Letter from the CEO


In forming XL Catlin, as we intend for the combined company to be known, we'll achieve scale with a focused purpose and solid financial uplift. That’s a unique opportunity.



My online dictionary tells me the first synonym for "ahead" is "in front." The synonym for the second definition is "in the future." The third definition is "onward so as to make progress."

Yes, Ahead. That pretty much sums up what is going on at XL.

First, we were "in front,” leading the way into the epic year of insurance sector M&A, with our decision to combine XL and Catlin Group Ltd.

Second, the reason for the combination was due to what we see "in the future": the need to create a firm with the capabilities to race apace with the faster and faster mutation of risk in order to serve our clients ever more usefully.

Finally, it has been almost a year since our acquisition of Catlin and we are now even more convinced that we are better matched to the future. We’re working every day to move “onward so as to make progress." Bluntly, some of the progress we believe we’ve made needs to start showing up in the numbers. We believe it will, and soon.

So Let's Start at the Beginning: Why XL + Catlin?

Certainly one of our objectives was to get ahead: ahead of trends that we felt would inevitably lead to sector consolidation — consolidation that we think has not yet ended.

My good friend Stephen Catlin and I compared notes, realized we were seeing the same forces and felt strongly that if consolidation was coming, moving early and having the chance to pick your partner was the best path.

Certainly one of our objectives was to get ahead: ahead of trends that we felt would inevitably lead to sector consolidation — consolidation that we think has not yet ended.

But that hardly tells the whole story. Our Leadership Team has been around the industry a long time and we’ve seen firsthand that the vast majority of mergers in our sector wind up as roadkill, creating larger but often lousier businesses. So the bar around here for contemplating large transactions has always been very high.

For us, the acquisition needed to meet three imperatives:

First, we had to be able to see why the acquisition would enable us to better serve our clients. No business survives unless it is thinking constantly about how to please those who pay it. Simple, yes. And often quite surprisingly forgotten.

Second, the transaction to acquire Catlin had to improve our ability to harness broad economic and sectoral trends to our advantage. Broader trends have a life of their own, almost always beyond the ability of any one actor to change. To us, the art is not in wishing that the trends would change, but rather it is in discerning which trends really matter and which will endure and then designing ourselves so as to make those trends our engines for success.

Finally, the transaction had to make us more durably profitable, moving us further and faster towards our financial ambitions. Too much of M&A, in our view, can articulate either a sound strategic or financial case. Rarely both. We were only interested in achieving both.

Here is how we answered these questions:

First, how does XL Catlin enable us to better serve clients?

Five big ideas stand out:

Our combined product array is broader. This means that more clients can benefit from more products. When you have more to offer, you can create more seamless and trusted solutions.

Our combined global footprint adds both to the number of locations in which we are present and to our leadership position and capabilities across the globe. Our clients' needs are constantly more global. This global network is a key differentiator.

Our depth of expertise is market-leading in the lines of business that lead the way in innovation. Historically, the product evolution is clear: specialty lines and complex risk insurers create unique covers for emerging risks. Eventually these coverages are standardized and, if they have broader utility, wind up as elements of broader policy forms. In a world where risk mutates ever faster, we knew that only a market-leading group of specialty and complex risk talent could really be up to the job of keeping pace with our clients’ emerging needs.

Notably this year, for the fourth year in a row, we ranked as one of the top innovators in (re)insurance, with 23 new products introduced. Given the complexity of integrating the companies, this was especially welcome evidence of our will to remain focused on the needs of our clients. We believe it stands to reason, and will be proven out, that if you can make the greatest difference for clients, you will be able to create the greatest value for shareholders.

Our total cost base is lower. With clients always sensitive to cost, only through constant attention to efficiency can we meet both our clients' cost demands and our shareholders' return expectations.

Our Reinsurance offering matches clients’ buying trends. The fact is that with alternative capital playing a more substantial role in the reinsurance marketplace, we found clients wanting larger lines from fewer carriers as part of their core programs. XL Catlin is able to take such leadership positions.

So then to our second question: How does XL Catlin harness the big trends we see shaping the sector?

Here too, the combination makes good sense. The five big trends that we think matter are globalization, analytics, broker consolidation, alternative capital and regulation. In all five, XL Catlin is better positioned. I've mentioned the expanded and more capable global platform previously, but the others are similarly well served.

Consider analytics: With greater scale of proprietary data, we can make better risk judgments, see risk trends more clearly and innovate more rapidly. And we have the scale to better absorb the related costs.

Consider our position relative to our broker partners: Not only are we offering more products in more places and ranking higher among partners with whom they trade, but through innovation we intend to become more often indispensable to them in service of our mutual clients.

Consider alternative capital: We have the scale of capabilities and history of business model innovation to be an innovator rather than a victim of business model change. We’re a sought-after partner and a force in trying to work with governments and others to consider how to make the greatest pool of capital more useful to the world. And bringing together two leading (Re)Insurance teams was key here; these are the minds that will reshape the business model. The end-to-end sophistication of our combined team enables us to more boldly innovate around entirely new ways to create insurance solutions.

Consider regulation: Regulators have increasingly required more strongly capitalized insurers, with approaches like the European Union’s Solvency II. Diversification is one of the keys to creating a capital-efficient organization in this new world, and scale helps us afford the large costs of compliance with the many new layers of regulation.

Now, just as you could argue that all of these trends, save regulation, are at some level an effect of the transformation that technology unleashes, so too you could argue that the answer to all five is simply scale. And you would have a point. But, we did not see “size for size’s sake” as a solution. We saw increased scale as a nice byproduct of the deeper strategic purpose of creating market-leading depth of expertise in the specialty and complex risk insurance and reinsurance sectors. That, we think, is the long-term big deal.

And finally, the third question, what about the financials?

We forecast at the time of the transaction that we would accelerate our attainment of double digit operating ROEs (excluding other comprehensive income) even in this time of very low interest rates and despite a very soft insurance pricing cycle. We still believe this to be true. A deeper look at the quantitative results should help explain our confidence.

We saw increased scale as a nice byproduct of the deeper strategic purpose of creating market-leading depth of expertise in the specialty and reinsurance sectors. That, we think, is the long-term big deal.

The results so far

Just as with the criteria to consider a transaction in the first instance, we had hard criteria to meet in the execution of the transaction itself and in the results we had to achieve for ourselves and others in order to consider it a success.

  • First, we had to keep the book of business together — at least as far as we wanted.
  • Second, we had to keep our workforce together and energized by the prospect of being part of this new future-oriented company.
  • Third, we had to get our infrastructure and systems together so we could operate as one, understand how the Company is performing and begin applying our unique levels of insight to the needs of our clients.
  • And finally, we had to do all of that while still delivering an acceptable result, because we said all along this was about both our long-term strategy and a compelling financial rationale.

So, how did we do against those goals?

Number one, we kept the book of business together. In fact, we believe that through the course of 2015 we lost less than a point of premium as a result of merging XL’s and Catlin’s books of business. We are thrilled by that result. It both validates the determination of our workforce to keep relationships intact through the natural anxiety that integration creates and confirms that our client and broker partners believe in our vision for what we are creating.

Number two, we kept the workforce together. Our voluntary attrition rates this year were only slightly elevated from historical levels. Of course, because of the integration, there are certain key areas where you would expect higher turnover, including in underwriting. But let me put it in perspective: of our more than 1,200 underwriters, there were just a couple of handfuls of voluntary departures that gave us pause. That the vast majority of our colleagues see the potential ahead is, again, an incredibly encouraging and validating result. 

As to number three, the combination of our infrastructure and systems, immediately upon the closing of the acquisition, around the world we were operating as one organization. This required substantial effort, and the work of our Facilities and Platform colleagues was stellar. Over a single weekend we moved over 1,600 of our colleagues together into combined offices. We merged information systems, and we began the process of rationalizing our footprint, halting duplicative investments or projects that no longer met our combined needs. And our pipeline of combined client data and risk insights is now supporting our underwriting, distribution and broader marketing efforts.

There is a clear reason for our speed. We can sense that markets are changing. We see companies in our sector overhauling their businesses. We see the many mergers that followed ours. We want to be in a position to take full advantage of what we have built: to be stable and performing in a "business as usual" way. And that’s how it feels inside XL Catlin today. Our teams have coalesced nicely; our assignments are clear and the noise of the transaction is receding. It was a manic and messy year, but it has put us in a terrific position relative to the sector.

Now, we said we would do all of those things and not lose sight of the fundamentals, of our fourth benchmark of success, of trying to build a better business with better margin over time. There are many important aspects to this, including our performance in 2015.

The place most people start to evaluate is on transaction-related synergies — a phrase larded with industry jargon which of course simply means how much expense the combined Company will save as a result of gaining greater scale and increased efficiency. When we announced the acquisition we said we could save at least $200 million in run-rate expenses. Later, we revised that figure to $250 million. Now, we have identified not less than $300 million in run-rate savings that we are absolutely committed to delivering by year-end 2017. And we’ll keep searching for more. 

You might ask, “Where did we find more money?” A couple of places: First, the transaction continues to reveal additional savings opportunities, and when we see one that we’re confident in, we grab it. Second, in line with current market conditions, we continue to increase internal expectations for expense savings. That’s just a reality of where we are today. With an overabundance of capacity at play in the market, the knife-fight over pennies continues. And, as we are committed to never losing our underwriting discipline, we have to prepare to earn margin in places other than pricing. Third, our people are well aware of these conditions, and they are responding and coming forward with additional opportunities for savings. Our hand will not come off the expense lever, because the simple truth is that these markets continue to worsen and we don’t run the business as though we’re counting on some turn in the pricing cycle. We may hope for it, but we don’t plan for it.  

A second benchmark many look at to gauge transaction success is the degree of capital flexibility gained. Throughout the year, as we became increasingly confident that we would meet our integration and savings targets, we resumed share buybacks — buying back over 12 million shares during 2015. Capital management is a conversation which we are continually engaged in with our Board, and it’s a mix we continue to evaluate. But in these conditions, as we look for new opportunities and at the same time are realistic about the near-term prospects for the market, continuing to return capital to shareholders remains an attractive strategy.

In terms of our operating results for 2015, taking into account all other factors — namely, the enormous distraction potential from the internal integration focus as well as the hypercompetitive market — we’re pleased with the solid results we returned. That said, aside from these factors, compared to the prior year, 2015 was simply a tougher year in many ways. Both natural catastrophe levels and our large loss activity were higher. Volatility returned to the financial markets in a big way, yielding little to no benefit from our investment portfolio. And comparing year-over-year results gets tricky when our (Re)Insurance operations only became XL Catlin as of May 1.

In some areas, such as Reinsurance, results across the board were strong — in a reinsurance market that is a concentration of the broader conditions into an even tougher rate and an often mindboggling underwriting standards environment. In Insurance, there was more noise, but the trends are all pointing in the right direction. And aside from the main event of creating XL Catlin, we were also able to execute several smaller strategic actions, which add to our collective sense of accomplishment for the year.

So, unpacking each of these a bit:

From the top of the house, we produced a total P&C combined ratio of 92.0% and an underwriting profit of $653 million. P&C gross written premium for the year was $10.7 billion. From a legacy XL perspective, that’s a 38% increase over 2014, as driven by the combination. From a historical combined basis, that number is essentially flat, compared to what XL Catlin would have done if it had been together in 2014. So it’s reasonable to ask, “Why didn’t we grow in the year?”

Well, we largely view the assembling of our books as complete, and the task now in front of our underwriters is to refine and optimize these books. The good news is that we’re ahead of the game. When we began our integration, we threw out the growth plans that both legacy companies had — realizing the market had worsened more than expected — and got to work walking away from either wildly underpriced businesses or accounts that simply don’t meet our performance standards. Thus, the reason for saying that a goal for the transaction was retaining the business to the extent we wanted, and it is the reason we didn’t grow in the year.  On this topic we are crystal clear with all audiences: growth for growth’s sake is not the objective. We’re bottom-line focused. We are perfectly willing to walk away from business rather than perpetuate the current market. And in fact, we feel we’ll have a role to play in helping to turn the market toward rationality, when the time comes.

In Reinsurance, where market conditions are in many ways the fiercest, our result was stellar. The segment produced a combined ratio of 81.0%, gross written premium of $2.3 billion and an underwriting profit of $478 million — the best underwriting profit result in more than 10 years. And even as catastrophe losses inched up year-over-year, the loss ratio held steady at 45.8%, also one of the best results in the past 10 years. Greg Hendrick, our Chief Executive for Reinsurance, and his team deserve much credit for their work navigating a complex field.  

In Insurance, where the results were no doubt more complicated, Paul Brand and Kelly Lyles, respectively our Chief Underwriting Officer, Insurance, and Chief Regional Officer, Insurance, have also done extraordinary work. Not only have they combined their teams and retained our business, but they’re leading their teams in a new matrixed business model which is different from what either legacy company knew before and which we think represents the best way to run our Insurance segment.

In 2015, the Insurance segment produced a combined ratio of 96.9%, gross written premium of $8.4 billion and an underwriting profit of $175 million. Since 2007, there has only been one year in which the Insurance combined ratio was lower and underwriting profit was higher. That was 2014, which was a standout and low-catastrophe year for the entire industry. So, while these numbers showed some deterioration year-over-year, other important metrics improved — namely the accident year, ex-catastrophe loss ratio, which is in many ways the most accurate measure of our underwriting, as it factors in losses without the benefit of prior year releases or the built-in assumptions for natural catastrophe events. And while this metric, 62.5% for the year, was impacted by large losses in the second half of 2015, it improved over 2014 and improved sequentially in the third and fourth quarters of 2015. If we can make this improvement in the conditions of last year, with some noteworthy large loss events hitting the entire market (such as the Tianjin port explosion in China), we certainly feel we can move the needle further in 2016.

Here, we are all impatient. Many of our observers are as well. We get it. Our Insurance loss ratio has been elevated during 2015, in part simply due to the process of getting the two books of business on common views, especially in long tail lines. But that process is done; and our plans for 2016 indicate to us that our loss ratios can come down through continued underwriting diligence and remixing the portfolio to optimize profit despite the continuing softening of rates paid for insurance risk. And this will further be aided by the steps we took in 2015 to make our reinsurance purchasing more efficient, enabling us to cede less profit while creating an improved risk profile.

Other important metrics improved — namely the accident year, ex-catastrophe loss ratio, which is in many ways the most accurate measure of our underwriting, as it factors in losses without the benefit of prior year releases or the built-in assumptions for natural catastrophe events.

All in, we feel it was an acceptable full year of results during a time of supremely strong effort. But better is expected of us, and we are driven to deliver.

One last thing about our progress in the year: our work in building a common culture.

The importance of culture is something I’ve emphasized before, and it remains an unheralded and most critical aspect of any integration effort. We still firmly believe that strategy in and of itself is great but doesn’t mean much until it’s married with the right people and the right culture. For our effort, culture has been a preeminent and ongoing focus since day one of XL Catlin (and even in the time leading up to the transaction when Stephen Catlin and I were imagining the firm we thought we could combine to create).

No matter how similar the cultures from which legacy companies start, there are both obvious and subtle differences that must be overcome. While always acknowledging that we have more to do, we’ve made leaps and bounds of progress in creating a unified culture. Our colleagues are thinking about XL Catlin and not just “how it used to be.”  Knowing they are part of one of the powerful forces in the (re)insurance sector, they really believe they are doing something special.

And our group Leadership Team functions as if it has been working together for years. We make decisions together quickly and efficiently, we have a sense of joy about it and we work damn hard because we have a common goal that we think is worthwhile.

With respect to having more to do on culture in the year ahead, I want to note one particular effort we have initiated to increase diversity and inclusion in the Company. Not only is this effort exactly in line with Our Commitments to Do What's Right and to continually Make It Better, but also there is a logical and compelling business case as well: Today, we are not as diverse as the world around us. And, therefore, by definition we have a more limited point of view and don't as often reflect the clients we seek to serve. To be fair, this is an industry challenge, and XL Catlin is actually better than the industry in many aspects of diversity. But we can and should do more. And while it is indeed a long-term effort, we want to make meaningful improvements as quickly as possible.

A few other items of note:

First, other strategic actions.

In addition to these core goals for the year — maintain our book, retain our talent, integrate our systems and return solid financial results — another effort was to continue to execute other strategic opportunities. While the hard work of integration proceeded, we didn’t want to lose sight of what other actions we could take to improve the firm, including:

  • The launch of XL Innovate, an XL-sponsored venture capital initiative investing in new and early-stage businesses that offer new approaches to distribution and underwriting — particularly in new or underinsured risk areas. With technology driving rapid risk evolution, we think there’s enormous potential to use this structure to create partnerships to align underwriting with capital and risk-specific expertise — all toward pushing our innovation abilities even further. We have proven the model with the successful launch of New Energy Risk, and we’re now investing in similar ventures.
  • The acquisition of Allied International Holdings, Inc., the holding company of Allied Specialty Insurance, Inc. and T.H.E. Insurance Company, a leading insurer of the outdoor entertainment industry in the US, which had approximately $70 million of gross written premium in 2014.
  • Strategic investments in Privilege Underwriters, Inc. and its affiliate, Privilege Underwriters Reciprocal Exchange (PURE), a policyholder-owned insurer dedicated to creating an exceptional experience for responsible high-net-worth individuals and families, and S-RM, a business intelligence and risk consulting and mitigation firm.
  • The retrocession of the vast majority of our legacy runoff US term life reinsurance reserves that were not included in the 2014 transaction, which transferred the bulk of this legacy portfolio to GreyCastle Holdings Ltd.

Second, our recently announced proposal to relocate our parent holding company to Bermuda from Ireland.

In so many ways, this feels like a natural step for us to take and one which we think will benefit clients, brokers and shareholders alike.

XL has had a presence in Bermuda since its inception in 1986, and our footprint in the country has grown significantly since the combination with Bermuda-based Catlin. And as the insurance industry and global regulatory environment have evolved, we have concluded with our regulators in Ireland that the Bermuda Monetary Authority (BMA) would be best suited to serve as our group-wide supervisor and be in the best position to approve XL’s internal capital solvency model.  

In addition to our history in Bermuda, the BMA is a premier regulator of global insurance and reinsurance companies, with highly sophisticated regulatory capabilities.  And, our proposal follows the recent announcement that Bermuda has been granted equivalence under Solvency II. Combined with Bermuda’s familiarity with our business, and with the BMA already serving as the regulator of our largest operating subsidiary, as I said, this is a natural step for us to take. 

In terms of timing and next steps, we expect to submit the proposal for redomestication, along with related proposals, to our shareholders in the next several months and hope to complete the transaction in the third quarter of 2016. Also, we do not expect the proposed redomestication to have any material impact on our financial results, including the Company’s worldwide effective tax rate. And, we will continue to trade on the New York Stock Exchange under the ticker symbol “XL” and expect to remain listed on the S&P 500 Index.

So, it should be a seamless transition for all of our partners and, as I said, in the long-term interest of the Company, our clients and brokers, and investors in XL alike.

Ahead and Crystal Clear

Now, I want to make one last thing crystal clear. Despite all that we have achieved in 2015, I know that if our sense of our own progress doesn’t show up in our numbers, in many respects it isn’t real. We did a lot in 2015, but this wasn’t the year progress would show in our results.

Know that we are every bit as impatient as any observer that these indicators turn into the financial progress we believe this transaction makes possible.  From the past year you can see the indicators of our progress; I like the indicators.

Our loss ratios, despite this pricing environment, continue to come down, and we believe that can continue. Our operating expense ratio is coming down, and we’re beating our own expense targets in real numbers. We kept the book of business together, and we seized new opportunities. We kept this incredible group of colleagues together, and we’ve energized them around a common future. That’s the direction of the Company we are now building, 7,000 global colleagues strong.

We’re pretty happy about where we are. We’re glad this last year is a bit of a memory now. And we’re excited about the progress we can and will demonstrate in the year Ahead.