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Edited Transcript of SLHN.S earnings conference call or presentation 28-Feb-20 8:00am GMT

Full Year 2019 Swiss Life Holding AG Earnings Call

Zürich Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Swiss Life Holding AG earnings conference call or presentation Friday, February 28, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Andrew Sinclair

BofA Merrill Lynch, Research Division - VP

* Fulin Liang

Morgan Stanley, Research Division - Former Research Associate

* Jonathan Peter Phillip Urwin

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

* Kevin Ryan

Bloomberg Intelligence - Analyst

* Michael Igor Huttner

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Peter Eliot

Kepler Cheuvreux, Research Division - Head of Insurance Sector Research

* Rene Locher

MainFirst Bank AG, Research Division - Director

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Swiss Life Presentation of the Full Year Results 2019 Conference Call and Live Webcast. I am Shai, the Chorus Call operator.

(Operator Instructions)

And the conference is being recorded.

(Operator Instructions)

(foreign language)

(Operator Instructions)

The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Patrick Frost, Group CEO of Swiss Life. Please go ahead.

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

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Dear analysts and investors, welcome to our call on our 2019 annual results. Thank you for giving us the opportunity to present our business performance. As usual, I shall first mention a few key aspects of the results before handing over to our CFO, Matthias Aellig. He will go through the figures for 2019 in detail, after which we will both be available to questions and answers.

Swiss Life can look back on a very successful financial year. Overall, net profit came to CHF 1.2 billion, which was 12% higher than the previous year. Our adjusted profit from operations rose by 10% to CHF 1.69 billion. The main driver was our fee results, and furthermore, all segments contributed to the increase in profit from operations, which I naturally find especially gratifying.

Fee income rose by 16% to CHF 1.82 billion. This produced a fee result of CHF 553 million, up 15%. Swiss Life asset managers with net new assets and third-party asset management of CHF 8.9 billion and our independent financial advisers were the main contributors. We were also able to improve our risk result with an increase of 3% to CHF 417 million. Furthermore, we were able to increase the value of new business by 45% to CHF 561 million. This is primarily due to the exceptional new business production in the group life business in Switzerland, a large extraordinary and one-off increase in single premiums last year that we've already mentioned several times in the past, resulted from the withdrawal of a competitor from the full insurance business. We, therefore, expect overall premiums to be lower in 2020.

Other KPIs set out in our Swiss Life 2021 group-wide program indicate that performance has been very positive. We again improved operational efficiency, as you can see on Slide 4. We estimate our SST ratio to be slightly above 200% at the beginning of the year, and we increased the cash remittance to the holding company by 8% to CHF 752 million.

Our success is also paying off for our shareholders. At the AGM, the Board of Directors will propose a dividend increase from CHF 16.50 to CHF 20 paid in cash, bringing our dividend payout ratio, another target figure for Swiss Life 2021, to 53%, which is within the target range of 50% to 60%. The strong solvency as well as the cash situation and development at the holding company enable Swiss Life to launch a new share buyback program totaling CHF 400 million. We'll start this new share buyback this March and plan to complete it by May of next year.

Ladies and gentlemen, I'm very happy with these results. The strong commitment of our employees enabled us to make progress in all strategic fronts of the Swiss Life 2021 program.

I now hand over to our CFO, Matthias Aellig.

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

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Thank you, Patrick. Good morning, ladies and gentlemen. I will now provide more details on our 2019 results. 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 7.

Gross written premiums, fees and deposits received increased by 22% in local currency to CHF 23 billion. This exceptional growth was mainly driven by our Swiss Group Life business. Fee and commission income was up by 16% in local currency to CHF 1.8 billion, primarily due to the strong contribution from asset managers, our owned IFAs and also due to our unit-linked business. The net investment result of the insurance portfolio for own risk slightly decreased to CHF 4.6 billion, mainly due to the slightly higher FX hedging costs and higher investment expenses.

Net insurance benefits and claims increased to CHF 17.8 billion due to Switzerland. This includes further reserve strengthening of around CHF 900 million, which leads, among other factors, to a lowering of the average technical interest rate. Policyholder participation slightly decreased to CHF 1.1 billion, mainly due to a reduction in France that was partly offset by an increase in Germany.

Operating expenses were up by 9% to CHF 3.5 billion, primarily due to higher commission expenses and expenses related to newly consolidated businesses. Profit from operations grew to CHF 1.7 billion, with a positive contribution from all profit sources. This includes the profit contribution from the exceptional premium increase in Switzerland. As mentioned on previous occasions, this contributed a very low double-digit million amount.

Borrowing costs decreased to CHF 123 million. This includes the effects of the refinancing in 2018 of a matured high -- hybrid bond with a comparatively high coupon. Our income tax expense slightly increased to CHF 324 million and includes a positive CHF 49 million one-off. This is a noncash accounting effect in the context of the implementation of the Swiss tax reform in several cantons. Our effective tax rate was around 21%, including this one-off item. We expect the tax rate in 2020 to be at the level of around 24%, essentially in line with prior year -- years, depending on the geographic split of profit generation. Finally, our net profit went up by 12% to CHF 1.2 billion, including what was mentioned of the positive tax one-off of CHF 49 million.

Slide 8 shows the adjustments to our profit from operations. On the left-hand side, you can see last year's adjustments, including a CHF 21 million FX translation effect relating to the decrease of the euro by EUR 0.04 in 2019.

On the right-hand side, we adjusted 2019 profit from operations to reflect restructuring charges and the program costs related to a new accounting standard. The adjusted profit from operations increased by 10% to CHF 1.69 billion.

Moving now to the segment results, I will start first with Switzerland on Slide 9. Premiums increased substantially by 41% to CHF 13.5 billion, while the overall market increased by 1%. In individual life, premiums were up by 9%, while the market was up by 2%. Single premiums increased by 29%, primarily with modern and modern-traditional products. Periodic premiums grew by 1%. Premiums in group life were up by 47%, while the market remained stable. Periodic premiums grew by 11%, single premiums increased by 76%. This exceptional increase was driven by additional demand as our largest competitor pulled out of the full insurance business. We maintained our strict underwriting discipline to support capital efficiency.

Overall premiums in group life, excluding this exceptional development are above the prior year level. In 2020, we expect a substantial decrease of single premiums. New business production with semiautonomous solutions was up by 39%. Assets under management in our investment foundation grew by 29% to CHF 11 billion compared to CHF 8.5 billion at year-end 2018.

Fee and commission income was up by 7% to CHF 265 million, with an increased contribution from Swiss Life Select, our mortgage business and investment solutions for private clients. Operating expenses decreased by 1% to CHF 419 million due to our continued cost management. Please note that starting half year 2019, we report operating expenses on all our business review slides on an unadjusted basis. The segment result improved by 3% to CHF 892 million due to higher costs, risk and fee results. The savings results decreased in line with the lower net investment income. The cost result increased due to higher cost premiums and the reduced DAC amortization since DAC amortization was exceptionally high in 2018.

The fee result was up by 11% to CHF 20 million. The drivers are the same as for the income development. The risk result increased by 4% to CHF 261 million, mainly driven by the growing group life business with full insurance and semiautonomous solutions. The value of new business increased by 90% to CHF 308 million, mainly due to the group life business and also positive contributions at individual life unit-linked and the assumed reinsurance businesses. The new business margin decreased from 2.8% to 1.6% due to the extraordinary high share of full insurance solutions and lower interest rates.

Turning now to France. Please note that all figures quoted are in euros for our segments, France, Germany and international.

In France, premiums increased by 5% to EUR 5.3 billion. Overall, the French market was up by 4%. In our life business, premiums were up by 5%, while the market was up by 4%. The unit-linked share in our life premiums was 49% and substantially above the market average of 27%.

In health and protection, premiums increased by 4%, whereas the market increased by 5%. Premiums in our group business were up by 5%. Premiums in our individual business increased by 3% with individual protection up by 8%. P&C premiums were up by 7%, driven by motor products, supported by new partnerships. The market was up by 4%. Fee and commission income increased by 9% to EUR 293 million. Unit-linked fees increased due to high unit-linked reserves in line with positive inflows and positive capital market development. This was partly offset by lower banking fees due to a low turnover of structured products.

Operating expenses increased by 4% to EUR 341 million due to business growth and investments in growth projects, such as digital client solutions. Segment result rose by 3% to EUR 247 million with a positive contribution from the savings fee and risk results. The savings result increased due to high financial margin in the life business and a high net investment income in the non-life businesses. The cost result decreased in line with a strong new business production.

In the context of (inaudible), we successfully launched new individual pension products in October 2019. Those will be complemented by group pension products in 2020. The fee result was up by 11% to EUR 75 million. The high unit-linked fee result was partly offset by a lower result in the banking business. The risk result increased by 2% to EUR 97 million. The positive contribution from the life and P&C businesses was partly offset by a lower risk result in health and protection due to higher claims. The value of new business increased by 1% to EUR 131 million, high volumes in life and health and protection were partly offset by the impact from a strong decrease in interest rates. The new business margin decreased to 2.4%.

Moving on to Germany on Slide 11. Premiums were up by 2% to EUR 1.2 billion. We achieved higher periodic premiums with disability and modern traditional products, both in group and individual life. The overall market was up by 11%, driven by single premiums. Fee and commission income grew by 14% to EUR 448 million, driven by a positive contribution from our owned IFAs, due to the increased number of financial advisers and productivity gains. The number of financial advisers amounted to almost 4,200, up 10% year-on-year. Operating expenses increased by 5% to EUR 224 million because of business growth as well as ongoing investments in growth initiatives, such as the digital client portal for our owned IFAs and digital interfaces to intermediaries in the insurance business. The segment result was up by 35% to EUR 167 million, primarily due to the positive development for savings and fee results, with broadly stable cost and risk results.

The savings result was unusually high. In the context of the ZZR financing, we had an extraordinarily high net investment result including gains on interest rate derivatives. We expect a lower savings result in 2020. The fee result was up by 11% to EUR 66 million, driven by a strong contribution from owned IFAs. The risk result slightly increased to EUR 33 million due to continued positive claims experience. The value of new business increased by 32% to EUR 55 million. We achieved high volumes and a higher share of modern products driven by the launch of new unit-linked products. As a result, the overall guarantee level decreased significantly. The new business margin remains strong at 3.3%.

Turning now to the International segment. Premiums decreased by 3% to EUR 2.1 billion due to lower premiums with private and corporate clients. In the fourth quarter of 2019, however, we achieved increasing premiums year-on-year. Assets under control for private clients increased by 12% to EUR 19.5 billion.

Fee and commission income was up by 25% to EUR 282 million. All business lines contributed to this. Main drivers were Fincentrum, acquired in October 2018, and organic growth at Chase de Vere as well as the private insurance clients. Operating expenses increased by 13% to EUR 103 million. This is due to the mentioned acquisition, while operating expenses in other businesses were essentially stable. The segment result increased by 25% to EUR 73 million due to the positive development of all profit sources. The fee result grew by 28% to EUR 53 million, primarily as a result of the positive organic contribution from existing businesses. The risk result slightly increased to EUR 11 million, given a continued positive claims experience. The value of new business improved by 77% to EUR 48 million. This was driven by high volumes at attractive margins in our risk business. The contribution from our business with private clients remained stable. The new business margin increased to 2.4%.

Let's now move to our Asset Managers segment that reports in Swiss francs. Asset Managers figures include payoffs acquired in August 2018 and Livit facility management that is reported on a gross basis starting in 2019. Asset Managers total income rose to CHF 853 million due to higher management fees on a growing asset base and higher transaction fees. This is an increase of 16% or, excluding Livit facility management, of 11%. In our PAM business, total income increased by 17% to CHF 377 million or by 9%, excluding Livit facility management, as a result of a higher asset base, primarily due to our interest rates and tight credit spreads. Moreover, we also have higher real estate transaction and management fees. In our TPAM business, total income was up by 15% to CHF 476 million or by 12%, excluding Livit facility management. This is due to higher recurring fees on growing assets under management and higher real estate transaction fees, while the increasing contribution from the acquisition of Beos was partly offset by the lower other net income driven at a well-flagged temporary reduction of project development contributions.

The share of total nonrecurring income for TPAM, meaning transaction fees and other net income, was at 27% of total income, compared to 33% in the prior year period. Operating expenses increased by 20% to CHF 480 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 11%.

The segment result increased by 14% to CHF 309 million. PAM was up by 12% to CHF 223 million, mainly as a result of the growing asset base and higher real estate fees. TPAM increased its contribution by 17% to CHF 86 million, this reflects operational progress that is partly offset by lower other net income. Other net income from real estate project development is expected to pick up again in 2020 as we have mentioned on previous occasions.

Net new assets in our TPAM business amounted to CHF 8.9 billion compared to CHF 8.4 billion in 2018. We have broadened our client base again in 2019. Net new assets placed by asset class were: 33% real estate; 20% balanced mandates; 16% bonds; 13% money market funds; 12% equities; and 6% infrastructure. Excluding money market funds, we generated net new assets of CHF 7.8 billion compared to CHF 10.6 billion in 2018.

Overall, assets under management in our TPAM business now amount to CHF 83 billion. The split by asset class is: 40% real estate; 20% balanced mandates; 20% bonds; 8% equities; 7% money market funds; and 4% infrastructure. Total assets under management were up by 9% to CHF 254 billion, mainly due to higher asset valuations in PAM and net inflows in TPAM.

Let's move back to the group on Slide 14 and have a look at our operating expenses. The overall cost base increased by 9% to CHF 3.5 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 6% to CHF 1.6 billion. In our insurance segments, adjusted operating expenses increased by 4% to CHF 1.2 billion. As explained, this is primarily due to Germany and France.

Turning now to the investment result on Slide 15. Our direct investment income was up by CHF 29 million to CHF 4.4 billion. Higher rental and dividend income was partly offset by lower coupons. Our direct investment yield decreased by 8 basis points to 2.8%, also due to the basis effect from higher asset valuations. The net investment result slightly decreased on a non FX-adjusted basis to CHF 4.6 billion, which led to a net investment yield of 2.9%. This is about 13 basis points below the prior year level. Investment expenses increased due to growing assets under management, higher real estate transaction volumes and transfer taxes.

Net capital gains increased slightly, primarily due to high net realized gains on equities, bonds and real estate revaluations. This was partly offset by lower realized gains on alternative investments and loans as well as by higher FX hedging costs and related items. FX hedging costs increased by CHF 57 million to CHF 774 million. Our total investment result, including changes in unrealized gains and losses on investments, increased to 7%, mainly due to lower interest rates and tight credit spreads.

Slide 16 shows the structure of our investment portfolio. The share of bonds slightly decreased to 57% as we shifted our portfolio further into real estate mortgages and equities. The share of real estate was at 20.7%. We had further real estate revaluations of CHF 0.7 billion and further net acquisitions of CHF 2.9 billion. The risk premium on real estate remains very attractive. Our gross equity quota increased to 8.8%. Our net equity exposure was 4.1%. Our duration gap was at 1.1. Please note that our foreign currency exposure on the insurance portfolio remains hedged. As mentioned on previous occasions, we do not hedge the FX translation effect from our foreign operations and their profits.

I will now move on to insurance reserves. Our insurance reserves, excluding policyholder participation liabilities increased by 7% in local currency to CHF 167 billion. All units contributed to this.

Turning now to shareholders' equity on Slide 18. Shareholders' equity increased by 10% to CHF 15.9 billion. The main drivers were in unrealized gains on bonds and equities, and the net profit attributable to shareholders. This was partly offset by the dividend paid to shareholders and the share buybacks completed in 2019.

Slide 19 shows our capital structure. Our total outstanding financing instruments amount to $4.4 billion. This includes CHF 600 million of green bonds issued in November 2019. Our total hybrids, including hybrid equity amounts to CHF 3.3 billion. The share of equity within our capital structure is 71%. It is calculated on shareholders' equity adjusted for unrealized gains on bonds and other financial assets, in line with our return on equity calculation. The capital structure and maturity profile remain well balanced, with a diversified denomination of debt in Swiss francs and euros. That brings me to our Swiss Life 2021 program.

On Slide 20, you can see our 2021 financial targets. I will provide more details on the Swiss Life 2021 progress reporting from the following pages. Let me start with the development of our earnings quality on Slide 21. Our savings result increased to CHF 912 million. The major drivers of this increase were Germany and France more than offsetting the decline in Switzerland. As mentioned, the level of the savings result in Germany is not sustainable. The risk result increased by 3% to CHF 417 million. All insurance units contributed positively. The fee result increased by 15% to CHF 553 million with a positive contribution from all of our business segments. This includes the mentioned acquisition-related increase from Beos, acquired in August 2018, and from Fincentrum, acquired in October 2018. The cost result improved mainly due to high cost premiums and lower bank expenses in Switzerland, partly offset by increase in acquisition costs in France due to a strong new business production.

The gross admin cost result increased by 10% to CHF 142 million. Our next 3 slides show that we continue to benefit from our discipline 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 the reinvestment rate of around 2% in 2019.

Moving on to the average technical interest rate on Slide 23. We further strengthened the technical reserve, which led to a 6 basis point decrease of the average technical interest rate. In addition, the shift to a more favorable business mix led to a further reduction of 4 basis points. We also lowered the guaranteed rate in our non-mandatory Swiss group Life business from 0.25% to 0.08%. This contributed another 2 basis points. Overall, our average technical interest rate decreased by 13 basis points to 1.12% as of 1st of January 2020. We are very pleased that we were able to reduce the average technical interest rate in Switzerland to 79 basis points.

With our disciplined ALM, we have again successfully protected our interest rate margin, as shown on Slide 24. Please note that the initially mentioned reserve strengthening of about CHF 900 million in 2019 will have a positive impact on our 2020 technical guarantees. And this does not yet reflected in the interest rate margin of 2019 shown on this slide.

Let me now briefly comment on the development of the fee and commission income. Commission income at Swiss Life Asset Managers was up by 21% in local currency. This excludes, as usual, other net income from real estate project developments. Commission income from our owned IFAs increased by 19%, with a positive contribution from Germany, International and Switzerland. The business with own and third-party products and services increased by 9%, local currency with a positive contribution from all insurance segments.

Overall, our fee and commission income increased by 16% in local currency to CHF 1.8 billion. About half of that growth is organic, about 30% is due to the acquisitions of Beos and Fincentrum, and the remainder is due to the full consolidation of Livit facility management. Turning to the value of new business. The value of new business increased from CHF 386 million to CHF 561 million. This is mainly due to the volume increases in all segments, primarily the exceptional new business production of full insurance solutions in Switzerland as well as our active new business steering and cost efficiency gains.

The decline of the new business margin from 2.6% to 1.9% is primarily due to the high new business production of full insurance solutions and the unfavorable interest rate developments. Nevertheless, our new business margin is above our ambition level of 1.5% in all of our segments.

Let me now move on to operational efficiency. As already mentioned, operational efficiency continues to be an important thrust in our Swiss Life 2021 program. We are addressing operational efficiency with 3 key performance indicators. In life insurance, the efficiency ratio improved by 1 basis point to 41 basis points, primarily driven by the increase in life insurance reserves. At our owned IFAs, the distribution operating expense ratio improved by 2 percentage points to 26% and higher commission income outweighed higher expenses. In our TPAM business, the cost-income ratio decreased to 84% from 91%, in line with the growing net commission income and improved efficiency.

Turning to capital, cash and payout on Slide 28. As of 1st of January 2020, our Swiss Solvency Test ratio is estimated to be slightly above 200%. As of today, the SST ratio is somewhat lower, given recent financial market development. We will communicate the results of the full calculation in our financial condition report by the end of April 2020. Our Solvency II ratio was above 200%, based on the standard model, excluding any transitional measures.

Slide 29 shows our cash remittance and dividend. In 2019, we remitted CHF 752 million of cash to the holding company. This is an increase of 8% year-on-year and corresponds to 70% of the 2018 net profit. For the 2019 financial year, the Board of Directors will propose to the AGM, an increase of the dividend to CHF 20, up from CHF 16.5 in the previous year. This corresponds to a payout ratio of 53%. Part of the total dividend payment, mainly CHF 5 per share will be paid in cash as a par value reduction. The par value of the Swiss Life share will thus be reduced from CHF 5.1 to CHF 0.10.

Coming to our newly announced share buyback program. On 5th of December 2019, we have completed our CHF 1 billion share buyback program. Today, we announced an additional share buyback program running from March 2020 to May 2021, we will repurchase shares for CHF 400 million. As in the last share buyback, the program will be executed by a partner bank through a second trading line. The repurchased shares will be proposed for cancellation to the AGM. The share buyback will be financed with cash at the holding, including the annual cash buildup. At year-end 2019, we had slightly more than CHF 0.9 billion of cash at the holding company and were thus slightly above the middle of our compute range.

Let me sum up. Today, we report a strong 2019 financial year. Our Swiss Life 2021 program is well underway. We are on track to strengthen our earnings quality, particularly by increasing our fee result. We are ahead with the value of new business though this has become more challenging, given the sharp decline in interest rate. Moreover, we will maintain our cost discipline to improve operational efficiency. When it comes to capital, cash and payout, I can report a strong solvency and a growing cash remittance based on disciplined capital management. This led to an increase of the payout ratio. We successfully completed our CHF 1 billion share buyback program in December 2019, and we'll buy back additional shares for CHF 400 million.

Finally, our return on equity increased to 10.8%, which is above our target range.

Thank you for listening, and back to you, Patrick.

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

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Thank you, Matthias. And now, dear analysts and investors, it's your turn, who'd like to ask the first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question comes from the line of Peter Eliot, Kepler Cheuvreux.

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Peter Eliot, Kepler Cheuvreux, Research Division - Head of Insurance Sector Research [2]

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I have 3 questions, please. The first 1 was on the sort of levels of cash that you need. I'm going to sound very greedy here because I was very pleased indeed with the announcements today, thank you. You mentioned, Matthias, that you were just above the CHF 0.9 billion midpoint at the end of the year. My understanding is that you're now thinking that, sort of CHF 0.8 billion is okay rather than the sort of CHF 0.8 billion to CHF 1.0 billion band. So I was just wondering if you could sort of confirm that and give your thoughts around what drove that. And maybe also sort of confirm your view on sort of other pockets of cash available, whether you'd still sort of rule out upstreaming any other pockets of fungible cash.

The second one was on the new French Solvency rules. And I was wondering if you could just sort of talk about the implications of those for you, and whether that has fed into the generous buyback. Whether you see more sustainable cash remittance up from France in the future on that. And the third one, on your investment portfolio. Obviously, you've gone more into real estate again this year. I'm just wondering whether there's an upper limit to that. Or what do you see going forward? Yes, whether we should expect any slowdown in that growth in real estate share of your investment portfolio.

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

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So thank you, Peter. I'll take the last question and hand over the other 2 to Matthias. So first, on real estate, no. I mean, there is no -- I mean, of course, at some point, there is an upper limit, but that's not, let's say, relevant for this year. So given the relative values of real estate versus long-dated bonds, I still expect us to be very active in the market. And on the other 2, over to Matthias.

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Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [4]

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Okay. Thank you, Peter. In terms of the level of cash, I think the guidance that we gave in the past still applies. So that means the CHF 800 million to -- CHF 1 million to CHF 1 billion, that's the comfort range and is kind of -- every level there is within that range is equally comfortable. And so there's no change there. And as you mentioned, we will find the share buyback with what we have currently at the holding and the annual cash build-ups that will come through. Now in terms of additional pockets, we had a discussion on a previous call in terms of the free reserves in the IG, which we then said they are called free reserves, but they are not free because we do not want to run the opco with less statutory equity. So to cut that answer short, there are no additional pockets.

Now moving to the French Solvency rule, as a group, we are regulated by SST and the relevant criteria that we consider when thinking about capital management actions over and on top of the dividend or the group SST ratio and the cash available at the holding company. So it is a positive for our French company there, that the Solvency II ratio will increase due to that regulation. But from the group's perspective, this is not a game-changer.

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Operator [5]

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Next question comes from the line of Andrew Sinclair, Bank of America.

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [6]

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3 for me, if that's okay. So firstly, just on sales, January's passed and just wondering if you could give us any update on kind of what the sales volumes look like for Switzerland. Is there any further residual pickup from access departure? Or is it really just back to normalized levels after the one-off boost last year?

Secondly, was just on debt levels. You're currently towards the upper end of your 25% to 30% range for debt and the capital structure. And that will probably exacerbate it a little bit by the buyback. I just wondered if there's any desire for deleveraging. Or just happy to grow into that over time?

And thirdly, just having deployed cash for the buybacks, does that really preclude you from looking at any M&A over your current plan period?

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [7]

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So on the insurance side, there is nothing special to say about any sales in Switzerland. So there is no further lap over from the competitor withdrawal from the BVG market. I mean, that was quite some time ago. Then on the debts side, we just -- we confirm our reference levels there. So there is no key leveraging ambition here. So we feel happy about where we are. And as you know, we're not on an M&A spree anyway. So any transactions we've done in the past, we're well below the amounts that would be possible to finance with the additional small debt capacity that we still have. So there is no change in policy here.

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Operator [8]

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Next question comes from the line of Michael Huttner from Berenberg.

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Michael Igor Huttner, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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The results was amazing. I mean not that I'm covering you yet, but the real question is, given where you are today and where you were 1.5 years ago when you set your new 3-year plan. Which targets in particular, do you feel most comfortable about? I would identify the [CBC] result, but I just wondered if maybe in the cash flow, new business is something -- that's something you're here for us to think about?

The other is a standard question, can you talk about the coronavirus thing, maybe give us a feel for how you see it? And then the final thing, and here -- I haven't looked at numbers, excuse me, if I'm wrong and well, I probably am wrong, but anyway. You know that the one bit of your presentation which struck me as not being quite confident was the health in France. And I just wondered, given that's a business where I've always had high expectations and they haven't always -- I always feel, well, not been quite so wonderful. Is that a business where you'd think well, strategically it's not as core as we think?

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

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So on the French health. I mean we do think that it is core. As you know, there have been quite a lot of reforms on the French market around the health business over the last couple of years, but we have a well-established franchise, and we've managed that transition so that stays core. Now on the corona side. I mean, first of all, we've issued similar travel restrictions or, let's say, we -- and hygiene policies as many of our competitors so I think that's important to mention first. And our business, we have not felt anything yet in our core markets here in Europe. Whether or not that will change, of course, will depend on how the coming weeks and months will develop. Of course, the first area where you could hypothetically expect some impact is in our advisory business. We have 14,000 salespeople out there. Of course, if we now see a very tired development here, of course, we'd notice that in our IFA business, but we don't feel anything yet at all. The main thing we feel is really on the financial markets. You know our SST sensitivities. And here, of course, that's where we feel it most. On the liability side, we have a well-balanced portfolio between mortality and longevity risk. And then the target question will be -- I'll hand over to Matthias.

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Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [11]

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Now in terms of the program. I mean, we can clearly confirm the Swiss Life 2021 targets that we have laid out that you see on Page 31, our current assessment is that we are really on track in terms of fee result and risk result. As mentioned, in terms of the new business with the closing of the year 2019, we see ourselves ahead. Having said that, rates have come down significantly since year-end. And there, we see some headwind. But as we close the year, value of new business really looked ahead of the goals.

Operational efficiency I think there, we are also comfortable. In terms of SST, we are ahead. This is also true if we talk about today's situation. And in terms of cash, you see we have also a good track record there as well as the dividend. So I think we are really comfortable with the targets even though there is hard work ahead of us.

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Operator [12]

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Next question comes from the line of Kevin Ryan of Bloomberg Intelligence.

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Kevin Ryan, Bloomberg Intelligence - Analyst [13]

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I've just got 2 questions on a similar theme, really. The first one is on the new Swiss group life business you've taken on last year. Have there been any surprises there with the portfolios that you have taken on? That's the first question.

And the second question is, this business is inherently lower margin than some of the other businesses you're in. And I'm just wondering how you're looking at rebalancing the portfolio going forward and what the outlook for more fee income is. And how you see that balancing the group life business that you've taken on.

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [14]

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So we have several sources for our fee income and fee result. I mean, first, we have asset management, where we were on a strong growth track supported by our real estate franchise, which is, of course, very well supported now by these low rates. So that should continue to do well. We also have a strongly growing IFA business as Matthias just pointed out, where we can also expect further growth, further demand by clients. And then we also have the unit-linked business, which is also important, mainly from France and from International. And here, of course, with these -- with the market environment we see -- we might see depending how financial markets continue, we might see some slowdown from the strong fourth quarter development. But overall, we confirm our very ambitious target. I mean, look, where we came from the fee result. Just 5 years ago, we were at CHF 260 million, today, we're on the CHF 550 million, and we confirm the CHF 600 million to CHF 650 million.

And now to the BVG, yes, you're right. It is indeed a lower-margin business than the rest of our business. We've always said that and confirmed that but with the business we've taken on from AXA, we've actually improved the quality of our business. So for example, the average age in our portfolio and other -- the mix between mandatory and non-mandatory business and so on. So if a surprise, then it was on the positive side.

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Operator [15]

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Next question comes from the line of Jonny Urwin, UBS.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [16]

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2 for me, please. Firstly, on the buyback, I'm just kind of trying to understand the rationale behind this -- the amounts and the timing a bit more. I mean, I guess, one of the things that you guys, as a management team have become very well-known for is kind of consistent, reliable, conservative and just execution. And it just feels to me that this buyback, having committed to do 2 years forward, cash -- returning cash remittances to shareholders, is a bit of a stretch and it does tie your hands a little bit on the cash flow front. And at quite an uncertain time for market. So I'm just wondering, basically, why you've done it. And what are you trying to signal here? So that's the first question. And then secondly, has there been any change on vacancy rates or de trends on the real estate markets in Switzerland?

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [17]

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Okay. So first, on the share buyback. As we've always said, it depends on 2 conditions, if 2 conditions are fulfilled, then we assess the situation. So the first condition is that we're above the CHF 190 million in SST and this, we've been for a -- for quite some time now. The second condition is that we have cash available with the ambition levels that we mentioned. And of course, there is no automatic share buyback if these conditions are fulfilled. We assessed the situation and given the outlook of the cash generation, given the outlook we have with the strong organic growth that is coming through, we felt comfortable with the share buyback and the timing. And you're right, we have 2 annual net cash generations within the program. That's exactly the reason why we've gone for 15 months. And the reason is we just don't want to sit on more cash than we need to.

Then the vacancy rate here. That's also going well in the Swiss market. We've seen a lower vacancy rate. As far as I remember, it's around 3.7%. And it's really across the board. We see lower vacancy rates in apartments. We saw lower vacancy rates in offices. The lowest vacancy rate, by the way, we have is in the retail space, which is always, I guess, a huge surprise for anybody in the U.K. And so it's really going well, and it's at the lowest vacancy rate we've had for as much as I can remember. Of course, we also have a lot of central locations, the office market is strong. The only bit difficult market is actually Geneva, which is, I would say much more difficult than Zürich or Basel or the rest of (inaudible). But also in France, we've hit new lows in the vacancy rates, and the same is true for Germany. So we really see a very good pick up here.

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Operator [18]

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Next question comes from the line of Fulin Liang, Morgan Stanley.

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Fulin Liang, Morgan Stanley, Research Division - Former Research Associate [19]

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This is Fulin. I've got 2 questions. So first of all, is on your -- do you mind that -- is there any estimate of your mark-to-market Solvency II -- sorry, SST ratio given the recent like market movement? That's the first one.

And then secondly, is that the -- I just want to make sure. So have you ever considered because as the -- you previously mentioned, so this buyback program is based on kind of assumption of future cash, excess cash generation. So I just wonder that given the recent market movements, do you think there is kind of -- or have you ever thought about, under kind of, what kind of stress scenario that this buyback could be actually canceled? That's the second one.

And the last one is kind of slightly irrelevant. Do you know the average -- just wondering, what's the average guarantee rate of you annualized -- annuitized book? And how does that move?

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [20]

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Okay. So no, we've not talked about canceling the share buyback that we've just announced. Again, we expect cash generation or cash to holding from our opco is more or less in line with the profit development, confirmed that last year, again. And on the annuitization number. We're trying to figure that out. So Matthias, if you have something on that? Not yet, apparently.

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Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [21]

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Maybe I have not fully understood the question. But in the booklet, on Page 49, you see essentially a breakdown of the reserves. So essentially, in the group life business, a bit more than the book is non-annuitized. And there, we have, on average, roughly 60 basis points worth of technical interest rate. Now we have given you for the entire Swiss market, the 80 basis points average technical rate. This includes also the individual lines, but this may be a guidance of -- for you to derive what is in the annuitization phase. So the 79 basis points I quoted includes the entire Swiss book.

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Fulin Liang, Morgan Stanley, Research Division - Former Research Associate [22]

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That's helpful. And what is the mark-to-market? Have you ever kind of have a mark-to-market?

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [23]

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Again, I mean, the SST is mark-to-market per se, I guess. So what you're trying to get to is to give an update on where we stand now after the strong market movements? And of course, we're now somewhat lower than where we were at the beginning of the year. But I'll remind you, at the beginning of the year, we were slightly above CHF 200 million, including the complete share buyback that we've just announced. And given the market movements we've seen now, we're somewhat lower now.

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Operator [24]

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(Operator Instructions) The next question comes from the line of Thomas Fossard, HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [25]

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I've got 3 questions. The first one would be related to the cash remittance ratio, 69%, in a way, it's 70% achieved in '19. So I just wanted to make sure that I -- if you could remind us if you provided any guidance or target in the past. And if there is any leeway for you to increase a bit the remittance ratio?

The second question will be related to Germany and to the savings margin. I think that several times in the presentation, you referred to the higher savings margin due to the ZZR funding. Could you provide us with any outlook or what you potentially need to -- you would have to further increase -- by how much you would have to increase ZZR again in 2020, bearing in mind the evolution of interest rates? And as a result, how it should play positively or negatively on your savings margin in Germany this year?

And the last question would be related to your duration gap. So looking at Slide 51, you had a stable duration gap to 1.1. Just wanted to understand if -- what was your current thinking about running this kind of duration mismatch in the current low interest rate environment? And if you had any actions to change that during the year.

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [26]

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So on the duration gap. The rationale we've mentioned now for many, many years of having this duration gap is that we do not include a duration component for our real estate portfolio. And the real estate portfolio we have, which is heavily geared towards Switzerland, has a rate sensitivity, especially in Switzerland. Look at the typical slide to quality moves we saw in 2008. We even had a slight appreciation of the real estate price in 2008 in Switzerland. And as we don't attribute any rate sensitivity to the real estate portfolio at all when we calculate the duration gap. I think we are on the side of caution that we have an open duration gap here, exactly to take that interest rate sensitivity of our 20% real estate portfolio into account. And again, we've been saying that for several years.

The other thing we've been saying for quite some time is the guidance or, let's say, indication on the cash generation. We've been slightly below 70% for several years now, it's usually been between 65% and 70%. And so the 70% of cash remittance -- sorry, I said, cash generation, it's cash remittance, that is really on, let's say, a bit on the high side. But we do confirm that going forward, we expect cash remittance to grow more or less in line with our earnings. And on the question in Germany, I hand over to Matthias Aellig.

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Matthias Aellig, Swiss Life Holding AG - Group CFO & Member of Executive Board [27]

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So on ZZR, we had -- this year quite an amount to finance CHF 185 million additional buildup of the ZZR, which meant some gains realization to finance that, including also gains on interest rate derivatives. And this actually was the reason why we said the savings result was unusually high. We do not expect that to occur to the same extent in 2020. Now rates have come down, but we cannot predict the rates and the additional debt that they've built up in Germany depends on where the rates are at the end of each quarter. So we -- to say that we expect a lower savings result, but I think the number would be speculation as we do not know where the rates will stay at the quarter ends.

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Operator [28]

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Next question comes from the line of Rene Locher, MainFirst.

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Rene Locher, MainFirst Bank AG, Research Division - Director [29]

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Yes. So I am on Slide of 39. That's the details of the net investment income. And perhaps you can comment. Firstly, on the revaluation gains on real estate. So now year by midyear, you're above the guidance of 1% to 2%. I would say, it's more or less in line with what we hear from listed Swiss real estate companies. But nevertheless, perhaps you can give a little bit of an outlook here?

And then as a follow-up question on struggling now for many years, you have increased reserves by CHF 900 million. And the net capital gains are CHF 659 million. And as I understood, as normally, you take the realized capital gains and they remain on the balance sheet to beef up -- [that I will decide of] the balance sheet. Perhaps you can also explain again?

The next question is on Circle. Let me just understand the revaluation or expected revaluation gains on The Circle project, how are these booked?

And then on Slide 41. In Switzerland, the savings result is slightly down from CHF 628 million to CHF 586 million. And Matthias, if I'm right, now with the reserve strengthening, is it fair to expect a slightly higher savings result in 2020? And I understood in Germany, so the CHF 73 million are not sustainable. Looking at France, France is up from CHF 179 million to CHF 210 million. And I was wondering if the strong saving result in France is sustainable.

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Patrick Frost, Swiss Life Holding AG - Group CEO & Chairman of the Corporate Executive Board [30]

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Okay. So first, on the savings result, we've never given any guidance on the savings results, as you know, we give guidance and targets on the risk and the fee results.

Then the strengthening of the reserves. Well, you're right. I mean, these have historically been close to each other, but they've never been exactly the same. I think Matthias can explain that in more detail right after me. And you mentioned that we've increased reserves by around CHF 600 million. No, we strengthened reserves by CHF 600 million. So of course, the increase in reserves has been much more.

Then the real estate gains, they've only been up by CHF 16 million year-on-year. But of course, they've been stronger than what we've guided for, let's say, several years ago, when we said it should usually be around 1% and 2%. But please keep in mind that also, interest rates have not exactly gone where we expected them. And because of the rate sensitivity that I just mentioned before, that's, in my view, the main reason why we've just seen much stronger revaluation reserve gains than we had alluded to several years ago. So they were now at around 3% and not at the 1% to 2% that I mentioned before.

And then on Circle. As you've probably seen, the take up here is also going strong now. We're at around almost 75% by now. And as we hold the minority share in the project of 49%, I believe that will be at cost. But it's too early to say. It's too early to say if there will be any gains or not coming from the project. But it's going well, and I'm very happy with the development. But now I hand over to Matthias for the reserve strengthening questions and details.

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

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As you said, we have similar figures as in 2018, so roughly CHF 600 million worth of realized gains of CHF 660 million concretely in 2019. And also around CHF 900 million of reserve strengthening. So the policy approach, which I think is as in the past. The reason for that is essentially the actuarial guidance that we have to follow and that we follow, which means that once you realize gains, that means it is essentially bringing forward some income and that then necessitates a strengthening of the reserve, and that's the pattern that we have been seeing for quite some years. So there's no change to that.

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Operator [32]

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That was the last question.

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

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So that brings us to the end of our conference. Once again, thank you for calling in today, and I wish you a goodbye -- good day. Goodbye, everyone.

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Operator [34]

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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.