Former Republican candidate Mike McGavick has a huge reputation after turning round XL Group and Safeco. But is his future in business or politics?

Mike McGavick turned his back on the insurance industry in December 2005, quitting his post as chief executive of US insurer Safeco to rejoin the world of politics and run for office in his home state of Washington. However, following his defeat in the 2006 election, where he failed to take a senate seat from incumbent Democrat Maria Cantwell, he decided to return, taking the reins of XL Group from longstanding chief executive Brian O’Hara on 1 May 2008.

McGavick’s comeback could be described as a resounding success: he is speaking to Global Reinsurance in his first big interview since returning XL to profitability.

It is perhaps not surprising that McGavick came back to insurance.

He had been successful during his five-year tenure at Safeco, and is credited with turning the company around. He was named chief executive of the year by Seattle’s Puget Sound Business Journal in 2002 in recognition of his efforts. Joining XL must have felt like a homecoming after his rough treatment at the hands of Washington State’s electorate.

And running a company like XL was clearly an attraction, being firmly established and well respected in the global insurance and reinsurance markets. McGavick himself describes the company as “one of the world’s great franchises”.

A particularly pressing matter

However, McGavick got slightly more than he bargained for when he took over at XL. That is not to say he was expecting a smooth ride. He felt the firm’s existing strategy of being a diversified financial services firm, as reflected in its old name, XL Capital, was pulling the company beyond its comfort zone.

“When this management team gathered, our view was that XL’s real strength was its core property/casualty insurance and reinsurance operations, and we wanted all the other stuff out of there,” he says. “Since then we have concentrated the firm around those opportunities, exiting or running off any businesses that didn’t fit very tightly in that definition.”

A particularly pressing matter for McGavick was to sever the company’s ties with financial guarantee business. XL had spun off its financial guarantee units into a separate holding company, Security Capital Assurance, in 2006 and listed it on the New York Stock Exchange. However, XL retained roughly 46% of the firm, now known as Syncora Holdings, and had put in place several guarantees and reinsurance arrangements protecting its business.

McGavick wasted little time: In July 2008, XL unveiled a plan to terminate the reinsurance policies and guarantees, in return for a cash payment of $1.775bn to SCA, and transfer its 46% stake in SCA into a trust. This was completed in August 2008 – only three months after McGavick took the helm of XL. The arrangement eliminated $64.6bn of the total net exposure under the reinsurance arrangements, which was $65.7bn as of 30 June 2008.

All looked to be in hand. However, the collapse of US investment bank Lehman Brothers the following month plunged the world into financial crisis. McGavick had recognised that XL’s investment portfolio needed de-risking – he says there had been a “reach for yield” in the investments backing XL’s non-property/casualty businesses, leading the company to have exposures to asset classes that would not be found on a traditional property/casualty

(re)insurer’s books in the same quantities. “The financial crisis really laid that bare because of the tumultuous effects it had on our balance sheet.”

2009 and back in profit

XL made a net loss of $2.63bn for the full year of 2008. The loss in the fourth quarter of the year alone was $1.43bn. At their peak at the end of the first quarter of 2009, unrealised losses on the investment portfolio were $4bn.

Instead of making a few fixes, McGavick found himself once again having to overhaul a company. “The job went from ‘solve a problem and get to run one of the world’s great franchises’, which is the job I signed up for, to running a turnaround.”

Cut to September 2010, however, and the work is largely done. Having returned to profitability in the full year of 2009, posting a net profit of $206.6m, XL Group made a net profit of $319.8m in the first half of 2010.

Having eliminated its exposure to a portfolio of financial guarantees protecting European Investment Bank, XL’s outstanding exposure to financial guarantee business is now minimal – McGavick estimates it is about $500m. The company also placed its life reinsurance business into run-off at the end of 2009, which McGavick says marked the completion of the exit from XL’s non-core business.

“It is now just the grind of getting the last bits done,” he says. “I am back to the part of the job that I came to take – the fun part.”

Part of the credit for the turnaround must go to McGavick’s fresh perspective, having come into XL from outside, rather than moving up in the company internally. Also, his experience at transforming Safeco’s fortunes played a role, both in terms of experience and giving staff confidence that they were in good hands.

However, McGavick also credits the loyalty of XL’s staff. “I strongly believe that the reason we survived this is because our people stayed together,” he says. “Everybody was expecting an exodus from XL in late 2008 and into 2009, particularly entering the bonus season in 2009, which is a typical time for firms to lose a lot of people. In fact, our 2009 staff turnover was lower than the prior year.”

Foresight, coupled with a small amount of luck, also helped XL weather the storm. XL raised $2.875bn from an issue of ordinary shares and equity units in 2008 in relation to its decision to commute the reinsurance policies with SCA. McGavick recalls that the company deliberately raised more than it needed to pay off SCA to provide an extra capital cushion against hurricanes and the fact that McGavick was concerned about XL’s investment portfolio.

It was a good thing it did: hurricanes Gustav and Ike hit the firm as well as the financial crisis. “If we hadn’t raised that additional capital for those purposes, it could have been even more challenging than it was,” McGavick says. “That decision held us in good stead as history has played out.”

Plenty of opportunity

McGavick can now focus on growing the company. Thanks to softening rates in both insurance and reinsurance, growth prospects are thin on the ground. And as a global insurer and reinsurer, XL has few places left to expand. However, McGavick is convinced there are opportunities.

“There are very few places that we can say we are so dominant in that space that we don’t want to do any more,” McGavick says. “We can be very opportunistic according to where we think the best margins are. Outside a couple of lines of business where we have very healthy market shares, while we tend to be a meaningful player in all of our markets, we still have plenty of opportunity for growth.”

However, McGavick is adamant that he will not grow XL at the expense of underwriting profitability. He says that there has been some growth at XL because of clients returning to the company now its troubles are over, but he adds: “The bottom line is our ultimate focus.”

While he is now doing the job he wanted at XL, McGavick acknowledges he cannot sit back and relax. “We have many high-quality competitors, and it is our job to keep advancing this firm so we can compete effectively with them all the time. I’m pretty sure most of them sit around thinking the same thing, and that makes it a marketplace in which you can never take a breather.”

Even so, with the bulk of the heavy-lifting done, it could be assumed that McGavick would be looking for a new challenge. He admits that he viewed Safeco as “a turnaround project” and moved on to try to satisfy his political ambitions.

There were rumours when McGavick joined Safeco that he was cleaning the company up for a sale, and similar rumours have persisted with his move to XL.

FBR Capital Markets analyst Bijan Moazami wrote in a recent research note: “Among the management teams of the insurers that we follow, we believe that no chief executive has a greater propensity to sell his company than Michael McGavick.” The note also suggested that XL would be better off in the hands of Warren Buffett’s Berkshire Hathaway or Prem Watsa’s Fairfax Financial Holdings.

However, McGavick insists that XL is more than a project. “I came here for a career,” he says.

Wise moves

It is also unlikely that McGavick will feel the urge to run for political office again. When asked if he is an insurance executive or a politician, he answers firmly: “I’m an insurance executive – full stop.”

He has a ‘been there, done that’ attitude to politics. “The people of the state of Washington made a decision that I might not be the right person to represent them in the Senate,” he says. “It was satisfying and fulfilling to be a part of that, but it also taught me that I have a lot to contribute in the insurance and reinsurance world.”

He also feels his choice of company, at a time when US politicians are eager to stem the flow of US premium dollars to non-US (re)insurers, will do little for his political standing.

“I don’t think running a global insurer based in Bermuda and headquartered in Dublin is a very wise political move.” GR