Troubleshooting, but with an eye for market opportunities

Although nearly every bank and insurance company is struggling at the moment, Delta Lloyd Group is weathering the storm well. We are also affected of course, but given our solvency rate, our liquidity position and our risk hedging, we’re doing very well in my view. Our solvency rate is still double what is required by law. And that means that as an insurer and a bank we can honour all our obligations as normal. Twice over, in fact. On top of that we have huge cash reserves. This high liquidity is thanks in part to our very cautious attitude towards lending and investing over the past six months. A prudent decision, as it turns out.

In my view Delta Lloyd Group is currently one of the best-capitalised insurance companies in the Netherlands. This because we hedged all our risks professionally and played it very safe. Understandably, of course, because solvency and security constitute the core business for a large insurer like Delta Lloyd. After all, we have to be able to pay our policyholders at any time. So we hedged our main risks, our shareholdings, at an early stage. By buying put options on global indices we placed a safety net under our portfolio. A safety net which was strong enough to get us through this period, with an equity portfolio whose downward risk is protected to a very large extent. With hindsight it’s clear that we did this very well indeed. We used our derivatives purely defensively, not to make profits but to hedge risks. And last but not least, we also managed the interest rate risk – the chance that interest rates will tumble – professionally.

We also started at an early stage to monitor what is called the counterparty risk, that is, the risk you run when you do business with other banks. Like all large institutions, Delta Lloyd does business with other banks across the world: with investments, by placing deposits, by borrowing funds and by conducting derivatives transactions. We’re on top of this process as well. Where are our risks? Who are our counterparties, and how are they doing? If a risk is too high with one institution, then we take our money away and place it with another institution. And where there remains a risk, we make sure there is enough collateral, in the form of bonds or cash. Especially in these market conditions. With our collateral management we keep our exposure to certain high-risk parties well under control. Again, a prudent decision.

To reiterate, then, we have double solvency and an excellent liquidity position, an equity portfolio and an interest rate risk that were hedged well in time, a sound system for monitoring our counterparty risks, and professional collateral management. All this adds up to a relatively strong position for Delta Lloyd. There’s no denying that the situation is serious, and we’re all affected, but we’ve been able to avoid the biggest pitfalls. Troubleshooting is our main priority at the moment, and that’s what we’re spending a lot of time on. But we shouldn’t forget to keep looking for opportunities even in the current market conditions. Because there are many opportunities out there. After all, some parties are forced to sell stocks at rock-bottom prices. And these stocks include many very strong ones, which are very attractive to long-term investors with good liquidity positions. Precisely these investors, who despite all the necessary troubleshooting continue to keep an eye on excellent market opportunities, are well placed to emerge stronger from this period. And I’m convinced that we’ll succeed in this. When we look back a year or two from now, there’s a good chance that we’ll be saying that it was a difficult period, but we got through it well, and even came out stronger because we grasped the available opportunities.

Alex Otto
Head of Investments, Delta Lloyd Asset Management