Financial Executive: May 2013

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Dalynn Hoch, chief financial officer of Zurich North America, talks about her career path and the people that helped it find direction — which has lead to her becoming one of the top financial executives at a major global insurer.
By Christopher Westfall

Whether it was a childhood acquaintance that focused Hoch on international business, co-workers that encouraged her to become a partner at a Big Four accounting firm or a client that challenged her to move into the corporate C-suite, Hoch easily cites “people that have taken me under their wing and given me every opportunity to succeed.”

But for the 42-year old Hoch, an FEI member, the foundation of her success was shaped as a child by her father and his emphasis on making a difference in people’s lives. “He sat me down — I still remember it — and he said, ‘You know, Dalynn, success is not measured by who you are or what you have, but by where you’ve been and who you’ve touched,” she says. “I often go back to my father’s definition of success in my role as CFO. We have an opportunity to touch and impact many people’s lives.”

Leading by example, and encouraging others to do the same, is more important than ever for today’s financial executives as they now play a more strategic role in any company’s success or failure, Hoch says.

“There is an opportunity to transform the financial processes; to develop our people and to take them up to the next level so they are not simply reporting the numbers but also providing insight,” Hoch says. “We want to truly have our financial staff to be strategic advisers to serve the businesses.”

The Road to Insurance
A proud “farmer’s daughter,” Hoch says that her early years were built around hard work on her family’s Minnesota farm and, as it happens, the insurance industry. She explains that though most of her father’s time was working the farm, like many in the farming community he supplemented the family income with additional work. Her father sold insurance as an independent agent through a small local agency. “I used to go to county fairs with him, sit in his little booth and I would listen and watch him sell insurance,” she says.

It was during a journey with her all-state band camp in Minnesota while in high school where Hoch met students from Japan and developed a taste for international business. “I came home from that [trip] and declared that I wanted to be an international business major with a focus in Japanese.”

At Northwestern College in St. Paul, Minn., Hoch enrolled in the international business program while also taking a number of accounting courses. “I didn’t plan to be an accountant and I think my friends in school would have been surprised that I ended up being in accounting. But as I took classes, they really clicked and it  brought out my passion.

“I could see how finance can make things come together and how it can truly tell a story of where a company has been, where a company is at and where a company is going,” she says.

Hoch eventually got the opportunity to work internationally when she took part in a Northwestern College program funded through a grant from 3M Co. that focused on doing business in Japan and the Japanese language. Japan was also the site of her internship with Cargill Inc.

“My experience in Japan — and really for anyone working overseas — helps you find your own strength and who you are. For me, it gave me a perspective of working globally in a different culture,” she says.

Upon graduation, Hoch was recruited by KPMG LLP and says her time was transformative. An early encounter gave her one of her first leadership lessons as a financial executive, she says, when she was asked to take the lead on a client meeting. “I still remember one of my first meetings with the comptroller of a fairly large insurance company,” she recounts.

The meeting with the comptroller enforced a greater sense of strength and pride as a financial executive, and she says, it also ”showed me, as a young accountant, how you could conduct yourself and how you could be a leader.”

Serendipitous, perhaps, but Hoch’s first client as an accountant at KPMG revolved around insurance.

“American Hardware was my first client and I thought  ‘perfect because I can count hammers,’ but I came to find out it was actually an insurance company,” she says. “So my first client ended up being in insurance and I fell in love with insurance and have been in [love with] it ever since.”

Over the next decade at KPMG she rose up the ranks until she was admitted to the partnership in 2004, and then spent approximately the next five years in the firm’s insurance practice.

Although content in her position as partner, it was yet another encounter with an industry friend and former colleague that pushed her to the next level of leadership, recruiting her to lead the Planning and Performance Management function at Zurich North America.

“I loved KPMG and was not looking to leave. But it really gave me the pause to think, ‘do I want to try the other side of the desk?’ And the answer was, ‘Yes.’” CFO in the Eye of the Storm while most financial executives might say that only part of their day is spent specifically on risk management, for Hoch it is at the center of the industry and company she has chosen to lead.

Corporate parent Zurich Insurance Group is one of the oldest and largest insurance providers in the world. Founded in 1872, the Swiss-based parent company currently has more than 60,000 employees scattered throughout 180 markets.

Zurich North America, based in Schaumburg, Ill. — which celebrated its 100-year anniversary in 2012 — is a major provider in several lines of business for the U.S. property/casualty market, including the fourth largest U.S. property insurance company, the second largest auto writer and one the largest construction insurers.

And while market share and longevity are certainly pluses in the highly competitive insurance business, the industry as whole is going through rapid transformation, with financial executives sitting at the center of the storm. How insurers make money — a dollar of risk matched to a dollar of premium — is under significant pressure as competition pushes down prices and companies are enticed to gain market share by accepting an underwriting loss.

At the same time, on the other side of the insurance ledger, investment income is languishing within insurers’ fixed-income laden portfolios struggling for decent investment returns in the near-zero interest rate environment.
 
And those two pressures are not likely to change anytime soon. According to the recently released 2013 U.S. Property/Casualty Insurance Outlook from Ernst & Young, North American insurers will be under heavy profit pressure for the foreseeable future.

“The continuing prospects for weak investment returns and low interest rates over an extended period compel carriers to improve underwriting margins, requiring difficult decisions concerning pricing and operating approaches,” the report says. “Organic growth continues to be a challenge, given the economic situation and the competitive landscape.”

The combination of price and investment pressure is offering financial executives in the insurance industry, like Hoch, some difficult choices while also forcing other stakeholders to look to the CFO for leadership advice, whether from inside or outside the firm.

“Faced with a continued sluggish economic environment and low interest rates, the challenge is around sharing the understanding of those risks to Zurich and helping our customers understand the risks they face as well,” Hoch says.

“From a CFO viewpoint it’s very important that I not just understand the risk as it shows up in our annual statements and equity. It is just as important to understand the true economic capital that we put at risk. Insurance CFOs, along with their teams, need to help the business units understand the true profitability and how do we allocate that capital.”

The insurance industry requires financial executives to understand how capital is truly being consumed by risk, Hoch explains, and then to help management realize its strategic plan for growth and profitability. This must be done while also protecting Zurich’s strong balance sheet so it can absorb eventual losses, including natural or man-made catastrophes.

That constant pressure on assets and liabilities means that professionals in the industry need to execute with constant, pinpoint accuracy to ensure their firms are getting the right price for that risk they are taking. Hoch says that means her staff has to get an accurate and complete picture of Zurich’s aggregated risks in almost real time.

“We have a strong financial rating and we are looking to ensure the continued strength in our balance sheet. Zurich needs to be able to honor our promise to be there to pay the claims when they occur.”

In the current environment, that also means communicating those financial realities to the entire company, Hoch says, adding that a recent leadership meeting focused on the pressure the company faces. The discussions helped to further educate and understand that the low investment returns is one of the factors in to how the financial staff measures total operating profit.

“My role as the CFO is to help people really comprehend the fact that the investment income is not the same levels that it was, particularly every year as we roll off those higher-yield securities that were purchased a number of years ago matching our liabilities at that time.”
 
Managing Investor and Regulatory Expectations

But leading from the financial suite does not stop within the firm, with Hoch responsible for communicating Zurich North America’s financial performance to the group office in Zurich.  Hoch says that the company’s strategic ambition is a target return on equity (ROE) of 16 percent after tax, which will be no easy feat. “We have great investors, and we pay a very strong dividend on our stock. Most are long-term investors and we are very transparent and talk about the return that we believe we can achieve in the current market.”

Hoch adds that although there is some investor criticism about insurance ROEs when compared to other industries, it is incumbent on the CFO to make sure those returns are explain­ed in the context of the current investment environment. “As a CFO, it’s a key skill: How do you address the issue of ROE against other industries and how do you explain it to investors when the issue comes up?”

Beyond managing the balance sheet and investor expectations, Zurich is also trying to manage its way through massive regulatory changes. One key effort within the insurance industry is Solvency II, a European Union effort to harmonize the insurance regulatory regime across the 27 member states.

“Solvency II is a significant effort across the industry and also within Zurich,” Hoch says. “There is new data to collect, and there are new reporting requirements.” In her former role leading finance transformation at corporate center in Zurich, she spent significant time on Solvency II, leading on change management, by educating management and the board while also dealing with rapid changes to the regulatory regime.

“That’s probably one of the best ways we’re trying to deal with the [regulatory] uncertainty by maintaining flexibility, while ensuring that we won’t be behind at the point standards would come out, to ensure we’re able to effectively implement,” she says.

As finance chief of one of the largest property insurers in the U.S., Hoch always needs to be aware of the role of the firm’s exposures to catastrophes. In fact, if there is a significant catastrophe then Hoch becomes chair of Zurich NA’s catastrophe committee, leading the effort in measuring the company’s exposure to the event. This includes collaboration with claims, underwriting and reinsurance units.

Leading that effort may take up more of her time as forecasters predict more storms like 2012’s Superstorm Sandy, which caused an estimated $15 billion in insured losses and up to $50 billion in economic losses, according to the Insurance Information Institute.

“We have more people in populated areas than we did 30 years ago, we have significantly more development and costlier buildings,” Hoch says. “If you have an event like flooding occur in these areas, the economic losses could go up exponentially. It’s imperative that the company continually monitor any catastrophe exposed risks.”
 
Leading Beyond the Numbers
Hoch believes that there is a “huge, open field of opportunity” for senior financial executives going into the next five years.

“As a CFO, we need to lead and help every employee better understand our results, understand the where, the why and the how of the financial engine,” she says. “Employees need to understand why we’re driving the organization in a particular direction, and they need to see themselves in that future. That is a key role within a company.”

Financial executives, she adds, should think creatively regarding how to communicate the ebb and flow of finance, from email communications to in-person meetings, in order to broaden financial education throughout the enterprise and help “people see the numbers for themselves.”

That also means giving the rest of the management team strategic counsel on the impact of financial decisions. “We look at the budgets, we look at the plans, we look at the forecasts,” Hoch says. “We need to lead our businesses in a way that builds expense efficiencies through transformation of process and outcomes; not just cutting into the bone of the organization.  We need to know when we’re stretching our muscles or starting to cut too deep.”

While the C-suite and the financial executive ranks throughout many industries are traditionally male dominated, Hoch dismisses any glass ceilings. “It’s statistically correct that there are more males in the industry, but I’ve never seen it that way. I just wasn’t raised to see it that way. I’ve just only seen it as an open field of opportunity and great people. I personally take responsibility for who I am, to deliver against the opportunities that I’ve been blessed with,” she says.

Bottom line, Hoch has learned to employ all her skills: “I bring to the role all of who I am. I bring the fact that I am finance professional and I bring my passion,” Hoch adds. “But I also bring the fact that I’m a woman and the fact that now I’m a mother and farmer’s daughter. You bring all these things together, and then blend them into the diversity of who you are, not what you are.”

Photo courtesy of Zurich North America