Value-based management
Our overriding strategic objective is to be one of the three most profitable reinsurers in the world and to increase our profit and the value of the company by a double-digit percentage every year.
In order to achieve this objective we have developed tools that enable us, on the one hand, to measure in light of value-based considerations how close we are to accomplishing our objective and, on the other, to break down the goals and value contributions to the level of individual profit centres.
In non-life reinsurance we have many years of positive experience using a ratio based on underwriting years, namely “DB 5”: level 5 of our contribution margin accounting method constitutes the clear profit after earning the discounted claims expenditure (level 1) plus all direct (level 2) and indirect costs (level 3), including the cost of capital (level 4). We apply DB 5 to the non-life reinsurance treaty departments as part of the fine tuning of portfolios down to the level of individual contracts.
In life and health reinsurance we use the Market Consistent Embedded Value (MCEV). The MCEV is defined as the intrinsic value of an enterprise, measured as the discounted profit flow until final run-off of the in-force portfolio – from the standpoint of the shareholder and after taxes.
Both concepts reflect the specific characteristics of the individual segments. Together, they constitute the basis for our central management tool: Intrinsic Value Creation (IVC).
| Targets until 2010 | |||||||
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| Business group | Key data | Strategic targets | 2010 | 20091 | 2008 | 2007 | 2006 |
1 Adjusted on the basis of IAS 8 |
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2 Operating profit (EBIT)/net premium earned |
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3 IVC/net premium earned |
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4 MCEV increase on the basis of the adjusted MCEV of the previous year after elimination of capital changes and changes from currency effects. |
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5 The MCEV as at 31 December 2010 will be published on our website at the same time as the quarterly financial report for the first quarter of 2011. |
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6 The decrease in the value of new business was due to three special effects. Details are provided in the EEV report for 2006 published on our website. |
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7 Risk-free interest rate + cost of capital |
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8 750 basis points above the risk-free return |
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9 Excluding tax effect |
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| Non-life reinsurance | Combined ratio | ≤ 100% | 98.2% | 96.6% | 95.4% | 99.7% | 100.8% |
| Net cat. loss expectancy | ≤ 500 | 662 | 240 | 458 | 285 | 107 | |
| EBIT margin2 | ≥ 10% | 16.3% | 14.0% | 0.1% | 14.6% | 14.2% | |
| IVC margin3 | ≥ 2% | n. a. | 1.7% | (10.7%) | 4.1% | 5.1% | |
| Life and health reinsurance | Gross premium growth | 10-12% | 12.4% | 44.5% | 1.7% | 10.4% | 15.2% |
| EBIT margin2 | 6-7% | 6.1% | 9.2% | 4.3% | 8.2% | 5.9% | |
| MCEV increase4 | ≥ 10% | n. a.5 | 33.8% | 6.0% | 20.1% | 16.8% | |
| Increase in the value of new business | ≥ 10% | n. a.5 | (44.2%) | 41.4% | 65.7% | (24.2%)6 | |
| Group | Investment return | ≥ 3.5%7 | 3.9% | 4.0% | 0.4% | 4.6% | 5.0% |
| Minimum return on equity | ≥ 11.1%8 | 18.2% | 22.4% | (4.1%) | 23.1% | 18.7% | |
Triple-10 targets |
EBIT growth | ≥ 10% | 2.7% | > 100% | (84.0%) | 13.2% | > 100% |
| Growth in earnings per share | ≥ 10% | 2.1% | > 100% | (117.6%) | 8.3%9 | > 100% | |
| Growth in book value per share | ≥ 10% | 21.4% | 31.2% | (15.5%) | 15.6% | 11.4% | |
With the aid of IVC it is possible to compare the value contributions of the Group as a whole, its two business groups and the individual operational units. This enables us to reliably identify value creators and value destroyers. In this way, we can
- optimise the allocation of capital and resources,
- identify opportunities and risks and
- use IVC – as the core business result within the scope of our holistic management system Performance Excellence (PE) – to measure the extent to which we are able to execute our strategy.
With Performance Excellence (PE) we have at our disposal a consistent method Group-wide that enables us to steer the development of the company and measure the extent to which we have achieved our strategic objectives, while at the same time accommodating the specific conditions of the various treaty departments and service units. The decentralised approach used by PE is of special importance in this context: every single organisational unit continuously examines its value contribution to the Hannover Re Group and develops improvement initiatives. At the same time, though, the “big picture” is never overlooked.