Quantitative Risk Management in Philips

Arjen Ronner

Seminar Quantitative Financial Risk Management

January 14, 2000

Content1. Governance model and Risk Management

2. Identification and quantification key success factors

3. Integral risk management hampered by agents, markets and accounting issues

Country

Country

Country

Country

Country

Country

Country

Elimination of the MatrixBOM/GMC

Prod

uct D

ivis

ion

Prod

uct D

ivis

ion

Prod

uct D

ivis

ion

Prod

uct D

ivis

ion

Prod

uct D

ivis

ion

Prod

uct D

ivis

ion

Prod

uct D

ivis

ion

The “matrix”

in the sense ofequal authority shared by

product and geographic dimensions

has disappeared

Governance Model: Businesses• Product Divisions organized into clear and

accountable Businesses• Each Business has:

– a clear scope of customers, channels, products

and geography– clear accountability and management structure– full control over its business systems

• Co-operation not enforced, but driven bybusiness and company interest

FinancialPriorities

Liability Risk

Property Risk

Currency Risk

Interest Rate Risk

Environmental Risk

Directors & OfficersRisk

Legal RiskPolitical Risk

Pension Risk

Business Risk

Credit Risk

Key Stages in Risk Management

Identification

Policy

Measurement

Execution

Interdependency Risk

Test &Ass

WaferFab.

glass base guns tube

TV

wafer

IC

IC

Gradings Low Medium High

Poor

Fair

Good

Excellent

Currency Risk Management

Goals and approach• Goal: Investigate the existing currency and interest rate

exposures, the policies and guidelines, the procedures and practices, in order to design a structure for identifying, measuring and managing these exposures.

• Starting-point: the objective of currency risk management is the protection of Euro-shareholder value of the Philips Group.

• In corporation with the Product Divisions a new structure has been developed.

• Benchmarking via Company visits.

Other companies

Co

1

C0

2

Current transaction hedging policyAt what level: (C)entral, (O)rganization O CAgainst what CCY: (L)ocal, CCY of (H)ead company L HStructural use of forecasting N YHedging mandatory N YFrequency of hedging: (D)aily, (M)onthly, (Q)uarterly D Q/MStructural performance measurement (Y/N) N Y

Cash flow

Philips

USD

HKD

USD

HKD

PhilipsPhilips

TransparencyMeasurement of total group exposure

Approach

StructureOne policy throughout the whole company

ConsistencyShareholder value protection

EfficiencyOptimal netting of exposures

Bottlenecks

• lack of information loan data base• stable cash flow P&L effects• changing Treasury management• hesitation towards hedging• changing accounting standards

CCY Risks for the Philips GroupCCY Risks for the Philips Group

Operating assetsDebt minus Cash

Group Equity

Philips Group

Matching required

CF from assets is leading

CF from liabilities has to follow

PD / Business responsibility:

Cash Flow per currency

from assets

Derived from OCF-model

Corp. Treasury responsibility:

Cash Flow per currency

from liabilities

Derived from Funding-database

Accounting implications

• Cash flow P&L

• Global Local

Is this the futureIs this the future

Aggregate Aggregate Aggregate

Combined ExcessIntegrated Program

Multi Years

Year 1 Year 3Year 2

Combined

Retention

Combined

Retention

Combined

Retention

High Excess

Casualty OnlyAnnual Limits

Annual Limits

High ExcessProperty Only

GL/Prod Auto Ocean Political Property Currency D&O

Marine Risk Risks