Risk Management

FM Global CFO Plans for Long-Term Currency Perils

Amid political uncertainty, the mutual property insurer's CFO closely manages currency risks to protect FM Global's policyholder-owners.
David KatzNovember 8, 2013

Like Frank Sinatra once did, Jeffrey Burchill might well have been singing “It Was a Very Good Year.”

FM Global, the big mutual property insurer where Burchill serves as CFO, this year enjoyed the two conditions an underwriter most craves. For one, unlike last year, when Superstorm Sandy struck, no major natural catastrophes occurred in 2013. Because of that, the company made money on its basic business, which is insuring companies against property damage, business interruption and related risks.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Second, the insurer’s investment income burgeoned. The capital markets “have been very strong this year,” Burchill noted earlier this week. “At last look, the S&P 500 is up about 25 percent, which has contributed to the financial strength of the company. It’s well above our plan, and we try to leverage that for the advantage of our policyholders.”

As a mutual company, FM Global is beholden to its policyholders rather than the shareholders a public company must satisfy. In a wide-ranging interview, Burchill explained how that makes his job different from finance chiefs at other kinds of companies. Still, like all his peers, he has risks to manage. His top concerns these days are the challenges of managing currency, cash flow and political risks like the recent U.S. debt-ceiling crisis. An edited version of the discussion follows.

Jeffrey Burchill, CFO, FM Global

Jeffrey Burchill, CFO, FM Global

How does your company’s status as a mutual property insurer affect your job as CFO?
Being a mutual property insurance carrier, our business model is very unique because we’ve built a lot of potential volatility into it, both from the underwriting and investment sides. On the underwriting side we offer large limits to our policyholders and  keep a lot of that risk internally. So if you have a major event such as a hurricane, an earthquake, a flood, a large fire (where unfortunately a client loses a facility), our profitability could be impacted by that one event. That makes predicting profitability on a quarter-to-quarter basis impossible. We underwrite for the longer term, knowing that in any one year we could underperform the market.

In a year in which we haven’t had a lot of natural disasters, we take more risk for the benefit of our policyholder. On the investment side of our business, we also take on more risk [than a public company might] because we are such a heavy investor in equities.

As the CFO of a property insurance company, I don’t have a a lot of long-term liabilities on the balance sheet. That’s because claims settlement happens within months instead of years [which is often the case for liability insurance claims, which may take years to settle]. Therefore, we intentionally take more risk on the balance sheet. And this year, it’s paying out very handsomely, with the financial markets up. But in 2008, when the markets went down 25 percent, certainly, if we were a stock company we would have had to change our business model. But because we were a mutual company, we did not have to change. We had built in the possibility of that volatility. We don’t measure ourselves on a quarterly basis. We take a longer term view of the world, both from an underwriting side and an investment side. That’s what makes my job very unique. Most CFOs could not take a longer term view.

How does that approach make your job different on a daily basis?
I think there are two differences. Number one is that we’re a global company, so that volatility is built into any geographical area in which the company operates, which means that we have to be very adaptable to a changing environment. We have to be adaptable in currency, since we deal with about 26 different major currencies. We can have an expenditure in any of those currencies at any time. Foreign exchange is probably a big part of what I do.  It’s also making sure that we can satisfy the needs of our policyholder in the event they do have a claim, because, being a property insurer, we would pay that claim very quickly. So cash flow and cash-flow forecasting can change in an instant.  

Why is that?
If a client of ours has a a major fire or a natural disaster, such as flood or wind, that claim would typically be settled in a matter of months, not years. Certainly the property damage would be within say 15 months, and any business interruption would be within the indemnity period, which is typically less than two years. It could be in any currency; it’s not just not U.S.-centric.

We [typically] pay in the local currency, but our policyholders do have an option to request a different currency. For example, if you had a claim in a third-world country, and you wanted to be reimbursed in dollars because you’re going to reinvest in dollars, we would allow for that. But in a typical claim, if there is such a thing, the policyholder would ask for reimbursement in the local currency because they’ll rebuild in the local [geography].

Does paying in the local currencies put you at substantial risk?
Sure. We have a lot of foreign-exchange exposure. Any time we have a major claim, we look at the currency that claim is in and try to predict where the dollar will go against that currency in the 12-to-24 month time frame.

In China, for example, most of the business is operated in U.S. dollars. But even though we’re a U.S. company, about a third is in different currencies: the Canadian dollar, the euro, the pound sterling or the Australian dollar. Those are our four big currencies, but it only takes one location to cause a loss. We just paid a claim in South Korea, and we had to go out and buy that currency [won] because that’s not one we typically hold. We had a small loss in that currency.

How did the recent political turmoil about the U.S. debt ceiling affect your management of currency risks? Since we’ve stabilized the debt outlook of the country, the dollar has stabilized and, in fact, gained against most currencies. But prior to the political settlement, the dollar was all over the place.  So I wouldn’t even try to measure whether we gained or lost, because you have to pick a starting point.

What was going through your mind while the debt-limit crisis was going on?
My overriding thinking was that I wish we could play nice together and get some sort of solution. It does have real economic consequence when you have a situation like that. And it’s a little bit unique. You know, we’re holding the debt of the country hostage for political purposes. A potentially significant default by the United States would have caused real havoc in interest rates and the strength of the dollar — which is what we were preparing for a little bit.

What would have been the consequences for your company if that had happened? Come to think of it, it still could happen.
Sure. All we’ve done is delay it. Because most of our business is in dollars, our immediate strategy is to move as much surplus currency into dollars so that we don’t have any financial risk. Certainly we aren’t going to get into any futures type of trading because in this environment of political uncertainty, it’s legalized gambling to do that. And people like me lose jobs if they gamble wrong. So we’re going to keep as much of our assets as we can in dollars until there’s some political stability in the economy.