Ladies and gentlemen, good morning. Welcome to the Swiss Life presentation of the Q3 Results 2017 conference call and live webcast. I'm Iruna, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions in writing via the relative field. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Thomas Buess, Group CFO of Swiss Life. Please go ahead, sir.
Good morning, ladies and gentlemen. Thank you for dialing in and for your interest in Swiss Life. Today we are reporting on selected top-line figures for the first nine months of 2017. Please note that all figures quoted are in CHF and are unaudited. Let me first summarize today's key messages. Afterwards, I'll provide more details on our segments. First, our fee and commission income was up by 7% in local currencies to CHF 1 billion. Our own and third-party products and services, Swiss Life Asset Managers, and the owned IFAs all contributed very positively. Second, our premiums in local currency were up by 3% to CHF 13.8 billion. This growth in premium was achieved despite our continued focus on profitability. Third, Swiss Life Asset Managers generated net new assets of CHF 7 billion in our Third-Party Asset Management. Total assets under management of our TPAM business amounted to almost CHF 61 billion.
Fourth, our direct investment income remained at prior year's level of CHF 3.2 billion, which resulted in a stable, non-annualized direct yield of 2.2%. Our net investment yield stood at 1.8% on the non-annualized basis. Fifth, our Swiss Life 2018 program is well underway. We are on track or slightly ahead with almost all of our targets. We are confident to achieve our 2017 financial targets. Let me continue with more details on the premium and fee income development. Our premiums increased by 3% in local currencies to CHF 13.8 billion. This is particularly due to the strong growth in our French and international market units. The decline in Switzerland was deliberate and helped to protect our profitability in the negative interest rate environment. Overall, our insurance reserves, excluding policyholder participation liabilities, were up by 3% in local currencies compared to year-end 2016 and stood at CHF 156 billion.
We continued our growth with capital-efficient products. The share of non-traditional products in our new business production grew to 93%. Our fee and commission income increased by 7% in local currencies to CHF 1 billion. The owned and third-party products and services grew by 12%, Swiss Life Asset Managers by 8%, and the owned IFAs by 4%. Let's have a quick look at our market segments. I'll start with Switzerland. Premiums were down by 7% to CHF 7.6 billion, driven by group life. The market decreased by 4%. In individual life, premiums remained unchanged. The overall individual market in Switzerland was down by 2%. Periodic premiums were stable, while single premiums declined by 3%. Premiums in group life were down by 8%. This reflects our continuous focus on capital efficiency. The Swiss group life market declined by 5%. Our single premiums were down by 15%, while periodic premiums remained stable.
We continue to successfully offer semi-autonomous and pure risk solutions. The share of semi-autonomous solutions in our new business production increased to 34% compared to 25% in the first nine months of 2016. Moreover, assets under management in our investment foundation grew to CHF 7.2 billion, compared to CHF 6.3 billion at the year-end 2016. The fee and commission income in Switzerland was down to CHF 170 million. We continue to see strong demand for investment solutions for private clients, real estate brokerage, and pension consulting business. However, this could not compensate for the decline from Swiss Life Select, where revenues were down by 3% on a standalone basis. In our French market unit, premiums increased by 13% in local currency to CHF 3.7 billion in a market that was down by 1%.
We are very pleased with the growth of our French Life business, where premiums were up by 21% against the market that was down by 3%. We benefited from our positioning in the high net worth and affluent client segment, as well as the high quality of our distribution networks. This is also demonstrated by our further increased unit-linked share and above-market growth. The overall market was down both for traditional and bank insurers due to the initiatives of the life insurers to limit growth of the euro funds business. The unit-linked share in our life premiums was 52%, substantially above the market average of 28%. In our new business, the unit-linked share accounted for 66% of the new business production. Overall, net inflows grew by 37% to CHF 1 billion. This reflects a 17% share of the net inflows of the entire French life market.
In health and protection, premiums increased by 1%. Growth in our individual protection business was 6%, while our individual health business declined by 4% as a result of the NI health reform. The market was up by 5%. Our premiums in group health and protection solutions were up by 7% in line with the market. Our P&C premiums remained flat while the market was up by 3%. The fee and commission income in our French market unit increased by 23% to EUR 216 million as a result of higher banking and unit-linked fees due to strong net inflows and a favorable market environment. Before moving to Germany, let me inform you about another topic. On October 6th, the French Constitutional Council confirmed the unconstitutionality of the 3% tax on dividends paid within the consolidation for group tax payments.
This decision gives companies the right to reclaim the tax amounts paid before. However, in order to preserve France's overall budget balance, the French government announced its intention to implement an exceptional tax for large companies. In this context, Swiss Life France will reclaim an amount of €7 million paid as taxes on dividends during the past years. That would expect an additional extraordinary tax charge of EUR 21 million from this newly implemented exceptional tax for large companies. If this is approved by both chambers of the French Parliament, these additional taxes would have a net impact of €14 million on Swiss Life France's 2017 results. Moving on to Germany, where premiums increased by 1% in local currency to EUR 911 million, while the market was unchanged. We saw growth in group life business and increased volumes with modern traditional pension and disability products.
Our focus on these products more than compensated for the decline in pure traditional business. Overall, we have further increased the share of risk products which have lower average premium but higher margins. Our fee and commission income was up by 5% to CHF 272 million, given the positive contribution from our own IFAs. Our own IFAs on a standalone basis grew their revenues by 6%. The number of financial advisors increased by 7% year-over-year. Let's turn to international. Premiums and deposits were up by 59% in local currency to CHF 1.6 billion, as we saw higher single premiums with private and corporate clients. Assets under control for high net worth individual clients grew by 1% in local currency to CHF 19.3 billion against the year-end 2016. Fee and commission income was up by 4% in local currencies to CHF 164 million.
Our commission income from our own IFAs was up by 2%, despite an adverse currency translation effect at Chase de Vere. Net earned policy fees remained flat. As you all know, on September 14, 2017, we informed about Swiss Life being contacted by the U.S. Department of Justice regarding our cross-border business with U.S. clients. There is no further news on this subject. Let's move on with Swiss Life Asset Managers. Asset Managers' commission income was up by 8% in local currency to CHF 465 million. TPIM contributed CHF 240 million and PAM CHF 215 million. Strong assets under management growth and substantial fees from real estate project developments in TPIM and the increased real estate asset base were important drivers. In TPIM, net new assets amounted to CHF 7 billion. We saw strong inflows in the asset class bonds, balanced mandates and real estate.
Assets under management for TPAM increased to CHF 60.8 billion, substantially up from the CHF 49.6 billion at the year-end 2016. Turning now to our investment results. Supported by our strategic asset allocation with long durations, we have again achieved a good investment result. Direct investment income of CHF 3.2 billion came in CHF 36 million lower in absolute terms. Our non-annualized direct investment yield was stable at 2.2%. The net investment result decreased to CHF 2.7 billion, which led to a non-annualized net investment yield of 1.8%. This is 44 basis points below the prior year number, given substantially lower net capital gains and effects from our equity hedging activities. We also had higher FX hedging costs, as already mentioned at the half-year 2017 results disclosures. We expect a net investment yield of around 2.7% for the full year 2017.
I'm saying this with the usual disclaimer of any unforeseen developments in the financial markets. The asset mix remained in line with our half-year disclosure. The duration gap remained below one. Moving on to our group solvency. Our Swiss Solvency Test ratio was around 175% at September 30, 2017, based on our internal model approved with conditions. The development was positively influenced by credit spread tightening. As of today, the ratio is slightly higher. As mentioned earlier, I'm pleased to report that our Swiss Life 2018 program is well underway. We continue to improve our quality of earnings by growing the fee business, thanks to the strong contribution of our own and third-party products, positive development of Swiss Life Asset Managers, and good progress of our own IFAs. We have already implemented three-quarters of the announced CHF 100 million cost savings initiatives, which supports our operational efficiency.
Before I close, let me briefly talk about our capital management. In November 2013, we have issued a convertible bond of CHF 500 million. So far, CHF 100 million nominal have been converted into Swiss Life shares. For the still outstanding amount, we have the optionality to call the bond. As the conditions are fulfilled, we will exercise this option. Official notice will be published tomorrow. Let me wrap up. Overall, we are very satisfied with the course of the business in the first nine months, particularly with our growth of the fee and commission income, the premium development, our direct investment result, the net new asset generation in TPAM, and the improved solvency ratio. I'm therefore, with the usual disclaimer of any unforeseen developments, confirm that we are confident to achieve our 2017 financial targets. I'm now ready to take your questions.
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Peter Eliot, Kepler Cheuvreux. Please go ahead, sir.
Thank you very much. I have three questions, please. The first one was on the CHF 3.7 billion of new assets. I was just wondering if you could talk a little bit about whether those include any big mandates. It's a very good number. I'm just wondering if there's any particular drivers of that, and if there's also anything you can say about the sort of potential pipeline. Secondly was on the investment income, and particularly on the capital gains strategy. I'm just wondering if you could say anything about the reason for timing of capital gains and perhaps why it's a little bit lower in Q3 and why you seem to be expecting more in Q4. The third question, just sort of generally really on the revenue that you're enjoying.
Versus my numbers, the revenue is pretty much ahead across the board, you've also had a very high contribution from owned and third-party products and services. I'm just wondering if there's anything, a sort of group strategy that's caused that, if there's any sort of at all change in strategy or whether it's just each bit of the business is performing very well. Perhaps if you could comment on that'd be great. Thank you very much.
Thank you very much for your question. First of all, on the net new assets, it is not CHF 3.7 billion, it is CHF 7 billion net new assets. Here, I can give you the split by asset classes which is interesting split. Again, if you look at the first three quarters of this year, we had 37% of net new assets were in bond mandates. We had 25% in real estate. We had about 14% in balanced mandates. We had 12% in money market funds. There was actually a swing against the half year where we had outflows in money market. We again had net inflows in money market funds. Despite us increasing the fees substantially, actually, we almost doubled the fees on this business. We have 7% in infrastructure and 4% in equities. There were no special big accounts that I can mention.
All in all, we are very pleased with the course of business. Again, we think that we really have a very nice value proposition, especially for pension funds in this area.
Thank you. Can I just follow up very quickly, Thomas, the CHF 3.7 billion I mentioned was basically for Q3 in isolation.
No, you're right. Yes.
Yeah. Because it seems there's a big acceleration in Q3.
Yeah. I know. I see it now. Yes. Okay. Sorry to correct you. Number 2 was about the investment income. There is not really a strategy of realizing gains because we realize gains, and we said this always, as we shift, say, assets in our portfolio. Currently, as we are very active in managing the bond portfolio, when we have a view, we would exit certain bonds. As we have a high number of unrealized gains, obviously, when we move, it will always lead to some gains harvesting. I think it's a good sign that we did not do a lot of harvesting in the first 3 quarters of this year because this will protect our direct yields going forward. The negative impact on yield 3 is more coming from our hedging strategy.
When you look at the hedging, you can see that we have, yes, the FX hedges and FX hedging has become more costly than in the past. You have us hedging a substantial amount of our equity portfolio. When you look at this, obviously, unfortunately on the IFRS, the hedges is fair value through P&L, but the unrealized gains on the underlying is fair value through OCI, which is not through P&L. Eventually, obviously, we have not made a loss on the hedges because you have the underlying that has substantially increased in value. That's more or less the development on our hedging and on our unrealized gains.
However, you also can remember the half year results where we have disclosed also the interest rate margin and we are very confident that we can again protect the interest rate margin despite a little bit lower U3 in our accounts. Number 3, revenue. We are driving all the 3 elements. We are driving asset managers, obviously, to generate additional fee income. There obviously the focus is on Third-Party Asset Management. We are driving our own IFAs, and here we are particularly pleased with the development in Germany and in the U.K. These are the biggest owned IFA markets for us. Obviously our third party products and services and the fee income generated out of the insurance businesses is driven by us moving away from traditional products more into unit-linked products. We are also driving this.
We actually are acting on all the three levers to increase the fee income and to increase the overall contribution of the fee result to our bottom line.
Okay. Thank you, Thomas. Sorry to labor the point, Thomas, just on the first one, the TPAM inflows. My point was just that there seemed to be a bit of an acceleration in Q3. You explained that a little bit through the money market flow reversal, I don't know if there's anything else there.
I think it's the money market, the swing of the money market. In the first half, you may remember we had outflows, in the second half, we again had net inflows on money markets, that's exactly the explanation.
Cool. Thanks. Thank you very much.
The next question is from Michael Huttner, JPMorgan. Please go ahead, sir.
Oh, fantastic. Thank you so much. Well done on amazing results. Just very quickly on the convertible, when you say call, does it mean you redeem for cash or does it mean it becomes equity? Maybe you can talk a little bit about the referendum vote which didn't go through. I know you said it wasn't material, but now it's done. Maybe you can give a little bit more insight into what it could mean for your business or if it's already taken that, as I don't know. On the French tax numbers, I'm really sorry I didn't catch them. Maybe you could repeat them. That would be really helpful. The final question is on the fees from owned IFAs.
I noticed the number of IFAs in Germany up a lot. Revenues are up there. The total figure for the group, Swiss Life, is up 4%, I was hoping for a bit more, I just wondered if you could give a little color here.
Thank you. First, it will become equity initially. However, we will address capital management next year, discuss capital management next year. Question number 2 on the pension vote, there is no direct negative impact of the no vote of the Swiss people on Swiss Life. We mentioned this also ahead of the vote that we do not expect a negative or a positive direct impact for the shareholder. However, I can again repeat that we would have liked a no from the perspective of the conversion rate. As you may know, in the bill there was a lowering of the conversion rate from 6.8% to 6% for the mandatory part of the business, which is about half of our business. There obviously, lowering the conversion rate is still necessary because this would stabilize the system.
Currently, we have still a big redistribution of funds from the young generation to the older generation, which in a fully funded system like the Swiss Pillar Two is not good for this system. Therefore, we still push for a lower conversion rate. However, as long as the funds are available within, the funds will not harm the shareholder, but it will harm policy holders, and they are the younger generation. Therefore, we are still pushing for a lower conversion rate. On the French tax, just to repeat the number. The French government lost its legal case, and therefore they have to refund taxes being paid on dividends. For Swiss Life, this means a refund of EUR 7 million.
On the other hand, they have immediately put a bill in place and passed it already through the first chamber of the French parliament which increases the tax rate for one year for large companies, which means companies with more than 1 billion turnover, Swiss Life obviously falls into this category. This would mean for us an additional tax bill of EUR 21 million, which on a net basis then means that our French market unit would have a negative impact of EUR 14 million in its 2017 accounts.
Thank you.
Number four was about the owned IFAs. There I can say, really the good development is really from Germany. Germany has substantially increased the advisor base by 7%. They have increased also the net fee result substantially again. We also saw positive development in U.K. This is masked a little bit by the conversion rate of the British pound. Then we saw positive developments in the smaller units. In Austria, we see a positive development. However, overall, the big markets are clearly the U.K. and Germany.
Brilliant. Thank you very much.
The next question is from Andrew Sinclair, Bank of America Merrill Lynch. Please go ahead, sir.
Thanks. Morning, everyone. Firstly, on the Switzerland premiums figures for Q3 were very strong versus what I expected. They seem to be up year-on-year for Q3 standalone. I just wonder if you could tell us what drove that turnaround, if there's any one-offs in there. Secondly, sorry to labor the point, but on the Swiss Life Asset Managers Q3 figures, can you quantify how much of the Q3 figures were from money market net inflows? And also just if you could elaborate on the margin pickup, or the margins now there for those money market inflows. Thirdly, just on the SST ratio, just wondered if you could give us how much of the move in the period was market moves versus organic. Can you remind us when are we going to get the details of the numerator and the denominator? Thanks.
Let me answer the last questions first about the SST. Obviously, the SST was influenced positively by spread tightening. We have published at the half year our sensitivity. If you take the sensitivities that we have published at the half year, you will end up close to the number that I have mentioned. Of course, we also have retained earnings that have a positive impact on the Swiss Solvency Test. We will have to publish more details on the Swiss Solvency Test by the end of April, because by then the Swiss regulator will ask all the insurance companies in Switzerland to publish a report that is called in Swiss we call it Büffel, which means buffalo.
It's a report that will be published on the internet on our webpage, there you will see more details on local statutory results as well as on the Swiss Solvency Test, including the target capital and the available capital. On the one-offs in Switzerland on the premium, there were no one-offs at all. The development was, for us, as expected, because we saw a pretty flat individual life market being driven on the one hand by lower single premium, but on the other hand, by still growing, which is very positive periodic premium. We saw the same situation actually in the group life business. In group life business, two, three years ago, we have started to be more prudent in our underwriting because this business is not capital efficient at the current negative interest rate environment.
Therefore, we kept our new production pretty low, which means that there is a negative development in the single premium business, because single premium you will usually get when you write new accounts. There is stable development on the periodic premium because there's not a lot of lapses. We keep our accounts, and the accounts that we have still show small growth, be it by salary increases, et cetera. All in all, yes, I am pleased with the development in Switzerland. It's actually the planned premium development that we saw in the Q3 results.
In the other markets, obviously, for us, the biggest surprise this year, but you already saw this trend at the half year, was clearly the French market, where we really benefit big time from our positioning in the affluent and high-net-worth individual space, and by our very high share of unit-linked business in this market. That's really the positive that I can see. I also see, by the way, a positive development in Germany, where we still see negative development in the single premium business in the traditional book, which is good. We see substantial growth of our disability and biometric risk insurance. That's really a good development when you look at the quality of our premium.
Very good. Thanks. On the money market flows in Q3.
Oh, yeah. Sorry. I give you the number. On the inflow basis, we had CHF 849 million net new assets in money markets in the year to date.
Okay.
I mentioned all the percentages. This is 12% of our net new assets.
Sure.
That's a swing against the half year of CHF 1.3 billion. Don't forget that the half year money market was outflows.
Sure. Understood.
You see also, we see about 14 basis points fee on the money markets.
Yes. Thank you very much.
The next question is from Jonny Irvine, UBS. Please go ahead, sir.
Hello, good morning. Thanks for taking my questions. Just two. Firstly, please could we have an update on the SST group life module standardization? Last we heard, I guess models were out for field testing, and they were throwing out some funny answers. Question 2, just thinking more conceptually, if I were a foundation or a company in Switzerland looking for a new full insurance group life solution, what sort of offering from companies would I get at the moment? It seems that most listed players are pulling back given the capital intensity, and you're all moving into sort of semi-autonomous solutions. Is there still an active market for full insurance solutions, and who still has appetite to write that business in the market, in your view? Thank you.
Thanks for the question. First, on the standard model development. I really can say that there is a very constructive dialogue currently with FINMA on multiple topics, by the way, not just on the standard model development. Standard model development for group life, we have two models that went through a field test, and the joint working group is now validating the results. Yes, you may have heard about funny results. I wouldn't take this as a big issue because these models are newly developments, and therefore, the calibration has not yet taken place. There is still some things to be clarified. From this perspective, I am actually pretty confident that we will reach, with FINMA, an agreement on the new models.
They also announced that they will develop a new model, a standard model for individual life, which you may know the old model is really not fit for purpose. Overall, I think these things are pretty well underway. In contrast to what I would have said about six or seven months ago. On the full insurance solution, that the market is still active. However, certain portfolios, such as those with lots of annuitants, are very difficult to be placed in the market because I mentioned that there are issues from a capital efficiency point of view, but also from a conversion rate point of view. Therefore, yes, there are some accounts that have difficulties to find a place.
On the other hand, for portfolios that are mixed or are more towards younger generations, this market is still very active and we still see a lot of accounts coming our way, coming through. There's also some accounts we still have to defend because obviously some of our competitors are also looking for more attractive accounts. The market is competitive, it's there, but there are some specific accounts where we do not see a lot of movement because it's difficult for people to get a new provider.
That's great. Thanks very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Arun Kumar, JPMorgan. Please go ahead.
Good morning. Couple of questions on your solvency ratio under the solvency test. You mentioned earlier that you're going to be redeeming the convertible bonds that you issued in 2013. The first question is, will you be redeeming that with internal cash or will you be financing that externally? The second question is, by redeeming the convertible bonds, would it have a material impact on your SST ratio or is it going to be immaterial?
Okay, first of all, we will not redeem. We will not buy it back. It will convert. People will convert it because it's currently very attractively priced for people who are owning this convertible. You can say it's some kind of a forced conversion that we are doing. This means that our shareholders' equity will increase by the amount of the convertible bond, which is overall CHF 500 million. Already CHF 100 million, by the way, have been converted.
Right
So far. This will dilute our equity base by 6.7% approximately. Obviously, this will have a positive impact on the SST ratio. However, it will be a pretty small impact given our target capital, which is pretty high. I cannot say more at this stage. I will also address all the capital management issues next year at the Investors Day. I mentioned this before. Capital management will be a very important topic for the Investors Day, because obviously, it's not nice to be diluted.
Okay, perfect. Thank you.
Gentlemen, that was the last question. Would you like to add any final comments?
Yes. I will add some comments. First of all, I'd like to thank you very much for taking part in this call. Again, please let me mention that Swiss Life will be hosting an Investors Day next year on the 29th of November in order to discuss our new strategic program. Thanks again for your interest. We look forward to joining you again on the 27th of February 2018 to discuss our full year 2017 results. Have a nice day.
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