Annual Report 2010 - Hannover Re

Value-based management
Our overriding strategic objective is to be one of the three
most profitable reinsurers in the world and to increase our
profit and the value of the company by a double-digit percentage
every year.
In order to achieve this objective we have developed tools that
enable us, on the one hand, to measure in light of value-based
considerations how close we are to accomplishing our objective
and, on the other, to break down the goals and value contributions
to the level of individual profit centres.
In non-life reinsurance we have many years of positive experience
using a ratio based on underwriting years, namely
“DB 5”: level 5 of our contribution margin accounting method
constitutes the clear profit after earning the discounted claims
expenditure (level 1) plus all direct (level 2) and indirect costs
(level 3), including the cost of capital (level 4). We apply DB 5
to the non-life reinsurance treaty departments as part of the
fine tuning of portfolios down to the level of individual contracts.
In life and health reinsurance we use the Market Consistent
Embedded Value (MCEV). The MCEV is defined as the intrinsic
value of an enterprise, measured as the discounted profit
flow until final run-off of the in-force portfolio – from the
standpoint of the shareholder and after taxes.
Both concepts reflect the specific characteristics of the individual
segments. Together, they constitute the basis for our
central management tool: Intrinsic Value Creation (IVC).
With the aid of IVC it is possible to compare the value contributions
of the Group as a whole, its two business groups and
the individual operational units. This enables us to reliably
identify value creators and value destroyers. In this way, we
can
• optimise the allocation of capital and resources,
• identify opportunities and risks and
• use IVC – as the core business result within the scope of our
holistic management system Performance Excellence (PE)
– to measure the extent to which we are able to execute our
strategy.
With Performance Excellence (PE) we have at our disposal a
consistent method Group-wide that enables us to steer the
development of the company and measure the extent to which
we have achieved our strategic objectives, while at the same
time accommodating the specific conditions of the various
treaty departments and service units. The decentralised approach
used by PE is of special importance in this context:
every single organisational unit continuously examines its
value contribution to the Hannover Re Group and develops
improvement initiatives. At the same time, though, the “big
picture” is never overlooked.
System of value-based management:
Performance Excellence (PE) combines the strategic and operational levels
Plan Implementation Evaluation
Strategy
Executive Board
retreat/GMF 1
Executive Board
retreat/GMF 1
Executive Board
retreat/GMF 1
Performance
Excellence
PE Check
PE Check
PE Check
Results
Risks
Resources
Planning process
Management
Reporting
Management
by Objectives
Agreement on targets
Attainment of targets
Planning year –1 Planning year
Planning year +1
1 All managers of the Hannover Re Group worldwide come together once a year at the Global Management Forum (GMF) to define
strategic orientations. The parameters developed here serve as the basis for the subsequent planning process.
70 Management report opportunity and risk report
Hannover Re Group annual report 2010