Tackling a turnaround

Former Safeco CEO Mike McGavick, who engineered big changes,
reflects on his years in the business

By Elisabeth Boone, CPCU

“Being in a business that helps people put their lives back together when something has gone wrong is worth getting up in the morning for.” —Mike McGavick

When your once-strong company has lost almost $1 billion in the last year, and respected analysts predict its demise, whom do you call?

When Safeco Insurance faced this daunting challenge five years ago this month, it dialed the number of Mike McGavick, who brought to the beleaguered insurer a fresh perspective and leadership savvy. Under his guidance, Safeco rebounded from a loss of nearly $1 billion in 2001 to profits of more than $300 million in 2002. For the third quarter of 2005 the company reported net income of $101.1 million compared with a loss of the same amount in the comparable period of 2004.

McGavick joined Safeco in January 2001 as president and chief executive officer and was named chairman of the board of directors two years later. “Safeco took a chance on a relative newcomer to the business,” McGavick says, noting that he was hired at Safeco with only six years of insurance company experience (executive positions in strategic planning and financial management at CNA) and nine years of total industry experience.

He announced his resignation from the CEO post at Safeco at the end of August 2005, continuing as chairman of the board through the end of 2005. As he prepared to leave Safeco to pursue a career in politics, McGavick reflected on the challenges he faced when he came on board, explained how he addressed them, and described the results. He also presented his assessment of the changes that have swept the property/casualty industry during his career.

When he joined Safeco, “There was a broad set of challenges,” McGavick says. “If you go back and read the analysts’ reports from that time, most of the speculation was that Safeco would fail, or be broken up and sold. The problems were that profound, and property/casualty companies are notoriously difficult to turn around. In that first year, as our team was being assembled, we lost a billion dollars, including a write-down of a problematic transaction. That was on revenue of $7 billion,” he observes. “That’s a tough situation to be in.”

A number of things were causing the insurer’s problems, McGavick remarks, “but principally, the company, which had been known as a great underwriting company for many decades, had missed several changes in underwriting approach that had revolutionized the rest of the industry. They had watched that revolution go by and not participated,” he says.

“Another problem was that Safeco had made a significant acquisition in the mid-1990s (American States Financial Corporation), and that acquisition in a sense had never been completed,” McGavick continues. “They had never put together all of the offices and come up with a way of operating the merged companies that was effective. So we were completing a several-year-old transaction, and at the same time we were revolutionizing the company. In corporate life, that’s about as big a challenge as you can get.”

A team and a plan

Mike McGavick confers with Jeffrey Roe, President of Distribution, Sales & Marketing.

In launching the effort to salvage Safeco, McGavick says, “Our first step was to build a team of people who had the energy and vision to take on a task like this.” Safeco drew on its own talents—promoting people from within the organization—and also recruited executives from other leading companies. “Our second step was to develop a game plan, which we then communicated to all of the people who cared about Safeco, from our colleagues in the company to our agents and shareholders and to the regulators and Wall Street. For each of those audiences, we laid out a fairly simple plan for restoring the company,” he explains.

“First, based on what we were demonstrably good at, we focused the company only on those lines in which we believed we had the distinction to compete well,” McGavick continues. Those lines are personal auto and homeowners, small to mid-sized commercial accounts, and surety bonds. “Our second task was to bring the company up to date in our chosen lines of business, and be very selective about whom we would and would not insure and at what price. Third, we needed to make sure that the infrastructure of our company was affordable, given our revenue. Finally, we took actions to restore our financial strength through sound capital management.

“We announced that game plan within several weeks of my arrival at Safeco, and within 11 months we had executed on nearly every point that we had laid out,” McGavick declares. “Happily, it turned out that those were the right things to do.”

Key elements of the plan to restore Safeco were automating and restoring to profitability the company’s auto, home, and small business insurance lines; selling non-core businesses like the life and investment operations (in 2004); strengthening the balance sheet; and reducing expenses while investing in employee training and new technologies. In 2003 the company rolled out Safeco Now™, a unified, Web-based sales and service platform that allows agents to quickly obtain bindable quotes for 12 commercial and personal lines products and to process other transactions. Late in 2005, the platform was expanded to permit online rating and quoting of commercial package policies in addition to businessowners and personal lines coverages.

A season of change

Over the 10-plus years of his insurance management career, Mike McGavick has had the opportunity not only to manage leading insurers through a host of internal changes, but also to observe significant shifts in trends that affect the entire independent agency system.

“With respect to the providers of insurance, I see a number of changes—and some things that have not changed,” McGavick remarks. “First, the industry has become more precise in its use of modeling to measure and price risk. This is a revolution that has been going on since the early 1990s, and it is leading to entirely different business models that I think work to the benefit of the customer and the agency community—and ultimately to the benefit of shareholders and employees of the companies that have developed these models.

“The more precise we are in our underwriting, the less violently cyclical the industry will be. If we can reduce dramatic swings in the underwriting cycle, we can avoid the kinds of price shocks that hurt customers and the kinds of losses that hurt shareholders,” he declares. “Those are both good things for the long-term health of the industry’s reputation and capacity.”

The second change he has observed, McGavick says, is a derivative of the first. “We see much greater efficiency in the business of insurance, allowing people to acquire insurance at lower cost—at least in terms of those costs the customer doesn’t value,” he says. “For example, customers don’t really find value in the fact that the company processes their policy accurately; they expect it to be done correctly as a baseline of performance.” Similarly, he says, “They expect to be treated courteously, and they expect the company to handle the billing competently.

“But that’s not really the product they’re buying,” McGavick points out. “What they’re buying is the promise that the company will be there when there’s a problem. These days, the so-called ‘friction’ costs—the costs that are not at the core of the product—are lower, because the advances in underwriting processes also allow for advances in using technology to make the entire customer experience more efficient.”

The technology advances, he notes, while lowering the costs of things the customer isn’t really seeking, ultimately lead to greater customer satisfaction. “More and more insurance transactions will be handled online. I see great benefit to the consumer over time, as competition among providers inevitably intensifies.”

What hasn’t changed? “It’s still an industry that has a very noble purpose, which at times can be misunderstood,” McGavick says. “Being in a business that helps people put their lives back together when something has gone wrong is worth getting up in the morning for. I think our fundamental purpose, and the pride we can all take in delivering on our promise, is the constant that makes the industry valuable and worth being a part of.”

Big changes for agents

“The changes in the agency ranks are perhaps even more dramatic than those I’ve described on the carrier side,” McGavick remarks. “Independent agents and brokers too are transforming their business by virtue of the way technology allows them to more efficiently reach out to customers, provide services to them, transact business with markets, and build stronger relationships. With these changes, we’re finding that independent agents and brokers are on the march again for the first time in some years in terms of expanding their share of the market, particularly in personal lines.

“It’s exciting to me that we’re seeing more and different forms of producer structures come into existence,” McGavick remarks. “We used to have the small guys, the middle guys, and the large guys. Now we see various networks of like-minded producers, working together in technology-enabled ways that are quite different from those old traditional ways of operating an agency.

“And if you want to run a traditional agency, technology allows you to do that and still be competitive. This means there’ll be many different kinds of agencies and brokerages, each serving different customers and each representing its markets in a different way, and all of them able to compete effectively. That’s an exciting thing if you’re coming into the agency or brokerage world.”

Although few people in the industry ever envisioned the impact on the independent agency system of advances in technology, McGavick remarks, “We shouldn’t be so surprised, because small, flexible, entrepreneur-driven organizations can adapt to change better than just about anybody. I remember all the talk about problems with company automation systems and fears that the Internet would drive agents out of business. We shouldn’t be surprised that it turned out the other way.”

Small agents shine

Throughout its 83-year history, Safeco has built a reputation for working productively with smaller independent agencies, whereas many other national carriers have either moved these agencies to the bottom of the heap or outright dismissed them. Why does Safeco find it productive and profitable to partner with smaller agencies?

Again, McGavick says, the key factor is the “T word”: technology. The same technological advances that have revolutionized the entire property/casualty industry, he says, “are enabling Safeco to partner more efficiently with more kinds of agencies rather than fewer. The great news is that the old prediction that the small agent would find it impossible to survive has been proven absolutely wrong,” McGavick declares. “We can now work efficiently with partners who have relatively small books of business—and they can compete efficiently with very large organizations, if they have the skills in sales, relationship building, and technology.

“The business model we use now,” McGavick continues, “is very complementary with all different kinds of distributors, and that means we can be more responsive to our smaller agents than we were in the past. The key is that these agents must continue to be open to change and modernization. To liberate ourselves from those friction costs that get in the way of servicing customers, we have to embrace the technology, not fight it,” he says. “We’ve found that our smaller partners who understand that thrive in this environment.”

Challenges abound

Asked what he considers to be the major challenges that confront the property/casualty industry, McGavick says, “A big concern is that because the industry is so intensely regulated, things that sound good in sound bites for politicians may not yield greater benefits for consumers. When the industry does well, people who don’t understand what it does and how it succeeds may create rules that make it less successful.”

Pointing to another challenge, McGavick says, “We are learning from recent hurricanes that some of our modeling of catastrophe risks has not served us well, particularly in the commercial arena. I think this is teaching us that if we’re entering a period of greater frequency and severity of natural catastrophes, as we have been in the Southeast, we’ll have to really think hard about how to create viable private insurance markets. We’ve already seen a fair amount of withdrawal from markets in the Southeast,” McGavick says.

“Clearly, insurance companies don’t want to do that; we make our money by providing insurance. But we’re beginning to realize that some risks in these areas aren’t particularly insurable. We’re all scrambling to figure out how we can overcome this challenge. I think that governments and insurers will have to work closely together to create the essential underpinning of a vibrant economy, and that underpinning is a stable insurance market.”

At press time, the federal Terrorism Risk Insurance Act (TRIA) was set to expire on December 31, 2005, unless Congress voted to extend it. “We still haven’t managed to figure out what we’re going to do about terrorism,” McGavick says. “Not having TRIA reenacted is a significant short-term problem in the marketplace. While we wait for Congress to act, we have contracts that contemplate TRIA might not be renewed. This is a tremendous problem facing America, not just the insurance industry,” he asserts.

A shared challenge for insurers and agents, McGavick observes, is that “there’s always a fight for quality talent. All of us are constantly looking for good people, and because the industry has not always done a good job of managing its image over the years, people don’t usually grow up wanting to be in our business. The fact is,” he continues, “it’s a fabulous business, with good, purpose-driven work and bright people with whom to partner. Making sure that people are excited about that opportunity is a big challenge,” he says. “On the agent and broker side, we need to draw fresh young talent into the business, particularly in the producer ranks.”

In the wake of the Spitzer investigations of 2004 and 2005, the industry is faced with a daunting task, McGavick cautions. “To ensure that we retain our credibility as a contributor to our society, we’ll have to keep working through the fallout from the various investigations of primary insurers and reinsurers as well as agents and brokers,” he declares. “The industry needs to do a first-rate job of working with state regulators, and increasingly the federal government, to ensure that our needs are understood, and that by getting these needs addressed, we’ll be better able to provide a viable market for insurance. All of our industry trade groups, like AIA, the Big I, PCI, and CIAB, are tremendously important in this effort,” he asserts.

A run for the Senate

As mentioned earlier, McGavick is leaving Safeco to return to politics. He recently announced that he is a candidate for the U.S. Senate in the 2006 election, representing the state of Washington as a Republican.

What goals would McGavick pursue if elected to the Senate? “As it was with Safeco, it seems to me that the country is not headed in the right direction,” he responds. “We are facing issues of enormous importance that the current culture in Washington, D.C., doesn’t seem to want to deal with. That kind of denial, and the acceptance of poor performance, are not unlike what was going on at Safeco,” he remarks. “We were able to turn that around by clearly communicating what we were trying to do, making sure we were focused on what was important, and creating common-sense solutions. I believe that the same principles will serve well to turn our nation around. I think that what I have learned from the good people who make Safeco so successful can be applied to further the best interests of our state and our country.” *

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