Value & Capital Management: A New Era - uni-hannover.de · Brand positioning / Managing value:...

Value & Capital

Management:

A New Era Thomas C. Wilson

CRO Allianz SE

Zurich-Hannover

Workshop on Insurance and Financial

Mathematics

Zurich, 14 April, 2016

Agenda

1. What defines the “New Era”?

2. Implications for value & risk

management?

2

3

The old paradigm: Focus on earnings and growth,

less on capital, none on internal metrics.

Which three measures are most used for strategic planning and decision making?

1. Earnings and earnings growth

2. Revenues and revenue growth

3. Cost or cost/income ratios

4. Return on book capital

5. Return on economic capital or economic profit

6. Market share

7. Other

8. Market or shareholder value, Embedded Value, Intrinsic Value

E

PExV

E

PExV

Economic Environment

Regulatory Pressure

Paradigm Shifts

• Anemic growth

• Low rates

• Asset volatility

• Technology

• New

competitors

• Demographics

• Capital &

leverage

• Conduct &

consumer

protection

4

Looking forward, challenges to earnings

growth and capital…

Low interest rates – the “new normal”

5

Since 2008, lower interest rates due to global Quantitative Easing (QE),

likely to continue as Draghi “pushes on string”

Low rates adversely impact insurer earnings

• Reinvestment rates below guarantees of traditional L/H legacy block

• Lower investment yields impact PC operating profit

6

55

65

75

85

95

105

115

31

.12

.20

10

14

.01

.20

11

28

.01

.20

11

11

.02

.20

11

25

.02

.20

11

11

.03

.20

11

25

.03

.20

11

08

.04

.20

11

22

.04

.20

11

06

.05

.20

11

20

.05

.20

11

03

.06

.20

11

17

.06

.20

11

01

.07

.20

11

15

.07

.20

11

29

.07

.20

11

12

.08

.20

11

26

.08

.20

11

09

.09

.20

11

23

.09

.20

11

07

.10

.20

11

21

.10

.20

11

04

.11

.20

11

18

.11

.20

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02

.12

.20

11

16

.12

.20

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30

.12

.20

11

AZ share price

Group MCEV per share roll forward (indexed)

IFRS S/h equity per share roll - forward (indexed)

Allianz share price vs MCEV and IFRS roll-forward

Roll-forward based on 2010 disclosed IFRS and MCEV sensitivities without quarterly rebalancing.

What can happen in a volatile market environment? Share price volatility from

„black swans“

• 2008 Financial crisis

• 2011/12 Sovereign crisis

• 2014/15 low rates

• 2016 China & commodity


Regulatory Pressure

Paradigm Shifts

• Anemic growth

• Low rates


• Technology

• New

competitors

• Demographics

• Capital & leverage

• Consumer

protection

• Change in

business model

7




Regulatory Pressure

Paradigm Shifts

• Anemic growth

• Low rates


• Technology

• New

competitors

• Demographics

• Capital & leverage

• Consumer

protection

• Change in

business model

8



Agenda

1. What defines the “New Era”?

2. Implications for value & risk

management?

9

10

A turbulent ride combined for insurers. Eurostoxx Insurance Index, 2003-2015

0

50

100

150

200

250

Euro Stoxx Insurance

11

Still, some prosper more than others in spite of the

headwinds.

Wilson, T., 2015, Value and Capital Management: A Handbook for Finance & Risk Professionals, John Wiley & Sons, Forthcoming

0

50

100

150

200

250

300

350

400

Euro Stoxx Insurance

Stoxx 600 Insurance Zurich Unipol

Raising two questions:

• What drives trend

with market?

• What drives relative

outperformance?

12

Drivers of relative share value are

trivial…


0

100

200

300

400

500

600

RoE=10%, M/B=1 RoE=15%, M/B=1 RoE=15%, M/B=1.5

…but what drives M/B?

13

There is a theory…


FTSE Eurofirst 300 Insurers

Tryg

Topdanmark

Storebrand

St. James's Place

Friends Life

Partnership

Novae

Lancashire

Hiscox

Catlin

BRIT Insurance

Beazley

Amlin

Wiener Städtische

Swiss Life

Standard Life

SCOR

RSA

Old Mutual

Legal & General

Hannover Re

Gjensidige

Direct Line

Baloise

Ageas

Zurich

Swiss Re

Sampo

Prudential

Munich Re

Generali

CNP

Axa

Aviva

Allianz

Aegon0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

5,00

-0,10 -0,05 0,00 0,05 0,10 0,15 0,20 0,25 0,30

Source: KBW Insurance Overview, 2014

M/B 2014E

RoE 2015E

…that generally works

gCoC

CoCRoE

B

M

1

14

Share Value

Growth

Operating Efficiency

Effective U/W & RAPM

Capital Efficiency

A/LM or Market „Alpha“

Capital management offers an

underultilized lever to increase value

Finance and Risk

Capital allocation and

portfolio strategy

Balance sheet, A/L and

liquidity management

Risk management & u/w

Operational drivers

Growth strategies

Expense management

Recognized by shareholders

15

“(In lieu of growth)…dividends

have been the key attraction

for investors in the European

insurance sector. A focus on

cash and dividends has

driven the sector to an

unprecedented fourth

consecutive year of

outperformance of the

European equity market…

Regulatory capital is the fuel

for dividends …(and) Given

the importance of dividends

we think it is crucial to

understand how capital will be

generated going forward.”

Morgan Stanley 2016

“(Investors need to

understand)… how the

capital is spent …We

are supportive of

investment in new

business … (if it

generates) IRRs

above the company’s

cost of capital and with

reasonable payback

periods . . . (but)

business at or sub 9%

IRRs which takes 9

years to break even ...

is not a viable source

of value for

shareholders.”

Barclays 2011

“Earnings analysis is of

limited use … We

prefer composites that

i) generate strong cash

flow after ‘maintenance

capex’ … , ii) have high

growth capex that

supports future

earnings and iii) …

surplus cash

generation, driving

financial flexibility and

the ability to redeploy

capital for growth.”

Morgan Stanley 2012

Implications for insurers‘ risk and capital

management

16

Capital Management Framework

Capital Allocation

Asset/Liability Management

Business Model

Solvency capital framework

1xx% 1yy%

Historic Scenarios – Illustrative

2008 Financial Crisis

2011/12 Sovereign Debt Crisis

2014/15 Low rate scenario, no UFR

Etc.

Parametric Stresses – Illustrative

1:x year modelled event

SII ratio not

resilient

Too much

capital

Appropriately

capitalized

Starting

Solvency

Ratio

Minimum ratio after all stresses

17

• What target level after stress?

• What stresses?

18

Capital allocation: Capital budget

From sources to uses

RoC

Capital /Avg.

Duration Capital

Sources ofCapital

Externalcapital / financialleverage

Capital generatedfromearnings

Capital freed fromexistingbusiness

Uses of Capital

‚Maintenance‘capex

Current business initiatives

Strategic initiatives

Return excess to shareholders

Dividend,Buyback

Capital Budget

Dividend

FinancingInitiatives

Strategic Initiatives

Portfolio Management

OrganicGrowth

Divest

Strategic Projects

Strategic acquisitions

Financing initiatives

Retire debt,Build liquidity

TacticalInvestments

Capital tied in existing business


19

Capital budget – Illustrative


20

Capital budget – Illustrative


Implications for insurers‘ risk and capital management

21

Capital Management Framework

Capital Allocation

Asset/Liability Management

Business Model

• Capital light & protection

products

• Focus on expenses and

technical underwriting

• Prudently manage legacy

business

• Balance expected returns

against cost of capital

• Invest only where you are

remunerated

22

Brand

positioning /

reputation Managing value: Three core skills

• How to value risk-based, capital intensive businesses?

• How to link management actions, risk adjusted performance measures (RAPMs) and other, Key Performance Indicators to value?

Better Information – What gets measured, gets managed

• What “rules of the game” (or generic strategies) create value in each business segment?

• What core skills are required in each segment?

Better Insights – How to create value through operations

• Strategic planning and capital allocation

• Balance sheet, asset/liability and liquidity management

• Risk management and risk underwriting

Better Decisions – How Finance & Risk create value


23

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Questions

24

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