(October 15, 2012) — Staring into the abyss usually makes people re-evaluate things. Insurance firm Zurich certainly re-evaluated when it came a little too close to the edge at the start of the 2000s.
“We had a near-death experience – it forced more discipline and closer attention to our risk policy and asset allocation,” says Rogers, a decade after being on the brink.
At the start of the new millennium, Zurich had expanded outside of its natural, insurance-based comfort zone into asset management and banking – and it was not doing terribly well in either of them.
By 2003, a new CEO had sold off much of what wasn’t working and told his employees to refocus on what a Swiss insurer was meant to be good at: managing its own and other people’s risk.
Rogers, then vice president for risk and investment management, was at the forefront of this refocus action.
“It embedded a culture that is more aware of risk. We don’t avoid risk, but we have a very strict risk budget and our asset/liability models are built to optimise risk and reward,” he says.
Today, the company has around $200 billion in insurance assets invested across a couple of hundred portfolios that are located on every continent. Operating in a country means having liabilities there too and the best asset match originates within the borders.
“We have about 5% of our portfolio in peripheral European debt – about $10.4 billion – which is only a small part of our overall portfolio. We have an Italian balance sheet, for example, so we have Italian liabilities. We don’t just hold debt from these countries in our those local portfolios though,” he clarifies.
The other 95% of the portfolio is made up primarily of international investment grade and government bonds. Rogers says an insurer’s liabilities are exposed to interest rate risks, this means this liability has to be hedged and this type of fixed income is the best way to do it.
Zurich manages around 30% of its portfolio internally, leaving the rest to a couple of dozen asset managers. The insurer also invests in a range of public and private equities, real estate and hedge funds. Rogers says it takes months before the company will commit to a new asset class: “We have to understand the risk/reward trade off. We ask whether it fits within our portfolio, if it will add diversification and whether it is permitted by the regulator.”
Adding to the investment discussion in Europe, Solvency II looms on the horizon, demanding better funding of liabilities with matching assets. Zurich is almost ready for it, however, as the company has used a fully economic model to manage risks for many years now, and as the Swiss regulation on insurers is already fairly strict.
“We won’t have to change our asset mix to comply with Solvency II – the Swiss Solvency Regime is similar and we have complied with that since 2006,” Rogers says.
“In terms of liabilities, we have a similar outlook to pension funds. Our actuarial colleagues are very good at predicting what we are going to need. For the catastrophes and natural disasters – well, that’s why there are reinsurers.”
Aligning assets and liabilities has been at the top of the investment group’s agenda for a couple of decades and it was one of the first to pioneer an in-house system to be able to gauge just how well it was doing.
“In the 1990s we built our own data warehouse system, which allowed us to see at any point what our exposure was. We wanted to move to an asset-liability matching model and realised we couldn’t do it without knowing the risk from all our offices in all our portfolios,” Rogers said.
Zurich’s proprietary monitoring system, which has been upgraded over time, pools all the information from its investment offices around the world and gives a clear view at any given moment of the insurer’s position.
It was useful in the most recent financial crisis and Rogers also credits being in a sticky situation and getting out of it made them more aware of potential dangers. “We had some asset-backed securities but we didn’t have to become a forced seller. In fact, we made a positive total return in 2008 – it was down to some skill and some luck.”