Capital management

We actively manage our capital to ensure that the Group and all Group companies are adequately capitalised at all times.

In 2012 Swiss Re maintained its strong capitalisation and demonstrated its ability to upstream capital flows from subsidiaries and to optimise capital on a Group level. These activities allow Swiss Re to return capital to its shareholders by proposing a regular dividend of CHF 3.50 per share and an additional special dividend of CHF 4.00 per share for 2012.

Swiss Re’s level of capitalisation and its capital structure are determined by regulatory capital requirements (both for the Group and its individual legal entities), rating agency requirements, as well as management’s view of risks and opportunities arising both from our business operations and from capital markets. We optimise all these constraints to increase the return to our shareholders while meeting or exceeding regulatory and rating agencies’ requirements.

Main Capital Management actions in 2012:

• We improved the Group financial flexibility by actively returning free funds to the parent holding company, Swiss Re Ltd. A total of USD 4 billion was returned to Swiss Re Ltd in 2012.
• On 31 May 2012 we agreed to sell our Admin Re^® US business. The transaction resulted in a dividend of USD 0.9 billion in cash to Swiss Re Ltd, thus unlocking capital for re-deployment across the Swiss Re Group.
• Swiss Reinsurance Company Ltd issued two Perpetual Subordinated Capital Instruments with stock settlement features in 2012, with a face value of CHF 320 million and USD 750 million, respectively. Both instruments may be settled, at the option of the issuer, for Swiss Re Ltd shares either at any time through at market conversion using the five-day Volume Weighted Average Share Price with a 3% discount, or within six months following a breach of 100% SST ratio at a pre-set floor price. The capital instruments are fully eligible for regulatory capital credit at Group level and thus increase the Group’s capital resources and flexibility.

Based on our improved capital position and retained earnings of USD 26.3 billion for 2012, Swiss Re proposes a regular dividend of CHF 3.50 per share for 2012 compared to the previous year’s dividend of CHF 3.00 per share. In addition, Swiss Re proposes to pay an additional special dividend of CHF 4.00 per share. This translates to a total return of capital to shareholders of approximately USD 2.8 billion.

Swiss Re’s capital adequacy

Regulatory capital requirements

Swiss Re is supervised by the Swiss Financial Market Supervisory Authority (FINMA), at Group level and for its regulated legal entities domiciled in Switzerland. The supervision comprises minimum solvency requirements, a wide range of qualitative assessments and governance standards.

At Group level and for regulated legal entities domiciled in Switzerland, Swiss Re provides regulatory solvency reporting to FINMA under the rules of Solvency I and the Swiss Solvency Test (SST). The SST is based on an economic view. We calculate available and required capital under SST based on our Economic Value Management (EVM) framework and internal risk model, respectively (see chapter Economic Value Management for further information on EVM). The minimum requirement for Solvency I and SST is a ratio of 100%. Swiss Re’s Solvency I and SST ratios both materially exceed the minimum requirement.

Regulated subsidiaries are subject to local regulatory requirements. Our EU subsidiaries will be required to comply with Solvency II. Similar to the SST, Solvency II is based on economic principles for the measurement of assets and liabilities, and sets out requirements for governance, risk management, and supervision, as well as for disclosure and transparency. We continue to follow the developments of the forthcoming Solvency II for the European entities and are implementing its requirements, which are broadly in line with SST.

Swiss Re’s financial strength ratings

We continuously strive to simplify our legal entity structure and to optimise local capital levels. We will extend these efforts to further enhance our efficiency and to respond to regulatory developments and client needs.

Rating agency capital requirements

Rating agencies assign credit ratings to the obligations of Swiss Reinsurance Company Ltd and its rated subsidiaries. The agencies evaluate Swiss Re based on a set of criteria that include an assessment of our capital adequacy. Each rating agency uses a different methodology for this assessment; A.M. Best and Standard & Poor’s (S&P) base their evaluation on proprietary capital models.

A.M. Best, Moody’s and S&P rate Swiss Re’s financial strength based upon interactive relationships. The insurance financial strength ratings are shown in the table above.

On 18 December 2012, S&P published its full year report on Swiss Re in which the financial strength, long-term and short-term credit ratings were confirmed. The outlook on the ratings is “stable”. In its report, S&P pointed to Swiss Re’s very strong competitive position and capitalisation as key rating strengths.

On 20 December 2012, Moody’s affirmed Swiss Re’s insurance financial strength rating at A1. The outlook remains “positive”. The affirmation reflects Swiss Re’s excellent market position, very strong business diversification and excellent capital adequacy.

On 23 January 2013, A.M. Best affirmed the A+ financial strength rating of Swiss Reinsurance Company Ltd and its subsidiaries. The outlook for all ratings is stable. In AM Best’s view, Swiss Re has consistently maintained superior levels of risk-based capitalisation, benefiting from its diverse books of business and efficient capital management programme.

Swiss Re’s capital management aims to ensure our ability to continue operations following an extremely adverse year of losses from insurance and/or financial market events. The tables below show the estimated capital adequacy ratios for rating and regulatory requirements at Group level.

Swiss Re’s capital adequacy

Swiss Re holds excess capital under all relevant capital adequacy requirements such as S&P’s AA rating level, Group Solvency I and the SST:

Estimated external Group capital adequacy

Swiss Solvency Test (SST) of Swiss Re Group