Solvency

Swiss Re uses an internal risk model to determine the economic capital required to support the risks on the Group’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 the market value margin (MVM) of subsidiaries – Methodology change (no impact at Group level)

Solvency

In SST 2018, the solvency of the Group and its Swiss-regulated re/insurance entities remains very strong, with the Group’s SST ratio increasing to 269%. The new ratio is comfortably above Swiss Re’s capitalisation target of 220% approved by the Board of Directors and 7 percentage points higher than in SST 2017.

Based on current SST rules introduced in 2017, the ratio is calculated as SST risk-bearing capital (RBC) minus the MVM, divided by SST target capital (TC) minus the MVM.

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:

Changes to the SST NAV mainly include economic capital generation or depletion due to underwriting and investment risk taking activities, foreign exchange movements, and capital management actions such as paying dividends and share repurchases.

Compared to the previous SST reporting period, the SST NAV increases by USD 919 million. The increase is mainly driven by a strong investment result and favourable foreign exchange movements in 2017. These effects are partly offset by a negative contribution from underwriting activities, dividends paid and public share buy back programmes.

The contribution from investment risk-taking activities is the main driver of the increase in SST NAV due to the impact of credit spread tightening and outperformance across all asset classes.

The overall contribution from underwriting activities is negative, mainly reflecting large natural catastrophe losses in Property & Casualty Reinsurance and Corporate Solutions, partly offset by positive underwriting contributions from Life & Health Reinsurance and Life Capital:

• The Property & Casualty Reinsurance contribution to the SST NAV is mainly impacted by losses from hurricanes Harvey, Irma and Maria, two earthquakes in Mexico, wildfires in California and Cyclone Debbie in Australia.
• The Life & Health Reinsurance contribution is driven by large transactions in Europe and continued growth in Asia.
• The Corporate Solutions underwriting contribution is mainly impacted by the large natural catastrophes in the Americas.
• The Life Capital underwriting contribution is positive overall resulting from two large transactions.

The positive impact from foreign exchange movements on the SST NAV mainly reflects the strengthening of major currencies against the US dollar.

Dividend payments and share repurchases lead to a decline in SST NAV of USD 2.6 billion.

Deductions mainly reflect projected dividends and share repurchases (to be paid in 2018) as well as deferred taxes on real estate. These items increase by USD 297 million compared to SST 2017.

Supplementary capital is recognised as risk-bearing under SST. The change in SST supplementary capital of USD 356 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 increases by USD 369 million to USD 23.2 billion, driven by an increase in both total risk (see Risk profile for details) and 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 predominantly due to regular model maintenance, the strengthening of major currencies against the US dollar and lower Canadian and US dollar interest rates for longer maturities.