International Insurance Society Roundtable on Risk

VOLUME21|NUMBER4|FALL2009APPLIEDCORPORATEFINANCEJournalofAMORGANSTANLEYPUBLICATIONInThisIssue:MarketEfficiencyandRiskManagementTheGlobalFinancialCrisisandtheEfficientMarketHypothesis:WhatHaveWeLearned?8RayBall,UniversityofChicagoContingentCapitalvs.ContingentReverseConvertiblesforBanksandInsuranceCompanies17ChristopherL.Culp,CompassLexeconandUniversityofChicagoInternationalInsuranceSocietyRoundtableonRiskManagementAftertheCrisis28Panelists:GeoffreyBell,GeoffreyBell&Company;NikolausvonBomhard,MunichRe;PremWatsaandBijanKhosrowshahi,FairfaxFinancialHoldings.ModeratedbyBrianDuperreault,MMCLessonsfromtheFinancialCrisisonRiskandCapitalManagement:TheCaseofInsuranceCompanies52NeilA.Doherty,UniversityofPennsylvania’sWhartonSchoolofBusiness,andJoanLamm-Tennant,GuyCarpenter&Co.andtheWhartonSchoolTheTheoryandPracticeofCorporateRiskManagement60HenriServaesandAneTamayo,LondonBusinessSchool,andPeterTufano,HarvardBusinessSchoolMeasuringtheContributionsofBrandtoShareholderValue(andHowtoMaintainorIncreaseThem)79JohnGerzema,EdLebar,andAnneRivers,Young&RubicamBrandsCreatingValueThroughBest-In-ClassCapitalAllocation89MarcZenner,TomerBerkovitz,andJohnH.S.Clark,J.P.MorganUsingCorporateInflationProtectedSecuritiestoHedgeInterestRateRisk97L.DwayneBarneyandKeithD.Harvey,BoiseStateUniversityTheGain-LossSpread:ANewandIntuitiveMeasureofRisk104JavierEstrada,IESEBusinessSchoolAssessingtheValueofGrowthOptionSynergiesfromBusinessCombinationsandTestingforGoodwillImpairment:ARealOptionsPerspective115FrancescoBaldi,LUISSGuidoCarliUniversity,andLenosTrigeorgis,UniversityofCyprus28JournalofAppliedCorporateFinance•Volume21Number4AMorganStanleyPublication•Fall2009InternationalInsuranceSocietyRoundtableonRiskManagementAftertheCrisisIIS45thAnnualSeminar|Amman,Jordan|June7–10,200929JournalofAppliedCorporateFinance•Volume21Number4AMorganStanleyPublication•Fall2009ROUNDTABLEaroundthosepriorityconcerns.Butthisyearhasbeendifferent.Indevelopingtheprogramforthemeeting,wewerefairlyconfidentaboutthenumberoneissueoneverybody’smind:theglobalfinan-cialcrisisandhowtomanagethroughit.AsIthinkweallcanappreciateatthispoint,thecurrenteconomicdownturnhaschangedtheplayingfield.Whilesomepartsoftheinsuranceindustryhaveweatheredthefinancialcrisisfairlywell,particularlythepropertyandcasualtysector,othershavefacedmajorchallengesandarelookingforawayforward.Forbothgroupsofcompanies,how-ever,thefinancialcrisisisclearlysomethingtobereckonedwith.Eveninthestron-gestandbest-runcompanies,thecrisishasforcedmanagementstoreevaluateindustrybenchmarksandtried-and-testedmethodologies.Aswithanychallenge,weshouldusethisasanopportunitytolearnfrompastmistakesand,wherecalledfor,toimproveorredefineourstandards.Bysodoing,wecancomeoutofthiswithcompaniesthatarebothmoreefficientandhavetheriskmanagementknowl-edgeandmethodstoensurestabilityandcontinuity.Atthismeeting,wehavebroughttogetherthreeleadersofinsurancecom-paniesrepresentingthreecontinentstodiscusstheirviewsonmanagingthroughthesechallengingtimes,andonfind-ingandcapitalizingonopportunitiesincrisis.Ourpanelistsbringbothawealthofexperienceanduniqueperspectivestothisdiscussion—andeach,Ishouldadd,representsacompanythathasnotonlyweatheredthecurrentstorm,butimproveditscompetitiveposition.Butbeforeturningtothesethreeexecutives,wehaveaskedGeoffreyBell,aBrianDuperreault:Goodmorning,andwelcometothisannualmeetingoftheInternationalInsuranceSociety.I’mBrianDuperreault,presidentandCEOofMMCaswellasthecurrentChairmanoftheIIS.TheIIS,asyouallknow,istheworld’slargestassociationofglobalinsurancecompanies.AndIthoughtyoumightliketoknowthatofthemorethan900membersrepresentingthe90companiesnowenrolledinourorganization,morethan350areattendingthisyear’smeetings.Andforthoseofyouwhoareattendingthesemeetingsforthefirsttime,letmejustrepeatthatourmissionistoprovideeducationandinformationabouttheglobalindustryaswellasnetworkingopportunitiesforpeopleandcompanieslookingforcross-borderexchangesandcontacts.Giventheglobalscopeandaimsofthisorganization,letmealsosayhowpleasedwearetobeholdingthesemeet-ingsinJordan.Inthepastfewdays,I’vehadthechancetomeetwithbothgov-ernmentofficialsandexecutivesfromawiderangeofindustries.WhencombinedwiththereportsI’vereadabouttheregion,myimpressionfromthesemeetingsanddiscussionsisthatJordanisnotonlyoneofthetwomostproductiveecono-miesintheMiddleEast,butoneofthemostpromisingintheentiredevelopingworld.Mysenseisthatthesecompaniesandthiseconomyhavedoneagreatjobofweatheringtheglobalcrisis,andareonthevergeofachievingsomeimpressivegainsingrowthandprofitability.Inthepast,wehaveplannedthesemeetingsbyaskingourmembercom-panieswhattheythinkarethetopissuesfacingtheinsuranceindustry.Wethentakethatinformationandbuildaprogramwell-knownadvisertogovernmentsandcentralbanksonawiderangeoffinancialandeconomicissues,tostartthediscus-sionbycommentingontheaftermathofthecrisisandthevariousproposalsforreformingtheinternationalfinancialsys-tem.FollowingGeoff’spresentation,wewillaskourotherpaneliststoreactinanopen-dialogueformat.AndbeforeIintro-duceMr.Bell,letmesayabitabouteachof