28 Capital Management

The group’s objectives when managing capital are: to comply with the regulatory capital requirements, to define and manage economic capital and to fulfill the company’s target on rating capital. The company also actively manages the composition and quality of the capital to continuously optimise its capital structure and interest cover ratio.

Regulatory requirements

In accordance with the federal act on the supervision of insurance companies and corresponding decree, the Swiss Life Group reports as an insurance group to the Swiss Financial Market Supervisory Authority (FINMA). The reporting covers risk management as outlined in note 5, Group solvency, legal structure, management organisation and intragroup 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. At 31 December 2008, the Group was compliant with the legal requirements.

The Group’s risk and value management decisions are primarily based on the embedded value and economic risk capital. This capital is determined on a bottom-up basis per country and business and takes into account market risk, credit risk, insurance risk, operational risk and strategic risk. Market and insurance risk are calculated using a value-at-risk approach with a 99.5 percentile and a holding period of one year. Credit risk is calculated as expected shortfall of 99 percentile, whereas operational and strategic risks are charged on a size basis similar to Basel II. Following the Swiss Solvency Test (SST) approach, market and insurance risks are assumed to be uncorrelated while all other risk capital is cumulated. Elements of the bottom-up risk capital per country and business are used to estimate the SST margin of the parent company on a monthly basis. The calibration is done based on the full valuation of the SST margin as at the beginning of the year.

In addition to the economic risk capital, Solvency I and other statutory constraints at local level are considered to address the specific situation of each country and business.

Economic and statutory capital constraints are the main elements determining the risk budgets. Based on these risk budgets, the Corporate Executive Board (Group Risk Committee) defines the risk limits for each country and business. The limits are monitored monthly.

Standard & Poor’s rating capital

Swiss Life has defined a target capitalisation rating. In the Standard & Poor’s risk-based capital model the total adjusted capital (TAC) is the measure used for capital available to meet a company’s capital requirements. TAC is thereby a narrower capital measure reflecting a nearer term view on the realisation of assets. In addition to assessing capital adequacy, Standard & Poor’s also measures the quality of capital on its various dimensions such as debt, hybrid and reinsurance leverage. In line with its active capital management, the Swiss Life Group uses hybrid instruments to optimise its capital structure.

Core capital

The Group’s capital performs several important functions, such as funding future growth and providing a protective cushion for shareholders and policyholders, as well as hedging future risks. The defined Group core capital includes equity, certain liabilities with equity characteristics (hybrid capital instruments) and deferred Group-related funds (theoretical policyholder participation in surplus under consideration of additional DAC amortisation and deferred taxes).

In CHF millionNotes  31.12.200831.12.2007
Equity  6 6527 334
Hybrid capital instruments22  2 6772 936
Deferred Group-related funds  6781 324
Total core capital  10 00711 594