Fwd: INARM Message - risk perspective on JP Morgan stock

[Dave Ingram]

Begin forwarded message:

From: "Ford, C. (Charlie)" <Charli...@us.ing.com>

Date: May 24, 2013 2:54:51 PM EDT

To: inarm inarm <in...@list.soa.org>

Subject: INARM Message - risk perspective on JP Morgan stock

This group may find this assessment of whether to invest in JP Morgan stock interesting, as it is a risk view driving the conclusion, rather than the usual valuation or growth argument.

http://www.fool.com/investing/general/2013/05/17/why-you-shouldnt-invest-in-jpmorgan.aspx

Do you see risk management considerations growing in importance in portfolio management?

Regards,
Charlie Ford


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[Dave Ingram]

Begin forwarded message:

From: "Ingram, Dave" <Dave....@willis.com>

Date: May 24, 2013 6:18:18 PM EDT

To: "Charli...@us.ing.com" <Charli...@us.ing.com>, "in...@list.soa.org" <in...@list.soa.org>

Subject: Re: INARM Message - risk perspective on JP Morgan stock

Personally, I think that lack of transparency is a huge risk issue.
David Ingram, CERA, FRM, PRM
Willis Re
+1 212 915 8039
+1 646 287 7929 (mobile)

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[Dave Ingram]

Begin forwarded message:

From: "Mango, Donald F" <Donald....@guycarp.com>

Date: May 27, 2013 7:59:52 AM EDT

To: inarm inarm <in...@list.soa.org>

Subject: RE: INARM Message - risk perspective on JP Morgan stock

We should all be dreaming of the day that risk management reputation is a key driver in stock valuation

-----Original Message-----
From: Ford, C. (Charlie) [mailto:Charli...@us.ing.com]
Sent: Friday, May 24, 2013 2:55 PM
To: inarm inarm
Subject: INARM Message - risk perspective on JP Morgan stock

This group may find this assessment of whether to invest in JP Morgan stock interesting, as it is a risk view driving the conclusion, rather than the usual valuation or growth argument.

http://www.fool.com/investing/general/2013/05/17/why-you-shouldnt-invest-in-jpmorgan.aspx

Do you see risk management considerations growing in importance in portfolio management?

Regards,
Charlie Ford


---------------------------------------------------------

NOTICE: The information contained in this electronic mail message is confidential and intended only for certain recipients.  If you are not an intended recipient, you are hereby notified that any disclosure, reproduction, distribution or other use of this communication and any attachments is strictly prohibited.  If you have received this communication in error, please notify the sender by reply transmission and delete the message without copying or disclosing it.

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[Dave Ingram]

Begin forwarded message:

From: David Ingram <davei...@optonline.net>

Date: May 27, 2013 9:08:33 AM EDT

To: "Mango, Donald F" <Donald....@guycarp.com>

Cc: inarm inarm <in...@list.soa.org>

Subject: Re: INARM Message - risk perspective on JP Morgan stock

I want expand on Don's point.  In theory, risk management should have some impact on stock valuation.  In practice it does not.  Also, in theory, ERM is all about risk reward optimization, but in practice it usually is not.  

I wonder if we are not doing ourselves harm by insisting on defining ERM in terms of some sort of risk reward optimization?  Management of most firms has not had any interest in being optimized.  Do we marginalize ourselves and our potential contributions by the optimization focus?  Isn't that the same story as the DFA efforts 15 years ago that were ultimately rejected by most firms?

I wonder if we shouldn't be more realistic about what actually is ever done in most firms and define an actuarial role in that context?

Dave

In theory, there is no difference between theory and practice.  In practice, there is.  Yogi Berra

[Dave Ingram]

Begin forwarded message:

From: "Zurbuchen, Barry" <Barry.Z...@awac.com>

Date: May 27, 2013 9:23:05 AM EDT

To: David Ingram <davei...@optonline.net>

Subject: RE: INARM Message - risk perspective on JP Morgan stock

I disagree somewhat. Risk management reputation may not be a driver of stock valuation, but (in theory) good risk management practices will lead to higher valuations because a firm with better than average risk management practices will be less likely to encounter large negative earnings "surprises."

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[Dave Ingram]

Begin forwarded message:

From: Matthew Modisett <matt_mod...@yahoo.com>

Date: May 27, 2013 10:19:19 AM EDT

To: David Ingram <davei...@optonline.net>

Subject: Re: INARM Message - risk perspective on JP Morgan stock

Reply-To: Matthew Modisett <matt_mod...@yahoo.com>

In my opinion, Risk Management and ERM in general is an off-shoot of the compliance function.  It is a more quant-focused version, appealing to expert judgement not just formulas to strictly check the letter of the law, but at heart it is still a compliance type exercise.  At least, this is how most managers in practice view it.

Manager may be interested in optimizing something, but even if they are then they would probably not first turn to the risk manager to do it.  

If there were ERRMs (Enterprise Risk-Return Managers) then perhaps they would be consulted.  However, I believe this risk-return comparison is what the capital managers (at least some) are supposed to do.  The ERM people are supposed to act as a CHECK on the risk-return efforts of the company, not a driving force for risk-return.  (at least in management's view)

If you are interested in doing the risk-return aspects of the company (to be an ERRM professional in my just invented lingo) then you need to be in a different role than what is generally labelled as risk management.

Matt Modisett

---

From: David Ingram <davei...@optonline.net>

To: "Mango, Donald F" <Donald....@guycarp.com>
Cc: inarm inarm <in...@list.soa.org>

Sent: Monday, 27 May 2013, 14:08

[Dave Ingram]

Begin forwarded message:

From: Max Rudolph <max.r...@rudolph-financial.com>

Date: May 27, 2013 12:51:54 PM EDT

To: 'inarm inarm' <in...@list.soa.org>

Subject: RE: INARM Message - risk perspective on JP Morgan stock

I think Dave's comment on risk and stock valuation is true for many
investors, but for a small portion that follows the value investing style it
is a key component. I wrote about this in a recent white paper you can find
at
www.soa.org/research/research-projects/pension/2013-value-investing-erm.aspx
(or you can wait for the summary article in an upcoming issue of SOA's The
Actuary. The best known of these investors is Warren Buffett of Berkshire
Hathaway. His sidekick and devil's advocate (another word for CRO) is
Charlie Munger. His investing checklist has 10 major categories, and risk is
number 1. Here it is.

Risk (especially reputational)
o Margin of safety
o People/ethics
o Get paid to take risk
o Inflation and interest rate exposures
o Avoid big mistakes

Berkshire used to have a large position in Freddie Mac, and suddenly left
their board and sold all their shares about 10 years ago (after taking a
major profit). My understanding is that the primary reason was a change in
the management style that focused on revenue growth and ignored tail risks.

Here are some other quotes that I included in the article.

"Outstanding investors, in my opinion, are distinguished at least as much
for their ability to control risk as they are for generating return."
-Howard Marks

"When things are going well and prices are high, investors rush to buy,
forgetting all prudence. Then, when there's chaos all around and assets are
on the bargain counter, they lose all willingness to bear risk and rush to
sell. And it will ever be so."
-Howard Marks

"The received wisdom is that risk increases in the recessions and falls in
booms. In contrast, it may be more helpful to think of risk as increasing
during upswings, as financial imbalances build up, and materializing in
recessions."
-Andrew Crockett (also known as Dave's Law of Risk and Light or Buffett's
comment about swimming naked when the tide goes out)

"Several things go together for those who view the world as an uncertain
place: healthy respect for risk; awareness that we don't know what the
future holds; an understanding that the best we can do is view the future as
a probability distribution and invest accordingly; insistence on defensive
investing; and emphasis on avoiding pitfalls. To me that's what thoughtful
investing is all about."
-Howard Marks

For people who don't believe that markets are completely efficient risk is a
very important part of investment analysis. I don't think optimization
formulas have much to do with it, although they can be interesting data
points to look at. The key is to look at the value of a firm rather than how
a firm's worth varies relative to other firms. We are very good at
calculating intrinsic value and should not ignore that fact. Too many
actuaries use beta and CAPM to make decisions and it ignores our competitive
advantage.

Max

Max J. Rudolph, FSA CFA CERA MAAA
Rudolph Financial Consulting, LLC
(402) 895-0829
Twitter at maxrudolph
www.rudolph-financial.com

-----Original Message-----
From: David Ingram [mailto:davei...@optonline.net]
Sent: Monday, May 27, 2013 8:09 AM
To: Mango, Donald F
Cc: inarm inarm

[Dave Ingram]

Begin forwarded message:

From: "Major, John A" <John.A...@guycarp.com>

Date: May 27, 2013 1:05:38 PM EDT

To: Max Rudolph <max.r...@rudolph-financial.com>, 'inarm inarm' <in...@list.soa.org>

Subject: RE: INARM Message - risk perspective on JP Morgan stock

Unless you can justify expenditure of resources in terms of value to the firm, ultimately, you are lost.  Is there value to ERM?  Consider these facts about re/insurance stocks....

* Ratings matter. Ratings downgrades hurt shareholder value.  Management DOES care about the risk of downgrades.
* "Flight to quality" is evident after catastrophes.  Firms with better ratings see their value rebound more quickly.
* There is a persistent, measurable effect of earnings volatility on the relationship between average ROE and value.  Low volatility firms do better than high volatility firms with the same average ROE.
* The empirical evidence and theoretical explanations for the value of risk management have been accumulating for decades.  Refer to CAS-COTOR's Risk Premium Project for a literature review.  It's all about the frictions.

Near term, Dave may have a point.  The value of ERM needs to be pushed on many fronts, as we are talking about a cultural shift, and that is never easy.  Long term, however, we need to quantify the value of ERM, the better to propose specific modes and magnitudes of effort that can be justified, credibly, when it comes time for resource allocation decisions. Optimization may be a long way off, but we at least need to be able to distinguish directionality!

Regards,

J*M

John A. Major, ASA, Senior Vice President,
Director of Actuarial Research, GC Analytics
Guy Carpenter | Phone 860-673-1997 | BB Mobile 860-839-9148
john.a...@guycarp.com | www.guycarp.com | Guy Carpenter & Company, LLC
Check out MetaRisk @ www.metarisk.info

[Dave Ingram]

Begin forwarded message:

From: "Mango, Donald F" <Donald....@guycarp.com>

Date: May 29, 2013 8:25:37 AM EDT

To: 'inarm inarm' <in...@list.soa.org>

Subject: RE: INARM Message - risk perspective on JP Morgan stock

S&P have also recently increased the relevance of their ERM rating in that you cannot have certain levels of financial strength rating without an appropriate ERM rating as well.

Brick by brick

Thanks
Don