Our integrated system of enterprise management constitutes the basis for attainment of our strategic objectives. Located at its core are, first and foremost, our profit and growth targets, which are summarised for the Group and its business groups in the so-called target matrix. In addition to traditional performance indicators geared to the IFRS balance sheet, our system of strategic targets also includes economic targets derived from our internal capital model approved by the regulator and from the economic equity pursuant to Solvency II reporting. The targets are regularly analysed and adjusted in the context of the strategy review conducted at periodic intervals. Thus, for example, with effect from the strategy cycle commencing in 2018 we added a target for our solvency ratio to the target matrix. In general terms, our primary focus is on medium- and long-term attainment of the strategic targets.
|Business group||Key data||Targets for 2018||Target attainment|
|2018||2017||2016||Ø 2016 – 2018 1|
|Group||Investment return 2||≥ 2.7%||3.2%||3.8%||3.0%||3.3%|
|Return on equity 3||≥ 9.4%||12.2%||10.9%||13.7%||12.3%|
|Growth in earnings per share||≥ 5%||10.5%||18.2%||1.8%||-2.7%|
|Economic value creation 4, 13||≥ 6.4%||8.1%||2.1%||12.4%||7.2%|
|Solvency ratio 5, 13||≥ 200%||245.7%||260.3%||229.8%||244.3%|
|Property & Casualty reinsurance||Gross premium growth||3 – 5% 6||16.2%||18.7%||-0.2%||11.2%|
|Combined ratio||≤ 96% 7||96.5%||99.8%||93.7%||96.8%|
|EBIT margin 8||≥ 10%||12.2%||12.2%||16.8%||13.5%|
|xRoCA 9||≥ 2%||9.0%||1.1%||7.1%||5.8%|
|Life & Health reinsurance||Gross premium growth||3–5% 10||4.6%||1.4%||-4.3%||0.5%|
|Value of New Business (VNB) 11||≥ EUR 220 million||EUR 290 million||EUR 364 million||EUR 893 million||EUR 516 million|
|EBIT growth 13||≥ 5% 12||12.5%||-28.6%||-15.3%||-12.0%|
|xRoCA 9||≥ 2%||-2.4%||-8.5%||2.8%||-3.0%|
| 1 Annual average growth, otherwise weighted averages
2 Excluding effects from ModCo derivatives
3 After tax; target value: 900 basis points above the five-year average return on ten-year German government bonds
4 Growth in the economic equity including dividend paid Target: 600 basis points above the five-year average return on ten-year German government bonds
5 In accordance with our internal capital model and Solvency II requirements
6 Average over the reinsurance cycle; at constant exchange rates
7 Including large loss budget of EUR 825 million
8 EBIT / net premium earned
9 Value contribution relative to allocated economic capital
10 Organic growth only; target: annual average growth over a three-year period; at constant exchange rates
11 Based on Solvency II principles; pre-tax reporting
12 Annual average growth over a three-year period
13 Strategic target since the 2018 financial year
In Performance Excellence (PE) we have at our disposal a consistent method Group-wide that enables us to steer the development of the company as well as to measure and hence also evaluate the extent to which we have achieved our strategic objectives. The decentralised approach used by PE is of special importance in this context: every single organisational unit defines and continuously examines its contributions to execution of the Hannover Re Group strategy and develops improvement initiatives.
The key indicators from the target matrix 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 standardised financial indicators but also non-financial variables derived from the strategic parameters.
The annual Management Reporting presents in detail the respective degree of target attainment for each individual treaty / regional department and service unit as well as for the two business groups of Property & Casualty and Life & Health reinsurance 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.
The basis of value-based management is the risk-appropriate allocation of capital to the individual business activities. This enables us to evaluate the acceptance of underwriting risks and investment risks both in light of individual risk / return aspects and against the backdrop of our overall risk appetite. Our internal capital model supplies the key parameters for this purpose. Starting out from the Group’s overall risk situation, capital is first allocated to the functional areas of underwriting and investments. We then further divide the capital within the underwriting sector, first between the business segments of property & casualty reinsurance and life & health reinsurance and then between the various reinsurance products according to risk categories / treaty types and lines. In this way, we ensure consistent adherence to our profit targets – allowing for risk, cost and return considerations – in the evaluation and pricing of our various reinsurance products.
In order to manage the portfolios and individual treaties we apply underwriting-year-oriented measurement principles based on expected cash flows that appropriately accommodate the specific characteristics of property & casualty and life & health reinsurance. The attainment of targets in a particular financial year is also of interest – especially from the standpoint of shareholders. Based on our economic measurement according to Solvency II principles and our internal capital model, the foundation of our enterprise management, we strive to generate a profit in excess of the cost of capital. This return – which is the decisive ratio for the management of our business activities – is referred to as Intrinsic Value Creation (IVC).
With the aid of the IVC ratio 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
The IVC (Intrinsic Value Creation) is calculated according
to the following formula:
Adjusted economic profit – (capital allocated × weighted cost of capital) = IVC
The adjusted economic profit is comprised of two factors: the IFRS Group net income recognised after tax and the change in the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet. By way of the latter we make allowance in the value determination for changes in the fair values of assets not recognised in income under IFRS as well as for the change in economic effects in the technical Solvency II balance sheet items that are not recognised in the IFRS balance sheet. In addition, interest on hybrid capital already recognised in the IFRS Group net income and the non-controlling interest in profit and loss are included back in the calculation.
|Intrinsic Value Creation and excess return on capital allocated|
|in EUR million||IVC||xRoCA||Reported IVC||Adjustment 1||Final IVC||xRoCA|
|Property and casualty reinsurance||459.7||9.0%||51.6||(0.2)||51.4||1.1%|
|Life and health reinsurance||(83.1)||-2.4%||(290.3)||0.0||(290.3)||-8.5%|
1 Restatement based on final Solvency II shareholders' equity as at year-end
2 Income above risk-free interest rate after deduction of risk-appropriate cost of capital
The allocated capital consists of three components: the shareholders’ equity including non-controlling interests, the balancing items for differences between economic valuations pursuant to Solvency II and amounts stated in the IFRS balance sheet and the hybrid capital. Capital is allocated to the profit centres as described above according to the risk content of the business in question. A systematic distinction is made here between the assumption of underwriting risks, on the one hand, and investment risks, on the other. Under the IVC calculation, therefore, only risk-free interest income on the generated cash flows is allocated to the business segments of property & casualty and life & health reinsurance. The investment income above and beyond risk-free is allocated in its entirety to the functional area of investments and included in the IVC after deduction of the risk-appropriate cost of capital and the administrative expenses.
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 900 basis points above risk-free thus already contains a substantial target value creation. We allocate equity sparingly and use equity substitutes to optimise our average cost of capital, which amounted to 4.6% in 2018.
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.
Through the close interlinking of our internal capital model with the capital allocation and value-based management, we fulfil the requirements of the Solvency II use test.