Swiss Life Holding AG

SIX:SLHN

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Swiss Life presentation of the Q3 results 2018 conference call and live webcast. I'm Yolanda, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Thomas Buess, Group CFO of Swiss Life. Please go ahead, sir.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

Good morning, ladies and gentlemen. Thank you for dialing in and for your interest in Swiss Life. Today, we are reporting on selected top line figures for the first 9 months of 2018. Please note that all figures quoted are in Swiss francs and are unaudited. All growth rates are in local currency.Let me summarize today's key messages.First, our fee and commission income was up by 7% to CHF 1.2 billion. Our owned IFAs and third-party products and services contributed positively. Second, our premiums grew by 4% to CHF 14.7 billion, mainly driven by France and Switzerland. Third, Swiss Life Asset Managers generated net new assets of CHF 5.2 billion in the third-party asset management. Total assets under management of our TPAM business amounted to CHF 66.3 billion. Fourth, our direct investment income was CHF 3.3 billion, which resulted in a stable non-annualized direct yield of 2.2%. Our net investment yield stood at 2.2% on a non-annualized basis. And finally, our Swiss Life 2018 program is well underway. We are confident to achieve or exceed all our 2018 financial targets.Let me continue with more details on the premium and fee income development. Our premiums increased by 4% to CHF 14.7 billion. This is particularly due to the strong growth in our French and Swiss market units. Overall, our insurance reserves, excluding policyholder participation liabilities, were up by 2% compared to year-end 2017 and stood at CHF 160 billion. We continued our growth with capitalization products. The share of nontraditional products in our new business production was 92%. Our fee and commission income increased by 7% to CHF 1.2 billion. The owned IFAs grew by 10%, our owned and third-party products and services by 6%, and Swiss Life Asset Managers was flat.Let's have a look at our market segments. I'll start with Switzerland. Premiums were up by 3% to CHF 7.8 billion, driven by group life. The market remained unchanged. In individual life, premiums grew by 1%. The overall individual market in Switzerland was up by 1%. Priority premiums increased by 3% while single premiums declined by 3%. Group life premiums grew by 3%, while the Swiss group life market remained unchanged. Our single premiums increased by 5%, primarily coming from existing clients.Periodic premium remained unchanged. We continue successfully to offer semiautonomous solutions where new business production increased by 28% in the first 9 months of 2018. Moreover, assets under management in our investment foundation grew to 18 -- to CHF 8.5 billion compared to CHF 7.5 billion at the year-end 2017. The fee and commission income in Switzerland was up by 7% to CHF 182 million. We continue to see increased demand for investment solutions for private clients, real estate brokerage and Swiss Life Select.Turning now to France. In our French market unit, premiums increased by 11% to CHF 4.3 billion in a market that was up by 4%. Our French life premiums grew by 17% against a market which increased by 5%. We benefited again from our strong positioning in the high-net-worth individual and affluent client segments, our attractive unit-linked offering as well as the high quality of our distribution network.The unit-linked share in our life premiums was 53%, substantially above the market average of 29%.Now in new business, the unit-linked share accounted for 64% of the new business production. In health and protection, premiums were stable while the market was up by 4%. This slower growth than the market is due to the fact that we focused on profitability before growth. Our P&C premiums were up by 1% while the market was up by 3%. The fee and commission income in France increased by 5% to CHF 240 million as a result of the strong unit-linked business and the solid contribution from the banking fees. Moving on to Germany, where premiums grew by 2% to CHF 986 million, while the market was almost 4% higher. We saw higher premiums with disability and modern traditional products, both in group and individual life businesses. We continue to see good new business profitability, mainly in our disability offering.Our fee and commission income was up by 15% to CHF 332 million, given the strong contribution from our owned IFAs and higher policy fees. Our owned IFAs grew their revenues by 14% on a stand-alone basis. The number of financial advisers increased by 8% year-over-year. Let's now turn to international. Here, premiums declined by 9% to CHF 1.6 billion due to lower single premiums with private clients, which more than offset the positive premium development with corporate clients. Assets under control for high-net-worth individual clients grew by 1% to CHF 20.1 billion.Fee and commission income was up by 7% to CHF 184 million. The main contributor to this increase was the strong growth of our owned IFAs in the U.K.Let's move on with Swiss Life Asset Managers. Here, income was flat at CHF 468 million. TPAM contributed CHF 240 million and PAM CHF 228 million. Recurring fees increased in line with the growing asset base, but we generated less fees from real estate transactions. Our nonrecurring fees were 16% against 20% in prior year period. There was also a negative effect due to the sale and deconsolidation of our Corpus Sireo real estate brokerage in Germany.As mentioned at the half year, we expect the catch-up of nonrecurring fees in the fourth quarter as the pipeline is full. In TPAM, net new assets amounted to CHF 5.2 billion. We saw strong inflows in the asset classes bonds, balanced mandates, equities and real estate. Our asset mix in TPAM's net new assets is 36% real estate, 34% balanced, 25% bonds, 10% equities, 6% infrastructure and 11% outflows in money market funds.Assets under management for TPAM increased to CHF 66.3 billion, substantially up from the CHF 61.4 billion at the year-end 2017.Let's have a quick look at our investment results. Our direct investment income grew by CHF 59 million to CHF 3.3 billion. This corresponds to a non-annualized direct investment yield of 2.2%, which was stable compared to prior year. This was possible thanks to our strategic asset allocation with long asset durations. The net investment result increased to CHF 3.4 billion, which led to a non-annualized net investment yield of 2.2%. This is 38 basis points above the prior year number, given substantially higher net capital gains mainly related to our decision to reduce our exposure in long-dated U.S.-dollar-denominated corp bonds as told at our half year disclosure.Moreover, valuation of our equity hedges increased and was only partly offset by realized losses on equities. We continue to see higher FX hedging costs. The asset mix remained in line with our half year disclosure. The duration gap remains below 1.Moving on to our group solvency. Our Swiss Solvency Test ratio was above 175% at September 30, based on our internal model approved with conditions. The increase compared to half year is due to the positive development of interest rates, credit spreads and equity markets overall. As of today, we expect to have a net fee ratio of around 175%.As mentioned earlier, I'm pleased to report that our Swiss Life 2018 program is well underway. We continue to improve our quality of earnings by growing the fee business, thanks to the strong growth of our owned IFAs, the progress of our owned and third-party products and services and the contribution of Swiss Life Asset Managers. We have already exceeded to announced CHF 100 million cost savings, which has further improved our operational efficiency. And our cash remittance to the holding company is substantially above the amounted target range.Let me wrap up. Overall, we are pleased with the course of the business in the first 9 months, particularly with our growth of the fee and commission income, the premium development, our direct investment results, the net new asset generation in TPAM, and again, the very strong solvency ratio. I can, therefore, with the usual disclaimer of any unforeseen developments, confirm that we are confident to achieve or exceed our 2018 financial targets.I'm now ready to take your questions.

[Operator]

[Operator Instructions] The first question from the phone comes from the line of Jonny Urwin with UBS.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

Two for me today. So firstly, can you please give us a bit of color around your great expectations from here in the fee and commission income? There was obviously a slowdown in Q3. And I appreciate there are still real estate transaction fees to come in 4Q and probably some catch-up for the full year. But it still seems like the like-for-like is slowing a little bit, so any color there would be great. And secondly, are you seeing any additional opportunities yet in the group life after AXA's withdrawal? Or is it still too early?

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

First of all, on the question about the asset management, as I mentioned in my speech, we expect the catch-up in the fourth quarter because of substantial real estate transaction fees that were coming. I expect that we will see an acceleration again compared to last year. I cannot give a number at this stage, but I'm actually very positive on this one. On the AXA withdrawal, we indeed see a very strong new business pipeline. We have seen a substantial increase of new business volumes year-to-date. We have not yet seen the impact on our growth rate in premium as mentioned also at the half year disclosure. So we expect strong premium growth next year because of the withdrawal of AXA because we see that some accounts want to stay in full insurance solution.

[Operator]

The next question from the phone comes from Michael Huttner with JPMorgan.

[Michael Igor Huttner, Senior Analyst]

I had the -- the one question I had was really on solvency, and I just wanted to understand better a little bit the move from the over 170% at the half year to around 175% or over 175% now. Any clarity -- not clarity, you've given clarity, but any kind of details on this would be really lovely. And then also to the extent that we're -- we'll move to a new standard model in January, can you talk a little bit more about that and how you see it, how the discussion is progressing or what the different modules might be? And then finally, how -- when you think about capital management, do you think about the -- your figure today, the 175? And previously in the past, you were quite happy with 144 or something. Or are you thinking about how the new model, and well, of course, we don't know what the PAM matters might be.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

Thank you, Michael. First, let me take your question on the new model before I give you a little bit the sensitivities of the SST. The new model that we will have to apply starting 1/1/2019 is, as mentioned before, is based on the standard model for both individual life and group life. And so far, the models are plus/minus 6%. There are some minor questions still that we have when we implement these models, but I think we have way more clarity now on how to apply these models. As mentioned also in earlier calls, so far FINMA has more or less kept the promise that the new model should not lead to higher capital requirements. What we also will see is, obviously, we will see an uplift on the ratio because of the fact that we will be able to apply the Solvency II interest rate curve in our foreign subsidiaries, France, Germany maybe. So this will give a positive impact. But overall, I cannot give a number yet. We will give an indication at the end of this month. Overall, I'm actually pretty pleased with the development there. Yes, there are still some discussions with FINMA. Of course, we always have to fight if there are some areas in the model that we think are not correct from our point of view. But overall, actually, that's way more clarity than before. Now on the movement of the 170% that we have announced at the half year to the above 175% SST ratio, obviously, there is a positive effect from interest rates because interest rates were slightly up. Then, there was a positive effect also from the spreads. The spreads have a little bit narrowed between half year and the Q3. And then there was the equity market until the end of September were okay-ish. So overall, these were the major drivers. Obviously, we also have generated, because of our profitability, some additional capital, which has also helped to move things upward. Now on the capital management, we will also give more details at the end of the month. We expect to give you an idea of a target range for the Swiss Solvency Test at the end of this month.

[Operator]

[Operator Instructions] The next question comes from Andrew Sinclair from Bank of America.

[Andrew Sinclair, Vice President]

Two for me, I think. Just on Swiss Life Asset Managers, you've mentioned that you've got the one-off revenues in terms of real estate transaction still to come. But I just wondered, are you seeing any underlying margin pressure? Or is it just a bit of a business mix effect of what's going on there? And secondly, just on the guaranteed rates. Just wondered if you could give us any update on guaranteed rates from, say, the Federal Council.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

On the asset management, we do -- in our books, we do not see margin pressure in any of the areas that we are in. We think, in real estate, actually, margins are extremely healthy. Especially in Germany, we see a high demand for real estate. On the guaranteed rate, there was a proposal that is in front of the Federal Council to lower it from 1% to 0.75%. This proposal comes from Commission of the Swiss Parliament -- or Expert Commission, I have to say. And the Federal Council has not yet decided. So usually, they follow this recommendation, but the decision has been delayed so far, so I'm not so optimistic. Let's see where it will end up.

[Operator]

We have a follow-up question from Mr. Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

It was -- 2 little questions. Yesterday I attended a really good day -- little advert for them for -- by -- organized by S&P in London. Really good. And one thing they did say is that RT1, so I think this means restricted Tier 1 debt, is likely to become more expensive. And I just wondered what -- how -- what your refinancing profile looks like and whether that's something we should think about. And then the other is always the potential risk. And I know in the past you've said, "No, no, nothing's happened." But maybe a confirmation would be very reassuring on this potential U.S. fine.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

On the newer -- on the potential U.S. fine, there is absolutely no news. I would not even use the word fine. At this stage, we are in a dialogue with the DOJ. Then on that capital structure, we published this on Page 27 of the -- I think it was the half year booklet. You can see exactly when each of the hybrids' call dates are. In addition, even a more detailed disclosure you will find in our financial report, the financial statements. But I'm not concerned, Michael, about our cost of debt. Actually, we still have some coming due that are pretty high coupons, and I still expect our financing costs in the next 2 years to go down.

[Operator]

The next question from the phone comes from Rene Locher with MainFirst.

[Rene Locher, Director]

Just a quick question on individual life Switzerland. I saw a statistic that, no less from the management, in this third pillar A is now at CHF 100 billion. And what is interesting to see is that the growth rate was over the last 3 years was, yes, some 3% to 4%. And yes, for that point, I'm wondering how Swiss Life is placing itself within the market in regard to these individual life products.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

Beyond this business, it doesn't play a very important role when it comes to profitability because there's a lot of competition in this business, as you know, because the banks are actually leaders in this business for us. We have new products in the markets that we sell. It's called FlexSave and that's pretty successful. But as you have seen, the premium growth was pretty low at -- for the time being. Because I think these products will be more attractive only if interest rates are -- interest rate environment is more attractive.

[Rene Locher, Director]

Okay. No, I was really surprised to see that banking, if you split this CHF 100 billion bank or at CHF 56 billion and the insurance companies are at CHF 43 billion and insurance companies grew by 4.1%. So I was struggling a little bit to understand which insurance companies is growing or still growing in this third pillar product.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference over back to Mr. Buess.We have one more follow-up question from Mr. Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

I'm very sorry. I'm not delaying and you probably say, "Well, actually, no, there is no update." But any kind of qualitative view on the progression of cash flow? I remember at half year, it's fully on track and your statement here is very clearly at or above targets for 2018. And just wondered just on cash flow, whether you can add anything.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

Yes. The cash remittance to the holding, as mentioned at the half year, we do not expect a big additional cash to the holding in the second half because most of the dividends are being paid in the first half. But just to give you an indication, I expect the year-end cash remittance to be approximately CHF 100 million above the prior year year-end. So approximately CHF 100 million more than in the prior year at the year-end. And prior year was CHF 600 million and -- sorry, CHF 598 million was the prior year, so we will be close to CHF 700 million at the year-end.

[Operator]

We have another question from Mr. Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

Sorry to add a further delay, actually, but just to follow up on Michael's question there actually. You previously said that you expect the cash flows to grow in line with earnings. I assumed you -- that -- does that statement remain true from that CHF 698 million that you expect at the full year?

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

Of course, this is the long-term view. Cash remittance should grow in line with earnings means that the cash remittance as a percentage of earnings will be stable, plus/minus. There should even be a little bit of a higher percentage over time that we can generate as cash because the fee business that's important will increase. But again, as cash remittance mostly takes place in the first half of the year because of the dividends that are paid on the basis of the prior year earnings, obviously, you will not see, under the year, a proportional development of the cash remittance to the earnings. You will only see it year after year after year.

[Peter Eliot, Head of Insurance Sector Research]

Yes. No, I guess, my question was whether there were any one-offs in that expectation.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

There are no one-offs in there. That's regular dividends that are sustainable.

[Operator]

There are no more questions at this time.

[Thomas Buess, Group CFO & Member of Corporate Executive Board]

So thank you very much for attending today's call. My colleagues from the executive board and I are looking forward to welcoming you in Swiss Life's Investor Day on the 29th of November 2018 at our headquarters here in Zürich. Our business division CEOs will give a deep dive into each of our market units and we will present our new strategic and financial targets until 2021. Thank you for your interest in Swiss Life and for your questions. Hope to see you soon. Have a nice day.

[Operator]

Ladies and gentlemen, that conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.