Available financial resources

Available financial resources

The economic risk capital - the Munich Re Group’s capital requirement - differs from the actually available financial resources, with which higher-than- expected loss event can be covered. These resources are calculated as the sum of the economic equity and the available hybrid capital. The economic equity is based mainly on the Munich Re Group’s IFRS equity, supplemented by various economically appropriate adjustments. Thus, for example, in life insurance market-consistent embedded value is regarded as capital available to cushion risks. This is only partially included in IFRS equity, which is why we make an adjustment to include it. On the other hand, capitalised goodwill is included in the Group’s IFRS equity. As it must be assumed that this might lose value in the event of a severe loss event, it is deducted.

The table shows the Munich Re Group’s available financial resources as at 31 December 2008. Compared with the previous year, economic equity fell by around €9.8bn, of which approximately €2.5bn was due to dividends and share buy-backs. Furthermore, particularly the first-time consolidation of Midland, Sterling and BACAV resulted in a rise in goodwill and other intangible assets in our IFRS balance sheet, but we do not recognise this rise in the economic balance sheet. This effect reduced economic equity by around €0.9bn. The net retained profits of €1.5bn and other changes in IFRS equity (-€3.1bn) are also reflected in the changes in economic equity¹. Finally, the valuation adjustments for property-casualty and life and health were reduced by around €4.9bn, especially for two reasons: the market-consistent embedded value of the German life insurers declined, because the interest-rate level in the eurozone fell, while at the same time the implicit volatilities of equities and interest rates rose substantially; on the other hand, the overall reduction in the interest-rate level influenced the discounting effect for property-casualty liabilities. As there was virtually no change in the hybrid capital compared with the previous year, all effects together reduced the available financial resources by €9.7bn.

The economic capital buffer shows the amount by which the available financial resources exceed the economic risk capital. The economic solvency ratio is the quotient of the available financial resources (less announced but not yet completed capital measures such as the 2008/09 share buy-back and dividend payment for the financial year 2008) and the economic risk capital. Over the course of the time, the situation has developed as follows:

The economic solvency ratio of 142% reflects Munich Re’s capital strength. It is worth pointing out again here that Munich Re’s economic risk capital, which produces the above solvency ratio, corresponds to 1.75 times the capital that will probably be necessary under Solvency II.

In calculating RORAC (see definition here), the factor “additional available economic equity“ is also relevant. It is the difference between the economic equity and the economic risk capital and totalled €3.1bn (12.9bn) in the year under review.

Regulatory solvency requirements

We report on regulatory solvency requirements in the section “Group solvency“ of the management report.

¹The overall change of around –€4.1bn in IFRS equity is made up of the net retained earnings of €1.5bn, the change of –€2.5bn resulting from the dividend payment and share buy-backs, and other changes of –€3.1bn.