XL: back on track

Mike McGavick joined XL Capital as chief executive officer on May 1, 2008. His mission: to right a ship that had been seriously holed and was taking on water.

"You only know how powerful something is when it's severely tested. XL has been severely tested, and now we're roaring back into the marketplace because the fundamentals are there."

McGavick’s analysis revealed that the company was basically sound, but faced two immediate, dangerous problems. The most serious was the difficulties at Security Capital Assurance Ltd. (SCA), now called Syncora, which threatened to drag XL down. XL had given unlimited guarantees to its former subsidiary, but was able to terminate the relationship with a single payment, using money XL raised in the open market. As McGavick explains below, had XL not acted when it did, such a solution might have proved impossible in a world where capital suddenly became unavailable.

The second problem at XL was a distressing habit of unexpectedly losing large amounts of money in the fourth quarter. On the evidence of the fourth quarter of 2008, that problem has been solved, too.

In a statement accompanying XL’s results for that quarter, McGavick, an unusually open chief executive, said: “No one is happier to see 2008 behind us or more excited to have 2009 before us than we are at XL. 2008 has been the toughest year in XL's history; albeit one in which we have put a number of issues behind us and emerged on a solid footing. Not only did we deal with the SCA overhang, we took major steps to de-risk our investment portfolio and to simplify our balance sheet.”

So, are the problems over? Three-quarters of the way through 2009, the year he welcomed as it began, Bermuda Re/insurance asked McGavick for an update on the company.

Bermuda Re/insurance: How is XL doing?

McGavick: XL is once again on the front foot and competing well. We feel very good about our position, especially given the challenges we have faced. We’re very excited.

Bermuda Re: In the past 18 months, what has the company achieved that you are proudest of?

McGavick: What all of us at XL are proudest of is the fact that, against very daunting market conditions, our people were loyal to one another and our clients were loyal to them. That is the key thing about this period. This is a tremendously resilient franchise, built on the skills and knowledge of our people and the value they add for our clients. I can’t say that everything we’ve been through to prove that to be true was fun, but to see us collectively weather the storm as we have has been very encouraging.

Bermuda Re: Is it over? Are XL’s troubles all now in the past tense?

McGavick: The problems we faced when I joined the company have been confronted and resolved, but business is always a changing landscape. There is never an endpoint to the journey.

Bermuda Re: Is the worst of what you faced behind you?

McGavick: It is. We clearly had challenges in terms of counterparties who were worried and brokers and colleagues who were worried about how we were doing. All of that is in the past and remarkably well in the past. XL deserves to be one of the great franchises. It has been in the past, and it will be again. That’s our only framework. Is XL Capital the best company in the world? Maybe not at this moment, but making it the best company in the world is what we are in the process of doing.

Bermuda Re: To reach this point, you’ve had to shrink the company.

McGavick: We have reduced our top line, but that has been more a function of what is going on in the global economy. Some of our challenges played into that, but global economic activity declined so much that it was bound to be reflected in our business. We insure global 500 companies, so we’re a reflection of their reduced output. We had to ensure that we had an effective business model and we were required to shrink the business, but that phase is moving into the past. If you look at the decline in the first quarter of 2009, versus the first quarter of 2008, and then look at the second quarters, you’ll see a reduced rate of decline. We have a rapidly healing franchise that, from a top-line basis, is performing pretty well.

Bermuda Re: Ultimately, you’re more interested in the bottom line, aren’t you?

McGavick: We are, and we always will be. In the end, great franchises find ways to grow, but the truly great franchises never take their eyes off the bottom line. Our ability to earn a profit creates a healthy cycle of circumstances that is better for our clients, our people and our shareholders. When we are successful, we are all successful together.

Bermuda Re: The industry buzz is that clients are looking for smaller lines, spread across more companies. Has that affected XL?

McGavick: Yes, we have seen that as a market phenomenon. As a company that has historically written larger lines, it has both a positive and a negative effect. The negative effect occurs where we have a large line; a decision to move to broader panels can reduce our participation. Last year such reductions might have had something to do with XL, but it has really been a broader market phenomenon. Where it can be a benefit is that we are not on all the programmes we’d like to be on. This change in philosophy affords us the opportunity to enter some new programmes. We’re big believers that when we have a chance to display our technical underwriting capacity, we have a good chance of being chosen to underwrite the business.

Bermuda Re: That development was as much a function of changing market conditions—and in particular of the problems at AIG—as it was of XL’s situation, wasn’t it?

McGavick: Yes. I think it would be just as true for us as if we had not been facing particular issues last fall. As our good name comes back to us, I don’t think that the use of smaller lines will stand the test of time. It was a reaction to market conditions. In the long run, I think the market will return to the old way of writing larger lines, because it’s a more efficient way for risk managers to effectively manage their counterparty relations.

Bermuda Re: How intensely did those changing market conditions affect the job you came to XL to do?

McGavick: Global market conditions made it massively worse. One can now stand safely on the other side and look back at the SCA solution and say that it would have been unimaginable once the global credit crisis took hold in September. So, while we worked at that with great focus and energy, if we hadn’t started when we did, it’s hard to say what would have happened. Being lucky is as important as being good. Then, too, on the XL side, we knew that we wanted to reposition the investment portfolio, but none of us anticipated the depth of challenge that would generate; it proved to create challenges as difficult as the SCA resolution. You only know how powerful something is when it’s severely tested. XL has been severely tested, and now we’re roaring back into the marketplace because the fundamentals are there.

Bermuda Re: Who was on your side and who wasn’t, as you worked through the past 18 months?

McGavick: Without a doubt, the people who were the most supportive were our clients. They looked at us and said ‘XL adds enormous value, and we must stand by the company’. The fact that our people remained loyal to us and stuck with us was central. Buyers and brokers valued XL’s role in the marketplace and saw it as important that XL survived. That was a powerful wind at our backs.

Bermuda Re: How about your competitors?

McGavick: Our competitors were a mixed bag. The thing is: we’re often not just competitors, but also partners on some programmes, so that produced mixed feelings, I would imagine. Some were clearly very cooperative—perhaps having been through a similar time themselves, when we had been supportive of them—in the way that competitors will help where they could. A small band of our other competitors, I think, were hoping that a weakened XL would not succeed, but they underestimated our resilience. We are never a mean-spirited competitor and that probably stood us in good stead.

Bermuda Re: After Safeco and now XL, you’re two for two. Is it ‘job done’ and away you go?

McGavick: No. Far from it. I’ve told the board and my colleagues that, if they’ll have me, I hope to be here for 10 years or more. I came to XL to work with people to make it the best company in the world. We have aspired to that title, and we look forward to earning it again. You do that by being repeatedly and consistently great.

Bermuda Re: How old are you?

McGavick: I’m 51.

Bermuda Re: So 10 years or more is eminently possible, all things being equal. Is your job fun?

McGavick: It certainly is.