Step 1: Save a 204-year-old financial icon. Step 2: Bow out gracefully
The day Liam McGee took charge at Hartford Financial Services Group—Oct. 1, 2009—he was facing one of the toughest rescue operations in the annals of the financial crisis. The job was to save a venerable institution that was then just a year from its 200th anniversary. The Hartford (HIG) had helped finance the Golden Gate Bridge and the Hoover Dam; it had contracted to pay benefits to Babe Ruth if the Sultan of Swat were sidelined by illness. It was a history reflected in the company’s baronial lobby—the one that McGee often walked past to reach the CEO suite. There on the wall was a framed homeowner’s policy that the company had issued to Abraham Lincoln in 1861. The annual premium? A prodigious $24.
On McGee’s arrival, The Hartford itself was in danger of becoming a fusty heirloom. Just four months earlier, it had been on the brink of demise, surviving only after taking a $3.4 billion bailout from the Troubled Asset Relief Program. The company was reeling from a loss of $2.7 billion in 2008. Its stock price had cratered 75% from its 2007 peak. And it was stuck with paying its customers far more return on their annuities than its tattered investment portfolio, packed with toxic real estate securities, could earn.
Over the next nearly five years, McGee repaid TARP, rebuilt the gutted balance sheet, and reconfigured its investment portfolio. That allowed the company to concentrate on what it had—for numerous decades at least—done very well: writing steady, highly profitable policies for America’s storefront bakeries, dentists’ offices, and other businesses. Now, earnings are running at around $2 billion a year and trending toward the mid-2000s peak. “It was one of the least-heralded but most outstanding turnarounds, against stiff odds, in financial services,” says Marc Feigen, a consultant who has counseled many prominent CEOs and who advised McGee on how to address thorny management issues in his first months at the helm.
On June 9, McGee’s remarkable tenure ended unexpectedly when he announced his resignation as CEO and president.
McGee, who will continue on as chairman until the annual shareholder’s meeting next spring, says he chose to depart his main management role early, at the age of 59, due to a medical condition. In January 2013, The Hartford announced that McGee had surgery for the removal of a brain tumor found during a routine checkup, and that he was cancer-free. But McGee, who before joining The Hartford was president of global consumer and small business banking at Bank of America (BAC), recently underwent a second procedure. He declines to discuss the details, but it’s clear that the follow-up treatments are tiring. “Sure, part of it was health,” McGee told Fortune in a phone interview the day of the announcement. “But it’s also because the financial turnaround was largely complete. These years have been an adrenalin rush for me.”
The new CEO is McGee’s first major hire, Christopher Swift, 53, a former accountant and top executive at rival AIG (AIG). Swift, unlike ex-banker McGee, has spent his career in this arcane field. He revels in its complexities, and is an expert on risk and capital management. McGee, for his part, prides himself on the team-building effort that enabled the board to choose an internal candidate. “I focused on succession from day one,” he says. “It’s the CEO’s most important job.”
The untold story of McGee’s stewardship is the cultural transformation at one of America’s oldest and, at one point, stodgiest of enterprises. Son of an Irish immigrant bus driver, McGee rose to stardom at Bank of America. His last job there entailed running the bank’s more than 5,000 branches, then the largest network in the nation. An expert on the intricacies of insurance McGee was not, and learning them wasn’t his goal. His mission, rather, was to surmount a crisis—and that would require radical change in The Hartford’s culture.
The old guard, McGee says, took every opportunity to warn him that insurance was one arena where rapid innovation wouldn’t work—and that if he knew enough about the industry, he’d realize that. The top objective for these managers was a laudable one, certainly—managing risk. But they took this aim to such extreme that growth froze as a result. Executives frequently criticized any decision aimed at major change as “too risky,” according to McGee and other insiders who witnessed the interactions firsthand. Another obstructionist strategy was to keep calling for more data and endless analysis, until the initiative faded from view.
McGee captured The Hartford ethos with a catchphrase—“It takes the time it takes.” Coupled with this inertial sensibility was a process for decision-making that made it all but certain nothing would change. Frequently, it wasn’t even clear who had the authority to make a decision. Just about anyone in the chain of command who objected had the veto power to kill a daring idea. “They’d have endless conversations around data,” says McGee. “These were smart people, who knew the facts, but couldn’t make a decision.”
The employees characterized the process as “the polls never close,” meaning once a decision seemed to be made, it could be changed by more “voting,” or discussion.
Nor was there much incentive in the management ranks to fix what was broken. Managers expected, and enjoyed, extremely long careers at The Hartford, a longevity that, in theory, was supposed to instill sage leadership. “Insurance places more value on tenure than anywhere else in financial services,” says McGee. “There’s this natural reticence that anyone without 25 years of experience can do anything major. I kept asking, ‘Why can’t we do it?’ and the response was, ‘Well, you don’t understand.’”
McGee fought the inertia. He’d ask his lieutenants, “Who has the ‘D?’” meaning the power to decide. When no one seemed to know, he’d pick out an executive and command, “Now you have the ‘D.’”
“If I’d listened to the folks who were part of the past,” he tells Fortune, “I would have found myriad reasons not to make big changes. I could have talked myself out of it one thousand times.”
Over the first two years, McGee gradually replaced virtually the entire top management with outside hires, as well as a few high-potential managers from the ranks. The arrival of Swift in early 2010 helped McGee develop, and sell, his strategy. “I’d sized the capital needs, and I thought the perception was more fire than the reality,” says Swift. “We had lots of value in businesses that needed love and attention.” When McGee would ask, “Why can’t we do this?”—and the traditionalists would reel off reasons not to—Swift would summon his mastery of insurance to explain why the boss’s plan was both practical, and essential. “Employees were shocked that we took action,” says McGee, “they expected Chris and me to change our minds, to follow the old practice of announcing something and not doing it.”
The business that almost sank The Hartford, and threatened to render it an unsteady enterprise for years to come, was variable annuities. Starting around 2000, The Hartford strayed from its core, routine-but-reliable property and casualty field into glamorous annuity products that guaranteed investors high rates of return. The Hartford had to pay those returns whether the securities backing these annuities (and hence funding the payments) rose or declined. And for a time, the strategy appeared to work brilliantly. Financial advisors loved the guaranteed annual returns of 7% or so, and The Hartford found the high fees intoxicating. During the boom years, its guaranteed products were a sensation, growing to a portfolio of $65 billion in the U.S. The company also took the concept to Japan, where the book of business mushroomed to $35 billion.
The crash exposed the cracks in the once best-selling products. The obligation to pay its annuity holders high returns, while its own investments were plummeting, spawned big losses. The losses, in turn, prompted regulators to require that the insurer raise far more capital to ensure that it could meet its obligations to customers. The TARP bailout provided only temporary salvation. Compounding the woes were large holdings of securities backed by commercial real estate as well as bonds in troubled regional banks. “Our dual threats were variable annuities, and structured products like CMBS [commercial mortgage-backed securities],” recalls McGee. “The annuities in the U.S. were well underwritten, but they were far too big for the balance sheet.”
An even bigger danger, he says, was the annuity business in Japan. “The foreign exchange risk was the main source of volatility,” says McGee. The portfolio was not hedged at all when the products were sold, and most of the annuities were issued when the yen was trading at around 115 to the dollar. The yen later rose to trade between 60 and 70 to the dollar. The strengthening in the Japanese currency meant that the income from investments in dollars shrank when translated into yen, so that it fell far short of the payments guaranteed to Japanese investors.
Here, McGee faced an outside force for change—and not exactly the change he wanted: an activist who had accumulated 8.5% of The Hartford’s shares. In February of 2012, hedge fund Paulson & Co, headed by billionaire John Paulson, demanded that McGee split the insurer into two parts, and spin off property and casualty as a single, standalone enterprise. McGee and Swift were already pursuing a plan to largely return to Hartford’s roots by leaving a number of non-core businesses. But they wanted the restructured company to stand on three legs: P&C, mutual funds, and “group” plans (comprising life and disability insurance for corporations).
McGee engaged in lengthy talks with Paulson. “We looked at the scenario he suggested, and looked at it again,” says McGee. “But I told him that the regulators would never approve his basic proposition, that the deal would require transferring too much debt from the P&C company to the life insurance business.”
McGee did, however, move in the direction Paulson wanted. In 2012, he sold in rapid succession the brokerage arm to AIG, the individual life insurance unit to Prudential, and the 401(k) retirement franchise to MassMutual, allowing The Hartford to add $1.5 billion in capital. Though the divestitures didn’t fully satisfy Paulson, the pressure abated. The day after McGee announced his retirement, Paulson & Co issued a statement saying that “Liam McGee has led a generational transformation of Hartford, positioning it to prosper by focusing on operations with industry-leading positions.”
McGee also took measures to substantially lower expensive debt. Just before the TARP bailout, The Hartford had sold warrants to Allianz to bolster its capital. Those warrants had a coupon of 10% a year and were issued at such low prices that, if exercised, could cause lots of dilution. In early 2012, he reached an agreement with Allianz SE that allowed The Hartford to buy back the warrants for $2.4 billion.
Around the same time, McGee announced a pullback in The Hartford’s annuities business: allowing the portfolio to “runoff” (meaning that the insurer would service and pay benefits for existing annuity holders), but ending the sale of new products. Managers have actually nicknamed the ongoing annuities program the “Talcott Resolution,” after the hill (“Talcott Mountain”) that stands between The Hartford’s headquarters in Hartford, Conn., and the office managing annuities and investment portfolios. “I’m going over the mountain,” is a frequent expression among managers shuttling between the offices.
McGee and Swift also managed to hedge, and eventually eliminate, most of the risk on the ultra-volatile Japanese book of business. And in April of 2014, McGee signed an agreement to sell the Japanese annuities portfolio to ORIX Corp of Japan for $895 million. “That portfolio will be permanently off the balance sheet and eliminate most of the risk that investors perceive as overhanging the company,” McGee says.
Marc Feigen, the CEO advisor who remembers the dark days, thinks an addition to The Hartford’s insurance museum, featuring not just the Lincoln policy but antique fire engines, is appropriate. “They should commission a portrait of Liam McGee as the man who saved this 204-year-old institution,” says Feigen. The old Hartford thought it was immortal, a dangerous thing. Liam McGee got the company to see its potential demise with clear eyes—and then gave it a second life.