XL CEO not surprised about takeover rumours

XL Group CEO Michael McGavick said that he is not surprised that there is speculation about a potential takeover of XL Group by other market players.

McGavick was referring to news earlier in February saying that XL Group is attracting interest from rivals including Allianz of Germany, which made the company’s shares jump.

“You just had a big trade with similar protagonists, so people look at that and say oh, there must be more of that happening. We have M&A in the air,” McGavick said at the Bank of America Merrill Lynch 2018 Insurance Conference.

In a recent move, American International Group (AIG) revealed plans to acquire Bermuda-based Validus Holdings for $5.56 billion.

Market observers have been speculating that the recent US tax change and the significant natural catastrophe losses that hit the market in 2017 will trigger consolidation in the re/insurance sector with a particular focus on Bermuda.

McGavick noted that if a proposition reached the board, it would be considered carefully and did not rule out that it could be accepted.

“We’re a publicly traded company,” McGavick said. “We are always in the business of enhancing shareholder value. If we got proposals that enhanced shareholder value, our board would have to examine that very carefully.”

But, McGavick suggested that XL does not currently need a partner to succeed. “We have a lot of upside and we believe we are going to deliver,” he said.

XL Group made a net loss of $560.4 million in 2017 compared to a $440 million net profit it posted the year before.

The company blamed the loss on high levels of natural catastrophe losses as well as a non-recurring tax charge of $100.5 million related to the revaluation of the net deferred tax asset as a result of the reduced US corporate income tax rate enacted under the US Tax Cuts and Jobs Act.

Natural catastrophe pre-tax losses net of reinsurance, reinstatement and premium adjustments and redeemable non-controlling interest reached $2 billion for the full year 2017, compared with $636.3 million for the prior year.

Following the catastrophe events in 2017, XL Group bought more reinsurance in the fourth quarter.

“Every time you have a meaningful series of large events, you have lessons to learn,” McGavick said.

For example, XL’s cat bonds did not cover the US overseas territories and Puerto Rico. XL was the first back into the bond market and also included US convective storms in the coverage, McGavick said.

XL is also recalibrating the reinsurance business, which represents about 30 percent of the total, away from cat into more stable, but higher loss-ratio business, McGavick noted. “We’ll keep remixing in a way that adds up to a best equation for our shareholders with lower volatility and still deliver on our hurdles,” McGavick said.

Regarding Brexit, McGavick believes that XL is in a good position to deal with potential turbulences.

“I do find it (Brexit) a very curious decision,” McGavick said. “I think it destabilises something that was working for the UK,” he added.

“The good news for us is, as messy as it has gotten, we were always in an advantageous position,” he said. For one, the organisation of the main London platform as a societas Europaea (SE) means that the location can be easily moved, he explained. Also, XL has a deep relationship with Dublin where the first overseas platform was created.

In September 2017, XL Group decided to move its principal European Union insurance company, XL Insurance Company, from the UK to Ireland in 2018 in response to Brexit.

“We can just take that core London platform, upon which our global business hangs, and move it up to Dublin,” McGavick said.

Afterwards, XL Group will continue having a legal entity in London for local business, and the Lloyds syndicate.

“I wish the very smoothest possible Brexit,” but “we are ready to keep serving customers in an absolutely uninterrupted way,” McGavick said.