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.

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.

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.

Discuss

Your email address will not be published. Required fields are marked *