Swiss Life Holding AG (SWSDF) Q4 2023 Earnings Call Transcript

Swiss Life Holding AG (OTCPK:SWSDF) Q4 2023 Earnings Conference Call March 1, 2023 3:00 AM ET

Company Participants

Patrick Frost - Group Chief Executive Officer

Matthias Aellig - Chief Financial Officer

Conference Call Participants

Andrew Sinclair - Bank of America

Peter Eliot - Kepler Cheuvreux

Thomas Bateman - Berenberg

Farquhar Murray - Autonomous

Jimmy Fan - UBS

Daniel Regli - Credit Suisse

René Locher - KBW

Peter Eliot - Kepler Cheuvreux

Operator

Ladies and gentlemen, welcome to the Swiss Life Presentation of the Full Year Results 2022 Conference Call and Live Webcast. I am Sandra, the chorus call operator.

At this time, it's my pleasure to hand over to Patrick Frost Group CEO of Swiss Life. Please go ahead sir.

Patrick Frost

Dear analysts and investors welcome to our conference call on the 2022 full year results. Thank you for joining us today. As usual, I'll start with an overview of our results. Our CFO, Matthias Aellig, will then take over and comment on our performance in more detail. Afterwards, we will open the floor for questions.

2022 was a very eventful year. For Swiss Life, a highlight was the return to positive interest rates. We achieved the highest net profit ever despite the renewed strengthening of the Swiss franc and subsequent negative FX translation effects. I'd like to thank all our employees for this remarkable achievement.

Adjusted profit from operations was up by 17% to more than CHF2 billion. Net profit increased by 16% to more than CHF1.4 billion. The return on equity was 12.8% and thus above our target range of 10% to 12%. The fee result grew by 13% to more than CHF750 million.

Cash remittance even increased by 21% slightly more than CHF1 billion. This development pertains to the 2021 local profit upstreaming and therefore, this direction of travel was already reported last August.

Based on the strong development of our profitability and cash remittance, we proposed to increase the dividend by 20% to CHF30 per share. This corresponds to a payout ratio of slightly more than 60%, in line with our Swiss Life 2024 targets.

Needless to say, I'm very pleased with the development of Swiss Life in 2022. Higher interest rates are economically beneficial for us and our policyholders. Many of the positive effects for us will be seen over time as we have alluded to regularly in the past.

One effect of higher rates has already materialized in the form of reserve releases. While we have not seen such an effect in many years, this is just the normal course of business for a life insurance company.

Since 2012, during the long stretch with low and even negative interest rates, we strengthened policyholder reserves by a total of close to CHF9 billion with a higher part related to the Swiss BVG business than to individual life. This is quite an amount.

Now, the situation has changed and for the first time in years, we have realized some of those reserves essentially outside the BVG business. Importantly, those releases were also recognized in local statutory accounts and thus are expected to contribute to a growing cash remittance in 2023 and thereafter. This comes on top of our cash remittance plans that we presented in a still-negative interest rate environment in autumn of 2021.

A higher level of rates is beneficial for Swiss Life as mentioned and therefore we expect to structurally exceed our cumulative cash remittance target. Cash remittance is a very important KPI. It is the basis of growing dividends and we have the ambition to continue to increase dividends per share.

Moreover, cash remittance is gaining an importance in the context of the transition to IFRS 17. Our CFO, Matthias Aellig today will host a separate call on the topic. Please tune in.

To wrap it up, this set of results marks a very strong start to our Swiss Life 2024 corporate program. I believe that we are very well positioned to successfully continue our journey and we expect to either achieve or exceed all of our group financial targets.

I will now hand over to Matthias Aellig who will take you through our financial results in more detail.

Matthias Aellig

Thank you, Patrick. Good morning ladies and gentlemen. I will start with selected P&L figures on slide six. Gross written premiums fees and deposits received increased by 1% in local currency to CHF19.6 billion. Fee and commission income was up by 9% in local currency to CHF2.4 billion. All sources contributed positively.

Net investment result of the insurance portfolio for own risk decreased to CHF4.3 billion due to lower net capital gains. Net insurance benefits and claims were down to CHF13.3 billion. This includes reserve releases of CHF0.3 billion in Switzerland.

As a reminder back in 2021, we strengthened reserves by about CHF0.3 billion in the negative interest rate environment. Policyholder participation decreased to CHF1.9 billion driven by lower net capital gains. Operating expenses were stable at CHF3.8 billion.

Profit from operations increased to CHF2.1 billion. This is mainly due to higher savings result in Switzerland and due to higher overall fee result. Borrowing costs were at CHF120 million and the income tax expense was CHF479 million. Net profit increased by 16% to CHF1.46 billion.

We adjusted profit from operations to reflect finance transformation expenses and FX translation effects. We also adjusted the 2022 financial year by CHF34 million pertaining to a net gain on sale of a subsidiary that took place in Q4. It related to a facility management company that provided services to both PAM and TPAM. Adjusted profit from operations increased by 17% to CHF2.1 billion.

Moving now to the segment results, starting with Switzerland. Premiums were stable at CHF9.9 billion in line with the market. Premiums in individual life were down by 4% to CHF1.5 billion but the market increased by 2%. Periodic premiums grew by 1% driven by unit-linked products.

Single premiums were down by 19%. Premiums in group life increased by 1% to CHF8.4 billion, but the market decreased by 1%. Single premiums increased by 2% due to higher premiums from employees entering existing full insurance schemes, while periodic premiums were stable.

Assets under management in our semi-autonomous foundations increased to CHF6.2 billion compared to CHF5.6 billion at year-end 2021. Fee and commission income was down by 2% to CHF322 million. Higher fees from Swiss Life Select were more than offset by a lower contribution from the mortgage business and from investment solutions for private clients.

Operating expenses were stable at CHF446 million. We had investments in growth projects such as, the previously mentioned wealth management initiative. Those were essentially offset by a positive effect of about CHF5 million due to a plan amendment in the owned IFA pension scheme which was already included in our half year 2022 figures.

The segment result increased by 36% to CHF1.2 billion, driven by a higher savings result while the cost and risk results were stable. The savings result significantly increased by around CHF0.3 billion in the context of rising interest rates.

The main reason for the increase were reserve releases of CHF0.3, billion essentially outside of the BVG business and therefore with a below average policyholder participation. Overall, we are pleased with the strong segment result, as shareholders and policyholders got the benefit from higher rates in 2022.

This benefits also local statutory accounts which are the basis of cash remittance. Fee result increased by 5% to CHF30 million mainly driven by the mentioned pension plan amendment. The value of new business increased by 8% to CHF204 million, this is mainly due to the higher volumes of group life semi-autonomous solutions.

In line with our Swiss Life 2024 financial targets and our continued focus on cash, we started to include cash remittance on each business division slide as of half year. For Switzerland, cash remittance increased by 6% to CHF451 million.

Turning now to France, please note that, all figures quoted are in euros for our French, German and International segments. In France, premiums decreased by 3% to €6.9 billion but the market was stable.

Now Life business, premiums were down by 5%, following strong growth in prior years. The market was down by 3%. Since 2019, we have outperformed the market. Our premiums increased at a CAGR of 12%, compared to 0% for the market.

Unit-linked share in our life premiums was 63%, but the market was at 40%. Life net inflows were €2.5 billion versus total market net inflows of €14.3 billion. Health & protection premiums increased by 5% in both the group and individual businesses. The market was up by 6%.

P&C premiums were down by 4%, primarily due to motor and home insurance products. Fee and commission income rose by 10% to €422 million. Unit-linked fee income increased based on higher average unit-linked reserves compared to the prior year.

We also had a strong contribution from the banking business, given exceptionally high revenues from structured products. Operating expenses grew to €378 million. Increase of 3% is due to investments in business growth and efficiency.

The segment result increased by 5% to €277 million. The savings results developed positively in all business lines, except, P&C. The cost result declined due to higher acquisition costs related to unit-linked growth in Life.

The risk result was down due to higher claims in the P&C business. This was partly offset by a higher risk result in health and protection, following a first step of repricing. The fee result was up by 32% to €136 million. More than half of the increase was due to higher contributions from the unit-linked and the banking businesses.

A smaller portion was due to positive contribution from a disposal of a small broker. The value of new business increased by 13% to €181 million, this was supported by higher interest rates and a further improved business mix that more than offset lower volumes.

Cash remittance increased by 55% to €135 million driven by a rebound in dividend payment as seen already in our half year disclosure. Cash remittance was relatively low in 2021 relating to the 2020 financial year that was affected by the pandemic.

Moving on to Germany, Premiums were up by 5% to €1.4 billion due to modern modern-traditional and disability products. Fee and commission income grew at 3% to €668 million, due to our owned IFAs.

As previously communicated this top line development needs to be put in the context of two extraordinary effects, in financial year 2021 of around €15 million each. One, from a successful campaign based on the solidarity surcharge the other based on the lowering of the guaranteed interest rate.

Number of financial advisers increased year-on-year by 7% to 5,943. Operating expenses were up by 7% to €261 million because of business growth and ongoing investments such as, the regional IFA network expansion and further digitalization of the advisory platform.

The segment result was down by 23% to €177 million, primarily because of the savings result. It was exceptionally high in 2021 due to the ZZR and other developments. The fee result was slightly down due to the mentioned investments.

Regarding the other profit sources, the risk result slightly decreased while the cost result increased mainly due to the updated tax assumptions driven by higher interest rates. Value of new business was down by 15% to €73 million.

The focus on capital-light business continued with an increased production of modern traditional products. The risk business contributed less, due to lower volumes and stronger discounting effects. Cash remittance increased by 23% to €75 million, driven by the positive fee result development in the 2021 financial year.

Turning now to the International segment, it includes effects from the acquisition of elipsLife consolidated beginning of July 2022. Premiums increased by 21% to €1.3 billion due to higher premiums with private and corporate clients. About 20% of the increase was due to elipsLife.

Fee and commission income was up by 19% to €373 million. About 80% of the increase was due to elipsLife. The remainder was driven by organic growth in the businesses with private and corporate clients and owned IFAs.

Operating expenses increased by 37% to €146 million. The increase is to a very large extent due to elipsLife. The segment result was up by 16% to €100 million. The higher fee and risk results were partly offset by slightly lower savings and cost results.

The fee result increased by 23% to €81 million mainly due to organic growth in all lines of business. About one-third of the increase is due to elipsLife. The value of new business grew by 20% to €42 million, driven by the positive organic volume development with both corporate and private clients. Cash remittance increased by 22% to €63 million, due to the positive net profit development in the 2021 financial year.

Let's move now to our Asset Managers segment that we report in Swiss franc. Asset Managers total income was up by 12% to CHF1.14 billion. This included the consolidation of SLAM Nordic the entire 2022 financial year. It also included the mentioned CHF34 million net gain on the sale of the subsidiary Livit facility management services.

About half of the net gain is reported in PAM total income, half of it in TPAM, as the company provided services to both. A much larger Livit property management company remains a fully owned subsidiary of Swiss Life Asset Managers.

Now our PAM business, total income was down by 3% to CHF380 million due to the substantially lower average assets under management, following the increase in interest rates and credit spreads. Income reduction was partly offset by the aforementioned net gain-on-sale reported as other net income.

Now TPAM business total income was up by 21% to CHF764 million. Half of that growth is organic pertaining to higher recurring income and higher net income from real estate project developments, despite negative FX translation effects. Slightly more than a quarter of that growth is inorganic from the mentioned sale and the SLAM Nordic contribution. The remainder is due to the enhanced income presentation at one of our subsidiaries without impact on segment results as mentioned throughout 2022.

The share of total non-recurring income for TPAM, meaning commission income as well as other net income was 31% of total income and therefore, above the prior year level of 27%. Operating expenses increased by 5% to CHF597 million, due to further business growth and investments.

Segment result increased at 16% to CHF433 million. The contribution of PAM was down by 7% to CHF199 million largely due to lower asset valuations. TPAM increased its segment result contribution by 47% to CHF234 million, thanks to the strong other net income.

Cost income ratio was stable at 79%. Cash remittance increased by 22% to CHF285 million. About half of the increase is based on the net profit development of the 2021 financial year. The other half of the growth is due to special dividends. Net new assets in our TPAM business amounted to CHF9.8 billion, up from CHF9.4 billion. We achieved inflows in real assets of CHF5.1 billion.

Next real assets, we also have comprehensive expertise in fixed income and equities. Excluding money market funds, net new assets amounted to CHF8.8 billion compared to CHF7.5 billion in 2021. Overall, assets under management in our TPAM business were at CHF105 billion, compared to CHF103 billion at the year-end 2021. Total assets under management decreased to CHF250 billion, driven by PAM, primarily due to lower asset valuations.

Let's move back to the group. Total operating expenses were stable at CHF3.8 billion. Operating expenses adjusted grew by 6% to CHF1.8 billion. Direct investment income decreased to CHF3.9 billion. It was stable adjusting for FX translation. Equities and real estate contributed more but income from bonds and alternative investments decreased.

Direct investment yield was 2.5% compared to 2.3% in 2021. Net investment result was down to CHF4.3 billion, due to lower net capital gains. Net investment yield was 2.7% compared to 2.9% in the prior year. Net capital gains decreased to CHF830 million. This is primarily due to net realized losses on bonds and a lower contribution from real estate. Real estate fair value changes were positive below the prior year level.

On the other hand we had a higher P&L contribution from the hedged equity portfolio, despite impairments. We also had higher fair value changes from infrastructure as well as a higher contribution from the hedge of the FX hedging costs. FX hedging costs amounted to CHF539 million compared to CHF345 million in 2021. Hedging costs are expected to go up in 2023 but this increase should be transitory.

At year-end, unrealized net gains on equities were CHF1.5 billion compared to CHF3.3 billion at the end of 2021. Unrealized net losses on bonds amounted to CHF7.9 billion compared to net gains of CHF12.1 billion at year-end 2021.

Slide 16 shows the structure of our investment portfolio. The share of government bonds declined primarily due to lower valuations. The share of corporate bonds increased. As mentioned during our Q3 disclosure, we slightly re-risked our asset allocation, given net corporate bond additions from around CHF1.2 billion.

The share of equities was at 8.2%. Our net equity exposure after hedging amounted to 4.5%. Following the drop in bond and equity valuations, the real estate exposure increased to 28.2%. It includes positive fair value changes of CHF0.8 billion. Fair value changes amounted to 2.0%,up from 1.2% at half year.

Let me briefly reiterate the attractiveness of real estate. It is an important asset class to back our long-dated liabilities in the context of our disciplined ALM. We hold real estate because of the regular rental income it provides and not because of appreciation. About three quarters of that rental income is indexed to inflation or interest rates.

Moreover, economic fundamentals in Switzerland remained strong, which is the basis for the resilience of our real estate portfolio. Vacancy rates for example are at 4.0% in line with the prior year. You can find more data on our real estate portfolio on Slide 60, and newly also on 61 in the appendix.

Moving on to slide 17. Insurance reserves excluding policyholder participation liabilities decreased by 1% in local currency to CHF 169 billion, mainly driven by financial market developments. Shareholders' equity decreased by 40% to CHF 9.5 billion. This was driven to a very large extent by the change in unrealized net gains and losses.

Our total outstanding financing instruments amounted to CHF 5.1 billion at year end. The maturing bonds in 2023 are already refinanced following the issuance of CHF 600 million of senior debt this January. That brings me to our Swiss Life 2024 program and the progress reporting, and we'll start with the profit by source development on slide 21.

The savings result significantly increased to CHF 1.1 billion driven by Switzerland in the context of rising interest rates. Risk results decreased primarily due to France and the mentioned reduction in our P&C business. The fee result increased by 13% to CHF 756 million primarily due to TPAM, France and International. The cost result increased driven by Germany.

Segment Other showed a negative contribution due to realized losses on bonds and higher FX hedging costs. Fee and commission income increased by 9% in local currency to CHF 2.4 billion. Commission income at Swiss Life Asset Managers was up by 7% primarily due to PAM -- TPAM sorry, due to TPAM.

As usual commission income on this slide excludes other net income such as income from real estate project developments. Commission income from owned IFAs increased by 1% and commission income from owned and third-party products and services was up by 9%.

Slide 23 shows our investment yields with the first rebound of the direct yield in a decade. The reinvestment rate was 3.5% in 2022, which is above the direct investment yield. Our average technical interest rate decreased by two basis points to 98 basis points due to business mix and FX translation.

Mentioned reserve releases of CHF 0.3 billion did not contribute to the average technical interest rate as they essentially pertain to a non-interest rate-bearing liability outside the BVG business. With our disciplined ALM, we continue to successfully protect our interest rate margin despite the drag from the increase in FX hedging costs.

The value of new business increased to CHF 497 million. This was driven by the higher interest rates and continued active new business steering resulting in an improved business mix and overall lower volumes. The new business margin increased to 3.5%.

Turning to capital, cash and payout. As of 1 of January, 2023 our Swiss solvency test ratio was estimated to be around 215%. It is well above the ambition range of 140% to 190%. Sensitivities are mentioned on the right-hand side.

Cash remittance to the holding company increased by 21% to CHF 1 billion. As mentioned it includes a special dividend from Asset Managers and the rebound in France. Liquidity at holding at year end amounted to CHF 0.8 billion.

Our CHF 1 billion share buyback is on track with more than 80% completed as of today. For the 2022 financial year the Board of Directors will propose a dividend of CHF 30 to the AGM up from CHF 25 in the previous year. The payout ratio is 60.5%. The dividend will be paid upon approval from the AGM on May 5, 2023.

Let me sum up. We are very pleased with our results. We confirm all our Swiss Life 2024 group financial targets and expect to either achieve or exceed them as we are ahead in terms of return on equity and cash remittance. Higher interest rates are economically beneficial for our life insurance business and the savings result.

Some effects are immediately positive like the reserve releases as seen today in our figures. Other effects materialize over time like higher reinvestment rates and increase of rental income due to the indexation for interest rates or inflation. The savings result will thus remain an important source of profit and cash remittance for the Swiss Life Group.

We will have our next trading update in May for the first quarter of 2023. It will focus as in the past on the usual top-line figures like fee income and premiums.

With this, thank you for listening and hand back to you Patrick.

Patrick Frost

All right. Thank you, Matthias. We're now ready for the Q&A session. Please note that we will take your IFRS 17 questions in the next call. So who would like to start?

Question-and-Answer Session

Operator

The first question comes from Andrew Sinclair from Bank of America. Please go ahead.

Andrew Sinclair

Thank you and good morning. And thank you for always a super comprehensive presentation. Two for me please. Firstly just on the holding company cash levels. Apologies, I think, I missed the date when you were just saying it there. Was that figure as at 1 of January? And could you give us the pro forma holding company cash figure for completion of the buyback?

Secondly, was just on real estate. I like the new slides, but it looks like for the first time that I can remember that you've had a slight negative net addition of real estate. Just really wondering is there anything one-off there, or do you think you're kind of a level you're happy with on real estate or kind of any indications there?

And thirdly, was just building on what you said at the start of the presentation Patrick on cash. Remittances going forward clearly a very nice number for 2022 I think 80% remittance. Just looking forward with that higher proportion of earnings coming from the savings result should we still be thinking that remittance can remain cover around that kind of 80% mark, or even if the absolute terms goes up might the percentage terms go a little bit lower in 2023? That's it for me. Thank you.

Patrick Frost

Okay. So let me start with the cash question. So we don't give any guidance on the 80%. So we stated that we expect to be structurally above the targets that we had in the past. I mean, why? That's because of higher interest rates right that help in many effects.

First of all, we have higher reinvestment rates, which of course helps. Second of all, we don't have any more pressure to strengthen reserves. And third on the contrary, with higher rates, we expect further reserve releases 2022, primarily or almost exclusively outside of the BVG business. In the BVG business, there is no profit impact. Any reserve releases from BVG business would not have any profit impact.

Now, turning now to real estate. Yes, you're right for the first time in a very long time, we've had negative net additions albeit, it was basically around zero right with minus 200 million. So this is down to some timing effects. And we have increased our real estate assets under management overall in the TPAM area especially. And going forward, we still think that the real estate is attractive. Of course, given the level of rates, right, I mean, there is some competition in returns of attractiveness from fixed income investments now given that rates are higher.

On the other hand, the big advantage of real estate is that it's a real asset. So we can going forward expect, clearly, higher rental income. Last year, we had higher rental income on the commercial side, because most of our commercial portfolio, I think around 90% is inflation-linked. Of course, there's more to come this year.

In Switzerland, it's a bit different. As you know here, the potential to increase rental income on our residential portfolio is linked to a formula with some lags. And here, we expect more rental income over the coming years. The reason why we had an increase in rental income, already last year was because we built 1,000 new apartments in Switzerland, which are 100% rented out. So there's still a very strong demand in the residential area in Switzerland. And overall, the real estate market in Switzerland is very well supported. And with that, I hand over to the holding cash question to Matthias.

Matthias Aellig

Thank you, Patrick. Short answer is the 0.8 billion that I gave is at year-end. As of now, we are at about 0.85 billion. The buyback runs at about 50 million, 55 million a month negative. But we also had the senior issuance in January, which added on a net basis about 150 million. So that's how to – this 0.85 billion come about as of today.

Andrew Sinclair

Sorry, just one final thing on the real estate, was should I just see that, we'll be returning slightly to net additions in 2023 from the signs of things, or should we keep it kind of flattish going forward?

Patrick Frost

I mean, that's too early to say. But yes, from this point in time, I'd expect some net additions.

Andrew Sinclair

Thanks very much, gentlemen.

Operator

The next question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead.

Peter Eliot

Thank you very much, and congratulations also from me. Got lots of questions, to be honest, I'll try and limit it to three. First one, on the reserve releases. I mean, I know you're guided on what to release, but you probably have more insight than us into sort of what to expect. So, I'm just wondering, how we should think about it going forward. I mean, if interest rates stay at current levels is it right to think that, we shouldn't expect any more releases this year, whereas if they go up we'll get further increases?

Just to understand, the mechanics a little bit. And I mean you mentioned Patrick at the start, you had 9 billion of reserve additions on the way down. I'm wondering, if you can tell us, how much of that was in the non-BVG business, and what the release was this year just to get an idea of the magnitude.

And then on the dividend, I'm wondering if you can just give us any additional insight into your sort of decision process. I mean, I guess, I think the dividend ideally is a smooth progression and the buybacks being used for when you have extra cash. So, I guess, if I was sort of sitting in your shoes, I'd be thinking we have strong results and holding cash. I can afford the dividend now, but can I keep increasing it at five Swiss francs per year? And so I guess, if you're thinking that's – the progression is sustainable that's great and really good news, but I'm just wondering if you can give us any insights there in terms of how you think about that

And then finally on the real estate flows great for 2022. Are you able to give us any insight into what you're seeing so far this year? I know, it's early days but any sign on the appetite for real estate in your third-party assets? Thank you very much.

Patrick Frost

Okay. So the inflows on the real estate this year, as you said, it's very early, but they're slightly positive. Then on the dividend, we don't give any guidance outside of the directionality. So we have the ambition to increase the DPS, but we don't give any guidance on how much. The other guidance, you're well aware of is the payout ratio.

Then your question on the strengthening of the reserves of 9 billion over the last 10 years or so, here it's around 30% is outside of the BVG business, so around 3 billion. And we released about 300 million. But please be aware that, we also have some policyholder participation in these releases also at the individual life level. And then the last question, I hand over to Matthias.

Matthias Aellig

Okay. Thanks. And let me first make the comment that, we reiterate -- or that we made on previous occasions. As you said, we assessed the reserving position at every closing in terms of the adequacy. With IFRS 17, this will change fundamentally. We will talk about it at the session at 11. But here I can say, under IFRS 17 we will reserve at the current best estimates and current rates. But the movement of the reserves under IFRS 17 will not directly impact the P&L. I think what is probably more relevant to your question is what the situation looks like under the statutory accounting. And there the situation as follows and Patrick alluded to it already beforehand a bit. Going forward, we expect higher rental income on the real estate portfolio and also higher reinvestments to come through with time.

And this will first contribute to higher investment income. They will secondly have less pressure on the reserving. And third, they will over time also contribute to reserve releases. And this will also as mentioned already depending on the business line be subject to policyholder sharing. But all these things net-net will have a noticeable effect, support for our structure to enhance cash remittance.

Peter Eliot

That’s great. Thank you very much.

Operator

The next question comes from Thomas Bateman from Berenberg. Please go ahead.

Thomas Bateman

Hi, good morning. Thanks very much for taking my questions and congratulations, these are record numbers. For me the increase in the dividend is a real sign of your confidence which implies that the cash outlook is very strong. You said that you'd expect to beat your 2022, 2024 target. And I appreciate you don't want to give guidance on this but maybe you could just give some more color on maybe the order of magnitude because it feels like you're guiding to a very strong beat on the cash.

Could you also give us a little bit more understanding on the sensitivity to interest rates, particularly on the spreads that you're making on savings policies. So what's the spread that you're making today? And maybe if that increases by 10 basis points or so, how does that flow through into the savings result?

And finally just on asset management flows, pretty strong in H2 of about CHF 6.8 billion. It feels like you're getting a little bit of more inflows into equities. Could you give us a bit of a feel for the demand you expect in 2023? So where are you seeing your clients? Which client base are you seeing demand from? And what type of asset classes are they looking for or do you think they will look for in 2023? Thank you.

Patrick Frost

So with respect to the cash outlook, we don't quantify it. But the reason why I said that we expect to structurally surpass our cash targets is because the reason that we expect to outperform this target is not just because of this year, right? I mean everything is going very well. You've seen that the fee result is up, the savings result is up for the reasons that we mentioned. So that's the color that we can give you with respect to quantities. For the rest I hand over to Matthias.

Matthias Aellig

Maybe in terms of the question on the spread of the – that flows through with the income goes up, I think there is one way to look at it in the – if you say what share of the savings result – what the savings result is as a share of the total net investment income that may give you some guidance on how much of an increase let's say, yield actually hits the savings result. Clearly, this very much depends on, let's say, where this additional yield accrues. We have in the BVG, the gross legal quote. So we're essentially 10% of it hits pretax off the mine. It's a bit different in the French and the Swiss individual business. So it really depends where this accrues. But by and large, you can look at the share of the savings result in terms of percentage points of the net investment income.

And the last question, I'm not sure whether I fully understood it, but we see clearly flows in Asset Managers and a TPAM that looks good, be it in fixed income, be it in balance, but also in the infrastructure equity area and really also in real estate.

Thomas Bateman

That’s right. Thank you, very much and congratulations.

Operator

The next question comes from Farquhar Murray from Autonomous. Please go ahead.

Farquhar Murray

Good morning all. I have two sets of questions, if I may. And apologies, I'm going to probably come back to the cash remittance target. Could I just ask, how large a reserving headwind was budgeted for against the original CHF 2.8 billion to CHF 3 billion target? And presumably, if that's falling away, should we expect that to result in basically a ratchet up in remittances from this year essentially, and then presumably, the kind of reinvestment improvement is much more graduated kind of drift in terms of the remittance pattern going forward? And then perhaps coming just back to the business, real estate development results were very strong. Is that kind of repeatable, given the pipeline you're seeing at the moment? And then just coming back to P&C in France, how much of the reserving issue there was kind of genuinely inflation versus perhaps other things, just to get a sense of what was happening there? Thanks.

Matthias Aellig

Let me start with the cash remittance. Clearly, when we indicated the cash target at Investor Day 2021, we were in an area of low negative interest rates. And clearly, we said back then that we anticipated kind of essentially stable, let's say, interest rate level. So, it was kind of not a significant amount, let's say, of additional strengthening that we have. But clearly, we had no potential releases or releases in scope of mentioning that target.

And you're right, this effect and the other one of the gradual increase of the reinvestment rate and also the increase of the rental income that comes on top of what we have there, and that's what Patrick referred to as this structural enhancement of the cash remittance. But again, all these effects are subject to policyholder sharing, to various degrees in the businesses we have, but net-net, it contributes to a structural uplift in the cash remittance.

Maybe I'll take the P&C question at this point in time before Patrick then goes into the real estate. The P&C is, if you look into the French market, strongly driven by natural catastrophes. We had quite some flooding in the summer '22. So I think that was the dominant effect and it was less inflation that was hitting the result. There may have been small contributions here and there, but it was not the driver of it.

Patrick Frost

So with respect to real estate and the increases in fair value that we've experienced, let's say over the last decade or so, here we can say that of course I mean higher rates are a certain drag on valuations. However, as most of our portfolio is in Switzerland and we have lower vacancy rates, we also expect to have even lower vacancy rates in 2023 in Switzerland.

And as you know we have -- every year we have an increase in population. We have additional demand from the average square footage per person in Switzerland. We don't have any issues with respect to office demand. As we mentioned throughout the COVID pandemic on the contrary, our real estate office space take-up is strong in the major cities in Switzerland with the exception of Basel where we don't have a lot.

And so the -- as I mentioned, we have the link to inflation in our commercial portfolio and even new leases that we signed, we signed at good levels. So as soon as they're refurbished, we have a nice uplift. And even if they're not refurbished, we can hold lease payments basically as if the contract keeps continuing.

And so what we see is, yes, discount rates are slightly increasing in Switzerland but the higher rental income expectation is at least compensating for that. Nonetheless, of course, we don't expect a repetition of the fair value changes that we've seen over the last -- the past averages. But we do expect to see further increases in fair value changes, albeit as I mentioned at the lower level. But we also have new projects coming due once they are finalized we see nice increases in valuations and abroad it's a bit more volatile.

So in Germany for example discount rate increases are higher than in Switzerland. And so here in some individual cases as others we have -- we're let's say a bit more cautious. But also in Germany we have very good locations. So it's early in the year, so it's very difficult to say where rates will end in the -- at the end of the year. It's also difficult to say what growth will look like.

But again in Switzerland we expect strong growth, low inflation, high migration, continued strong uptick in office demand, lower vacancy rates in both our offices and residential area. So the market despite what other countries are experiencing is still strong, not as strong as it used to be, but we still like investing in Swiss real estate and so do our clients.

Farquhar Murray

Great. Thanks much.

Operator

The next question comes from Jimmy Fan from UBS. Please go ahead.

Jimmy Fan

Yes. Thank you for taking my questions. I have two please. First around the savings results in Switzerland and you mentioned about this reserve release. I just want to understand, how much of this reserve release will lead to higher cash remittance at the half year last year. Could you give a bit more color in terms of what kind of reserve release will lead to higher cash remittance and what reserve release will not lead to higher reserve release?

And second question, I guess in the past, if I net off the impact from the buyback program in the past you have always been accumulating excess cash over dividend payments around over €200 million per annum in the past. Is this still the level like you are aiming to accumulate going forward, or you are comfortable of accumulating less amount of cash each year going forward?

Matthias Aellig

Okay. Thanks Jimmy. Let me start with the savings result first. I think, the point I can make here is the reserve release is a gross figure. And there is -- depending on the policy -- on the line of business there are different, let's say levels of policyholder sharing or the other way around there is a different level of shareholder share of that reserve release. And as I mentioned the €0.3 billion are mainly outside the BVG business.

So, therefore, we have a higher shareholder share in that area so as I said or implied a higher than average share. And if you look at the overall savings result, you may have seen that this was a quarter for the total. And this will also be a benefit for the locals that result maybe not to the exact amount, because the current IFRS in stat are different but a share of that reserve release will also be a benefit in the local stat results 2022. Maybe that's the first question.

And the second question, we have the cash both that we mentioned and as Patrick said and we are ahead with them. And the part that we retain if you wish is just the difference between let's say what is upstreamed, what we have as cost -- a little cost at the holding and then what goes out as a dividend pay. So this is not per se a target, but it is really as mentioned also at Investor Day our goal to increase the cash returns to shareholders, which we keep in the focus.

Jimmy Fan

Thank you.

Operator

The next question comes from Daniel Regli from Credit Suisse. Please go ahead.

Daniel Regli

Hello. Thanks a lot for taking my questions. I have primarily one follow-up question about this reserve releases again and sorry to come back to this. But can you just give me kind of some feeling about, how we should think about these reserve releases to develop over the next couple of years?

So as I understand you, this reserve release should rather accelerate a bit over the next couple of years before then kind of coming down again. And also what is kind of the time horizon you expect kind of positive reserve releases based on the current interest rate environment? And until what time more or less this positive impact will be neutralized again?

And then, one question on share buybacks, obviously, you plan to complete your current share buyback program in May 2023. Are there any further share buyback programs planned going forward? Thank you.

Patrick Frost

So there is no news on any new share buybacks. I mean, it's clear we don't preannounce or comment on this. And for the reserve release question, I hand back to Matthias.

Matthias Aellig

Thank you, Patrick. There is -- there are essentially two worlds. And in both worlds we assess the technical reserves on a regular basis, essentially for each of the closing. Now, under IFRS, these changes this is one of the worlds I mentioned going forward.

We will see I assume some volatility of the reserving levels depending on the interest rates the current interest rates because reserves will be determined at current rates and using best estimates. Given the mechanics and I refer to more details for our 11:00 call, both reserve changes do not immediately hit the P&L given the mechanics of IFRS 17.

And so there is one world which is kind of different from the statutory world which I would like now to comment indeed. That statutory world is the one that is at the end of the day relevant for the cash remittance. In the statutory accounting, it looks as follows.

We expect that these higher rental income that we talk about because of their indexation to rates or inflation, that these higher rental incomes from the real estate and the higher investment income due to the reinvestment rates that are higher which itself has a lag, they will feed through to the statutory income to the statutory higher investment income.

This will have first positive. There's a second positive. There is less pressure on the reserving. And there's also with a lag effect that we will have some releases overtime. And this will have then this positive effect on the cash remittance that Patrick referred to in his intro where he was talking about this structural enhanced cash remittance.

Daniel Regli

Okay. Understood.

Operator

The next question comes from René Locher from KBW. Please go ahead.

René Locher

Yes. Good morning all. Yeah. I'll start with real estate, before I have another question on this reserve release. But on slide 60, you show your real estate portfolio and the breakdown by type.

Now, some of the larger listed real estate companies they were guiding for 2.6%, 2.7% increase in the rents on the commercial side, given that this is inflation-linked. And I was just wondering if you could give us kind of a feel by, how much you have increased commercial rents.

And on the residential which is up 43% we have to focus on these reference interest rates. And I have seen a report from a larger bank. They were guiding from an increase of 1.25% to 2.5% by 2025. And this would trigger rent increase in the resi portfolio by some 20%. So perhaps you could yeah, just share your view on this because it's so important for cash on the local stats.

And if I can come back again, on these reserve releases, on page 14 [ph] -- you show that, the segment result in Switzerland is up by CHF 325 million year-over-year driven by the savings result. And then if I take a look at the cash remittance in Switzerland, it's up by, how much is it, CHF 26 million. I think I understand you have explained the statutory accounts. But question is, are these reserve releases cash items or not?

Patrick Frost

Okay. Thank you. Yes. That’s the -- they are cash items as we explained, because it feeds through the statutory result. Yes, there is some policyholder sharing, but it essentially feeds to the statutory results. So with one year later, we will see that in the cash remittance, right? So there's a year lag in the reported cash remittance figures and the statutory results, right?

So the cash remittance figures you see here, they belong to the developments of what happened two years ago versus what happened one year ago. So there's a one-year lag to it. That explains why the segment results -- you're under IFRS, but the same thing is also true under statutory accounts -- differs in the increase compared to the cash remittance. There's just a one-year lag in the reported figures on that.

Second question, yes, so depending on what happens to the so-called reference index in Switzerland, we've tried to explain that a number of times. In the past, there are large lag effects here, but we are coming closer to being able to increase residential rental incomes in the future in Switzerland. But this depends on this index, which is a weighted average of all outstanding retail mortgage payments or residential mortgage payments in Switzerland.

And just this morning, it was announced that once again this index is still stable. Once it increases by 25 basis points, which is sometime in the future, maybe this year, who knows, that gives us the right to increase rental incomes by 3%, again with a lag of three months, for those people who have benefited from lease decreases in the past.

So people can ask for -- or have been able to ask for reductions of their lease payments over the last years, as this reference index has come down. And you're right, I mean, if this index keeps increasing, each time, we can increase -- every 25-basis-point increase, we can increase lease payments by 3% for those people who benefited from the reduction in lease payments.

For commercial, here what you mentioned for, I guess, the Swiss real estate companies in the area of commercial, over the last year, so the reporting season 2022, we have not seen big increases yet, because this was linked to the inflation rates of 2021 or maybe it leaked into 2022. This will kick in this year, right? So this year we expect to kick in an additional rental income on the commercial side in Switzerland and also abroad.

René Locher

Okay. Very interesting. Thank you, very much.

Patrick Frost

So, if I may, I mean, those are a lot of very positive developments right? As I mentioned in the past, there was one negative related to higher rates and that is, that rates abroad tend to increase more than rents in -- than rates in Switzerland for interest rates. And this of course then leads to a transitory increase in hedging costs, which we will especially feel this year, right? So a lot of positive effects, one negative effect, which is, the increase in FX hedging costs, which is, to a large extent, again, like the positives, shared with policyholders.

René Locher

Thank you.

Operator

The last question for today's call is a follow-up from Peter Eliot from Kepler Cheuvreux. Please, go ahead.

Peter Eliot

Thank you very much for letting me come back. Sorry. I just wanted to clarify a few points that was said actually. First of all, on my original question and you said that 300 -- you gave a number of CHF 300 million for 2022. I assume that was a net number in terms of shareholder benefit.

And I assume that the CHF 2.7 billion that you said has been released over the last 10 years outside of BVG was a gross number. So just wanted to confirm those and understand sort of how much potentially is still there to come back.

The second clarification was just on your comment just now Patrick about the increase of 3% in rental income for those that have benefited from the decreases. Are you able to tell us how many people that applies to? So how many people have applied and got the decreases? And I'm just struggling to understand the materiality, because if it's only a portion of your portfolio that gets a 3% increase, I'm sort of thinking that doesn't seem very material in terms of the overall Swiss franc impact on your investment income. But just to clarify that would be great.

And the third point was on the hedging costs again you just mentioned. You said those would be transitory. I guess are you saying that just because they're currently above long-term average normal levels, or do you have any extra insights there or as to how those might decline again in the near future? Thank you. Sorry for coming back.

Patrick Frost

So let's say the large increase is transitory, right but hedging costs per se are here to stay. I mean they've been around throughout the last 10 years of course. And you can calculate that by yourself. right? I mean you can just look at the forward rate differential. So your fixed income experts can look at that. What are the forward rate differential year-by-year? And you'll see, if you look at the forwards, the largest impact is this year and then it will recede, right? So – and that gives you a good estimate for the pattern that we face. And it's a – in dollars it's more – for the dollar portfolio it's more pronounced. And for the euro portfolio but even for the euro relative to the Swiss franc rates, it's about the same.

Then for – back to the apartment. So I'd say about half of people who stayed in their apartments have asked for a reduction. But okay, not everybody stays in their apartments. And so these 3%, those are for every quarter for every 25 basis points that this index increases we can increase by 3%, right? So of course, if you – again, if you look at the forward rates fixed income there of course many such 25-basis-point steps implied in forward curve.

And this effect of 50% decreases with every step. So let's say the net effect for us increases over time. So it not only accumulates but it increases over time because for the second step of 25 basis points, it will be a lower amount of people that have asked for reductions and so on. So I wouldn't underestimate this effect. And the last point was – back to Matthias.

Matthias Aellig

And on the reserve strengthening and the releases, thanks Peter, it's a very good question that it's important to clarify. The CHF3 billion strengthening that Patrick referred to over the past decade was on a gross basis. And similarly the CHF300 million release in 2022 was also a gross figure. It is before policyholder sharing. So as mentioned, because it's outside of the BVG business, there is a lower policyholder sharing, so meaning a higher contribution to the bottom line than what you would expect from the overall picture. But it is a net – it is gross the CHF300 million.

Peter Eliot

Okay. Thank you very much.

Operator

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing remarks.

Patrick Frost

So ladies and gentlemen, thanks for the exciting Q&A session. This brings us to the end of our conference call. Thanks for your time and your questions. And again, those interested in IFRS 17, please dial in to our presentation at 11 o’clock CET. Thank you and goodbye.