23 Capital Management
Swiss Life’s objectives when managing capital are as follows: to comply with the legal and regulatory requirements, to manage economic capital, to fulfil the company’s rating capital target and to optimise capital and cash remittance efficiency. The company also actively manages the composition and quality of the capital to continuously optimise its capital structure and interest coverage ratio.
Swiss Solvency Test
The Swiss Solvency Test (SST) is the Swiss legislation which governs the capital requirements of insurance companies and groups. It is a principle-based framework whose main objective is the alignment of the required capital with the underlying risks. The SST capital requirement underpins a high level of confidence that insurers will meet their obligations towards policyholders even in adverse circumstances. Since 1 January 2019 Swiss Life has used the SST standard model with some company-specific adjustments for the determination of the regulatory solvency.
Continuous monitoring of solvency under the SST is conducted on an ongoing basis and calibration is updated based on the full SST calculations as at the beginning of each calendar year.
Regulatory requirements
Swiss Life reports to the Swiss Financial Market Supervisory Authority FINMA. The reporting covers risk management and solvency, liquidity, legal structure, management organisation and intra-group transactions. The reporting is submitted on an ad-hoc, quarterly, half-yearly or yearly basis depending on the topic and is reviewed on a yearly basis by the statutory auditor according to the legal requirements. As at 31 December 2023 and 2022, Swiss Life was compliant with the legal requirements.
In addition to the Group’s solvency requirements, constraints at local level such as Solvency II are considered to address the specific situation of each country and business unit.
Economic capital
The value of a life insurance company for its shareholders comprises the economic net worth and the present value of future profits. The optimal amount of economic capital an insurance company needs to hold in order to maximise the company value is based on a risk/reward trade-off. For risk and capital management decisions, Swiss Life uses an integrated approach. The economic risk capital is determined bottom-up for each large business unit and takes into account market risk, credit risk and insurance risk. These risks are calculated on the basis of loss distributions using a specified risk measure. The overall capital requirement is obtained by taking into consideration respective diversification effects.
Economic and statutory capital requirements and the profit target are the main elements determining the risk budgets. Based on the overall risk budget set by the Investment and Risk Committee of the Board of Directors, the Group Risk Committee of the Corporate Executive Board defines the risk limits for the particular business units. Adherence to these limits is checked on an ongoing basis.
Standard & Poor’s rating capital
In Standard & Poor’s risk-based capital model, the total adjusted capital (TAC) is the measure used for available capital. TAC is set against the capital required given the company’s target rating category (target capital). The calculation of target capital takes into account, in particular, insurance risks, asset value volatility and credit risks. Swiss Life has established a target capital level in line with its rating ambition. Within the capital analysis, in addition to assessing capital adequacy, Standard & Poor’s also evaluates the quality of capital with respect to its structure. Capital adequacy is monitored on an ongoing basis according to Standard & Poor’s capital model.
Managing the capital structure and flows
The Group has defined a reference capital structure based on IFRS Accounting Standards with the goal of optimising the return on equity and the interest coverage ratio, while taking into account restrictions such as regulatory and rating agency targets. The capital structure components include shareholders’ equity, CSM after taxes, hybrid capital and senior debt. The Swiss Life Group seeks to maintain its capital structure close to the reference levels.
Swiss Life Holding is the ultimate parent of all of the Group’s legal entities. Capital and cash held at Swiss Life Holding have the highest fungibility. Therefore, the Group aims to hold an appropriate capital buffer at the holding level. Under consideration of legal and regulatory restrictions, internal limits and local capital buffers, the legal entities of the Group transfer cash and capital to Swiss Life Holding, in the form of dividends, interest on loans and fees (cash remittance). Capital at Swiss Life Holding is used as a buffer to ensure financial flexibility of the Group, to pay dividends to shareholders, to execute potential share buybacks and to finance growth.
Capital planning
Capital planning is an integral part of the Group’s yearly mid-term plan. Intercompany and external capital flows are planned based on the Group’s objectives and according to the frameworks set out above. In this context, the Swiss Life Group also plans to fund transactions in accordance with its reference capital structure and its debt maturity profile.