The transformer-Mike McGavick

Adrian Ladbury met Mr McGavick during the group’s recent customer forum in Munich and asked him how the recovery had been achieved, what lies in store for the group now that it’s back on the front foot and his thoughts on some of the key issues raised by Europe’s risk managers during Commercial Risk Europe’s annual Risk Frontiers survey published this month and sponsored by XL Insurance Adrian Ladbury: Is the rehabilitation of XL now complete and the company now fully back on the front foot? What are the main lessons learned from the last 2-3 years and how is ‘new’ XL a better company for customers, investors and staff as a result? Mike McGavick: “Yes, we are back. In the past we have spent plenty of time with clients discussing and explaining the issues of the past and on the very significant challenges that all of us face in this economy. Having regained our strength we now have to focus again on how we can organise ourselves to best serve customers in this environment. So it is a very different mindset from that during the crisis when so much of the focus was on our own survival and how to create trust with our clients again. Now we can focus entirely on solving their problems which is of course what any insurer exists to do. That is about innovation, understanding how hard it is for clients in their markets and how we can bring our intellect to bear on solving those challenges or at least help solve them. hideAL: How difficult has it been to focus on fixing the problems and at the same time retain customers and motivate your staff? It must have been quite a juggling act. How did you achieve this? MM: There is no substitute for great people and we have many leaders throughout the business who have been doing a great job keeping out there with clients and staying focused as much as possible on the challenges. The reality in any organisation when faced with threats like XL faced is that there will be distractions. There is no way around it. To illustrate this, imagine if you were a client today. We would spend a great deal of time listening to you about the challenges you face both from a risk management and business perspective so that we can try and focus on areas where XL has some unique ability to help. But when you are going through the kind of very public challenges that XL Group experienced in late 2008 and into 2009, that inevitably becomes a huge focus of conversation. This is because the client has to be comfortable that you are going to be there for them over the long haul to pay claims. The only way trust can be engendered or rebuilt when there is so much publicity and confusion is to sit down, face to face and have long, detailed conversations about the strength of the balance sheet and what you are doing about your challenges. Of course all the time spent doing that is time taken away from what you do best which is solving clients’ problems. Therefore as heroically as our people performed during that time there is no way that XL was at its best. To think so is just not realistic because we were focusing on ourselves as opposed to clients. So now we are back to full strength in terms of balance sheet, reputation and stability, we can go back to what we do best. This will have two effects: First, our clients’ incredible trust in us will be rewarded with the kind of innovation that they expect from XL; and second, our shareholders should be rewarded too because this renewed focus on the client doesn’t just benefit the client but the company as a whole. AL: What about your role as an individual? Why were you chosen to help manage XL through this period and why were you willing and able to take up such a challenge? MM: I’d like to think that part of my contribution comes from two things: First; I have been through big turnarounds at insurance enterprises before. I led a turnaround at a unit at CNA and this led to me being hired at Safeco. This company was in truly desperate straits in 2001 when I arrived and when I left in 2005 we had a real leadership position and the value of the company had been doubled at the same time. Those were the fundamentals that at least demonstrated some capacity to help the company in troubled times. AL: It seems that the key function of a CEO nowadays is to communicate effectively with stakeholders. How have you approached it? MM: I think effective communication always comes from a very simple set of ideas. First, be as candid as possible and second always speak from the heart. You have noticed I don’t use notes when I speak. Anything that gets in the way of what you really know and how you feel about it impairs the communication. So I was in a really beneficial situation because I knew XL as a customer and competitor and I had a deep regard for what was already here. To be able to speak passionately with people about how we would get back to that special place was, I suppose, a compelling message because I knew it was true. Also you have to give the same message to all audiences all the time. There was a time when some people believed you could say one thing in the boardroom, another to colleagues and another to the outside world. That has changed in today’s world and it is good news because that makes communication much simpler. Of course there are boundaries to what you can say but the reality is those are pretty simple ideas. Above all, candour is a great rule of thumb. We sell a trust-based product. It is the very essence of our firm and without it we don’t exist. If you don’t speak the truth you erode your ability to sell your product as everyone can see what is going on. There is nothing that makes me laugh harder than when people talk about the ‘art of spin’. What nonsense and especially at companies like XL where we have 3,500 very smart people working for us worldwide. We are not going to pull the wool over their eyes, never. AL: Were you surprised by the robust performance of the entire market during the crisis? I expected to write all kinds of stories about insurers being downgraded, claims not being paid and the like but it just did not happen. Why did the market perform so well? MM: What surprised me about the market was that there weren’t more stories of risky behaviour. There were really relatively few and that is largely attributable to two things: First; management across the board in insurance and reinsurance has improved over the last twenty years. Through consolidation and shareholder action the current cohort of industry leaders is really more advanced. Second; the regulators deserve more credit than most of us who run companies want to give them. We often want to be in this contested situation with our regulators. But the reality is that the regulators stop us doing things that are self destructive. They provide boundaries that keep the industry reputation strong. I think they did their jobs very well and I think that they came through well. The only thing that surprises me now is that some want to take the lessons of what happened in the banking crisis and somehow use those to improve the regulation of the insurance industry. I think it would be wiser to take lessons from the insurers and apply them to the banks. With respect to XL the main surprise was the speed of the recovery. We knew by January 2009 that, despite being rocked to our toes by the credit crisis and our own financial guarantee company, we were going to make it. This was because people stuck together during that crisis and, by extension, our clients knew that. My experience at Safeco said it would have taken two years for the market to have accepted this but at XL, within about six months we were not being challenged about the depth of our balance sheet and so we knew it was going to be ok. AL: What about AIG. You spoke openly during the World Insurance Forum in Bermuda earlier this year about the fact that you were proud to have sorted out your problems without any government bail-out but that you were unhappy that the US taxpayer had bailed out one of your main competitors and that this support enabled it to survive and compete unfairly. AIG now believes it can repay the government and even deliver a profit. How do you feel about this now? MM: XL is an influential company because of the types of risk we take on and the global nature of our business. But no one was out there saying XL is a systemic risk or that we would force the whole house of cards to collapse. That was a mixed blessing for us because no government had to fix us, we had to fix ourselves. The whole situation at AIG was completely different. I have been surprised by the speed of the recovery. The good news is that, if they are able to deliver a profit, the US government is repaid and soon we have a competitor that is faced with the realities of being a private company again and not a government entity. That would be a great outcome for everybody. I have been saying that in a pretty aggressive way for quite a while. But I don’t like the idea that a company that gave the government and the world so much trouble should have the ability to pick and choose which entities would have to deal with reality. That troubled me because, of course, we found it a bit unfair that we wound up with the one [Chartis] that they chose to keep and therefore provide with government support. But look, in the long run, if this ends soon with financial success for the US there is no more to be said. AL: Were you pleased with your last set of quarterly results, what were the highlights and what is your outlook for the market? MM: The biggest highlight to me in the insurance operations was, if you strip away catastrophes and prior year development, our combined ratio in insurance improved by about a point. In a soft pricing market where commercial rates are off by several points, to have achieved that means you have been keeping your prices pretty level and picking good risks. And to have achieved that in a market with large losses is a very strong result. We came from behind the pack because of what happened and this result provides a sense of how I look at the future for XL. Our combined ratio is not at the top of the pack right now and hasn’t been for a while, but if we can hold that line, overcome these market conditions and walk away from risks that insist on being underpriced, if we remain disciplined, the pack will drift towards us. If we can achieve that we will find ourselves among the leaders again in the future and that is our real goal. So it sounds like a real weird achievement because they are not great combined ratios, but it is a real achievement. The best players in cycle management never fall as low as the lowest and it is from that solid footing that you can be rewarded more fully when the hard market comes. AL: What is your personal view of the cycle and how is it best managed by a company like XL in the international industrial insurance market? MM: If you were sitting here as a client of XL Insurance and you were saying: ‘Why am I not seeing 15% reductions from you?’ We would say: ‘We are technically driven underwriters, that is our calling card, we work on technically driven products. Not everybody can understand your kind of risk. At this stage in the cycle others will come to you and offer you fabulous prices but they don’t understand your risk as we do and we will be there when the tears come. So if you stay with us we will price your risk thoughtfully. Yes, we will react to market conditions, but we are not going to give it away. The benefit to you is that, over time, because as we work more closely with you we can help with engineering and claims, we will not magically seek to gouge you as pricing hardens. So your total cost of insurance over the cycle will be less because of the reality of an improved experience and the reality of working with a partner that trades though the cycle on a technical basis not on the basis of how much they can get out of you.’ That is the XL story and we have lived that story for a long period of time and I think that is the reason why we lead so many programmes. AL: The primary industrial insurance market will remain stubbornly flat according to CRE readers. How do you differentiate yourself in that market, perhaps by the level and type of service you offer, without messing up your cost base and hammering the combined ratio? MM: You will notice that when our management team was assembled we did go after costs. We knew it was a soft market and knew XL had focused on being in many, many businesses and decided to pull out of some businesses. We needed to do that because we were going to focus on the core P&C business and so we had plenty of things we did not need anymore. These are always awful times but we got through it and the run rate savings are somewhere in the order of $200m a year. We therefore went through the stuff people do in the cycle early, for a different reason. But we also believe that keeping our underwriting capacity is terribly important. So we must be able to put down our pen, stop writing and be willing to incur more expense than the top line justifies at times and how you react to that requires great discipline. For some people that means we have to say ‘just play golf for a while.’ We will write something like $5-6bn premium income this year. But we still have the capital and human capacity to go back up to $10bn if we want and when we choose to do that. It is a tough choice but we think it is the right choice. We write about 1,600 global programmes. In property we are the lead on about half of those and on liability we are the lead on about two thirds. So we have the closest relationship with clients on many programmes. We highly value that relationship with risk managers and brokers because it means we can sit down with clients and deeply understand their business. You have spoken to loads of risk managers recently for the Risk Frontiers Survey and they are all telling you: ‘Hey you aren’t going to believe this, but my CFO has just told me I have got to spend 35% less on my insurance programme’. Now those risk managers have a problem because they know the risk has not gone away, so they just have to solve that risk more efficiently. To have a technical underwriter by your side to sort that out is a good idea. To have an underwriter who just gives you a price is a bad idea. You may obtain a cheaper price but you may not get what you really need and I don’t want to be that risk manager if something happens. AL: What about innovation. That has been one of the key topics during the Risk Frontiers roundtables. How can you be more innovative during this tough time when the underlying risks are changing so much and so rapidly? MM: This is a time when we think it is incumbent upon us to ask ourselves about what more we can do for our clients. So you will see more products from XL Insurance such as our recently launched EXCLAIM product in the UK which is a bundled product of claims management services designed to bring down the cost of claims and ultimately the cost of risk. We also do a lot of work on supply chain management and we are working with risk managers in Europe on this. We also think we have not been attentive enough to professional lines in Europe and we now have 27 underwriters across the continent to work locally with clients to get the job done. In the middle market we have just opened an office in Barcelona. We are expanding in product recall and you will see us in the cyber liabilities space area. Innovation is essential at this time because if we can’t figure out a way to make us more and more essential to our clients then we become less and less relevant. We are very excited about the opportunities for companies like ours. We completely believe that innovation is at the centre of things. For us, if you go back two years ago or even a year and a half ago XL Insurance can be forgiven for being a pretty risk averse firm. We felt on such thin ice in late 2008 but it doesn’t feel like that at all anymore. People feel brave again. It’s happening already. We now have a professional lines underwriter in Singapore, hope for a full branch license in China soon and have just hired the best surety lines team in the US, based in Baltimore. We are on the march and to bring that kind of expertise and innovation will make us more highly valued by clients and that is why you see this innovation. We have been spending tens of millions of dollars on a claims system in recent times and it is not a good time to be spending money like that. But this will allow our clients to manage their claims though our systems, which is a much better tool than they have to manage their claims and lower their costs. AL: Global programmes was another hot topic of debate that was consistently raised during the Risk Frontiers survey. Risk and insurance managers are increasingly worried about the apparent lack of compliance and demand greater certainty and clarity without having to pay through the nose for it. There were also some risk managers who said that these programmes look great when they are bought but can break down very quickly when a claim actually occurs as the head office and local office just don’t communicate properly to deliver what the programme was supposed to deliver. Do you see this as a problem and what is XL doing about this? MM: It’s an attitude. We have been offering global programmes for a long time and we are the smallest of the players that does this in a serious way. This means that we have always had to get it right otherwise we wouldn’t get a seat at the table. Our organisation was born to be the opposite of the traditional insurance claims operation because we were born as a mutual. So never in our history has there been an attitude of how not to pay. The first thought on our claims is ‘what can we do to help the client’. This is just a completely different mentality that comes from that mutual background and I won’t change that. The other thing is to look at products like our XL WorldPass product. We are one of the first to really understand why programmes break down and provide a cure for it. The regulatory compliance and complexity of these global programmes is brutal and through this product, fronting and expertise, we are truly able to help clients deal with the regulatory and legal requirements. That is huge for risk managers and my guess is that the experiences you are describing with claims are not XL experiences. I would be shocked if they were. AL: Do risk managers just need to work harder with their insurers and brokers to ensure they are compliant or go to an international body like the International Association of Insurance Supervisors [IAIS], and try to impose some kind of order and consistency from above? Do you think such an effort would work? MM: It is a wonderful idea and if it happened we are ready to compete and take part. But let’s stick with the world as it is because these things will not evolve quickly and companies that solve this in an industrial way are advantaged. AL: And what about the call from risk managers to stop using compliance as a competitive advantage and charging for it as it should be a basic element of the service? MM: These programmes take a lot of effort and work to put together and you just have to charge for it fairly. You are doing something special which deserves to be rewarded. Just don’t charge for it unfairly. PROFILE: Mike McGavick Mike McGavick joined XL Group in 2008 as Chief Executive Officer. During his time at the helm he has focused on the development of new systems for Enterprise Risk Management, corporate governance and strategy development, to help it overcome its credit-crisis related problems and rebuild its reputation as a leading global insurance and reinsurance provider of property, casualty and specialty products. Under Mr McGavick’s guidance the company has won back the trust and confidence of both customer and investors and achieved the highest performing stock listed on the S&P500 for 2009. Mr McGavick is something of a turnaround specialist. Before joining XL he was Chairman, President & CEO of the Seattle-based Safeco Corporation, which he joined in January 2001 as it was struggling to survive. He left in December 2005 having led a highly successful recovery and doubled the value of the company. Before joining Safeco, Mr McGavick spent six years with the Chicago-based CNA Financial Corporation where he held various senior executive positions before becoming President and Chief Operating Officer of the company’s largest commercial insurance operating unit and also led a big recovery. Mr McGavick’s insurance industry experience also includes two years as Director of the American Insurance Association’s Superfund Improvement Project in Washington D.C. where he became the association’s lead strategist in the effort to transform US Superfund environmental laws. He has been involved in a number of political and public affairs organisations, including a period as a Chief of Staff in the United States Senate. He also ran for the US Senate in the State of Washington. Mr McGavick’s deep interest in public policy also led him to take an active role in organisations working to find innovative solutions to lift people out of poverty and strengthen civic institutions. He sits on the Board of the Rural Development Institute (RDI), a non-profit organisation of experts and attorneys that helps the rural poor obtain legal rights to land. RDI works with governments, researchers, foreign aid agencies and other partners to enact reforms of local land uses, laws and policies to make meaningful progress in the developing world.

The transformer-Mike McGavick

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