Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
liabilities, which are described on page 210 of the notes to
the financial statements. Off-balance-sheet financing does
not play a significant role in the Munich Re Group.
Asset-liability management
The structure of our technical provisions and other liabilities
is the basis for the Munich Re Group’s investment
strategy. The main focus of this strategy is asset-liability
management, the aim of which is to ensure that economic
factors influence the value of our investments and the
value of our technical provisions and liabilities in the same
way, thus cushioning the effect of capital market fluctuations.
For this purpose, we mirror important features of
the liabilities, such as maturity patterns, currency structures
and inflation sensitivities, on the assets side of the
balance sheet by means of investments with similar characteristics.
If, for instance, there is a strong rise in inflation,
our nominal outflows as a result of claims payments increase
significantly. This applies in particular to lines of
business with long payout patterns, e.g. liability, as inflation
accumulates over a number of periods. To an increasing
extent we are endeavouring in our asset-liability management
to structure our investment portfolio in such a
way that inflows from investments increase in line with
rising inflation rates. To configure our asset-liability management
as effectively as possible, we also use derivative
financial instruments, which are described on page 171
of the notes to the financial statements.
Capital management
Through active capital management, we ensure that the
capital of the Munich Re Group is always maintained at
an appropriate level. The Group’s available capital must
always be sufficient to cover the capital requirements
determined both by our own internal risk model and by the
requirements of supervisory authorities and rating agencies.
In this way, we ensure that our financial strength is
sufficient for us to take advantage of measured opportunities
for growth, while remaining at a reasonable level even
in the wake of major loss events or substantial falls in the
stock markets. At the same time, we also define an appropriate
level of Group capital as one which does not significantly
exceed that required for our operations. A lean cap-
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Management report_Financial situation
ital level makes a decisive contribution to financial discipline
in all our business processes. Our active capital management
includes returning surplus capital to equity holders
through attractive dividends and share buy-backs. Our
proposed dividend is linked directly to the Group result, of
which we aim to pay out a minimum of 25%. We also make
use of share buy-backs as a flexible way of returning capital
to our shareholders. Naturally, we liaise closely with
the regulators, rating agencies and capital market participants
in this regard.
Essentially, we see efficient and transparent capital
management as an appropriate means of achieving our
goal of being recognised as a reliable partner in the capital
markets. This should guarantee our ability to raise capital
quickly and easily on the capital markets, especially for
large potential growth opportunities.
In addition to the level of capital, its efficient deployment
is also a key factor. We use our value-based management
(see page 52f.) to set performance targets designed
to ensure that every investment achieves a sustainable
return commensurate with the risk involved. To limit fluctuations
in results owing to major losses, we have also
developed guidelines and limit systems within the framework
of integrated risk management and corporate underwriting
for our reinsurance companies. We protect the
results and capital of our primary insurance companies
against unacceptable fluctuations by means of suitable
reinsurance covers.
Our internal risk model, which we use to analyse how
certain risk scenarios affect segment results and investments,
plays a central role in capital management. We
determine our economic capital on the basis of the internal
risk model data so that we are able to absorb two successive
annual losses of a size expected only every 100 years.
Next, the determined capital is allocated proportionately to
divisional units in line with the volatility of their business
activities. Our procedure in the primary insurance group
also takes account of management factors arising mainly
out of supervisory restrictions and clients’ participation in
surpluses. We continuously review the assumptions on
which the internal risk model is based and adjust them as
required.