Value and Capital Management

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.

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