1 March 2012Re/insurance

XL Re: the DNA of success

Following a difficult few years on both the underwriting and investment sides of the book, the importance of a clear strategic vision has become all the more pressing for international re/insurers. XL is no exception, with the firm turning to the expertise of Greg Hendrick, chief executive of XL’s insurance segment, Sarah Street, XL’s chief investment officer, and Jamie Veghte, chief executive of XL’s reinsurance segment, to guide the company’s ambitions through choppy waters.

January’s renewals brought some cheer as ratings rose across a host of short-tail lines, but a clear global vision remains an overarching theme in XL’s approach to its business. Here, Veghte addresses XL’s strategic approach and details how XL’s essential structure—its ‘DNA’—enables the firm to differentiate itself from the marketplace.

What is the focus of XL Re’s global strategy: diversification by line, by geography, or building out existing business, and how do you see this strategy playing out over the coming five years?

XL’s reinsurance segment has always sought to diversify by both line and geography. However, we are also very focused on underwriting discipline contributing to our global strategic approach and the role it will play in optimising the return profile of our underwriting portfolio. I don’t see that strategy changing over the next five years, as it has been our approach for the last 20 years.

We have strong business in all the global developed markets and we are developing businesses in a range of emerging markets. I see the next five years as a combination of both building out our existing platforms and pursuing opportunities, looking to new territories. If you look at the last few years it demonstrates the way that we want to build out our business.

We have added new teams in some of our existing geographies—in the last year, for example, we added a Middle East and North Africa team to our London operations and added an accident and health unit to our reinsurance team in the US. In addition we were one of the first local reinsurers to receive a licence in Brazil when that market opened, so it’s a combination of developing new geographies and growing our existing businesses.

Looking at figures from 2010, you were writing just under $2 billion of business. What are your expectations for future growth?

It is very difficult to put a specific number on our future expectations and frankly that reflects the way that we think about the business: when there are opportunities to grow, we are happy to grow very quickly, and when there are not, we are content to exert the sort of discipline on the portfolio that may require us to not grow at all. In fact, between 2005 and 2010 we actually shrank.

Our mantra has always been about being global, but also being disciplined and generating underwriting profits, which we have consistently achieved—the combined ratio of our reinsurance operations worldwide between 2006 and 2010 was in the order of 85 percent, an outstanding achievement for a global multi-line reinsurer with a significant component of long-tail business. Like any businessman I would like to see our business grow over the next five years, and I think that we will have a great opportunity to do so, between new opportunities and an improving market.

Are you more positive about the coming months?

I am. Between improving margins and where we sit in the marketplace, I think that we will have some great opportunities. At year-end conditions on the short-tail side went slightly better than we expected in the US—not quite as good as we had hoped in Europe— but nevertheless we got some positive rate movement. We are seeing signs of improvement in pockets of the long-tail market, but broadly an overall improving market is going to play right into our hands and we are ready to take advantage of that.

With many of the cat-hit renewals occurring later in the year, are you expecting further positive developments?

I certainly think that we are on a very nice glide path across the marketplace. The earthquake in Japan occurred very close to that market’s universal renewal date of April 1, so I imagine that we will see improving terms and conditions in that marketplace at April 1, 2012, and broadly across the short-tail markets we would expect rates to improve further.

In terms of XL’s reinsurance global strategic development, which geographies are you looking to develop and what are the attractions of these particular territories?

We are constantly on the prowl for development opportunities. Last year we had two specific examples: the Middle East and North Africa desk and the US accident and health operation being kicked off in Stamford, Connecticut. In the long run I would expect us to grow our physical footprint out in the Asia Pacific region more broadly than we have. We have one branch in Singapore, but I think with the development of that market there will be a good chance to expand our footprint in the region.

Do you foresee building joint ventures with local players in emerging geographies or is establishing a local presence more in line with the XL approach?

It really does depend upon circumstances on the ground. I can give you two specific examples of how we have approached the issue. Broadly, where we have a history of activity and a physical presence and knowledge of the market, we tend to go it alone and develop our own platform. Where we have less knowledge of the market and some questions regarding how we can optimally enter, we have looked to joint venture structures. Having said that, we generally would work to have a controlling interest in these initiatives at some juncture.

In Brazil, we had had a representative office there for more than a decade before the market opened. We knew most of the players in that marketplace, were very familiar with their customer base, and were happy to capitalise our own local reinsurer when that market opened.

In contrast to that, we decided to enter the European market on a joint venture basis with French mutual, Les Mutuelles Du Mans Assurances Group in 1999. We formed a joint venture in Le Mans—establishing what is now XL Re Europe—with a minority interest in the venture, but the intention was always to have a majority stake and ultimately to own 100 percent of the entity. We took this approach because we had less familiarity with the European market and some of the employment practices and felt that the joint venture approach would be the optimal way for us to enter the market. It has been a huge success.

In more developed geographies what are XL’s reinsurance operations bringing to the table in order to strengthen market share?

The combination of our reputation in the market, our emphasis on analytics and a deeply experienced team—particularly on the underwriting side—has allowed us to differentiate ourselves from the competition. If you go back to 2008 and 2009, when XL faced some well-documented challenges, there is no question in my mind that the relationships we developed over the previous two decades allowed us to trade through that difficult situation quite effectively. I think the level of experience that we have among our people, particularly the business unit leaders, is a deep advantage for us.

"We have a very flat management structure, in which there are very few levels between executive management and anyone who has the authority to put the company at risk around the world."

One of the other things that we have always tried is to utilise a consistent approach around the world. We have a very flat management structure, in which there are very few levels between executive management and anyone who has the authority to put the company at risk around the world. We have insisted on a similarly global approach to pricing and underwriting. An underwriter in Singapore will look at a risk in the same way as an underwriter in London will, based on our web-based pricing system, our peer review process and our referral guidelines—it’s all been built very deliberately to promote consistency wherever we do business. As we have developed as a company, that approach has generated not only great results, but a differentiating philosophy for us.

A lot of reinsurers are talking about reinsurance-plus: providing bolt-on services to the traditional reinsurance offering—is XL doing or considering this?

Do we provide bolt-on services to our clients? Absolutely, although I would say that this is on more of a one-off basis, rather than as a core part of our strategy. Our differentiating characteristic has always been our technical skills. One of the reasons that we are mainly a broker market is that we take most of the investment we make into technology and use it to build our own capabilities, and allow the brokers to work with the clients in terms of capital management and portfolio optimisation. We have invested in our ability to ‘outunderwrite’ the marketplace and that’s how we differentiate ourselves and provide value to the marketplace.

You recently changed your brand identity. What role is that playing in your global strategic development?

The brand roll-out supports the strategy work that we have been doing over the last couple of years. Broadly we are looking to solve complex risks and I think the new brand reflects that approach. One of the gratifying things about both the strategy and the branding is that it honours what I think of as the DNA of XL. If you think about the founding of this company, it was an act of extraordinary innovation and the new branding and strategy really reflect that history.