Quick and Decisive
With the announcement that XL Group plc bought Catlin Group, the global P&C (re)insurer that operates the largest syndicate at Lloyd’s, XL Catlin CEO Mike McGavick can say that he’s plucked a plum.
It’s a prize the former rugby player won by absorbing hard hits and staying on his feet.
Dublin-based XL closed on the $3.93 billion acquisition of Catlin on May 1. According to experts, the purchase will combine deep benches in Bermuda and London, and position XL Catlin to be a top 10 global reinsurer and a global force in specialty insurance.
“We’re going to be darn hard to ignore. That’s meaningful to us,” McGavick said.
McGavick and XL bought Catlin from a position of strength. XL averaged a combined ratio of 92.3 over the past three years and recorded operating net income of almost a billion dollars in 2014.
“Communication, in my mind, is the least fully appreciated of the management arts. That’s a bias that I’ve developed over a long, long time.” — XL Catlin CEO Mike McGavick
Credit McGavick’s leadership, because when he became CEO in May 2008, XL was reeling.
McGavick said he knew when he took the job that the company had problems. What he didn’t know was how widespread they were.
In 2006, XL spun off a financial guarantee business, Security Capital Assurance, (now known as Syncora Capital Assurance) that suffered huge mortgage-backed securities losses in 2008.
XL’s exposure to those losses as a reinsurer as of mid-2008 was more than $67 billion. To put that exposure in perspective, XL’s assets at year-end 2008 were $45.6 billion.
With the blessing of the New York Department of Insurance, McGavick negotiated a commutation agreement with SCA that reduced XL’s exposure to around $1 billion.
But the problems didn’t end there. With the financial crisis in full roar, XL next faced heavy losses due to its own investments in mortgage-backed securities.
No sooner had the company worked to rectify those problems when the soundness of its underwriting came into question. With barely a minute to catch their breath, McGavick and his team then turned to face that issue.
Three massive problems, all handled in quick succession.
Elliott Bundy, McGavick’s assistant and XL’s chief communications and marketing officer, said McGavick’s strength as a communicator is one of the keys to the XL turnaround.
“He is very respectful of his audience,” Bundy said. “He wants everyone to understand what it is we are really trying to do, particularly what we want to do together.”
“Communication, in my mind, is the least fully appreciated of the management arts,” McGavick said. “That’s a bias that I’ve developed over a long, long time.
“Leaders can have any number of ways they choose to communicate. What they can’t do is they can’t delegate responsibility for the fact that there is effective communication.”
McGavick communicated well, but he also acted decisively, according to a veteran insurance industry leader.
“Michael came in and he didn’t flinch. He had to do what he did and he did it with speed,” said Brian Duperreault, CEO of the Hamilton Insurance Group.
Duperreault, like many other leaders who have faced steep challenges, was watching McGavick back in 2008 to see how he’d do.
Some say the biggest challenge McGavick faced at XL in 2008 was a crisis in confidence.
“He shored up confidence and he got people to believe in XL. That’s certainly a big part of it,” said Cliff Gallant, an insurance industry analyst with Nomura Securities.
Making big changes when an organization is in difficulty means telling the unvarnished truth and that’s what McGavick did, Duperreault said.
“You can’t get people to buy into a secret,” said Duperreault.
McGavick is now an established insurance leader, but public service also flows in his veins. His dad Joe McGavick was a state legislator in Washington and served on the state’s liquor control board.
McGavick got one of his first major lessons in self-sufficiency when his father convinced him to attend the Seattle Preparatory School. A good Jesuit education had been good for him and it was the best thing for his son, Joe McGavick reasoned.
What Joe didn’t tell Mike was that he expected him to pay his own way.
Every paycheck Mike McGavick earned in high school was garnished by his father to cover tuition expenses, leaving Mike just a few bucks in pocket money. Perhaps that early lesson hardened him for some tougher cost-cutting decisions later on.
Another consequence of Joe McGavick’s training was that by the time Mike McGavick entered the University of Washington, he was out of the house and supporting himself.
“I became an incredibly independent cuss,” McGavick said.
True to his genetics, in his early professional life McGavick worked for a public policy roundtable in Seattle and later served as the chief of staff to Washington State Sen. Slade Gorton, whom he counts as a mentor.
McGavick started with Gorton as a driver. As they crisscrossed the state, traveling from fire halls to churches and other meeting places, McGavick gradually worked up the nerve to engage the senator in conversation. Once the senator started talking, McGavick kept his ears open and picked up what he could.
One of the key lessons McGavick remembers from Gorton is the importance of true root-cause analysis.
Don’t just come to conclusions that fit your preconceived notions, the senator taught McGavick. Dig into the problem and discover its essence.
“He deeply shaped how I think about the world,” said McGavick.
Mike McGavick’s entrée into insurance came about through his passion for public policy.
From 1992 through 1995, McGavick worked with the Superfund Improvement Project for the American Insurance Association in Washington, D.C. That work led to a job with CNA.
McGavick rose through the ranks there to become president and chief operating officer at CNA Financial, then the company’s largest operating unit. CNA Financial was plagued by inflated expenses, which McGavick addressed.
Hired by the Seattle-based personal lines insurer Safeco in 2001, McGavick again moved up, becoming president, CEO and chairman. And again he faced legacy problems.
“In many of the situations I solved, there was an absence of will to make decisions that are fairly obvious,” McGavick said.
“Too many of the strategies I saw were a hope that the problem would go away or that you could overwhelm it with good stuff.”
Before McGavick’s time, Safeco purchased American States, a life insurance business. When he became CEO, McGavick made the decision to unwind the American States deal.
The turnaround meant reductions in payroll. As anyone who’s done it knows, letting staff members go comes at a personal cost.
“You spend a little bit of your humanity with every job that you cause to be lost,” McGavick said.
As quickly as he turned around the three insurers, McGavick believes he could have acted more quickly.
“You learn that a lot more suffering comes from an unwillingness to do hard things. And even learning it you tend to be not quite as fast, as in retrospect you wish you would have been. All the big mistakes are in that bucket,” McGavick said.
Nomura’s Gallant said that McGavick showed backbone in doing what he did at Safeco.
“He said Safeco doesn’t need to be in this life business and he got rid of it. He said a big mistake was made in trying to do this and we have to let it go.”
“The right decisions always look like the easy ones in the rearview mirror,” said Greg Case, president and CEO of Aon and a McGavick admirer.
“Rarely do insurance leaders get credit for having the courage to return a company to its core business,” Case said.
“That was the case at Safeco. Mike inherited a business that had gone through a period of rapid M&A and lost sight of its core. It took real conviction and operational discipline to turn that around. But that is what the industry has come to expect from Mike and his team,” Case said.
McGavick said that at CNA, Safeco and XL, he discovered a formula. It wasn’t a formula he had in mind going in, but it turned out to be applicable in the case of each troubled company.
“You go in there and you try to learn to be humble and focus on two things. What is the real problem and what are some possible solutions?” McGavick said.
The team that will evolve will be comprised of three groups, he said.
“A third will be people who are in the right job and doing a good job and who are retained and become critical friends and advisers. There’s another third who were trapped under poor leadership, but in fact knew the place was falling apart and had some ideas about how to fix it,” he added.
“The other third you’re going to have to recruit.”
In 2006, showing that his taste for politics never ebbed, McGavick left Safeco to run for the U.S. Senate as a Republican. He lost the race.
“When he ran for office in Washington it wasn’t a surprise for me because you could tell he’s a gifted leader. For the insurance industry, it’s good he lost,” Gallant said.
Mike McGavick is clearly excited about the XL Catlin deal. He’s so excited that he slapped a conference table several times during an interview in Stamford as he talked about what the new company is capable of.
“There are things that the combined company can do for clients that we couldn’t do before. Some of them are obvious,” McGavick said.
One of the obvious pieces is the increased capital the company will be able to align against risks.
“There are also skills that we bring that are formed differently at each company and combined, we believe, will yield a real depth of insight.”
Across the industry, specialty insurance is attracting talent and capital for a number of reasons. Risk is evolving rapidly. Specialty is the place where innovative products emerge and it’s a place where premium growth is substantial.
“Our clients’ risks are evolving rapidly. And we should expect that. That’s the world we live in,” McGavick said.
“If we’re going to have an organization matching this rate of change — in an industry that is very poor at innovation — we’re going to have to be deeply in the specialty spaces because that’s where solutions tend to emerge first.”
That’s why Catlin, in its position as the leading insurer at Lloyd’s, the global epicenter of specialty insurance, made so much sense as a partner.
“I upgraded the stock on the day they announced the deal, so I like it,” Gallant said.
Gallant relates that XL and ACE, whose offices in Bermuda are virtually side by side, were both seen as future powers when they were formed.
XL lost ground against its rival because it needed to tend to its problems back in 2008 and in subsequent years. While XL was on the mend, ACE flourished and achieved that early promise.
Gallant views the Catlin deal as XL’s chance to catch up and become a global leader.
“Catlin really pushed them into that category,” Gallant said.
“They’ve got the Lloyd’s business which puts them in every market in the world. So I think the combined company re-establishes XL as one of the top insurers in the world.”
“ACE was well positioned and we were horribly positioned,” McGavick said. “We lost a couple of years and ACE took advantage of those years and a big gap emerged.
“We’re closing a big chunk of that gap.”
Greenberg on Cuba
On a visit to Moscow in 1964, Hank Greenberg noticed a picture of a Havana office building on the desk of an official with the Soviet insurance company Ingosstrakh.
“That looks like the building where my company housed its insurance operations,” Greenberg — who was in Moscow seeking a travel risk reinsurance deal — told the official.
The C.V. Starr Companies had an office in Havana – pictured above – between 1943 and 1958.
“That may be,” the Soviet official replied. “Now it is the building where Ingosstrakh houses the Soviet Union’s Cuban operations,” he added.
“Please take care of that building,” Greenberg told the official. “We will get it back … soon.”
More than 50 years after Greenberg made that bold statement, as recounted in his 2013 book “The AIG Story,” the day that Starr Companies takes possession of its former property in Havana is not yet here.
“Change must come about, but how fast? I can’t answer that.” – Hank Greenberg, CEO and Chairman of the Starr Companies.
With the recent easing of travel restrictions to Cuba by the U.S. government, however, Starr Companies’ executives are checking on the condition and ownership of the building just the same.
Untangling the history of that Havana building is just one of the opportunities that are on the minds of business people in the United States since travel restrictions to Cuba were eased in January.
Greenberg expresses the hope that his company can one day re-open an insurance operation in Havana. At the same time, Greenberg said that there is much work yet to be done, on the part of both the public and the private sector, before anything like that can happen.
“Both governments have got to agree on the speed by which normalization would come into being,” Greenberg said.
Since the restrictions were eased, Greenberg reports that the Starr Companies’ travel services subsidiary Assist-Card International Holdings, which it acquired in 2011, is already seeing an uptick in inquiries from businesspeople interested in its travel protection services in Cuba.
“From what we can discern, there is a great deal of interest and a pent-up need to travel,” Greenberg said.
The hotel and restaurant business, agriculture and travel-related industries like cruise shipping and aviation are just a few of the industries that will see opportunities in nearby Cuba as relationships between that country and the United States open up.
There will also be an intense interest, Greenberg said, for people of Cuban descent who are United States citizens eager to visit their origin country.
However, more evolution in government relations must occur before many of those dreams can become a reality.
“Change must come about, but how fast? I can’t answer that,” Greenberg said.
One thing Greenberg is certain of. Free trade is the quickest route to building lasting bonds between the United States and Cuba.
“I think that where trade increases between countries generally you see change in attitudes and building better trust between countries. You learn from each other, it’s a faster way to normalize relations than anything I can think of,” Greenberg said.
Greenberg stressed that Assist-Card International isn’t the only U.S.-based insurance company or subsidiary in the travel risk business.
The Starr chairman indicated though that he expects his company to be a strong competitor.
“The challenges of doing business in Cuba are substantial,” Greenberg said.
“But Starr is well-positioned and prepared to leverage our relationships and global network to support our clients’ entry into this market.”
Most Dangerous Emerging Risks: A Look Back
Each year since 2011, Risk & Insurance® identified and reported on the Most Dangerous Emerging Risks. Here’s how we did on some of them.
2011: Rising Sea Levels
In 2011, our sources talked about the threat of rising sea levels, combined with land subsidence in major urban areas. Our reporting postulated that investment in infrastructure was not keeping pace with the risk.
Outcome: Elevated sea levels lift a Category One tropical storm, Superstorm Sandy, on Oct. 29, 2012 and enable it to inundate New Jersey and New York, resulting in $25 billion in insured losses and the deaths of 285 people.
2011: Political Revolutionary Risk
In 2011, we described a scenario in which the head of a fictional country, Yberra, nationalized all privately held assets. In the scenario, mining operations and fruit-exporting companies with substantial holdings in Yberra suffered large losses. Risk managers for those companies were sent scurrying to examine their business interruption and political risk coverages.
Outcome: Tunisia, Egypt (twice), Libya, Ukraine and Kyrgyz all saw the removal of their heads of state in the aftermath of the Arab Spring. Ongoing pressure from Islamic militants and national governments threaten to redraw boundaries throughout the Middle East in 2015 and beyond.
2011: Toxic Water
In 2011, Risk & Insurance® described a fictional Category 2 hurricane, Hurricane Lucy, that dropped so much water on North Carolina that it caused the walls of a massive agricultural manure lagoon to burst. The resulting environmental damage resulted in the closure of hundreds of thousands of acres of commercial fisheries. Cryptosporidium infected hundreds, killing 142.
Outcome: In February 2015, Duke Energy was getting set to agree to a $100 million payment and five years’ probation in response to criminal charges after it spilled 40,000 tons of coal ash riddled with arsenic, lead and selenium into the Dan River in February 2014.
In January 2014, a chemical spill by Freedom Industries resulted in the loss of drinkable water for 300,000 residents near Charleston, W. Va. Schools and businesses where shut down by the event. The Freedom spill was the third chemical spill in that area in the last five years, following spills at Bayer and DuPont facilities.
2011, 2012, 2013 and 2014: Cyber attacks
Our reporting in 2011 and beyond described a range of cyber events, from the leaking of sensitive information to state-sponsored cyber attacks on our energy infrastructure and cloud-based data storehouses.
Outcome: NSA contractor Edward Snowden released thousands of classified documents to journalists in June 2013. Major hacks that have taken place since 2011 have impacted Target, Home Depot, Sony, the U.S. military, AOL, Adobe, Anthem and eBay with economic damages in the hundreds of millions of dollars.
2013: NFL Concussions
The tragic deaths of beloved NFL stars such as Junior Seau and “Iron” Mike Webster related to degenerative brain disease from repeated blows to the head signaled a wave of liability headed not just at the NFL but at other high-contact professional sports leagues such as the NHL. The long history of the NFL coupled with the number of former players possibly impacted added up to a heavy financial penalty.
Outcome: A final ruling from a federal court judge in Philadelphia is expected to produce a settlement in excess of $1 billion in a case brought by ex-NFL players that alleges that the NFL not only knew about the dangers of the game but hid that knowledge from players.
In February, a group of NHL players including Stanley Cup winners Eddie Westfall and Butch Goring filed a lawsuit against that league, alleging that the NHL failed to offer adequate education and protection against brain injury to players.
2012: Typhoons in Areas of Recently Increased Business Density
In 2012, a fictional typhoon, Typhoon Tsuguko, a Category Four, slammed into Taiwan, killing hundreds and wiping out one-third of the world’s semi-conductor manufacturing capacity.
Outcome: The 2013 Pacific typhoon season, responsible for 6,287 deaths, was the deadliest season since 1975. Overall economic damages from Pacific typhoons in 2013 came to some $22.8 billion.
In July 2014, Typhoon Rammasun caused economic damages in excess of $6.5 billion in China, Vietnam and the Philippines.
2012: Protest 2.0; The Use of Social Media in Protests
In a 2012 scenario, a fictional protester, Joshua Shane, sparked a national reaction when a protest he organized against a local foreclosure went viral, sparking sister protests in a number of cities. The fictional Twitter tag #RiseUp served as fuel for the fire.
Outcome: More than 500,000 Twitter postings following the shooting death of Michael Brown in Ferguson, Mo., ignited protests around the world from August through December 2014. In addition to riots that destroyed businesses and homes in Ferguson and St. Louis, riots sparked with the Twitter tag #HandsUp shut down commerce and traffic in Oakland, Calif., and London, among other locations.
2013: The Antibiotic Void; The Rise of Drug-Resistant Superbugs
In 2013, our scenario described an “antibiotic void,” a world in which antibiotic-resistant “superbugs” wreaked havoc in hospitals and in society at large.
Outcome: An antibiotic-resistant strain of Salmonella broke out in the summer and fall of 2013 and hospitalized 278 people in 18 states.
An antibiotic-resistant “superbug” — CRE — spread by an unapproved medical device, sickened some patients and killed others at Los Angeles area hospitals in late 2014 and early 2015. The same superbug is thought to have hit a hospital in Wisconsin in 2013.
Complete coverage of 2015’s Most Dangerous Emerging Risks:
Corporate Privacy: Nowhere to Hide. Rapid advances in technology are ushering in an era of hyper-transparency.
Implantable Devices: Medical Devices Open to Cyber Threats. The threat of hacking implantable defibrillators and other devices is growing.
Athletic Head Injuries: An Increasing Liability. Liability for brain injury and disease isn’t limited to professional sports organizations.
Vaping: Smoking Gun. As e-cigarette usage rises, danger lies in the lack of regulations and unknown long-term health effects.
Aquifer: Nothing in the Bank. Once we deplete our aquifers, there is nothing helping us get through extended droughts.
Most Dangerous Emerging Risks: A Look Back. Each year since 2011, we identified and reported on the Most Dangerous Emerging Risks. Here’s how we did on some of them.