Ladies and gentlemen, good morning. Welcome to the Swiss Life Presentation of the Full Year Results twenty sixteen Conference Call and Live Webcast. I am Milo, 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 and A session.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Patrick Frost, Group CEO and Thomas Puez, Group CFO of Swiss Life. Please go ahead,
Ladies and gentlemen, thank you for taking the time to join our conference call. As usual, Thomas Puez, our CFO, will give a detailed account of the results after my introduction. As you've seen, 2016 turned out very well for Swiss Life. The continuity and consistency we have shown in pursuing our key topics over the years have paid off once again. The results for the past financial year fit in seamlessly with the good years before.
However, our continuous success is not to be taken for granted for these positive results were achieved in spite of a consistently challenging regulatory and economic environment. My positive assessment is based on the key figures, which you see on Slides three and four. Swiss Life again increased its net profit by 5% this time to million. Profit from operation also increased by 5% to CHF1.4 billion. The increase in earnings power mainly stems from the successful expansion of our fee business.
Its contribution to the profits from operations increased by 14% to $396,000,000 The risk result was $388,000,000 compared to $398,000,000 in 2015. In 2016, Swiss Life achieved direct investment income of 3% or $4,300,000,000 which was the same as 2015. The net invested result was $4,800,000,000 and the net investment yield was 3.3%. This allowed us to again strengthen the reserves by about 1,000,000,000 and thus support the sustainability of our business model over the next few years. The long term orientation of our investment portfolio and our consistent asset and liability management resulted in a broadly stable interest margin over the last years.
Another strategic milestone, which we initiated several years ago is also making a sustained contribution to one of our current strengths. The growth of SwissBot asset managers and in particular, the marketing of our skills in investments to third parties. Overall, at the end of the year, we had a total of $2.00 4,000,000,000 management. We attracted net new assets of $8,500,000,000 in third party asset management. We thus had $49,600,000,000 in assets under management for third parties at the 2016, which represents a rise of 28%.
Overall, our premium volume fell by 9% to $17,400,000,000 Our new business margin and value of new business demonstrate that we are not compromising on profitability in of interest rates falling further In spite of interest rates falling further, the new business margin improved to 2.1% relative to 1.7% in the prior year due to disciplined margin management and an improved more capital efficient composition of new business. The value of new business rose from $268,000,000 in 2015 to $296,000,000 which is a plus of 10%. Finally, shareholders' equity amounted to 13,700,000,000.0 Swiss Life estimates its SST ratio at about 160% as of the 01/01/2017 based on the internal model approved with conditions. The strong results on the 2016 financial year enable us to propose a dividend increase from CHF 8.5 to CHF 11 to the AGM on April 25. Ladies and gentlemen, that concludes my overview of our figures.
Thomas Buas, our CFO, will now provide you with more detail on the annual results. Thomas?
Thank you, Patrick. Good morning, ladies and gentlemen. In the next thirty five minutes, I'll inform you in more detail about our 2016 results. I'll start with an overview of the income statement, then I'll provide some details on our major segments. Afterwards, I'll explain some specific P and L and balance sheet items.
I'll close with a short update on the implementation of our strategy. Please note that all figures quoted are in Swiss francs unless I state otherwise. Let me start with an overview of our P and L figures on Page seven of the Investors presentation. Gross written premiums, fees and deposits decreased by 9% in local currency to $17,400,000,000 This decline was in line with our focus on profitability and capital efficiency in the low interest rate environment. Fee and commission income increased by 3% in local currency to 1,400,000,000 due to strong contributions from asset managers and our owned IFAs in Germany and France.
The net investment result of the insurance portfolio for own risk decreased to $4,800,000,000 due to substantially lower net capital gains. Net insurance benefits and claims decreased to $14,100,000,000 driven by Switzerland and France. Insurance benefits include further reserve strengthening of about $1,000,000,000 in Switzerland. This amongst other factors led to a lower average technical interest rate that preserves our interest rate margin. Policyholder participation increased to 1,300,000,000 mainly due to France and Germany.
Deferred policyholder participation was substantially higher in France, but fully offset by a decrease in net insurance benefits and claims. Operating expenses were up by 4% to $2,800,000,000 mainly due to higher commission expense and growth in our asset managers business. Please note that this was more than offset by higher commission income. Profit from operations was up by 5% to $1,400,000,000 The major driver of the increase was the substantially improved fee result. Borrowing costs increased to $178,000,000 mainly due to our hybrid issue in 2016 for refinancing of outstanding debt instruments.
This led to a temporary overlap of hybrid debt. Going forward, we expect borrowing costs to return to a level in line with previous years. The income tax expense of $289,000,000 corresponds to an effective tax rate of 24%. This
is
in line with our expected tax rate. Overall, net profit was up by 5% to $926,000,000 Slide eight shows the one offs in our profit from operations. On the left hand side, you can see the one offs and the currency translation effect in 2015 to obtain a comparable basis. On the right hand side, we adjusted the 2016 profit from operations for restructuring costs of CHF9 million. This leads to an adjusted profit from operations of CHF1.4 billion, which is an increase of 5% on a like for like basis.
Moving now to the segment results, let me start with Switzerland on Slide nine. Premiums were down by 6% to €9,900,000,000 in line with the market. We continued to focus on profitability and deemphasized capital intensive single premium products. In Individual Life, premiums declined by 7%, while the market was down by 5%. Single premiums decreased by 28%, while periodic premiums grew by 6%.
Premiums in group life were down by 6% in line with the market. Here, single premiums declined by 10%, while periodic premiums were flat. We continue to successfully offer semi autonomous and risk solutions. Their share has more than doubled and accounted for 26% of the new business production compared to 11% in 2015. Moreover, assets under management in our investment foundation grew to $6,300,000,000 compared to $5,500,000,000 at year end twenty fifteen.
Fee and commission income was up by 17% to €233,000,000 This includes the increased revenues from Swiss Life Select, our real estate brokerage and our fund business. In addition, our sales of non life products for our partners contributed positively. Operating expenses were down by 1% to $388,000,000 We continued to focus on strict cost management and realized further efficiency gains, for example, from process automation. This led to a further improvement of the efficiency ratio. The segment result improved by 7% to $812,000,000 All profit sources except the risk results contributed to this.
The cost result increased due to lower acquisition costs in line with the lower new business production. The savings result slightly improved as the lower net investment income was more than offset by lower reserve strengthening. The fee result increased to $12,000,000 with a higher contribution from our real estate brokerage and the fund business. The biggest improvement, however, came from our pension consulting business as the prior year was negatively affected by write off following the acquisition of a broker platform and two pension consulting companies. The risk result declined to $253,000,000 driven by our Individual Life business.
Despite the continuing low interest rate environment, the value of the new business increased by seven percent to 154,000,000 Active new business steering with repricings and product discontinuations in both group and individual life led to an improved business mix. Our assumed reinsurance business contributed as well. The new business margin increased from 1.7% to 2.3. Turning now to France. Please note that for the insurance segments, France, Germany and International, all figures quoted are in euros.
In France, premium decreased by 3% to $4,100,000,000 in a market that was flat. In our Life business, premiums were down by four percent in a challenging financial market environment. Volumes slightly picked up in the fourth quarter, but could not compensate for the decline in previous months. The overall market was down by 1%. The unit linked share in our life premiums was 42%, which is again substantially above the market average of 20%.
In our new business, the unit linked share accounted for 58%. Net inflows continued to be positive and amounted to €1,100,000,000 Our market share in terms of net inflows again exceeded our market share in terms of premium. In Health and Protection, premiums were flat, while the market was up by 5%. We saw a strong performance in group health and protection and growth in individual protection. Both were offset by substantially lower individual health premiums following the Annie reform.
Our P and C premiums decreased by 2% in a market that was up by 2%. Fee and commission income decreased by 4% to $221,000,000 as a result of lower banking fees, primarily due to lower asset valuations. Higher unit linked fees based on growing unit linked reserves partly compensated for this. Operating expenses increased by 1% to $298,000,000 Regulatory project costs in our Life, Banking and Health business as well as costs related to the new business mix outweighed efficiency gains. Due to growing life reserve, the efficiency ratio has nevertheless further improved.
The segment result was up by 2% to $224,000,000 based on stronger savings and risk results. The saving result benefited from a higher financial margin and real estate revaluations. The cost result decreased mainly due to higher acquisition costs as a result of the new business mix. The risk result increased by 9% to 90,000,000 due to a very positive development of the loss ratio in Non Life and Protection. The fee result was down by 9% to $39,000,000 primarily due to lower banking fees, which outweighed a positive contribution from higher unit linked reserves.
The value of new business increased by 26% to $88,000,000 Reduced guarantees in Life business more than offset the effects from a slightly lower unit linked share in new business and from lower capital market interest rates. We achieved a volume increase in health and protection and improved the new business mix, particularly with a higher share of protection business. This led to an overall increase of the new business margin from 1.9% to 2.1%. Moving on to Germany on Slide 11. Premiums were down by 10% to €1,200,000,000 while the market declined by 2%.
As already mentioned at the half year, we continued to deemphasize traditional products in line with our focus on profitability and capital efficiency. We partly compensated for this decline by increased periodic premiums with modern traditional and risk products. Overall, we have substantially increased share of risk products, which have lower premiums, but higher margins. Fee and commission income was up by 2% to $347,000,000 The strong contribution from our owned IFAs more than offset the negative development in our insurance business. Our owned IFAs grew their revenues by 13% on a stand alone basis.
The number of financial advisers increased by 5%. Operating expenses were flat at $197,000,000 Efficiency gains from further process automation compensated for higher costs related to a growing new business activity. The efficiency ratio was further improved. The segment result decreased by 5% to $115,000,000 due to a negative development of both savings and cost results. The savings result declined due to a higher policyholder participation driven by an extraordinary tax gain from a positive tax audit.
The cost result decreased due to higher acquisition costs as a result of higher new business volumes. The fee result was up by 52% to $57,000,000 based on the substantially higher contribution from our owned IFAs. The risk result increased by 6% to $28,000,000 mainly due to the growing disability business. The value of new business doubled to 28,000,000 active shift to modern traditional and risk products led to an improved business mix with substantially improved profitability. Enhanced by favorable persistency experience, this led overall to an increased new business margin of 2.7%.
Turning now to the segment International. Premiums were down by 31% to $1,600,000,000 as a result of the lower single premiums with private clients. Priority premiums in our Corporate Clients business increased, but were more than offset by lower single premium. Assets under control with private clients decreased by 4% to $16,800,000,000 as surrenders outweighed near deposits and the asset performance. Fee and commission income was down by 7% to $195,000,000 due to lower policy fees and a lower contribution from owned IFAs that was partly FX driven.
Operating expenses decreased by 4% to $91,000,000 mainly due to efficiency gains as a result of the adapted operating model. Segment result increased by six percent to $41,000,000 due to a positive development of the fee result, while the other profit sources remained stable. The fee results grew by 6% to $31,000,000 driven by tight cost management. We saw again a good contribution from Chase DeVeer to the overall fee result. The risk result amounted to $6,000,000 due to a stable development in our Corporate Clients business in Luxembourg.
The value of new business dropped by 43% to 17,000,000 as a result of the lower volumes with private clients and the reduced share of risk business with corporate clients. Slightly improved fee levels had a mitigating effect. Overall, the new business margin decreased from 1.4% to 1.2%. Let's have a look now at our Asset Manager segment, which reports in Swiss francs. Asset Manager's income was up by 8% to €619,000,000 primarily due to our third party asset management, TPAN, with strong net new assets and higher profits from real estate development.
Please note that TPAN 2015 income is adjusted for the positive FX gain of $17,000,000 in 2015. We have communicated this last year in our release as well. Mayfair Capital in The UK bought in November 2016 is only reflected with two months of fee income. The impact is not material. In our Penn business, which manages our insurance assets, the income growth is the result of the higher average asset base, partly offset by a lower transaction volume in real estate.
Operating expenses increased by 8% to $317,000,000 due to the organic business growth and the higher share of real estate in both PAM and TPAM. The second result increased by 8% to $243,000,000 PAM contributed $173,000,000 and TPAM contributed 70,000,000 up 19% on a like for like basis. Asset management's overall costincome ratio has slightly increased due to our growing real estate business. Net new assets in our TPAM business amounted to $8,500,000,000 We saw strong inflows from institutional customers in both France and Switzerland, mainly in real estate, fixed income and money market funds. Assets under management in our TPAM business now amounts to $49,600,000,000 This figure includes $1,300,000,000 from Mayfair Capital.
Please refer to Page 54 in the appendix of the investors booklet for further details on TPAM's net new assets and assets under management. Total assets under management were up by 10% to $2.00 $4,000,000,000 mainly due to higher valuations in our PAM business and the net inflows in our TPAM business. Let's now move back to the group and have a look at our operating expenses on Slide 14. Our overall cost base increased by 4% to 2,800,000,000.0 primarily due to higher commission expenses and growth in our asset management business. Operating expenses adjusted for restructuring costs, one offs and scope changes were flat and amounted to $1,400,000,000 We are pleased with the expense development in our Insurance segments with a decline of 1% to 1,100,000,000 Turning now to the investment result on Slide 15.
Supported by our long asset durations, we were again able to achieve a strong investment result. Our direct investment income was flat at $4,300,000,000 Our direct investment yield was stable at 3%. The net investment results decreased to $4,800,000,000 which led to a net investment yield of 3.3%. This is about 40 basis points below the prior year level given lower net capital gains and higher average asset base. Our FX hedging costs increased by about $100,000,000 to $548,000,000 Our total investment result increased to 5.1%.
This is mainly due to lower interest rates in Switzerland and Europe and the corresponding changes in unrealized gains and losses on our investments. Slide 16 shows the structure of our investment portfolio. The share of bonds decreased to 64.3% due to sales and reinvestments in other asset classes. The share of real estate increased to 16.4%. We saw real estate revaluations of $800,000,000 and further net acquisitions of $1,200,000,000 in 2016.
Real estate continues to be a particularly capital efficient asset class under our solvency regime. Moreover, investment risk premium on real estate continues to be very attractive. We increased our gross equity quota to 5% in order to benefit from attractive dividend yields. However, our net equity exposure increased only slightly to 2.1%. We kept the duration gap below 1% and our foreign currency exposure on the insurance portfolio continues to be hedged.
Let's have a look at our insurance reserves on Slide 17 of the presentation. Our insurance reserves, excluding policyholder participation liabilities, were up by 3% to $147,900,000,000 mainly due to net inflows and accrued interest. In Switzerland, insurance reserves grew by 3%, while they were up by 6% in local currency in our French business. Our German business reported a flat and our international business a negative development. Turning now to our shareholders' equity on Slide 18.
Shareholders' equity increased by 12% to $13,700,000,000 The main drivers were the higher net unrealized gains on bonds and the net profit attributable to shareholders. Moving on to a short update on the progress of our ZwickLife 2018 program. I'm pleased to report that we are well on track with all our targets. Let's first have a look at the development of our sources of profit on Slide 20, where we again made substantial progress. Our savings result remained strong at $8.00 4,000,000 due to our disciplined asset and liability management and the successful protection of our interest rate margin.
Increased contributions came from Switzerland and France, offsetting the strong decline in Germany. The risk result declined by 2% to $388,000,000 mainly due to Switzerland. However, we remain in the upper end of the announced target range of $350,000,000 to $400,000,000 As at the half year, we are particularly pleased with the development of the fee result, which increased by 14% to $396,000,000 Major contributors to this development were Germany, asset managers and Switzerland, while France reported a decline. The cost result also developed favorably. Our next chart on '21 shows how we continue to benefit from our disciplined asset and liability management.
The dark red line demonstrates that our long asset duration leads to a resilient direct yield despite continued low and even negative interest rates. Only about 3% to 4% of our bonds on average needs to be reinvested every year. Our reinvestment rate in 2016 was slightly below 2%. Moving on to the average technical interest rate. In 2016, we further strengthened the technical reserves, which led to a decrease of the average technical interest rate of six basis points.
In addition, the shift to a more favorable business mix led to a further reduction of four basis points. Moreover, the Swiss Federal Council has lowered the minimum interest rate for the mandatory group life business by 25 basis points to 1% as of the 01/01/2017. At the same time, we have lowered our guaranteed rate for the non mandatory group life business by 50 basis points to 0.25%. Taken together, this led to a reduction of 12 basis points. Overall, our average technical interest rate, therefore, decreased by 23 basis points to 1.41% as of the 01/01/2017.
This means that we were able to again preserve our interest rate margin in this low interest rate environment as shown on Slide 23. This is the result of our continued disciplined asset and liability management. Please note that the initially mentioned reserve strengthening and the reduced guarantees in the Swiss Group Life business will have a positive impact on our 2017 technical guarantees and are thus not yet reflected in the interest rate margin of 2016, as 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 5% in local currency.
As already mentioned, strong net new assets from TPAM and the higher average asset base in PAM contributed positively. Our owned IFAs increased their commission income by 4% in local currency, supported by both higher productivity and an increased number of advisers. The business with owned and third party products and services was down by 2% in local currency, primarily due to lower banking fees in France. In Switzerland, real estate brokerage, our fund business and the sale of non life products from partners all contributed positively. Overall, our fee and commission income increased by 3% in local currency.
Turning to the value of new business and the new business margin on Slide 25. As you can see, our ongoing margin management efforts and the product shift have paid off. The further decline of capital market interest rates in Swiss franc and euro reduced our margin by about 40 basis points. This was more than offset by the active new business steering with a clear and continued focus on profitability, which improved margins by 60 basis points. Other effects added another 20 basis points, which led to a new business margin of 2.1%, considerably above our ambition level of 1.5%.
Following market practice, we now base VNB and NCEV on Solvency II valuation curve. This alignment and the refinement of the interest rate model, which allows for negative interest rates, had overall a slightly negative effect on the overall margin, I. E, that is slightly positive for France and Germany, while negative for Switzerland. Let me now move to our next financial thrust being operational efficiency. At the 2016, we had already implemented €59,000,000 of our Swiss Life 2018 cost savings initiatives.
All units contributed to this. On the next slide, you can see the improvement of our efficiency ratio. At group level, the improvement is an additional three basis points to 58 basis points. All insurance segments, with the exception of International, have contributed to this positive development. Turning to the next financial thrust, capital, cash and dividends on Slide 28.
This shows our capital structure. Our total debt outstanding was €4,500,000,000 at the December 2016. Our total hybrid debt amounted to €3,600,000,000 This includes 600,000,000 in euro denominated hybrid debt issued in September 2016. The proceeds of this will be used to call the €590,000,000 hybrid debt in April. Our capital structure and maturity profile both continue to be well balanced with a well diversified denomination of debt in Swiss francs and Europe.
Let me now move on to cash remittance. In 2016, we remitted $598,000,000 cash to the holding company. This corresponds to 68% of the 2015 net profit. 58% of the cash came from our Life business and 42% from asset managers, our owned IFAs and the Health and P and
C
business. For the financial year 2016, Swiss Life will propose a 29% dividend increase to CHF 11 per share to be paid to shareholders later on this year. This corresponds to a payout ratio of 38%, up from 31% in the previous year. With respect to the Swiss Solvency test, we expect the ratio to be around 160 as of the 01/01/2017 based on our internal model approved with conditions. As of today, I expect the ratio to be about the same level.
This includes the changes announced by FINMA first, the revised treatment of the market value margin and second, a small relief from the revised scenario aggregation. We estimate the combined impact of the two changes to be about 10 to 15 percentage points. At last year, we will communicate the results of our full calculation of the SST ratio in our Q1 interim call. Let me sum up. We have again reported a strong set of results in a challenging environment.
After one year into our new Swiss Life 2018 program, we are well on track to deliver on our promises and to achieve all our financial targets. We have improved our quality of earnings by substantially increasing the fee result and are now already ahead of plan with respect to our Swiss Life 2018 target. We have successfully defended our risk result. Thanks to our margin management efforts, we have grown our value of new business. However, the environment with its continuing low interest rate environment remains very challenging for the new business.
We have continued with our strict cost discipline, have already implemented about 60% of the cost savings plan and lowered the expense base in our insurance units. We have substantially increased our cash remittance to the holding company through disciplined capital management. Finally, return on equity at 9.6% was at the upper end of our target range. We are thus continuing on our successful path to further enhance the resilience of our business model. And despite the tough financial market environment, this should enable us to deliver sustainable earnings and an attractive payout to our shareholders.
Thank you for listening. Back to you, Patrick.
Thank you, Thomas. Dear analysts and investors, now it's your turn. We would like to ask the first question.
We will now begin the question and answer session. The first question comes from Farquhar Mare from Autonomous. Please go ahead.
Good morning, gentlemen. And just two questions, if I may. Firstly, the savings result of $8.00 €4,000,000 is holding up quite well, and Slide 40 gives some kind of interesting insights into how that splits between the geographies. My question then is how much of the savings result relates to gross legal quote rules as opposed to net legal quote rules in terms of how the profit sharing works on each? I would have naturally thought that Switzerland is mainly a gross legal quote situation, whereas probably Germany is more net.
But if you could give an accurate decomposition that would be great. And then secondly, the dividend of CHF11 is clearly a very pleasant surprise and takes the payout ratio to 38%. How should we think about the payout trajectory from here? Should we think in terms of grading towards the upper end of the 30% to 50% range or maybe even all the way to 50% by 2018? Thanks.
Okay. First to the your question on the savings. Here, you're right. In Switzerland, we do have one gross quote, which is the BVG business. But the rest of our business in Switzerland and the business in Germany are based on a net method.
And we don't provide further decomposition, but as you know, our BBG business is the profitability of our BBG business is below average compared to our other businesses. So you'll find some details on the statutory accounts on Page 37 of the presentation. Those are the same numbers that we report to FINMA, which are then published once a year.
Yes. Just as a follow on, is it fair to assume that less than half of it is gross legal quote then?
Again, we disclose it.
Okay.
And then on your dividend trajectory, yes, while we're we've made quite a nice step in our 30,000,000 to 50,000,000 range, and we have the ambition to continue to move ahead in that range.
Okay. Thanks so much.
The next question comes from Quillen Horvath from Exane BNP Paribas. Please go ahead.
Yes, good morning. Thanks for taking my questions. I have two. The first one is on VNB and the slide on developments. It looks like if you compare with H1, so the economic variance has halved and the business mix impact is rather the same.
So should we expect this business mix to continue at the same run rates? Or do you expect to have somehow a deterioration going forward in terms of what you can do for improving the mix? And then your outlook in terms of economic variances as well. What do you expect another improvement going forward? Or yes, what do you expect?
And the second is on the fee results. And my question mainly is, are you surprised by the fee result evolution? Because it looks like it's already quite strong compared to what you target for 2018, and both in terms of fee contribution and TPAM asset under management since you announced the plan? And on this, what's your view on what you can do in terms of cash remittance to the holding going forward and especially for 2017? Thanks,
Luis.
Okay. Yes. Well, on the fee result, yes, of course, that's been a pleasant surprise compared to where we stood a year ago. As you might remember, back then, we guided that the net new assets we showed a year ago were already at a very good level and now to have surpassed that, of course, that is a nice surprise. And you're right, we're really closing in on the lower part of our target range of 400,000,000 to $450,000,000 in the fee results.
Now the results, on the cash remittance, as you know, we have a 2018 target, which is cumulative for 'sixteen, 'seventeen and 'eighteen of $1,500,000,000 We've almost reached $600,000,000 now for 'sixteen, I believe it was $598,000,000 if I'm right. And here, again, we don't provide any additional guidance on our cash remittance. But of course, the only thing I can say is that a stronger fee result is, of course, supportive. Then on the VNB questions, I hand over to Thomas.
Yes. On the VNB on Page 25, the economic variance is driven by the interest rate level, the overall interest rate environment. And thus, we see lower interest rate environment, then of course, economic variance will be negative. If it goes up, interest rate environment goes up, then economic variance will be positive in a nutshell. Then on the new business mix, we already have now a very favorable new business mix.
If you, for example, go to the appendix, you see that we only now have about 9% traditional business left. So there's not a lot of traditional business left in our new business. So I do not really expect a further improvement mainly of the margin due to the new business mix. However, I can actually show you that we will keep the pricing discipline. And there obviously, I actually would assign part of the improvement and we've written this also part of the improvement in the second half also to the pricing discipline.
So that it wasn't just the new business mix that developed favorably, but even in existing products. So for example, in the Swiss FlexSafe products, we have really used the environment and have repriced the product. Obviously, and I have to be very frank also on this, small interest rate hike in the Swiss market at the year end has also Okay. Helped a little
And just a small follow-up on this. On this 0.6% volume business mix and pricing, do we know how much is due to business mix and how much is due to pricing? Or do you don't you communicate on that?
No, we don't communicate on that. But what I can also add is that our ambition level is 1.5%. And we are I also said in past discussions that we are not in the margin business, we are in the V and B business. So as long as the margin exceeds our minimum hurdle rates and is in line with our ambition level, we will produce new business and thus add BNB. So overall, the BNB is the important metric.
As long as the margin restrictions, which I've mentioned, point 5% at an ambition level and 1% at the minimum run rate are met.
Okay, that's great. Thanks so much.
The next question comes from Daniel Bishop from Baader Helvea. Please go ahead.
Good morning, everyone. A couple of things. The first question again on capital management. I mean, this buffer building process, which you planned throughout the three year plan, I mean, here the basis was originally lower because you now benefited from the change in the market value margin in scenario analysis. So given that part of the buffer building was actually for regulatory risks and exactly these changed in your favor, I was wondering how you think about this process now?
The second one on Page 17. So
if you look
at the net flows here, they declined from €3,400,000,000 in 2015 to €1,000,000,000 in 2016. Say it's excluding the Unit Linked business, which probably enjoyed some growth. What would you expect here in terms of net flows for this year? And then the third one, I mean, we're currently in the midst of the discussion for the pension reform. What is interesting is that things could change quite considerably and quite quickly.
I mean, some elements potentially already next year. I guess the most negative scenarios here are out of the way, but still I would be interested to hear your view in terms of the political risks that are involved given that most of your group life contracts are probably on a three year or five year basis?
Okay. Let's take the political question first. As we've widely communicated, there is no direct impact on us financially whether or not we'll have the large chamber or the small chamber who wins out in the present discussions. As you know, our major message here is that our interest is that politicians find a compromise that will have a good chance of passing the popular vote in September. And the main story here is that in the Swiss second pillar, which is part of our business, we have a substantial cross subsidy of our young clients to our old clients.
I mean, that's true not only for Swiss Life or for the insurance companies, but it's true for the overall pension system. And the whole debate now is to put the reform of the reform is to put the whole thing on a more sustained basis by reducing these cross subsidies. So for us, we favor the solution of the larger chamber, but it's now not up to us, but it's up to politicians in Bern to find the solution here. Now to your first question on capital management. Yes, you're right.
FINMA corrected a mistake, which was the market value margin that was not in line with the Solvency methodology. But it's really more, let's say, a visual thing, you subtract or add the market value margin. I have to say that we are still in intense discussions with FINMA on a number of topics around the SST as you very well know. And we've always said this regulatory uncertainty is the reason next to economic uncertainties for our continued buffer building, and we will not change our guidance with respect to buffer building because these risks are still here, unfortunately. So there is no reason to change our policy to buffer building for the time being.
Now on your second question, I hand over to Thomas.
Yes. On the net inflows, we usually do not give guidance on net inflows for future. But what I can say is that we certainly do not expect a big boost on net inflows as we have seen production numbers last year, mainly in the PDG business to be not very exciting. We'd rather see more assets under management net new assets than in the past than insurance assets. So, I would say, let's stay with about the number that we have achieved last year.
Okay. Thank you very much.
The next question comes from Jonny Irwin from UBS. Please go ahead.
Hi, there. Good morning. Thanks for taking my questions. Great results. Congratulations.
Just two for me. So firstly, how are you thinking about these twenty eighteen targets? I mean, you're now approaching a few of the headline targets and the others look firmly within reach. So I mean, my question would be, is it time to upgrade these targets to ensure the group keeps stretching and pushing itself? And if not, why not?
And secondly, just thinking a bit about the Swiss real estate market. There was a report out last week that suggested some cooling down or softening is a possibility. Could you comment there? Are you seeing any signs of negative trends? Well,
first, the Swiss real estate. I cannot remember a year where there have not been warnings about an imminent cooling of the Swiss real estate markets. And what we've always and consistently said is that the so called risk premium investment risk premium of Swiss real estate versus long term bonds is still very attractive. And now you can say, well, unfortunately, that's still the case because interest rates have kept falling. And if you look at our vacancy rates, for example, overall in the group, we see a slight reduction from the end of 'sixteen versus the end of 'fifteen, which is somewhat surprising, but we've seen a very small increase of our vacancy rates in Switzerland.
But already in the second half of last year, even in Switzerland, we were able to reduce our vacancy rates, which is good news. And if you have these two things, vacancy rates which are stable or even beneficial and you have lower discount rates and you have everybody looking for more yields, real estate, especially Swiss real estate is still attractively priced and we are still buyers in the market as long as this is the case. Now to the target sale, of course, I mean, is a question we've been expecting and it's also a question, of course, we've had over the last couple of years in our different programs and we've always said, no, we will not revise our targets within our three year programs. But of course, that does not prevent us or lower ambition of reaching or even surpassing these targets. And I mean that's been the same for our milestone program, then our SWIF-five twenty fifteen program and our most recent program as well.
There is no reason to change this policy now.
The next question comes from Michael Huttner from JPMorgan. And
just like to you, Sky, really fantastic results. Well done. Really well done. Lots of little questions, if I may. In the past, you kind of gave a feeling for how much the uplift of Swiss Solvency test or Solvency II could be.
Could you give us an update on this, given that the Swiss Solvency test formula has changed a bit? Could you also talk about the ISA and C trends in what you're seeing in the last two months? Is it accelerating? Is it slowing? Whatever.
You mentioned the in Germany, part of the reason for the fall in profit, is this savings result linked to a tax audit? Is this a one off? And how much was it? On the equities, I saw that you'd realized lots of losses. And I just wondered is this a kind of prudent reserve to realize losses so that you lower effectively the cost of each line?
Or is it something happened? And then on real estate, if you could give me an update, a feeling for where the yields are in your portfolio, both on a direct and on a net basis? I'm sorry, it's lots of questions. Okay.
So Thomas will take the SST question and the tax audit question, and I'll take the rest.
Okay. On the question number one, SST, the Solvency II ratio is about 40% to 60% above our SST ratio. We can communicate that our Solvency II ratio is clearly above 200%. And we will again give more details when we move to the Q1 and the half year results disclosure. As usual, at the half year, we will also give the sensitivities on the Swiss Solvency test results.
On the tax issue or actually the positive development in Germany, we got a positive tax audit outcome and this led to a positive item in the tax line in Germany, which has to be shared partially with the policyholder. And this led to higher policyholder participation, which is above the segment result. So the net profit in Germany was actually better than last year, but the segment result was lower than last year. So this was the counting way of showing it unfortunately, this led to a lower segment result. However, I do think that in Germany, the medium term, the savings result is more under pressure than in other geographies.
That's why we are really pushing hard on generating more fee income in Germany. And you have seen that especially the old IFAs have performed very nicely in Germany and have compensated for lower savings results in the German market. Now on the IFA and how we will move on in the IFA basis, I hand back to Patrick.
Okay. As Thomas just mentioned, yes, we've seen a positive development on IFAs in Germany. Our recruitment efforts are paying off. Also, have productivity gains. That's the main reasons behind this 13% increase in Germany on a stand alone basis.
In Switzerland, here, we've seen a bit of a smaller contribution compared to the really spectacular prior year 2015, but that's only been a small difference between the two years and France is also developing well. So then on the equity losses, well, yes, I guess I'm not unhappy about now having higher unrealized gains on our equity portfolio. As you know, quite surprisingly, equity, because we don't have a lot of it, is quite capital efficient in terms of the SFT treatments. And so of course, the next thing to look at is then to ensure that we don't run into any issues in our statutory accounting or our IFRS accounting in our equity portfolio. And that, of course, what you just mentioned is, of course, helpful for holding equity over the next couple of years.
Then your next question was on the different yields of our on the real estate yields. Well, here overall, we have a 3% to 4% yield. If you calculate the net yield from the figures that we have shown, you wind up with 3%. But please bear in mind that we include refurbishment costs and other maintenance costs in these figures. So those are already lowered compared to in terms of direct yields.
And the overall yield for our real estate was above 6%, of course, including the unrealized gains development last year. And here, we've always gotten a number of questions in the past. We usually said we expect real estate revaluations of 1% to 2%. We now have more or around 3% in both 'fifteen and 'sixteen. And of course, we don't expect that to continue like that In our plans, we're closer to the lower end of the 1% to 2% revaluation gains for 2017.
Does that answer your question?
Is brilliant. Thank you so much and really well done. That's great results. Thank you.
The next question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead.
Thank you very much. Most of my questions have been answered, be honest. But maybe if I could just follow-up on in terms of your targets. I mean, if I think of one, perhaps arguably one of the most important targets at the moment is what you're trying to do on the sort of buffer, the rebuilding capital position. And I'm just wondering what needs to happen for you to feel that you have fully rebuilt the buffers?
Is there anything you can guide us to there in terms of when we can think that's complete? And related to that, once you feel you're in a position where you're happy, what is the ultimate restriction on the payout ratio? If you weren't sort of trying to rebuild still to complete the rebuilding phase at the moment, potentially, might you sort of feel that you had to play with? And then perhaps just one follow-up on the movements in the solvency ratio when you said that the scenario aggregation should also be included. Apologies, I may be not up to speed on this, but I thought that was sort of going away in terms of discussion.
But could you just update us on where we are on that? Has that actually now been approved? Is that a done deal?
So I interpret the follow-up question on the buffer building that you want to hear, Thomas, on this subject.
Okay. We made it very clear that there is some additional buffer building. And when you go back to the Investors Day slides and where we have shown our cash generation and the remittance, we have made it clear that there is some buffer building at the holding company level and there is a little bit of buffer building, but mainly for growth, by the way, in the business units. We have said about 15% of our cash generation will be retained at the business units and about 15% to 30% at the holding level. Now, the reason was really regulatory uncertainty and there still is.
And you've mentioned exactly, for example, the point of the scenario. Yes, FINMA has given guidance that certain scenarios can be removed. And actually, we have removed one category of scenarios, which only gave us a few percentage points out of the 10% to 15 relief that we got. A few is due to the scenarios that we were allowed to remove. Of course, you could remove further scenarios, which may happen someday.
But the question is, how far do we go with the development of the standard model? There is currently, with FINMA, a working group between the Swiss Insurance Association and FINMA working on the standard model for the group life business in Switzerland. And the outcome of this standard model development is still not clear. And therefore, there is still some regulatory uncertainty that we have to account for. And as we are on the cautious side, we want to be in the position that we can tell our shareholders, yes, the dividend that we pay, the payout ratio is sustainable.
We don't want to have volatility in our dividend payouts. And therefore, we keep building, although a smaller buffer than in the past for the regulatory uncertainties that still exists. So that's the short answer to a very long question. Actually, it's the opposite.
The next question comes from Stefan Schulman, Bankfontobel. I
have three questions. The first one still on the reserving additions. Can you maybe give a split how much to that went to group by and how much in the real life? And they also confirmed that there was no impact on IFRS results from ZZR in Germany. Then the second one, maybe a qualitative statement on the life insurance lapse rates 2016 compared to last year.
And the third one, you are still low in terms of duration gap, zero point seven years. I mean, as of today, is there any need of change of view in regard to interest rates going forward? Or is everything still unchanged?
Okay. I'll take the first and the second question. So on the duration gap, that's unchanged. I just remind you that we say that we don't account for any duration contribution from real estate. That's one of the reasons why we have an open duration gap.
And I don't expect any changes here going forward. Then on the reserving, we don't disclose the split between the okay, just don't the I'd like to say that it's only in Switzerland. So your the February we increased the ZZR that sets it down in Germany by about $0.02 $5,000,000,000 but that's only statutory. That doesn't have anything to do with the IFRS $1,000,000,000 that is related to the Swiss strengthening. And we can say about one third is individual and two thirds are group life with respect to this €1,000,000,000 strengthening under IFRS accounts in Switzerland.
Okay.
Then on the lapses, the lapse situation is about similar to the prior year. So we haven't seen major movements on the lapse rate, maybe a little bit positive development even.
A bit positive even, okay.
A little bit, I think a positive develop.
That's good. Okay. Thank you.
We have a follow-up question from Michael Huttner from JPMorgan. Please go ahead.
Fantastic. Thank you very much. This is on Slide 23, and I suppose it's a little bit the same question as the previous one. So
on the red bars,
I mean, the guarantees, including conversion rate expense. So I guess the figure there is around two percent. And last year, I think the minimum average guaranteed rate was about 1.6%. So the difference is 40 bps. I just wanted to confirm that 40 bps, which I assume is the conversion rate expense.
So that would be for the portfolio as a whole about €600,000,000 if you've got about €150,000,000,000 of reserves. Is that €600,000,000 like an annual addition? Or is it because interest rates have gone down? How do I think about it? And will the €600,000,000 if you get this the desired results on the Swiss pension reform, I.
A lower conversion rate, will the €600,000,000 then disappear? Thank you.
Yes, actually you're right. The difference is most of it is the conversion rate, say 30 bps is the conversion rate. Yes, it is has to be added as long as the conversion rate is where it is and the life expectancy and the interest rate is where it is. It has to be added every year. And yes, if the conversion rate of course is lowered, there is a small positive effect on this number.
So a big effect?
There is an effect on this no.
Okay. And I was just hoping you'd say a big effect, okay, small enough. No, I'll assume you'll well, thank you. Thank you very much.
The next question is a follow-up question from Jonny Irwin from UBS. Please go ahead.
Hi, thanks. Just a very quick one. Could you tell us the payout ratio on statutory earnings, please?
You mean
in the BBG business?
No. So just we've got the IFRS 14, I think
company, yes. Yes, yes.
One minute, I think it is the payout ratio. One minute, I have to double check because that's a number I do not have readily available. I think our statutory profit is about 80% more almost 100% of the statutory profit of the holding company is being paid out as we have written off about February on our participations, which is non cash.
Okay, got it. Thank you.
So, it's statutory, yes, statutory on the holding company.
Yes. Thanks.
Okay. I'll give the number on the road show when you see each other in London.
Ladies and gentlemen, that was the last question.
Dear investors and analysts, in an age of breathtaking innovation and quantum leaps in technology, we believe that people will remain at the heart of our business whether that applies to working with customers, training our staff or in delivering value to our shareholders. On that note, I would like to say a big thank you to our staff for these pleasing results.
They have allowed us to be successful.
Allow me to close with one more news item. We announced the latest on the CEO Germany position this morning. The successor of Markus Leipenkut, who as we said at the 2016, will become CEO of Switzerland on April 1 will be Jorg Arnaud, who will take up the new position on July 1. He will also be a member of the Corporate Executive Board and I look forward to working with this new colleague. Ladies and gentlemen, thank you for your interest and I wish you all a good rest of the day.
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