Ladies and gentlemen, good morning or good afternoon. Welcome to the Swiss Life presentation of the half year results 2017. Ladies and gentlemen, good morning or good afternoon. Welcome to the Swiss Life presentation of the half year results 2017 conference call and live webcast. I'm Runa, the conference 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&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions in writing via the relative field. Should you need assistance, please press star and zero to call an operator. 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 Buess, Group CFO of Swiss Life. Please go ahead, gentlemen.
Ladies and gentlemen, good morning and welcome to the presentation of the Swiss Life Group half year results 2017. I appreciate your taking this time for Swiss Life. As for me, I'm particularly pleased to be back here today. As many of you've heard, I was diagnosed with cancer about five months ago, which turned out to be Hodgkin's disease, to be more precise. I had to undergo a course of chemotherapy and radiotherapy. The confidence with which I embarked on this therapy was well-founded, as it has been successful. Well, thanks to the marvels of modern medicine, I've recovered from my illness, and I'm very grateful for that. Now it's a pleasure to get back to work here at the office, and I'm getting off to a good start as Thomas Buess, our CFO, and I can now provide you with an update on the progress of our business.
As usual, Thomas will take you through the details of the presentation following my introduction. We will take your questions. Dear analysts and investors, the first six months fit seamlessly into the very positive development of our group in recent years. Allow me to share some figures that illustrate this point. I'm on page three, by the way. Let's start with net profits, which came out well again, rising by 5% to CHF 524 million. Adjusted profit from operations, meanwhile, amounted to CHF 763 million and was also 5% higher. We were able to strengthen our earnings power and profitability again. Premiums were relatively stable, down 1% in local currency to CHF 10 billion. Our fee business grew by 6% to CHF 681 million, which resulted in a fee result of CHF 222 million, or an increase of 16%.
We achieved a further significant improvement in the quality of our profit sources. Direct investment income was practically at the previous year's level of CHF 2.2 billion, and the non-annualized direct investment yield was stable at 1.5%. The non-annualized net investment yield was 1.4% relative to 1.6% in the previous half year. We continued to focus on capital efficiency through the excellent progress in our margin management and added value in new business. We achieved a new business margin of 2.6%, 1.1 percentage points higher than the first semester in the previous year. The value of new business was CHF 177 million. This time last year, it was CHF 113 million. That's a 56% increase. In the first six months of the year, we achieved a return on equity of 10.5% against 11.1% in the previous year's first semester.
Costs rose slightly in our insurance business by 2%, having fallen by 2% one year ago. We improved our average efficiency ratio by one basis point. We are on track to achieve our strategic aim of a stable cost base in spite of growth initiatives. My message is clear. I'm very happy with the group's performance. I'm also pleased with the good progress of our group-wide strategy, Swiss Life 2018. On that note, I would like to hand over to our CFO, Thomas Buess, who'll go into the figures in more detail. Go ahead.
Thank you, Patrick. Good morning, ladies and gentlemen. In the next 35 minutes, I'll inform you in more detail about our half year 2017 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&L and balance sheet items. I'll close with a short update on the implementation of our Swiss Life 2018 strategy. Please note that all figures quoted are in Swiss francs unless I state otherwise. Let me start with selected P&L figures on page six of the investors' presentation. Gross written premiums, fees, and deposits decreased by 1% in local currency to CHF 10 billion. France and International showed very strong growth, while the development in Germany was flat. Switzerland's premiums decreased due to lower single premiums.
Fee and commission income increased by 6% in local currency to CHF 681 million due to a strong contribution from our own and third-party products and services and Asset Managers. The net investment result of the insurance portfolio for own risk was down to CHF 2.1 billion from CHF 2.3 billion last year due to lower net realized gains. Net insurance benefits and claims decreased by 12% to CHF 8 billion. This includes further reserve strengthening of about CHF 0.2 billion, which again led to a lower average technical interest rate that defends our interest rate margin. Policyholder participation increased to CHF 452 million, mainly due to an increase in France and Germany. Please note that final policyholder participation and reserve strengthening is determined at the end of the financial year. Operating expense was up by 5% to CHF 1.3 billion, primarily due to higher commissions and growth initiatives in our Asset Managers and German business unit.
Profit from operations was up by 4% to CHF 760 million. The drivers of this increase were a higher fee result and an improved savings result. Borrowing costs decreased slightly to CHF 84 million. In April, we redeemed a €590 million hybrid bond, which had already been refinanced in the fall of 2016. Furthermore, in the first six months, CHF 98 million of our outstanding convertible bonds were converted into Swiss Life shares. Going forward, we expect borrowing costs to decrease back to previous year levels as we have no further overlapping refinancing transaction this year. Income tax expense increased to CHF 152 million, which corresponds to a stable effective tax rate of 22%. Overall, net profit was up by 5% to CHF 524 million. Slide seven shows the one-offs in our profit from operations.
On the left-hand side, you can see the one-offs and currency translation effect in half year 2016 on a comparable basis. On the other side, sorry, we adjusted the half year 2017 profit from operations for restructuring costs of CHF 3 million. This leads to an adjusted profit from operations of CHF 763 million, which corresponds to an increase of 5% on a like-for-like basis. Moving now on to the second result, let me start with Switzerland. In our Swiss market unit, premiums were down by 10% to CHF 5.9 billion, driven by group life. The overall market decreased by 5%. In individual life, premiums increased by 6%. The individual life market in Switzerland was flat. Single premiums were up by 24% due to a strong development of unit-linked products. Periodic premiums grew by 1%. Premiums in group life were down by 12%, while the market declined by 6%.
Single premiums declined by 23%, driven by lower new business for full insurance, while periodic premiums remained stable. We continue to focus on capital efficiency, which led to lower single premiums. Moreover, we also offer semi-autonomous and pure risk solutions. Semi-autonomous business now accounts for 33% of the new business production, compared to 23% in the first six months of 2016. Fee and commission income was down by 2% to CHF 115 million, primarily due to a lower contribution from Swiss Life Select. Higher income from investment solutions for private clients, real estate brokerage, and pension consulting business partly compensated for this decline. On a standalone basis, i.e., before intercompany eliminations of own products sold, the fee and commission income was flat. Operating expenses stayed about stable at CHF 190 million due to further efficiency gains and lower professional fees.
The benefits of our efficiency measures were used to make further investments in fee businesses. The efficiency ratio remained unchanged. The second result improved by 1% to CHF 425 million, driven by the savings result. The fee result increased by 2% to CHF 11 million, with higher contributions from pension consulting business and Swiss Life Select with an improved distribution ratio. The value of new business increased by 40% to CHF 91 million. Our continued active new business steering with repricings and product discontinuations led to a further improved business mix. Our pricing discipline and selective underwriting in group life resulted in lower volumes with higher profitability. In individual life, volumes increased due to the successful launch of new unit-linked products. As a result, the margin increased from 1.4% to 2.9%, also supported by an increase of interest rates. Turning now to France.
Please note that for the insurance segments, France, Germany, and International, all figures quoted are in EUR. In France, premium income increased by 10% to EUR 2.2 billion in a market that was down by 3%. We are very pleased with the premium development in our life business. Premiums were up by 17%, while the market declined by 5%. We benefited from our positioning in the high net worth individual and affluent client segments, as well as the high quality of our distribution network. This is demonstrated by our further increased unit link share and the growth outperforming the market. The unit link share in our life premiums was particularly high at 51%, substantially above the market average of 28%. In our new business, the unit link share accounted for a record high of 66%.
Overall, net inflows grew by 20% to half a billion, a quarter of the EUR 2 billion inflow of the entire French market. In health and protection, premiums were up by 1%. Growth in our individual protection business was 7%. Our individual health business declined by 5% as a result of the mentioned ANI health reform . A lower lapse rate than expected helped to compensate for this decline, and we also had a very good production of group contracts. Fee and commission income increased by 22% to EUR 130 million as a result of higher banking and unit link fees. Both benefited from net inflows and a positive market environment. Operating expense decreased by 1% to EUR 145 million. Lower project costs in our life and banking business and strict cost discipline led to efficiency gains despite growth and investment into digitalization.
The segment result increased by 7% to EUR 144 million, driven by a higher fee result of EUR 30 million and more favorable cost and savings result. The risk result was lower due to a less favorable claims development compared to the prior year period. The VNB increased by 71% to EUR 48 million. Volumes in our life business increased, outperforming, as mentioned, the French life market, and offset the lower volumes in health and protection. The increased share of unit links products, the higher interest rates, as well as the lower future tax rates, led to an increase of the margin from 1.4% to 2.4%. Moving on to Germany on slide 10 of the investor's presentation. In our German market unit, premiums were flat at EUR 577 million, in line with the market. We saw growth in group life business and increased volumes with modern traditional pension and disability products.
Our focus on capital-efficient products compensated for the decline in pure traditional business volume. Overall, we have further increased the share of risk products, which had lower premiums but higher margin. Fee and commission income was up by 2% to EUR 169 million, given the positive contribution from our owned IFAs. On a standalone basis, before intercompany eliminations of own products sold, the fee and commission income increased by 5%. The number of financial advisors increased by 6% year-over-year. Operating expense was up by 4% to EUR 95 million. Decrease in operating expense results from higher new business production and related staff costs. The efficiency ratio thereby slightly increased. The segment result grew by 15% to EUR 65 million due to higher savings and fee results. The savings result increased, driven by higher realized gains.
The fee result was up by 9% to CHF 32 million, based on the higher contribution from our own IFAs. The value of the new business almost doubled to CHF 19 million. The higher volumes, combined with a continued shift to modern traditional and risk products, led to an improved business mix with substantially higher profitability. Enhanced by lowered guarantees levels and higher interest rates, this led to considerably increased new business margin of 3.3%. Turning now to the segment international on slide 11 of the presentation. Premiums and deposits were up by 50% to CHF 1 billion, as we saw higher single premiums with private and corporate clients. Please note that the overall increase is also the result of a basis effect. We saw significantly higher single premiums with private clients. Periodic premiums within our corporate clients business increased as well. Assets under control grew by 1% to CHF 18.4 billion.
Fee and commission income was up by 6% to CHF 104 million. Our net earned policy fees increased by 9%. Commission income from owned IFAs was slightly higher despite an adverse currency translation effect at Chase de Vere. Operating expense was flat at CHF 44 million. The segment result increased by 2% to CHF 23 million, due to a higher fee result, partly offset by FX impacts and a reduced risk result. The fee results grew by 7% to CHF 18 million, driven by tight cost management and a higher margin at our owned IFAs. The value of new business increased significantly by 74% to CHF 12 million as a result of the increased new business production, in particular the business out of our Singapore carrier developed very positively. Overall, the new business margin increased from 1.2% to 1.4%. Let's now have a look at our asset manager segment that reports in Swiss francs.
Asset managers commission income was up by 6% to CHF 295 million, primarily driven by our third-party asset management, TPAM, with strong growth of our assets under management and higher transaction fees. In our PAM business, which manages our insurance assets, the income growth mainly results from increased real estate assets and the related services. Operating expense increased by 9% to CHF 161 million, due to business growth, particularly of our real estate organization. Front-loaded cost growth in the first half is expected to be compensated by stronger fee income growth in the second half. The second result was up by 7% to CHF 123 million. TPAM increased its contribution by 32% to CHF 36 million. Net new assets in our TPAM business amounted to CHF 3.3 billion. We are very pleased with the quality of our net new assets.
We saw very strong inflows in the asset classes bonds and balanced mandates compared to last year's first six months. On the other hand, we saw outflows from money market funds of CHF 0.5 billion, compared to inflows of CHF 1.1 billion in the previous half year. Excluding money market flows, our net new assets are higher than in the previous half year. Assets under management in our TPAM business now account for CHF 54.3 billion. Total assets under management were up by 3% to CHF 210 billion, thanks to the overall good asset performance and the strong net inflows in TPAM. Turning now to expense development on slide 13. Our overall cost base increased by 5% to CHF 1.3 billion, primarily due to higher commissions and growth in our asset managers and German business units. Operating expense adjusted for restructuring costs, one-offs, and scope changes was CHF 700 million.
The insurance segment showed an increase of 2% due to strong new business growth in Germany and investments in fee businesses. Slide 14 shows our investment results. Supported by our strategic asset allocation with long asset duration, we were again able to achieve a good investment result. Direct investment income decreased slightly by CHF 49 million to CHF 2.2 billion in absolute terms. Our direct investment yield was stable at 1.5% on a non-annualized basis. The net investment result decreased to CHF 2.1 billion, which led to a non-annualized net investment yield of 1.4%. This is 20 basis points below the prior year level, given substantially lower net capital gains. Our hedging costs amounted to CHF 302 million, up from CHF 263 million in the prior year period. We expect a net investment yield of somewhat below 3% in 2017. I'm saying this with the usual disclaimer of any unforeseen developments in the financial markets.
Our total investment result was at 1%, again, not annualized. This reduced performance is due to the increase in interest rates and the corresponding changes in unrealized gains and losses on our investments. Slide 15 shows the structure of our investment portfolio. The share of government bonds decreased to 30.9%, driven by lower valuations due to interest rate increases. The share of real estate increased to 17.2%. In absolute terms, we saw net purchases of CHF 1.1 billion and a positive revaluation of about CHF 0.4 billion in the first six months of 2017. The share of loans decreased due to sales and interest rate increases. The gross equity quota stood at 5.8%. After hedging, the net equity exposure was 2.2%. We kept our duration gap below one, and our foreign currency exposure on the insurance portfolio remains hedged.
Let's have a look at our insurance reserves on slide 16 of the presentation. Our insurance reserves, excluding policyholder participation liabilities, were up by 2% to CHF 152 billion, as a result of net inflows of CHF 1.4 billion, accrued interest and market movements. In Switzerland, insurance reserves grew by 2%, while they were up by 4% in France. Our German and international businesses reported increases of 1% and 2% respectively. Turning now to our shareholders' equity on slide 17. Shareholders' equity increased by 2% to CHF 13.9 billion. The main drivers were the distribution from capital contribution reserves and the net profit attributable to shareholders. Another small effect came from convertible bonds conversion. I'm happy to give you now an update on the progress of our Swiss Life 2018 progress.
I'm pleased to report that we are well on track with respect to all of our three major thrusts, quality of earnings and earnings growth, operational efficiency, and capital cash and dividends. I'll start with the first thrust by providing more details on our fee income and fee results on the next two slides. Commission income at Swiss Life Asset Managers was up by 6% in local currency. Our owned IFAs increased commission income by 2% in local currency, supported by both higher sales performance and an increased number of advisors. The business with own and third-party products and services increased substantially by 15% in local currency, primarily due to higher banking and unit-linked fees in France, and increased policy fees in international. Overall, our fee and commission income increased by 6% in local currency. This led to an improved fee result as shown on slide 20.
The fee results increased by 16% to CHF 222 million. This substantial increase is due to the strong contributions from asset managers and our own and third-party products and services. Our next slide 21 demonstrates 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 the still low interest rates. Moving on to the average technical interest rate on slide 22. As already mentioned, in the first six months of 2017, we further strengthened the technical reserves, which led to a decrease of the average technical interest rate of two basis points. In addition, the shift to a more favorable business mix led to a further reduction of two basis points, while the appreciation of the EUR increased the average technical rate by one basis point.
Our average technical interest rate decreased by three basis points to 1.38%. This means that we are able to defend our interest rate margin in this low interest rate environment. Turning to the value of new business on slide 23. As you can see, our ongoing margin management efforts and the product shift has paid off. The share of traditional products in our new business production, including Group Life Switzerland, was down to 6%, compared to 9% at the year-end 2016. Our new business margin increased by about 110 basis points to 2.6% year-over-year. This is mainly due to our further improved business mix with a clear and continued focus on capital efficient products and our pricing discipline. We are very pleased with the new business margin, which is considerably above our ambition level of 1.5%.
Our value of new business increased to CHF 177 million from CHF 113 million in the prior year period. Let me now move on to our next financial thrust, being operational efficiency, on slide 24. As of the 30th of June, we have already implemented two-thirds of our Swiss Life 2018 cost savings initiatives. All units contributed to this. On the next slide, we show our efficiency ratios at group level. The result is a one basis point improvement to 27 basis points. Turning to the next financial thrust, capital cash and dividends. On January one, 2017, our Swiss Solvency Test ratio stood at 161%, as filed with FINMA, based on our internal model approved with conditions. On the right-hand side, you can see our updated SST sensitivities as of the 1st of January 2017.
I can confirm that our SST ratio was almost at 170% as of June 30th, 2017, and at around the same level as of today. Our Solvency II ratio was above 200% on January 1st, 2017. Please note that the Solvency II ratio is based on the standard model, excluding any transitional measures. Slide 27 shows our capital structure. As mentioned in April 2017, we redeemed a EUR 590 million hybrid bond. Our total hybrid debt currently amounts to CHF three billion. The total financing debt decreased by CHF 686 million to CHF 3.8 billion. The capital structure and maturity profile continue to be well-balanced with a diversified denomination of debt in Swiss francs and EUR. Let me move on to the cash remittance on slide 28. In the first half of this year, we remitted CHF 591 million of cash to the holding company, an increase of 6%.
This means that we are ahead of our cash remittance target as we achieved almost 80% of our CHF 1.5 billion goal. Let me sum up. We have again reported a strong set of results and have successfully continued our Swiss Life 2018 program. Furthermore, I'm confident to deliver on our 2017 financial targets. We have improved our quality of earnings by substantially increasing the fee results, being now ahead of plan with respect to our Swiss Life 2018 target. We are very pleased with our VNB, though the environment is still challenging. We have continued with our strict cost discipline by already implementing more than two-thirds of the planned cost savings. We are ahead with our cash remittance to the holding company through disciplined capital management. Finally, our adjusted return on equity was at 10.5% in the first half of this year.
We are continuing on our successful path to further enhance the resilience of our business model. This should enable us to deliver sustainable earnings and attractive payouts to our shareholders. Thank you very much. Now back to you, Patrick.
Thanks for that, Thomas. Ladies and gentlemen, you have the floor now. Who would like to ask the first question?
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Guillaume Horvat, Exane. Please go ahead, sir.
Yes, good morning. Thanks for taking my questions. The first one is on the value of new business, because you benefited once again from pricing business mix and volume initiatives, which I thought was somehow capped or coming to an end. You now have a very little part of your new business which is guaranteed. I would like to understand how long do you expect these initiatives to continue and how long will you be able to benefit from these kind of initiatives in terms of value of new business? The second is on SST, because if you compare the full year level with the estimated half year level, you had a quite strong SST generation. If possible, I'd like you to go through the generation path. Is this taking into account the dividend payments?
The third one is on M&A, because I read an article yesterday from you, Patrick, saying that you were starting to think about the new strategic plan, and considering potentially M&A remaining disciplined. I'd like to understand if something changed in terms of M&A, potentially in terms of targets. Are you still looking for something in potentially asset management, looking like [inaudible] or did something change? The last one, if I may, is on the convertible. Can you remind us, please, what part of the debt was converted, and the conversion price and the maturity of this bond? Thanks.
Let me start with the third question, which was on M&A. The background here is that a journalist asked me what we're thinking about while thinking about the time beyond 2018. Of course, I mentioned M&A. I can assure you nothing has changed. I also told the journalist exactly that we will be which means cautious. No change here. On the convertible, about one-fifth was converted. I'll hand over for Thomas to the specifics of the convertible maturity, et cetera.
Yes, the conversion price was CHF 232 currently. As Patrick has mentioned, one-fifth so far converted. Of course, we expect conversion to happen ahead of the dividend payment 2018. What else was the question? The maturity is 2020. Let me move on to the other questions. First on the VNB. How long will we benefit from all these initiatives? It's not Single initiatives that are driving the VNB. It's ongoing margin management and it's ongoing replacement of traditional products. We only now have about 6% of the new business in pure traditional products. We expect this share to stay low, very low, at about this level. The overall profitability of the new business portfolio is improved, and this is sustainable. We expect to have higher new business margins, in the range above our ambition level, which is 1.5%.
We expect to generate at least the expected CHF 750 million of new business value over the three years. We even mentioned as of today that we think that we are ahead of target there. On the SST. The SST improvement from 161%-170% was driven first by an improved capital market. The spread tightening, higher interest rates. Of course, there was also the retained earnings that have helped there at the new business value created. Of course, the dividend is always deducted when we are calculating the SST ratio. The last question, I think that was it.
Yeah. That's it. Thank you.
The next question is from Peter Eliot from Kepler Cheuvreux. Please go ahead, sir.
Thank you very much. Very good to see you back, Patrick. Thank you. A couple of questions, please. On the third-party assets under management, you've had very strong inflows across H1. I guess if you look at Q2 in isolation, they were lower at about half a billion. Can you just talk about any sort of trends that are going on there and any insights you might have into the pipeline? The second question, I'm probably trying my luck, and I know you're going to say it's too early to talk about new targets. If I just look at two of your existing ones, the cash remittance and payout ratio, I was wondering if you could say how linked those two are. Just, I guess given the fact that you've already achieved so much of the CHF 1.5 billion. Thank you.
I'll go first on TPAM. I mean, the medium-term pipeline looks strong. One important fact to keep in mind is that we had outflows in money market in the second quarter, which tends to happen at the end of the half year and at the end of the year. The quality actually of the net new assets was much better. We disclosed that somewhere in the booklet. Actually, if you exclude money market movements, which are less sticky than other types of inflows, then over the half year, we even had an increase of net new assets by CHF 100 million. I'm particularly pleased, of course, with the real estate development in the third-party business. You're right. The second quarter in the absolute number was lower than the first quarter. Over to Thomas Buess.
Yes. Your second question was about the relationship between cash remittance and the payout ratio. We maintain our guidance that we are targeting a payout ratio between 30%-50% for the Swiss Life 2018 program period, I have to say. Obviously, we have stated at the investor day at the end of 2015 that we will still improve our financial flexibility at the holding company. Obviously, we are retaining some of the cash that we are generating at the holding company level. You may remember that at the time, we said that about 20% of our earnings are non-cash items, which actually is about the same level as some of our competitors have stated. It's the IFRS way of accounting. We also are leaving about 15% of our earnings as a growth buffer at the individual company level.
We will obviously generate between 30%-50% payout ratio. 15%-35%, we will still keep at the holding company as a buffer for financial flexibility on the one hand and for possible regulatory and macroeconomic uncertainties. For the time being, we do not have a reason to change the guidance on the payout ratio.
Thanks very much.
The next question comes from Daniel Bischof, Baader Helvea. Please go ahead, sir.
Yeah, good morning. I have three questions, please. The first one is on France, where you reported quite a strong performance. Could you talk about the impact of potential changes in terms of taxation on life insurance, et cetera, on the business? The second one is on the real estate side. Could you update us here on how you look at real estate from a regional perspective? My understanding is that the focus is rather on Switzerland, France, and Germany for owned property, and probably a bit of a broader focus on the real estate asset management side. How much real estate assets do you currently have in Spain? Are these owned properties? Would furthermore sizable investments be in line with your strategy there? The last one on the cash remittance. You report a nice increase of CHF 34 million.
Just maybe comment where this came from. Was it across the board? Was it a specific segment?
I'll start again with real estate. You have the regional splits on page 57 of our real estate allocation for our own assets. 80% is in Switzerland, 11% in France, and 9% in Germany. We don't have any real estate outside of these countries, with a very small exception of a property in Brussels. You're right, for third-party management, of course, we have properties in other countries, especially the U.K. Yes, we're also looking at diversifying our real estate portfolio a little bit. As you know, the main reason for holding real estate is it's close to a bond investment as long as it's invested mainly in Switzerland and Germany because we have a high interest rate sensitivity, and we're contemplating to diversify that a bit.
Of course, any investments outside of our core markets are primarily driven by our third-party business, which are funds, mainly.
On the French market, yes, there are discussions about changing tax laws, but currently we do not see a negative effect of any of those proposals that are on the table. Obviously, we always have to follow these discussions very closely, but currently, we remain very positive about our French life market. On the cash, I can say that out of mentioned cash remittance, lion's share, about CHF 440 million is coming from Swiss Life AG. You can say the remaining piece is coming from asset management business. Plus or minus.
Okay, thank you.
The next question comes from Farquhar Murray from Autonomous. Please go ahead, sir.
Morning, gentlemen. Obviously to Patrick, I am genuinely glad to see you recovered, but that means we are all back to work. Two questions, if I may. Firstly, on the SST, you seem likely to drift over 170% in the second half of the year. Is there an upper bound on the SST where capital distribution would become appropriate? How do you obviously balance that discussion with the kind of ongoing debate around the SST? If you can, perhaps could you update us on where those discussions are going on the standard model? Secondly, on the asset management business, the fee income continued to improve, but the operational jaws in the first half was kind of negative with cost growth slightly exceeding rev fee growth. How long will that negative jaws continue?
I think on the call you suggested a revenue catch-up in the second half. I wonder if that actually will kind of get back to positive jaws before the end of the year. Thanks.
I will take the SST.
Okay, go on.
Okay, I'll take the SST. Yes, indeed, there was an improvement close to 170%. It is too soon to tell about any implications on our capital management because we stick to our pretty cautious approach where we say there's still uncertainty, there's still regulatory uncertainty on the SST. You have mentioned one. There is currently still the discussion about the possible implementation of the standard model. At the end of the day, I think let's wait for all these regulatory uncertainties to be sorted out. Then let's discuss a target range, et cetera, on SST and the implications on our capital management. On the discussions about the standard models, I can say that currently there are two standard models in the field test. In all the companies, major life insurance companies in Switzerland. The results are expected somewhere in August.
I think then, of course, there will be discussions also with FINMA about the calibration of these models and also about the timeline by when these models shall be implemented. I can only say that I do not expect a big negative effect from these models, as FINMA has multiple times confirmed that they will recalibrate it in a way that this should not lead to, overall for the market, to higher capital requirements.
Thanks.
Tom, maybe could you repeat your question on asset managers? Because I'm actually quite happy with the development.
It was just more that if you look at the fee growth, I think actually that was slightly behind cost growth. Actually, you'd argue that the operational jaws were slightly negative in the first half, even though, as you say, the result continued to improve quite strongly, which I'd agree with. It's just a question that, in the call you said that you get a revenue catch-up in the second half from the sound of it. I'm just wondering, would we see that kind of difference between cost growth and fee growth go back to being a positive?
Okay. I think over the medium term, yes, you can expect that. I wouldn't venture to say it's already going to be the case in the second half of the year. It's linked to some investments for further growth and, the precise timing from one semester to another, that's always a bit of a coincidence. Of course, over the medium term, we have the goal to keep or to improve the cost-income ratio in TPAM.
Okay. Thanks very much.
The next question comes from Michael Huttner, JP Morgan. Please go ahead, sir.
Fantastic. Thank you. Yeah, congratulations on the results, and really, it's lovely to hear you back and that you're well. Thank you. I had three questions. One is, given that a lot of the targets on the 2018 Plan are kind of in sight now, will you provide an update maybe on the Plan at the end of the year? The second, you've given us a lot of detail on the fee results, and I just wondered if you could discuss a bit more the risk result. The feeling I had is that, or it's actually in the text, it's down a bit in France and international. You say it's on track, but maybe you can explain what's happening there. That'd be lovely. Two other questions. Banking. You mentioned banking fees.
I'm sure you've explained it in the past, but I always worry when I hear banking and insurance in the same breath, and I just wondered what those are. Finally, about just under 30% of your operating profit is now coming from fee revenues of CHF 222 divided by CHF 760. In competitors like Zurich, this allows them to have a much higher payout. Is this going to guide your thinking when you produce your new plan? Thank you.
The first question is easy. No, we will not give an update on our targets at the end of the year. We're planning to do that when our current strategic cycle comes to an end, that would be at the end of November of next year. Of course, even as we've stated again and again in the past, of course, if we're ahead of our goals, we try to achieve an even better result despite not having new targets. On the risk result, yes, you're right, that the risk result has been a bit weaker, especially driven by France. Please keep in mind that, especially with the risk result, the full-year numbers are much more meaningful than the half-year numbers. I wouldn't put a lot of weight on half-year profit by sources.
That's why we also refrain from publishing the full profit by source numbers in August. Banking fees here, we always mean the same thing, that is France. We've had a very nice swing back from a very weak prior year result. Here, the main drivers are, on the one hand, structured products, which are then distributed through and wrapped into our insurance policies. We've had, of course, a very good unit link contribution to our new business production in France, which was in the mid-60s, as far as I recall. That, of course, is driven by the banks. Of course, we have some further fee income from the bank. Now, you mentioned some of our competitors, which might have a higher fee income. I'd say mainly based on historic developments. We don't compare ourselves here directly to our competitors, next door or even abroad.
We try to continue to improve our contribution coming from the fee result and
Of course, with the fee results up by 16%, I'm happy, and that's, of course, completely within our target of having a CHF 400 million-CHF 450 million contribution over the full year for Swiss Life 2018. Of course, yes, that is top of mind when we think about our Beyond 2018 program. That will continue to be how we continue to grow our bottom line contribution from the fee result. Risk, of course, as well, but I would say secondary.
Thank you very much.
The next question comes from Jonny Urvan from UBS. Please go ahead, sir.
Hi, guys. Thanks for taking my questions. Patrick, great to hear back. Firstly, on the targets. Sorry. I appreciate that you don't typically upgrade the external targets intra-plan . You've stuck to your policy today. Albeit, clearly these are a good set of numbers, and you probably could have upgraded targets. I wondered, do you recalibrate internal targets to ensure that each of the segments, are pushing as hard as they can? Do you just continue to make sure there's momentum internally by sort of increasing the hurdle rates? Secondly, just thinking ahead to the September Altersvorsorge 2020 referendum, can you give us some thinking around the potential scenarios? If we do get a no vote, what does that mean for your group life exposures from here? Equally, if it's yes, does group life become a more attractive area?
Given obviously there's been a big retrenchment again in the first half of this year. Thirdly, very quick question. Could you update us on Swiss real estate trends as you're seeing them? Thank you.
Of course, internally, we push harder. That's clear. If we talk about the financial targets, that's of course revised each and every year, and thoroughly discussed with the Board of Directors, which is very much on top of things. In some cases, even, of course, during the year, we're in close contact with all units. On the upcoming vote. Here, as you know, we're not fighting either against or for this vote. We see the impact on our business more indirectly. A yes would stabilize the overall system, which is a positive. We'd see a little bit of increase in our business on the mandatory side.
The overall business will be impacted less than is clear on first view, because as the saving process is strengthened, because of the increase of mandatory business, on the other side, we'll probably have somewhat of a reaction on the non-mandatory part. Of course, on the positive side are that the conversion ratios would be a good thing. On the negative side, again, the legal quotes issues. There are some positives and negatives. We see ourselves as part of a solution for our clients, and we let it up to politicians, or in this case to the popular vote, which is really a toss-up at this point. On the real estate trends. Here, you might remember that we had a lot of warnings around vacancy rates, especially in Switzerland, because of the strong CHF, because of some migration debates.
Here we've really seen a very positive trend over the last 2 years. We're now in Switzerland down to a vacancy rate of 4.4%, which is about 60 basis points lower than at the end of the year. For the group, we're at a vacancy rate, which is a bit higher as it has always been, at 5.3%. We see that the rent levels in the residential area, especially at the very high end where we're not very much exposed, is going a bit lower. Office is going well, and retail is lower. Quite surprisingly, the lowest vacancy rate of all those 3 categories is in the retail area, which is extremely surprising if you know what is going on in the market. As we have excellent locations, I'm very happy with the development.
Going forward, I still feel very comfortable with Swiss real estate because the yield pickup versus long bonds is still at or very close to the highest it's ever been over the last couple of decades. We still see this as a very capital-efficient investment. I can tell you that we had net acquisitions for our balance sheets of more than CHF 1 billion in the first half. That we still see very positive, despite now warnings for more than half a decade from our regulators that the top of a so-called real estate bubble is imminent, which we always have disagreed on. Of course, one year somewhere in the future, we might see a correction.
In my view, that's mainly depending on interest rates, that would not hurt us under the SST, because one of the reasons why we have an open duration gap is because we hold interest rate-sensitive real estate. Of course, that is a totally different story than the Anglo-Saxon part of the world, where you have the reverse effect on interest rates. In Germany and Switzerland, the Swiss franc falls to somewhere between, I'd say, but it's had a very strong move as of late. That's pretty much it on our real estate. I think one question was still open. No?
No, that's everything. Thank you.
The next question is from Andrew Sinclair from Bank of America Merrill Lynch. Please go ahead, sir.
Morning, and just to echo comments, really glad to hear you're back and healthy, Patrick. Firstly, first of three questions on SST. SST figures sounds good. I just wanted to check your SST ratio sensitivity to a 50 basis points lower interest rate move has increased from 8 points to 12 points over the last year. Just wondered if you could give us any color on that sensitivity. Secondly, value of new business picked up strongly, but new business strain crept up a little bit. Just wondered, can you give us payback periods for your new business and how that's evolved? Thirdly, just of the CHF 69 million of cost saves that have now been implemented, how much of that has already hit the bottom line and how much is still to come through? Thanks.
I'll take the first question and Thomas will take the other two. Well, on the increased sensitivity on the SST. The main driver was the new definition of the SST ratio, so that the market value margin has moved to be in line with Solvency II definitions. That's the main effect. For interest rate sensitivities, in addition to that, we've seen some convexity effects because on the year-on-year comparison, so beginning of 2017 compared to the beginning of 2016, we've seen lower interest rates, mainly in the Euro area. There, interest rates have come down, as far as I recall, by around 40 basis points, but also in Switzerland, we had interest rates coming down in the mid-teens. Those were the two effects on the increased interest rate sensitivity. Now I'll hand over to Thomas.
Yeah, on the payback periods of the new business. First, we do not disclose those, but we can say that we obviously have, over time, improved our business mix substantially from traditional products where you have a very long payback periods to unit linked products, where you have a shorter payback period. Of course, on the other hand, I have to admit that, especially on the risk product side in Germany, you have very long payback periods. This is very high margin business, and it generates its own capital also. Don't forget that. That's a little bit how you have to look at it. On the CHF 69 million savings, the majority is already in the bottom line.
I would not expect the remaining part of CHF 31 million to have a substantial impact on bottom line, as we have mentioned that we will use this money for investments in growth and digitalization initiatives.
Thank you very much.
The next question is from Stefan Schürmann from Bank Vontobel. Please go ahead, sir.
Yes. Hello. I just have two questions. The first one on reserve additions, the CHF 0.2 billion. Maybe can you just give us some flavor why it is not more or less, why it is CHF 0.2 billion? If you can use that sort of as a run rate for the second half of the year. The second one on the fee income, a bit more in detail, the IFA channel growing 2% basically in local currency terms. Can you go into more details on the different units where you show the positive and negative growth there?
On the CHF 200 million reserve strengthening. The reserve strengthening depends on the interest rate development. We are using the methodology of the Swiss Association of Actuaries. Of course, there is a little bit of leeway still within this framework. We assume that our reserves currently are in very good shape. We, of course, are assessing our reserving at each closing again. I cannot yet say how the reserving will look like at year-end. If interest rates stay where they are, you may expect a little bit more strengthening, but it would be nominal at this stage. I cannot give any more guidance here because I just don't know, to be honest. At the end of the day, where interest rates will be at the year-end, and where the assessment of our actuaries will be at the year-end.
We are very well reserved, and therefore, I'm very confident with our reserving. On the other hand, on the IFAs, I can give more granularity there. The revenues growth is mainly coming from Germany, as this is by far the biggest IFA unit. The German market, our IFAs grew their revenues by 4%, and this is driving the overall revenue growth. We have a negative growth in Switzerland, as I've mentioned. We have a positive growth in international. Overall, that's more or less the trend that we are seeing. Don't forget that when we publish the individual revenues by market segment, we usually adjust for internal fees. For example, if what has happened in the first half, the Swiss Life Select market unit is selling more of our own products.
The German Swiss Life Select market unit is selling more of Swiss Life products, then obviously this, through the consolidation effect, will also have a negative impact on the top-line fees that we are publishing.
Yes. Okay. That's very helpful. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Ralph Hebgen, KBW. Please go ahead, sir.
Yes. Hi. Good morning, guys. Patrick, very good to see you back also from me. Just one question. It is back to targets. I heard everything you said. There is just one thing which I would like to explore perhaps. How do you stay hungry? Basically, if I look at slide 29, many of your key targets have already been achieved, or at least you are ahead of where you need to be at this stage in the process. Can I assume that internally, you are communicating to the divisions, the targets or expectations, which are more ambitious than those which are currently publicly communicated?
Raf, we are approaching noontime here in Switzerland, so of course we are very hungry. I can assure you that internally, yes, of course, we push the different units to continue to deliver or over-deliver, if things are not moving, to correct the wrongs and to continue to push their units hard. Of course, as this time of year, we have more intense discussions than in other months. Of course, that is an important thing. As I mentioned before, also our BOD is on top of things. I do not think that this non-revision policy of strategic targets has any negative impact on our hunger or willingness to be successful. On that note, thank you for all for welcoming me back here. That is it.
The next question is from René Locher from MainFirst. Please go ahead.
Yes, good morning, and thank you. Where do I start? I start with slide 22. It is interesting to see that you have increased reserves by these CHF 200 million. The question is, how have you financed these CHF 200 million? Because in former years, you have realized capital gains, and you have used these capital gains to increase the reserve. Now, this time, situation looks a bit different. You have realized gains of CHF 35 million, and nevertheless, you have increased reserves by CHF 200 million. Might be a little bit stupid question. The second question is on, can you just elaborate a little bit on Group Life? I have discussed that this morning with your IR. How can I say? Is there really a development out of full coverage and Group Life Business Switzerland into these semi-autonomous pension funds?
Perhaps, you can also give us just kind of a big numbers here, what's going to happen. As you know, normally Swiss people or entrepreneurs are very cautious, I am a little bit surprised to see that they are now also opting for these semi-autonomous pension funds. The third question on the convertible. I was just checking on the convertible you mentioned before. Is this the CHF 500 million convertible exercisable at 243.97, which would, according to my estimates, add another 2 million shares? Thank you very much.
The last question, yes, you're right. That's exactly that's convertible.
Okay.
The second question on the semi-autonomous business. Yes, we are growing in that field significantly. We're now, I think in the mid-30s of new business production in our BVG business is semi-autonomous production. Where the client takes over the financial risk on the asset side. On the reserve strengthening, well, if you look exactly on page 22, you see the annualized technical rates of 138 for the group. By the way, that's 105 now for the Swiss business.
You also see the non-annualized recurring yields on the prior page, that's page 21, which is 1.5%. If you compare the two figures, annualized we're at 3% running yield, and we're at 1.4% technical rate. That gives us ample leeway in terms of reserve strengthening despite hedging costs, which also have to be, of course, financed out of that asset management fees and so on. As I've said in the last couple of years, the more we strengthen reserves, which are financed by our clients.
The better the situation gets over the years. It's sort of a virtuous spiral upwards, as I used to say.
I just want to remind you that also already in the prior year, we have more strengthening than realized gains. The difference was about the same in the first half of 2016. Of course, we strengthened the reserves out of the regular investment income. Don't forget that all the strengthening is taking place to the expense of the policy holder at the end of the day.
That's why this is possible without hurting our bottom line.
Yes. Very clear. Thank you very much.
The next question is a follow-up question from Guillaume Horvat, Exane. Please go ahead, sir.
Yes, thank you. Just coming back on the remitted cash. I remember last year at H1, you gave us a target for full year, and it was slightly below CHF 600 million. The large bulk of it being remitted during H1. Can you maybe update this target for full year 2017? Thank you.
Yes. I expect this to be around CHF 625 million at the year end.
Okay. Thank you.
The next question is a follow-up question from Michael Huttner, JPMorgan. Please go ahead, sir.
Thank you very much. This is more a philosophical question, sorry. The sharp increase in unit linked, particularly in France and I guess a little bit in Switzerland as well. Unit linked for me is more, you're competing straight with asset managers, straight from banks. Clients see the market valuation immediately. If markets go down, they say, "Oh my gosh, my money. Where's my money?" Does that worry you at all that what you're selling now is a product which is potentially more sensitive to markets? Yeah, that's my question.
Especially in France, of course, it's a very special situation that we have this relative tax advantage towards other products. I'm not worried about that. We have a very long tradition in that. We've been doing that now for more than a decade, this specialization in unit linked. One of the interesting thing was, I think Thomas mentioned it before, we had a quarter of the net inflows into unit linked in France in the first half of the year came from Swiss Life. We're very much specialized in that, and our people know how to deal with it. In Switzerland, it's a bit different. Of course, we have less of a tradition here. A bit more than 20% of our premiums in Switzerland individual Life are unit linked.
Please keep in mind here that some of that is real estate related, which of course has a much closer or better acceptance. I'm also a client of Swiss Life in our unit linked business, and I get the information about once a year. That's not something I really closely follow, even though I have a high affinity to it. One thing which is new and which we're now selling quite successfully are actually asset management solutions in Switzerland in direct competition with banks. With no tax advantage or disadvantage. Here we're selling between CHF 4 million and CHF 5 million a week, which are pure asset management solutions. Here you're right. Here it's much more important to keep a close eye on who is selling that, how that is sold, and to hold clients' hands in times of a market downturn.
Unfortunately, it's now less than CHF 200 million so far, so it's not yet of a material impact. We want to continue to grow that business because it's, of course, very capital efficient.
Brilliant. Thank you very much.
Gentlemen, there are no more questions at this time.
That brings us to the end of our telephone conference. Thank you again for your interest in Swiss Life and welcoming me back. I'm, of course, very happy to hear that. I'd like to wish you all a very pleasant rest of the summer, and I look forward to talking to you soon, and in some cases, very soon. All the best till then. Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye