Shareholder Value Measures in Non-Life Insurance

Richard Rodriguez Richard BlandGraham Fulcher Richard KelseyRichard Shaw Sean Laird

Format of the Presentation

• Introduction to shareholder value

• Shareholder Value case study

• Analysis of Shareholder Value Measures

• Wrap up

Introduction to shareholder value

Shareholders

Senior Executive

StaffThe

Business

Case Study on The Independent Insurance Company

A Shareholder Value Strategy for Independent Insurance Group

• Why choose Independent ?– A pure non-life UK listed insurer.– No declared shareholder value strategy in the 1999

Report and Accounts

• Our approach– Identify elements already in place e.g.

• Performance measures stated in Report and Accounts;

• Directors’ Remuneration; – Link with the company’s “Vision and Values” statement– Artistic Licence for the missing bits....

Our Strategy For Independent

• To deliver – Above median growth of Earning Per Share (EPS) versus

FTSE Mid 250 companies excluding Investment Trusts.– Annual growth in EPS of at least RPI+2%.

• Chosen markets– Insurance and risk management solutions to commercial and

industrial organisations,high net worth individuals and affinity groups in Europe.

• Strategy – Focused and disciplined underwriting principles– Long term business relationships with a small panel of highly

professional insurance intermediaries– Innovation– Market leading service

Shareholder Value Measures Non- Financial

•Shareholder communication

– Detailed Review pages in Report and Accounts•Senior executives

– Experience

– Credibility (past performance)

– Setting out forecasts and achieving them•Business KPIs (Financial)

– Gross Written Premium

– Return on Capital Employed

– Spare Capital (for future growth)

– Retained Profits (after dividend•Staff

– Training “Investor in People”

– Retention ?

Shareholder Value Measures Financial

•Shareholder Wealth

– Growth in EPS

•Senior Exec Remuneration

– Incentive (Share) Plans aligned to growth in EPS

•Business KPIs (Financial)

– Gross Written Premium

– Return on Capital Employed

– Spare Capital (for future growth)

– Retained Profits (after dividend

•Key Staff Remuneration

– Aligned to performance of financial AND non-financial business KPIs

?

Integrated Shareholder Value Targets

• Average annual growth in EPS of RPI + X – Determine RPI and the required X

• Convert EPS into annual profits and required annual underwriting profits and strategy targets

– Forecast profitability of current business– Allocate capital required to support this business (commensurate with

Standard and Poors ‘A’ rating– Identify likely new markets, growth opportunities and higher margin

business– Plan business growth to achieve growth in profits– Calculate profits to be retained in business as capital to support business

growth (subject to company dividend policy and capital requirements)

• Incentivise key staff to achieving targets

Analysis of Shareholder Value Measures

Robustness of Measures

• Approach– Simple model office– 3 classes of business– 5 measures of shareholder value

• Tracking the measures– Over a 4 year period – For a growth, decline and static base scenario

• Findings– Different results according to measure– Optimal strategy varies by measure– Trend more important than individual value

Measure against measure

-4

-3

-2

-1

0

1

2

3

4

Embedded value EPS EVA MVA

Base Growth Decline

Trend over time (base)

-1

-0.5

0

0.5

1

1.5

2

1996 1997 1998 1999

Embedded value EPS EVA

Trend over time (growth)

-1

-0.5

0

0.5

1

1.5

2

1996 1997 1998 1999

Embedded value EPS EVA

Trend over time (decline)

-1

-0.5

0

0.5

1

1.5

2

1996 1997 1998 1999

Embedded value EPS EVA

Wrap Up

• Shareholder Value is about– Profit for shareholders– Alignment of objectives– Effective and consistent communication– Organisation’s culture

• It has been around for a long time, however,– Not universally adopted by all organisations– Communication approaches vary– No market agreement as to the most appropriate

measures to use– No single measure appropriate all of the time