Munich Re Group Annual Report 2006 (PDF, 1.8

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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- 98 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.
Munich Re Group Annual Report 2006 Management report_Financial situation Group equity Development of Group equity in 2006 €bn 31.12.2006 7.4 9.4 5.7 3.4 0.5 7.4 7.8 6.1 2.7 0.4 31.12.2005 * * Adjusted owing to first-time application of IAS 19 (rev. 2004). Minority interests Consolidated result attributable to Munich Re equity holders Retained earnings Issued capital reserve Other reserves In the year under review, our equity increased by €2.0bn or 8.3% to €26.4bn compared with 2005 (for details see page 178 in the notes to the financial statements). The most important changes in equity were due to the following: – Most of the increase results from the consolidated profit of €3,440m attributable to Munich Re equity holders. The previous year’s profit of €2,679m, net of the dividend payment of €707m for 2005, was transferred to retained earnings. – By the balance sheet date, we had bought back shares to the value of approximately €250m within the framework of the share buy-back approved on 7 November 2006. The costs have been offset against retained earnings. – Net unrealised gains were €189m higher than as at the beginning of the year because gains on our fixed-interest securities available for sale fell due to higher interest Changes in Group equity and in the valuation reserves not recognised in the balance sheet As at 31 December 2006, Munich Reinsurance Company’s share capital of €587.7m was divided into 229,580,233 registered, no-par-value, fully paid shares. The shares are endowed with full voting and dividend rights, with the exception of the 3,964,060 shares held by the Munich Re Group itself (Section 71b of the German Stock Companies Act). The registered shares are subject to transfer restrictions in that pursuant to Article 3 paragraph 2 of the Articles of Association of Munich Reinsurance Company, they may be transferred to another holder only with the consent of the Company. As at the balance sheet date, 12,355 shares rates. The rise in the net unrealised gains in the share portfolio due to favourable stock-market development was sufficient to compensate for this effect. – As a result of the rise in the euro, particularly against the US dollar, the reserve for currency translation was reduced by €595m. In this reserve, we recognise the effects of changes in exchange rates arising from the translation into euros of our foreign subsidiaries’ assets and liabilities. For further information regarding the valuation reserves for assets not accounted for at fair value, please see page 180. All figures in €bn 31.12.2006 31.12.2005 31.12.2004 31.12.2003 31.12.2002 Group equity 26.4 24.4 * 20.5 * Valuation reserves not recognised in the balance sheet, including those 19.3 13.9 apportionable to minority interests and policyholders (before tax) 1.9 2.6 3.2 1.8 1.1 * Adjusted owing to first-time application of IAS 19 (rev. 2004). 26.4 24.4 issued to staff were subject to a restriction on disposal until 30 November 2007. The control rights are exercised directly by the employees. There are no direct or indirect shareholdings in Munich Reinsurance Company that exceed 10% of the voting rights, nor are there any shares with special control rights. Amendments to the Articles of Association are subject to the provisions of the German Stock Companies Act (Sections 179 to 181, 133); the Annual General Meeting has made use of the possibility provided for in Section 179 paragraph 1 sentence 2 of the Act. Pursuant to Article 14 of the Articles of Association of Munich Reinsurance 99
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Munich Re Group Annual Report 2006
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The Munich Re Group Our operations
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Munich Re Group in 2006 Tireless an
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Quarterly figures Balance sheet 31.
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© 2007 Münchener Rückversicherun
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