Ladies and gentlemen, good morning or good afternoon. Welcome to the Swiss Life Presentation of the Half Year Results twenty seventeen. Ladies and gentlemen, good morning or good afternoon. Welcome to the Swiss Life Presentation of the Half Year Results twenty seventeen Conference Call and Live Webcast. I'm Irwin, the Chorus 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 and A session. Webcast. 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 Buys, 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 have 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 Buys, 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, then 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 profit, which came out well again rising by 5% to CHF524 million. Adjusted profit from operations meanwhile amounted to CHF763 million and was also 5% higher. So we were able to strengthen our earnings power and profitability again.
Premiums were relatively stable, down 1% in local currency to 10,000,000,000 Our fee business grew by 6% to $681,000,000 which resulted in the fee result of $222,000,000 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 $2,200,000,000 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 continue 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 $177,000,000 This time last year, it was 113,000,000 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 two percent one year ago. We improved our average efficiency ratio by one basis point and 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 Buys, who will go into the figures in more detail.
Go ahead. Thank you, Patrick. Good morning, and gentlemen. In the next thirty five 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 and 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 and L figures on Page six of the investors presentation. Growth written premiums, fees and deposits decreased by 1% in local currency to $10,000,000,000 France And International showed very strong growth, while the development in Germany was flat.
Switzerland's premiums decreased due to lower single premium. Fee and commission income increased by 6% in local currency to $681,000,000 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 $2,100,000,000 from $2,300,000,000 last year due to lower net realized gains. Net insurance benefits and claims decreased by 12% to $8,000,000,000 This includes further reserve strengthening of about $200,000,000 which again led to a lower average technical interest rate that defends our interest rate margin. Policyholder participation increased to $452,000,000 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 $1,300,000,000 primarily due to higher commissions and growth initiatives in our asset managers and German business unit. Profit from operations was up by 4% to $760,000,000 The drivers of this increase were a higher fee result and an improved savings result. Borrowing costs decreased slightly to $84,000,000 In April, we redeemed a €590,000,000 hybrid bond, which led which had already been refinanced in the 2016. Furthermore, in the first six months, CHF98 million of our outstanding convertible bond 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. The income tax expense increased to $152,000,000 which corresponds to a stable effective tax rate of 22%. Overall, net profit was up by 5% to $524,000,000 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 twenty sixteen on a comparable basis. On the other hand, on the other side, sorry, we adjusted the half year twenty seventeen profit from operations for restructuring costs of $3,000,000 This leads to an adjusted profit from operations of $763,000,000 which corresponds to an increase of 5% on a like for like basis.
Moving now on to the second results, let me start with Switzerland. In our Swiss market unit, premiums were down by 10% to $5,900,000,000 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 markets 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 premium.
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 115,000,000 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 owned products sold, the fee and commission income was flat. Operating expenses stayed about stable at $190,000,000 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 segment result improved by 1% to $425,000,000 driven by the savings result.
The fee result increased by 2% to $11,000,000 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 $91,000,000 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 1.5 sorry, point 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 euros. In France, premium income increased by 10% to 2,200,000,000.0 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 markets 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 linked share and the growth outperforming the market. The unit linked share in our life premiums was particularly high at 51%, substantially above the market average of 28%. In our new business, the unit linked share accounted for a record high of 66%. Overall, net inflows grew by 20% to €05,000,000,000 a quarter of the €2,000,000,000 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 NI health reform. However, 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 $130,000,000 as a result of higher banking and unit linked fees, both benefited from net inflows and a positive market environment.
Operating expense decreased by 1% to $145,000,000 Lower project costs in our Life and Banking business and strict cost discipline led to efficiency gains despite growth and investment into digitalization. The second result decreased by 7% to $144,000,000 driven by a higher fee result of $30,000,000 and more favorable cost and savings results. The risk result was lower due to a less favorable claims development compared to the prior year period. The value of new business increased by 71% to $48,000,000 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 linked products, the higher interest rates as well as the lowered 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 Investors presentation. In our German market unit, premiums were flat at €577,000,000 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 have lower premiums, but higher margins.
Fee and commission income was up by 2% to $169,000,000 given the positive contribution from our owned IFAs. On a stand alone basis, before intercompany eliminations of owned products sold, the fee and commission income increased by 5%. The number of financial advisers increased by 6% year over year. Operating expense was up by 4% to $95,000,000 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 $65,000,000 due to higher savings and fee results. The savings result increased driven by higher realized gains. The fee result was up by 9% to $32,000,000 based on the higher contribution from our own IFAs. The value of the new business almost doubled to $19,000,000 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 guaranteed 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 1,000,000,000 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 18,400,000,000.0 Fee and commission income was up by 6% to $104,000,000 Our net earned policy fees increased by 9%.
Commission income from owned IFAs was slightly higher despite of an adverse currency translation effect at Chase De Beer. Operating expense was flat at $44,000,000 The segment result increased by 2% to $23,000,000 due to a higher fee result partly offset by FX impact and the reduced risk results. The fee results grew by 7% to $18,000,000 driven by tight cost management and a higher margin at our owned IFAs. The value of new business increased significantly by 74% to $12,000,000 as a result of the increased new business production, and particularly 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 manager's commission income was up by 6% to $295,000,000 primarily driven by our third party asset management, GPAM, 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 $161,000,000 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 $123,000,000 TPAM increased its contribution by 32% to $36,000,000 Net new assets in our TPAM business amounted to $3,300,000,000 We are very pleased with the quality of our net new assets. We saw very strong inflows in the asset classes bonds and balance mandates compared to last year's first six months. On the other hand, we saw outflows from money market funds of $500,000,000 compared to inflows of $1,100,000,000 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 54,300,000,000.0 Total assets under management were up by 3% to $210,000,000,000 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 $1,300,000,000 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 700,000,000 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 durations, we were again able to achieve a good investment result.
Direct investment income decreased slightly by 49,000,000 to $2,200,000,000 in absolute terms. Our direct investment yield was stable at 1.5 on a non annualized basis. The net investment result decreased to $2,100,000,000 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 $3.00 $2,000,000 up from $263,000,000 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 market. 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 $1,100,000,000 and a positive revaluation of about $400,000,000 in the first six months of twenty seventeen. 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 1% 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 $152,000,000,000 sorry, as a result of net inflows of 1,400,000,000 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 12% respectively. Turning now to our shareholders' equity on Slide 17. Shareholders' equity increased by 2% to €13,900,000,000 The main drivers were the distribution from capital contribution reserves and the net profit attributable to shareholders. Another small effect came from convertible bond 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 Twist Life Asset Management 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 advisers. 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 €222,000,000 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 euro increased the average technical rate by one basis point. Overall, 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 on 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%. Overall, our value of new business increased by increased to $177,000,000 from $113,000,000 in the prior year period. Let me now move on to our next financial thrust being operational efficiency on Slide 24. As of the June 30, 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 01/01/2017, 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 01/01/2017.
I can confirm that our SST ratio was almost at 170% as of June 3037 and at around the same level as of today. Our Solvency II ratio was above 200% on 01/01/2017. 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 five ninety million euros hybrid bond.
Our total hybrid debt currently amounts to €3,000,000,000 The total financing debt decreased by €686,000,000 to 3,800,000,000.0 The capital structure and maturity profile continued to be well balanced with a diversified denomination of debt in Swiss francs and Europe. Let me move on to the cash remittance on Slide 28. In the first half of this year, we remitted €591,000,000 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 €1,500,000,000 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 BNB, so the environment is still challenging. We have continued with our strict cost discipline by already implementing more than twothree of the planned cost savings.
We are ahead with our cash remittance to the holding company through disciplined capital management. And 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. The first question is from Guilherme Horvath, 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 capital coming to an end. You now have a very little part of your new business, which is guaranteed. So 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? And the second is on SST, because if you compare the full year level with the estimated half year level, you had a quite strong SSD generation. And then if possible, I'd like you to go through the degeneration path. And also, is this taking into account the dividend payments? The third one is on M and 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 and A remaining disciplined.
But I'd like to understand if something changed in terms of M and A, potentially in terms of targets. Are you still looking for something in potentially asset management looking like Corpus Real or did something change? And 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.
So let me start with the third question, which was on M and A. The background here is that a journalist asked me what we're thinking about while thinking about the time beyond 2018. And of course, I mentioned M and A, but I can assure you nothing has changed. And I also told the journalists exactly that, that we will be solicholten, which means cautious. And so no change here.
So then on the convertible about onefive was converted and I'll hand over for Thomas to the specifics of the convertible maturity, etcetera.
Yes, the conversion price was $2.32 currently. And Patrick has mentioned, onefive so far converted. Of course, we expect conversion to happen ahead of the dividend payment 2018. So what else was on the question? The maturity is 2020.
And then let me move on to the other questions. First, on the V and D, 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. And we only now have about 6% of the new business in pure traditional products.
And we expect this share to stay low, very low at about this level. And therefore, the overall profitability of new business portfolio is improved and this is sustainable. So we expect to have higher new business margins in the range above our ambition level, which is 1.5%. And we expect to generate the expected at least the expected €750,000,000 of new business value over the three years. So we even mentioned as of today that we think that we are ahead of target there.
On the SST, the SST improvement from 161 to about 170% was driven first by an improved capital market, the spreads tightening, higher interest rates. But of course, there is also there was also the retained earnings that have helped there at the new business value created. Then, of course, the dividend is always deducted when we are calculating the SST ratio. Then the last question was I think that was it.
Yes, that's it. Thank you.
The next question is from Peter Eliot from Kepler Cheuvreux. Please go ahead, sir.
Thank you very much and very, very good to see you back, Patrick. A couple of questions, please. On the third party assets under management, I mean, you've had very strong inflows in across H1. But I guess if you look at Q2 in isolation, they were low. It's about SEK $05,000,000,000.
Can you just talk about any sort of trends that are going on there and any insights you might have into the pipeline? And then 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. But 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. I guess given the fact that you've already achieved so much of the €1,500,000,000
Thank you. So on I'll go first on TPAM, I mean the medium term pipeline looks strong. And 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. So the quality actually of the net new assets was much better. We disclosed that somewhere in the booklet.
And 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 $100,000,000 And I'm particularly pleased, course, with the real estate development in the third party business. But you're right, the second quarter was in the absolute number was lower than the first quarter. So over to Thomas with
Yes. Your second question was about the relationship between cash remittance and the payout ratio. And we maintain our guidance that we are targeting a payout ratio between 30% to 50% for the Swiss Life 2018 period 2018 program period, have to say. Obviously, we have stated at the Investor Day at the 2015 that we will still improve our financial flexibility at the holding company. And thus, 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. Then we also are leaving about 15% of our earnings as a growth buffer at the individual company level. And then we will obviously generate between 30% to 50% payout ratio and 15% to 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 uncertainty. So 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 Bischoff, Baader Helvea. Please go ahead, sir.
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, etcetera, on the business? And then 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 own property probably a bit of a broader focus on the real estate asset management side. But how much real estate assets do you currently have in Spain? Are these own properties? And would furthermore sizable investments be in line with your strategy there?
And then the last one on the cash remittance. You reported a nice increase of €34,000,000 Just maybe comment where this came from? Was it across the board? Was it a specific segment?
So I'll start again with real estate. Well, you have the regional split on Page 57 of our real estate allocation for our own assets, 80% is in Switzerland, 11% in France and 9% in Germany. And we don't have any real estate outside of these countries with a very small exception of a property in Brussels. But you're right for third party management, of course, we have properties in other countries, especially The UK. And 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. But 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, Alliance share, about €440,000,000 is coming from Swiss Life AG.
And 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.
Good morning, And obviously, it's Patrick. I'm genuinely glad to see you recovered. But that means we're all back to work. So 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? And how do you obviously balance that discussion with the kind of ongoing debate around the SST? And if you can, perhaps, could you update us on where those discussions are going on the standard model? And then 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?
Because I think on the call, you suggested a revenue catch up in the second half. So I wonder if actually we'll kind of get back to positive jaws before the end of the year. Thanks.
I'll take the SCT.
Okay, go ahead.
Okay, I'll take the SCT. Yes, indeed, there was an improvement close to 170%. But 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 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. And then let's discuss a target range, etcetera, etcetera on SST and 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. And I think then, of course, there will be discussions also with FINMA about the calibration of these models and also about the time line by when these models shall be implemented. I can only say that I do not expect a negative effect 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 requirement.
Tom, maybe could you repeat your question on asset managers because I'm actually quite happy with the development. It was
just more that the if you look at the fee growth, I think actually that was slightly behind cost growth in terms of the so actually you'd call you'd kind of 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 you kind of in the call, you said that you got a revenue catch up in the second half from the sound of it. I'm just wondering would we get 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. But 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. But 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, JPMorgan. Please go ahead, sir.
Fantastic. Thank you. And yes, congratulations on the results. And really, it's lovely to hear you back and that you're Thank you. And I had three questions.
One is, given that you've 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 it's actually in the text, you it's down a bit in France and international. But and it's you say it's on track, but maybe you can explain what's happening there, that would be lovely.
And then two other questions. Banking, you mentioned banking fees. I'm sure you've explained it in the past, but I was worried when I hear banking and insurance in the same breath, and I just wondered what those are. And then finally, about just on the 30% of your operating profit is now coming from fee revenues of $222,000,000 divided by $7.60 In competitors like Zurich, this allows them to have a much higher payout. When you produce is this going to guide your thinking when you produce your new plan?
Thank you.
Okay. So 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. So that would be at the November next year.
But of course, even as we 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. Then on the risk result, yes, you're right that the risk result has been a bit weaker, especially driven by France. But please keep in mind that especially with the risk result, the full year numbers are much more meaningful than the half year numbers. So 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.
Then banking fees here, we always mean the same thing that is false. We've had a very nice swing back from a very weak prior year result. And here the main drivers are on the one hand structured products, which are then distributed through and wrapped into our insurance policies. And we've had, of course, a very good unit linked 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, but then 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.
And we don't compare ourselves here directly to our competitors next door or even abroad, but 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 with in our target of having a 400,000,000 to $450,000,000 contribution over the full year for Swiss Life 2018. And 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 risk result from the fee result. And risk, of course, as well, but let's say second priority.
Thank you very much.
The next question comes from Jonny Urwin from UBS. Please go ahead, sir.
Hi, guys. Thanks for taking my questions. Patrick, great to hear you back. So firstly, on the targets, sorry, I appreciate that you don't typically upgrade the external targets in TrePLAN. You stuck to your policy today, albeit clearly, 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 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 pension twenty twenty referendum, can you give us some thinking around the potential scenario? So 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?
And then thirdly, very quick question. Could you update us on Swiss real estate trends as you're seeing them? Thank you.
Course, internally, we push harder. That's clear. And so if we talk about the financial targets, that's, of course, revised each and every year and then thoroughly discussed with the Board of Directors, which is very much on top of things. And in some cases, even, of course during the year, I mean, we're in close contact with all units. Then on the upcoming votes here, as you know, we're not fighting either against or for this vote.
We see the impact on our business more indirectly. So yes, would stabilize the overall system, which is a positive. And then we'd see a little bit of increase in our business on the mandatory side. But the overall business will 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. But then of course, on the positive side are that the conversion ratios would be a good thing, the negative side.
And again, the legal quote issues. So 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 then to the popular vote, which is really a toss-up at this point. Then 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 Frank, because of some migration debates. And here we've really seen a very positive trend over the last two 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. And 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 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. But quite surprisingly, the lowest vacancy rate of all those three categories is in the retail area, which is extremely surprising if you know what is going on in the market. But as we have excellent locations, I'm very happy with development.
Now going forward, I still feel very comfortable with Swiss real estate because the yield pickup versus long bond is still at or very close to the highest it's ever been over the last couple of decades. So 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 $1,000,000,000 in the first half. And so that we still see very positive despite now warnings for more than half a decade from our regulators that imminent the pop of a so called real estate bubble is imminent, which we always have disagreed on. But of course, one year somewhere in the future, we might see a correction.
But in my view, that's mainly depending on interest rates. And so 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. But in Germany and Switzerland is also on France is somewhere between, I'd say, but it's had a very strong move as of late. And so 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.
Good morning and just echo comments. Really glad to hear you're back and healthy, Patrick. Firstly, first of three questions on SST. SST figures sounds good. But I just want to check your SST ratio sensitivity to a 50 bps lower interest rate move has increased from eight points to 12 points over last year.
I 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? And thirdly, just of the $69,000,000 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. 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 and for interest rate sensitivities. In addition to that, we've seen some convexity effects because on the year on year comparison, so 2017 compared to the 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.
So those were the two effects on the increased interest rate sensitivity. Now I'll hand over to Thomas.
Yes. 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 like unit linked products where you have a shorter payback period. And 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, but this is very high margin business and it generates its own capital also, don't forget that. And so that's a little bit how you have to look at it. On the €69,000,000 savings, the majority is already in the bottom line.
I would not expect the remaining part of 31,000,000 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 Stephane Schurman from Bank of Vontobel. Please go ahead, sir.
Yes, hello. I just have two questions. The first one on reserve additions, the 200,000,000.0 Maybe can you just give us some flavor why it's not more or less why it's EUR 200,000,000.0? And if you can use that sort of as a run rate for the second half of the year? And 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, I mean, on the different units where you showed a positive and negative growth there?
On the €200,000,000 reserve strengthening, the reserve strengthening depends on the interest rate development. We have we are using the methodology of the Swiss Actuarial Association. And of course, there is a little bit of leeway still within this framework. But we assume that our reserves currently are very in very good shape. And we, of course, are assessing our reserving at each closing again.
So 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 wouldn't be it would be nominal at this stage. So 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. But 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. And 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 positive growth in international. So 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. So for example, if what has happened in the first half, the Swiss LifeSelect market is selling more of our own products or the German Swiss Life Select market unit is selling more of Swiss Life product then obviously, this through the consolidation effect will also have a negative impact on the top line fees that we are publishing.
Okay. That's very helpful. Thank you.
The next question is from Ralf Hepgan, KBW. Please go ahead, sir.
Yes, hi. Good morning, guys. And Patrick, very good to see you back. Also from me. Just one question, it's back to targets.
I mean, I hear I heard everything you said. There's just one thing which I'd like to explore perhaps. How do you stay hungry? I mean, 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. So can I assume that internally you are communicating to the divisions targets or expectations which are more ambitious than those which are currently publicly communicated?
So we're approaching noontime here in Switzerland. So of course, we're very hungry. And I can assure you that internally, yes, of course, we push the different units to continue to deliver or over deliver if things aren't moving to correct the wrongs and to continue to push their units hard. And of course, at this time of year, we have more intense discussions than in other months. But of course, that is an important thing.
As I mentioned before, also our VOD is on top of things. And so I don't think that this non revision policy of strategic targets has any negative impact on our hunger or willingness to be successful. And on that note, thank you for all also for welcoming me back here and that's it.
The next question is from Rene Lohar from MainFirst. Please go ahead.
Yes, good morning and thank you. How do I start? I start with Slide 22. It's interesting to see that you have increased reserves by this EUR 200,000,000. But the question is how have you financed this EUR 200,000,000?
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 little bit different. You have realized gains of CHF35 million. So this is nevertheless, you have increased reserves by CHF200 million. Might be a
little bit stupid
question. The second question is on can you just elaborate a little bit on Groupe Life? I've discussed that this morning with your IR. Is it 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, yes, just kind of a big numbers here, what's going to happen because, as you know, normally, Swiss people or entrepreneurs are very, very cautious.
And so I am a little bit surprised to see that they are now also opting for these same autonomous pension funds. And then third question on the convertible, I was just checking on the convertible you mentioned before. Is this the €500,000,000 convertible exercisable at 243.97, which would according to my estimates add another 2,000,000 shares? Thank you very much.
So 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. So where the client takes over the financial risk on the asset side. And on the reserve strengthening, if you look exactly on Page 22, you see the annualized technical rates of 1.38 for the group.
By the way, that's 1.05 now for the Swiss business. And you also see the non annualized recurring yields on the prior page, that's Page 21, which is 1.5%. So if you annualize if you compare the 2 figures annualized we're at 3% running yield and we're at 1.4% at a technical rate. So that gives us ample leeway in terms of reserve strengthening despite hedging costs, which also have to be of course financed at about asset management fees and so on. And 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. And 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 2016. Of course, we strengthened the reserves out of the regular investment income. And don't forget that all the strengthening is taking place to the expense of the policyholders at the end of the day.
And so 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. And I remember last year at H1, you gave us a target for full year, and it was slightly below €600,000,000 So the large bulk of it being remitted during H1. Can you maybe update this target for full year 'seventeen? Thank you.
Yes, I expect this to be around €625,000,000 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. And clients see the market valuation immediately.
So if markets go down, they say, oh my gosh, my money, where's my money? That worry you at all that what you're selling now is a product which is potentially more sensitive to markets? And yes, that's my question.
So especially in France, of course, it's a very special situation that we have this relative tax advantage towards other products. So 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. The specialization in unit linked and 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.
So 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, but please keep in mind here that some of that is real estate related, which of course has a much closer or better acceptance. And I'm also a client of Swiss Life in our unit linked business and I get the information about once a year.
And that's not something I really closely follow even though I have a high affinity to it. But 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. So with no tax advantage or disadvantage and here we're selling between 4,000,000 and $5,000,000 a week, which are pure asset management solutions. And 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. But unfortunately, it's now less than $200,000,000 so far.
So it's not yet of a material impact, but we want to continue to grow that business because it's, of course, very capital efficient.
Thank you very much.
Gentlemen, there are no more questions at this time.
So that brings us to the end of our telephone conference. Thank you again for your interest in Swiss Reich and welcoming me back. I'm of course very happy to hear that. And 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 and 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.