XL chief stays focused on solid, stable growth

Brian O'Hara/ Brian O'Hara

HAMILTON, Bermuda--The past 20 years have seen XL Capital Ltd. grow from a monoline mutual insurer into a global commercial lines player, but the values and culture on which it was founded remain embedded in the company, President and Chief Executive Officer Brian O'Hara says. Mr. O'Hara spoke recently with Business Insurance Editor Regis Coccia about XL's history as well as changes in the insurance business and XL during his tenure.

Q: You were the first employee hired at XL back in 1986. Which achievements are you proudest of during your time at XL?

A: When I look back, what makes me most proud is that those values we had at the beginning have endured, even though we have grown so dramatically, both organically and through many acquisitions. XL has been able to retain its same culture, the key characteristics of which are underwriting discipline, being a large risk-taker and trying to bring value to our customers.

Remember, XL was born out of a crisis where our customers couldn't get coverage. So our guiding principles are to provide lasting value, maintain long-term relationships and keep an even keel and not go through these boom/bust periods that have marked the insurance industry and caused these capacity crises.

XL was a great, fresh start to try to do things the right way and avoid those pitfalls. If we promise that we will be dedicated to taking large risks, we can only do that if we have underwriting discipline that's dedicated to making a profit, recognizing that these large risks are going to have volatility.

That doesn't mean if we have a good year we cut rates or if we have a bad year we put rates through the ceiling or cut back on the coverage. That disciplined approach worked exceedingly well in our first 10 years, and the late '90s were a very trying period for everyone. But I think our culture came through that intact.

I'm most proud of the fact that XL has been able to retain what we've built over the last 20 years from being small to a large, global player. This business is all built on trust that you'll be there to pay in a disaster, in a calamity. What gives me comfort, not just about where XL is but where we're going, is the strength of our culture and the deep relationships we've built with large-risk customers around the world. The more we can work with customers on a level playing field, the less cyclical this business can be.

Q: How is XL celebrating its 20th anniversary?

A: It's been an exciting 20th anniversary, and we've done a lot of significant things to celebrate it, internally and externally. We started out at our annual general meeting at the end of April, where we had (basketball) Coach Mike Krzyzewski from Duke University talk about leadership. We felt like we were getting a great coaching. He said, "I did my homework on XL and I know you had a tough year, but what everybody told me is they can count on you, that what you say is what they'll get." That was very gratifying.

We followed on in May with the first of two congresses, beginning in Berlin, where we had an interesting array of speakers talking about the problems of our day. I introduced the congress with the concept that we're here to pay for disasters, but we also have to try to stretch ourselves as an industry to go beyond that in helping to be part of the solutions to the world's problems and be cognizant of all the pain and suffering that goes with these disasters. To that end, we've been trying to start an initiative in the industry to think more about that in our corporate social responsibility efforts industrywide.

I know others are thinking that way, too. Our 20th anniversary galvanized us to speak to this point.

The best part, though, was in mid-June. We had a global day of giving, where we closed our operations around the world to let our people perform community service. Our goal was to dedicate 20,000 man-hours to community service around the world. Our theme has been "One company without borders" and on this day everybody was doing something for their local communities.

The response from all the charities and organizations that we helped out was so overwhelmingly positive that, while we did this to celebrate our 20th anniversary, we're going to do it again next year. People got connected to the institutions that they were helping out.

We had more than 20 projects in Bermuda, and I went to four of them. I spent a lot of the day helping paint the house of the blind, which was in really bad shape. It felt so good at the end of the day to look at it and see how we had completely transformed it.

So many people bonded with the institutions that we're going to continue to do that. In the world today, there's a lot of competition for talent, and people that have talent can work almost anywhere. But the thing that cinches it is people want to work for an organization that is making the world a better place, that has integrity and is trying to do the right thing. That really came through so clearly from our employees in our global day of giving.

Q: What were some of the lessons XL learned from the catastrophes in 2004 and 2005?

A: Even though we had four hurricanes in '04, they weren't devastating. We still had a reasonably good year because we had diversified a great deal and we have a lot of noncat-related premium income and a large asset base that helps us to absorb risk a lot better. Katrina in '05 was the real wild card, and what it brought out was that we do indeed take large net lines.

Catastrophe models don't really work for large-risk properties. They're better for broad risk portfolios and don't have good accuracy on large risks. What you had with Katrina was the double trigger of the wind and the flood. You can look back and say, well maybe we should've seen that coming. But nobody in the industry did, and we ended up with a lot of large lines especially exposed to business interruption.

Now that we are a much larger, diversified company with a broad array of shareholders, we unavoidably have to dial down our volatility that Katrina exposed. And the frequency we had in '04 and '05 was something that never happened before.

But now all of that has to be considered by everyone, including ourselves, so it does necessitate cutting back some of our larger net lines in property that are exposed to catastrophe. And we've done that. We're trying to use our diversification and not be overpowered by one particular line, one particular exposure.

Other than that, our underwriting discipline will take us through. Underlying that discipline is my refusal to put growth targets on XL's premium writings. I allow our people to come up with their best estimates based on market conditions and our position in the market. Everyone wants to grow; it's a natural orientation in business. In our business, anybody can grow--just take more risk, just say yes.

These days, people will plan on a flattish environment. But we still think we can grow book value and the bottom line well without having to grow the top line. It's the quality of the business, not the quantity. Intellectual honesty is pricing your existing business at the same level as new business. I find too many in our industry, in their hunger to get new business, are willing to be more aggressive on pricing, terms and conditions for new business vs. what they know is the right price on their existing book.

Q: We're only part of the way through hurricane season, so far with no major events, and not many people are thinking about earthquakes. What's XL's outlook on natural catastrophes?

A: It's the 100th anniversary of the San Francisco quake. In fact, it was the first thought on my mind at New Year's. It should have us all concerned. I don't think anybody in our industry is confused today that we're in the risk business. I think in the late '90s people got very confused. But most of the drivers of behavior in our industry call for discipline and wariness, given everything that's happened in the last five years.

Terrorism is still a haunting specter. Most people think it's a matter of time. If earthquakes and hurricanes and terrorism events are just a matter of time, then you have to expect every year you're going to be beset by it and underwrite accordingly. That's got to keep everybody's minds very focused on the risks that we're taking. We can't afford to give it away or be lackadaisical about risk management.

Q: Earlier this year, XL created an Office of the CEO and realigned some of its senior management. What led XL to do this?

A: In consultation with the board, XL's directors wanted to see me have fewer direct reports so I can do what I do best. I like to have customer/broker interface, and I've been kind of locked inside for the last few years with internal, administrative activity. So one goal was to delegate more and reduce my direct reports, which is what the Office of the CEO achieves. It also helps our succession planning by giving greater responsibility to the upper-tier executives to take on greater challenges. The main thing is to help XL's units focus on their business and not get people bogged down in administrative detail.

It certainly doesn't help them serve their customers, grow our business and achieve their goals. It's not that anything was broken, we just think going forward we can operate at a higher level with this structure.

Q: What's in the future for you? Are you looking ahead to a time when you'll no longer be at XL?

A: That's going to happen to everyone eventually. But I'm only 58 and I do mean only. Last year was a tough year, and I was worn out at year end. But I'm feeling very invigorated and optimistic about where we are in the market. I think we have better days ahead. I'm not in any hurry, but I know realistically I should plan to move on at the right time and give room for other people to get their opportunities.

Q: If the opportunity to join XL hadn't come along 20 years ago, what do you think you'd be doing now?

A: I was a founding principal of Trenwick before I came to XL, and I was proud of what we were building there. They were derailed by acquisitions, and almost all the acquisitions that occurred in the late '90s were a real problem for everyone. Trenwick's underwriting was fine but for many companies acquired at the time, the underwriting standards were much lower. If I had stayed at Trenwick, I'd like to think we wouldn't have done some of that. This opportunity at XL was so compelling, and I'm glad I took it. I was fortunate to be asked.

Q: Did you foresee that XL would grow as it has?

A: No way. Our goal at the beginning was just to survive. We were taking unprecedented risk--$75 million net lines on companies I was taught to decline to underwrite. It was very scary. Fortunately, we had a market where we could charge what we thought were appropriate premiums and that mostly turned out to be the case. On some risks, you couldn't charge enough. We just were taking it one step at a time, dedicated to solving problems for our customers. That was our long-term plan: to create a consistent, large-risk, large-capacity market that our customers could count on. We achieved that, and the rest was a byproduct of that success. We put our capital to work and, block by block, organically and through acquisition, set out to build global capabilities and expand our lines. We've expanded broadly, but we're still very focused. We do not try to be all things to all people. Again, it's about having the discipline to stay within who you are and what you're good at and not overreaching.

Q: What helps you to relax and balance your professional and personal commitments?

A: Fortunately, I'm surrounded by a lot of people I really like. So I really enjoy coming to work and just being with our people. I don't find that stressful, I find that actually enjoyable. External factors can give me a lot of stress, but not internally. I have a great family situation, a beautiful home that's very tranquil. That helps in itself. I play sports. Keeping in shape gets your angst out and keeps the blood pressure down. And I try not to read bad press!