Capital management

Through active capital management, we ensure that the capital of the Munich Re Group is maintained at an appropriate level. The Group’s available financial resources must always be sufficient to cover the capital requirements determined both by our internal risk model and by the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of measured opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains 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 economic equity as one which does not exceed that required for our operations. Such a needs-based, risk- commensurate capital level makes a decisive contribution to financial discipline in all our business processes.

We derive our economic equity from IFRS equity by means of various adjustments. These are described in the section on available financial resources of the risk report.

We return surplus capital to equity holders through attractive dividends and share buy-backs, within the scope permitted by Munich Reinsurance Company’s revenue reserves as determined under German commercial law, and provided this does not impair our strategic flexibility or our overall capital strength. As things stand at present, we aim in principle to continue the share buy-back programme we announced in 2007. Given the economic crisis, however, we will – in the interests of our shareholders – carefully weigh the benefit of the buy-backs against the advantages of comfortable capitalisation, also with a view to our opportunities for organic and possible external growth. In addition, subject to the approval of the Supervisory Board and the Annual General Meeting, we intend to pay our shareholders a dividend of €5.50 per share for the financial year 2008.

Essentially, we see efficient and transparent capital management – always geared to what is feasible – 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 and the optimisation of our capital structure.

The available capital should not only be adequate, it should also be deployed efficiently. We use our value-based management 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 and reinsurance companies against unacceptable fluctuations by means of suitable reinsurance and retrocession covers. We also use asset-liability management and a system of limits to restrict the risks involved in our investments.

Our internal risk model plays a central role in capital management. We use it to analyse how certain risk scenarios affect segment results and investments. We explain how we determine our economic risk capital. in the risk report. The risk report also provides information on the economic equity (see here).