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.

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.

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