The goal of our value-based management approach is to consistently meet our shareholders’ return expectations over the long run. Furthermore, we want shareholders, employees, customers and other stakeholders to profit from the value our company creates.
What do we mean when we talk about the creation of value? The capital used by a company must yield a higher return than a comparable alternative investment. In order to accomplish this objective and to measure our success, we apply the EVA®(1) (Economic Value Added) concept, adapted to our specific needs, across the Allianz Group. EVA® involves comparing profit with the cost of capital, representing the return an investor can expect from an alternative investment with comparable risk. EVA® – whether positive or negative – is the difference between profit and the cost of capital. A positive EVA® means that an added value has been achieved and a negative EVA® indicates that a shareholder would have received a greater return from another risk adequate investment than from Allianz SE shares.
Implementation into the Allianz Group
EVA® is an all-encompassing tool for the coordination and direction of our enterprise and gives our internal management approach with a capital market orientation.
An important component in the calculation of EVA® is the determination of the capital required to cover the financial risks involved in our business activities.(2)
It is our role to provide that the sum of our risks is affordable for the Group and that the achieved return justifies the amount of capital employed. Therefore we assign available capital on the basis of a risk-return profile and the value of our operating entities. Using this process, our companies can only ensure that they receive growth capital if they:
operate in a profitable market or business;
transform their market position into one allowing for the sustainable creation of value and achieve a leading market position;
maintain an orientation and competency that fit within the long-term strategy of the Allianz Group; and
are able to generate distributable earnings in an amount that is at least equal to their cost of capital.
All Allianz Group companies are thus responsible for generating a return on their risk capital that covers at least their cost of capital. Profits exceeding the cost of capital can be retained by the operating entities to finance their internal growth. As a result our most profitable entities have direct access to considerable funds. If these funds are not required to finance their profitable growth, they will be distributed to the holding company.
The requirement to meet the cost of capital is just the minimum we demand. Over the medium-term, our objective is to generate a return of 15% or more on the capital employed. Therefore, our companies must determine what business activities will increase their value and concentrate their efforts and resources on these activities. Further, new value drivers must be created, for example, through new products, more cost effective processes and optimized distribution channels. Local management must also prevent value from being diminished along the value chain. If value diminishes, countermeasures must be immediately implemented.
In measuring our success, we minimize the impact of equity market fluctuations by basing our calculations on “normalized” long-term average returns.
Due to our strong net income our EVA®, after minority interests, reached € 3,528 million in 2006 and the return on risk adjusted capital(3) was 21.3%.
Management remuneration
Because EVA® is an important factor in managing our business, senior management compensation is based on this measurement to a significant extent.(4) Our incentive based management compensation system helps to make the continuous increase in the value of the Allianz Group a priority across our entire organization.
Our objective to accomplish a positive EVA® not only benefits our shareholders; our customers, employees and the communities in which we operate benefit as well. We can only succeed by offering high quality products at attractive prices that satisfy our customers, generate sales to secure jobs and produce profits that allow us to further increase our contribution to society.
(1) EVA® is a registered trademark of Stern Stewart & Co. (2) For detailed information on the determination of our internal risk capital please see page Internal Risk Capital of our risk report. (3) Return on risk adjusted capital represents normalized profit divided by average risk adjusted capital. (4) For detailed information on the remuneration see pages Board of Management remuneration and Supervisory Board remuneration.
