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.