Axa XL in London: The path forward
Since the $15.3bn takeover of XL Group in September 2018, Axa’s ownership of the global carrier has been anything but easy.
Axa XL has been plagued by poor underwriting performance and volatility issues, which has led its new parent to buy more reinsurance and a substantial adverse development cover, and inject an additional $1bn in capital into the business.
It has also brought in new leadership in CEO Scott Gunter and overhauled the operational structure to create greater accountability as it seeks to return the business to profitability.
When the deal was first announced in March 2018, Axa lauded the revenue growth potential and the “unique combination” of Axa's small and medium-sized enterprise (SME) and global footprint with XL's specialty focus.
As we wrote at the time, the takeover of XL was a big picture deal – a strategic move driven by deep thinking about the type of risk Axa wanted to take, and the long-term direction the insurance market was heading in.
However, few could have anticipated how quickly the performance of the business would deteriorate post-acquisition, nor the amount of hands-on remedial work that now faces the French carrier to bring it into line. The business has also seen significant talent flight, both out of necessity due to the organisational restructure and as a result of disenfranchised staff.
The issues that Axa XL faces show up most acutely in the London market business, where the change in the perception of the former Catlin business of the early 2010s, compared with the Axa XL of today, has been stark.
Axa XL’s London business – now headed up by the firm’s UK and Lloyd’s CEO Sean McGovern – has also faced an additional and unique set of challenges compared with the wider group. Those include the appearance of new underwriting businesses to attract the eye of disenfranchised staff, and a tougher stance from Lloyd’s that put the brakes on growth and subjected the firm to greater scrutiny on performance.
The decision to exit management liability and financial institutions (FI) in London – where Axa XL was a major market leader – also demonstrates that Axa XL's London business had deep issues around exposure management and underwriting standards which were not replicated to the same extent in other regional hubs.
The issues arising are in part a consequence of two M&A deals in just over three years, with management arguably incentivised to grow top line in a softening market ahead of each deal, and staff facing two rounds of operational restructure after each transaction.
These challenges then surfaced at Axa XL in London with full force at a time when the wider (re)insurance market was also grappling with pressures around social inflation, heightened cat activity, and Covid-19, after enduring years of soft market pricing.
There is also said to have been some friction as a result of a misalignment between the corporate culture of a London market specialty business and that of a Bermudian/US corporate, and then a global behemoth.
After a difficult 2020, Axa XL’s London business will now look to put the past behind it and in 2021 start a new chapter in its history.
There are a number of questions the business will be asking itself, chief among them being how to re-assert itself in the London market as a leading (re)insurer and premier employer after a period of retrenchment, negative headlines and talent flight.
There are also questions around whether the remedial scale-back of the business at this point in the market cycle will put it at a competitive disadvantage going forward, and where the London arm of Axa XL fits within the giant which is the EUR72bn-equity Axa group.
However, there are a number of strengths that Axa XL can draw on to achieve its ambitions in London, including its scale, leadership positions on business, key distribution relationships, and well-respected leadership in McGovern.
There is also scope for Axa XL’s London business to leverage the brand, balance sheet and capabilities of the Axa group to achieve cross-selling and revenue synergies, as well as preferential access to good business.
Below, this publication goes into further detail on the main challenges and key strengths facing the London business of Axa XL as it seeks to draw a line under the past:
Axa XL declined to comment on this article.
1. Underwriting performance – the not-so slow decline
Since the takeover of XL in 2018, Axa XL as a group has failed to turn an underwriting profit, as a result of cat losses which exceeded budget or adverse development on prior years.
In London, Axa XL runs a Lloyd’s and a company market platform, and while visibility around the financials of the whole London business is poor, Syndicate 2003 accounts show that the Lloyd’s business last generated a (slim) underwriting profit in 2016.
The full-year 2020 result has been its poorest underwriting performance to date, as the syndicate reported a 24-point deterioration to 134% on Covid-19 losses and adverse development on long-tail lines.
To start assessing the performance of the London business, however, it is worth going back in its history.
The former Catlin Group business – founded by Stephen Catlin in 1984 – is one of the London market’s major success stories, not least due to its leaders’ ability to scale the business and extend its reach globally from EC3. However, it was not necessarily a constant outperformer – with Syndicate 2003 typically hovering around average Lloyd’s market performance in terms of underwriting.
It was, however, viewed as a premier business for ambitious London underwriters, and is often held up as a leading example of old-school London market entrepreneurialism. When interviewed by this publication, former Catlin employees tended to recall those days with nostalgia.
However, the Catlin business “ran out of road” – as one former employee put it – and the firm was unable to achieve its global ambitions on its own without racking up huge cost and pressuring profits at a time when the market was starting to soften.
An M&A deal was deemed the only viable option for the business to continue on its trajectory, and Catlin found that in XL – a business with far greater reach internationally, although arguably poorer performance than Catlin.
The takeover by XL completed in May 2015, and the difficult integration of the two businesses began – not least being the change from a regional operating model to a global, product-based structure, and apparent clashes of underwriting approach.
As one former XL Catlin employee said: “At Catlin, you had to get approval from the top to write a new big risk. At XL Catlin, you had to get approval to come off a risk.”
One area of dispute was said to be US casualty, where former Catlin employees said their new parent company was in expansion mode, whereas prior to the deal they had been starting to scale back due to market conditions.
Many speculated that the business was scaling up in preparation for a sale, and in 2018 the deal between Axa and XL Group was announced.
A number of senior sources said they believed a significant part of the challenges faced by the Axa XL London business today was down to two rounds of M&A, and the incentive to grow top line at the expense of the bottom line, at a time when the market was softening or at a low.
“With all M&A deals, everyone hopes two plus two equals five, but it’s hardly ever the case,” one source said.
Gross written premium (GWP) figures from Syndicate 2003 appear to show that trajectory, although it should be noted that these do not account for growth on the XL London market company platform.
Fast forward to the latest set of Syndicate 2003 accounts and both the ramifications of previous underwriting decisions and the severity of the remedial work undertaken by Axa XL are clear.
In 2020, the syndicate booked £98mn of adverse claims development on prior years, equivalent to almost 7.5% of net earned premium. The most significant contributors were international financial lines, international casualty, accident and health, and wholesale casualty, partially offset by favourable movements on marine, aerospace, crisis management and wholesale property.
Syndicate 2003 premium levels in 2020 are now significantly less than what they were in 2018, as the syndicate dropped substantial volumes of business to remediate. Its syndicate accounts also said premium levels in 2020 had been impacted by reduced economic activity due to Covid-19.
It is additionally understood that Axa XL is also aiming to write more business on its London market platform – for which data is not available – as Lloyd’s continues to clamp down on growth for poor performers. GWP numbers from the syndicate alone therefore do not paint a full picture of the scale of Axa XL’s London business.
2. Exposure management – more is more?
Chief among the reasons for the GWP contraction at Syndicate 2003 last year was the withdrawal from management liability and FI in London, which had suffered severe adverse development. However, sources said the issues in management liability were symptomatic of wider issues around underwriting standards and exposure management at Axa XL, albeit to a more extreme degree.
In London, the carrier was a major market player and a dominant leader in management liability and FI. However, sources told of poor underwriting controls and a tendency to “be the brokers’ best friend” – leading the carrier to be overweight on its exposure on risks, and as a result receiving outsized losses in a world where social inflation was driving up loss costs.
The carrier became the victim of anti-selection, being shown the poorest risks in the market. Sources described Axa XL in London as the easiest and most competitive source of lead capacity in D&O, even for the most challenging risks.
Reinsurers speaking to this publication said that concerns around the Axa XL London financial lines book had, however, stemmed as far back as the XL Catlin days.
“We were always worried about their aggressive limit deployment in financial lines,” said one reinsurance underwriter. “They would lead with big lines and give additional sizeable lines further up the tower for seemingly no additional value. We were concerned they were being leveraged by the market.”
Although the management liability and FI situation is an extreme example, the issue of gross limit deployment and capacity being deployed from different geographies on the same risk was recurrent in other classes, leading the carrier to take heavy hits on losses, sources said.
More generally, post-XL deal, there was more appetite to take more risk net. The group was said to buy extensive reinsurance, but as the group became bigger and more complex, the protection didn’t quite respond in the way it needed to when faced with volatility, sources said.
Post-takeover, Axa has bought more reinsurance to account for volatility and reviewed attachment points for that protection. In addition, a central feature of the turnaround of Axa XL has been the massive legacy transaction – a deal struck with Enstar providing a combined $2.55bn of protection through a hybrid of a loss reserves transfer and an adverse development cover.
The transaction sought to cauterise the issues stemming from adverse development and draw a line in the sand on reserving issues and resulting volatility for investors.
When questioned on how the level of underwriting oversight lost its way in London, sources often pointed to the change from a regional structure under Catlin to a product structure under XL.
As the business got bigger, product leaders had increasingly larger remits and it became extremely difficult to create accountability, sources said. This was at a point when rates were nearing or at a low, between 2015 and 2018.
While the reporting of metrics was there, few tough decisions were made during the XL Catlin days, one source said, adding that the culture at that time was “extremely forgiving” and that they had never seen any underwriter exited from the business as a result of poor performance.
When Axa XL pivoted back to a regional structure once CEO Gunter was in place, the major reasoning behind the move was to drive greater accountability and simpler, shorter chains of authority, in a bid to regain greater control of each of the regions.
A number of sources also noted that the drastic action taken on management liability and FI underlined the change in management approach under the new structure – and the company’s commitment to turning around the profitability of the London business.
The repositioning of the portfolio away from third-party liability lines in the past year is evident in the portfolio mix of Syndicate 2003, where third-party liability has dropped to 16% of the book compared with almost a quarter of premium in 2019.
3. The talent exodus
With M&A also come rounds of restructuring and employee consultations to deliver synergies, which have a detrimental effect on staff morale and performance. A P&C revamp in 2016 saw 50 staff leave the combined XL-Catlin business and the majority of new leadership roles given to former XL staff.
However, the consequence of another operational restructure under Axa ownership has been the displacement of talent, both as a result of the new model and of an unsettled workforce, some of which was facing their second takeover in less than four years.
In early 2019, Axa XL outlined plans to cut 711 positions in Europe, equivalent to 7.5% of the workforce, before later moving to the regional model which saw another wave of employees leave the business.
The change to a regional structure in April 2020 saw the exit of some key leaders in the London business – Kelly Lyles, Paul Greensmith, Neil Robertson, Jason Harris – whose exit left some of the staff feeling “rudderless”, according to one source.
McGovern was appointed UK and Lloyd’s CEO initially on an interim basis in addition to his role as general counsel, before the position was made permanent in July 2020. Although the executive is well regarded among the London workforce, for many the change to a regional structure and greater oversight from Paris led them to seek alternatives in a market which has a high level of employer optionality.
Talent had also already started to leave the business as soon as the Axa deal was announced in March 2018. These departures followed an outflux of former Catlin talent and senior leaders in the preceding period, including London CUO Nick Burkinshaw, UK CEO Andrew McMellin, and Stephen Catlin himself. Group CUO Paul Brand exited somewhat later, having taken an innovation role in the 2016 XL Catlin P&C revamp.
According to Insurance Insider news archives, at least 45 staff members of a seniority of class underwriter or above have left the London business since the Axa takeover announcement – although the number has the scope to be greater given opacity around departures. Around half of this list are understood to have left as a result of the restructure to the new regional model.
For context, Axa XL’s London business employs around 1,400 staff, and is understood to have made hires in the triple figures this year, as well as promoting existing staff.
The business has also faced a unique challenge in Convex, the start-up led by Catlin and Brand that launched soon after the Axa takeover and attracted a significant number of former Catlin employees.
According to Insurance Insider figures, just under half of the Axa XL senior staff departures (20) since the Axa takeover announcement have left for Convex.
There were clear pull factors in the form of an enticing start-up, but according to sources this came at a time when morale inside Axa XL's London business was low, with underwriters disillusioned with the new regime.
With performance deteriorating, oversight from the parent grew – and the additional bureaucracy, reporting and accountability stifled underwriters who wanted the freedom to underwrite, sources said.
“French oversight when you are used to being empowered is suffocating,” one source said.
However, a number of sources speaking to this publication also said they understood why Axa would want greater control over the business, given that the level of volatility arising from Axa XL was not paying for itself. Axa’s laser focus on financial returns and desire to make the acquisition a success meant greater control from the centre was probably inevitable.
Many former Axa XL employees said the new regional structure created some tension between the regional hubs and has the scope to drive internal competition for business.
Some made the claims that a mismatch in working cultures and practices – both at XL Catlin, and then at Axa XL – had also been a cause of difficulties, and a more corporate approach from a new French or Bermudian parent sat awkwardly with the “London market” feel of the operations in EC3.
4. Drawing on strengths
After a challenging 2020, Axa XL’s London business will be looking to draw a line under the tumult and start pushing forward to a new chapter.
There remain key questions for the business going forward, including how it can maintain its relevance in London for both trading partners and for talent, and where its place in the giant corporate structure of Axa sits.
Despite the negative headlines, there are strengths to the business that it can draw upon.
On the underwriting side, scale will play an important part to its relevance in London, as well as its significant number of leadership positions on business. Even though Syndicate 2003 is almost $1bn of premium smaller than it was two years ago, it remains one of the biggest syndicates in Lloyd’s – and the scale of Axa XL’s company market platform is also thought to be sizeable.
It is understood that Axa XL is targeting a rough 50-50 split between the syndicate and the company platform, an equilibrium which the business is said to be nearing.
The London business is understood to lead about 70% of what it writes, and according to broking sources, is still in the top five markets for specialty business in London – with particularly strong capabilities in marine, aviation, specie and energy.
Indeed, despite the challenges, many of the broker relationships it holds remain strong, and Axa XL still has excellent distribution capabilities – which can only be strengthened by being part of a global insurance giant with positioning like Axa’s.
Meanwhile, its position as part of the Axa group not only means it can complete its remediation within the shelter of a global corporate, but also has access to a bigger balance sheet once it is ready for expansion – with cross-selling opportunities across other units such as Axa’s real estate arm and asset management division, and the company’s substantial SME presence.
The London business has already gone through some refinement to bring it back to its core proposition – which is specialty, with a comparatively small retail P&C division. It has understood to have cut back its delegated authority book significantly to avoid overlap with the wider Axa group and has sold its private clients business to Aviva to hone that focus further.
Axa group CEO Thomas Buberl has been vocal about the firm's commitment to turning around Axa XL, saying publicly the remediation of the unit is an “absolute priority”.
Questions remain, however, around whether the scale-back as a result of remedial action has meant that Axa XL will have mistimed the cycle and missed over a year of rate increase for profitable growth – although it should be said that rate rises will give the turnaround work an extra tailwind.
In terms of leadership, UK and Lloyd’s CEO McGovern is said to have the respect of his employees as well as the wider market, and is regarded as having a sound “London market” head on his shoulders as the business repositions.
The business has had significant talent flight, but there is an argument to be made that those who remain in place should now be largely on board with the company’s new trajectory and its leadership.
In terms of attracting new talent, as part of a wider corporate the business will not necessarily appeal to the kind of staff who would look to more entrepreneurial businesses like Ark, Ascot or Inigo, or Lloyd's blue blood firms like MAP, Atrium and Munich Re Syndicate.
However, the strength, size and solidity of a business such as Axa and Axa XL would appeal to some.
Its position as a lead writer in specialty also allows up-and-coming underwriters to gain sought-after lead market experience, rather than following market.
As the London market tentatively returns to EC3 post pandemic, Axa XL also has the opportunity to position itself as a forward-thinking employer around flexible working, while its parent’s stance on ESG could also position Axa XL favourably in London where environmental and social commitments are becoming increasingly important to new talent.
The challenges that have faced Axa XL’s London business, particularly in the past year, have been substantial – and management will be keen to draw a line under 2020. It has residing strengths and advantages it can leverage as it embarks on a new path forward, although the pressure to deliver progress in 2021 will be significant – and turning around underperforming insurance companies is notoriously difficult.