CNA's Hengesbaugh: Tight Focus on the Turnaround.

In a conversation with Risk & Insurance, CNA chief Bernard Hengesbaugh discusses his drive to keep the nation's second largest commercial insurer on a straight path to success, as the market hardens and CAN's turnaround continues.

When Bernard L. Hengesbaugh assumed the helm of Chicago-based CNA Insurance Co. early in 1999, he was faced--like virtually all CEOs of great multiline insurers--with an industry in flux. The futuristic challenges of technology and the Internet made everything seem more complex, while the tough realities of the seemingly eternal soft market had left CNA with more than its share of underpriced business and troubled lines.

Still, Hengesbaugh, a 20-year veteran of CNA, had a clear vision of its strengths: CNA is not only the second largest commercial lines underwriter in the United States, with annual revenues in excess of $16 billion, but it can boast one of the industry's strongest balance sheets, with more than $61 billion in assets. In short order, Hengesbaugh and his executive team took tough action, launching a multi-year turnaround that involved shedding some $1.2 billion in property/casualty business; taking more than $380 million in run-rate costs out of its operations; and exiting longtime CNA business that no longer seemed to fit with the company's core strengths.

For starters, CNA's personal lines business was sold to Allstate and, among other divestitures, the company's life reinsurance business was sold in October to MARC, the U.S. life subsidiary of Munich Re. All along, many of its key lines were delivering good underwriting results--in directors' and officers', professional liability, warranty, and the majority-owned CNA Surety operation. And the company's continued strong relationship with the community of independent agents and brokers served it well in the ever-competitive market.

Now, as the commercial market appears to be hardening across the board, CNA's turnaround seems to be hitting its stride, and Hengesbaugh is vigorous in his championing of it. In early October--on the eve of the CNA Life Re sale to MARC--Hengesbaugh was an ebullient host to the throng of top agents, brokers and insurance executives gathered at West Virginia's Greenbrier resort for the annual Insurance Leadership Forum, the high-level confab sponsored by Washington's CIAB (Council of Insurance Agents and Brokers) and CICE (Council of Insurance Company Executives).

Indeed, Hengesbaugh is a direct and outgoing corporate leader, and industry insiders like to note the difference in style between him and his predecessor as chairman and CEO of CNA, Dennis Chookaszian. Where Chookaszian (now heading the executive committee of CNA Financial Corp.'s board of directors) was a CEO with a theoretical bent and a strategic vision of CNA as something of an insurance laboratory, observers say, Hengesbaugh is more the bottom-line man of action and a natural for the company's turnaround.

Hengesbaugh himself dismisses the idea of a difference in style as superficial and affirms that his chairmanship follows logically from Chookaszian's. Here, in an interview conducted in October at the Greenbrier with Risk & Insurance editor-in-chief Matt Damsker, Hengesbaugh discusses the commercial insurance climate and his company's place in the market.

Damsker: There's so much talk here about e-commerce and insurance and the impracticality of being able to service or sell commercial clients on the Internet. What role do you think the Internet plays for a company like CNA?

Hengesbaugh: Down the road, I think that if you get more sophisticated in business-to-business interaction that it will also change the way the product is delivered business-to-business. We're seeing signs of that right now, so we don't discount that at all. It will impact reducing the cost of delivering the product and that will be very positive.... But there is a much more significant factor, and that is the impact of technology on the exposures--that's where the most fundamental challenges are occurring. So, while we'll get better and be more effective at getting insurance contracts and administration of insurance services through the Internet, the big issues are how do we deal with the new set of exposures that our clients have that they've never faced before.

For example, there's a company in Northern California that we insure, a family owned business whose marketplace was the western U.S., and several years ago, after several young family members built a Web page, their growth has been coming from non-U.S. sales, particularly European sales of this product through the Web. The dependence on the Web is becoming very significant. So if they lose their capability to work on the Web for any period of time, that is a significant new risk to them.

In addition, even more importantly, the Web has made them a global company, and as a global company, they now have a new set of things that they never had to deal with before. They're shipping alcoholic beverages to other countries, so they have to deal with laws and restrictions there. In addition, the European sanctions for misuse of credit card data are much greater than they are in the U.S.

When we think about what's happening with the Internet, we're spending an awful lot of money right now on opening up what we have to make the product more cost-effective. But our main focus will be on how the exposures of our clients' change. That's the big deal. We really need to be in the forefront of those products and services. And I think we will be.

Damsker: What about the climate of the market? We're starting to see pricing bottom out in most lines, and you've spoken of disciplined underwriting as the key. Do you think the market is turning the corner toward what the industry requires to sustain success going forward?

Hengesbaugh: First of all, I think we're on a good track, but it is really uneven between lines of business ... Our biggest concern is that it's going to take several renewal cycles to get anywhere near the profit level that our shareholders really require. So we can't let up on this. We're going to have to go another full cycle after the one we re in right now...

Now, the professional liability lines have not moved as fast. They're just starting to move. Yet the cost pressures there are going to be very significant over the next few years. There are judicial rulings that are devastating to directors' and officers' liability businesses--a $2 billion settlement sets a whole new stage. So in the professional liability areas, it has not changed as rapidly. Finally, the reinsurance markets, as you probably heard in Monte Carlo, have been very slow to turn. What we are going to see with this next renewal cycle (January 1) are rates going up and things are firming, and everybody is proclaiming they are determined this time.

Damsker: Do you think that multi-year contracts are going to impact this renewal?

Hengesbaugh: I think that's one of the things that have delayed the reinsurance recovery. If the primary markets for the last two years have engaged in rate activity, the reinsurance markets have not, and part of it is due to multiple contracts. In our book of business, well over 60 percent of the business is renewed as of January 1 ... In our book, and in many others, many of those are expiring this year. So I think it'll be less.

Damsker: There's so much talk now about disciplined underwriting ...

Hengesbaugh: Our whole concept of underwriting is making sure that we have a very comprehensive and solid knowledge of our clients. That sounds so simple and self-evident. But with these traditional coverages it's very easy for underwriters over time to lose sight of what they're insuring. They just go to the standard coverage statements. It's all standardized. It's very easy to say a hardware store is a hardware store and nothing much else about it.

But our emphasis on underwriting is forcing us back to getting a very clear and basic understanding of the risks that we're insuring; to making sure that we're dealing with them in a way that is useful to the insured; and to making sure that we go through a very disciplined and organized process for every risk. To make sure that we understand it. That is actually very different from the way a lot of the industry has done it for a while.

Damsker: Will that add a lot of frictional cost when the object is to drive costs down?

Hengesbaugh: We have to be a low-cost producer right now. Thirty cents of every dollar has to do with the expense of administering the business. Seventy to 90 cents has to do with the risk selection process and claims handling. So we have got to invest in them, and we intend to do that.

In most cases too, in the final analysis that deeper understanding results in a better value for the customer. If we can help them to understand, as well as ourselves, what the real risks are, it doesn't result in the situation at claims time where suddenly it's, "This wasn't declared! We didn't know that these two buildings were adjoining!" Or this or that. We do a better service ultimately for our customers.

So the return to the fundamentals of underwriting is really a very key thing for us. Right now a lot of it has had to do with narrowing the playing field down to what we can really be good at. Our next set of challenges will be taking that superior knowledge and understanding the claim and use this knowledge as a basis for growing a business.

Damsker: The fundamentals of CNA appear to be very good amid the changes that you've instituted. Is there a difference in philosophy or vision, strategically, between yourself and your predecessor, Dennis Chookaszian, that you think is significant to point out? It's interesting because he was a strong CEO for many years.

Hengesbaugh: As a matter of fact, there is less difference than meets the eye. Dennis and I have gone way back. We worked together for 30 years. We worked together as a team very well. Dennis has had a unique strategic viewpoint that helped our company a long time.

Damsker: Nobody else was saying the things he was saying.

Hengesbaugh: That's right. And he was out in front of an awful lot of things. But at this point it is very important for a company like CNA to make a transition to the new world and the new economy, to realize the type of vision and the type of ideas that Dennis was seeing out there. We've had to do some pretty hard things because we had to change some of the more traditional ways this business is connected.

Now, people may view this as a difference in style, but it's more than anything a question of what we're focused on today. The only thing that bothers me about that concept is I think that we are every bit as involved today in the strategic direction of the company as we were before. The difference is that it is also linked, in a way, to operating improvements that we need right now. So it's not really as much of a difference as it seems. We just needed some special emphasis right now in improving operating performance.

Damsker: Was there much debate in the company when it was time to move away from personal lines?

Hengesbaugh: Was there much debate? No. I think that what we had all come to realize is that, we were in many respects, one of the old multiline companies. We use this term, "A mile wide and a quarter of a mile deep."

The effective competitors for us were very specialized. They had attracted capital, some narrow and focused talent, and they could knock our socks off anywhere.

So we realized that we had to narrow our focus to be more like a half-mile wide and three miles deep. In the process, we examined the core strengths of the company. Our core heritage goes back to the insurance businesses. We have well over a billion dollars of capital tied up in personal insurance that we needed to plug back into it. So it wasn't a debate ...

In fact, there's something very encouraging to our people about the idea of being able to narrow their own focus ... to not be a jack-of-all-trades and master of none, but really to be able to focus on a few. I think that's very liberating. That part is very encouraging.

But this is not a one-person show--this is a very strong team. I would say the entire senior group here is very strong. We've been able to bring a few people in over the last couple of years and complement them with a lot of other folks who have been at CNA for a while. So that's what is driving us.

Damsker: Magazines and newspapers focus on the man at the top. There has to be a focus--someone who is sort of saying, "I'm responsible."

Hengesbaugh: A corporation has to be humanized ... but it's what is on the inside that is making it work.

Willis's Plumeri:"Not Number Three Forever"

Despite being in a new role at October's Insurance Leadership Forum at the Greenbrier, Joseph J. Plumeri hardly seemed like a neophyte. The 32-year veteran of Citigroup and its predecessor companies had just been named chairman and 4 CEO of the world's third largest insurance broker, the London-based Willis Group, and he exuded confidence as prepared to bring his experience with a broad-based financial giant to bear on the more specialized world of commercial insurance broking.

"Willis is a worldwide franchise," he told Risk & Insurance in an interview at the Greenbrier. 'We have many different kinds of constituents. We have business constituents, big, medium and small, and we've got the people who work inside those constituents. So when you look at the world of insurance brokerage, you're really looking at the world of financial services.

"And as I look at the financial relationships that Willis has with its clients, I feel that once you've got a relationship, and once you open your thinking to almost anything, the world gets bigger, and it becomes more exciting and it becomes more inviting."

Plumeri is a Trenton, NJ., native who once coached high school football and now owns a couple of minor league baseball teams, including the popular Trenton Thunder. He succeeds Willis CEO John Reeve, who is retiring having completed a five-year contract with the brokerage. Plumeri had overseen Citibank's 450 retail branches in North America, following the merger of Travelers Group and Citicorp. He also served as CEO of Traveler's Primerica Financial Services, managing a sales force of 150,000 serving more than six million clients. Before that, Plumeri had been president of Smith Barney Shearson, having overseen the 1993 merger of Smith Barney with Shearson.

"When I was in the [stock] brokerage business, we always viewed our relationship with our clients as a professional services relationship, where we consulted and advised them but we also did the transactions at the same time," Plumeri explains. "What they really wanted was the consultation and advice and they gave us the transactional business as compensation for that. That's what a brokerage firm does. So when people say to me, 'Joe, you've never been in the insurance brokerage business before,' I say, 'No, I haven't, but I'm not sure that I haven't done this before.'"

Plumeri believes that the future of insurance broking lies in providing real value, not competing as a commodity. "You've got to decide, in any business, whether you're in the value business or you're in the price business," he says. "if you're in the price business, fine, then be very good at it. But understand that your margins are going to be very slim and you're not going to offer very much. If you're going to be in the value business, which means you're going to charge a fair price, there has to be a very obvious difference between what you provide and what somebody else provides, which is the reason you charge what you charge.

"That's why I say you can't stop at the traditional approaches to what insurance brokers do. It has to be, 'Ok, you're my client, tell me what your needs are across the board. Let me see whether or not I can help you find solutions for those needs. While you're doing your thing, I can do my thing, and I bet you that if I do that, you don't mind paying me for what I do.' People only care about price in the absence of value."

As for Willis being the third largest broker, behind Marsh and Aon8, Plumeri's style suggests that the two mega-brokers have him right where he wants them. "I like the idea of being the alternative," he says, "an entrepreneurial alternative where clients and specialists alike can come and feel like entrepreneurs, can build their business, can feel like it's an atmosphere that's conducive to growing and people are listening to them. It's a very nice position to be in. But my plan is not to be number three forever. We're going to grow. We're going to be a real force in this business."

With insurance pricing seeming to harden, timing seems to be on Plumeri's side. "I don't know," he smiles. "I would tell you that ever since I got here (the Greenbrier) on Saturday, everybody says to me 'You got here at the right time.' I said, Why is that?' They said, 'Well, the prices are getting better and everybody seems to be a little cheerier than they were a year ago.' Well, that makes me nervous, because if I do well, everybody will say I came at the right time, and it really wasn't me, it was the environment. If I do poorly, it was me. I'll have to find a way to reconcile that."

Malt Damsker