Shareholder Value Measures in NonLife Insurance

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Shareholder Value Measures in Non-Life Insurance

• Richard Rodriguez Richard Bland
• Graham Fulcher Richard Kelsey
• Richard Shaw Sean Laird

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Format of the Presentation

• Introduction to shareholder value
• Shareholder Value case study
• Analysis of Shareholder Value Measures
• Wrap up

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Introduction to shareholder value
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Case Study on The Independent Insurance Company
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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 companys Vision and Values
  statement
• Artistic Licence for the missing bits....

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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 RPI2.
• 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

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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 ?

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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

?
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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

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Analysis of Shareholder Value Measures
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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

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Measure against measure
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Trend over time (base)
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Trend over time (growth)
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Trend over time (decline)
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Wrap Up

• Shareholder Value is about
• Profit for shareholders
• Alignment of objectives
• Effective and consistent communication
• Organisations 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