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I. Introduction In one week, on July 10, 1997, the Finance…
I. Introduction
In one week, on July 10, 1997, the Finance Committee members of Honeywell Inc.’s board of
directors would vote on whether to proceed with a new risk management program. For the past two
years, members of Honeywell’s Treasury Management Team, in conjunction with insurance
specialists J&H Marsh & McLennan (now Marsh Inc.), auditor Deloitte & Touche, and later with
insurance underwriter American International Group (AIG) had worked to form new, more costefficient method for managing some of Honeywell’s risks. Their proposal, the first of its kind,
provided combined protection against Honeywell’s currency risks along with other, more
traditionally-insurable risks, in a multiyear, insurance-based, integrated form management program.
Honeywell had a long history of product innovation; this new proposal would extend its innovation
to the financial arena. While a significant amount of time and effort had been invested in developing
this new concept and in simulating program results, the absence of a precedent was a source of
concern. The Finance Committee’s vote depended, in part, on whether the anticipated savings of the
program would be realized, and whether the coverage provided by the new contract would be
adequate. Because Honeywell viewed the proposed plan as a first step in a firm-wide integrated
(sometimes referred to as enterprise) risk management program that would extend to cover all of
Honeywell’s financial and operational risks, the Finance Committee’s decision would establish
Honeywell’s risk management strategy for some years to come.
II. Business Description
Honeywell was a multibillion-dollar, international corporation, employing 53,000 people and
managing operations in 95 countries. It was the largest producer of control systems and products
used to regulate heating and air conditioning in commercial buildings, and of systems to control
industrial processes worldwide, and was also a leading supplier of commercial, military, and space
avionics systems. Exhibit 1 and the Appendix contain Honeywell’s consolidated financial statements
and excerpts from Management’s 1996 Discussion and Analysis of Operations, which together
provide recent detail on both corporate and business-unit level performance. Exhibits 2 and 3
provide comparative operating and stock price performance measures for Honeywell and its
competitors, and Exhibit 4 shows Honeywell’s volatility of equity relative to the S&P 500 from 1985-
1996.
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200-036 Honeywell, Inc. and Integrated Risk Management
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III. Honeywell’s Risk Management Review
Honeywell’s managers reviewed the firm’s existing financial practices, determining that
change was needed in order to support the firm’s operational goals. As Honeywell’s Treasurer Paul
Saleh explained, “We did not have a whole set of strategies in place that identified exactly what we
were trying to do, in dividends, in debt management, in risk management and so on.”1
Honeywell’s Existing Risk Management Policies
Exhibit 5 shows a number of risks that Honeywell concurrently managed in order to achieve
its financial objectives. Honeywell’s risk management activities were dispersed throughout the firm
(see Table A). Active hedging or insuring of risks occurred only for currency, interest rate, liquidity
risk, credit risk, pension fund, and traditionally-insured risks. Other risks were managed
operationally.
Table A
Type of Risk Department with Oversight Responsibility
Traditionally-Insured (i.e., Hazard) Risksa TreasuryInsurance Risk Management unit
Currency Risks TreasuryFinancial Risk Management unit
Other Financial Risks (interest-rate risk,
credit risk, liquidity risk)
TreasuryFinancial Risk Management and Capital Markets
Units
Pension Fund Risk Financial Dept. (outside of Treasury but still reporting to CFO)
Operational Risks Operating Units
Competitive Risks Operating Units
Credit (customer and vendor) Risks Operating Units
Environmental Risks Health, Safety and Environmental Department
Technological Risks Technology Center
Legal Risks Office of General Counsel
Market Risks Marketing Management
Regulatory Risks Office of Governmental Affairs
a Traditionally-insured risks included general liability, property, product liability, automobile liability, employer liability, ocean
marine transit, and workers’ compensation. Honeywell’s Insurance Risk Management unit was responsible for managing the
financing portion of workers’ compensation risk, while Human Resources managed all loss-prevention activities related to this
risk.
1 J. Slovak, “Honeywell turns up the controls,” Institutional Investor, September 1996.
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Honeywell, Inc. and Integrated Risk Management 200-036
3
Treasury’s Role in Risk Management
Honeywell’s Treasury group encompassed a capital markets unit, a cash management unit, a
financial risk management unit, and an insurance risk management unit. The financial risk
management unit managed currency risk, interest rate risk, and credit risk. The capital markets unit
managed risks associated with the firm’s capital structure, including liquidity risk. The insurance risk
management unit’s activities involved risks traditionally covered by insurance. Each unit’s risks had
different loss characteristics, and were managed using different risk management methods and
instruments.
The Insurance unit, under the leadership of Tom Seuntjens, was responsible for general
liability, property, product liability, automobile liability, employer liability, ocean marine transit, and
workers’ compensation risk. Exhibit 6 displays Honeywell’s insurance risk management program,
prior to the redesign currently under consideration. Honeywell used separate, annually-renewable,
insurance policies for each type of insurable risk. Each policy had a specified deductible (or, in
insurance terms, a “retention”) in an amount that ranged between zero and $6 million. Honeywell
would absorb any losses up to the retention level before it received any insurance payments for a loss
(referred to as “attaching”). Each loss was subject to a separate retention, meaning that Honeywell
paid a new deductible for each loss that occurred.
The Currency unit, under the direction of Deyonne Epperson, was responsible for managing
financial risks, including tactical transaction and translation risk arising from Honeywell’s foreign
operations.2 Transaction risk (sometimes called contractual risk) is the specific exposure faced by a
firm when it enters into a contract with a future payoff. A U.S.-based firm may, for example, agree to
buy a Japanese machine today, but actually pay for that machine (in Japanese yen) upon delivery, say
in three months time. During the three months that elapse from the time the amount of the payment
is fixed (in yen), through the time that the company pays for that machine, the company faces yendollar exchange-rate risk. A firm can mitigate this exchange-rate risk by taking a long position in yen
to offset the risk associated with its future yen-based payment. Honeywell used such a strategy to
manage transaction risk. Translation risk, in contrast, refers to the difference in reported earnings (in
dollars) that can occur when a U.S.-based firm translates its earnings denominated in foreign
currency back into its home currency (dollars) for reporting purposes (financial statements must be
reported in a common currency). This reporting-based translation from foreign currency into dollars
may or may not represent repatriation or actual exchanges of the foreign-currency into dollars.
Honeywell managed its translation risk by estimating its future foreign-currency based earnings, and
hedging in a way to offset the effect of exchange-rate movements on those estimated earnings.
Honeywell’s currency hedging operation was independent of any other hedging or insuring carried
out in other parts of the firm.
To hedge its exchange-rate exposures, the Currency unit used at-the-money options. The
centerpiece of the program was a basket-option of 20 currencies that matured quarterly. These 20
currencies represented 85% of Honeywell’s foreign profits. The basket-option provided protection if
the U.S. dollar strengthened against the basket, yet allowed Honeywell to retain profits when the
reverse was true. The basket was typically purchased late in the year from 2 or 3 major banks at the
same point in time with the amount of currency hedged in the basket (otherwise referred to as the
“notional” amount) determined by the company’s forecasts for the following year’s planned profits.
2 A firm can also face foreign-exchange risk that is “strategic,” rather than “tactical,” in nature. Strategic risk
management addresses the broader question of how exchange rate fluctuations affect the value of the entire firm,
taking into account how these fluctuations affect the firm’s competitive environment, including the pricing of its
products, the quantity sold, the costs of its inputs, and the response of other firms in the same industry. For more
information, see Note on Transaction and Translation Exposure, Harvard Business School case No. 288-017, and Note
on Operating Exposure to Exchange-Rate Changes, Harvard Business School case No. 288-018.
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200-036 Honeywell, Inc. and Integrated Risk Management
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Each operating unit determined its own foreign-currency exposure and submitted these long-range
estimates to corporate headquarters in the form of a three-year forecast. The notional amount was
typically 80%-90% of the upcoming fiscal year’s total exposure. The basket-option had a strike price
that weighted the different currencies to reflect the proportion of the firm’s profits originating in a
given country. The United Kingdom, Germany, and Canada, for example, comprised 40% of
Honeywell’s profits, so the basket-option was constructed to weight the currencies of these countries
more heavily than those of other countries. This process was repeated annually, as each operating
division updated its three-year forecasts. Annual program costs, consisting primarily of option
premiums, ranged from $3-$9 million, and averaged $5 million.
Re-thinking Risk Management within Treasury
The treasury team began an extensive evaluation of current program design, examining
whether Honeywell’s existing strategy was consistent with its risk management objective of
minimizing earnings volatility and its “cost of risk” (defined by Honeywell as the sum of retained
loss costs, administrative expenses, and insurance and option premia).
One focal point for the team was Honeywell’s traditional hazard insurance, noting that the
current practice was to manage each risk separately, with an individual insurance policy. The team
wondered about the applicability of the relatively new concept of enterprise risk management, that is,
grouping many risks together into a portfolio of risks, rather than managing each risk separately.
Enterprise, or integrated, risk management was based, in part, upon financial portfolio theory: when
stocks are less than perfectly correlated, the total risk of a portfolio of stocks will be less than the sum
of the risk of each individual stock. If Honeywell treated its risk exposures as a portfolio of risks,
perhaps this “portfolio effect” would reduce its total risk (s) exposure, thereby warranting a lower
premium from the underwriter who would then assume the risk of the entire portfolio. A similar
portfolio strategy was currently in place in the currency program with the use of a basket option, in
place of individual options for each specific currency.
Following an internal assessment, the treasury team met with members of Honeywell’s
insurance consultant and broker, Marsh Inc., to discuss possible design modifications to their current
program. The team thought that the new enterprise risk management concept could be implemented
through an innovative insurance contract. Such a contract would combine traditional hazard risk
with foreign-exchange translation risk within a unified multiyear policy. Insurance underwriters, such
as AIG’s Risk Finance division, had been working on the integrated risk concept for some time, and
Marsh’s Scott Sanderson believed that other insurance underwriters would also be receptive to the
new concept. If such a program could be developed, expected annual cost savings would include a
reduced premium as “portfolio effects” across traditional insured coverages, across multiple
currencies and across multiple years led to decreased volatility. Because traditionally-insured risks
were virtually uncorrelated with currency fluctuations, such savings should be significant.
Honeywell’s treasurer, Paul Saleh, believed the idea was promising, but thought that the
organizational barriers involved in developing such a program were daunting. The traditional
insurance-based risk management area historically had little to do with the derivatives-based
currency risk management team. On the surface, the objectives of their risk management programs
seemed quite different and the tools they used to manage risk did not seem at all related.
Nonetheless, risk was risk, reasoned Mr. Saleh, and Honeywell’s approach to traditionally insured
risks should be consistent with its currency risk management program. Mr. Saleh had already laid the
groundwork for a unified attempt to manage risk by putting all of the risk management units on the
same floor and holding monthly cross-functional meetings to encourage interaction within the two
groups so that each side understood the other’s tasks. He now accelerated this process, and
assembled a multi-specialty team from both the insurance unit and the currency risk management
side of the Treasury area. To unify the new team and to encourage members to think beyond their
traditional risk management frameworks, Mr. Saleh eliminated all titles and all members were
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Honeywell, Inc. and Integrated Risk Management 200-036
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subsequently referred to as “member, Treasury Management Team.”3 The team began by
establishing guidelines that any new program would have to meet in order for it to replace
Treasury’s existing risk management practices. Specifically, the new program would need to provide
an equal or greater level of earnings protection, have a total cost lower than existing program costs,
have the flexibility to incorporate additional risks in the future, and comply with all accounting
standards.
Modeling the Treasury-based Integrated Program
A significant challenge for the Honeywell team members designing the new integrated
program was understanding how to find the “optimal” risk management structure, in terms of the
appropriate retention and insurance coverage levels, and adapting the insurance program to
incorporate foreign-currency translation risk (usually managed with derivatives). The team thought
that the standard approach to finding the optimal level of insurance could be adapted to meet their
needs if they explicitly modeled the interactions between the different types of risk.
Standard industry practice to determine insurance structure (i.e. retention and coverage
limits) was to use the firm’s historical loss record to estimate the future one-year “expected loss” for
each insurable risk. To reach this estimate, one must assume that the total losses follow a specific
probability distribution function. While the true underlying distribution is unknown, a typical
assumption for property and casualty losses, for example, might be that the losses fit a log-normal
distribution.4 Sometimes, the analyst constructs the total loss distribution function by explicitly
modeling a separate distribution for the frequency and the severity of each type of loss.5 Having
identified the loss distribution function, the analyst must estimate the parameters of that distribution.
For instance, the relevant parameters for a normal distribution are the mean and standard deviation.
Monte Carlo analysis can be used to simulate both the firm’s expected losses and its losses net of
insurance payments received and premiums paid under different insurance contract designs. The
analyst uses this information to find the appropriate retention levels and insurance coverage for each
individual risk category. This decision involves trading off the lower premium cost associated with
assuming higher retention levels, and the greater risk exposure associated with that higher retention
level. In other words, the greater the risk retained by the firm, the lower the insurance premium and
the greater the firm’s exposure to volatility in earnings and firm value. Honeywell’s usual practice
was to set retention levels such that the probability of having a loss greater than the retention above
that level was roughly 45%.
The risk management team followed a process similar to the standard insurance industry
practice to determine the optimal aggregate retention and coverage levels. Their analysis, however,
was no longer performed on a risk-by-risk basis; instead, the team estimated the expected loss of the
combined insured and currency translation risks over the entire term of the policy (the initial term of
the policy was 2.5 years to match Honeywell’s fiscal year). The team thought it reasonable to assume
that currency movements had little to do with the loss pattern experienced from traditionally insured
risks (e.g. property and casualty and workers’ compensation risk) so they estimated the correlation
between the two major groups of risk to be zero. This assumption, combined with the expected loss
estimate for the portfolio of risks (which equaled the weighted sum of the expected losses for each
individual risk), and an idea about the probability distribution of each individual risk, yielded an
3 J. Slovak, “Honeywell turns up the controls,” Institutional Investor, September 1996.
4 In practice, actuarial professionals fit property and casualty losses to a number of well-known distributions for
analysis purposes.
5 The number of loss occurrences per year (frequency) is often estimated using either the Poisson or the negative
binomial distributions. The dollar losses per occurrence (severity) is often estimated using either the Pareto or
the lognormal distributions.
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200-036 Honeywell, Inc. and Integrated Risk Management
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estimate of the probability distribution of the aggregate portfolio of risks, along with its relevant
parameters. Monte Carlo analysis was again used, with the joint probability distribution of the risks
of the portfolio, to find the desired retention and coverage levels. Exhibit 7, Charts 1 and 2 show the
individual probability distributions that underlie the existing program and the simulated joint
probability distribution that was the basis for identifying the expected aggregate loss, retention level,
and premium for the proposed program.
The Proposed Integrated Risk Management Program
The aforementioned analysis, the subsequent development of a structure consistent with the
stated program objectives, and the evaluation of potential designs took almost 12 months. Exhibit 8
displays the team’s final proposal. The “Integrated Risk Management Program” was a multiyear
insurance-based strategy that covered all traditionally- insured global risks and currency translation
risk in a single master insurance policy. In contrast to Honeywell’s existing plan, the proposed
program had one annual aggregate retention (deductible) of $30 million, rather than a separate
retention for each individual risk. This aggregate retention was set to approximately equal the sum of
the separate retentions under the current program. The $30 million retention also roughly equaled the
firm’s expected annual losses for the portfolio of covered risks. That is, Honeywell “self-insured” its
first $30 million of annual losses (the aggregate of traditionally-insured and foreign currency
translation losses).
The specific risks covered in the integrated program included global general liability, global
products liability, global property and business interruption, global fidelity, global employee crime,
global ocean marine transit, global political risk, director and officer (D&O) liability (entity side B),
U.S. auto liability, U.S. workers’ compensation, and foreign currency translation. Aviation product
liability was covered under a separate $1 billion per occurrence policy as only a small group of
specialized aviation insurers offered aviation product liability insurance, effectively prohibiting its
bundling into the integrated insurance policy. If this first integrated risk management program were
successful, Honeywell anticipated that other risks (e.g. interest rate exposures, weather risk,
commodity price risk, and perhaps others) could eventually be incorporated into the contract. The
coverage offered by the proposed contract differed slightly from Honeywell’s existing coverage,
complicating side-by-side comparisons, but the team estimated that the insurance premium cost of
the new program would be on the order of 15%-20% less than that of the existing program.
As Exhibit 8 shows, under the proposed program, Honeywell would receive reimbursement
for losses in excess of the $30 million annual aggregate retention under the “Combined Integrated
Program,” subject to a maximum pay out of $100 million over the two and one-half year term of the
policy.6 Exhibit 8 also shows that the proposed program provided excess annual coverage, subject to
a maximum pay out of an additional $200 million, for specific risks having the potential for largescale losses, including general, product and auto liability as well as workers’ compensation and
property risks.7
The foreign-currency coverage of the proposed insurance contract was similar, in a number
of ways, to the existing currency hedging program. The new program retained the basket-ofcurrencies approach to managing translation risk, but the notional amounts of the basket currencies,
6 If adopted, Honeywell’s new program would begin mid-year. The proposed combined aggregate retention
would, therefore, be pro-rated to $15 million for the first year. The combined aggregate retention would be $30
million for each of the following two years.
7 Property risk was covered by an annual excess coverage policy having a maximum pay out of $870 million.
Because property losses are also covered by both the $30 million annual aggregate retention and the $100 million
Combined Integrated Program, the maximum pay out for these losses would be $1 billion assuming that there
were no additional losses having a senior claim to insurance reimbursement.
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Honeywell, Inc. and Integrated Risk Management 200-036
7
as well as the weights assigned to each currency, were determined at the contract’s outset. The target
strike price (weighted by the proportion of Honeywell’s profits in the individual foreign currencies),
however, was re-set each year based upon a weighted-average of the preceding year’s monthly spot
rates. The amount of currency to be hedged was specified in the insurance contract for each of the
upcoming years covered by the policy, although a provision in the contract permitted 1%-3%
adjustments in the notional amount of each currency.
Exhibit 9 shows the expected savings of the proposed program based on AIG’s pricing at the
chosen $30 million annual aggregate retention.
The Decision
The integrated risk management plan had the tentative support of Honeywell’s CEO,
conditional on the Finance Committee’s in-depth evaluation of the Treasury team’s proposal. Such an
evaluation required the Finance Committee to determine whether the Treasury team’s estimate of
20% annual premium savings were real or illusory. Would Honeywell have the same degree of
protection under the new program as it had had under its existing program? If so, how could the
insurance underwriters afford such a generous “discount” given the competitive nature of their
business? More broadly, was “integration” the right approach for Honeywell? While traditional
insurance was, of course, viewed as a business necessity, the integrated risk management concept
had not yet reached such a degree of acceptance by the broader business community. Was Honeywell
the right firm to innovate in this area? Finally, as complex as the proposed program was, further
development would probably become even more Byzantine, so the Finance Committee’s decision
needed to set the right course for future risk management efforts.
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200-036 Honeywell, Inc. and Integrated Risk Management
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Exhibit 1 Honeywell Inc. Annual Income Statement ($ Millions)
31-Dec-96 31-Dec-95 31-Dec-94
SalesCore Business 7,311.6 6,731.3 6,057.0
Total Sales 7,311.6 6,731.3 6,057.0
Cost of Goods Sold 4,975.4 4,584.2 4,082.1
SG&A Expense 1,313.1 1,263.1 1,173.8
Research and Development 353.3 323.2 319.0
Unusual Income/Expense 0.0 0.0 62.7
Total Expenses 6,641.8 6,170.5 5,637.6
Interest Expense, Non-Operating -81.4 -83.3 -75.5
OtherNet 21.8 28.0 25.8
Pre-Tax Income 610.2 505.5 369.7
Income Taxes 207.5 171.9 90.8
Income After Taxes 402.7 333.6 278.9
Net Income (Excluding E&D) 402.7 333.6 278.9
Discontinued Operations 0.0 0.0 0.0
Extraordinary Items 0.0 0.0 0.0
Accounting Change 0.0 0.0 0.0
Net Income (Including E&D) 402.7 333.6 278.9
Primary EPS Excluding E&D 3.18 2.62 2.16
Primary EPS Including E&D 3.18 2.62 2.16
Dividends Per Common Share 1.06 1.01 0.97
Shares to Calculate Primary EPS (millions of shares) 126.6 127.1 129.4
Source: Honeywell Inc. 1995 and 1996 Annual Reports.
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Honeywell, Inc. and Integrated Risk Management 200-036
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Exhibit 1 (continued) Honeywell Inc. Annual Balance Sheet ($ Millions)
31-Dec-96 31-Dec-95 31-Dec-94
Assets
Cash and Equivalents 127.1 291.6 267.4
Other Short-Term Investments 8.6 9.0 7.4
Accounts Receivable 1,714.7 1,477.3 1,406.9
Inventory 937.6 794.4 760.2
Other Current Assets 193.2 194.6 207.5
Total Current Assets 2,981.2 2,766.9 2,649.4
Long-Term Investments 247.6 244.8 242.8
Property, Plant and Equipment 2,973.6 2,857.1 2,716.8
Accumulated Depreciation and Amortization -1,839.4 -1,758.2 -1,617.3
Property, Plant and Equipment, Net 1,134.2 1,098.9 1,099.5
Goodwill/Intangibles 690.9 624.2 566.2
Other Long-Term Assets 439.4 325.4 328.0
Total Assets 5,493.3 5,060.2 4,885.9
Liabilities
Accounts Payable 584.8 491.5 429.6
Short-term Debt 153.7 312.4 360.6
Current Long-term Debt and CLOs 98.7 0.0 0.0
Other Current Liabilities 1,229.7 1,218.6 1,281.6
Total Current Liabilities 2,066.9 2,022.5 2,071.8
Long-term Debt 715.3 481.0 501.5
Total Long-Term Debt 715.3 481.0 501.5
Deferred Taxes 46.0 0.0 0.0
Other Long-term Liabilities 460.2 516.6 457.9
Total Liabilities 3,288.4 3,020.1 3,031.2
Stockholders’ Equity
Common Stock 281.7 282.2 282.4
Additional Paid in Capital 528.8 481.3 446.9
Retained Earnings 3,074.7 2,805.8 2,600.4
Treasury Stock -1,763.5 -1,650.2 -1,576.5
Other Equity 83.2 121.0 101.5
Total Shareholders’ Equity 2,204.9 2,040.1 1,854.7
Total Liabilities + Shareholders’ Equity 5,493.3 5,060.2 4,885.9
Shares Outstanding 126.4 126.8 127.3
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200-036 Honeywell, Inc. and Integrated Risk Management
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Exhibit 1 (continued) Honeywell Inc. Statement of Cash Flows ($ Millions)
31-Dec-96 31-Dec-95 31-Dec-94
Net Income (SCF) 402.7 333.6 278.9
Depreciation 236.1 236.1 235.3
Amortization 51.4 56.8 52.1
Deferred Taxes 38.5 67.2 14.0
Other Non-Cash Items 15.4 23.6 19.9
Other Operating Cash Flows -250.3 -144.8 -130.7
Cash from Operations 493.8 572.5 469.5
Capital Expenditures -296.5 -238.1 -262.4
Other Investing Cash Flows -285.7 -25.6 -64.8
Cash from Investing -582.2 -263.7 -327.2
Dividends Paid -133.5 -127.5 -125.6
Purchase or Sale of Stock -105.9 -76.9 -156.6
Purchase and Retirement of Debt 170.4 -89.9 160.4
Cash From Financing -69.0 -294.3 -121.8
Exchange Rate Effects -7.1 9.7 4.6
Net Change in Cash -164.5 24.2 25.1
Cash Interest Paid 77.3 86.0 69.1
Cash Taxes Paid 113.1 128.3 79.4
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200-036 -11-
Exhibit 2 1996 Profile: Honeywell and Competition
($MM) Honeywell
Johnson
Controls
Emerson
Electric Siemens Siebe Smith Inds.
Asea Brown
Boveri
Rockwell
International
Sales 7,312 10,009 11,150 63,771 4,069 1,536 32,905 10,373
Operating Profit 670 500 1,793 2,097 580 262 3,029 1,002
Net Working Capital 914 291 1,166 17,297 1,053 227 4,012 1,077
Property, Plant and Equipment
(1995-1996 change) 35 160 316 496 127 90 (133) (364)
Earnings 403 235 1,019 1,543 302 182 1,233 726
Long-term Debt 814 792 785 1,642 964 145 1,823 178
Market Value of Equity 8,314 3,113 20,163 25,676 8,775 1,392 9,993 12,318
Volatility (per year, measured for 1996) 27% 18% 19% 14% 13% 13% 13% 27%
Beta .99 1.17 1.24 .45 .38 .49 .71 .84
% Sales
North and South America 63 77 69 10 45 44 20 78
Europe 25 17 23 83 36 55 56 14
Other Regions 12 6 8 7 19 1 24 8
Source: Company annual reports and casewriter estimates.
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200-036 -12-
Exhibit 3
Indexed Returns, Hone
ywell vs. Com
petition and S&P 500, 1991-1996
0
50
800
750
700
650
600
550
500
450
400
350
300
250
200
150
100
Jan-91
Apr-91
Jul-91
Oct-91
Jan-92
Apr-92
Jul-92
Oct-92
Jan-93
Apr-93
Jul-93
Oct-93
Jan-94
Apr-94
Jul-94
Oct-94
Jan-95
Apr-95
Jul-95
Oct-95
Jan-96
Apr-96
Jul-96
Oct-96
JOHNSON CONTROLS EMERSON ELECTRIC SIEMENS
ROCKWELL INTL SMITHS INDS. HONEYWELL
S&P500 ABB SIEBE
Source: Casewriter estimates based on CRSP (Center for Research in Security Prices, University of Chicago) data.
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Honeywell, Inc. and Integrated Risk Management 200-036
13
Exhibit 4
Honeywell vs. S&P500 Annualized Monthly Volatility: 1985-1996
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
HONEYWELL S&P 500
Source: Casewriter estimates based on CRSP (Center for Research in Security Prices, University of Chicago) data.
Exhibit 5 Risks Faced by Honeywell
Financial
Priorities
Liability Risk Liability Risk
Property Risk Property Risk
Currency Risk Currency Risk
Interest Rate Risk Interest Rate Risk
Environmental Risk Environmental Risk
Directors &
Officers Risk
Directors &
Officers Risk
Legal Risk Legal Risk
Political Risk Political Risk
Pension Risk Pension Risk
Business Ris
