Corporate Governance, Financial Market Orientation and Resilience

Corporate Governance, Financial Market Orientation and Resilience to Financial
Crisis in the Interwar Period
20th Annual Congress of the European Business History Association 2016 / 1st World
Congress on Business History / Bergen, Norway
Luca Froelicher, Institute for History, History of Technology, ETH Zürich, Switzerland
DRAFT, NOT TO BE CITED
In the financial crisis of 2007/09, many big insurance companies ran into serious
trouble, although the collapsing financial markets hit banks the most. Among others,
the most prominent insurers to ask for state support were American International Group
(AIG) and the Dutch ING Group. Regulators, insurers and politicians identified the main
reason for the high vulnerability in their significant activities in non-traditional, noninsurance business (credit default swaps, banking).1 Generally, insurers are
considered to have a stabilizing role during financial shocks. They are long-term
investors, net buyers of financial assets during the crisis, have long-term policies, are
not hit by cash runs and do not contribute to systemic risk in financial markets, the
literature says.2 Nevertheless, financial market shocks strongly affect insurance
companies.3
Insurance companies belong to the largest institutional investors, amounting for total
assets of USD 24 trillion (12 per cent of global financial investment) in 2015.4 This
financial power exposes them to financial market shocks: sharp and sizeable declines
in asset prices have an appreciable impact on insurers, their solvency, their customers
and their shareholders.5 In fact, recent insurance history studies show that financial
market shocks throughout the 20th century posed a greater threat to insurance
companies than shocks from the technical side (natural catastrophes and so forth). 6
However, their individual resilience to financial shocks was divergent. It is therefore the
goal of this paper to show how the financial sector absorbed macroeconomic shocks
1
The Geneva Association 2010, p. 15; International Association of Insurance Supervisors 2011, p. 5
The Geneva Association 2010, p. 3; International Association of Insurance Supervisors 2011, p. 5;
International Monetary Fund 2016, p. 88. Recent studies, according to the IMF, show that systemic
risk of insurance companies is underestimated.
3 International Association of Insurance Supervisors 2011, pp. 25–26
4 International Monetary Fund 2016, p. 88. Whereof life insurance companies cover 85 per cent.
5 International Association of Insurance Supervisors 2011, pp. 25–26
6 Borscheid et al. 2014; Bähr, Kopper 2015
2
1
historically. Moreover, it will show the individual financial intermediaries’ similarity and
divergence in resilience to financial crisis.
In 2008 - for the first time in 140 years – Swiss Re, the second largest global reinsurer
by then, had to report an annual net loss.7 Interestingly this was not the case during
the financial shocks of the 1920s and 1930s, when Swiss Re (SR) had become the
world largest reinsurer and Switzerland had become the home of global players in
insurance, with “Zurich” and “Winterthur” as two of the biggest European accidental
and liability insurers.8 None of them reported any annual net loss during the interwar
period.9
This is puzzling for three reasons. First, it was in the interwar period when declining
underwriting profit margins made insurers more dependent on gain from investment.
This trend has already started in the beginning of the 20th century when net income on
financial asset exceeded business-operating profit – a key feature of 20th century
insurance companies - and was reinforced in the interwar period. Particularly, this was
characteristic for the US-insurance market. Second, it was in the interwar period when
monetary instability, currency crisis, financial volatility and booms challenged the
insurance companies. These opportunities and challenges shifted the management’s
focus to financial markets. Third, the 1920s were also a time of business expansion in
insurance (e.g. automobile, life), in particular for Swiss companies benefiting from the
political neutrality and monetary stability in Switzerland. 10 Growing business and
market share meant that insurers had to manage more financial assets globally. All
three trends made insurance companies exposed to financial shocks. It is therefore
puzzling that the different shocks during the Great Depression (stock market crash
1929, German banking crisis 1931, devaluations and end of gold standard and so forth)
were not reflected in the annual reports of Swiss Re, Zurich and Winterthur. What was
the reason for the resilience to financial crisis?
While the macroeconomic literature on the interwar period is well established, we lack
studies and comparisons of how actors within the financial sector absorbed the shocks.
So far, insurance history unfortunately underestimated the financial side of insurance
business with a few exceptions.11 While insurance history is still in the shadow of other
7
Straumann 2014b, p. 55
Lengwiler 2012, p. 148
9 For Zurich see Froelicher 2013; Jung 2000 for Winterthur
10 Lengwiler 2012, pp. 155–156
11 Exceptions are Werner 2016; Straumann 2014b; Baker, Collins 2003; Scott 2002; Trebilcock 1997;
Keneley 2006
8
2
financial institution’s history, there has been growing interest and scientific publications
in the last few years.12 However, detailed historical examination of insurance
companies’ investment strategy, financial market orientation and resilience to financial
crisis remain limited.
This paper will show the divergent financial market orientation and its implication for
resilience to financial shocks. It bases on studies and archival material of the then three
biggest insurance companies of Switzerland: Swiss Re, Zurich and Winterthur. In the
first part, I will trace the opportunities and challenges of financial market orientation in
the interwar period and show which paths the different insurers decided to follow. In
the second part, I will show the different vulnerabilities and resilience of the three
insurers during the period of heavy financial shocks in the 1930s. In the conclusion, I
will identify the interdependence of financial market orientation and resilience to
financial crisis.
Part I: Growing significance of financial questions
The three biggest Swiss insurers experienced a considerable growth period in the
interwar period. In addition to net premium income, their nominal financial assets
(securities, mortgages, real estate) doubled (Winterthur), tripled (Zurich) or even
quadrupled (Swiss Re) from 1910 to 1928 because of internationalization and growth.
Figure 1: Financial assets (securities, mortgages, real estate). In m CHF, 1914=100
Zurich
Winterthur
Swiss Re
nom
real
nom
real
nom
real
1910
69
71
43
45
49
51
1928
211
131
96
60
190
118
Source: Eidgenössisches Versicherungsamt 1912, 1931
This trend was heavily associated to the developments of US financial markets, for two
reasons. First, the American insurance market was the main growth driver of the Swiss
insurers. Second, monetary instability in Europe after WW I urged the insurance
companies to transfer their financial assets to safe havens, which was - besides
Switzerland - the United States. I will show this in more detail.
In the case of Zurich, the initial motivation to expand business to the United States was
the feared nationalization of Swiss accidental insurance, the existence of huge
12
Lembke 2016; Bähr, Kopper 2015; Eggenkämper et al. 2015; Borscheid et al. 2014; Borscheid,
Haueter 2012; Pearson 2010
3
reserves to finance the expansion and the global attractiveness of the American
insurance market. It was in 1911, when August Tobler - son of an old Zurich bourgeois
family, born in Bergamo, trained in a Swiss silk trading house in Manila and recruited
for Zurich’s directorate because of his English language skills and his “mercantile
talent” in 190013 – reported to the board of directors (BoD) about the benefit of
expanding the business. The United States were a land of opportunity but also
considerable risk, he explained to the board. Around 60 companies were involved in
liability and accidental insurance, the competition was hard and average premium
income low. He suspected the American insurers would do underwriting only in order
to collect money for investment (“Finanzoperationen”), while underestimating the
technical side of business (“fachmännisches Element”). He stated that in the US
market, one could only survive if there was sufficient gain on financial asset
investment.14 Optimism to sustain in this finance-oriented market prevailed and in
December 1912, Zurich was licensed to do business.15 The expansion in the United
States radically changed Zurich’s income. In the interwar period, more than 50 per cent
of premiums came from the United States.16 The expansion proved to be the most
important and far-reaching decision for the growth of the company. The importance of
the US market was for example reflected in the fact that - before their nomination - all
CEOs of Zurich were responsible for the American business.17
Two years earlier, in 1910, Swiss Re opened their first branch under the guidance of
Charles Simon – a lawyer and former director of an Alsation insurance company.18 It
was clear to Simon that if SR wanted to play a significant role in the reinsurance
industry, it had to be present in the American insurance business.19 This decision
turned out to be prophetic. Almost overnight SR became the leading global insurer,
when foreign competitors had to withdraw from the markets during WW I and the
monetary crisis in the aftermath. The spectacular rise of SR was strongly linked to the
US, the most dynamic market at that time.20 Due to regulation in the US, SR could only
13
Corporate Archives of Zurich Insurance Company, Switzerland, hereafter Z-Archiv A 101 201 588,
Erinnerungen von Herrn Präsident Tobler 1941, pp. 1–3; StAZH Da 2090, August L. Tobler 1948
14 As cited in Z-Archiv: 100 Years Insuring America. Helping Out Customers Better Understand and
Manage Their Risk 2012, p. 20; Z-Archiv E 102 206 1186: Notizen zur Ausdehnung des
Geschäftsbetriebes auf die Vereinigten Staaten von Nordamerika 1912?, pp. 1–2
15 Sprecher 1948, pp. 50–52
16 Sprecher 1948, pp. 68–69
17 Z-Archiv: 100 Years Insuring America. Helping Out Customers Better Understand and Manage Their
Risk 2012, p. 147
18 Mestral 1947, p. 69; Straumann 2014a, pp. 358–359
19 Straumann 2014a, p. 366
20 Straumann 2014b, pp. 57–58
4
follow one line of underwriting directly through her branch in New York (fire
reinsurance). Therefore, SR further expanded its business in the 1920s and founded
subsidiaries for all the other business lines. SR and her subsidiaries (Prudentia, North
American Reassurance, European) became the most important reinsurance
companies in their lines of business in the US.21 The further expansion in the 1920s
and the foundation of subsidiaries were not only motivated by the growing US
insurance market but also by the possibility for financial operations. The US insurance
market and the possibilities of financial assets excited Erwin Hürlimann, who was
responsible for the expansion of business and CEO since 1919.22 The possibilities
were twofold. First, the USD provided a safe currency in a period of monetary instability
after the war. Second, Hürlimann – son of a bourgeois Zurich silk factory dynasty,
traditionally trained for a merchant career in a bank, but then changed his career plans
because of his profits in stock market trade and went to work at Swiss Bank
Corporation in London23 – was aware of the profits that could be achieved on US
financial assets.24
Figure 2: Percentage of US premium income of total premium income and percentage of US financial
assets of total assets (securities).
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930
Anteil USA
Anteil USA an Kapitalanlagen
Source: Annual reports of the Superintendent of Insurance (New York), 1915-1928; Swiss Federal
Archives, E4360A#A-097, Schweiz. Rückversicherungs-Gesellschaft, inkl. separate Währungsbilanzen,
Zürich, 1915-1930
21
Bach 2008, pp. 505–506
Straumann 2014a, pp. 374–377
23 Straumann 2014a, pp. 366–367
24 Feldmann 1998, pp. 57–58
22
5
In fact, Hürlimann regrouped throughout the interwar period SR’s financial assets to
the US financial market. Figure two shows that the relation of US assets to US premium
income within SR (i.e. only fire-reinsurance) was very strongly tilted towards the
equities.
Indeed, the American business in the interwar period had the potential to challenge
fundamentally the management’s perspective on insurance business. This is also
evident from Zurich’s experience in the interwar period. Figure 3 shows that businessoperating profit of American business mostly remained negative and heavily affected
the technical result of the whole company. The gain on investment contributed
significantly to annual net profit.
Millionen
Figure 3: Business-operating profit and net capital profit for Zurich
14
12
10
8
6
4
2
0
-2 1910 1912 1914 1916 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940
-4
-6
-8
BOP US
BOP total
Net capital profit
Source: Z-Archiv, no signature, Handakten Wildberger und Hagemann; Z-Archiv, F 101 1282/1289,
Tech. Geschäfts-Ergebnisse der 'Z',Filialen und Tochtergesellschaften in der Schweiz und im Ausland
1904-1943; CH SWA, Versicherungen A 109, Annual Report, 1910-1940
By vontrast, Winterthur, the third insurance company investigated in our study, didn’t
expand to the US. The BoD variously discussed the subject and in 1908 almost
decided to go ahead, but postponed a decision because of administrative problems.
Officially, the company only applied for US license in 1936. Nevertheless, Winterthur
was involved in the US market by retrocessions of SR’s fire business. Additionally, free
funds were transferred to the US financial market because of monetary turbulences in
Europe.25 In retrospect, the company’s management was - in its own words - lucky not
to be directly involved in the American insurance market prior the Great Depression.
25
Hasler 1951, pp. 37–39
6
Heinrich Fehlmann – a lawyer that was recruited to Winterthur in 190426 to follow his
precursor Gottfried Bosshard, who was a farmer’s son in rural Zurich mountainous area
and became a lawyer too27 - wrote to the BoD in 1935 about the good things of the
Great Depression. “Much what was rotten has disappeared, [and one can hope] that
the rest of the [US] insurance companies will remember that in insurance business the
main issue is not financial or speculative profits, but detailed and accurate technical
and mercantile administration of business”.28
To sum up, what can be derived from the insurers’ trend towards financial market
orientation? Clearly, going to America had the potential to challenge the traditional
business orientation. At the end of the 1920s, the question of what the essence of an
insurance company was supposed to be became increasingly fuzzy.
Insurance companies or investment companies
The US insurance market had strong attractiveness to the whole world, in the 19th as
well as in the 20th century. After World War I insurers from almost all countries began
to expand overseas again, because of increased growth, the reestablishment of the
gold standard and political normalization.29 In 1929 there were 99 foreign fire and
marine insurers present in the US.30 The insurance world was not only attracted by the
growth possibilities but also by the sheer size of capital assets that were managed by
US – especially life – insurance companies. For example, Alfred Manes - the most
important German insurance scholar - reported to his colleagues and insurance
company leaders about his US study trip in 1927. Thanks to the profitable but safe
financial assets, many insurance companies have become true investment companies,
he added admiringly.31 Figure 4 shows what Manes and many others have described
as an American characteristic: the main source of income was gain from investment.
Did SR, Zurich and Winterthur also become investment companies?
26
Corporate Archives of AXA-Winterthur, Switzerland, hereafter A-AXAWI 920 Bro Nr. 15, Heinrich
Fehlmann, 1880-1952. Zur Erinnerung an Heinrich Fehlmann, pp. 1–8
27 A-AXAWI 920 Bro Nr. 22, Gottfried Bosshard. Zur Erinnerung an Gottfried Bosshard 1867-1955,
pp. 1–34
28 A-AXAWI 603.101.202.301: Zur Frage der Aufnahme des Geschäftsbetriebs in Amerika 1935, p. 4
Original: „Manches, was faul war, verschwand und dass die übrigen Gesellschaften sich wieder etwas
besser darauf besannen, dass im Versicherungswesen nicht finanzielle oder Spekulationsgewinne die
Hauptsache sind, sondern die minutiöse und genaue technische und kaufmännische Verwaltung des
Geschäfts“
29 Borscheid 2012, p. 243
30 Kobrak 2012, p. 294
31 Manes 1928, pp. 20–21
7
Figure 4: Business-operating profit and gain from investment for companies that have licensed
Millionen
insurance business in New York
250
200
150
100
50
-100
Casualty
1932
1931
1930
1929
1928
1927
1926
1925
1924
1923
1922
1931
1930
1929
1928
1927
1926
1925
1924
1923
-50
1922
0
Fire/Marine
-150
-200
Sum of Gain from underwritting and profit and loss items
Sum of Gain from investments
Source: Annual reports of the Superintendent of Insurance (New York), 1922-1930
Generally, during the monetary instability in the aftermath of WW I until 1925 the main
reason for US financial investment made by SR, Zurich and Winterthur was trust in the
US dollar and the principle of an even currency balance sheet.32 A key lesson for the
insurers from the inflation period was the importance of having assets and liabilities in
the same currency, i.e. to invest the assets in the same currency as the respective
premium income. This was a simple policy to reduce inflation and exchange rate risk.33
On top of that, all three insurers had considerable amounts of free funds (so-called free
reserves, surpluses from European countries) at their disposal. The management of
all three companies regrouped these funds to the US and Switzerland.34 At Winterthur,
there were lively discussions about these issues in BoD meetings in 1923 and 1925.
From their perspective, the US financial market remained a safe haven, where the
dollar would be safe in the case of a possible war. They decided to invest a maximum
of CHF 15 m from free funds in the US financial market, an amount reached only in
1930.35 While Winterthur and Zurich prioritized safety and an even currency balance
sheet, SR managing director Erwin Hürlimann not only had incredible trust in the
American currency, but also saw the possibility to benefit from favorable conditions on
the currency and financial market already from 1922. During 1922-1928 SR bought
32
Felix 2015, p. 40; Froelicher 2013
Boss 1926, p. 24; Andreoli 1932, pp. 19–20; Sprecher 1948, pp. 58–59
34 Froelicher 2013, p. 43
35 A-AXAWI 603.101.203.301, Protokolle des Verwaltungsausschusses -1926, p. 448; A-AXAWI
603.101.202.301, Protokolle des Verwaltungsrats, pp. 68–70
33
8
USD by selling foreign exchange and taking debt.36 After 1926, a balanced currency
sheet was not important to Hürlimann anymore.37 Moreover, Hürlimann and his
subdirector Paul Alther – son of a St. Gall textile trading dynasty, educated at University
School of Commerce in St. Gall, working for a New York City investment house in
London and successor of Erwin Hürlimann38 - pushed forward an investment strategy
for SR that prioritized US financial market (1), realizing benefits from short-term trade
(2) and riskier assets (3).
While Zurich’s and Winterthur’s investment decisions mainly relied on information
provided by their house bank and traditional US insurance brokerage houses, SR tried
to become part of the US financial elite in order to get insider information that could be
of use for their investment decisions. The BoD and the management of SR considered
a return on investment below 5 per cent low; they aimed for at least 7 per cent.39
Logically, SR increasingly invested in common shares during the stock market boom,
as figure 5 shows. Zurich and Winterthur remained fixed on mortgages and bonds,
although they did not abstain from buying shares. An important contributor to the
investment strategy of SR was the banking house of Lee, Higginson & Co. Originally
from Boston, the house tried to catch up with J.P. Morgan in the 1920s, becoming the
financier of Ivan Kreuger’s Match Corporation, a strategy that ended with bankruptcy
in the Great Depression.40
Figure 5: Percentage of shares in financial assets
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1920
1922
1924
1926
Swiss Re
36
1928
1930
1932
Winterthur
1934
1936
1938
1940
Zürich
Felix 2015, p. 40
Felix 2015, pp. 42–43
38 Corporate Archives of Swiss Re, Switzerland. Hereafter SRCA 10.103 300.01, Eastern Underwriter,
Nov. 13, 1936 1936, p. 21
39 SRCA 10.107 765, Protokolle der VR-Sitzungen, pp. 44–45
40 Partnoy 2009, p. 15-20, 199
9
37
Source: Swiss Federal Archives, E4360A#A-097, Schweiz. Rückversicherungs-Gesellschaft, inkl.
separate Währungsbilanzen, Zürich, 1910-1940; Swiss Federal Archives, E4360A#A-080, Schweiz.
Unfallversicherungs-Gesellschaft in Winterthur, inkl. separates Wertschriftenverzeichnis, Winterthur,
1910-1940; Swiss Federal Archives, E4360A#A-084, Zürich Versicherungs-Gesellschaft, inkl. separates
Wertschriftenverzeichnis, 1910-1940
In 1928, Erwin Hürlimann reflected about how SR had changed due to increased
financial market orientation. In a memorandum to the BoD he stated, that SR did not
behave like an insurance company but rather like an investment company. 41 Instead
of problematizing this issue further, Hürlimann suggested the foundation of a specific
investment company, the “Intercontinentale Anlage-Gesellschaft” (IAG). With this
company, it could be possible to optimize his relationship to financial circles.
However, the new self-image did not change the composition of the portfolio of SR in
a fundamental way. The foundation of IAG rather strengthened the orientation of SR
towards the financial market.
To summarize, at the eve of the stock market crash of 1929 all three insurance
companies had big portfolios invested in US and European financial markets as a result
of internationalization and growth. Income from capital assets commonly exceeded
business-operating profit. However, they developed a divergent understanding of an
insurance company. How did this affect their vulnerability during the financial shocks
that followed after 1929?
Part 2: Financial Resilience
In its 1931 report, the Swiss insurance regulation authority named CHF 26.8 m total
net write-down for Swiss accidental and liability insurance companies, which amounted
to 5% of total assets.42 SR – the reinsurer – alone reported in the same year a net
capital loss of CHF 31 m (total write-down was CHF 42 m).43 Zurich and Winterthur
had to report write-downs of CHF 18 m (Zurich) and CHF 10 m (Winterthur), but thanks
to continuing income from interest on mortgages and bonds and the activation of
hidden reserves (e.g. the difference of book and market values on financial assets)
net-capital loss was small (Zurich) or it even showed a gain (Winterthur). The biggest
part of the depreciation came from US stocks and bonds. Since SR’s total devaluation
of financial assets amounted nearly 30% of total assets, whereas the write-down were
41
SRCA 10.107 968: An den Verwaltungsrat der schweizerischen Rückversicherungs-Gesellschaft
1928, p. 5
42 Eidgenössisches Versicherungsamt 1933, p. 41
43 Eidgenössisches Versicherungsamt 1933, pp. 48–49
10
only between 8 and 9% in the case of Zurich and Winterthur, the management was
heavily challenged by this situation. Clearly, the management’s investment strategy
and especially the shift from bonds to stocks as an investment priority was responsible
for that.44 SR became highly vulnerable. Of course, the investments in the US market
as such made also Zurich and Winterthur vulnerable to financial shocks, but they (1)
followed a more conservative investment strategy, (2) kept their focus on an even
currency balance sheet, (3) hold the assets for a longer period in their books and
therefore generated hidden reserves. While the paper has discussed (1) and (2) in the
last part, it will identify the hidden reserves as the key element of resilience to financial
crisis.
Millionen
Figure 6: Net-capital return
20
15
10
5
0
-5
1929
1930
1931
1932
1933
1934
1935
1936
-10
-15
-20
-25
-30
-35
SRG
Winterthur
Zürich
Source: Eidgenössisches Versicherungsamt, 1929-1936
Briefly, there were two different forms to build hidden reserves for insurance
companies. First, overvaluing liabilities, e.g. technical reserves or internal reserve
accounts. Second, undervaluing assets, e.g. writing-down the book values of financial
assets. Hidden reserves were quite common, not only in Switzerland but also
practically in every country where the three insurance companies were doing business.
Of interest to this is figure 7, which reflects the existence of hidden reserves on financial
assets specifically for US non-life insurance companies as reported to the New York
State Superintendent of Insurance. Surprisingly, most of the hidden reserves were on
stocks, what could indicate that insurance companies were long-term oriented stock
buyers.
44
Straumann 2014b, p. 60
11
Millionen
Figure 7: Difference book and market value of selected US non-life insurers
70
60
50
40
Bonds
30
Stocks
20
10
0
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
-10
Source: Annual reports of the Superintendent of Insurance (New York), 1923-1930. Selected insurers
are: Aetna Casualty and Surety, Aetna Insurance Co., Hartford Accident and Indemnity, Hartford Fire
Insurance Co., Home Insurance Co., Maryland Casualty Co., Travelers Insurance Co.
Interestingly, it was in the regulators interest to let insurance companies build hidden
reserves on financial assets. The Swiss regulation authority explained their accounting
standards concerning financial resilience in 1933. Insurance business had proved to
be very robust in the crisis, the authority argued, because of its careful accounting
principles. Shocks were inherent to financial markets; nevertheless, it was important to
have preconditions that could absorb these shocks, the regulators stated not entirely
without pride.45 According to the Swiss Code of Obligations, joint stock companies
could value their financial assets in their books in between the price of purchase –
which in further years was (extensively) written-down – and at most as the average
listed price of the last month of closing date.46 The longer an insurance company held
a financial asset in their book, the more it could write-down the price of it, which it did
regularly with so-called global write-downs (“Globalabschreibungen”). Additionally
Zurich and Winterthur followed the strategy to never adjust the asset prices to market
value unless it went beneath the book value.47 This of course required action when
Eidgenössisches Versicherungsamt 1933, p. 68. They write: „Gegen die Krisenfolgen erweist sich
das Versicherungsgewerbe als äusserst widerstandsfähig. Diese Erscheinung ist in erheblichem
Masse auf die vorsichtige Finanz- und Bilanzierungstechnik zurückzuführen, die in diesem Zweig der
Wirtschaft Übung ist. Bei Störungen auf dem Geld- und Kapitalmarkt, wie sie das Berichtsjahr mit sich
brachte, sind Verluste unvermeidlich. Es müssen aber Voraussetzungen vorhanden sein, dass diese
aufgefangen werden, ohne die finanzielle Lage einer Unternehmung zu erschüttern. In dieser Hinsicht
darf den in der Schweiz konzessionierten Unternehmungen ein günstiges Zeugnis ausgestellt werden.
Damit wollen wir keineswegs die vorteilhaften Umstände abschwächen, die mildernd eingriffen und
vornehmlich im befriedigenden technischen Verlauf der Geschäfte zu erblicken sind.“
46 Boss 1926, p. 35
47 Z-Archiv B 101 62752:1-3, Sammlung aller gesellschaftsrechtlichen Unterlagen 1872-1967
12
45
asset prices dropped after 1929, but when book values were already very deep, it
absorbed a lot of the financial shock. Winterthur’s management decided to lift the book
value of some assets that were kept in the book at a very low rate, in order to absorb
the write-downs.48 While Winterthur because of this procedure and Zurich because its
ongoing business-operating profit did not even have to touch special reserve accounts,
SR’s hidden reserves on financial assets of CHF 15 m in 1928 were gone completely
before 1931.49 Still, net-capital loss of CHF 30 m had to be covered. Therefore, the
BoD and Hürlimann took the money from hidden reserves that were existent in the
technical reserves (reserves for catastrophes, “Zillmerquote”).50 This saved SR from
serious problems and with this move, SR reported an annual net-profit throughout the
Great Depression.
Although there is very little research about the situation of US insurers, there is
evidence that similar accounting standards saved them, too.51 On the surface,
insurance companies were far from failure during the Depression. Official statements
of the companies showed asset values comfortably in excess of policyholder reserves
during the entire period. However, these reports did not present a completely accurate
picture of the insurance companies' condition. The US insurance regulation authorities,
coordinated by the National Association of Insurance Commissioners (NAIC), allowed
the insurance companies in 1931 for instance to value their financial assets at market
values as an average of the time period January to June 1931, when prices were not
affected by the banking crisis yet.52 This measure proved to be highly successful.53 For
example at the Metropolitan Life Insurance Company, the country's largest insurance
company with nearly one-fifth of the nation's insurance in force, the market value of the
portfolio was only 82 percent of its book value. This depreciation, if reflected on the
official statement, would have practically exhausted Metropolitan's total capital. If
mortgages had also been valued at what they could be sold for rather than what they
had cost, Metropolitan would almost certainly have been insolvent at the end of 1932.54
48
Schweizerische Unfallversicherungs-Gesellschaft in Winterthur 1932, pp. 4–5
SRCA 10.108 184: Hausstatistik der Schweizer Rück 1939, pp. 283–284
50 SRCA 10.107 766, Protokolle der VR-Sitzung 1931-1937, pp. 13–23
51 Huertas, Silverman 1984, p. 110
52 SRCA 10.145 820 1288, Die Bilanz-Bewertungs-Vorschriften für die Versicherungs-Gesellschaften,
an Hürlimann. Bericht Nr. 30 1931
53 Werner 2016, p. 33
54 Huertas, Silverman 1984, p. 110
13
49
Conclusion
It was in the interwar period when the interdependence between financial market
orientation and vulnerability became a pressing problem. Insurers were vulnerable to
financial market shocks due to their business model (1), to their international expansion
(2) and to the growth of their business (3). The 20th century made some useful
principles within insurance business apparent; among others is the principle of an even
currency balance sheet or the diversification of risk. If insurance companies are
contributing to systemic risk, or in contrary, have a stabilizing role to the financial
system remains an open question. At least, there were specific circumstances,
strategies and principles that reduced vulnerability significantly.
What has become evident is that insurance companies were heavily affected to the
financial shocks throughout the first half of the 20th century. Focusing on the interwar
period and especially on the financial shocks that followed the stock market crash of
1929, the paper states that only the common feature of hidden reserves, insurer
friendly accounting principles, a relatively low level transparent financial reporting and
specific corporate governance saved the biggest Swiss insurance companies from
serious solvency problems. While hidden reserves helped a lot to absorb massive
depreciation on financial assets during financial crises, regulators supported insurance
companies with accounting principles that allowed to either build hidden reserves
(Switzerland) or to value financial assets not to its market price in midst of the financial
depression (USA). A relatively low transparency in financial reporting supported this,
although the existence of hidden reserves was a commonly known “secret”. Overall, it
can be assumed that shareholder carried this policy actively. This form of corporate
governance was typical for Switzerland.55 The system of a registered share, the proxy
voting power of the house banks and the high price of a share surely helped to
contribute to resilience to financial crisis. Moreover, we can assume that most of the
shareholders belonged to a small business elite (founding families) who saw their
investment in a long-term view and was not relying on the full shareholder value.56
However, the grade of vulnerability to financial shocks was different and depended –
in the case of the three Swiss insurers – to a great part on the investments on the US
financial market (1), their valuation (2) and their composition (3). There were of course
legal requirements, to invest American premiums in American assets, but as we have
55
56
See David, Lüpold 2015
Froelicher 2013, pp. 62–65
14
seen this does not fully explain the investment strategy of SR. There were serious
concerns about the European currencies before the restoration of the gold exchange
standard in the mid-1920s, but these concerns cannot explain the massive regrouping
of capital after 1925. There were of course structural differences of how the American
insurance market was organized; with high competition and low premiums an
insurance company was mostly depending on gains from investment. However, as the
case of Zurich and Winterthur has shown, it did not challenge the prioritization of
technical expertise, careful calculation of premiums, an even currency balance sheet
and the idea to put underwriting first. The high vulnerability of SR was due to its own
management’s decisions prior to the crisis.
Erwin Hürlimann (and Paul Alther, his successor) was trained in young years in the
London investment-banking sphere. It was Hürlimann himself who looked back in 1928
to what has happened with SR in the 1920s, and stated that it was not an insurance
company anymore but an investment house. Interestingly it did not change SR’s
behavior but triggered the financial market orientation even more. The foundation of
IAG was prove of this, when Hürlimann stated that SR can benefit further from the
connection in to highest global financial circles, benefit from insider information and
play in the highest financial league.
It remains an open question if this shift towards financial market orientation within
insurance companies should be described under the concept of an American business
culture. Going to the US certainly did challenge Swiss insurers’ business culture, but
as the case of Zurich and Winterthur has shown, it did not change a lot. More important
seems to be the recruitment and background of the management. Coming from
transnational banking, Hürlimann and Alther might have had a different perspective on
the financial assets of an insurance company. The question therefore arises, if for this
shift concepts like a transnational financial milieu or financialization are more useful.
15
Publication bibliography
Andreoli, Ernst (1932): Die Bedeutung der Währungsprobleme in der Versicherung und
Rückversicherung. aus: Assekuranz-Jahrbuch. In Betriebswirtschaft 5.
Bach, Raffael C. (2008): Die Schweizerische Rückversicherungs-Gesellschaft. Ein
Dienstleistungsunternehmen im Ersten Weltkrieg. In Tobias Straumann, Roman Rossfeld
(Eds.): Der vergessene Wirtschaftskrieg. Schweizer Unternehmen im Ersten Weltkrieg.
Zürich: Chronos, pp. 493–517.
Bähr, Johannes; Kopper, Christopher (2015): Munich Re. Die Geschichte der Münchener
Rück 1880-1980. München: C.H. Beck.
Baker, Mae; Collins, Michael (2003): The asset portfolio composition of British life insurance
firms, 1900–1965. In Financ. Hist. Rev. 10 (02). DOI: 10.1017/S0968565003000131.
Borscheid, Peter (2012): North America. Overview. In Peter Borscheid, Niels Viggo Haueter
(Eds.): World Insurance. The Evolution of a Global Risk Network: Oxford University Press,
pp. 239–251.
Borscheid, Peter; Gugerli, David; Straumann, Tobias; James, Harold (Eds.) (2014): Swiss Re
und die Welt der Risikomärkte. Eine Geschichte. München: C.H. Beck.
Borscheid, Peter; Haueter, Niels Viggo (Eds.) (2012): World Insurance. The Evolution of a
Global Risk Network: Oxford University Press.
Boss, Emil (1926): Die Kapitalanlagen der schweizerischen Unfall- und SachversicherungsGesellschaften. Dissertation. Universität Bern, Bern. Juristische Fakultät.
David, Thomas; Lüpold, Martin (2015): De la “Forteresse des Alpes” à valeur actionnariale:
histoire de la gouvernance d’entreprise suisse (1880-2010). Thomas David, André Mach,
Martin Lüpold et Gerhard Schnyder. Zürich: Seismo (Terrains des sciences sociales).
Eggenkämper, Barbara; Modert, Gerd; Pretzlik, Stefan (2015): Die Allianz. Geschichte des
Unternehmens 1890-2015. 1. Aufl. München: Beck, C H.
Eidgenössisches Versicherungsamt (Ed.) (1912): Die privaten VersicherungsUnternehmungen in der Schweiz im Jahre 1910. Bericht des eidgenössischen
Versicherungsamtes. Veröffentlicht auf den Beschluss des schweizerischen Bundesrates
vom 22. Juni 1912. Eidgenössisches Versicherungsamt. Bern (Die privaten VersicherungsUnternehmungen in der Schweiz, 25).
Eidgenössisches Versicherungsamt (Ed.) (1931): Die privaten VersicherungsUnternehmungen in der Schweiz im Jahre 1929. Bericht des eidgenössischen
Versicherungsamtes. Veröffentlicht auf Beschluss des schweizerischen Bundesrates vom
16. März 1931. Eidgenössisches Versicherungsamt. Bern (Die privaten VersicherungsUnternehmungen in der Schweiz, 44).
Eidgenössisches Versicherungsamt (Ed.) (1933): Die privaten VersicherungsUnternehmungen in der Schweiz im Jahre 1931. Bericht des Eidgenössischen
Versicherungsamtes. Veröffentlicht auf Beschluss des Schweizerischen Bundesrates vom 5.
Mai 1933. Eidgenössisches Versicherungsamt. Bern (Die privaten VersicherungsUnternehmungen in der Schweiz, 46).
Feldmann, Lars (1998): Die schweizerische Rückversicherungsgesellschaft in der
Zwischenkriegszeit 1918-1939. Lizentiatarbeit. Universität Zürich, Zürich.
Felix, Oliver (2015): Exchange rate fluctuations in the interwar period. How did FX risk
management come into Swiss Re? Master Thesis. Graduate Institute of International and
Development Studies, Geneva. History Department.
16
Froelicher, Luca (2013): Die Finanzpolitik der “Zürich”-Versicherungsgesellschaft 1910-1940.
Master thesis. Universität Zürich, Zürich. Forschungsstelle für Sozial- und
Wirtschaftsgeschichte.
Hasler, Georg (1951): Schweizerische Unfallversicherungs-Gesellschaft in Winterthur. 18751950. Edited by Schweizerische Unfallversicherungs-Gesellschaft in Winterthur. Winterthur.
Huertas, Thomas F.; Silverman, Joan L. (1984): The Banking and Insurance Holidays of
1933. In Business and Economic History 13, pp. 105–114.
International Association of Insurance Supervisors (Ed.) (2011): Insurance and Financial
Stability. Basel.
International Monetary Fund (Ed.) (2016): Global Financial Stability Report. Potent Policies
for a Successful Normalization. Washington, D.C., United States.
Jung, Joseph (2000): Die Winterthur. Eine Versicherungsgeschichte. Zürich: Neue Zürcher
Zeitung.
Keneley, Monica (2006): Mortgages and bonds. The asset management practices of
Australian life insurers to 1960. In Accounting, Business & Financial History 16 (1), pp. 99–
119. DOI: 10.1080/09585200500505599.
Kobrak, Christopher (2012): USA. The International Attraction of the US Insurance Market. In
Peter Borscheid, Niels Viggo Haueter (Eds.): World Insurance. The Evolution of a Global
Risk Network: Oxford University Press, pp. 274–310.
Lembke, Hans H. (2016): Phönix, Wiener und Berliner. Wiesbaden: Springer Fachmedien
Wiesbaden.
Lengwiler, Martin (2012): Switzerland. Insurance and The Need to Export. In Peter
Borscheid, Niels Viggo Haueter (Eds.): World Insurance. The Evolution of a Global Risk
Network: Oxford University Press, pp. 143–166.
Manes, Alfred (1928): Amerikanische Versicherung. Reiseeindrücke. Vortrag gehaltem am
Tage der 25. Wiederkehr seines Amtsantritts in der Mitgliederversammlung des Deutschen
Vereins für Versicherungs-Wissenschaft vom 1. Dezember 1927. Berlin.
Mestral, Aymon de (1947): Charles Simon. Humaniste et réassureur, 1862 - 1942. Zurich:
Compagnie Suisse de Réassurances.
Partnoy, Frank (2009): The match king. Ivar Kreuger, the financial genius behind a century of
Wall Street scandals. 1st ed. New York: PublicAffairs.
Pearson, Robin (Ed.) (2010): The development of international insurance. London: Pickering
& Chatto (Financial history).
Schweizerische Unfallversicherungs-Gesellschaft in Winterthur (Ed.) (1932): Jahresbericht
der Schweizerischen Unfallversicherungs-Aktiengesellschaft in Winterthur 1931. Winterthur.
Scott, Peter (2002): Towards the ‘cult of equity’? Insurance companies and the interwar
capital market. In Economic History Review 55 (1), pp. 78–104.
Sprecher, Andreas von (1948): 75 Jahre “Zürich”. Werden und Wachsen der Gesellschaft
1872-1947. 2 volumes. Zürich: Orell Füssli (1).
SRCA 10.107 765, Protokolle der VR-Sitzungen.
SRCA 10.107 968. Hürlimann, Erwin (1928): An den Verwaltungsrat der schweizerischen
Rückversicherungs-Gesellschaft. Berichtsammlung Verwaltungsrats- und AusschussProtokolle (1923-1935).
17
SRCA 10.145 820 1288, Die Bilanz-Bewertungs-Vorschriften für die VersicherungsGesellschaften, an Hürlimann. Bericht Nr. 30 (1931). Mitteilungen des Revisionsbüros.
SRCA 10.107 766, Protokolle der VR-Sitzung (1931-1937).
SRCA 10.103 300.01, Eastern Underwriter, Nov. 13, 1936 (1936). Dossier Paul Alther (19211961).
SRCA 10.108 184. Guggenbühl, Paul (1939): Hausstatistik der Schweizer Rück,
StAZH Da 2090, August L. Tobler (1948). Trauerfeier für August L. Tobler in der Kirche
Zürich-Enge am 20. September 1948.
Straumann, Tobias (2014a): Der unsichtbare Riese. Die Geschichte von Swiss Re 18632013. In Peter Borscheid, David Gugerli, Tobias Straumann, Harold James (Eds.): Swiss Re
und die Welt der Risikomärkte. Eine Geschichte. München: C.H. Beck, pp. 329–465.
Straumann, Tobias (2014b): The Discreet Charm of Hidden Reserves. How Swiss Re
Survived the Great Depression. In Piet Clement, Harold James, Herman van der Wee (Eds.):
Financial innovation, regulation and crises in history. London: Pickering & Chatto Publishers
(Banking, Money and International Finance), pp. 55–64.
The Geneva Association (Ed.) (2010): System Risk in Insurance. An analysis of insurance
and financial stability. Geneva.
Trebilcock, Clive (1997): Phoenix. Financial sercives, insurance, and economic revival
between the wars. In Peter Clarke, Clive Trebilcock (Eds.): Understanding decline.
Perceptions and realitites of British economic performance. Cambridge: Cambridge
University Press, pp. 123–144.
Werner, Stephan D. (2016): Endogenous risk in non-life insurance. Evidence from the
German insurance sector during the Interwar period. Dissertation. London School of
Economics and Political Science, London. Departement of Economic History. Available
online at http://etheses.lse.ac.uk/3269/, checked on 4/1/2016.
Z-Archiv E 102 206 1186. Tobler, August (1912?): Notizen zur Ausdehnung des
Geschäftsbetriebes auf die Vereinigten Staaten von Nordamerika,
Z-Archiv B 101 62752:1-3, Sammlung aller gesellschaftsrechtlichen Unterlagen 1872-1967
Z-Archiv A 101 201 588, Erinnerungen von Herrn Präsident Tobler (1941).
Z-Archiv. Zurich American Insurance Company (2012): 100 Years Insuring America. Helping
Out Customers Better Understand and Manage Their Risk. Broschüre.
A-AXAWI 920 Bro Nr. 22, Gottfried Bosshard. Zur Erinnerung an Gottfried Bosshard 18671955. Erinnerungsbroschüre.
A-AXAWI 920 Bro Nr. 15, Heinrich Fehlmann, 1880-1952. Zur Erinnerung an Heinrich
Fehlmann. Erinnerungsbroschüre.
A-AXAWI 603.101.202.301, Protokolle des Verwaltungsrats. Band 5.
A-AXAWI 603.101.203.301, Protokolle des Verwaltungsausschusses (-1926). Band 9.
A-AXAWI 603.101.202.301. Fehlmann, H. (1935): Zur Frage der Aufnahme des
Geschäftsbetriebs in Amerika. Beilage zu Seite 210 des Protokolls des Verw. Rates der
Schweiz. Unfall-vers. Ges. in Winterthur.
18