Interview: Donal Kelly

Donal Kelly’s had a tough few years. As XL’s regional director with responsibilities for the UK, Ireland and Bermuda, he’s been in the eye of the financial storm; the insurer suffered second only to AIG during the financial meltdown. Yet it has turned around its fortunes in spectacular fashion.

Accordingly, Kelly looks relaxed and cheerful as he meets Insurance Times on a warm summer day. With a strong Irish accent to match the Celtic name, he’s keen to talk about how XL has moved on since the dark days of 2008 – and to outline modest but firm proposals for its future growth.

Today, Kelly is the first senior executive to speak to the UK press about XL’s torrid two years. So let’s recap: the Bermudian-based insurer was caught short by its investment portfolio when the market crashed.

Announcing its 2008 results, the company lamented the “toughest year in its history”, as its 2007 £143m profit was turned into a staggering £1.8bn loss. The loss was mainly prompted by investments in risky mortgage-backed securities.

Just doing my job

Kelly remembers it well. “It’s strange, looking back now,” he muses. “If someone said to you, next week there’s going to be this major problem and you’re going to come into work every day and have to worry about what the market thinks and explain yourself to your clients and brokers, you would think it would be a horrendous situation. But you just come in and you do your work every day and you get through it.”

It’s a stoic message, yet Kelly is keen to put an even more positive spin on events: “It was an interesting time,” he says – a classic understatement. “We all like to spend time with our clients and our brokers and we spent more time with our clients and brokers at that time than ever before.” Well, yes, Donal, but it can’t have been that pleasant? “It wasn’t very nice,” he admits. “We were always trying to defend and explain ourselves.”

XL came through it though, to the surprise of some and the relief of many. Kelly’s argument, echoing that made by the insurer throughout the crisis, is that XL had the financial strength to wait for its investments to return to value.

“That’s been proved,” he says. “Our shareholder equity has increased 64% from the end of 2008 to the end of 2010. The reason is because those investments that had unrealised losses on them have come back. It turned out exactly as we thought it would.”

Into the light

Many observers have attributed XL’s successful rally to its charismatic leader, chief executive and former Senate candidate Mike McGavick, appointed when the company was on its knees in 2008. Like most of his peers, Kelly is a big fan.

“Mike is a very inspirational figure – the best communicator I have ever met,” he says. “But communication is not everything, there has to be something behind it. If Mike hadn’t raised capital when he did then it could have been a different situation. Some would say the timing was lucky; some would say it was inspired.”

McGavick’s strategy, with the support of his staff and clients, seemed to do the trick. XL posted a modest $207m (£133m) profit for 2009.

Kelly has a lifetime of experience in insurance to bring to the table. Indeed, he spent many years working at AIG, but when questioned about it, laughingly protests: “I left AIG before the problems – I wasn’t responsible!”

Kelly was at AIG for 13 years, nine of them on Bermuda’s sunny shores. Like so many, he started out in insurance as a graduate trainee with Sun Alliance. “They said I could go overseas,” he recalls, “then they offered me a post in Horsham. That wasn’t my idea of overseas, so I moved on from there to CNA Re in Bermuda for a couple of years, then I joined AIG, working in the captive management division. I went out there as a single guy, met my wife and had two children. I loved it.”

But back to today’s job, in the rather more prosaic setting of London, where Kelly has been since October 2009. In the UK, XL operates mainly at the top end of the market, underwriting large global risk programmes. It’s a tough place to be right now, and Kelly admits: “We’re trying to get through the market as best we can, and that involves modest growth on the property/casualty side – nothing dramatic.”

Asked about Aviva’s plans to break into the corporate risks arena, he seems relaxed. “There’s more competition in the marketplace and we just have to deal with that,” he says frankly. “Good luck to them – but not too much luck!”

Kelly is reluctant to gaze into his crystal ball on rates, simply citing excess of capacity as the major issue depressing prices. “I honestly haven’t got a clue what it would take to turn the market – we were predicting it two years ago,” he says. “Will it be 2010? I don’t know.”

XL is also a significant player in specialty lines, through its Lloyd’s platform, where again it is looking for modest growth.

Big plans, small steps

More significant expansion could be on the horizon in mid-market, which XL entered in a small way two years ago, and on professional insurances.

Here he says: “We’re trying to take an area of business that we have some expertise in and bring it to bear in a new territory. We’ve got a big PI book in the USA, so we’ve got the expertise. We’ve been writing on an excess basis in the UK, and now we’re writing on a primary basis. We’ve gone from a standing start to a significant top five player in the space of a year.”

Kelly will be an unfamiliar face to many brokers, as XL largely deals with the top five. While it may open up new partnerships in the mid-market, this will remain the case for most of its business. But Kelly adds: “We do have some business with some of the big regional players, and if they have business for us to write, we would look at that for them.”

It’s a story of modest growth for XL – which is only sensible at this stage in the cycle. And any growth at all must seem like a dream come true given where the insurer was this time two years ago. As for Kelly himself? “I just hope I can make a success of it, then I’ll see what opportunities develop,” he says. “XL won’t let me vegetate.” IT