Risk Management Case Study

2015 Spencer-RIMS Risk Management Challenge

The Walt Disney Company Page 2

2015 Spencer-RIMS Risk Management Challenge Case Study

TABLE OF CONTENTS

The 2015 Spencer-RIMS Risk Management Challenge Page 3

Introduction to The Walt Disney Company Page 4

Company Overview Page 6

Performance by Business Segment Page 7

Risk Management Strategy Page 14


The 2015 Spencer-RIMS Risk Management Challenge

Team Challenge: Risk consulting and brokerage services for The Walt Disney Company as defined below.

No more than ten page proposal with risk management recommendations regarding:

Identification and assessment of key risks that Disney should focus on

o A key risk is a pure risk with a significant degree of severity and meaningful degree of occurrence viewed in light of the Companys goals, cash flows and assets

o Seven key risks should be identified

Recommended risk treatments and alternatives to be considered for each of the key risks

Materials provided:

Overview of The Walt Disney Company (TWDC)

References for additional information publically available Note: This list is not exhaustive and participants are encouraged to source credible and reliable information that may be available


Introduction to The Walt Disney Company The Walt Disney Company is a diversified multinational media corporation headquartered at the Walt Disney Studios in Burbank, California. It is the world's second largest broadcasting and cable company in terms of revenue, after Comcast. Disney was founded on October 16, 1923, by Walt Disney and Roy O. Disney as the Disney Brothers Cartoon Studio, and established itself as a leader in the American animation industry before diversifying into live-action film production, television, and theme parks. After operating at various times as The Walt Disney Studio and Walt Disney Productions, the company changed to its current name in 1986, expanding into theatrical productions, radio, music, publishing, and online media. In 1995 the company acquired Cap Cities/ABC, adding ESPN, the ABC Television Network and the A&E cable channels into its portfolio of assets. Further acquisitions include PIXAR Animation Studios (2006), Marvel Entertainment Inc. (2009) and Lucasfilm (2012). The company is best known for the products of its film studio and production companies and its theme parks and resorts, now located in France, Florida, California, Hong Kong and, soon to be completed, Shanghai. The company has been a component of the Dow Jones Industrial Average since May 6, 1991. Further information and performance data can be found at:

http://thewaltdisneycompany.com/

Disneys driving passion is to be one of the world's leading producers and providers of entertainment and information, using its portfolio of brands to differentiate its content, services and consumer products. The company's primary financial goals are to maximize earnings and cash flow, and to allocate capital profitability toward growth initiatives that will drive long-term shareholder value.

Cinderellas Castle at Disneys Magic Kingdom, Walt Disney World


The Walt Disney Company Today The Walt Disney Company (TWDC) is known throughout the world as a leader in the entertainment industry. With corporate headquarters in Burbank, California, TWDC employs over 175,000 individuals world-wide and is divided into five major business segments:

Media Networks Studio Entertainment Theme Parks & Resorts Consumer Products Disney Interactive Media Group (DIMG)

Each segment consists of integrated, well-connected businesses that operate in concert to maximize business opportunities and promote growth worldwide.


Company Overview At the time of the submission of the 2015 Risk Management Challenge, The Walt Disney Company had not completed its financial results for the fiscal year-ending September 30, 2014; results based on FY2013 are in line with current results and are provided below. 2013 BUSINESS RESULTS

Disneys fiscal 2013 financial results were the third consecutive year of record performance, which reflects the impact of our acquisitions and capital investments and the Companys long-term strategy focused on exceptional creativity, innovative use of technology and global growth.

Core Business Priorities:

Creating exceptional high-quality family content that people want to experience

Using new innovative technology to maximize the engagement and accessibility of that content

Growing our brands and businesses in promising international markets to extend the impact of that entertainment

2013 FINANANCIAL RESULTS

FY 2013 Financial Highlights: Revenues increased 7% to $45 billion Net income was a record $6.6B, an increase of 8% from the prior fiscal year Diluted EPS increased 8% to a record $3.38


Performance by Business Segment

MEDIA NETWORKS The Media Networks segment includes broadcast and cable television networks, television production and distribution operations, domestic television stations and radio networks and stations. The Company also has an interest in Hulu LLC (Hulu), a joint venture that distributes film and television content on the internet.

MEDIA NETWORK PERFORMANCE - 2013 For the year, operating income in the Media Networks segment increased 5% to $20.4 billion and operating income increased 3% to $6.8 billion. The growth in operating income at Cable Networks was due to affiliate and advertising revenues growth at ESPN, the domestic Disney Channels and A&E Television Networks (AETN). Disney Junior finished 2013 as the number-one channel in the United States among children 2-5, and has already emerged as a global preschool entertainment brand, fueled by a new generation of original characters beloved by children around the world. Sofia, Jake and Doc McStuffins have now joined Mickey, Minnie and Pooh as favorite Disney friends of millions of young kids from Milwaukee to Mumbai. ESPN continues to lead the digital media sports space, leading in audience share, total visits, total minutes, and average audience per minute, among other measures. The brands groundbreaking WatchESPN service is now available to more than 55 million U.S. homes, allowing fans to stream live sports programming on a variety of devices. In month alone, ESPN reached more than 68 million fans across digital platforms.

Media Networks comprise a vast array of broadcast, cable, radio and publishing businesses. Key areas include: Disney-ABC Television Group, ESPN Inc., ABC owned television stations, and a supporting headquarters group. Marketing, research, sales and communications functions also exist within the segment.


Good Morning America took the top spot as the number one morning news show in the country and ABCNews/Yahoo became the number one source of news and information on the web. Likewise, a compelling mix of national and local content delivered across a variety of platforms made ABC-owned stations local market leaders and set WABC apart as the most watched television station in the nation yet again. STUDIO ENTERTAINMENT

The Studio Entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. The Company distributes produced and acquired films (including its film and television library) in the theatrical, home entertainment and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Touchstone and Lucasfilm banners. The Company produces and distributes Indian movies worldwide through its UTV banner.

STUDIO ENTERTAINMENT PERFORMANCE - 2013 Studio Entertainment revenues for the year increased 3% to $6.0 billion due to growth from television/ subscription video on demand (TV/ SVOD) distribution and two Disney feature animation releases, Wreck-It-Ralph and Planes. Segment operating income decreased $61 million to $661 million primarily due to lower results at our home entertainment business. In 2013 we followed the phenomenal success of last years Marvels: The Avengers with yet another blockbuster, Iron Man 3. This film was the highest grossing movie of 2013, earning Marvel Studios the distinction of being the first film studio in history to ever release two movies in a row that each exceeded a billion dollars at the box office. The success of both Iron Man 3 and Thor: The Dark World, added to other creative triumphs across our studios, helping to deliver the best box office results in Disney history -- more than $4.7 billion in total ticket sales in calendar year 2013

The Walt Disney Studios is the foundation on which Disney was built, and at its heart are world-renowned animated features and live-action motion pictures. Since the creation of Mickey Mouse and Snow White and the Seven Dwarfs, the Disney name quickly became synonymous with quality entertainment for the whole family.


Released over Thanksgiving of 2013, Frozen has already exceeded $1 billion at the global box office, earned the Golden Globe and Oscars for best animated feature film and best original song. Its also the first soundtrack from a Disney animated movie to reach number one on the charts since 1995.


THEME PARKS AND RESORTS

The Theme Parks and Resorts segment includes Walt Disney World Resort in Florida, the Disneyland Resort in California, Aulani, a Disney Resort & Spa in Hawaii, the Disney Vacation Club, the Disney Cruise Line and Adventures by Disney. The Company manages and has effective ownership interests of 51% in Disneyland Paris, 48% in Hong Kong Disneyland Resort and 43% in Shanghai Disney Resort, each of which is consolidated in our financial statements. The Company also licenses the operations of the Tokyo Disney Resort in Japan. The Companys Walt Disney Imagineering unit designs and develops new theme park concepts and attractions as well as resort properties. .

THEME PARKS AND RESORTS PERFORMANCE - 2013

Parks and Resorts annual revenues increased 9% to $14.1 billion and segment operating income increased 17% to $2.2 billion due to increased guest spending at our domestic parks and resorts and Hong Kong Disneyland Resort as well as sales of The Villas at Disneys Grand Floridian Resort & Spa, the newest Disney Vacation Club. In 2013 we introduced an historic technological innovation to enhance the guest experience at our Walt Disney World Resort with the launch of Disneys MyMagic+, featuring a variety of online tools to help guests get the most out of their time with us, including convenient MagicBands serving as park tickets, hotel keys and a convenient form of payment all rolled into one. We began testing the program in January with a small number of our guests, and have gradually expanded throughout the year with full roll out completed in 2014.

Wherever the Guest experience takes place - in our parks, on the high seas, on a guided tour of exotic locales, through our vacation ownership program -- we remain dedicated to the promise that our Cast members turn the ordinary into the extraordinary. Making dreams come true every day is central to our global growth strategy.


The transformation of Disneys California Adventure at the Disneyland Resort with the completion of Cars Land, the expansion of Fantasyland at Walt Disney World, the addition of three new lands to Hong Kong Disneyland and the incredible celebration of Tokyo Disneylands 30th anniversary led to record attendance at these parks in fiscal 2013. CONSUMER PRODUCTS

The Consumer Products segment engages with licensees, publishers and retailers throughout the world to design, develop, publish, promote and sell a wide variety of products based on existing and new characters through its Merchandise Licensing, Publishing and Retail businesses. In addition to leveraging the Companys film and television properties, Consumer Products also develops new intellectual property, which can be used across the Companys other businesses.

CONSUMER PRODUCTS PERFORMANCE 2013 For the year, revenues increased 9% to $3.6 billion and segment operating income increased 19% to $1.1 billion. The increase in operating income was due to growth at our Merchandise Licensing, Retail and Publishing businesses. The increase at Merchandise Licensing was driven by the performance of Disney Junior, Monsters University, Mickey and Minnie, Iron Man and Planes merchandise. In fiscal 2013, retail sales for Disney Junior merchandise grew significantly, exceeding $1.8 billion for the year, and all indications point to continued growth of this dynamic new branded business.

Disney Consumer Products and affiliates (DCP) extend the Disney brand to merchandise ranging from apparel, toys, home dcor and books and magazines to interactive games, foods and beverages, stationery, electronics and fine art. This is accomplished through DCP's various lines of business which include: Disney Toys, Disney Apparel, Accessories & Footwear, Disney Food, Health & Beauty, Disney Home and Disney Stationery.


Merchandise licensing results also increased for the year due to the inclusion of Lucasfilm. At our Retail business, higher operating income for the year was due to comparable store sales growth in North America and Japan and higher online sales in North America. At Publishing, higher operating income for the year was due to the strength of Marvel comics. In fiscal 2013 The Disney Stores delivered their best performance to date and with double-digit growth across all lines of business and Disney Consumer Products delivered operating income of more than $1 billion for the first time in the companys history. INTERACTIVE MEDIA The Interactive segment creates and delivers branded entertainment and lifestyle content across interactive media platforms. The primary operating businesses of Interactive are Interactive Games which produces multi-platform games for global distribution, and Interactive Media, which develops branded online services.. Disney Interactive Media Group (DIMG) derives revenues from a combination of wholesale sales, licensing, advertising, sponsorships, subscription services and online game accessories. DIMG also manages the Companys Disney-branded mobile phone business in Japan which provides mobile phone service and content to consumers.

INTERACTIVE MEDIA PERFORMANCE - 2013 For the year, revenues increased 26% to $1.1 billion and segment operating results improved by $129 million to a loss of $87 million. Improved operating results for the year were due to increases at our Japan mobile businesses and console games, primarily driven by the fourth quarter release of Disney Infinity.

DIMG core businesses include Disney Interactive Studios, which self publishes and distributes a broad portfolio of multi-platform video games, mobile games and interactive entertainment worldwide; and Disney Online, which produces the No. 1 Community-Family & Parenting Web site and a suite of online virtual worlds for kids and families.


Our new video game platform, Disney Infinity, gives millions of players around the world the power to mix and match characters, stories and settings from Disney and Pixars most popular franchises to create a personal gaming experience unique to each of them. More than three million units have been sold worldwide since its release. Japan mobile results benefited from the full year impact of a licensing agreement that started in February 2012, which drove an increase in handset sales and subscribers. Disney Interactive has also become a leading publisher of mobile games, delivering seven number-one titles on Apples app store in fiscal 2013 and launched Disney Animated, a premium interactive iPad app that beat out more than 100,000 other new apps to earn Apples iPad App of the Year honor for 2013.

Recent Acquisitions: Maker Studios On May 7, 2014, the Company acquired Maker Studios, Inc. (Maker), a leading network of online video content on YouTube, for approximately $500 million of cash consideration, subject to certain conditions and adjustments. Maker shareholders may also receive up to $450 million of additional cash if Maker achieves certain performance targets for calendar years 2014 and 2015. The Company has recognized a $198 million liability for the fair value of the contingent consideration (determined by a probability weighting of potential payouts). Subsequent changes in the estimated fair value, if any, will be recognized in earnings. The Company is in the process of finalizing the valuation of the assets acquired, liabilities assumed and the fair value of the contingent consideration. The majority of the purchase price has initially been allocated to goodwill, which is not deductible for tax purposes. Goodwill reflects the synergies expected from enhancing the presence of Disney's franchises and brands through the use of Maker's distribution platform, advanced technology and business intelligence capability. The revenue and net income of Maker, which are included in the Company's Condensed Consolidated Statement of Income from the closing through June 28, 2014, are not material.

Source: The Walt Disney Company; June, 2014 Form 10-Q


RISK MANAGEMENT STRATEGY

How we approach risk

The corporate philosophy for managing risk at The Walt Disney Company is to pursue an aggressive, pro-active strategy of risk engineering, safety and loss mitigation. At our primary business units and throughout subsidiaries, the Company has an extensive team of professionals and resources dedicated to this mission.

While The Walt Disney Company does transfer risk, this is primarily used to address catastrophic exposures; any risk transfer programs include significant Disney retentions. In 2002, The Walt Disney Company formed two captive insurance companies, Buena Vista Insurance Company and Alameda Insurance Company, to support its philosophy of risk retention. Strategic Partnerships in Loss control The Walt Disney Company believes strongly in long-

term strategic business partnerships. This philosophy is evident throughout our risk management programs, and a key example can be seen in the relationship with FM Global that spans over six decades. FM Globals engineering and loss control resources, practices and expertise have been integrated in both design and operations throughout the Company. The Walt Disney Company: A premier highly-protected risk All major construction projects completed by The Walt Disney Company are built in accordance with FM Global Engineering construction and protection specifications. The close working relationship is clearly evident in the dedication of a full-time FM engineer at The Walt Disney World property, as well as robust support services at other locations.

RISK MANAGEMENT VISION

To minimize risks and the associated costs within The Walt Disney Company by providing

quality and professional technical services which foster the safest environment possible for Cast Members, Guests and property. We are chartered to

pioneer new and futuristic approaches while acting as a

catalyst for change.


LOSS CONTROL PHILOSOPHY IN BUSINESS OPERATIONS Loss control is integrated throughout the Disney business units. These efforts are focused on training and developing our staff to meet their loss control responsibilities, as well as providing processes and facilities that support and encourage their efforts. This can be illustrated by the model below:

People

Experience Quality Education & Certification Training & Preparation

Processes

Effective Organization Advance Planning Safety/Loss Prevention Cost Allocation Systems

Facilities

Design to FM standards Integrate Safety Systems Constant Improvement

http://thewaltdisneycompany.com/citizenship/act-responsibly

Documents

Risk Management Case Study