Swiss Life Holding AG (SLHN) Earnings Call Transcript & Summary

Thank you. Ladies and gentlemen, welcome to the IFRS 17 / 9 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Matthias Aellig, Group CFO of Swiss Life. Please go ahead.

Good morning, ladies and gentlemen, and welcome to our second call of today. This covers key aspects of the transition to IFRS 17 and 9 from a Swiss Life point of view. Before I start, I would like to mention that our IFRS 17 and 9 assessment and comments or provisional. New accounting standards will be implemented effective January 1, 2023. The prior year will be restated for IFRS 17 with the opening balance starting January 1, 2022. Let me start with the key messages. First, the underlying business and the way we manage it is unaffected by the transition to IFRS 17 and 9. This means our focus on strengthening the quality of earnings remains key and there will be no change to capital management. We continue to focus on higher cash returns to shareholders, as mentioned at the Investor Day in November 2021. Second, IFRS 17 and 9 will change the presentation of our insurance business. It will be mostly accounted for under the variable fee approach called VFA. The overall contractual service margin, or CSM, will amount to about CHF 17.5 billion as per January 1, 2022. From an earnings perspective, our fee result will be essentially unaffected by the transition to IFRS 17 and 9. Insurance business, however, will experience a different timing of profit recognition while the overall profits of the lifetime of the contract will not be affected. Local statutory accounting, which is the basis for cash remittance is unaffected. We confirm our business strategy and reaffirm the 2 financial ambitions of quality of earnings and earnings growth as well as capital cash and payout. As mentioned at Investor Day in November 2021, our Swiss Life 2024 strategy focuses on key value drivers, which are most relevant in explaining our growth ambitions. Those are the fee result and the cash remittance to the holding company. Starting with the fee result. It is a key element of earnings quality, and this is, as mentioned, essentially unaffected by the transition to IFRS 17 and 9. The operating result from insurance business is impacted. We continue to manage the business in a capital-efficient way. With this slide, let me also illustrate our future reporting. Going forward, we will enhance the disclosure of the fee result and reported by business line presenting separately asset managers, owned IFAs and the business with own and third-party products and services. This will provide more granularity to our profit presentation. Given the mechanics of IFRS 17 accounting, the operating result of the insurance business will be bundled and will encompass the savings, risk and cost results of the current reporting. Cash remittance is also unchanged as it is based on local statutory accounts of Swiss Life Holdings subsidiaries. Cash remitted to the holding is the basis for attractive cash returns to shareholders, namely dividends and share buybacks, as shown on the slide. We have the ambition to continue to increase dividends per share. We continue to implement our Swiss Life 2024 strategy with discipline. We are very well on track to achieve all financial targets and are even ahead in terms of return on equity, cash remittance to the holding company. Let's now move to the second part of my speech, which is centered around more technical features of IFRS 17 and 9 and what they mean for Swiss Life. IFRS 17 and 9 will affect existing and introduce new elements in the balance sheet. The biggest impact will be seen on the liability side. It will also change the presentation of the P&L. Premiums, for example, will no longer be disclosed as part of the P&L. And the main driver of the operating profit from the insurance business will be the release of a balance sheet item. I will provide more details later on. Coming back to the balance sheet. Investment contracts without discretionary participation features are not impacted by IFRS 17 and are reported as other liabilities. Insurance liabilities will be calculated as best estimate using current discount rates. Swiss Life's best estimate liabilities or BEL amounts to slightly more than CHF 160 billion as of January 1, 2022. Given the policyholder participation feature of the contracts, there is a certain share of non-guaranteed liabilities as part of this BEL. In case of adverse events, there is future policyholder participation in the form of those non-guaranteed best estimate liabilities that absorb those developments. In our case, they account for an estimated 15% to 20% of total BEL and similar to the SST framework, have a risk-bearing nature. IFRS 17 also introduces the contractual service margin, CSM. It is a stock of unearned future profits that is recognized as a liability and released to P&L over time. The risk adjustment is an allowance for nonfinancial risk. For Swiss Life, the risk adjustment only plays a minor role. It will also be released the P&L over time. On the asset side, there's no tax accounting under IFRS 17. Acquisition costs are implicitly included in the BEL and CSM. This limited impact from IFRS 9 as the majority of our financial assets are already measured at fair value. Real estate is not affected by IFRS 9. Please note that IFRS 9 will be applied from January 1, 2023, onwards without any restatement of the prior year information in the financial report. We also expect a limited impact from new rules to account for expected credit losses, given the high quality of our credit portfolio. Coming to the different measurement models under IFRS 17 in our insurance business. We have total insurance liabilities, including the CSM of about CHF 180 billion as of January 1, 2022. About 99% of those total insurance liabilities are accounted for under the variable fee approach or VFA. This approach is compulsory for all direct participating businesses. For Swiss Life, these are the individual group life businesses in Switzerland, the saving and pensions businesses in France, insurance business in Germany and group pension business at our International business division. Building block approach, or BBA, is applied for long-term nonparticipating businesses, such as the French credit life business and the reinsurance business in Switzerland. Both the VFA and BBA have a CSM that is released to P&L over time in line with the services provided for insurance contracts. Finally, health and protection as well as P&C businesses in France and the group base business in International are accounted for under the premium allocation approach or PAA given their more short-term nature. On Slide 10, you see our key accounting choices and the rationale behind them. In terms of discount rates, we take the asset mix and the liability characteristics into consideration. This means discount rates include a liquidity premium for fixed income and other instruments such as real estate. Given our allocation to real estate, the premium over swap is higher than under Solvency II framework. For the risk adjustment, we consider the 70 percentile approach as an adequate allowance for nonfinancial risk. The risk adjustment only plays a minor role for Swiss Life with an amount of well below CHF 0.5 billion. On transition, we applied the modified retrospective approach. Regarding equity investments, we will use the fair value through OCI option to some degree outside the VFA business. By using this option, realized gains and losses will never be recognized in the P&L. It is -- there will be no recycling. This comes at the cost of losing P&L contributions in the future. Given today's equity exposure in those areas outside the VFA business, this could lead the scenario of expected positive equity market returns to low net profit of about CHF 30 million to CHF 40 million on an annual basis. On the other hand, earnings sensitivity to equity market movements will be lower whenever the option is used. Finally, there is a certain cross subsidization among groups of [ onerous ] contracts that share at the same [ tied ] asset portfolio such as in the group life business in Switzerland. This reduces the risk of onerous contracts and the related P&L impact. On Slide 11, we provide the shareholders' equity work from IFRS 4 to IFRS 17 as transition. It is as of January 1, 2022. Upon transition, the new standard for Swiss to recognize profits that relate to future services in the CSM and to spread them over the remaining lifetime of the contracts. More precisely, it will be the shareholders' share of unrealized gains and losses under all direct participating contracts that is now recognized in the CSM rather than in shareholders' equity. For Swiss Life, this includes unrealized gains and losses and financial assets and real estate fair value changes of the VFA portfolios. Other changes are less material in our case, like the reduction from the intangible elimination relating to that. Estimated impact of IFRS 9 on shareholders' equity as of January 1, 2023, is limited as no significant remeasurement of financial assets from amortized cost to fair value is expected. Overall, shareholders' equity under IFRS 17 will amount to about CHF 8.3 billion as of January 1, 2022. It continues to include unrealized net gains and losses and financial assets outside the VFA business. However, those amounts are much smaller than under IFRS 4 as all unrealized net gains and losses from the VFA business are recognized in the CSM. As a result, shareholders' equity under IFRS 17 will continue to have some volatility post by capital market movements, although much lower than in the past. Given the aforementioned shift of unrealized gains and losses, new shareholders' equity is best considered in conjunction with the CSM on a post-tax basis, as this represents the stock of future profits. For Swiss Life, both figures taken together amount to about CHF 22 billion as of January 1, 2022. This is a substantial increase of about 40% compared to the IFRS 4 shareholders' equity. The value of the pretax CSM is shown on Slide 13. The CSM demonstrates the level of future unearned pretax profits relating to our VFA and BBA businesses. As in the past, we will focus on capital efficiency and disciplined ALM. Therefore, we foresee positive contributions to the CSM from the expected business contribution and new business. Experience adjustments reflect the impact on the CSM from the actual current period experience compared to expectations, such as, for example, pertaining to claims or expenses. Additionally, changes in actuarial projection assumptions are also included, like future surrender, mortality or longevity assumptions. Economic variances include changes in economic conditions, such as interest rates, credit spreads, real estate and equity market movements or FX. As of January 1, 2022, the CSM amounts to about CHF 17.5 billion. The CSM includes the intra group margin from insurance asset management services. Similar to the VNB or MCEV approach that accounts for about 20% of the total CSM, slightly less than 10% of the total CSM relate to non-allocated insurance operating expenses. Those are not protected in the CSM will be charged directly to P&L as incurred. The CSM release reflects the pretax profit that is recognized in the P&L when the insurance services are provided. The pretax CSM release for Swiss Life is estimated from today's perspective at about 6% to 8% per annum of the total CSM. The annual CSM release is the main profit driver within the operating result of our insurance business. It includes the unit-linked business in scope of IFRS 17, such as the business in France. This will be, however, deducted from the operating result of the insurance business that it will be mapped like today to the fee result. A portion of the release pertaining to the integral margin from insurance asset management services is essentially eliminated within the operating result. Also non-allocated insurance operating expenses are directly charged to P&L outside of the CSM release, thereby essentially offsetting the corresponding portion of the release. The remaining profit contribution stems from the PAA insurance service results and from total net investment results, which will be defined differently than under IFRS 4. I will speak about that in a minute. On Slide 15, we illustrate the differences in profit recognition related to changes in assets and liability values by comparing IFRS 17 to IFRS 4. For IFRS 17, we focus on the VFA business. Let's say, for example, for real estate. Fair value changes will be accounted for in the P&L. But in the case of gains, we offset by the recognition of insurance finance expenses in the P&L. Those expenses are booked within the net investment result. They will first reduce the net investment result and second, leads to an increase of the CSM P&L on the balance sheet. Therefore, the immediate net P&L recognition of the net investment result from those real estate fair value changes will be 0. This results in a smooth P&L impact related to fair value changes over time as they will be released from the CSM over time in line with insurance services provided. Therefore, the vast majority of the fair value changes will be released to P&L after period in which they were incurred. As a result, the new IFRS 17 profit impact from those real estate fair value changes will be much smaller than under IFRS 4. As a reminder, on the local statutory accounting, there is no contribution to P&L unless real estate values either fall below cost value or real estate is sold. On the VFA business under IFRS 17, the same smoothing over time applies to realized gains. Other fair value changes and to reserve strengthening or releases. It also applies to direct investment income. All of that will be absorbed by the BEL and the CSM and release to P&L over time with only a small fraction of it being recognized in the current period. Given the high relevance of the VFA business for Swiss Life, this difference in the profit recognition pattern will affect the group's net profit. Moreover, there is the impact from applying fair value through OCI option, for equity instruments, as mentioned before, expect this directional IFRS 17 and 9 impact on net profit contribution illustrated on the full year '22 basis as shown on this slide. The arrows are illustrative and not to scale. This brings me back to the Swiss Life 2024 group financial targets. The fee result, cash remittance and the share buyback will be unaffected. We're on track to achieve those targets and are ahead in terms of cash remittance. The KPI is based on IFRS 4 and IAS 39. It looks as follows: we are ahead with the return on equity and on track with the dividend payout ratio. In the current assessment, both will experience a mechanical uplift from the introduction of IFRS 17 and 9, since it affects profit and shareholders' equity as shown on Slides 11 and 16. At this point in time, we do not update those targets. Let me reiterate in the context of the payout ratio message given on Slide 6, a growing cash remittance, the basis of growing dividends. To wrap up, the IFRS 17 and 9 accounting changes will affect the presentation of our insurance business on the balance sheet and the P&L as illustrated today. Our underlying business, the way we manage it are unaffected by the transition to IFRS 17 and 9. We confirm our Swiss Life 2024 strategy and its implementation. We are very well positioned to successfully continue our journey, and we expect to either achieve or exceed all of our group financial targets. With this, I am now ready to take your questions.

[Operator Instructions] The first question comes from Simon Fössmeier from Bank Vontobel.

It sounds very intuitive. My 2 questions are the first on the leverage ratio. Would you -- so just to calculate the leverage ratio on the shareholders' equity under IFRS 17? Or would you include the CSM? I think there's a debate with the rating agencies. Some will include the CSM, some will include 50%. I was wondering what's your view. Second question is, you alluded to some reporting changes or are there additional details in the reporting? When will we get the new reporting framework, the new templates?

Thanks, Simon. In terms of the leverage ratio, we clearly consider CSM to be part of the calculation at 100%. We understand this is what the market practice is from our peers. And if we look to the solvency regime, they have a 100% allowance for future profits as well. Then to the second question, we will start to include this Slide 5 styled granularity at half year in the normal reporting. As mentioned in the call, 1 hour ago, the Q1 and Q3 reporting will continue as in the past, to focus on fee, cash and premium as in the past.

Next question comes from Andrew Sinclair from Bank of America.

A few for me, please. Firstly, just on the reduction in the operating profit from the insurance businesses. Are you able to give any quantification of that, even just at a high level, like kind of low single-digit, high single-digit teens? Or just any high-level indication there? And secondly, it was just with book value declining, is there going to be a big deferred tax asset created? And if so, can you quantify it and let us know over what sort of time frame that would be utilized? And thirdly, just -- we have got some big market moves through 2022. Really just wonder if you can give us an idea of how much of a difference you'd expect on effectively Slide 11 on the balance sheet impacts, if we're kind of thinking about that after 2022's moves?

Okay. Thanks for your questions. On the first one, there's no quantitative indication. We mentioned on the slide that those are directional impacts illustrated for the full year 2022. So no positive indications beyond what we just mentioned. The second question, we checked there is, in our view, no relevant impact on tax from IFRS 17/ 9, other than clearly the current tax, which is depending on what the pretax profit is doing. So I don't see here any additional, let's say, asset liabilities of material impact to happen.

Does that not effectively mean you're paying tax twice on profits that you've recognized in IFRS terms historically and then reearning or are just getting mixed up with Swiss tax rates -- Swiss tax system, sorry?

I may not have gotten your question, but let me try to try to answer it the following way. I mean there is a deferred tax asset liability. If there is a difference between, let's say, carry value on the local set and let's say, the market value on the IFRS balance sheet. And this typically creates deferred tax assets. And on the asset side, we, as said, have essentially no big remeasurements that are made.

Understood. And then on the difference on Slide 11, if it was done at the end of '22.

Slide 11 -- maybe on the very qualitative indication, I mean, the big volatility that we have shown under IFRS 4 relates to the recognition of those elements in the CSM. So there is now one element of volatility, if you wish that is now removed from today's IFRS 4 shareholders' equity. I think that's probably the guidance I can give you on that. The second point is, and I alluded to that, IFRS 9 will be applied starting January 1, 2023. And there we do not expect, let's say, any additional significant remeasurements other than what is included in the opening balance as of January 1, '22. There will be, going forward, certain assets that will continue to be accounted for at cost. For example, mortgages, they are what the accountants called Hold to Collect Business Model. And there will be no change compared to today's treatment.

The next question comes from Anne-Chantal Risold from Octavian.

I have a question trying to compare a bit IFRS 17 with SST. On your Page 10, you mentioned on the discount rate more in particular. So how will the discount rate between SST and the IFRS 17 is varying? As I understand, the discount bit in IFRS 17 will be higher than in SST. It's one. And also, will you disclose your discounting curve?

Thanks for the question. If we look at the CSM, the shareholders' equity and try to link that to SST, there are various components to mention, if we start at the CHF 8.3 billion. If we add in the CSM, which is pretax, like the SST, which is pretax, we will end up at maybe CHF 26 billion. Then moving closer to SST, we also add to this figure of the world, if you wish at the non-guaranteed policy or the best estimate liabilities, which are part of the risk-bearing capital in SST that may add quite significant amounts. We indicated 15% to 10%, 20% of the BEL. And there is, as you mentioned, a negative component because the discounting in the SST is much stricter. In the SST, we don't have -- first, we have [ COVID ] rates, and we have nothing added on top. Here, under the IFRS 17 framework, we base ourselves on swap, and we have a liquidity premium, which is maybe 70 to 90 basis points on top of what you would expect on the Solvency II. So in that step, if you wish, there is a big positive. You know the non-guaranteed benefits in IFRS 17 is a negative from the discounting and taken together with some other things like the fact that in the SST, we have a short projection of the BVG business. We don't have goodwill in the SST. There is maybe net-net a positive of CHF 12 million, CHF 15 million. So you're essentially at CHF 40 billion. And then there are a couple of pluses and the minuses that relate to items like the dividend, the foreseen dividend, which is fully subtracted in the SEC, the share buyback, which was already fully subtracted and transferred, which may add up a small billion amount. So that's essentially how you come from the IFRS 17 role to the SST. And as you said, there is a significant part of that change, a negative one that relates to the discounting. And to your question, yes, we will disclose the discounting curve.

Okay. And maybe just one other in the -- also in the assumption parameter. As you mentioned on the onerous contract, there is some benefit how you group the contracts so we can kind of expect that you will not have any material onerous contract to disclose? Is that your assumption?

I said in the -- in the VFA business, which accounts for 99% of our insurance liabilities, we have the policyholder sharing. I mean, this subsidization across the policyholder entirety. That's part of the business model. And as a result, we do not foresee any onerous contracts in the VFA business. There may be in the P&C and health businesses in France, some minor amounts, but the light business, we do not see onerous contracts.

[Operator Instructions]

Okay. And then I think we are at the end of the call. Thank you for listening.

It seems that Mr. Sinclair has a follow-up question. Is he allowed to ask a question?

Absolutely.

Two more for me. One was just -- have we actually got a date for when you'll be able to provide the 2022, sorry, restated numbers on an IFRS 17 basis? Clearly, we'd be keen to get that significantly in advance of half year results, so we can start properly building our models. And secondly, just -- it sounds like you're going to be dropping the savings and risk splits I mean that sounds a little bit of a loss. I mean, is there any way that we're going to be able to see what is coming through still from what's historically been called the risk business? It's been declining a bit in recent years, I know. But still a decent high-quality stream of earnings. It would be interesting to see that split going forward.

Maybe to the second point first. It was not our intention to go down that route, given the mechanics of IFRS 17 with this present value, if you wish, of the CSM, we did not find a reasonable way to continue to have the split into cost risk and specifically savings business. So there is no way that we can split that out. You will see the operating result of insurance bundled together and then this additional granularity on the fee result, as mentioned. Now in terms of the question in regard of the restated figures. Our base case is that there will be no figures before half year. But we will, as said, report in Q1 as in the past, on the top line figure for fee income and premium and so forth. But again, the restated figures, no things before half year. But let me also point out that fee results is essentially unaffected and there I think you can build on the track record and the historical data that are available.

Understood. It does make life incredibly difficult for analysts to not have any figures in advance of half year results season, which is already an incredibly busy time, but -- so anything that can be provided in advance of results that allow us to start building models would be hugely appreciated.

Next question comes from [ Marius Borkar ] from Autonomous.

Just one question for me, just actually following on from Andy's question. I mean it is going to be quite difficult for us to really model your earnings for first half blind with no real financial supplement. Could I actually just ask why you're one of the few insurers I've heard so far taking that route of essentially leaving us blind on quite a large part of the P&L?

I think what we have provided today is the CSM, what you can expect in terms of release. I think we have the fee result that is -- that continues to be unaffected. And I think what is also relevant that we indicated a bit with the directional impact will be based on the full year 2022 result. We talked this morning about key drivers. We mentioned what their actual impacts are illustrated at the full year 2022 results. And I think at the end -- and let me underscore that point, with IFRS 4 we had something that was relatively -- and I say relatively close to stat earnings and, therefore, cash and with IFRS 17 and 9, the IFRS profit has essentially moved far away from the statutory earnings and therefore, from cash and income cash we were expecting this morning on how the outlook looks like on that key important metric.

I've got a lot of sympathy for that point you just made there. But wouldn't the answer in a way maybe the almost try and give us something more useful in terms of statutory look through framework or something that might actually help us frame the dividend in a more effective way. I mean quite frankly, I'd be quite willing to abandon IFRS 17 at a certain level, if I had something more useful to frame the dividend against.

Look, we have earlier ratios in the...

There are no more questions.

Okay. I think that brings us now to the end of the call. Thank you for listening and for your questions. Take care, and goodbye.

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