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The Hartford's David Johnson

The company's stock price has jumped nearly 50 percent since 2001 — an increase attributable, in some part, to its CFO's good sense and financial rigor.
John Goff, CFO Magazine
February 1, 2007

Examine the career of David Johnson and you begin to think that timing may not be his strong suit. In 1998, the former Merrill Lynch investment banker signed on at Cendant Corp., a company he had helped take public years earlier. Within months, Cendant was engulfed in a massive financial scandal (due to its previous merger with CUC International, a company Johnson says "turned out to be run by criminals"). In 2001, Johnson was hired as CFO at The Hartford Financial Services Group. That same year, the 9/11 terrorist attacks triggered huge losses in the insurance and equity markets. Since then, the insurance industry has been rocked by several catastrophic, capital-draining storms and a series of ugly scandals. Despite the damage to the company's reputation, The Hartford's management team has succeeded in turning in a solid performance over the past five years. Since 2001, core earnings (per diluted share) have increased at a 13 percent compounded annual rate. More gratifying to shareholders, The Hartford's stock price has jumped nearly 50 percent during that time — an increase attributable, in some part, to its CFO's good sense and financial rigor.

What did you learn from your time at Cendant?
When I joined in April 1998 I was in charge of investor relations [IR], treasury, and tax. So I was focused on some of the things that are most important in a time of crisis — liquidity and communications. In some ways, those two things are linked. To maintain liquidity, you draw on reservoirs of goodwill and strong communications lines, strong relationships.

IR was extremely active. I'd come back to the office and the call sheet would be 20 pages long — and I'd only been away four hours. Sixty percent of what I know about investor relations I learned in that six months [before being promoted to CFO]. It was a crucible of intense learning.

The insurance industry has had its own scandals, its own problems of late. Yet profits at The Hartford keep rising. What's behind this performance?
When I first arrived at this company, I called a buy-side analyst for the industry and asked him what one thing I should know as the chief financial officer of an insurance company. His reply was: "It's a volatile industry. Accept that, embrace it, and don't try to hide it." Well, the way we deal with volatility is diversification. We're one of the few true multiline insurance carriers left in the United States. That's helped us deliver strong performance even when individual parts of our enterprise have faced setbacks.

There's also a tremendous amount of experience here. We've seen so many companies go down around us that we've learned and internalized many hard lessons — where you don't go, what to avoid, when you have to pull back. Fifty percent of success in insurance is not failing.

Speaking of not failing, is there any simple advice you can give to CFOs about how they should approach enterprise risk management?
One thing is to look at your pain point. That is, what thing do you need to be calculating to determine what is going to knock your enterprise down first. For an insurance company, it's not cash or liquidity, it's our statutory/regulatory capital. That is our pain point. For most companies, the pain point will be cash. For some companies it will be reputation. For those companies in regulated industries, it will be a metric that matters to regulators.

But if you're going to invest in the highest level of risk management, in the complex modeling and analytical work that's sometimes required, invest where it matters. You have to really think deeply about what will be the first thing in line to knock your enterprise off. It could prove to be something that's second, third, or fourth in line, but if the first one gets you, it doesn't really matter about the other three.

Is there any risk that companies tend to overlook?
Well, an investment in workers' compensation will always yield returns. It will probably decrease the frequency and severity of events. But it's difficult to get an immediate lift in terms of a premium reduction, so people probably underinvest in this area because it's hard to see it. And frankly, the way we calculate P&Ls at companies doesn't immediately reward somebody for looking at long-term benefits.

I'm guessing it can be difficult to convince some managers to take a big-picture view of risk management.
It is difficult to know the right level of investment and the right risk-reward trade-off in that investment. A lot of businesses have a fixed budget for insurance and then go out and get what insurance they can for it. You see people taking relatively big swings in their risk appetite to maintain a budget for insurance and loss control. Typically, they will have a choice on some coverage, so they will take relatively more risk in property because that's a voluntary coverage in their fixed budget. At a small or midsize business, that is often what you face.

Insurers have to make similar decisions — what types of coverage they'll underwrite and so forth. These days you hear a lot about catastrophic losses due to storms. Is that a big risk factor for the industry?
Almost all of the issues of catastrophic losses today are due to the fact that we're richer as a society and so much of that wealth is concentrated in coastal and other exposed areas. But yes, if the severity and frequency of events increase, it is an issue that the insurance industry can — and must — respond to. The industry is relatively better positioned to respond to [these events] because our capital is mobile.


Except to the extent that we're not allowed to by regulation, we can respond just by repricing, by reframing our risk appetite. And capital will emerge to handle it — if we're allowed to put the appropriate pricing on it. That's what we do for a living.




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