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Setting up risk appetite in a more complex trade environment - 6th Webinar FERMA ecoDa AIG 7 Sept 2017
Solvay has established a Highly Protected Risk culture to anticipate and mitigate risks. They develop scenarios and response plans for uncertainties. Their risk assessment process involves updating a risk matrix and individual risk sheets with critical risks and mitigation actions. For Brexit, Solvay set up a task force to evaluate risks and opportunities to protect value and stay competitive, even though analysts say Solvay is well positioned due to its diverse portfolio.
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Setting up risk appetite in a more complex trade environment - 6th Webinar FERMA ecoDa AIG 7 Sept 2017
- 1. Sonia Cambier Global Headof Insurance and Prevention SOLVAY Fredrik Erixon Director and co-founder of European Centre for International Political Economy (ECIPE) Carolyne Spackman VP-Chief Economist of Country Risk AIG Jan Wesseldijk Board Member of ecoDa Owner of Wesseldijk & Co., Board Consultancy Firm
- 2. Fredrik Erixon, EuropeanCentre for International Political Economy (ECIPE), Brussels Globalisation and Protectionism – New Trends in the World Economy
- 3. Salient trends inthe world economy ⎯Trade growth ⎯Shifting patterns of trade ⎯Composition of 21st century protectionism
- 4.
- 5. A. The valueof global exports
- 6. B. Shifting patternsof trade
- 7. C. Composition of21st century protectionism
- 8. Regulatory freedom (product markets) 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 19701975 1980 1985 1990 1995 2000 2005 2010 2013 United States Germany France Italy
- 9. Economic freedom totrade 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 1995 2000 2005 2010 2013 United States Germany France Italy
- 10. Share of USjobs that requre local license 0 5 10 15 20 25 30 1950s 1960s 1970s 1980s 1990s 2000 2006 2008
- 11. Data loclisation measures- globally 0 10 20 30 40 50 60 70 80 90 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
- 12. Strategies going forward ⎯Globalisationwill not reverse, but isn’t growing much ⎯Protectionism hits factor markets, platforms, IP and advanced services ⎯21st century protectinism puts a premium at corporate startegies to control markets and competition
- 14. - 1 - TheGlobal Economy Resuscitates in 2017 But Uncertainty is Here to Stay… What are the Key Risks and How Should Companies Respond? Carolyne Spackman Vice President /Chief Economist, Country Risk AIG Credit Lines- Political Risk, Trade Credit, and Surety September 2017
- 15. DISCLAIMER The statements providedherein are based solely on the opinions of AIG and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions ofAmerican International Group, Inc. (“AIG”) or its affiliates. Certain information may be based on information received from sources AIG considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of AIG only as of the date of this document and are subject to change without notice. AIG has no obligation to provide updates or changes to these opinions, projections, forecasts and forward- looking statements. AIG is not soliciting or recommending any action based on any information in this document. 1 5
- 16. 0 200 400 600 800 Data Source: Bloombergas of 18-Aug-17 1.000 1.200 1.400 Baltic Dry Index (BDI) Weekly Data with 4-Jan-85 = 1,000 (The last trading day of every year is Christmas Eve.) A shipping & trade index measuring changes in the transport cost of raw materials. A rising BDI indicates a bullish environment for commodities & world trade. Source: Bloomberg, L.P,. Data as of August 2017 Despite Protectionism, Trade Activity is Trending Up, Implying Stronger Growth in 2017 1 6
- 17. US Challenges tothe Global System Imply that 1 7 Other Countries May Have to Adjust to a New Order US Maintains Commitment NATO: Trump made this an important part of his campaign. He also called into question the need for NATO if European countries would not help pay more for defense Result: After claiming European countries are starting to pay more for NATO, Trump has finally committed to the NATO Article 5 WTO: On the campaign trail, Trump threatened to pull the US out of the WTO Result: Trump appointed a protectionist, Lighthizer, as US trade negotiator, has suggested ignoring the WTO, or using its mechanisms to get China to meet its WTO obligations US Revises NAFTA: Trump threatened to withdraw on the campaign trail Result: NAFTA will be renegotiated, which may take up to a couple years US Withdraws Paris Climate Agreement (COP 21): Trump campaigned that the agreement disadvantages the US and benefits other countries Result: Trump has removed the US from the agreement; however many states, cities, companies and organizations in the “We are Still In Coalition” have affirmed they will meet the de-carbonization goals Trans-Pacific Partnership: Ending TPP was a goal of Trump’s election campaign Result: InAugust, Trump signed the order to formally withdraw the US from the TPP
- 18. Current Account Balance,% of GDP … And Trade Surplus Countries May Still be Targeted by Trump in “Surplus Wars” 0 1 2 3 4 5 6 7 8 9 2013 2014 2015 2016 2017F 2018F Japan Source: EIU. Data as of July 2017 1 8 Germany Korea China The US is unlikely to impose broad trade barriers on China, Mexico, or other countries, but other measures are being considered: • The US may cite national security concerns under Section 232 of the Trade Expansion Act of 1962. Example: Investigations into steel and aluminum imports were launched inApril but dropped in July • May cite foreign practices that harm certain US industries under Section 301 of the TradeAct of 1974 Example: Administration alleges that China does not respect intellectual property • NAFTA renegotiation proposes amending regional content rules and prevent currency manipulation while dropping the dispute settlement court
- 19. New Wars CouldBreak Out in Asia or the Middle East Meanwhile, conflicts in Syria and Iraq are not Over 1 9 North Korea: • Sanctions often preclude war, but the EU may not go along with any US-led strike; meanwhile the recent US sanctions on Chinese and Russian entities raise the risk of larger countries getting involved in any conflict • The US wants to prevent the DPRK from furthering its nuclear program; it was also discovered that North Korea may have 2/3 of the world’s supply of rare earths which are vital to US weapons systems, smartphones/tablets/laptops, and carbon-reducing technologies Qatar: • Saudi Arabia has in effect told Qatar to surrender its independence (especially regarding foreign policy) and take orders from the Kingdom, as put forth by the 13 demand (shades of WWI have emerged); while Qatar will not relinquish its sovereignty • The isolation of Qatar has lined up countries into two camps, with Turkey (and to a degree Iran) rallying behind Qatar while the UAE and Egypt support Saudi Arabia Afghanistan 2.0: • Although the war never officially ended, US troops largely withdrew in 2014 but now plans are in motion to step up US military presence again
- 20. Although the Macronwin Prevented “Frexit,” “Uncertainty” will Continue to Bedevil Policymaking 0 50 Migrant Crisis Grows 150 100 200 250 300 US Election BrexitProtests against New Year’s assaults Macron win Source: policyuncertainty.com 2 0
- 21. Source: IMF WEO Risksto the EU Remain Until Growth is Restored Real GDP, % chg Yoy One: Post-Euro Growth Slowdown Implies that the 4 3,5 3 2,5 2 1,5 1 0,5 0 1980-1998 1999-2016 -2.9% chg -0.7% chg -1.1% chg -0.7% chg -0.7% chg -1.7% chg -1.1% chg -0.4% chg Kept the Pound Sterling 21
- 22. Two: Although Unlikely,Could Divergent Policy 22 over Migrants Lead to a Polexit? Or Visegrád-out? Some Countries’ EU Voting Rights May be Stripped, Which Could Backfire: If Eastern European countries such as Poland, Hungary, and the Czech Republic continue to defy the EU, and the EU continues with the sanctions procedures under Article 7, these countries could consider leaving the EU as a response. What are These Countries’Alternatives?: These three countries could have other alternatives to simply embracing Russia’s orbit. Together, the Visegrád 4 + Baltics+ Balkans= the Intermarium, or, the idea of a large Eastern European Union from the Baltic Sea to the Black Sea popular in the 1930s. The Vishegrád countries tried last year to get the EU to consider expansion of the EU to the Balkans as an alternative to taking in migrants from Syria, but to no avail. Investment from China could partly replace structural funds / EBRD: China is trying to integrate the “Intermarium” countries in its Silk Road Strategy with all kinds of linkages and investment The US has a geopolitical interest in the Intermarium region: Stratfor’s Robert Kaplan (author of the famous Balkan Ghosts that influenced the Clinton administration) argued an Intermarium could also include Central Asia/caucuses, and might be allied with the United States given the new bloc would border and contain Russia
- 23. With So MuchUncertainty, What Can You Do To Protect Your Company? 23 You Can Insure Yourself Against Losses Deriving from: Trade: • Short term trade non-payment, including for reasons arising out of abrupt political or economic changes • AIG’s trade product is based on non-cancellable limits, which means that you can depend on coverage even when times are bad, unlike many of our competitors Political Risks facing project lenders, contractors, financial institutions and multinationals: • Political Violence/Civil Commotions and War Risks • Contract Frustration due to Political Risks • Confiscation, Expropriation, Nationalisation Risks • Currency Inconvertibility and Non-transfer Risk • AIG was the first private sector Political Risk provider and has a solid underwriting track record spanning decades Cyber-Risk • Protect against the threat of property damage, business interruption, product liability and a number of other cyber risks with AIG Cyber policies
- 25. ecoDa The European Voiceof Directors Globalization in practice Globalization in practice Jan Wesseldijk
- 26. ecoDa The European Voiceof Directors Globalization in practice Content • Fact vs. Fiction • Five personal experiences • Divestment Colombia • Leading agricultural seeds • Chinese connection • Conquering the world • World upside down • Conclusions
- 27. ecoDa The European Voiceof Directors Globalization in practice Globalization has not gone into reverse
- 28. ecoDa The European Voiceof Directors Globalization in practice Health and social problem worse in more unequal countries
- 29. ecoDa The European Voiceof Directors Globalization in practice Five personal experiences Case Environment Methodology Strategy choice Board role Result Political squeeze Financial projection Divestment Lobbying Imminent GMO ban War gaming Public offering Sounding out investors End EU sugar quota PEST analysis Economy of scale Communist party politics Digitization BHAG Platform business Preaching Shareholder activism Scenarios Split-up Wake-up
- 30. ecoDa The European Voiceof Directors Globalization in practice Conclusions • Globalization: More global, more equal, more unequal • Environment: Respect all stakeholders (customers, workers, shareholders, governments) • Methodology: Focus on process, not outcome • Strategic choice: Dream with deadline • Board role: Mind human handicaps (makeability, groupthink, visual illusion) • Result: Entrepreneurship, mixed succes
- 31. ecoDa The European Voiceof Directors Globalization in practice Globalization with a human face
- 33. Finance Sonia Cambier Setting UpRisk Appetite in a more complex Trade Environment Webinar ecoDa, AIG , FERMA – 07/09
- 34. WHO IS SOLVAY? WEARE A MULTI-SPECIALTY CHEMICAL COMPANY 1. 2016 underlying results 2. MTAR: Medical Treatment Accident Rate 27,000 employees1 5.86 greenhouse gas intensity kg CO2 eq. per € EBITDA € 10.9 billion of net sales1 € 2,284 million of EBITDA1 139 industrial sites1 58 countries1 21 major R&I centers1 0.77occupational accidents at Group sites per million hours worked2 Group presentation 2017 34 43% sustainable solutions Group net sales
- 35. Group presentation 2017 35 ABALANCED PRESENCE IN ALL GROWTH REGIONS NORTH AMERICA 2016 underlying results 27% of net sales 6,400 employees 44 industrial sites 6 major R&I centers LATIN AMERICA 10% of net sales 2,350 employees 8 industrial sites 1 major R&I center EUROPE 33% of net sales 13,200 employees 57 industrial sites 10 major R&I centers 30% of net sales 5,050 employees 30 industrial sites 4 major R&I centers ASIA PACIFIC
- 36. Political Sciences & Business Administration Education Hundredsof millions of Captive LoB Contributing to the Group Strategic Agenda Hundreds of millions of EBITDA to protect Global Head of Insurance & Prevention 25+ Experience as Underwriter, Broker and Risk Manager CORPORATE FINANCE Group CRITICAL Expertise 36 Hundreds of Millions of Risk Transfer
- 37. 37 Risk Management Strategy AsSolvay Group, we want to promote, implement and maintain a Highly Protected Risk (HPR) culture which welcomes, encourages and rewards reporting “bad news”, establishes a proactive attitude towards risk evaluation and risk reduction, prepares personnel to expect the unexpected and rejects complacency by nurturing constant anticipation of what can go wrong. We develop What-if scenarios, responses, plans, Stress Test for the anticipation of risks principles in our Strategy and all our processes and manufacturing operations. Uncertainties are our New Normal!
- 38. Identified Risks Action Plans1) Risk AssessmentStatus • Risk matrix updated • Individual critical risk sheets & action plans established by the GBU, Insurance & Prevention and Legal Critical Risks and Mitigation Actions 8 2 1 3 13 1) actions taken to reduce or mitigate the risk38 ERM Methodology - Example – Risk Matrix VERYLOWLOWDEVELOPEDADVANCED 4 2 5 LOW MODERATE HIGH LEVEL OF CONTROL CRITICAL RISKS 6 3 1 8 8 VERY HIGH IMPACT 7
- 39. Is Solvay ‘‘BrexitProof ’’ ? • Solvay well positioned due to diverse portfolio, high profitability and cashflows. • Financial analysts suggested Solvay is in a good position to withstand such storms, with “comfortable profit margins, an apparently maintained dividend policy and further diversification of activities.” • Analysts may be right but faced with uncertainty it is better to avoid speculating what will happen and instead focus on scenarios of what could happen - and then be prepared with strategies to protect our interests and compete effectively Solvay set up a task force to evaluate BREXIT risks & opportunities to ensure that we stay ahead of the game, protecting the value that we are busy creating! PRESENTATION TITLE - Entity 39
- 40. IMPACT LEVELOFCONTROL LOW MEDIUM HIGHVERY HIGH ADVANCED DEVELOPED MODERATE LOW CRITICAL RISKS BREXIT 3. UK plants out of the Emission Trading Scheme 4 EU Employees in UK. 7. More Customs Clearance Hurdle (cost & delay) Note: the above numbering of risks do not represent the ranking level 5.UK Product Stewardship out of REACH 6. Increase sales cost Commodity Business) Confidential
- 41. Identified Risks Action Plans1) Risk AssessmentStatus • Risk matrix updated Critical Risks and Mitigation Actions 41 BREXIT VERYLOWLOWDEVELOPEDADVANCED 5 4 LOW MODERATE HIGH LEVEL OF CONTROL CRITICAL RISKS 3 6 VERY HIGH IMPACT 7
- 42. Risk Transfer Exampleof Comex Discussion 2. What is not? • GGGGGGGGG • GGGGGGGG 07/09/2017 42 1. What is existing? • People Protection • Assets, Profit & Cash 3. For discussion: Buying Insurance? • Group Risk Exposure and Profile (internal, external, underwriter view) • Financial exposure and Insurance Program options (+ What-if Scenarios) • Benchmarkings
- 43.
- 44. Landscape of PoliticalRisks & Opportunities • COP 21, 22, 23, 24 - Solvay ahead of the game • Commitment on Carbon Intensity Reduction (40% by 2025) • Predictability, Convergence and transparency of policies key for business competitiveness • Protectionism still vague but to be monitored and anticipated • Iran, Polexit, North Korea on our radar • Financial Markets and EU back to Growth: to be prudent: we know Black Swan exists! 44
- 45. Karim Hajjar, GroupCFO at Solvay SA 45 “You need to have a strategy and clear line. It's not the bumps on the road that will divert or distract. The CFO is there to accompany value creation and also to protect value through risk management, to stress test and to find the right balance. Turmoil in markets are an integral part of business life. It's part of the new normal, and it should not stop us from developing our businesses, provided we continue to tread carefully.”
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