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Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions

Book Description

A value management framework designed specifically for banking and insurance

The Value Management Handbook is a comprehensive, practical reference written specifically for bank and insurance valuation and value management. Spelling out how the finance and risk functions add value in their respective spheres, this book presents a framework for measuring - and more importantly, influencing - the value of the firm from the position of the CFO and CRO. Case studies illustrating value-enhancing initiatives are designed to help Heads of Strategy offer CEOs concrete ideas toward creating more value, and discussion of "hard" and "soft" skills put CFOs and CROs in a position to better influence strategy and operations. The challenge of financial services valuation is addressed in terms of the roles of risk and capital, and business-specific "value trees" demonstrate the source of successful value enhancement initiatives.

While most value management resources fail to adequately address the unique role of risk and capital in banks, insurance, and asset management, this book fills the gap by providing concrete, business-specific information that connects management actions and value creation, helping readers to:

  • Measure value accurately for more productive value-based management initiatives and evaluation of growth opportunities

  • Apply a quantitative, risk-adjusted value management framework reconciled with the way financial services shares are valued by the market

  • Develop a value set specific to the industry to inspire initiatives that increase the firm's value

  • Study the quantitative and qualitative management frameworks that move CFOs and CROs from measurement to management

  • The roles of CFO and CRO in financial firms have changed dramatically over the past decade, requiring business savvy and the ability to challenge the CEO. The Value Management Handbook provides the expert guidance that leads CFOs and CROs toward better information, better insight, and better decisions.

    Table of Contents

    1. Cover
    2. Series Page
    3. Title Page
    4. Copyright
    5. Dedication
    6. List of Abbreviations
    7. Preface
      1. Who Should Read This Book?
    8. Acknowledgments
      1. Colleagues at Work
      2. Colleagues in the Profession
      3. Research and Editorial Support
      4. To My Family
      5. Disclaimer
    9. About the Author
    10. Part One: Introduction
      1. Chapter 1: Why is Value Management Important?
        1. Better Information
        2. Better Insights
        3. Better Decisions
        4. Why Shareholder Value?
      2. Chapter 2: How do CFOs and CROs Add Value?
        1. The Evolution of the Corporate Center as “Shareholder Surrogate”
        2. The Implications for the CFO
        3. The Implications For The CRO
    11. Part Two: Better Information – Measuring Value
      1. Chapter 3: RAPMs – The Industry Standard
        1. What Makes Financial Services Unique?
        2. What Do RAPMs Do And How?
        3. The RAPM (R)Evolution
        4. Three RAPMs For Three Distinct Purposes…
        5. …Linking Directly To Shareholder Value
        6. Insurance Example
        7. Banking Example
      2. Chapter 4: Two Challenges in Using RAPMs
        1. Do RAPMs Influence Strategy?
        2. Do RAPMs Give The Right Signals?
      3. Chapter 5: Valuing Financial Services – The Theory
        1. What Determines Share Value? Market Multiples, Roe And Growth…
        2. …But What Determines Market Multiples?
        3. Why A Market-Consistent Approach?
        4. Value: Where It Comes From and How to Create More of It
      4. Chapter 6: Valuing Financial Services – The Evidence
        1. Evidence From The Insurance Industry1
        2. Evidence From Banking
        3. Is It Just Me Or are Others Thinking the Same Thing?
      5. Chapter 7: Market-Consistent Valuation for Insurers
        1. Introduction to Fair Valuation For Insurers
        2. Calculating Traditional Embedded Value
        3. European Embedded Value
        4. Market Consistent Embedded Value (Mcev)
        5. How is MCEV Calculated in Practice?
        6. From MCEV to MVBS
        7. Final Comments: Whither MCEV?
    12. Part Three: Better Insights – Managing Value
      1. Chapter 8: Property and Casualty Insurance
        1. History And Economic Rationale1
        2. From Principles to Rules of the Game
        3. From Rules to the Valuation of PC Businesses
        4. PC KPIs: Understanding And Managing Value
      2. Chapter 9: Life and Health Insurance
        1. History and Economic Rationale
        2. From Principles to “Rules of the Game”
        3. LH Valuation
        4. Understanding Value Creation: Capital Intensity and Financial Risk Taking
      3. Chapter 10: Banking
        1. History1
        2. Products
        3. Economic Rationale
        4. From Principles To “Rules Of The Game”
        5. From “Rules” To Value
      4. Chapter 11: Achieving Profitable Growth
        1. Rules of the Game and KPIs
        2. Management Actions – Three Horizons of Growth
        3. Horizon 1 – Increasing Sales Productivity
        4. Horizon 1 – Going Multi-Channel
        5. Horizon 1 – Getting More out of Existing Customers; Cross Sell, Big Data and Customer Loyalty
        6. Horizon 1 – Managing the Customer Portfolio Skew
        7. Horizon 2 – Anticipating Mega-trends
        8. Horizon 2 – Exploiting Adjacencies
        9. Horizon 2 – Transformational and Bolt-On Acquisitions
        10. Horizon 3 – Creative Disruptions
      5. Chapter 12: Achieving Operating Efficiency
        1. The Importance of Operating Efficiency
        2. Rules of the Game
        3. Pay Less: Optimize Procurement
        4. Pay less: From Business Process Redesign to Outsourcing
        5. Use Less, But More Effectively: Digitize and Automate
        6. Use Less, But More Effectively: Re-Engineer the Product Portfolio
        7. Case Example
        8. Use Less, But More Effectively: Managing Acquisition Expenses
    13. Part Four: Better Decisions – Capital, Balance Sheet and Risk Management
      1. Chapter 13: Corporate Strategy and Capital Allocation
        1. Corporate Strategy, Capital Allocation and Performance Management
        2. Capital Allocation: The Capital Budget, From Sources to Uses of Capital
        3. Capital Allocation: Optimizing the Corporate Portfolio
        4. Capital Allocation: Aligning Financial Resources within Constraints
      2. Chapter 14: Strategic Planning and Performance Management
        1. What is Strategic Planning?
        2. Why Does Strategic Planning Fail and What can be Done About It?
        3. Corporate Strategy
      3. Chapter 15: Balance Sheet Management
        1. Balance Sheet Management Activities
        2. The Asset/Liability Committee (ALCO) Mandate and Agenda
        3. The Asset/Liability Management (ALM) Unit
        4. Two Complications to the “Classic” ALM Unit
        5. The Insurer ALM–Investment Value Chain
        6. The Treasury Function
      4. Chapter 16: The Economics of Asset/Liability Management
        1. The Role of ALM Earnings
        2. The Risks: Some Spectacular ALM Failures
        3. The Returns: Are Shareholders Willing to Pay a Premium or a Discount?
      5. Chapter 17: The Practical Aspects of Asset/Liability Management
        1. ALM Performance and Risk Measures
        2. Calculating Funds Transfer Prices (FTPs)
        3. Measuring Alpha
      6. Chapter 18: Cash and Liquidity Management
        1. Managing Funding Liquidity Risk
        2. What Happens If It Goes Wrong?
        3. Measuring Funding Liquidity Risk
      7. Chapter 19: Managing the Capital and Funding Structure
        1. Capital Funding Management
        2. Determining The Optimal Capital Structure
        3. The Empirical Reality: What Determines Capital Structure?
      8. Chapter 20: Risk Management
        1. Enterprise Risk Management
        2. Taking The Right Decisions
        3. The Role Of Culture
      9. Chapter 21: Risk Governance and Organization
        1. Risk Governance Principles
        2. Role of the Board and Management
        3. Three-Line-of-Defense Model
        4. The Risk Function
      10. Chapter 22: Risk Identification and Evaluation
        1. From Risk Identification to Evaluation
        2. Data-Driven Approaches
        3. Evaluation-Based Approaches
        4. Building a Resilient Organization
      11. Chapter 23: Risk Underwriting – Strategy and Governance
        1. Underwriting Context
        2. Underwriting Strategy
        3. Underwriting Governance
      12. Chapter 24: Risk Underwriting – Technical Tools
        1. Retail Segment: “Scoring” Models
        2. Commercial Lines: Leveraging Expert Judgment
        3. Underwriting Structured Solutions
        4. Underwriting Controls, Validation and Learning
      13. Chapter 25: Risk Underwriting – From Technical Pricing to Value Maximization
        1. Technical Production Cost: RAPM Pricing
        2. From Technical Pricing to Optimal Price
      14. Chapter 26: Managing Operational and Reputational Risks
        1. Defining Operational Risk
        2. Managing Operational Risk
      15. Chapter 27: Risk and Limit Controlling
        1. Risk Reporting
        2. An Effective Risk Limit Framework
        3. Final Thoughts on Risk and Limit Reporting
    14. Appendix AMarket Multiple Approaches
      1. Step 1: Define the Peer Group for Comparison
      2. Step 2: Estimate Sectoral Multiples
      3. Step 3: Calculate the Implied Sum-of-Parts Valuation Using the Following Formulae
    15. Appendix BDerivation of Steady-State Valuation Multiples
      1. The Accounting Approach
      2. The Discounted Free Cash Flow Entity Approach
      3. The Market-Consistent Valuation Approach
      4. A Brief Digression on Changing the Accounting Basis
    16. Appendix CValuing Banks and Insurers: The Link Between Value and New Business and Investment RAPM
      1. Valuation of Insurers
      2. Valuation of Banks
    17. Appendix DBeyond Debt and Equity
      1. Sources of Customer and Internal Financing
      2. Unsecured Financing from the Wholesale Markets
      3. Securitized Financing
      4. Hybrid Capital
    18. Glossary
    19. References
    20. Index
    21. End User License Agreement