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 doubledigit percentage every year.
In order to achieve this objective we have developed tools that enable us, on the one hand, to measure how close we are to accomplishing our goal and, on the other, to break it down 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).
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 operating 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.
System of value-based management: Performance Excellence (PE) combines the strategic and operational levels
Profit growth targets
| Business group | Key data | Target | 2008 | 2007 | 2006 | 20051) | 20041) |
|---|---|---|---|---|---|---|---|
| Non-life reinsurance | Combined ratio | < 100% | 95.4% | 99.7% | 100.8% | 112.8% | 97.2 % |
| Net catastrophe loss ratio | up to 10% | 10.7% | 6.3% | 2.3% | 26.3% | 8.3% | |
| EBIT margin2) | ≥ 12.5% | 0.1% | 14.6% | 14.2% | (0.7%) | 13.4% | |
| Life and health reinsurance | Gross premium growth | 12–15% | 1.7% | 10.4% | 15.2% | 11.4% | (4.4%) |
| EBIT margin2) | 6.5–7.5% | 4.3% | 8.2% | 5.9% | 4.1% | 3.9% | |
| EBIT growth | 12–15% | (47.5%) | 64,7% | 49.8% | 21.4% | 25.7% | |
| MCEV growth4) | ≥ 10% | n.a.5) | 12.3% | 16.3% | 8.2% | ||
| Value of new business growth | ≥ 10% | n.a.5) | 65.7% | (24.2%)6) | 54.8% | ||
| Group | Investment return | ≥ 4.2%7) | 0.4% | 4.6% | 5.0% | 4.4% | 4.6% |
| Minimum return on equity | ≥ 11.1%3) | (4.1%) | 23.1% | 18.7% | 1.9% | 11.5% | |
|
EBIT growth | ≥ 10% | (84.0%) | 13.2% | 795.0% | (82.9%) | (26.4%) |
| Growth in earnings per share | ≥ 10% | 8.3%3) | 942.7% | (82.4%) | (28.4%) | ||
| Growth in book value per share | ≥ 10% | (15.5%) | 15.6% | 11.4% | 3.0% | 6.3% | |
| 1) Figures for 2005 and 2004 in accordance with old segmentation | |||||||
| 2) Operating profit (EBIT)/net premium earned | |||||||
| 3) 750 basis points above the risk-free interest rate | |||||||
| 4) Embedded value after consolidation, before minority interests. For 2005 to 2007 the European Embedded Value (EEV) was established according to the EEV principles of the CFO Forum. For 2006 and 2007 market-consistent assumptions were already used as a basis. For 2008 a Market Consistent Embedded Value (MCEV) was calculated on the basis of the principles of the CFO Forum published in June 2008 |
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| 5) The MCEV as at 31 December 2008 will be published on our website at the same time as the quarterly financial report for the first quarter of 2009 | |||||||
| 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 | |||||||
| 7) Risk-free interest rate cost of capital | |||||||
| 8) Excl. tax effect | |||||||
With PE we have at our disposal a consistent method Group-wide that enables us to measure how the company is evolving and to what extent we have achieved our strategic objectives, while at the same time accommodating the specific conditions of the various treaty departments and service units. The local approach used by PE is of special importance in this context: it is incumbent upon every single organisational unit to continually reassess and enhance its value contribution to the Hannover Re Group. In so doing, however, we never lose sight of the big picture.
Performance Excellence Check
The PE Check (consisting of Output, Strategy and Input Checks as well as Activity Planning) is used by the treaty departments and service units to develop – making allowance for the strategic parameters – detailed strategies and activity plans. These central documents also serve as a basis for the planning cycle – both for the operational planning and for the planning of resources and costs. The PE Check is carried out at closed-door meetings of the individual units.
Planning process
The planning process spans the three levels of Results, Risks and Resources, which are closely interrelated. Results, Risks and Resources are planned by the responsible officers with the support of Group Controlling Services and Corporate Development and they are reconciled by the Executive Board. Key pivot points are the detailed strategies and activity plans drawn up by all treaty departments and service units. The planning is approved by the Executive Board and subsequently communicated within the Group.
Management by Objectives
The targets that emerge out of the planning process are integrated into the individual agreements on objectives with managers. When defining targets the participants take into account not only profit-oriented but also nonfinancial goals, including for example the activity planning.