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 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
Base
Growth
Decline
MVA
Trend over time (base)
2
1.5
1
0.5
0
-0.5
-1
1996
1997
Embedded value
1998
EPS
1999
EVA
Trend over time (growth)
2
1.5
1
0.5
0
-0.5
-1
1996
1997
Embedded value
1998
EPS
1999
EVA
Trend over time (decline)
2
1.5
1
0.5
0
-0.5
-1
1996
1997
Embedded value
1998
EPS
1999
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