Shareholder Value Measures in Non-Life Insurance
Richard Rodriguez Graham Fulcher Richard Shaw Richard Bland Richard Kelsey 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
Staff
The 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 communication •Senior executives
– Experience
Shareholder Value Measures Non- Financial
– Detailed Review pages in Report and Accounts
– 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 Base Growth EVA Decline MVA
Trend over time (base)
2 1.5
1
0.5
0
-0.5
-1 1996 1997 Embedded value EPS 1998 EVA 1999
Trend over time (growth)
2 1.5
1
0.5
0
-0.5
-1 1996 1997 Embedded value EPS 1998 EVA 1999
Trend over time (decline)
2 1.5
1
0.5
0
-0.5
-1 1996 1997 Embedded value EPS 1998 EVA 1999
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