Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006 Management report_Financial situation
exchangeable into Sanofi-Aventis shares were redeemed
at their nominal value.
The bank borrowing of ERGO AG shown in the previous
year was repaid as planned. The other strategic debt
was incurred to finance our operating activities in the long
term.
The interest expenses for strategic debt are shown
separately in the consolidated income statement under
“finance costs” and are explained in detail in the notes to
the financial statements (see page 197 f.). As at 31 December
2006, our debt leverage was 13.3%, down 4.5 percentage
points on the previous year, due to a reduction in
strategic debt and an increase in Group equity. There are
currently no plans to increase strategic debt.
Debt leverage
31.12.2006 Prev. year
Strategic debt €m 4,059 5,277
Group equity €m 26,429 24,397 *
Total €m 30,488 29,674
Debt leverage % 13.3 17.8
* Adjusted owing to first-time application of IAS 19 (rev. 2004).
If the own funds recognised under supervisory law are
taken as the basis instead of the balance sheet equity, the
strategic debt is reduced to €2,265m. This results in a debt
leverage of 7.4%.
Group solvency
The Munich Re Group is subject not only to the supervisory
requirements applying to individual insurance companies
but also to supervision at Group level. Munich Reinsurance
Company as the parent has introduced suitable control
methods, and its reports to the German Federal Financial
Supervisory Authority (BaFin) responsible for the Munich
Re Group include supplementary aspects at Group level,
such as shareholdings, consolidated financial data and
intra-Group transactions. Solvency in the case of insurance
companies is generally understood to be the ability of an
insurer always to meet the obligations assumed under its
contracts. This means an insurance company must fulfil
specific minimum capital requirements. The aim of the
“adjusted solvency” rules is to prevent the multiple use of
equity to cover risks from underwriting business at different
levels of the Group hierarchy. To calculate the adjusted
solvency, the minimum equity required for the volume of
business (required solvency margin) is compared with the
eligible equity actually available (actual solvency margin)
on the basis of the IFRS consolidated financial statements.
In determining the eligible capital elements, the IFRS equity
is adjusted; specifically, it is increased by portions of the
subordinated liabilities and reduced by intangible assets.
The Munich Re Group’s eligible capital is more than three
times higher than the legal requirement.
Adjusted solvency
31.12.2006 Prev. year
Eligible capital of the Group €bn 24.8 22.9
Adjusted solvency ratio % 345.2 305.7
In 2006, we modified the treatment of subordinated loans
as own funds and have adjusted the previous year’s figures
for ease of comparison. Thanks principally to the excellent
Group result and the lower solvency requirements as a
result of a reduced loss burden, the solvency ratio has continued
to improve despite the share buy-back.
All insurers in the Munich Re Group met the relevant
solvency requirements in 2006.
Rating
Munich Re’s financial strength is generally evaluated by
the leading rating agencies as very positive, and our ratings
remain at a high level. In December 2006, Standard &
Poor’s upgraded our rating from the third-best category,
A+ (strong) to the second-best category, AA– (very strong)
with a stable outlook. The reasons given by Standard &
Poor’s for the upgrade are the sustained good operating
performance, strong risk management, increased certainty
about the adequacy of Munich Re’s reserves, and our
strong competitive position, capitalisation and financial
flexibility. Moody’s, A.M. Best and Fitch retained their good
ratings from the previous year.
Financial strength ratings for the Munich Re Group
Rating agency Rating Outlook
A.M. Best A+ (Superior) Negative
Fitch AA– (Very strong) Stable
Moody’s Aa3 (Excellent) Stable
Standard & Poor’s AA– (Very strong) Stable
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