Strategic debt

We define as strategic debt all financial instruments with the character of outside financing that do not have a direct link with our operative business. It supplements our equity and is essentially designed to reduce the cost of capital and ensure that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we detail below the calculation of our debt leverage, which is defined as the ratio of strategic debt to the sum of Group equity and strategic debt expressed as a percentage. Our technical provisions are not considered, even though they are mostly available to us on a very long-term basis as a source of financing for investment.

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The subordinated bond with a volume of €1.5bn issued by Munich Re in June 2007 is a perpetual bond, but callable by us for the first time from ten years after the date of issue. The term of the Munich Re subordinated bond issued in 2003 is limited. The tranches with nominal values of €3.0bn and £300m will mature in 2023 (euro tranche) and 2028 (pound sterling tranche) and are callable by us for the first time on 21 June 2013 and 21 June 2018 respectively.

The other strategic debt was incurred to finance our operating activities in the long term. A portion of this, namely US$ 79m of the Munich Re America Corporation senior bond, was paid back in August 2008 through a cash tender offer.

As at 31 December 2008, our debt leverage was 20.7%, up 3.1 percentage points on the previous year. 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. At 10.3 (16.0), our interest cover – an indicator of our ability to service our strategic interest payments from the result before finance costs, tax and impairment losses of goodwill – was at a comfortable level for 2008.

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The subordinated bonds are recognised in part as own funds by the German Federal Financial Supervisory Authority (BaFin). When this is considered in calculating the strategic debt, the latter is reduced to €2,026m and the debt leverage amounts to only 7.6%.