Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
With offices in New York and Hong Kong, MEAG is internationally
oriented, offering global competence and knowhow
across a wide range of asset classes to institutional
investors and private clients. In July 2006, MEAG acquired
a 19% stake in PICC Asset Management Company Ltd.
(PAMC) in Shanghai – the asset manager of one of the
largest Chinese insurance groups, the People’s Insurance
Company of China (PICC Group).
Important tools of corporate management
Munich Re’s value-based management philosophy
The Munich Re Group’s objective is to analyse risk from
every conceivable angle and to handle it successfully,
thereby creating lasting value for its shareholders, clients
and staff. A guiding principle of our corporate thinking and
activity is to increase Munich Re’s share price on a sustained
basis. The main features of this shareholder value
approach in practice are the consistent application of
robust, value-based management systems within the
Group and a clear focus on future prospects of success.
Besides value-based performance measures, we
observe a range of important additional conditions in managing
our business. These conditions may be reflected in
supplementary targets within the Group, or in isolated
cases may even determine a unit’s short-term orientation
in a particular situation. They include the rules of local
accounting systems, tax aspects, liquidity requirements,
supervisory parameters, and our shareholders’ legitimate
interest in attractive regular cash distributions and an
appropriate return on the overall capital invested.
The key factor in our business decisions is to increase
corporate value, which we do in the following ways:
– We assess business activities not only according to their
earnings potential but also relative to the extent of the
risks assumed, which is material in measuring added
value. Only the risk-return relationship reveals how
beneficial an activity is from the shareholder’s point of
view.
52
Management report_Munich Re Group
– With clearly defined value-based performance indicators,
we ensure the necessary comparability of alternative
measures and initiatives as the basis for setting priorities.
– We clearly assign responsibilities and make the levers
for adding value transparent for both management and
staff.
– We closely link strategic and operative planning. All initiatives
are ultimately geared to the overriding financial
objective of enhancing corporate value.
Our value-based management system takes into account
the individual characteristics of the business segments
In our non-life business, which is mainly of a short-term
nature, we employ the following simple formula for measuring
the value added annually by our insurance business
and for managing and monitoring our business activities:
Adjusted
result
–
Necessary
operating
equity
Cost of equity
The adjusted result serves as the basis for determining the
value added. It consists of the underwriting result (derived
from the income statement), the investment result, and the
remaining non-technical result. In each case, value-based
adjustments are made, including the smoothing of expenditure
for major losses, the normalisation of investment
income, and the recognition of future claims expenses at
present value.
We compare the correspondingly adjusted result with
the requisite cost of equity. A significant factor in the calculation
of the cost of equity is the risk-based capital, which
we determine using our internal model. In the propertycasualty
business and health reinsurance measured on a
single-period basis, value is added to the extent that the
adjusted result exceeds the cost of equity.
X
Target rate
=
Value
added