Credit Suisse Executive Insights: U.S. Product Strategy, Pricing Environment

On Friday, Credit Suisse Group ADR (NYSE:CS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

U.S. Product Strategy

Nick Holmes – Nomura International plc: Just a couple of questions. First one, just on the U.S. I just wondered if you could update us please on your U.S. product strategy, and I’m thinking of the changes you’ve made to Accumulator, and also what proportion of sales are now coming from retirement gateway, and then another question on life, not really on the U.S. looking at your General Account Savings products, I wondered, if you could describe what sort of products are being sold, and whether they have asset liability mismatches or not, and I’m thinking I guess of the Belgian products in particular, where you had really quite big sales? Thank you very much.

Gerald Harlin – Group Chief Financial Officer: Okay. Thank you, Nick, for your questions. First of all on the U.S., our product as you know is much more focused on products which are, I would say, products which are protection, which are (energy) but none VA products and we still have part of our production, which is linked to VA, but which is quite small. And remember that last time at the end of ’11, we said that GMxB Accumulator (who presented) something like, let’s say, 10%, a bit more than 10% of the whole production. And that Retirement Cornerstone was roughly at 20%. So that’s a major change. So the trend is exactly same, focusing much more on less risky products like Retirement Cornerstone, which means less hedging, so less risk, less volatility, and we still keep Accumulator but it’s quite limited. As far as the other products are concerned, you’ll notice that in the U.S. we have the Structured Capital Strategies, which is a structured product, which means that it’s products where we don’t have any kind of ALM mismatch. It’s completely hedged. We buy externally. The hedging is linked to the structured product and that explains why we achieved quite a significant growth in the U.S. during the quarter. So as a whole we were at plus 20% roughly on Unit-Linked in the U.S.

Nick Holmes – Nomura International plc: I wondered could you just refresh our memory on the changes you’ve made to Accumulator or what is the level of guarantee?

Gerald Harlin – Group Chief Financial Officer: We lowered the guarantee, so that means that today we said with the guarantee at – we still have a guarantee at 5%, but it’s limited, and I’ll remind you that Retirement Cornerstone is a valuable guarantee. That means the guarantee between 4% and 8% is linked to the treasury level. So, presently most of the products are 4%. Your second question, Nick, was about the General Account and the ALM in Europe, and especially you had the question relative to Belgium. So generally speaking, in Europe, we don’t boost I would say, the sales of General Accounts. You perfectly know as many times that (indiscernible) that the profitability is low, it’s roughly a 5%, 6% NBV margin in terms of internal rates of return, it’s quite low as well, it’s 4%, 5%. There is an exception with Belgium. Why? Because in Belgium, as you know, there is an exception in the Belgium market and products like Unit-Linked products are not (indiscernible) for the time being due to the tax constraints. So, at the end of last year we had the opportunity to buy some OLOs at an average rate of 6%. What we did in fact is we made a promotion that was limited in time during two months with guaranteed rate at 3%. That explains why on an (exceptional) basis and you cannot expect for the rest of the year to have such a high growth on General Account products in Belgium, but we did it after low profitability levels, but not at a loss level and it was a way also to keep certain level of sales.

Nick Holmes – Nomura International plc: And would you say that the interest rate guarantee in the Belgium products has been hedged for any integration…

Gerald Harlin – Group Chief Financial Officer: You are absolutely right, it’s completely hedged.

Nick Holmes – Nomura International plc: Completely hedged.

Gerald Harlin – Group Chief Financial Officer: Most of these guarantees; we have OLOs which have quite – which have the same expected duration as the duration of the liability. You know, as a genuine comment on it, we can say that our policy that has been to have no mismatch on the General Account between assets and liabilities is true. That means that – I remember that I mentioned the figure that our average duration was seven years; it didn’t change. The mismatch between assets and liabilities is not more than our figure.

Pricing Environment

Blair Stewart – Bank of America-Merrill Lynch: Couple of questions. Firstly, on P&C and the pricing environment, and then retail lines seems to have softened slightly from the run rate at the full year. I wonder if you can just comment on that. Gerald, I don’t know if you are able to comment on GMxB. You said that the end of February that you had made a small profit in that book. Could you give us just a rough indication as to how that is as at the end of the quarter? Then the – I would also be interested in what’s going on in the U.K. where the margins have fallen to painfully low levels. Could you give us an update as to what’s going on there?

Gerald Harlin – Group Chief Financial Officer: Okay, Blair. First of all on the pricing environment, maybe you can go to Appendix 6 which is a good summary of the environment. As you can see that I would not describe this environment as softening, because, in fact, you’ll remember that last year on average we had a price increase that was at 3.7%. That was 3.1% a year before. So here you can see that on personal on average we are 3.5% and on commercial at 2.5%, and you can see that with the exception of Switzerland – but in Switzerland I remind you that we have a quite low combined ratio. We have increases almost everywhere. You know this as well that in Germany, for example, you’ll remember maybe that in Germany we were slightly lower on the other countries. This quarter we are plus 4%. So, I would say that in line with what we expected at the end of last year, that’s exactly in line with our own expectation and we consider that this is a good environment and that’s why I mentioned to you that that’s another reason why we are quite confident in bringing our combined ratio total down. On your second question, on GMxB, you’re right that we mentioned that we had positive results on the GMxB. We mentioned at your conference – at the Merrill conference that generally February was €37 million positive from GMxB. What I can tell you is (only) the same. In that at the end of March this time it’s the same. So that means that we don’t have bad news on that side. We’ve been helped by quite benign volatility which helped us. On the U.K. margin – sorry – your question was relative to P&C or to Life?

Blair Stewart – Bank of America-Merrill Lynch: It was the new business margin in Life, please Gerald.

Gerald Harlin – Group Chief Financial Officer: On the new business margin in Life, maybe you can see that it’s mainly due to no specific (worry in terms of) size. It’s due to our business mix. That means that you know that we have different type of products and we had the offshore bonds which are much more profitable and due to the environment the relative size and the relative weight of these products was lower. So, that explains why we have a deterioration of the (NDD) margin. But it’s not a matter of (indiscernible).

Blair Stewart – Bank of America-Merrill Lynch: Is that something that you think is temporary Gerald or would you expect the margin to be higher at the end of the year?

Gerald Harlin – Group Chief Financial Officer: I expect Blair. To be honest with you, what I expect that it will highly depend on the environment and on the equity environment. If we have an equity environment which is better, no doubt that we will have an improvement. So, that’s directly linked to the equity environment. So, sooner or later we’ll get an improvement. It’s quite difficult for me to tell you when.