Taking the helm in a perfect storm

Industry veteran Tom Motamed brings experience and vision to CNA

By Elisabeth Boone, CPCU

The phrase “perfect storm,” taken from the title of Sebastian Junger’s breathtaking saga of the Gloucester fishing fleet’s encounter with destiny in the North Atlantic, has been used to describe everything from meteorological catastrophes to financial collapses.

Albeit well worn, the term describes with pinpoint accuracy the situation in which large, multiple line insurers currently find themselves. Like the 50-foot waves that buffeted the swordboat “Andrea Gail” in The Perfect Storm, powerful forces are challenging carriers on all sides: the prolonged soft market in property/casualty lines; possible reserve inadequacies for life companies; the stock market volatility, the credit crunch, and the ongoing crisis in the housing market.

Given the number, nature, and magnitude of these challenges, few would question the decision of industry veteran Thomas F. Motamed to retire last June from The Chubb Corporation after a distinguished 31-year career with the insurer. Motamed joined Chubb in 1977 as a claims trainee and in 2002 was elected vice chairman and chief operating officer.

Quite a few people, however, might wonder what motivated Motamed to defer his well-earned R&R and instead return to the executive suite, this time at a leading multi-line carrier based in Chicago.

On January 5, 2009, Motamed began his tenure as chairman and chief executive officer of CNA Financial, the holding company of CNA insurance companies. He succeeded Stephen W. Lilienthal, who retired in Deccember 2008 after holding those positions since 2002.

In an exclusive interview with Rough Notes, Motamed explained his reasons for accepting the top post at CNA and, from the perspective of his first 30 days on the job, shared his insights into the myriad challenges that face his organization and its competitors in today’s storm-tossed market.

“First and foremost, I thought there was a tremendous opportunity to build a great company,” Motamed said. “CNA has been around since 1897, so it has a long history, and I thought it had good people. This is a people business, and if you have good people who are on the right page, you can win.”

Ranking priorities

Given the “perfect storm” in which insurers are struggling to remain afloat, how do leaders like Motamed approach the challenge of establishing their priorities?

“Everyone—individuals, businesses in general, and certainly insurance companies—is facing a decline in the value of their assets,” Motamed observed. “To me, probably the most serious issue insurance companies are dealing with, particularly life companies, is the asset side of the balance sheet. Clearly, everyone is hoping for an economic recovery and a financial market recovery, but we need to be constantly looking at ways to improve the financial side of the business.”

In recent months, some life insurers have been petitioning their home state insurance departments to reduce reserve requirements to help preserve their financial stability ratings in the current crisis. We asked Motamed to comment on this trend.

“Every insurance company I know has taken a hit on the asset side,” he replied. “When that happens, you’re subjected to scrutiny by the rating agencies. I believe that all of us who run companies, who believe that we have good products, services and people, don’t want to operate under the cloud of a lower rating. People look to the financial strength of insurers to protect their assets when it comes to a claim,” he pointed out.

“It’s important to remember that we’re not the only ones in control of our destiny. We’re watched by the rating agencies and by state regulators, and by the federal government when it gives TARP money to insurers.” In this environment, Motamed remarked, “I think everyone is trying to avoid a downturn in their rating.”

Eye on the cycle

These days you’d have to go a long way to find any Pollyannas in the insurance business, and Motamed is no relentless optimist. Neither, however, is he a pessimist; his long experience in the industry informs his stance as a confirmed realist.

“I think it’s a great business with great people, and it’s cyclical,” he said. “People have to understand that we’re in a cycle now where it’s not as lucrative for insurers, and customers are getting lower prices. And that will change.”

For that reason, Motamed sees no reason to view today’s soft property/casualty market as anything more than an inevitable turn in the traditional underwriting cycle.

“A lot of people are complaining about the soft market, but the current soft cycle is a lot shorter than historic soft market cycles,” he commented. “It’s not as bad as people think, and the calendar year results are pretty good for most insurance companies. The current accident years are coming under some pressure, but a lot of companies reported pretty good earnings and combined ratios, aside from what happened on the investment side of the house.

“Core property and casualty results continue to be pretty good,” Motamed continued. “Growth is not good, but in economic times like these, where sales and payrolls are down and people are not reinvesting in their businesses, it’s hard to charge people more money for insurance when they’re already suffering economically.”

In times like these, Motamed said, “Whether you’re an insurance company or an agent, the most important thing you can do is stay close to the customer. We have to stay close to our agents and brokers, and we have to execute our fundamentals in a superb way. We also have to be clear about our abilities in the marketplace, and we have to exercise what I call ‘continuing underwriting discipline,’” Motamed asserted.

It’s equally important to recognize, he continued, that “this is a face-to-face business. Underwriters need to be in front of their agents, and agents need to be in front of their customers. Technology is never going to change the face-to-face nature of the business, and I don’t think it should.”

Pointing to another imperative, Motamed said, “We have to make sure we’re providing excellent service to the ultimate customer, because that’s who pays the bills.”

Playing to strengths

How does Motamed characterize the key strengths of CNA in today’s economic climate?

“I’ve learned a lot about the company since I got here, and I’ve been very pleased,” Motamed replied. “First, we have good ratings, and people look to that. We have solid service capabilities in claims, risk control, and back-office operations. We’re known in the marketplace for underwriting strength in our HealthPro business, construction, and our programs.” (The CNA HealthPro division was profiled in an article titled “Leading the Way in Health Care Liability” in the October 2008 issue of Rough Notes.)

A key strength for CNA is its relationships with the agents and brokers who distribute its products, Motamed emphasized. “We’re very much an independent agent company, and agents will be hearing more about CNA expanding its relationships with groups like the Big ‘I’ and the CIAB. We believe we have to work with our agency force to provide first-class solutions to clients,” he said.

“Agents need to be more selective as to whom they represent,” Motamed remarked, “and stick with those relationships and build stronger relationships with a core group of companies, rather than dealing with a fractured list of markets. It’s not economical, and it creates problems on the E&O side if you don’t really know what your markets are selling.”

What’s more, Motamed commented, “Agents have to be more vocal to their underwriters as to what products and services they want and what their customers are willing to pay for. On the other hand, we as underwriters know that price is part of every sales equation, but agents need to demonstrate their value to the client as well as the value of the market they are representing.

“At the end of the day,” Motamed asserted, “relationships are everything. In soft markets and hard markets, agents want long-term relationships with their clients, and we want the same with our agents. It’s cost effective; ultimately it’s more profitable not only for the agent and the underwriter but also for the client when there’s a long-term relationship.”

Future of consolidation

The last several years have seen the consolidation of some industry giants that few if any industry observers ever would have imagined joining forces. Centuries-old names have disappeared amid a wave of mergers and acquisitions as insurers seek to control their ever-rising costs of doing business. We asked Motamed to comment on this trend and whether he expects it to continue.

“It’s kind of a ‘tale of two cities,’” he responded. “On the one hand, I expect more consolidation because there are companies with weaker balance sheets that are unable to raise capital in this economic climate. Underwriting results have deteriorated in the soft market, so logically that suggests that some companies would view a sale to be in the best interests of their shareholders.

“On the other hand, there are fewer buyers, because they have weaker balance sheets as well,” Motamed observed, “and they also have the problem of raising capital today. What’s more, today there are many fewer companies to buy than there were 30 years ago. So when you look at consolidation, logically it should happen—but will it? Only time will tell.”

Like his peers in the executive suites of other top insurers, Motamed was leery of playing the role of crystal ball gazer. Asked what he thinks the property/casualty business might look like three to five years from now, he did offer some thoughts.

“I can’t predict the future with any degree of accuracy, but I expect there will be a turning point on pricing in the next year or two,” Motamed said. “However, that will be muted by the effects of the economy. Underwriters will be able to get a better price for the product, but whether it’s payroll, sales, or total insured values, they are still going to be depressed until the economy comes back.

“We’re looking at a scenario where the bottom line may improve, but growth will be difficult in a soft economy. Profitability could improve as rates increase, but the fact is that clients still won’t be paying a lot more for their insurance,” Motamed said.

Challenges notwithstanding, Motamed declared: “I continue to be excited about the opportunities at CNA. It’s great to be back in the saddle, and CNA has a lot of advantages. We have talented people who really want to work with our agents, and our local presence in the marketplace with CNA offices is very important so our field people can have face-to-face discussions with their agents,” Motamed said. “We want to be a company that thinks in a big way but acts very locally.”