U.S. Markets closed

Edited Transcript of SLHN.S earnings conference call or presentation 13-Aug-19 7:00am GMT

Half Year 2019 Swiss Life Holding AG Earnings Call

Zürich Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Swiss Life Holding AG earnings conference call or presentation Tuesday, August 13, 2019 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Matthias Aellig

Swiss Life Holding AG - Group CFO & Member of Executive Board

* Patrick Frost

Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board

================================================================================

Conference Call Participants

================================================================================

* Andrew Sinclair

BofA Merrill Lynch, Research Division - VP

* Ashik Musaddi

JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research

* Farquhar Charles Murray

Autonomous Research LLP - Partner, Insurance and Banks

* Frank Kopfinger

Deutsche Bank AG, Research Division - Research Analyst

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

* Kevin Ryan

Bloomberg Intelligence - Analyst

* Peter Eliot

Kepler Cheuvreux, Research Division - Head of Insurance Sector Research

* Rene Locher

MainFirst Bank AG, Research Division - Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the Swiss Life Presentation of the Half Year Results 2019 Conference Call and Live Webcast. I'm Sandra, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) At this time, it's my pleasure to hand over to Patrick Frost, Group CEO of Swiss Life. Please go ahead, sir.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [2]

--------------------------------------------------------------------------------

Thank you. Dear analysts and investors, thank you for dialing into our presentation of Swiss Life's half year results. On our side, Matthias Aellig, our Group CFO, and I will be on this call. I will start with an introduction, and he will then give a more detailed presentation and commentary on our figures.

Half year is a short time for a company that calculates in terms of decades on behalf of its customers. Nevertheless, I've confirmed by our press release and earnings presentation this morning we remain on track regarding the consistent implementation of our plan.

Allow me to illustrate this point with some key figures from our half year results. We increased our adjusted profit from operations by 6% to CHF 846 million. Net profit rose by 10% to CHF 617 million. This includes a positive one-off tax effect of about CHF 30 million in the context of the Swiss tax reform. The cash remittance to the holding company rose by 8% to over CHF 700 million.

It's also pleasing to see continued success in our fee income. Swiss Life posted a 13% increase of our fee income in local currency to CHF 876 million. The fee results meanwhile increased by 7% to CHF 260 million.

As you know, premiums were particularly high for the first half of the year following the exit of a competitor from the full insurance business in Switzerland. Swiss Life posted premiums of more than CHF 14 billion, equivalent to a 33% increase in local currency.

Our third-party business at Swiss Life Asset Managers acquired net new assets of CHF 6.2 billion. As at the end of June, assets under management for third parties thus came to almost CHF 80 billion, 12% higher than at the end of 2018.

Direct investment income was the same as the previous year at CHF 2.24 billion. And the net investment yield on a non-annualized basis was 1.3%, having been 1.7% in the previous year.

Let's now turn to the value of new business. The VNB increased by about 80% to CHF 387 million. The new business margin was 1.8%, down from 2.6% in the prior year period. Both these developments are mainly due to the previously mentioned changes in the Swiss Group business.

And last but not the least, Swiss Life increased its adjusted return on equity from 10.4% to 11.4% in the first half year.

Overall, the figures show that Swiss Life has made a strong start to the new Swiss Life 2021 group-wide program. That is due to the immense commitment of our employees and the trust displayed by our customers.

I will now hand over to our CFO who will give you a more detailed account of our performance. Matthias, the floor is yours.

--------------------------------------------------------------------------------

Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [3]

--------------------------------------------------------------------------------

Thank you, Patrick. Good morning, ladies and gentlemen. I will now provide more details on our financial performance in the first 6 months of 2019. Please note that all figures quoted are in Swiss francs, unless I say otherwise.

Let me start with an overview of our P&L on Slide 6. Gross written premiums, fees and deposits received increased by 33% in local currency to CHF 14.1 billion. This growth was driven by our Swiss Group Life business.

Fee and commission income was up by 13% in local currency to CHF 876 million, due to the strong contribution from Asset Managers and from our owned IFAs. As already mentioned during our Q1 call, this includes Beos, Fincentrum and Livit facility management.

The net investment result of the insurance portfolio for own risk decreased to CHF 2.1 billion, mainly due to our net capital gains.

Net insurance benefits and claims increased to CHF 11.6 billion, due to Switzerland.

Policyholder participation decreased to CHF 0.6 billion, mainly due to Switzerland.

Overall, we have strengthened technical reserves by about CHF 300 million. Please note the final policyholder participation and reserve strengthening is determined at the end of the financial year.

Operating expenses were up by 12% to CHF 1.6 billion, primarily as a result of higher commission expenses and expenses related to newly consolidated businesses.

Profit from operations grew to CHF 830 million with a positive contribution from the savings, risks and fee results while the cost result remained stable.

Borrowing costs decreased to CHF 63 million. This is due to lower coupons on the hybrid refinanced in 2018.

Our income tax expense decreased to CHF 150 million. This includes a positive accounting one-off of CHF 30 million in the context of the Swiss tax reform. We do not exclude to see an additional partial release of deferred tax liabilities in the second half of 2019.

Our effective tax rate was 20%.

Finally, our net profit was up by 10% to CHF 617 million including the just mentioned positive tax impact of CHF 30 million.

Slide 7 shows the one-off in our profit from operations. On the left-hand side, you can see last year's adjustments. On the right-hand side, we adjusted the 2019 half year profit from operations to reflect restructuring charges of CHF 3 million and program costs of CHF 13 million related to a new accounting standard. Adjusted for these one-offs, profit from operations increased by 6% to CHF 846 million.

Moving now to the segment results. I will start with Switzerland on Slide 8. Premiums increased substantially by 57% to CHF 9.6 billion while the overall market increased by 7%. In individual life, premiums were up by 10% while the market was up by 1%. Single premiums increased by 33%, primarily with modern and modern-traditional products. Periodic premiums grew by 1%.

Premiums in group life were up by 63% while the market increased by 8%. Periodic premiums grew by 11%. Single premiums increased by 118%. This increase in premiums is primarily driven by our largest competitor pulling out of the full insurance business. It was achieved while maintaining our strict underwriting discipline to support capital efficiency. Premiums in group life, excluding this exceptional move, are above the prior year level. Therefore, as previously said, group life premium growth is exceptional in 2019.

Single premiums will revert to a more normal level in 2020.

New business production with semiautonomous solutions was up by 22%. Assets under management in our investment foundation grew by 18% to CHF 10.1 billion, compared to CHF 8.5 billion at year-end 2018.

Fee and commission income was up by 6% to CHF 133 million, with an increased contribution from Swiss Life Select, our mortgage business, pension consulting and investment solutions for private clients.

Operating expenses decreased by CHF 4 million to CHF 194 million, mainly due to our disciplined cost management. There's also some seasonality. We expect full year operating expenses at around the prior year levels.

Please note that we now report operating expenses on all our business review slides on a nonadjusted basis. This is in line with the other information provided on the business review slides.

The segment result improved by 5% to CHF 460 million, primarily due to higher savings and risk result. The profit impact from the exceptional premium increase amounts to a single-digit million amount. The fee result was up by 7% to CHF 15 million, with a higher contribution from Swiss Life Select, our mortgage business and investment solutions.

The value of new business increased by 169% to CHF 282 million, mainly driven by group life business with a positive contribution also from the individual life unit-linked and the assumed reinsurance businesses. The new business margin decreased from 2.6% to 1.7%, due to the shift in business mix towards full insurance solutions and the low interest rates.

Turning now to France. Please note that all figures quoted are in euros for the insurance segments France, Germany and International. In France, premiums decreased by 1% to EUR 2.5 billion. We managed to almost catch up to the strong prior year level, benefiting life from the recovery of the equity markets and from a positive development in our health and protection and our P&C businesses. The overall French market was up by 3%.

In our life business, premiums were down by 3% while the market was up by 3%. This is due to our focus on capital efficiency, which means maintaining an attractive unit-linked share in our business. The unit-linked share in our life premiums was 46%, slightly lower than the 50% for the full year 2018 but essentially double the market average of 24%. In health and protection, premiums increased by 4% in line with the market. Premiums in our group business were up by 4%. Premiums in individual protection increased by 7%. Our P&C premiums were up by 4%, driven by fleets and motor products supported by new partnerships. The market was up 3%.

Fee and commission income decreased slightly 1% to EUR 139 million. Unit-linked fees increased due to higher unit-linked reserves and positive inflows. However, this increase was offset by lower banking fees due to a lower turnover of structured products following the negative equity markets in the last quarter of 2018.

Operating expenses increased by 2% to EUR 165 million. Efficiency gains were offset by business growth and investments in projects.

The segment result rose by 4% to EUR 136 million with a positive contribution from the risks and savings results. The fee result was down by 7% to EUR 34 million. The higher unit-linked fee result more than offset -- was more than offset by a lower result in the banking business. The value of new business decreased by 5% to EUR 58 million. Higher volumes in health and protection were more than offset by lower volumes with the reduced unit-linked share in our life business, and by the strong decrease in interest rates. The new business margin decreased to 2.3%.

Moving on to Germany on Slide 10. Premiums were up by 2% to EUR 603 million due to higher periodic premiums with risk and modern-traditional products. The overall market was up by 10%, driven by single premiums.

Fee and commission income grew by 8% to EUR 213 million, driven by a positive contribution from our owned IFAs due to an increased number of financial advisers. The number of financial advisers now amounts to 3,990, up 8% year-on-year.

Operating expenses increased by 8% to EUR 102 million because of investments in growth initiatives such as digital prime portal for our owned IFAs and digital interfaces to intermediaries in the insurance business.

The segment result was up by 6% to EUR 85 million, primarily due to the positive development of the savings result. Please note that this is again an unusually strong first half result. As in 2018, we do not expect a linear development in the second half of the year. The fee result is down by 4% to EUR 39 million as the higher fee income was more than offset by higher investments in growth initiatives. We expect to be above the prior year level by the end of 2019.

The value of new business increased by 8% to EUR 24 million. We achieved high volumes with modern products driven by the launch of the new unit-linked product. This reduced the overall guarantee levels significantly while volumes with risk products declined. The new business margin decreased to 3.3%.

Turning now to the International segment. Premiums were stable at EUR 808 million, following a strong second quarter. Higher premiums with private clients were offset by lower premiums with corporate clients. Assets under control for private clients increased by 5% to EUR 18.4 billion compared to year-end.

Fee and commission income was up by 36% to EUR 144 million, primarily due to the acquisition of Fincentrum in October 2018. Higher revenues obtained for the year and higher contribution from both private and corporate clients also contributed positively.

Operating expenses increased by 12% to EUR 51 million. This is due to the mentioned acquisition while operating expenses in other businesses were stable.

The segment result increased by 23% to EUR 35 million due to positive development of the fee result while the other profit sources remained stable. Fee result grew by 33% to EUR 28 million, in line with the positive income development.

The value of new business improved by 30% to EUR 13 million. This was mainly driven by higher volumes and improved margins in our risk business and the higher volumes with private clients. The new business margins rose to 1.8%.

Let's now move to our asset management segment that reports in Swiss francs. Asset Managers figures include Livit facility management that is reported on a gross basis starting in 2019. Commission income is increased due to this consolidation effect by around CHF 20 million with a PAM-TPAM split of around 60-40. Prior to that, it was consolidated according to the equity method, impacting only segment results.

Asset management income rose to CHF 385 million. This is an increase of 18% or -- excluding the just mentioned consolidation effect of 12%. In our PAM business, total income increased by 18% to CHF 177 million. This is the result of a higher asset base primarily due to our interest rate and net insurance inflows. Moreover, we also had higher real estate transaction management fees. In our TPAM business, total income was up by 19% to CHF 208 million. The positive contribution from the acquisition of Beos in August 2018 and from higher transaction fees was partly offset by lower other net income. Total nonrecurring income for TPAM, meaning transaction fees and other net income, came to 23% of total income compared to 24% in the prior year period.

Operating expenses increased by 27% to CHF 229 million due to Beos and Livit facility management, as well as further organic growth primarily in real estate. Excluding Livit facility management, operating expenses would have grown by 17%.

The segment result increased by 7% to CHF 126 million. PAM was up by 11% to CHF 104 million, mainly as a result of the growing asset base and the higher real estate fees. TPAM reported a segment result of CHF 22 million that came in CHF 2 million below the prior year level. This is due to slightly higher cost/income ratio and lower other net income that more than offset the positive fee income development.

We expect to see a catch-up by the end of 2019 as the business is normally back end-loaded within the year while operating expenses are more linearly incurred.

Having said that, other net income from real estate project development is expected to come in below the 2018 level and will pick up again in 2020 as we have mentioned on previous occasions. Moreover, we have started initiatives to shape our asset management organization in Germany to achieve further growth.

Net new assets in our TPAM business amounted to CHF 6.2 billion. This is exceptional growth. We do not expect a linear risk development in the second half of the year. We generated net inflows primarily in the real estate and balanced mandates as well as in money market funds. Our asset mix in TPAM net new assets is 34% real estate, 22% balanced mandates, 21% money market funds, 12% bonds, 7% equities and 4% infrastructure. Excluding money market funds, we generated net new assets of CHF 4.9 billion compared to CHF 4.8 billion in the prior year period when we had money market outflows of CHF 1.2 billion.

Overall, assets under management in our TPAM business now amount to almost CHF 80 billion. Total assets under management were up by 7% to CHF 250 billion, mainly due to higher asset valuations in PAM and net inflows in TPAM.

Let's move back to the group on Slide 13 and have a look at our operating expenses. Our overall cost base increased by 12% to CHF 1.6 billion, mainly due to higher commission expenses and expenses related to newly consolidated businesses.

Operating expenses, adjusted for restructuring charges, program costs for a new accounting standard, scope changes and FX increased by 4% to CHF 773 million.

In our insurance segments, adjusted operating expenses increased by 3% to CHF 575 million. As explained, this is primarily due to Germany and France.

Turning now to the investment result on Slide 14. Our direct investment income was up by CHF 6 million to CHF 2.24 billion, supported by increasing rental income and income from infrastructure investments that outweighed mainly lower coupons.

Our nonannualized direct investment yield decreased by 4 basis points to 1.4%.

The net investment result decreased to CHF 2.1 billion, which led to a nonannualized net investment yield of 1.3%. This is about 40 basis points below the prior year level, mainly due to lower net capital gains primarily from bonds, alternative investments and loans. This was partly offset by higher realization gains in real estate and net realized gains in equities. FX hedging costs increased by CHF 30 million to CHF 376 million.

Our total investment result including changes in unrealized gains and losses on investments increased to CHF 9 billion mainly due to our interest rates and also tighter credit spreads.

Slide 15 shows the structure of our investment portfolio. The share of bonds increased slightly to 58.7%, mainly driven by the lower interest rates. Our gross equity growth increased to 8.3%. Our net equity exposure was 2.9%. The share of real estate was more or less stable at 19.7%. We have further real estate revaluations of CHF 0.4 billion and further net acquisitions of CHF 1.8 billion. The risk premium on the real estate remains very attractive.

Our duration gap was at 1, and our foreign currency exposure on the insurance portfolio remains hedged.

That brings us to insurance reserve. Our insurance reserves excluding policyholder participation liabilities increased by 5% in local currency to CHF 165 billion. Whole units contributed to this.

Turning now to shareholders' equity on Slide 17. Shareholders' equity increased by 10% to CHF 15.9 billion. The main drivers were unrealized gains in bonds and equities and the net profit attributable to shareholders. This was partly offset by the dividend paid to shareholders and the share buyback.

Slide 18 shows our capital structure. Our total outstanding financing instruments amounted to CHF 3.8 billion. Our total hybrids including hybrid equity amounts to CHF 3.4 billion. The share of equity within our capital structure is 74%. It is calculated on shareholders' equity adjusted for unrealized gains on bonds and other financial assets, in line with our new return on equity calculations.

The capital structure and maturity profile remained well balanced with a diversified denomination of debt in Swiss francs and euros.

I will now move on to our Swiss Life 2021 program. On Slide 19, you can see our 2021 financial targets. I will provide more details on the Swiss Life 2021 progress reporting on the following pages.

Let me start with the development of our fee business on Slide 20. Commission income at Swiss Life Asset Managers was up by 22% in local currency. Commission income from our owned IFAs increased by 20% with a positive contribution from Switzerland, Germany and International. The business with owned and third-party products and services increased by 3% in local currency primarily due to Switzerland, Germany and International, while higher unit-linked fees in France were offset by lower banking fees. Overall, our fee and commission income increased by 13% in local currency to CHF 876 million. Half of the growth is due to the acquisitions of Beos and Fincentrum and 1/4 each is due to organic growth as well as the consolidation effects of Livit facility management.

This brings me to the fee result as shown on Slide 21. The fee result increased by 7% to CHF 260 million. As already mentioned, Asset Managers, Switzerland and International reported growing fee results, but Germany and France reported a decline.

Our next 2 slides show that we continue to benefit from our disciplined asset and liability management. We are pleased with the resilience of our direct investment yield in this challenging environment with negative interest rates. This was supported by an increasing real estate portfolio and a reinvestment rate of around 2% in 2019 so far.

Moving on to the average technical interest rate in Slide 23. In the first 6 months of 2019, we further strengthened the technical reserves, which led to a 2 basis point decrease in the average technical interest rate. In addition, the shift to a more favorable business mix led to a further reduction of 3 basis points. Overall, our average technical interest rate decreased by 6 basis points to 1.2%. We are very pleased that we are able to reduce the technical interest rate in Switzerland to 88 basis points.

Turning to the value of new business and the new business margin. Decline of the new business margin is primarily due to the high new business production of full insurance solutions in Switzerland and the unfavorable development of interest rates. Nevertheless, our new business margin was above our ambition level of 1.5% in all our market units. The value of new business increased at the same time by 82% to CHF 387 million.

Let me now move on to operational efficiency. As already mentioned, operational efficiency continues to be important thrust also in our Swiss Life '21 program. Taking into account the diversity of our businesses, we are addressing operational efficiency with 3 key performance indicators. In life insurance, the efficiency ratio improved by 1 basis point year-on-year to 19 basis points, primarily driven by the increase in life reserves. At our owned IFAs, the distribution operating expense ratio improved by 1 percentage point to 25% as higher commission income outweighed higher expenses. In our TPAM business, the cost/income ratio increased to 96% from 94%. Please note that half year figures are not fully representative. That TPAM income is back end-loaded within the year while operating expenses are more linearly incurred. We expect to improve the ratio to below 90% by year-end 2019.

Turning to capital, cash and dividends on Slide 26. In November 2018, we newly introduced our SST ambition range of 140% to 190%. As of end of June 2019, our Swiss Solvency Test ratio is estimated to be around 200%. This is higher than the 185% as of January 1, 2019, in line with a more favorable equity market environment and tighter credit spreads. You can see this ratio and our Solvency II ratio as of January 1, 2019, on our next Slide 27.

As mentioned before, new SST standard model has a low sensitivity towards interest rates, and they have relatively high sensitivity towards credit spreads. I refer to the right-hand side of the slide and the updated SST sensitivities as of January 1, 2019.

Slide 28 shows our cash remittance and the share buyback. In the first half of the year, we remitted CHF 708 million of cash to the holding company. This is an increase of 8% year-on-year.

Coming to our CHF 1 billion share buyback program. By the end of June 2019, we have so far repurchased around 1.3 million of shares for a total amount of CHF 560 million. About 1 month ago, we have canceled 628,500 shares as approved by the recent AGM. This reduces our current number of shares outstanding to around 33.6 million.

Let me sum up. Overall, we had a good start into the first 6 months of 2019 that also marked the start of our Swiss Life 2021 program. We will further strengthen our earnings quality and grow our earnings, particularly by increasing our fee and risk results. We are on track with the development of these 2 profit sources with the fee result growing somewhat back end-loaded within our 3-year strategic 2021 plan due to Swiss Life Asset Managers, as already mentioned. We are also on track with the value of new business, though this has become more challenging given the recent sharp decline in interest rates all over Europe.

Moreover, we will maintain our cost discipline to improve operational efficiency, especially in our TPAM business, with a goal to improve the cost/income ratio to around 75% by the end of 2021.

When it comes to capital, cash and payout, I can report a healthy solvency and a growing cash remittance based on our disciplined capital management. We are also on track with our share buyback program. Our annualized return on equity was 11.4% at the half year 2019.

Let me now close by reiterating that we will continue with our disciplined execution of the Swiss Life 2021 program.

Thank you, and back to you, Patrick.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [4]

--------------------------------------------------------------------------------

Thank you, Matthias. Dear analysts and investors, the floor is now open for questions. Who would like to start?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Andrew Sinclair, BAML.

--------------------------------------------------------------------------------

Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [2]

--------------------------------------------------------------------------------

Three for me, if that's okay. Firstly, just really excellent solvency position today. But just wondered if you could talk a little bit about liquidity and how much accessible liquidity do you have today at the holdco after allowing for completion of the existing buyback to facilitate further capital management, capital return?

Secondly, just what actions could you consider or would you consider taking to facilitate extra capital return if you have the strong solvency position, but not the liquidity? Would you consider raising debt, for example, or something along those lines?

And third and finally for me, just on the Swiss tax changes. Just wondered if you could give us an update on your guidance for your tax rate going forward.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [3]

--------------------------------------------------------------------------------

Okay. So first of all, to cash, we have CHF 1.3 billion at holdco level at the end of June, and that will go down to a bit more than CHF 800 million by the end of the year after having completed our share buyback program. So that's at the lower end of our comfort range of CHF 0.8 billion to CHF 1.0 billion in terms of cash at the holding company.

In terms of further outlook, we now first want to complete our existing share buyback before talking about the future. Then tax guidance, here we have an effective tax rate of 20% and that's all for the guidance for the future, more or less, please.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from Peter Eliot from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Peter Eliot, Kepler Cheuvreux, Research Division - Head of Insurance Sector Research [5]

--------------------------------------------------------------------------------

I had very similar questions actually, and I may be equally unlucky. But I mean should -- just quickly on Andrew's first point. I mean the obvious source, I guess, for further liquidity from internal without raising any debt, I think, is the free reserves, and I think there's significant potential if you wanted to use it to upstream some cash there. Are you able to talk at all about any sort of constraints that you might have there, or how feasible that is?

Second question on the solvency moving parts, appreciate you updated the sensitivities. I'm wondering if you could give us a little bit of a walk from the 185% to the 200%, in particular how much from property revaluation and how much from ongoing capital generation?

And maybe, sorry, if I could add a third question. I note the costs, I've seen the IFRS 17 related in terms of the one-offs this period. Should we expect that sort of run rate going forward? I'm wondering if you could talk at all about that.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [6]

--------------------------------------------------------------------------------

Okay. Thank you. I'll take the first question, and Matthias will take the second and third questions. So on the further cash upstreaming from free reserves, that was the question, well, first of all, these 3 reserves are technically labeled free reserves, but we do need a certain statutory equity to run the assets risks we're running. So while, in accounting terms, it's called free reserves, in reality, those are not free reserves when looking at the risk-taking ability in a statutory world, which, you know, is also important to keep on an eye on next to, of course, the economic solvency framework that we have. So we stick to our Swiss Life 2021 guidance of our goal of operating upstreaming CHF 2 billion to CHF 2.25 billion cumulatively over the years 19, '20, 2021. So there is no, let's say -- we're not going to upstream at the detriment of our statutory equity. Over to Matthias.

--------------------------------------------------------------------------------

Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [7]

--------------------------------------------------------------------------------

Now to the question regarding SST moving from the 185% that we disclosed at January 1 and if you have a look at the sensitivities, it was essentially the uptick in equity markets that contributed the biggest contribution to the positive movement. We had, let's say, somewhat similar positive contributions also from the real estate revaluations that you referred to and the tightening of the credit spreads. And interest rates were, if you just look at the sensitivities disclosed, slightly negative. There you have to factor in that we have increased the asset duration during the first half of the year, which actually reduced that interest rate effect.

Capital generation, I think we disclosed that in the financial condition report. It's probably safe to assume something of a similar order of magnitude for the first half of the year 2019 on a pro rata basis.

On IFRS 17, this is a program that runs over several years, so we expect to incur further costs relating to the implementation of that program in the coming quarters and years.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

The next question comes from Farquhar Murray, Autonomous.

--------------------------------------------------------------------------------

Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [9]

--------------------------------------------------------------------------------

Just 2 questions, if I may. Firstly, just coming back to the IFRS accounting issue. Could you actually just quantify whether you expect the ultimate project cost probably to be over the next couple of years? I imagine it's going to be probably a multiple of the 13 we've seen.

And then more generally, do you have any sense of when you might expect to be able to report preliminary impact in terms of equity and earnings going forward?

And then more fundamentally, do you think IFRS 17 is going to impact how you run the business? And actually, on that, you are allowed to say no if you think that's the honest answer.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [10]

--------------------------------------------------------------------------------

Okay. So we expect the total project cost around IFRS 17, but that includes also new systems and the like that we're introducing at the same time of about CHF 100 million in total. And I don't expect any major changes in how we run the business as we already have well-established economic metrics for running our business, which, of course, IFRS 17 aspires to also reflect in the accounting framework. Saying that, I mean it will always then depend on how our investors deal with these accounting metrics. And as you're well aware of, one thing doesn't change, and that is that cash remittance and dividends don't change in importance.

--------------------------------------------------------------------------------

Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [11]

--------------------------------------------------------------------------------

Okay. Just one quick follow-up actually because you mentioned the economic models you have in the background. Given the low rate background we've got at the moment, is there any kind of movement -- difference in the movements we're seeing between the SST ratio, which obviously moved positively in the first half and the economic model that you have at all?

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [12]

--------------------------------------------------------------------------------

Yes. That's correct. There is a difference. So in the economic models, we do see a much more pronounced negative impact from the lower rates, but nothing that would change the way we're running the business. But that means, of course, that the different operating units have to react -- well, continue to react to these developments by improving their product mix, by reducing the guarantees we offer and the like. So the product margins of our new business, we'll have to really keep an eye on.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Jonny Urwin, UBS.

--------------------------------------------------------------------------------

Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [14]

--------------------------------------------------------------------------------

Just two for me, please. Firstly, what's the outlook for the fee result growth in the second half of this year and into next year as well? I know we were expecting a bit of a slowdown driven by the project fees and asset management doesn't look like it's coming through yet, but I expect this is more of a 2H impact. So any color there would be great.

And secondly, just on the yield reductions year-to-date. Obviously, it's not terribly helpful. I mean what's the need for further reserve strengthening, do you think, across the life book, especially in Switzerland in the current yield environment?

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [15]

--------------------------------------------------------------------------------

Okay. With respect to the fee result, we're well on track to our Swiss Life 2021 targets if we look at the CAGR that we achieved this year vis-à-vis the one we have in our plans. But you're right, in the second half of the year, we've indicated at the Investor Day and we did so again at Q1 and now that we will see a reduction in the project development income coming through in the second half of the year, but this will again pick up then in 2020. So I think we're overall well on track. Obviously, this continues to depend on the markets, but we're well on track there.

Now for the further reserve strengthening. Yes, as rates are coming down faster as we expected, we will have to reassess the situation at the end of the year. And of course, the lower reinvestment rates that we will now have to factor into our model using the Swiss Actuarial Society's approach might, indeed, lead to further reserve strengthening in the second half of the year. How much that is, is, of course, too early to tell.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

The next question comes from Frank Kopfinger, Deutsche Bank.

--------------------------------------------------------------------------------

Frank Kopfinger, Deutsche Bank AG, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

I have also 2 questions. My first question is a general question on your low interest rate sensitivity of 4 percentage points. I -- my understanding that this is obviously driven by the new standard model.

And the separate question is, given that interest rates came down so dramatically and even as you adjusted this model on a sector or industry basis, however, do you see a risk that FINMA might touch this model again and -- which would -- could lead to higher sensitivities in this respect?

And then, secondly, again on lower yields, is there -- do you see any impact from the lower yields on your cash-generation ability?

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [18]

--------------------------------------------------------------------------------

Okay. Let's start with the standard model. I mean, as you know, we have quite a checkered history with FINMA regarding model changes, but FINMA has stuck to its promises in, let's say, the recent 2 years and so we don't expect any changes to the standard model, let's say, major changes. There might be smaller ones here and there. But also FINMA is very much aware that we have a higher volatility of our solvency ratio, especially related to credit spreads than under Solvency II. So our ambitions, of course, are to lower that sensitivity and not to increase it.

Now with respect to interest rate sensitivity, yes, there, you're right. Similar to the last couple of questions, the standard model has a lower liability duration than the internal model. And one of the reasons why we protected or even increased our solvency -- our SST, standard model solvency, so much in the first half of the year is, indeed, we were extremely disciplined in increasing our assets duration and thereby keeping our duration gap stable at 1. Now -- so I don't expect -- bottom line is I don't expect any major changes now.

Lower yields should not majorly impact our cash-generation ability because that is driven by our statutory results, which are very stable, which we managed to increase in the half, first half of the year. Of course, very, very, very long term. Of course, low rates will have an impact also on the statutory results. But as you know, we've been saying this for quite some time and we've managed to protect these results quite successfully.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question comes from Kevin Ryan of Bloomberg Intelligence.

--------------------------------------------------------------------------------

Kevin Ryan, Bloomberg Intelligence - Analyst [20]

--------------------------------------------------------------------------------

I've just got a couple of questions around the Swiss full insurance solutions business. The first one is around the surge in premiums, which you've picked up from a competitor who must remain nameless, of course. Could you give us some color on what you were able to do differently from them which will boost the profitability? That's question one.

And the second question is around the new business margin. I've seen that fall in the first half, partly driven, you mentioned, by this Swiss full insurance solutions business. Is that likely to recover? Or are we looking at a lower rate overall group margin going forward?

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [21]

--------------------------------------------------------------------------------

Okay. So I'll take the BVG question, and Matthias Aellig, our CFO, will talk about the margins then. So what we showed at our Investor Day is that we are much better reserved in our group life business than the average market is, and we also have a lot higher recurring income than the average market did. So of course, that -- both of that helps profitability.

Having said that, even for us, the profitability coming from our full insurance business is clearly below average in terms of return on capital compared to other businesses we have. But we do earn our cost of capital in this business, and some of our competitors might have had other considerations in that respect. But again, as we said in November, we are much better reserved and we have much better direct yields on our assets than our competitors have. So we're in a much stronger position to run this business profitably. Now to the margins, Matthias?

--------------------------------------------------------------------------------

Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [22]

--------------------------------------------------------------------------------

As you mentioned, if we look at -- on Slide 24 and if we see the negative 60 basis points on the margin, this is with 90% driven by this increase of group life volume. So 90% of that margin decrease is due to that surge in BVG new business.

Let me be clear also, if we look at the new BVG business acquired, it meets our hurdle rates and it was almost at the ambition level for the new business margin, but it was below average. And going forward, if we have a more normal, so to speak, volume of new business in the BVG area, we expect margins to go up again.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

The next question comes from Ashik Musaddi, JPMorgan.

--------------------------------------------------------------------------------

Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [24]

--------------------------------------------------------------------------------

This is Ashik Musaddi. Just a few questions I have, if you can help me. First of all, I mean there is a bit of difference between SST Solvency II ratio and internal model. So one part of this question is basically how will the Solvency II ratio will have moved in first half? Any color on that? Because Solvency II has more impact of -- from interest rates than clearly suggested by your SST model. So that's first part of it.

The second part of it, I mean if I look at your economic model, which you have not given any color as to what the ratio is, but is it fair to say that is above the ambition range at the moment? Or where it would be if you categorize between your ambition range, above capital, or say, below that? Just trying to get a bit of sense as to the drop in interest rate, how much economic impact it would have on your balance sheet.

The next question is on the cash remittances. Any possibility if you can give us more color as to where is this CHF 700 million coming from? Is it equally split between in line with the profits or is it like skewed by any particular division?

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [25]

--------------------------------------------------------------------------------

Okay. First, on the solvency, right, we have not given color on our internal model. The only thing I can say is that we are in our ambition range with respect to our internal model, whereas we're above the ambition range with respect to SST.

On the cash side, most of the money actually comes just simply from our major opcos, so Swiss Life AG. That is the lion's part of the upstreaming. Of course, the fee businesses tend to have a higher percentage, whereas the insurance businesses tend to have a bit of lower percentage of cash upstreaming with respect to IFRS earnings, but most of the money comes from the life insurance business.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

(Operator Instructions) Gentlemen, there are no more questions.

I'm sorry to interrupt. We have a follow-up question from Mr. Ashik Musaddi, JPMorgan.

--------------------------------------------------------------------------------

Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [27]

--------------------------------------------------------------------------------

Just a couple of follow-up questions. On your reinvestment yield, you mentioned that there could be some changes you would consider in second half. I mean what sort of reinvestment yield assumptions are used in the current SST model? Any color on that would be great.

And secondly, you mentioned that in very, very long term, low interest rates will have an impact on statutory results. I mean is it to do with the cash flow matching, and for how long are you cash flow matching and when will it start having an impact? Is it fair to say that like for the first 20, 25 years, it's cash flow matching and after that there is some duration mismatch?

--------------------------------------------------------------------------------

Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [28]

--------------------------------------------------------------------------------

Maybe on the question of the reinvestment rate, within the SST model, there, everything is risk-free. And that's by design of the model, that's what it is. I think the comment before was referring to the reserving situation where we anticipate that the lower yields in the capital market may influence the reserving position going forward. But that's an assessment that we make for statutory and also for IFRS at the half year and the next time for the full year closing, and that's I think too early to tell something in terms of numbers.

The second question regarding yields and their impact on the cash remittance, I think, first, I have to say that due to the fact that we have so long duration and such a long -- such a disciplined asset liability management, we have protected our interest rate margin for more than 3 decades. So that's what we keep disclosing at our Investors Day and that's something we see clear benefits of having these long asset durations. So it would take a very long time before we see an impact there.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

We have a follow-up question from Farquhar Murray, Autonomous.

--------------------------------------------------------------------------------

Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [30]

--------------------------------------------------------------------------------

Sorry for just extending the call. Just a quick question actually on the asset management business. Again, a very strong performance there in terms of growth in the segment result of 7%. I just wondered if you could help us maybe understand the organic component for that if we strip out the Beos. acquisition.

And then, more generally, you suggested some catch-up in that business in the second half. Is that coming from higher real estate project realizations or higher activity in net new money? And can you put any potential magnitude around that catch-up in the second half?

--------------------------------------------------------------------------------

Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [31]

--------------------------------------------------------------------------------

Yes. We said that we expect a catch-up for the second half of the year. Real estate business such as the one particularly from Beos, they develop a business in the first half of the year and typically transact in the second half of the year and that's why the income is really back end-loaded and that's the reason why we see a catch-up that brings us into a segment result above the level of 2018 in TPAM. So I think that's the reason for that. So it's more transaction-related, even though there's some contribution from net new assets Beos as well.

In terms of the organic growth, I mean, the majority of the net new assets that we achieved out of the CHF 6.2 billion that the vast majority was organic and only a small contribution there came from the recent acquisition.

--------------------------------------------------------------------------------

Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [32]

--------------------------------------------------------------------------------

And then if we look at the plus 7% growth in the segment result year-on-year, how much of that was coming from Beos?

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [33]

--------------------------------------------------------------------------------

I believe it was around CHF 3 million coming from Beos and the CHF 2.3 million in the first half coming from Beos.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Next question comes from Rene Locher, MainFirst.

--------------------------------------------------------------------------------

Rene Locher, MainFirst Bank AG, Research Division - Director [35]

--------------------------------------------------------------------------------

Yes. First, a technical question looking on Slide 36. There, we can see that net capital gains amounted to CHF 138 million, mainly driven by, I guess, these real estate revaluation gains. And I was wondering, this CHF 138 million, have you used it to increase reserves because there is -- as you can see, reserve strengthening on Slide 23 resulted in a minus 2 bps of the average technical reserve. And just general one, I'm just wondering your view on the proposal for pension reform in Switzerland. I mean proposal is out and I haven't seen anything from insurance companies and neither from the Swiss Insurance Association.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [36]

--------------------------------------------------------------------------------

Well, yes. As Matthias said, we strengthened reserves by CHF 300 million in the first half, so nothing new on that front. So what we tend to do is that net capital gains, especially in the fixed income area, leads to lower reinvestment assumptions and that then triggers these reserve strengthening adjustments according to the Swiss Actuarial Society, and that was CHF 300 million in the first half.

And with respect to the political endeavors now pending Parliament or more specifically the Swiss government here, the Swiss Insurance Association said that they welcome the different statements from the different associations that have said something about that. And of course, we welcome the lowering -- the immediate lowering of the conversion ratio of 6.8 to 6.0, and we also welcome that it opens up the possibility for additional premiums for our business, but we haven't said whether or not we welcome these explicit initiatives. We said we are assessing, and we will assess the drafts that are due at the end of August for first pillar reforms from the federal government and the other drafts at the end of November for the second pillar reforms and we will then make our statements after the release of those drafts.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

That was the last question, gentlemen.

--------------------------------------------------------------------------------

Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [38]

--------------------------------------------------------------------------------

Okay. So that brings us to the end of our phone conference. Thank you, again, for joining us today. I hope you enjoy the rest of the summer, and look forward to seeing you again soon. Goodbye, everyone.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

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. Goodbye.