The planning process spans the three levels of Results, Risks and Resources, which are closely interrelated. These three levels are planned by the responsible officers with central support and are reviewed and approved by the Executive Board. On the basis of the detailed strategies and activity plans drawn up by all treaty departments and service units, the planning is adopted by the Executive Board and subsequently communicated within the Group.

The targets that emerge out of the planning process are integrated into the individual agreements on objectives with managers. When it comes to the definition of objectives, the participants take into account not only profit-oriented but also non-financial variables derived from the activity planning.

The annual Management Reporting presents in detail the attainment of targets for each individual operational unit and for the Group as a whole. On this basis appropriate performance controlling is carried out, potential scope for improvement and refinement is identified and performance-oriented remuneration components defined in the context of Management by Objectives are established.

We use the following formula to calculate the IVC (Intrinsic Value Creation):

Adjusted operating profit (EBIT) − (capital allocated x weighted cost of capital) = IVC

The adjusted operating profit (EBIT) consists of the recognised Group net income after tax and the change in the balancing items for differences between economic 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 gains 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 order to be able to distinguish in future on the Group level between the value contribution from investments and from the technical account, a separate IVC is shown for the functional area of investments from 2010 onwards.

In calculating the cost of capital, our assumption – based on a Capital Asset Pricing Model (CAPM) approach – is that the investor’s opportunity costs are 450 basis points above the risk-free interest rate, meaning that value is created above this threshold. Our strategic return on equity target of 750 basis points above “risk-free” thus already contains a not insignificant target value creation. We allocate equity sparingly and make efficient use of equity substitutes to optimise our average cost of capital. At 7.4%, we can point to a very attractive average cost of capital – not only in absolute terms but also relative to our competitors.

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.

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