‘Foreign exchange movements’ should not affect re/insurers’ results

A number of reinsurers have attributed fluctuations in their results to currency movements this year. But there should be no such excuse for such fluctuations given the tools that are available to hedge and better manage this risk, one currency specialist has claimed.

ACE is one of several companies that has noted this. The company posted a solid set of results for the first quarter of 2015 though its net profit fell by 7.2 percent to $681 million in the quarter.

The company said its year-over-year results were adversely impacted by foreign exchange movements in the period because a number of favourable items from the prior year that were not repeated.

“ACE’s first quarter earnings per share were essentially flat with prior year – a good result for a global, dollar-based insurer. We overcame unfavourable foreign exchange movement and a number of favourable items from prior year to produce after-tax operating income of $745 million, or $2.25 per share,” said Evan Greenberg, chairman and chief executive officer of ACE.

Broker Willis also noted that unfavourable foreign exchange movements dented profits in its first quarter results.

Its profits fell to $210 million in the quarter compared with $246 million in the prior year, driven by restructuring costs and adverse foreign currency movements. Foreign exchange movements impacted commissions and fees by $69 million and a $25 million period-over-period net increase from acquisitions and disposals completed in the past 12 months, the company said.

However, the impact of currency movements is not always cited as a negative force, as Hiscox noted in its first quarter results.

The company enjoyed strong growth in the quarter, its overall gross written premiums increasing by 12 percent to £561.7 million.

“It’s been an excellent start to the year, flattered by a good claims experience and favourable foreign exchange movements.  While the market has been tough, with a reduction in pricing in the big ticket businesses, we have continued to grow in our specialty lines and expand our ILS business,” said Bronek Masojada, chief executive of Hiscox.

But Brett Thomas, foreign exchange dealer at OSTC FX, says there is little excuse for being caught out by movements in foreign currencies. Speaking generally rather than about any one company in particular, he said that while the markets have been prone to fluctuations in the past year, it is possible to manage and hedge this risk.

“For any successful organisation trading in the global market place, dealing in foreign currencies is now an unavoidable prerequisite,” Thomas said. “Yet time and time again companies cite unforeseen movements in the currency markets as a driver for poor performance or for worse than expected numbers at the end of a quarter. Is such an oversight of what is now a fundamental part of international trade really a palatable excuse in 2015?

“The last 12 months have without a doubt seen some choppy trading in the currency markets, but that said the currency markets have always been dynamic and are constantly reacting to political and economic data from across the globe.

"Foreign exchange risk and currency management should now be a hugely important consideration of any modern finance department and finance director, therefore it is surprising just how few companies are genuinely on top of this and minimising their exposure to currency fluctuations.

“For those who don’t currently have an effective strategy in place, there are numerous tools available to help manage and ‘hedge’ this currency exposure. For those companies that are unable to naturally ‘hedge’ their exposure, the use of a good foreign exchange broker could be invaluable.”

He added that as well as providing those basic services that enable a company to exchange currencies on the spot, companies should also consider using ‘forward’ contracts which “should form the basis of any hedging programme”. A forward contract allows a firm to secure today’s rate for settlement at an agreed future date.

“If you can accurately forecast your quarterly/annual revenues and expenditures that will then allow you to lock in a percentage of that exposure for settlement at a future date, therefore negating a large part of your risk to currency fluctuations,” Thomas said.