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Morningstar | Swiss Life's Decent 2018 Fee Result Drives Our FVE Upgrade

Swiss Life reported 2018 results that included net income of CHF 1,080 million, a little bit above our full-year estimate. Gross premiums on insurance contracts rose 360 basis points, and gross premiums on investment contracts with discretionary participation features declined 640 basis points. Full-year numbers were CHF 12.54 billion and CHF 0.795 billion, respectively. We are raising our fair value estimate to CHF 445 per share from CHF 385, having rolled our valuation model and accounted for an improved outlook for fee generation. We maintain our no-moat rating.

Policy fees continue to be an increasingly important part of income for the business, with full-year results coming in at CHF 340 million, or growth of 8.6%. This predominantly came from policy fees earned on investment contracts and unit-linked business, with that making up CHF 313 million of the total CHF 340 million. We think this fee-based business is ultimately the driving factor of change in the business because Swiss Life is now also taking CHF 1.3 billion in fees from asset management. That is split across its third-party asset-management and proprietary asset-management businesses. Assets under management at TPAM have risen by just over 15% to CHF 71.2 billion, and that will continue to drive the fee result. Net new assets have been driven by strong inflows from real estate, for which Swiss Life is well known, and balanced mandates, outweighing lower-fee money market outflows.

Our calculation for the investment income yield, which excludes financial assets for the account and risk of Swiss Life Group customers, comes at 261 basis points, which is a marginal improvement on the 253 basis points one year ago. With a technical interest rate of 126 basis points, this leaves a 127-basis-point gross investment margin, a slight improvement on the prior year.

This uptick in yield has essentially come from rising allocations to equities, public and private, real estate, and infrastructure investments. These mixes have been shifted by 170 basis points, 110 basis points, and 200 basis points, respectively. This has pretty much all come at the cost, in terms of allocation mix, from debt securities. At the moment, impairments across the investment portfolio are coming in at around 8 basis points, but we forecast a blended average of 25 basis points allocated to our model line item of debt securities. The 10-year Swiss government bond yield has declined in recent months and now stands at negative 25 basis points. The 10-year German government bond yield is at around 15 basis points positive. While the direction of the net investment yield has looked positive over the past year, it is now looking less appealing. For the moment, we forecast a 25-basis-point annual improvement in the investment yield.

The board is proposing a CHF 16.5 dividend, CHF 2.5 paid in the form of a withholding tax-free distribution. This brings the payout ratio to around 50% and gives the stock a near 4% dividend yield. Solvency is estimated to be around 180% as at Jan. 1, 2018, which at the moment leaves little room for beyond factored capital repatriation. The targeted range is 140%-190% and cash upstreamed during the year has come in at CHF 695 million, which drives the remainder of the CHF 1 billion buyback. We forecast annual buybacks of CHF 500 million as management guides to CHF 2.0 billion-2.25 billion in cash repatriation over 2019-21, similar to the 70% upstreamed holding cash payout we have seen in recent years.