The former Republican candidate Mike McGavick has a huge reputation after turning round XL Group and Safeco. But will his next challenge be in business or politics?

Mike McGavick turned his back on insurance 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. He returned following his defeat in the 2006 election, where he failed to take a senate seat from Democrat Maria Cantwell. Instead, he took 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: this is his first big interview since returning XL to profitability. He is also credited with turning Safeco around during his five-year tenure and was named chief executive of the year by Seattle’s Puget Sound Business Journal in 2002. 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, firmly established and well respected in the global insurance and reinsurance markets, was clearly attractive. 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. He had not been expecting a smooth ride: he felt that 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.

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 (SCA), 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 (£1.13bn) to SCA, and transfer its 46% stake in SCA into a trust. This was completed in August 2008 – only three months after McGavick arrived at XL. The arrangement eliminated $64.6bn of the total net exposure under the reinsurance arrangements, which was $65.7bn as of 30 June 2008.

The collapse of US investment bank Lehman Brothers the following month plunged the world into financial crisis, however. 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,” he says.

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

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.”

Back in profit in 2009

Today, however, 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 around $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. His experience at transforming Safeco’s fortunes played a role, both in terms of experience and giving staff confidence.

However, McGavick also credits the loyalty of XL’s staff. “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. In fact, our 2009 staff turnover was lower than the prior year.”

Timely capital cushion

Foresight, coupled with a small amount of luck, also helped XL weather the storm. It 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. It deliberately raised more than it needed, to provide an extra capital cushion against hurricanes. When hurricanes Gustav and Ike hit the firm, McGavick says, “That decision held us in good stead.”

He 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.” However, he is adamant that he will not grow XL at the expense of underwriting profitability.“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. 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: “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. IT