R&I Profile

Quick and Decisive

Mike McGavick, the CEO of XL Catlin, earns praise by making tough decisions others avoid.
By: | May 6, 2015 • 9 min read

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.

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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.

Brian Duperreault CEO Hamilton Insurance Group

Brian Duperreault
CEO
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.

Roots

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.

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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.

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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.

Insurance Calls

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.

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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.

Greg Case President and CEO Aon

Greg Case
President and CEO
Aon

“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.

XL Catlin

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.”

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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.”

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Black Swan: Cloud Attack

Breaking Clouds

A combination of physical and cyber attacks on multiple data centers for cloud service providers causes economic havoc. Even the most well-prepared companies are thrown into paralyzing coverage confusion.
By: | July 27, 2017 • 10 min read

Scenario

By month 16 of the new presidential administration, the Sunshine Brigade is more than ready to act.

Stoked by their anger over rampant economic inequality, the mostly college-educated group of what might best be called upper-middle-class anarchists — many of them from California, Oregon and Washington State — put in motion the gears of a plan more than two years in the making.

Their logic, to them at least, is unimpeachable. Continued consolidation of economic power into the hands of fewer and fewer corporations is creating a world where the rich increasingly exploit and shut out the poor.

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The rise of the techno giants is accelerating this trend, according to the Sunshine Brigade’s de facto leader Emily Brookes, an All-American rugby player and a graduate of Reed College in Oregon.

With a new presidential administration seemingly bent on increasing the economic advantages of the rich with no end in sight, nothing to do then but break things up; and in so doing break the hold of this technology oligarchy.

As Emily Brookes so forcefully put in her instant messages to the other members of the brigade: Break the Cloud.

With more than 500 members, many of them with ample financial and technical resources, the Sunshine Brigade is very capable of delivering on its plan for a two-pronged attack.

It is also radicalized enough to justify the loss of some human life, even its own countrymen, to “save” — in its collective logic — the tens of millions of global citizens that are living as virtual slaves in this callous, exploitative global economy.

With websites and digitally connected services large and small down for days, irritation turns to fear.

The first wave in the attack is an attempt to infect and shut down the data centers for the top three cloud service providers. It takes months to set up this offensive.

Rather than rely on a phishing scam from outside the firewalls of the service providers, The Sunshine Brigade uses its social and business connections to place three members on each of the cloud provider’s payrolls. An infected link from someone you know, someone in the cubicle right next to you, seems like an unstoppable play.

It only partially works. Only one of the cloud service providers is harmed when an unsuspecting employee clicks on a link from their traitorous co-worker. The released malware manages to cripple a major cloud service provider for 12 hours.

With millions of users affected, the act creates substantial disruption and garners global headlines. Insured losses are around $1.5 billion. But this is just the beginning.

The morning after, the Sunshine Brigade unleashes a far more devastating and far more ruthless Round Two.

Using self-driving trucks, the Sunshine Brigade smashes into five data centers; three on the West Coast, and two in the Midwest. Fourteen employees of those cloud servers are killed and another 23 injured; some of them critically.

This time the Brigade gets what it wanted. The physical damage to the data centers is substantial enough that it significantly affects three of the top four cloud service providers for five days.

With websites and digitally connected services large and small down for days, irritation turns to fear.

Small and mid-sized banks, which host their applications on clouds, are shut down. Small business owners and consumer banking customers immediately feel the brunt. Retailers that depend on clouds to host their inventory and transaction information are also hit hard.

But really, the blow falls everywhere.

In the U.S., transportation, financial, health, government and other crucial services grind to a halt in many cases.

Not everyone is disrupted. Some of the larger corporations are sophisticated enough in their risk management, those that used back-up clouds and had steadfast business resiliency plans suffer minimal disruption.

Many small to mid-size companies, though, cannot operate. Their employees can’t get to work and when they can, they sit idly in front of blank computer screens connected to useless servers.

For the man on the street, this is hell.

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Long lines blossom at the likes of gas stations, banks and grocery stores. A population already on edge from a steady diet of social media provocation becomes even more inflamed.

By nightfall of Day Five, the three major cloud service providers are recovered, and digital “normalcy” begins to creep back. But for many small and medium-sized businesses, the recovery comes way too late.

Economic losses promise to register in the tens of billions. It’s not being too imaginative to think that losses could hit the $100 billion mark.

Two multinational insurers based in the U.S., three Lloyd’s syndicates and a Bermuda insurer signal to regulators that their aggregate cyber-related losses are so great that they will most likely become insolvent.

Emily Brookes and her cohorts were willing to kill more than a dozen people to promote their worldview. In their youthful naiveté, they could not know just how much suffering they would cause.

Observations

For some commercial insurance carriers, the aggregated losses from a prolonged disruption of cloud computing services could be catastrophic, or close to it.

“It’s on a par with any earthquake or hurricane or tornado,” said Scott Stransky, an associate vice president and principal scientist with the modeling firm AIR Worldwide.

AIR modeled the insured losses for the Fortune 1,000 were Amazon’s cloud service to go down for one day. They came up with a figure of $3 billion.

Now consider that most businesses in this country are small businesses, with not nearly the risk management sophistication of the Fortune 1000. Then consider a cloud interruption of five days or more.

Mark Greisiger, president, NetDiligence

“Almost any company you talk about today would rely to some extent on the cloud, either to host their website, to do invoicing, inventory, you name it — the cloud is being used across the board,” Stransky said.

“It’s a significant issue for insurers and one we think about a lot,” said Nick Economidis, an underwriter with specialty carrier Beazley.

“Should a cloud service provider go down, everybody who is working with that cloud service provider is impacted by that,” he said.

“Now, pretty much every software maker is on the cloud,” said Mark Greisiger, president of NetDiligence.

“In the old days, someone would come in and install software on your servers and come in annually for maintenance. That’s all gone bye-bye. Everybody who makes software is forcing you onto their private cloud,” Greisiger said.

The aggregation risk for carriers is complicated by the degree of transparency they have into which insured’s applications are hosted on which cloud provider.

Now here’s the even trickier part. Clouds outsource to other clouds.

“It’s almost becoming a spider’s web of interdependencies on who has access to what in terms of upstream and downstream providers,” Greisiger said.

Determining which of their insureds is hosted on which cloud, and in turn, where that cloud is outsourcing to other clouds can be very difficult for carriers to determine.

Even if a company is careful to diversify the risks they’re taking, they might not realize that a high percentage of insureds are even with the same cloud provider. They could be hit with devastating losses across their entire portfolio of business, said an executive with BDO consulting.

AIR’s Stransky said his company launched a product in April, ARC, which stands for Analytics of Risk from Cyber, which is designed to help carriers gain that much needed transparency.

Among insureds, surviving an event of this magnitude will depend not only on the sophistication of their risk management department, but on the company’s overall ability to negotiate contracts with vendors and suppliers that will indemnify the company in the case of a cloud outage of this duration.

It will also depend on organization’s understanding that there is no off-the-shelf solution that will prevent an event like this or make a company whole after it.

Shiraz Saeed, national practice leader, cyber, Starr Companies

Experts say contracts with cloud service providers, customers and suppliers must be structured so that a company is defended should it lose cloud access for as much as five days or more.

Best practices also include modeling just what your losses would look like in this area, and vetting your full portfolio of insurance policies to understand how each would respond.

One broker said buyers can’t be blamed if the complexities of the coverage issues at stake here are initially hard to grasp.

“It’s becoming a spider’s web of interdependencies on who has access to what.” —Mark Greisiger, president, NetDiligence

“I think it’s the broker’s job to inform the client of this exposure,” said Doug Friel, a vice president with JKJ Commercial Insurance, based in Newtown, Pa.

“You may have business interruption coverage for direct physical damage to your building. But have you ever thought about your business income if your IT structure goes down?” Friel said.

He said many buyers might not realize there is a difference.

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Large businesses should have the resources to demand from their cloud service providers that they be indemnified for the entirety of a cloud failure event. There will be a fee for that, but it will be well worth paying, Friel said.

“You have to push,” Friel said. “They are going to say, ‘Here is our standard contract, sign it.’ ”

Don’t settle for that, he said, although many do in ignorance, he added.

“Where possible, we would look for clients to negotiate their contracts. These business relationships should be mutually beneficial, even if one of these events occur,” said Shiraz Saeed, national practice leader, cyber, for the Starr Companies.

It’s a partnership, he said.

“It shouldn’t be a zero sum game on either side. I think there should be an understanding of what the potential loss might be and then designing a contract around that,” he said.

While cloud service providers are known for having high grade security systems, most average organizations don’t have the means for that. But no matter what a company’s resources, the first step is modeling where your digital assets are, and what you and your customers stand to lose if you lose access to them.

“Most insureds don’t seem to understand the amount of individual loss that you could be subject to,” said Jim Evans, leader of insurance advisory services at BDO Consulting. “Usually this stuff is measured in hours,” he said. “But what if a cloud provider is out for three or four days?” he said.

“Trying to quantify what you did lose in an event is hard enough. Trying to do a modeling exercise about what you could lose? It’s something that just doesn’t get done enough,” he said.

Once you have an understanding of what you own and what you stand to lose, the next step is prioritizing the protection of the assets you have. That means drilling into your contract with your cloud service providers to get the maximum indemnification.

It also means spreading your risk so that if at all possible, not all of your assets or your customers’ assets are housed by one cloud service provider. Cloud platforms can be public, private, or a hybrid of the two.

Understanding where your assets are in that architecture is crucial. Spending the money to insure that they are protected behind a diverse menu of firewalls is highly advisable.

Navigating the different iterations of business interruption coverage in property, cyber and kidnap and ransom policies is also important.

Make sure your broker can provide clarity on the different types of coverages and tailor them to your needs, experts said.

The concept of design thinking is really what’s in play here. Organizations have to work with vendors in every aspect of their operations to design a risk management system that can sustain this kind of hit.

“Build a better mousetrap to protect yourself,” said JKJ’s Friel.

“Depending on your service, you need to have the best and the brightest designing this stuff. Spread the risk.”

“Don’t be afraid to ask for more,” he said.

Postscript

In engineering an attack on the cloud, Emily Brookes and her cohorts accomplished the opposite of what they set out to do.

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Only the largest corporations with the most sophisticated risk management programs were able to survive the attempt to break the cloud with manageable losses.

Small businesses, the true backbone of the U.S. economy, suffered terribly. Entrepreneurs who put their life’s work into their business lost it in many cases.

Those on the lowest part of the economic scale, the working poor, lost their jobs and their ability to cover their rent and grocery bills. They joined the ranks of those subsidized by the government by the millions.  The attempt to break the cloud resulted in an even more polarized society. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]