I n t rod u c t i o n

H o n ey we l l I n c .

R i s k M a n a ge me nt Re v i e w

Ty p e o f R i s k & D e p a r t me nt

N e w R i s k M a n a g e me nt Pro g ra m
Introduction
• Honeywell’s Treasury Management Team create a new, more cost efficient
method for managing risk

• The proposal provided combined protection against Honeywell’s currencry

risk along with other, more traditioally-insurrable risk, in a multiyear,
insurance based, integrated risk management program

• Finance committee’s vote depended on :

• Whether the anticipated savings of the program would be realized
• Whether the coverage provided by the new contract would be adequate

• The decision would established Honeywell’s risk management strategy for

some years.
Introduction
Exiting Program: Proposed Program:
Different types of risks Enterprise risk
handled separately by management – handling
different departemens all risk within a single
porfolio

Exiting Program Proposed Program % Change

Total Retained Loss 27.545.737 26.135.432 -5%
Premium Paid 11.236.00 8.509.000 -24%
Total Expected Cost of 39.781.737 34.644.432 11%
Risk
Standar Deviation of 15.793.879 3.819.568 -76%
Total Cost od Risk
Business Description Honeywell
• International corporation
• Employing 53,000 people
• Operate in 95 countries
• Sales of $7.3billion and net income of $402million
• Largest producer of control systems and products used to
regulate keating and air conditioning in commercial buildings, and
of system to control industrial worldwide, and also leading
supplier of commercial, military and space avionics system
Risk Management Review
Interest Credit Risk Liability
Rate Risk Risk

Environ-
Property
mental
Risk
Risk
Financial
Directors & Priorities Business
Officer Risk Risk

Political
Risk Legal Risk
Pension Currency
Risk Risk
 Type of Risk - Department

Type of Risk Department Handling Risk

Traditionally Insured (i.e. Hazard) Risks Treasury - Insurance Risk Mgmt. Unit
Currency Risks Treasury - Financial Risk Mgmt. Unit
Other Financial (interest rate, credit and Treasury - Financial Risk Mgmt. & Capital Markets
liquidity) Risks Unit
Pension Fund Risk Financial Dept.
Operational Risk Operating Units
Credit Risk Operating Units
Environmental Risks Health, Safety and Environment Dept.
Legal Risks Office of General Counsel
Market Risks Marketing Mgmt.
Type of Risk - Department
1. Capital market unit which managed the Capital structure and Liquidity
risk
2. Cash management unit managing the cash requirements
3. Financial risk management unit which managed the Currency, Interest
rate and Credit risk
• Currency hedging operations were independent of any other hedging
or insuring carried out in other parts of the firm
• Used at-the-money options
• Used basket-option of 20 currencies that matured quarterly
• These 20 currencies represented 85% of HW’s foreign profits
• Provided protection when UD$ strengthened against the currency
basket
Type of Risk - Department
4. Insurance risk management unit which managed risk generally covered by
insurance.
• Used separate annually-renewable insurance policies for each type of
insurable risks
• Each policy had specified deductible (retention) in an amount ranged
between 0 and $6 million
• HW would absorb losses up-to retention level before calling insurance
company for any claim
• Each loss was subject to separate retention
• HW paid a new deductible for each loss that occurred
Honeywell and IRM
• A similar approach already effectively adopted for
mitigating currency risks
• Plans for expansion in the future
• Potential for furher cost reductions
• Synergies
• Efficiency improvements through reduced complexity
• Strengthening competitive position through pioneering
the new approach
 Re-thinking Risk Management

Honeywell’s ERM or
Risk Management Objective
Existing Risk Integrated
“minimizing earnings
Management “Portfolio
volatility and cost of risk”
Strategy Effect”

“Risk Manage
Separately”
New Risk Management Program
• First of its kind
• Provided combined protection against HW’s currency
risks along with other traditionally insurable risks
• Multi-year
• Insurance based
• Integrated risk management program
• Would extend its innovation into the financial arena
New Risk Management Program
Featured included:
• Traditionally insured risks should be consistent with
currency risk management program
• Monthly cross-functional meeting to interact with two
groups to understand the other’s tasks
• Multi-specialty team: insurance unit + currency risk
management team
• All members were named as member treasury
management team
New Risk Management Program
Challenges to the program include:
• New program to provide..,
• Equal or greater level of earnings protection
• Total cost is less than existing program costs
• Flexibility to incorporate additional risks in the future
• Comply with all accounting standards
• Finding optimal risk management structure
Analysis
• Traditional risk management focus on mitigating
events
• Integrated risk management focus on goals and risks
that could affect the goals
• No risk stands alone, they’re all connected
• Every risk has their own value
• Risks and goals are connected
Analysis
• Honeywell could reduce the total cost on risk
management and get the combination risk assignment
that connected with each other

• Honeywell could subsidize risk in one are to other are

if it was required to achieve a better goals

• Integration risk management is the right approach for

Honeywell. It would be easier for Honeywell to control
risks that could affect their goals
THANK YOU