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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen good morning. Welcome to the Swiss Life presentation of the Q1 results 2018 conference call and live webcast. I'm [Cherie], the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. [Operator Instructions.] The conference must not be recorded [for publication] or broadcast.At this time, it's my pleasure to hand over to Mr. Thomas Buess, Group CFO of Swiss Life. Please go ahead.
Good morning, ladies and gentlemen. Thank you for dialing in and for your interest in Swiss Life. Today, we are reporting on selected figures for the first quarter of 2018. Please note that all figures quoted in this call are in Swiss francs and are unaudited.I'll start with today's key messages. Afterwards, I'll provide more details on our [second]. Fee and commission income was up by 9% in local currency to CHF395 million due to strong contributions from Swiss Life Asset Managers, our owned IFAs, and our own and third-party products and services. Gross written premiums, fees, and deposits received increased by 4% in local currency to CHF7 billion. This growth was driven by our French Life business and the corporate business in our international market unit. Swiss Life Asset Managers acquired net new assets of CHF2.4 billion in our third-party asset management. Total assets under management in our TPAM business now amount to CHF63.6 billion. Direct investment income was resilient at CHF1 billion, which results in a stable non-annualized direct yield of 0.7%. The net investment yield increased to 1% on a non-annualized basis. Our SST ratio on January 1, 2018, as published and filed with FINMA, was at 170%. We continue to be well on track to achieve or exceed all our Swiss Life 2018 financial targets.Let's have a deeper look at the premium and fee income development. As already mentioned, premiums increased by 4% in local currency to CHF7 billion. Our insurance reserves, excluding policyholder participation liabilities, grew by 1% in local currency to CHF161 billion. We continued to focus on capital-efficient products. The share of non-traditional products in our new business was stable at 93%. Fee income increased by 9% in local currency to CHF395 million. Swiss Life Asset Managers grew by 11%, the owned IFAs by 8%, and the own and third-party business by 4%.Moving on to our [main] market segments, I will start with Switzerland. Premiums were flat at CHF4.6 billion. The overall market decreased by 2%. In individual life, premiums were flat, in line with the market. Single premiums decreased by 5%, periodic premiums grew by 2%. Premiums in group life were stable. Periodic premiums were down by 2%. Single premiums from existing clients increased by 3%. The Swiss group life market decreased by 2%. We continue to offer semi-autonomous solutions. The share of semi-autonomous solutions in our new business production was stable at 17%. In absolute terms, we reported a substantial increase compared to the prior year period. Moreover, assets under management in our investment foundation grew by 10% to CHF8.3 billion compared to CHF7.5 billion at the year-end of 2017.Fee and commission income in Switzerland was up by 5% to CHF65 million due to Swiss Life Select and our real estate brokerage. The sale of mortgage [fees] and investment solutions to private clients contributed, as well.Turning now to France, premiums increased by 17% in local currency to CHF1.4 billion in a market that was up by 5%. We are particularly pleased with the premium development in our life business. Here, premiums were up by 30%, while the market was up by 6%. We benefited from our strong positioning in the high net worth individual and affluent client segments, our attractive unit-linked product offering, as well as the high quality of our distribution network. Our unit-linked share in our life premiums increased to 58%, which is again substantially above the market average of 30%.In health and protection, premiums decreased by 3%. Growth in our individual protection business was 3%, while our individual health business was down by 5%. Premiums in group health and protection solutions decreased by 2%. Our P&C premiums were down by 2%. Fee and commission income increased by 6% to CHF79 million primarily as a result of the strong development of our unit-linked business and increasing banking fees. Turning now to Germany, here premiums were flat in local currency at CHF375 million. Higher periodic premiums with disability and modern-traditional products offset the decline in single premiums. The overall market increased by 2%. Fee and commission income increased by 16% in local currency to CHF116 million due to the strong growth of our owned IFAs and higher policy fees. Our owned IFAs increased their revenues by 10% on a standalone basis. The number of financial advisers was up 9% year-over-year.Moving on to our international business, where premiums increased by 12% in local currency to CHF582 million, this was mainly due to higher single premiums with corporate clients. Premiums with private clients, as well as assets under control for high net worth individuals, remained stable. Fee and commission income was up by 3% in local currency to CHF60 million. Commission income from our owned IFAs increased primarily due to the strong contribution from Chase de Vere while net earned policy fees declined.Let's continue with Swiss Life Asset Management. Commission income was up by 11% in local currency to CHF152 million, driven by both PAM and TPAM. TPAM increased its commission income from CHF65 million to CHF77 million due to a growing asset base and higher fees from real estate management. Net new assets in our TPAM business amounted to CHF2.4 billion. Excluding money market funds, net new assets were CHF2.8 billion compared to CHF1.8 billion in the prior year period. Assets under management in our TPAM business increased to CHF63.6 billion compared to CHF61.4 billion at the year-end 2017.Turning now to our investment results, our direct investment income was stable at CHF1 billion, supported by an increasing rental income on our real estate portfolio. The non-annualized direct yield was flat at 0.7%. Our net investment yield increased to 1% on a non-annualized basis. This compares to 0.5% in the prior year period and is explained by the positive valuation of our equity derivatives used to hedge our equity exposure, while higher FX hedging costs and the [increased] average asset base had a negative impact on the net yield.The asset mix remained more or less stable, with [a] slightly higher net equity exposure. Duration gap remained below one.Moving on to our group solvency, on January 1, 2018, our Swiss Solvency Test ratio was at 170% as filed with FINMA based on our internal model approved with conditions. You'll find this ratio and additional information in our financial condition report first published on April 25. As of today, we expect the SST ratio to be a few percentage points higher. Overall, capital market developments were slightly positive. We also had a positive contribution from the 2 hybrid debt tranches issued in March.Regarding Solvency II, last week, our insurance entities in Europe disclosed their local solvency and financial condition reports. In this context, I can confirm that our group Solvency II ratio was above 200% as of January 1, 2018 based on the standard model with volatility adjustment and without taking credit for any transitional measures.Turning to the Swiss Life 2018 program, slightly more than two years into the program, we are well on track to achieve or exceed all our announced financial targets. We continued to improve our quality of earnings by further growing the fee business. Let me remind you that our fee business is pretty diversified, and I'm pleased that all of our three fee sources - asset management, IFAs, as well as the own and third-party business - developed positively. Moreover, all our market units kept their focus on profitable and capital-efficient growth. We are therefore well on track to achieve our value of new business aspiration. Finally, we have already implemented more than CHF90 million of our CHF100 million cost savings initiatives. This allows us to invest in growth and digitalization while keeping our operational expense base flat. Let me wrap up. We have again reported a strong set of numbers in the first three months of 2018. I'm particularly pleased with the continuing strong growth of our fee and commission income that will further improve the quality of our earnings and with the resilience of our direct investment income. I can therefore confirm that we are well on track to achieve or even exceed all our 2018 financial targets.I'm now ready to take your questions.
[Operator Instructions.] Peter Eliot, Kepler Cheuvreux.
The first one actually was on the inflows. I was wondering if you could just give us the composition of the TPAM inflows in the quarter, be very helpful. And then, the second one [indiscernible] questions was on the financial condition reports that you mentioned. You've talked about some very good numbers both on Solvency II and the SST. I guess your peers have been showing numbers well over 200%, and I'm just wondering if you can give us any sort of more insights into how you think about your ratio on an absolute or relative basis. Appreciate we might have to wait until the Capital Markets day for a lot of that.And specifically, when you look at the financial condition reports, there's quite a lot of variation between companies and the type of risk. And from a Swiss Life perspective, you show reserves on a gross basis rather than a net of your peers. And I'm wondering, if you were in our positions, what would you like to look at if you're looking at these reports?
First of all, the net new assets in the first quarter were split as follows. We had 20% in bond mandates, we had 60% in balance mandates, 4% in equity, 31% in real estate, and minus 15% was in money market. So we had outflows in the money market.When we look at the assets under management in the first quarter of CHF63.6 billion, 23% was in bonds, 20% in balance, 7% in equity, and 37% in real estate, 2% in infrastructure, and 11% in money markets. When we look at the inflows in the Q1, the net new assets was almost entirely in Switzerland and in the U.K. So in France, we did not see net inflows because we had the outflows of the money markets.On the second questions on the SST ratio, yes indeed, when you look at the group ratios, where it's a combination of life and non-life business, our number looks to be low because, and we mentioned this many times, the Swiss Solvency Test is treating the life business much harsher than the non-life business. If we just look at the life business, and I think that's the way to look at, we see that our ratio is in the middle of the pack, even a little bit above average. There are the usual suspects there who do not have full insurance solutions, and they have higher ratios. But all in all, we are very pleased with the 170% of the group and with the 174% of our Swiss Life [AET] ratio.Now, of course, when you compare the various financial condition reports, you have to be aware of the fact that these models are very different. They vary a lot. Especially our model is different because FINMA, one of the conditions FINMA imposed on us, and I really have to say imposed on us, is that we have to look at it on a gross basis, meaning that we are not allowed to model policyholder bonuses as liabilities. And therefore, our risk-bearing capital, as well as our target capital, are very much inflated. However, there will be more comparability starting next year as most of the companies in Switzerland -- I think there's only two exceptions, which are the two big ones, Swiss Re and Zurich. All the others will move to a standard model in the group life business, and we are currently also working jointly with FINMA on a new standard model for the individual life business.Of course, I would look at the model without all these policyholder bonuses, because I think the way FINMA has imposed this on us is completely flawed. We do not like this, but it's the way it is. They are the regulator, and therefore, that's the way we had to publish it.
Michael Huttner, JP Morgan.
You must be very pleased with [everything going on exactly]. Three questions. One, I didn't catch your Swiss Solvency II number. I know you said it, but I'm really sorry I didn't listen. The second is the policyholders' bonuses [not as] liabilities [saving a gross basis]. If I were to try and estimate a net basis, would it be fair to treat the [CHF22.2 billion] of policyholder bonuses and to deduct them from both the top line and--the thing above the ratio and the thing below the ratio?And the other thing is you do sound quite comfortable with your solvency. A, why did you raise CHF600 million debt; and B, is this to fund the buyback?
Let me answer your last question first, why have we issued to the CHF600 million hybrid. First of all, we have to refinance CHF300 million in August, and we wanted to, early on, be in the market because market conditions were extremely good, and the conditions we got were actually super. And from this perspective, half of this will be used to refinance the hybrid in August.The other half, it was very good conditions in the market, and we took advantage of it. But stay tuned. We will inform at the Investors Day what we will do in the capital management area in the future.On the question of the Solvency II ratio, we do not disclose individual Solvency II ratio for Switzerland. We only disclosed for the group, and there we say it's above 200%, which I think is a very pleasing number compared to our peers, especially when you take into account that we do not take any [translation] measures into account even not for our German portfolio.On your second question, I don't think this is a fair way to do it. I also would say please wait until next year when we have [three] models that are calculated on a comparable basis, because just deducting numbers and doing some arithmetics with the published numbers doesn't do a real good -- it doesn't give you a real good impression. It would be [cooked], be misleading. So from this perspective, I wouldn't do that.
And just to go back on the Solvency II ratio, so no conditionals, no transitionals, but do you use volatility as [indiscernible], dynamic volatility adjusted when you think about the above 200%?
Yes, indeed we do, yes.
Daniel Bischof , Baader-Helvea.
I have two questions, as well. The first one is on the withdrawal from AXA, from the [full] insurance solution. You immediately publish a press release signaling that you're open for business there, but Swiss Life has also become quite a bit more selective and has started to push [the -- saying the] autonomous business. So I was wondering how you look at this huge potential of accounts may be looking for new providers.And would also be interested to know what you've heard from the brokers. I appreciate you cannot talk about AXA, but more in general. What's the feedback from the intermediaries on the full insurance solution?And the second one is one on the asset side. So you have a relatively high corporate bond exposure in U.S. dollars, I think roughly $18 billion, and some peers reported that, given the increased hedging costs, this is no longer an attractive space. So I was wondering how you look at this and that you made some changes here.
First, let me address the AXA move. Of course, I will not comment on AXA, but we made it very clear that we are committed to this full insurance solution model. At the same time, of course we are expecting some new basis inflows there. However, we also made clear right from the beginning that we will keep our underwriting discipline in this space. And therefore, we don't sit here and wait until everybody joins our full insurance solution. We will be very selective and keep being very selective on the underwriting. This is the policy that we have followed in the last few years, and this has served us very well.The broker community, yes, of course we got a lot of broker reactions. Of course, there were a lot of brokers asking would you take our accounts into your full insurance solution. However, I think what this will do overall to our business, the jury is still out, and we still have to wait until these accounts come into the market. So these were only preliminary reactions that we saw.On the corporate bond exposure, we have reduced the U.S. dollar bond exposure already. Of course, on the old portfolio, we have high book yields, and therefore, the problem you mentioned is mainly a problem on the reinvestment space. We also see that we are looking, under the new models, at the capital efficiency of these bonds, and you mentioned correctly that, given the extremely high hedging costs, that the reinvestment rate on U.S. dollar bond exposure is not very attractive for us. Therefore, capital efficiency is also questioned. But here again, stay tuned. We will inform about our investment strategy also in more detail at the Investor Day in November.
Guilhem Horvath, Exane.
Two questions, please. The first one is you mentioned that, in terms of total assets, real estate represented 37%, I think. I'd like to have an updated view on where you see the market going here. Are you still confirm this market will evolve positively in the future?The second question is would you be able to give us an update on the potential litigation with the U.S. authorities regarding international and the life insurance product, the book you [acquired sold] in the past? And would this potentially [put health] to some of your capital return ambitions in the future?
First of all, I mentioned real estate of 37%, and this is the real estate in our TPAM business, meaning third-party asset management business. So it's not the real estate on our balance sheet. The share of real estate on our balance sheet is a little bit above 18% currently. But you asked for our view on the real estate market. It's still attractive. We still see a very good risk premium, and you have to look at the attractiveness of this market from a spread perspective. And we have currently one of the highest spreads ever in the Swiss real estate market when you compare the use that we are getting on the real estate to the GOVI bonds use in Switzerland. And therefore, we think it's still attractive.We also see, by the way, and we have disclosed this at the year-end, we see very stable, even last year a little bit lower vacancy rates in the Swiss market, which also gives us some confidence. And what you also have to consider is that the Swiss economy is, again, growing, and has accelerated its growth, and this will also support the real estate market. And therefore, our view is still pretty positive.Looking at the DOJ situation, there is no news on the DOJ situation. We have talks, and if there is any change, any news, we will, of course, let you know.
And what would be your worst-case scenario in this particular case? And once again, would it be potentially [indiscernible] when considering capital return in November 2018?
There is no such consideration, and I do not give any projection on this outcome of this. There are some numbers in the market, but I do not give an indication here.
Andrew Sinclair, Bank of America Merrill Lynch.
Just two from me, if that's okay. Just wondered, again, on the recent SST disclosure, just wondered if you could give us your thoughts on organic capital generation and what you've seen year-to-date on your SST capital generation.Secondly was just on premium growth in France, seemed to be really strong in the period. I was just wondering if you could give us any indication on how repeatable that was going through the rest of the year.
Let me answer your last question first. The growth in France was extremely pleasing. The 30% in the life business is really a number that you cannot repeat every quarter. And then, therefore, I do not expect the 30% to continue. However, I expect a very positive development to continue in the French market, because all the positive aspects that I have mentioned, meaning that we are in the affluent, high net worth individual business. We are, for many years already, focused on pushing unit-linked, and the entire French market is moving now towards unit-linked. And we have an extremely strong distribution in the French market, actually managed and drawn by an actuary, and this also helps because he really understands not just how to sell things, but also how to sell profitable things to the clients. I think, overall, we will keep the positive momentum. But the 30% I think is a positive, extremely good, [therefore].On the Swiss Solvency Test, the capital generation, we indicated for the full year 2017 a substantial capital generation. You can find this number in the financial conditions report under the tag business development. I think it was CHF1.3 billion that we have shown there. We do not give, obviously, year-to-date numbers, but we see good progress, and we estimate to be a couple of percentage points higher in our SST ratio as of today.
[Johnny] Urwin, UBS.
Just two from me on the SST again, please. Firstly, could you help steer us on the potential SST ratio uplift from the application of euro swap curves to the European businesses? That would be helpful. And secondly, I understand you're lobbying FINMA to be able to apply diversification benefit between market and credit risk, which you're not currently able to do, but some of your peers are. I wondered what would the potential uplift be to the SST ratio from that, and how are discussions going.
Let me answer, again, your last question first. Here I have to manage expectations. I do not expect, in the near future, that we will get diversification between market and credit, so here I have to manage expectations. Of course, we think there is diversification, and we still push hard with the FINMA [responsibles] to get it. We also have in the Swiss [indiscernible] association, a study where we try to convince our colleagues at FINMA, but it will take some time, and here I have to manage expectations.When we look at applying the Solvency II curves, [U] curves for our foreign businesses, mainly for us this is the French, the German, and the Luxembourg business. I expect a real noticeable positive impact. But I hope you understand that I, at this stage, cannot give a number, but it will be a positive impact.
[Operator Instructions.] Michael Huttner.
So on the Department of Justice, I suppose, and maybe you've already answered, but does this mean you've fully reserved, or you're fully comfortable that there wouldn't be any kind of impact on your profit? And under the CHF1.3 billion capital generation figure in that lovely report last week, is there an exceptional in there which one could say, well, actually, that's not organic capital generation? I don't know, bond issuance, or any kind of help on this? You can see I'm a bit tongue-tied. I can't think what this would be, because there's no breakdown of the figure. That's why I'm asking for a little bit of help.
First of all, on the DOJ, it's extremely difficult to comment on this because it's in so early stages. And there was not a lot of conversations. There is not a clear view on anything at this stage. But I do not expect an impact on dividend capacity at this stage.On the business development, or capital generation in the SST, yes, we have two movements there. In the CHF1.3 billion there is CHF0.5 billion convertible, and another CHF0.5 billion negative of dividend. So these two are washes.
You know the 170% ratio, which is very sticky, so I know you've moved up from 140% to 170%, but I imagine your peers have moved up from, I don't know, 170% to 260%, whatever. My feeling that your ratio is much more sticky because you've got these huge lumps of policyholder bonuses which can't actually -- because they're so big, they don't move very much. The ratio itself tends to stay where it is.
It's really the model as well, but there is various reasons to that. Also, we have disclosed our sensitivities, and then, when you look at our sensitivities, there was not a lot of movements on the macroeconomic side in the capital markets. But I cannot speculate on numbers of our peers because I do not know their models in detail, so it's very difficult to explain. But again, I think let's wait for next year, then I think we should be more comparable.
Is there a movement within FINMA, as you publish more of these numbers and we become more comfortable with them, to use the standard model and all these things to try and limit capital management?
Limit what?
Capital management; in other words, to make sure that not too much gets paid out too quickly.
You have to ask FINMA. I would be negatively surprised if there was.
Farquhar Murray, Autonomous.
Just a quick question on the net investment return in the quarter. You mentioned that most of the gains came from equity derivatives. Is it fair to assume that most of those have reversed, given the way the second quarter's panned out so far?
Yes indeed.
[Operator Instructions.] There are no more questions at this time.
So thank you very much for listening in. I'm very much looking forward to hearing you and seeing you, some of you again at the half-year results disclosure, which will take place on August 14. Thank you very much, and have a good day.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Good-bye.