While other insurance companies watched their investment portfolios bleed losses during the financial crisis, The Guardian Life Insurance Company of America’s balance sheet came through the period very much intact. The New York-based mutual life insurer had less than 2% of invested assets in asset-backed instruments and no exposure to CDOs, CLOs, or structured investment vehicles.
That was no accident, says Robert Broatch, Guardian’s finance chief and executive vice president of finance, risk, and operational excellence. The insurer does its own fundamental credit analysis and uses models to understand its capital adequacy, and nine months before Lehman Brothers collapsed it had modeled a Great Depression-like scenario. (Guardian’s actual performance in 2008 and 2009 fell within $100 million of the model, says Broatch.)
Still, Broatch had plenty to do to steer the $31 billion (in assets) private company through the crisis. He diligently tracked Guardian’s capital position and policy withdrawals for any hint of market deterioration or panic, and used hedges to protect the insurer’s downside risk.
Today, Broatch has a new set of priorities. With Washington bearing down on financial-services companies, compliance risk is a growing threat. The state of the financial markets also poses a unique double-barreled challenge to the life-insurance industry. In a recent interview with CFO, Broatch discussed his concerns about regulatory reform and how his finance department is now modeling a new, perhaps scarier, economic scenario: a Japan-like cycle during which interest rates stay depressed for the better part of the next decade.
The following is an edited version of CFO’s interview with Broatch.
While Guardian didn’t invest in complex securities or pour money into derivatives, it did make a big change in its portfolio after the collapse of Lehman Brothers in September 2008. What was it?
We had quite a bit of common stock, and since it’s marked to market, it can bring your capital base down very quickly. One of our risk-management techniques is to be 100% out of stock if our capital is ever threatened. The chief investment officer, the CEO, and I met and asked, Are we going to pull the trigger on this and get out of the market? It was a tough decision. On September 16, when things really fell apart, we had well over $1 billion in stock; the next day we were effectively 100% out of [equities] as a result of our dynamic hedging program.
What saved you on the liability side?
We didn’t do anything crazy with products. Many insurers that experienced trouble had products with guarantees associated with them, like variable annuities. They promised guaranteed incomes, and the assets were invested in stocks, so there was a big earnings gap. We had a small variable-annuity business, with risk limits around it. Guarantees can produce a lot of growth in no time at all; we didn’t chase growth.