List of Abbreviations xiii Preface xvii Acknowledgments xix About the Author xxiii PART ONE Introduction 1 CHAPTER 1 Why is Value Management Important? 3 Better Information 3 Better Insights 6 Better Decisions 8 Why Shareholder Value? 12 CHAPTER 2 How do CFOs and CROs Add Value? 15 The Evolution of the Corporate Center as "Shareholder Surrogate" 15 The Implications for the CFO 20 The Implications for the CRO 24 PART TWO Better Information - Measuring Value 29 CHAPTER 3 RAPMs - The Industry Standard 31 What Makes Financial Services Unique? 31 What do RAPMs do and How? 34 The RAPM (R)evolution 37 Three RAPMs for Three Distinct Purposes . . . 41 . . . Linking Directly to Shareholder Value 46 Insurance Example 49 Banking Example 50 CHAPTER 4 Two Challenges in Using RAPMs 51 Do RAPMs Influence Strategy? 51 Do RAPMs Give the Right Signals? 55 CHAPTER 5 Valuing Financial Services - The Theory 71 What Determines Share Value? Market Multiples, RoE and Growth . . . 71 . . . But What Determines Market Multiples? 73 Why a Market-Consistent Approach? 77 Value: Where it Comes from and How to Create More of it 80 CHAPTER 6 Valuing Financial Services - The Evidence 85 Evidence from the Insurance Industry 85 Evidence from Banking 96 Is it Just me or are Others Thinking the Same Thing? 98 CHAPTER 7 Market-Consistent Valuation for Insurers 101 Introduction to Fair Valuation for Insurers 101 Calculating Traditional Embedded Value 104 European Embedded Value 106 Market Consistent Embedded Value (MCEV) 109 How is MCEV Calculated in Practice? 115 From MCEV to MVBS 120 Final Comments: Whither MCEV? 122 PART THREE Better Insights - Managing Value 125 CHAPTER 8 Property and Casualty Insurance 127 History and Economic Rationale 127 From Principles to Rules of the Game 133 From Rules to the Valuation of PC Businesses 135 PC KPIs: Understanding and Managing Value 140 CHAPTER 9 Life and Health Insurance 151 History and Economic Rationale 151 From Principles to "Rules of the Game" 163 LH Valuation 167 Understanding Value Creation: Capital Intensity and Financial Risk Taking 171 CHAPTER 10 Banking 189 History 189 Products 195 Economic Rationale 197 From Principles to "Rules of the Game" 199 From "Rules" to Value 201 CHAPTER 11 Achieving Profitable Growth 211 Rules of the Game and KPIs 211 Management Actions - Three Horizons of Growth 217 Horizon 1 - Increasing Sales Productivity 218 Horizon 1 - Going Multi-channel 221 Horizon 1 - Getting More out of Existing Customers; cross sell, big data and customer loyalty 224 Horizon 1 - Managing the Customer Portfolio Skew 228 Horizon 2 - Anticipating Mega-trends 230 Horizon 2 - Exploiting Adjacencies 232 Horizon 2 - Transformational and Bolt-on Acquisitions 234 Horizon 3 - Creative Disruptions 238 CHAPTER 12 Achieving Operating Efficiency 241 The Importance of Operating Efficiency 242 Rules of the Game 248 Pay Less: Optimize Procurement 249 Pay Less: From Business Process Redesign to Outsourcing 250 Use Less, But More Effectively: Digitize and Automate 253 Use Less, But More Effectively: Re-engineer the Product Portfolio 254 Use Less, But More Effectively: Managing Acquisition Expenses 257 PART FOUR Better Decisions - Capital, Balance Sheet and Risk Management 261 CHAPTER 13 Corporate Strategy and Capital Allocation 263 Corporate Strategy, Capital Allocation and Performance Management 263 Capital Allocation: The Capital Budget, from Sources to Uses of Capital 265 Capital Allocation: Optimizing the Corporate Portfolio 273 Capital Allocation: Aligning Financial Resources within Constraints 278 CHAPTER 14 Strategic Planning and Performance Management 285 What is Strategic Planning? 285 Why does Strategic Planning Fail and What can be done About it? 295 Corporate Strategy 302 CHAPTER 15 Balance Sheet Management 311 Balance Sheet Management Activities 311 The Asset/Liability Committee (ALCO) Mandate and Agenda 314 The Asset/Liability Management (ALM) Unit 323 The Insurer ALM-Investment Value Chain 330 The Treasury Function 339 CHAPTER 16 The Economics of Asset/Liability Management 345 The Role of ALM Earnings 345 The Risks: Some Spectacular ALM Failures 349 The Returns: Are Shareholders Willing to Pay a Premium or a Discount? 361 CHAPTER 17 The Practical Aspects of Asset/Liability Management 371 ALM Performance and Risk Measures 372 Calculating Funds Transfer Prices (FTPs) 385 Measuring Alpha 406 CHAPTER 18 Cash and Liquidity Management 413 Managing Funding Liquidity Risk 413 What Happens if it Goes Wrong? 416 Measuring Funding Liquidity Risk 420 CHAPTER 19 Managing the Capital and Funding Structure 431 Capital Funding Management 431 Determining the Optimal Capital Structure 436 The Empirical Reality: What Determines Capital Structure? 446 CHAPTER 20 Risk Management 451 Enterprise Risk Management 451 Taking the Right Decisions 460 The Role of Culture 463 CHAPTER 21 Risk Governance and Organization 477 Risk Governance Principles 477 Role of the Board and Management 478 Three-Line-of-Defense Model 480 The Risk Function 484 CHAPTER 22 Risk Identification and Evaluation 491 From Risk Identification to Evaluation 491 Data-Driven Approaches 497 Evaluation-Based Approaches 499 Building a Resilient Organization 507 CHAPTER 23 Risk Underwriting - Strategy and Governance 513 Underwriting Context 513 Underwriting Strategy 518 Underwriting Governance 522 CHAPTER 24 Risk Underwriting - Technical Tools 527 Retail Segment: "Scoring" Models 527 Commercial Lines: Leveraging Expert Judgment 535 Underwriting Structured Solutions 541 Underwriting Controls, Validation and Learning 542 CHAPTER 25 Risk Underwriting - From Technical Pricing to Value Maximization 549 Technical Production Cost: RAPM Pricing 549 From Technical Pricing to Optimal Price 558 CHAPTER 26 Managing Operational and Reputational Risks 571 Defining Operational Risk 571 Managing Operational Risk 581 CHAPTER 27 Risk and Limit Controlling 589 Risk Reporting 589 An Effective Risk Limit Framework 601 Final Thoughts on Risk and Limit Reporting 606 Appendices Appendix A: Market Multiple Approaches 609 Appendix B: Derivation of Steady-State Valuation Multiples 613 Appendix C: Valuing Banks and Insurers: The Link Between Value and New Business and Investment RAPM 621 Appendix D: Beyond Debt and Equity 629 GLOSSARY 641 REFERENCES 653 Index 675
THOMAS C. WILSON is the chief risk officer for Allianz Group, where he is responsible for global risk controlling and risk management policies and guidelines. He has spent nearly 30 years working in finance and risk for such companies as UBS, McKinsey & Company, Swiss Reinsurance, Oliver Wyman & Company, and ING.