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

Despite large natural catastrophe losses, the SST ratio of the Company increases by 15 percentage points to 252%, further improving the entity’s capital position.

A change in methodology for the calculation of MVM of subsidiaries contributes to a decrease in both the SST RBC and the SST TC. This change has an overall positive impact on the SST ratio.

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 the negative underwriting contribution due to large natural catastrophe losses in Property & Casualty Reinsurance and the dividend paid to Swiss Re Ltd in 2017. This is partly offset by a strong investment contribution, a strong underwriting contribution from Life & Health Reinsurance and favourable foreign exchange movements.

Drivers for the change are the following:

• The Property & Casualty Reinsurance underwriting contribution reflects the impact of the large natural catastrophe losses for hurricanes Harvey, Irma and Maria, two earthquakes in Mexico, wildfires in California and Cyclone Debbie in Australia.
• The Life & Health Reinsurance strong underwriting contribution is driven by profitable new business performance in all divisions, large transactions in Europe and continued growth in Asia.
• The investment contribution reflects credit spreads tightening as well as equity and alternative investments returns.
• Favourable foreign exchange movements mainly reflect the strengthening of major currencies against the US dollar.

Deductions mainly reflect projected dividends payable to Swiss Re Ltd (to be paid in 2018) as well as deferred taxes on real estate. These items decrease by USD 637 million compared to SST 2017.

Supplementary capital is recognised as risk-bearing under SST. The change in SST supplementary capital of USD 329 million reflects the changes in the market value.

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:

SST TC is USD 140 million lower at USD 14.6 billion, as an increase in total risk (see Risk profile for details) is more than offset by other impacts.

Other impacts mainly reflect run-off capital costs (MVM) – which are deducted again from target capital 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.

The increase in MVM is to a large extent driven by the novation of Canadian business during 2017 (previously retroceded to a subsidiary of the Company). The strengthening of major currencies against the US dollar, lower Canadian and US dollar interest rates for longer maturities, and regular model maintenance also contribute to the increase.