Markel International, the (re)insurer created from the muddle of Terra Nova, is bursting with ambition. We talk to its leaders about where next for the firm that has embraced US-style management and has its eye on major growth

The senior management team at Markel International, the (re)insurer that was formed following US insurer Markel Corporation’s purchase of Terra Nova 10 years ago, has clearly spent a lot of time together. Team members are not shy of interrupting each other to make additional points or flesh out an idea, and they often finish one another’s sentences or trains of thought.

Although there are four people in the room – chief operating officer William Stovin, insurance company president and syndicate active underwriter Jeremy Brazil, finance director Andy Davies and chief actuary Nick Line – it is clear they all have the same message, even if they occasionally stumble over one another to deliver it.

In some ways, this is hardly surprising: Stovin, Davies and Line are all members of the Terra Nova old guard. This united front is, according to the four executives, a world away from the situation at the company that Markel Corporation bought at the turn of the millennium.

Made of many fragments

Terra Nova had eight Lloyd’s syndicates operating under the Octavian Syndicate Management banner, as well as a London market operation Terra Nova Insurance Company, French reinsurer Corifrance, Bermudan insurer Terra Nova (Bermuda) Insurance Company and a Bermudan holding company. There were also offices in Belgium, Australia, Hong Kong and a branch in Canada.

To hear the executives describe it, Terra Nova was a company in the loosest sense of the word. “It was a fragmented organisation – we had six finance departments, for example,” says Davies. “Each divisional syndicate had its own ecosystem.”

“They were very separate businesses,” Stovin chips in. “They had their own accounting, recruitment and reinsurance arrangements.”

As well as being inefficient, this structure was clearly doing nothing for the company’s structural integrity. “As you can imagine with eight syndicates, two companies and other bits around the edge, there was massive infighting, nobody feeling like they were part of anything in particular, and the medieval Lloyd’s fiefdoms that were the old-fashioned syndicates,” says Stovin.

Line adds: “Almost all of them wrote personal accident business. Most of them wrote property business. They were all fighting over the same stuff.”

The company was also in poor shape financially. Stovin says Terra Nova would have gone bust if a buyer had not been found.

Gut-wrenching changes

It was clear that nothing short of a drastic and speedy overhaul would fix the problems at Terra Nova. Over nine months, the firm’s sprawling operations were whittled down to two core units: Syndicate 3000 and Markel International Insurance Company Ltd, the London market insurer. The Bermuda operation was closed. Corifrance was placed into run-off and sold. The Hong Kong operation was sold and the Brussels operation and the Australian unit, which Stovin describes as a “total disaster”, were shut.

“You can imagine that, in buying something like that, you had to make some gut-wrenching, radical changes,” says Davies. “For the first nine months, the real focus was developing a structure that we were comfortable with. Rather than doing it piecemeal, which ultimately is a more painful exercise, we did it in one swoop.”

As well as bringing together the underwriting, they also consolidated the company’s back-office functions, such as reinsurance and claims handling.

The new two-piece Markel International was organised around six divisions: marine, aviation, reinsurance and specialty, professional and financial risks, retail and property. The company’s book was pared back from $900m annual gross premium to around $650m.

If that was not painful enough, the company had to adapt to Markel’s reserving philosophy, which Davies says errs on the side of redundancy. This meant a round of reserve strengthening. “For the first two years, that put quite a bit of pressure on the balance sheet,” Davies recalls. “Our company was downgraded in 2002 to BBB, but was upgraded to A in 2003 once the rating agencies were comfortable with our restructuring and strategy.”

With the reserves taken care of, the company set about putting focus on underwriting profitability, as measured using a US GAAP combined ratio rather than a loss ratio, as was more typical within Lloyd’s. Coupled with this change, the company put its underwriters on bonuses tied to underwriting profitability.

As well as the changes to structure and approach, Markel International also introduced a new corporate culture to try to unify the firm. One element of this is that, in a departure from the Terra Nova days, underwriters work across both the syndicate and the insurance company.

The shift also involved a healthy dose of US-style corporate culture. Line recalls that Tony Markel, the firm’s formidable co-vice-chairman, was walking around the Markel International building a day after the acquisition giving speeches on how things would be different.

Shaping up well

Markel International clearly bears some of the hallmarks of the American vision of corporate culture. The four men’s suits are adorned with gold Markel lapel pins, reminiscent of the blue-and-gold flag-shaped badges that Joe Plumeri introduced at Willis when he stormed over from the USA to run the broker in October 2000.

Just as Willis now has The Willis Way, Markel has The Markel Style: a five-line summary of the company’s ethos. It is clear, however, that the London and Lloyd’s market finds these US-style tactics difficult to stomach. Some Willis brokers reportedly rejected Plumeri’s flag pins, and Tony Markel’s approach was clearly as much of a jolt to some Terra Nova underwriters as combined ratios and the new bonus scheme.

“If you had asked a Lloyd’s syndicate back then: ‘What’s your corporate culture?’ they would have looked at you like you were an alien. It just didn’t exist as a concept.” Stovin says. “You took your money from a capital provider each year and you either gave them a return or you didn’t. There was nothing more to it than that. This was a huge transition for every employee and some made it, some didn’t make it; some didn’t want to make it and preferred to stay in the old system.”

While it is possible to debate at length whether such techniques are genuinely valuable or mere gimmickry, it seems to have ensured that the right people stayed with Markel International. “Without putting names to anybody, there are people still in this market who firmly believe that what they had done prior to the acquisition was successful,” says Stovin. “It was anything but.”

It is also difficult to argue with the turnaround in the results. Markel International’s combined ratio was 91% in 2009, on the back of $52m in underwriting profits. The company has made underwriting profits in two of the past three years, only missing 2008 because of hurricanes Ike and Gustav hitting the USA. Markel Corporation’s 2009 report reads: “Approaching the 10-year anniversary of its addition to the group, Markel International stands as one of the crown jewels of Markel.”

Thanks to the heavy losses in the first half of 2010, Markel International has made an underwriting loss for the first six months, posting a combined ratio of 112%. However, Stovin says the losses from the Chilean earthquakes and the Deepwater Horizon oil rig explosion, at $15m each, were within the company’s expectations given its size.

If there are no further major losses, the company is hoping to make an underwriting profit for the full year. “If you look historically at our performance over the year, we tend to be conservative in the first two quarters and the second half of the year tends to be stronger,” says Davies.

Stovin adds: “Our view is that there are no prizes given out in the first two legs of a 400-metre race: it’s who crosses the line.”

While market conditions are challenging, with rates softening in both commercial insurance and reinsurance lines of business, Markel International is looking to grow. Since stripping back Terra Nova’s office network, it has begun to expand internationally, and has offices in Madrid, Stockholm and Singapore. The Singapore office writes business on behalf of Syndicate 3000 via the Lloyd’s trading platform in Singapore.

Time to grow

The company has made a series of acquisitions and additions over the past year. In October 2009, it closed the acquisition of Canadian managing general agency Elliot Special Risks. More recently, in July this year, it expanded its equine business by acquiring French broker and coverholder Le Centaure. The firm also launched a trade credit division in April after hiring a team of underwriters from ACE.

Markel International continues to expand its capabilities by hiring individual underwriters. For example, it appointed Daniel McCarthy as a hull and war underwriter in March and hired Mike Bridgeman to develop accident and health business in April.

“Having cut our teeth on small overseas offices and doing it slowly and steadily, we are now looking to ramp that up. We are in the middle of significant research as to where to go next,” says Stovin.

Markel hired Simon Wilson, previously general representative of the Lloyd’s Singapore platform and managing director of Lloyd’s Asia, in January 2010 as director of international development. “[Wilson] is doing a lot of research into distilling our thoughts on where and what next,” says Stovin. “That is close to the implementation phase. At the same time we are looking for acquisitions both in the UK and abroad.”

Expansion in the Asia Pacific region is part of the plan. “We will shortly be opening an office in Hong Kong, which will be the first spoke from the Singapore hub,” says Brazil. “You are not going to get fat writing Singapore business, but Singapore is a good hub for that part of the world.”

While the company is looking to grow, Stovin is adamant that, whether it comes organically or through acquisition, it will be profitable. “Significant pieces of our bonus structure are based on five-year aggregate growth in the book value of the company,” he says. “You don’t succeed at that by flipping a coin, holding your nose, shutting your eyes and hoping it doesn’t happen.” GR