ECONOMIC VALUE ADDED 25 The Group, on the other hand – and this is where the cen- tral management instrument comes in – must look after the in- terests of shareholders and make sure that the sum total of the risks entered into remains acceptable for the company as a whole and that the actual profit realized justifies the investment of capital. The liquidity from divided payments is used by the holding to meet external obligations, i. e. servicing debt and paying divi- dends to shareholders. In addition, the remaining capital can be used to finance growth. All Group companies are thus responsible for generating a return on their risk capital that covers at least the cost of capital. Added value results only when this threshold is exceeded. But that is only the minimum we demand. Over the medium term, we expect our business units to generate a return of 15 percent or more on the capital employed. That means that the units must know which business activities will increase the value of their companies and concentrate on these activities. New value drivers must also be built up, for example, through new prod- ucts, more cost-effective processes and optimized distribution channels. Local management must also prevent value from be- ing destroyed along the value added chain. If this happens, countermeasures must be adopted immediately. In order to do this, we start by determining the amount of cap- ital each individual operational entity requires to cover the fi- nancial risks involved in ongoing business activities. On the one hand, the required capital depends upon the risks that are typical for the products of our Group companies, i.e., premium, reserve and credit risks plus risks in connection with capital investment and operational risks. On the other hand, the amount of capi- tal needed is geared to the mandatory level of security that is centrally prescribed for the group as a whole. Uniform standards are also applied when determining risk capital. For this purpose, risk was up to now measured by means of the Standard & Poor’s model. Beginning in fiscal 2004, we will apply our internal risk model, which permits a more precise valuation of company-spe- cific risk factors.  The Group Center supports the business units in this con- tinuous optimization process. The jointly acquired experience then flows into mandatory operational targets. For example, this involves determining the cost and claim quotas a unit will have to achieve in future periods to attain a sustainable increase in EVA ® and thereby meet, if not exceed, the expectations of our shareholders. In measuring our success, we minimize the im- pact of capital market fluctuations by basing our calculations on “normalized” long-term average returns. As holding company, we assign available capital to our opera- tional entities on the basis of efficiency and risk. In this process, only those units can count on growth capital Since EVA ® is the key indicator that shows us whether or not we are generating a profit, the remuneration of senior manage- ment is based to a significant extent upon this factor. That means we have opted for an incentive system that helps make the continuous increase in the value of the company a priority concern that cuts across our entire organization.  Our plan for achieving economic value added primarily ben- efits our shareholders. However, our customers, employees and the society in which we operate benefit just as much. After all, sustainable success can only be achieved by offering excellent products at attractive prices that satisfy our customers, gener- ate sales to secure jobs and produce profits that allow us to con- tinue and increase our involvement in society. Profits that exceed capital costs can be retained by the compa- nies to finance their internal growth. That means: our most prof- itable companies have direct access to considerable funds to fi- nance their growth. This dividend model, which applies as of 2004, provides for two exceptions: _  which operate in a profitable market or business segment, _  which transform their market position into sustainable crea- tion of value and become a market leader, _  whose orientation and competency fit in with the long-term strategic orientation of the Allianz Group, and _  which are in a position to pay dividends that are at least equal to their capital costs. _  When a group company must be restructured, it can tempo- rarily be exempted from the dividend rule in order to be able to build equity. _  Certain units which are building up business in strategically important future markets are, for the time being, not held to pay dividends – for example our organizations in China and India. Risk capital Value added Management remuneration EVA$^{® }$is a registered Trademark of Stern Steward & Co.