Solvency

The Company uses Swiss Re’s internal risk model to determine the economic capital required to support the risks on the Company’s books, as well as to allocate risk-taking capacity to the different lines of business. The model also provides the basis for capital cost allocation in Swiss Re’s EVM framework, which is used for pricing, profitability evaluation and compensation decisions. In addition to these internal purposes, the model is used to determine regulatory capital requirements under economic solvency frameworks such as the SST and Solvency II (see Governance and risk management for further details).

In November 2017, FINMA approved Swiss Re’s internal model and its components for SST reporting purposes under their revised model review process. The approval included three major model changes implemented since SST 2017:

• Credit risk – New approach for calculating correlation parameters
• Asbestos risk – Refined and expanded model
• Calculation of MVM of subsidiaries – Methodology change

Solvency

The SST ratio of the Company decreases by 10 percentage points to 160%. Given the entity’s business mix, its solvency position is subject to some volatility, and the decrease is in line with the developments during 2017. In the fourth quarter, the Group strengthened the Company’s capital position by USD 1 billion, underlining its commitment to the commercial insurance market and the long-term strategy.

SST risk-bearing capital

The SST RBC is derived from the SST NAV, which represents the difference between the market-consistent value of assets and liabilities, according to the valuation methodology prescribed under SST. For this purpose, the SST NAV is adjusted for the items in the table below:

The decrease in SST NAV reflects a negative underwriting contribution due to large natural catastrophe losses and the dividend paid to Swiss Re Ltd in 2017, mostly offset by a capital contribution from Swiss Re Ltd as well as a positive investment contribution.

Drivers for the change are the following:

• The underwriting contribution reflects the impact of the large natural catastrophe losses for hurricanes Harvey, Irma and Maria, the earthquake in Puebla, Mexico, wildfires in California and Cyclone Debbie in Australia, as well as the non-recognition of goodwill following the Bradesco joint venture.
• The investment contribution reflects credit spread tightening as well as equities returns.
• Favourable foreign exchange movements mainly reflect the strengthening of major currencies against the US dollar.

Deductions mainly reflect projected dividend to Swiss Re Ltd (to be paid in 2018) as well as deferred taxes on real estate. These items decrease by USD 100 million compared to SST 2017.

Supplementary capital is recognised as risk bearing under SST. The change in SST supplementary capital of USD 28 million reflects the changes in the market value of the capital instruments.

A description of the change in MVM, which represents the capital costs for the run-off period, is provided together with the SST TC comments.

SST target capital

In order to derive SST TC, total risk is adjusted for the line item Other impacts as shown in the table below:

The SST TC of the Company increases by USD 162 million to USD 2.3 billion, driven primarily by an increase in total risk (see Risk profile for details), while other impacts remain broadly unchanged.

Other impacts mainly reflect run-off capital costs (MVM) – which are deducted again from the SST TC to calculate the ratio – as well as the impact from business development over the forecasting period and requirements from FINMA that are not included in total risk as they are not consistent with Swiss Re’s own risk view.

MVM increases due to changes in underlying exposures, particularly reflecting increases in generic liability and pharma liability.