IVC – our key ratio
We use the following formula to calculate the IVC (Intrinsic
Value Creation):
Adjusted operating result (EBIT) − (capital allocated x
weighted cost of capital) = IVC
| Targets until 2009 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Business group | Key data | Strategic targets | 2009 | 2008 | 2007 | 2006 | 20051 | |
| 1Including financial reinsurance and specialty insurance | ||||||||
| 2Operating profit (EBIT)/net premium earned | ||||||||
| 3750 basis points above the risk-free return | ||||||||
| 4MCEV increase on the basis of the adjusted MCEV of the previous year after elimination of capital changes and changes from currency effects. | ||||||||
| 5The MCEV as at 31 December 2009 will be published on our website at the same time as the financial report for the first quarter of 2010. | ||||||||
| 6The decrease in the value of new business was due to three special effects: details are provided in the EEV report published on our website. | ||||||||
| 7Risk-free interest rate + cost of capital | ||||||||
| 8Excluding tax effect | ||||||||
| Non-life reinsurance | Combined ratio | ≤ 100% | 96.6% | 95.4% | 99.7% | 100.8% | 112.8% | |
| Net cat. loss ratio | up to 10% | 4.6% | 10.7% | 6.3% | 2.3% | 26.3% | ||
| EBIT margin2 | ≥ 12.5% | 14.0% | 0.1% | 14.6% | 14.2% | (0.7%) | ||
| Life and health reinsurance | Gross premium growth | 12–15% | 44.5% | 1.7% | 10.4% | 15.2% | 11.4% | |
| EBIT margin2 | 6.5–7.5% | 9.1% | 4.3% | 8.2% | 5.9% | 4.1% | ||
| EBIT growth | 12–15% | 208.4% | (47.5%) | 64.7% | 49.8% | 21.4% | ||
| MCEV increase4 | ≥ 10% | n.a.5 | 6.0% | 20.1% | 16.8% | 6.7% | ||
| Increase in the value of new business | ≥ 10% | n.a.5 | 41.4% | 65.7% | (24.2%)6 | 54.8% | ||
| Group | Investment return | ≥ 4.27 | 4.0% | 0.4% | 4.6% | 5.0% | 4.4% | |
| Minimum return on equity | ≥ 11.1%3 | 22.4% | (4.1%) | 23.1% | 18.7% | 1.9% | ||
 Triple-10 target |
EBIT growth | ≥ 10% | 69.9% | (84.0%) | 13.2% | 795.0% | (82.9%) | |
| Growth in earnings per share | ≥ 10% | (117.6%) | 8.3%8 | 942.7% | (82.4%) | |||
| Growth in book value per share | ≥ 10% | 31.2% | (15.5%) | 15.6% | 11.4% | 3.0% | ||
The adjusted operating profit (EBIT) consists principally of the reported Group net income after tax and the change in the balancing items for differences between present values and amounts stated in the balance sheet (one adjustment for non-life and one for life/health reinsurance). In addition, the interest on hybrid capital, minority interest in profit and loss and extraordinary profits and losses are eliminated. We consider the allocated capital to be the shareholders' equity plus minority interests, the balancing items for differences between present values and carrying amounts as well as the hybrid capital. Capital is allocated to the profit centres according to the risk content of the business in question. In this context, the risks associated with the assets under own management have to date been allocated to the non-life reinsurance business group, hence explaining the sharply negative value for 2008. Going forward, in order to be able to distinguish between the value contribution from investments and the underwriting account on the Group level too, a separate IVC will be shown for the functional area of investments from 2010 onwards.
| Intrinsic value Creation and excess return on capital allocated | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2006 | 2005 | |||||
| IVC in EUR million |
xRoCA in % |
IVC in EUR million |
xRoCA in % |
IVC in EUR million |
xRoCA in % |
IVC in EUR million |
xRoCA in % |
|
| 1In 2005 to 2007 the present value components are based on the European Embedded Value (EEV), from 2008 onwards theyare based on the Market Consistent Embedded Value (MCEV). | ||||||||
| Non-life reinsurance | (458.7) | (8.0) | 185.6 | +3.2 | 242.4 | +4.4 | (101.1) | (1.9) |
| Life and health reinsurance1 | 105.9 | +11.2 | 193.0 | +28.8 | 174.9 | +40.1 | 149.1 | +35.7 |
| Consolidation | 14.4 | 34.9 | (11.1) | (13.4) | ||||
| Group | (338.3) | (5.0) | 413.5 | +6.4 | 406.2 | +6.8 | 34.7 | +0.6 |
In calculating the cost of capital, our assumption for the cost of shareholders' equity – based on a Capital Asset Pricing Model (CAPM) – is that the investor's opportunity costs are 450 basis points above the risk-free interest rate. Value is created in excess of this return. The definition of our targeted minimum return on equity as 750 basis points above “risk-free” thus already contains a not insignificant target value creation. Interest is calculated on the balancing items for present value at the underlying interest rates, and on debt capital at the actually paid interest for our hybrid capital. Weighted according to the composition of the allocated capital defined above, the weighted cost of capital applicable to all profit centres is calculated from these interest rates. We allocate equity sparingly and make efficient use of hybrid capital as well as other equity substitutes; our weighted cost of capital is consequently low, not only in absolute terms but also relative to our competitors (6.8% in 2008).
Since comparison of absolute amounts is not always meaningful, we have introduced the xRoCA (Excess Return on Capital Allocated) in addition to the IVC. This describes the IVC in relation to the allocated capital and shows us the relative excess return generated above and beyond the weighted cost of capital. Once they have been calculated we communicate the IVC and xRoCA for the reporting year in the second quarter in various media, including on our website.