Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006 Management report_Munich Re Group
The products of life primary insurance and reinsurance,
and the bulk of our health primary insurance business, are
characterised by their long-term nature and the distribution
of results over the duration of the policies. For valuing
such long-term portfolios, whose performance cannot be
reasonably measured on the basis of a single year, we use
the European Embedded Value method. Embedded value
is the present value of future net earnings from business in
force plus the value of shareholders’ equity, less the cost of
holding capital. All assets and liabilities are valued consistently
with how financial markets price tradeable instruments
(”market-consistent embedded value”). Policyholders’
options and guarantees are explicitly taken into
account using stochastic simulations. By setting a minimum
return requirement, we aim through value-based
management to ensure an adequate return on the capital
employed and an appropriate value added.
Our steering of Munich Re’s investments is strongly
geared to the structure of the liabilities on our balance
sheet. With the help of asset-liability management, we
determine the “neutral position”. This involves a synthetic
investment portfolio which – taking into consideration
significant additional parameters in the investment of
capital – best reflects the characteristics of our liabilities
towards clients. Further information on asset-liability management
is provided on page 98. The target return, i.e. the
expected income from the neutral position, is compared
with the return from the actual portfolio, bearing in mind
the risk capital required for deviating from the neutral position.
Finally, a comparison with the returns of relevant
stock market indices provides important insights into the
performance of our own investments.
In addition to these purely financial performance
factors, non-financial performance measures like market
share, speed of processes, staff-training level and client
satisfaction play a major part. In the long term, a firm can
only be successful if it operates sustainably and takes
account of such future-oriented qualitative factors as well.
We closely link strategy and operative planning by
defining our objectives in structured overviews or “scorecards”,
from which we derive initiatives, performance
measures and responsibilities within a framework of four
perspectives: “financial”, “market and client”, “process”
and “employee”. We promote an entrepreneurial culture
among staff through the clear allocation of responsibility
and accountability, recognising how much the individual,
unit or field of business contributes to increasing value.
The consistent integration of the financial and non-financial
objectives into Board, executive and staff incentive systems
supports the clear orientation towards value creation.
In order to give more emphasis in external communication
to the Munich Re Group’s value orientation – as
widely implemented through our internal management
tools – we have geared our Group return target to riskadjusted
performance indicators, which are explained in
more detail below.
What we aim to achieve
Starting point 2006
In the past year, the Munich Re Group’s business performed
very well. Thanks to the excellent business experience in
reinsurance, the gratifying performance in primary insurance
and the very good investment result, we recorded an
outstanding consolidated profit of over €3.5bn. We achieved
a return of 20.3% on our risk-adjusted capital, thus surpassing
our target of 15%. Our return on investment was a
very satisfying 5.0% (5.9%). This is the ratio of the investment
result of €8.9bn to the average market value of the
investment portfolio at the balance sheet and quarterly
reporting dates, totalling €178bn.
Our combined ratio, a much-heeded performance indicator
in property-casualty insurance, was convincing in
both reinsurance and primary insurance. For better comparability,
we divide the combined ratio into property-casualty
and health. The combined ratio in property-casualty
includes all the business attributable to this segment,
whereas in health it refers only to health insurance that is
not conducted like life insurance. Calculated as the percentage
ratio of the sum of net expenses for claims and
benefits plus net operating expenses to net earned premiums,
the combined ratio corresponds to the sum of the
loss ratio and the expense ratio. Put simply, a combined
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