Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006 Management report_Financial situation
Financial situation
Analysis of our capital structure
The capital structure of the Munich Re Group is essentially
governed by its activity as a primary insurer and a reinsurer.
Investments on the assets side of the balance sheet
serve mainly to cover technical provisions (74.3% of the
balance sheet total). Equity (12.2% of the balance sheet
total) and bonds classified as strategic debt (1.8% of the
balance sheet total) are the most important sources of
funds.
Capital structure
as at 31.12.2006 (prev. year * )
Technical provisions 74.3% (74.1%)
* Adjusted owing to first-time application of IAS 19 (rev. 2004).
Reinsurance business accounts for approximately 39%
of technical provisions and primary insurance business
for about 61%. Further information on these provisions
may be found in the notes to the financial statements on
page 181. In contrast to liabilities under loans and securities
issued, we cannot foresee with certainty how high our
liabilities from underwriting business will be and when
they will arise. This is especially true of reinsurance. The
payout pattern of the technical provisions varies considerably
from one segment to another and from one line of
business to another. In property insurance, for instance, a
major portion of the provisions is generally paid out after
one year, whereas in life insurance substantial amounts
are still due decades after the contracts were concluded.
The currency distribution of our provisions reflects the
global orientation of our Group. Besides the euro, our main
currencies are the US dollar and pound sterling. We ensure
that our business is sufficiently capitalised at all times by
monitoring the situation continuously and taking suitable
measures, which are dealt with in the section on capital
management. To optimise our capital position and reduce
capital costs, we have not only employed internal forms of
financing in previous years but have also used strategic
debt, primarily in the form of subordinated and/or exchange-
Other liabilities 11.7% (12.6%)
Equity 12.2% (11.2%)
Bonds and subordinated liabilities 1.8% (2.1%)
able bonds. A detailed analysis of the structure of this
funding is provided in the section on strategic debt.
Debt was reduced in 2006 by €1,218m, mainly due to
redemption of the ERGO International AG bonds exchangeable
into E.ON AG und Sanofi-Aventis S.A. shares. We also
reduced amounts due to banks. At the same time, equity
rose as a result of our good performance, increasing its
share of the total capital. Available capital exceeds the
levels required for supervisory, rating and internal risk
model purposes. We have no intention of using this “surplus
balance sheet capacity” to buy growth either organically
or through acquisitions at uneconomical terms. As
part of our active capital management, we therefore took
the decision to buy back shares up to a value of €1bn by
the next Annual General Meeting on 26 April 2007. The
share buy-back was successfully concluded in February
2007.
Since we are an international (re)insurance group,
some of our financial resources are subject to restraints on
disposal. For example, the supervisory authorities in some
countries require foreign reinsurers to establish premium
and reserve deposits with primary insurers. As at the balance
sheet date, investments totalling €6.7bn were subject
to restraints on disposal. In addition, there were contingent
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