With the defining moment of his tenure as chief executive of Lexington Insurance Company now 10 months behind him, Peter Eastwood says the nation’s largest excess and surplus lines insurer is no longer facing any particularly unique challenges.
Mr. Eastwood spoke to NU’s E&S/Specialty Lines Extra at the annual conference of the National Association of Professional Surplus Lines Offices, Ltd., which took place in Orlando, Fla., earlier this month—sharing his personal perspective on the changes that have taken place at his firm since he took the helm on Dec. 9 last year.
Excerpts of the NAPSLO interview with Mr. Eastwood provide a glimpse of what it was like to work through the turmoil that began roughly a year ago, when attendees of the 2008 NAPSLO meeting headed home to learn news of the near-bankruptcy of Lexington’s parent, American International Group, on the morning of Monday, Sept. 15.
Less than two months later, Mr. Eastwood was named Lexington’s CEO when former CEO Kevin Kelley, a 35-year veteran of the organization, left the company together with former President and Chief Operating Officer Shaun Kelly. Both left Lexington to head up Ironshore in Bermuda.
A year later, the E&S operations of AIG, now known as Chartis, still sit on top of a ranking of E&S insurers (based on direct written E&S premiums for 2008) prepared by A.M. Best Company and contained in a special report on the surplus lines market for NAPSLO distributed at the meeting. (See related link for more on the report.)
Mr. Eastwood explains how Lexington, a company specializing in product innovations that are often linked to an array of crisis management service add-ons, averted a crisis of its own and is moving ahead to attack the challenges of a competitive market.
Q: What do you view as Lexington’s biggest challenges, and how have you addressed them in the past year?
Mr. Eastwood: There’s been an evolution in terms of our challenges. As we sit here today, I would tell you that our challenges are similar to the ones that others in the business face….Supply is greater than demand, and so we face competition in our business, followed very closely by the recessionary economy here in the United States. Those are the two biggest factors affecting us in our portfolio.
AIG and its issues that emanated from the liquidity crisis…while still in effect for us as an organization are really a distant third for us.
That’s quite positive. Eight months ago, that wasn’t the case. The number-one issue we faced was creating certainty in our company and making sure our customers and other business partners understood the distinction between the holding company and its issues—largely emanating from the financial products and capital markets business that AIG owns—and the insurance operations that are protected by the state regulatory framework in the United States.
Q: How are you meeting the current challenges—the ones that everyone else is facing? What strategies are in place to deal with the market and the business environment?
Mr. Eastwood: We’re somewhat unique in being able to deal with the challenges because of the length of time we’ve been in the businesses we’re involved in, the size of our portfolio, and importantly, the diversity of the portfolio.
[Size and experience] give us information and knowledge advantages relative to others that haven’t been participating in the business for as long as we have.
Diversity is something that we spend a tremendous amount of time on. Our balance between property and casualty writings at the end of last year was roughly 46-to-47 percent property and the rest in the casualty liability lines….
New business writings in a depressed pricing environment are arguably the Achilles heel of the casualty market…Having a knowledge advantage on your renewal portfolio puts you in a better, more advantageous place.
When I assumed my responsibilities [in December], it became very clear to me that in order for us to be successful into the future,…I needed to make sure that the talent that we had with the Lexington organization—and it’s quite abundant—remained with the organization.
My number-one mission early on was to make sure I secured people in the organization, [and] we’ve had a good deal of success—both at the senior-most levels and throughout other levels of the organization. That’s critical to our success.
Q: We read so much about the talent that has left. There have been articles that have included lists of people and places they’ve gone. Tell us more about how much of the employee base you’ve been able to retain, and what you did to convince people to stay.
Mr. Eastwood: We’ve lost some people, there’s no doubt—and we’ve lost some high-profile people. I’m in the role that I’m in because we lost a very high-profile person.
I’ve said to everybody, you don’t lose somebody like Kevin [Kelley] and think that that’s a good thing. But it ultimately comes down to how you deal with the change.
We have approximately 1,500 people across the Lexington platform in 33 locations throughout the United States, Canada and London, and if you look at our voluntary turnover rates, they are roughly equal to the 2008 figures. So we have not seen higher levels of turnover throughout this challenging period.
But I think, importantly, it’s not just about the number of people you retain in an organization. It’s about the individual people and making sure that the people you do retain are the ones that are contributing the most to the success of the organization. That’s really what a true meritocracy is.
So that’s been my focus. Starting at the top of the organization—because we are a large, hierarchical company—and recognizing that the people you secure at the top are also going to work with you to secure everybody else that sits underneath them.
[During] that first week, as I would secure the commitment of an individual, I would say, “Now I need you to go secure the other people on your team. I also need you to be thinking about who else in the organization you have relationships with, who are not in your direct line of report, and I need you to secure those individuals.”
In addition, “I need you to know who else is committed to being here. I’m going to tell you who those people are, and I need you to call and tell them that you’re staying as well because I don’t want them to think that they’re the only person who’s going to stay here with Peter.”
By that first weekend, it became a very intricate networking process taking place, with everybody relying on one another and lending support to the greater organization.
Like me, many of our people have worked for the organization for many years. So we feel very committed to the organization, committed to one another.
We have a lot of obligations that we created. The view that I have, and I think many of our people have, is that you have a responsibility to stay and honor those obligations.
We’ve also looked at it, I think, as individuals very, very closely, and we recognize that this is a tremendous opportunity. For me, it’s an opportunity borne out of a crisis created at the AIG level. In any other aspect of your life, and this is no different, it’s then a matter of how you choose to handle it.
Ten percent of life is what happens and 90 percent of life is how you handle it.
Q: Prior to the NAPSLO conference, Matt Power, Lexington’s executive vice president, spoke to NU about creating a more collaborative culture. I think that’s basically what you just described.
Mr. Eastwood: I talk to people about that all the time—internally and externally….We’ve had people working together that have not done so in the past. The only interaction they would have would be in a weekly staff meeting.
I believe we are much better as an organization with 1,500 people working together to be successful than we are as individuals trying to accomplish singular goals. [Throughout this process,] we’ve also…been able to create an environment where individuals in the organization perhaps have a voice today that they may not have had in the past.
(Editor’s Note: See related article link below for more on the interview with Mr. Power.)
Q: We all want to know what it’s like to wake up one morning and become president and CEO.
Mr. Eastwood: When you have somebody who has run an organization for as long as Kevin Kelley did, that sort of change is a defining moment for your organization. But it’s not defined by the departure of an individual. It’s defined by how the remaining individuals chose to handle the challenges they face.
I’m a big believer that people can deal with change. But change naturally creates uncertainty, and people will struggle to deal with uncertainty.
What I’ve tried to achieve through the course of the last 10 months—and I’ve asked our team to look to achieve—is as change takes place in the organization, create certainty.
People need to know who you are if you’re in a new role, they need to know what they can expect from you, and they need to know what you expect from them as well.
Q: On an A.M. Best Webcast for NAPSLO recently, Mr. Power spoke about the defining moment. He said, “It got us back to a key discipline that made us great, which is client engagement.
Mr. Eastwood: Customer and broker interaction, yes.
That really extends far beyond Lexington. We’re part of the Chartis organization, and I think really starting with the senior-most management levels of Chartis, the communication from us as an organization from Sept. 17 [2008] on has been quite prolific—[and] the mediums have been quite varied. Much of it has been direct customer interacation—in meetings or via telephone and conference calls. There have been much broader Webcasts that have been held with many of our business partners—customers, brokers and reinsurers.
There’s been a tremendous amount of travel that has taken place. In the last 10 months, I’ve been on 56 business trips. I’m just using myself as an example, but there are other individuals who have made an equal amount of effort to be as visible in the marketplace as we possibly can.
Our brokers, our customers, our employees didn’t get us into the situation that we’re in. Unfortunately, for those of us in the insurance operations, nor did we necessarily. But at the end of the day, it’s a fight we’re in and we’ve got to stay in it.
We have a responsibility to our business partners and to our employees to communicate effectively, to be transparent about what’s happening in the organization, both in terms of the financial condition of the organization—in the early days about the distinction between the holding company and the regulated subsidiaries and why that’s important for them to understand—and about our plans for the future.
Q: Everyone has suffered a volume decline over the past year. In your own book of business, has the main cause been the supply-demand shift, the pricing environment, or customers choosing to restructure programs because they don’t want too much with one insurer?
Mr. Eastwood: There are a number of contributing factors, all of which you just covered, [but] my sense would be that Lexington will end this year with a top-line performance that’s better than the E&S lines industry as a whole.…
It’s tough for me to attribute a certain percentage in terms of the contribution that those factors make, but the economy is in my opinion the biggest contributor to the deterioration in writings in our portfolio, followed by the competitive pricing environment and the flight of business from the E&S space to the admitted markets.
The way I view Lexington is it’s going to contract and it’s going to expand, and it should expand when the pricing allows us to. And we’ve got to be smart underwriters and make sure the business contracts when the pricing environment doesn’t allow us to essentially write business at rates that we think are acceptable to generate a positive bottom line.
The key for us is to make sure that we position the organization for the inevitable turn in the marketplace.
We’ve been good at that for a long time in my opinion, and we are taking steps today to make sure that the organization is well-positioned for that turn. For us, that means we’re prepared with relevant products and services to continue to satisfy the needs of our customer base when others drop out of the market. We will still be there.
Q: How focused is Lexington’s management team on the market share rankings in the A.M. Best report? Do you care if Chartis is the No. 1 E&S writer, or if it’s Lloyd’s?
Mr. Eastwood: I view market share as a measurement of our success. I don’t view it as the exclusive measurement. It is a measurement, not an objective.
If we’re doing our jobs correctly, which means that we run the organization so we have a sustainable competitive advantage into the future, that market share will naturally result.
(Editor’s Note: According to A.M. Best’s current and past reports on the surplus lines market prepared for NAPSLO, AIG has held the top spot since 2002, retaining the position in 2008, but AIG’s E&S premiums dropped nearly 13 percent in 2008, while Lloyd’s experienced only a 5 percent drop.)
During the interview, Mr. Eastwood also talked about the possibility of a market turn, about new product initiatives, and about how his prior roles at AIG would impact the direction of Lexington going forward.
Mr. Eastwood seemed more optimistic about a pricing turn than other executives at the conference, who expressed the view that there’s been some moderation in property price increases since midyear. “I don’t think the pricing environment today is necessarily a reflection of what’s going to happen when you get to the first and second quarters of next year when the vast majority of cat property starts to renew,” he observed.
Turning to new product development, he said that “innovation is a key part of who we are a company. We view innovation on the product front, the distribution front and the process front as [a means of] creating differentiation.
“Business is about differentiation. If you don’t differentiate yourself, then you’re just like everybody else, and for all intents and purposes, you’re average. We’ve never wanted to be average,” he said.
In his prior roles at AIG, Mr. Eastwood worked at National Union (which has a strong focus on the professional liability side), he managed Lexington’s health care liability operations, and he held a management position with AIG Risk Finance, among other roles.
Asked if product innovation might be focused in some of those areas, Mr. Eastwood said he believed that while 12 years in New York and six in Boston had given him a broader perspective than others in the E&S business, he doesn’t anticipate a push into any specific area of past experience at Lexington going forward.
“What I will tell you is that I think my broad experiences give us an advantage certainly internally in the sense that I’ve got deep relationships throughout the entire AIG organization to call on to help not just us at Lexington but our customer base,” he said.
Looking back on his career, the native Rhode Islander said his original decision to leave the comfort of the AIG “mother ship in New York” to accept an opportunity to work for Lexington in 2003 was less challenging personally than professionally, having grown up in New England.
“Since Dec. 9 of last year, people no longer ask me if that was a good decision,” he said.
“I’m very fortunate,” he added. “I have very much viewed AIG as a meritocracy—an organization where I believe I’ve given a lot, and it’s given me back an equal amount. In my opinion, that’s a fair relationship.”
“So when Dec. 9 came and John Doyle [Chartis’ president of commercial insurance] called to say Kevin Kelley and Shaun Kelly had left the organization [and] we’d like you to run Lexington, while there’s a brief moment of shock, there was no reluctance on my part to say, absolutely. I’m committed to being here and seeing this through. It’s another terrific demonstration of what the organization has to offer,” he said.
See also, related articles:
“Lexington Still Number-One E&S Insurer; Diversity Is Key, Senior Executive Says.”
“Merger Activity Low Even After E&S Premium Falls For Second Straight Year.”