Shareholder Value Measures in Non-Life Insurance Richard RodriguezRichard Bland Graham Fulcher Richard Kelsey Richard ShawSean 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 companys 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

Trend over time (base)

Trend over time (growth)

Trend over time (decline)

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