experts pair up with brokers as opposed to using a "sales generalist approach."

The difficult economy has helped raise the expectations among buyers for carriers and brokers, Concannon said. "It goes beyond just pricing, though, to buyers really understanding the complete value they're getting," Concannon said.

With the company's top 10 market share position across the group life and disability, middle market and small business property/casualty, and small business 401(k) markets, McGee's cross-selling gambit is worth considering.

Add to that The Hartford's No. 1 brand recognition among middle-market property/casualty customers, its top-five brand recognition with small-business customers in the property/casualty, benefits and retirement space, and its No. 2 brand recognition among agents and brokers selling life and disability and property/casualty products to the middle-market and small-business segments. Suddenly, betting against McGee's cross-selling strategy looks more like a fool's errand.

So far, buyers have responded well to the changes, The Hartford executives said. Commercial market property/casualty renewal pricing at the end of the first quarter was positive for the first time in six years, McGee said. The group benefits unit also continues to emphasize pricing discipline, even as the soft pricing environment makes it tough.

First-quarter policy retentions were up 4 percent over the prior-year period. Employer group benefits products in force "remains solid" at 91.7 percent, McGee said in the insurer's public financial filings.

First-quarter property/casualty commercial markets' combined ratio, excluding catastrophe losses and prior-year development, was 92.8 due to strong results in small commercial and specialty lines, up slightly from the 91.9 in the year-earlier period, the company reported.

For now, small-business and middle-market policyholders, voting with their wallets, appear to have given The Hartford and McGee a vote of confidence as they "stick with the stag" and renew their policies.

Staggering across the finish line at the end of its second century, deeply wounded by the mortgage meltdown, the insurance carrier is off on a trot at the dawn of its third century.

"Their focus on the middle market shows the company is focusing on their strengths, and to the extent that they are focusing on their strengths, that's a good thing," Moody's Bauer said.

October 15, 2010

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