BELOW ARE 2 CASE STUDIES FROM ENTERPRISE RISK MANAGEMENT END OF CHAPTER 8 BY JAMES LAM.- from each we are required to:

CASE STUDY: HONEYWELL INC.

In February 1997, Honeywell Inc. took an intrepid step forward transfer-ring its risks4 by blending its property and casualty exposures and foreign exchange translation risks in a single policy insured by American Interna-tional Group and brokered by J&H Marsh & McLennan. Our objective was to significantly reduce our overall cost of risk, as well as our administra-tive costs, says Larry Stranghoener, Honeywells CFO and vice president.5 Mr. Stranghoener was looking for a policy that would limit the volatility of Honeywells financial results under the assumption that, as was discussed earlier in this chapter, stock markets punish earnings volatility with some-times significantly lower stock prices. By taking an integrated view of their risk exposure and using alterna-tive risk transfer methods, Tom Seuntjens, director of risk management at Honeywell, estimates that Honeywell was able to save more than 20 percent over its traditional risk management practices. It was able to cut the number of insurance carriers it used from 17 down to 10, and noted real savings in staff time and overhead because of simplified transactions.6 Honeywell has been pleased with the policys performance thus far, and is now considering adding a weather risk transfer element to help offset the risk of mild winters on sales of its thermostats. Honeywell is also evaluating the possibility of adding interest rate risks and foreign exchange transaction risks to the mix.7 Furthermore, it is deliberating movement in the direction of full enterprise risk management. We believe it makes sense from a risk management standpoint to evaluate our total risk profile, not just hazard and financial risks, but also our operational and strategic risks. Once we do that, the next logical step is to find a comprehensive way of mitigating those risks. Its still too early to say if we will go this way, but I think we already have the reputation for being aggressive and innovative in this area.In February 1997, Honeywell Inc. took an intrepid step forward transfer-ring its risks4 by blending its property and casualty exposures and foreign exchange translation risks in a single policy insured by American Interna-tional Group and brokered by J&H Marsh & McLennan. Our objective was to significantly reduce our overall cost of risk, as well as our administra-tive costs, says Larry Stranghoener, Honeywells CFO and vice president.5 Mr. Stranghoener was looking for a policy that would limit the volatility of Honeywells financial results under the assumption that, as was discussed earlier in this chapter, stock markets punish earnings volatility with some-times significantly lower stock prices. By taking an integrated view of their risk exposure and using alterna-tive risk transfer methods, Tom Seuntjens, director of risk management at Honeywell, estimates that Honeywell was able to save more than 20 percent over its traditional risk management practices. It was able to cut the number of insurance carriers it used from 17 down to 10, and noted real savings in staff time and overhead because of simplified transactions.6 Honeywell has been pleased with the policys performance thus far, and is now considering adding a weather risk transfer element to help offset the risk of mild winters on sales of its thermostats. Honeywell is also evaluating the possibility of adding interest rate risks and foreign exchange transaction risks to the mix.7 Furthermore, it is deliberating movement in the direction of full enterprise risk management. We believe it makes sense from a risk management standpoint to evaluate our total risk profile, not just hazard and financial risks, but also our operational and strategic risks. Once we do that, the next logical step is to find a comprehensive way of mitigating those risks. Its still too early to say if we will go this way, but I think we already have the reputation for being aggressive and innovative in this area.

a. What is the central issue the case is describing?

b. Based on your readings, what problem needs to be addressed?

c. Put yourself in the Chief Risk Officer's chair and describe the considerations you would identify.

d. Agree or disagree with the solution described in the case and provide support for your position.

e. Provide a concise summary of the items you considered and your conclusion.

CASE STUDY: BARCLAYS

In an effort to meet the higher required levels of contingent capital, British banking giant Barclays has recently rejuvenated its ART strategies by offer-ing a wave of 10-year contingent capital bondsin 2012, it sold $3 billion worth of these products to investors across Asia, Europe, and the United States. The attractiveness of the bonds can be attributed to its 7.6 percent in-terest rate, which is remarkable in todays historically low rate environment. Still, this higher yield comes attached with a corresponding higher risk; should Barclays incur losses that bring its core Tier 1 equity ratio to 7 percent or lower, the value of the contingent capital bonds drops to zero, nd investors lose all their money. Potential investors are concerned by this stipulation, worrying about the asymmetrical risk/return profile of these bonds. Robert Montague, of ECM, notes how some investors prefer get-ting written off to being converted to equity. . . . These instruments share the same downside risk as equity, but none of the upside.9 While some banks have followed in Barclays footstepsincluding Credit Suisse and UBSmany have instead turned to other forms of ART products. While regulators are encouraging banks to engage more with contingent capital, Barclays current shareholders hold mixed views of it; in the case that these bonds are converted into equity shares, the ownership interests of existing shareholders will inevitably be diluted. It is too early to tell whether Barclays latest move will prove to be a success or a failure. However, what is obvious at this stage is the fact that in-creased regulatory capital requirements and an uncertain economic climate have driven banks to be more innovative in their risk transfer strategies, which has pushed the growth of ART applications to a much higher level.

a. What is the central issue the case is describing?

b. Based on your readings, what problem needs to be addressed?

c. Put yourself in the Chief Risk Officer's chair and describe the considerations you would identify.

d. Agree or disagree with the solution described in the case and provide support for your position.

e. Provide a concise summary of the items you considered and your conclusion.