Ladies and gentlemen, good morning. Welcome to the Swiss Life Presentation of the Half Year Results twenty sixteen. I am Maria, 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.
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 Buys, Group CFO of Swiss Life. Please go ahead, gentlemen.
Thank you. Dear analysts and investors, welcome to our telephone conference on the Swiss Life Group 2016 Half Year Results. Thanks for dialing in. I'll start off, then Thomas Gorssar, Group CFO, will present the results in more detail. Afterwards, we will answer your questions.
Ladies and gentlemen, allow me to start by putting our work during the first six months of the year in context. In reporting on their business performances, you must have heard comments about the larger macroeconomic environment for many companies. This is not different at Swiss Life, where the big picture didn't do us any favors. This environment certainly didn't help us in our task of presenting customers with an attractive offer that is both useful and adds value. Having said that, the current environment is also a big opportunity for us to serve our customers through these turbulent times as a provider of comprehensive pension solutions.
The security we can offer is even more valuable in such times. Our financial solidity and business model oriented towards long term sustainability stand out, especially in the current climate. They show that life insurers can provide convincing offers in the pensions market. The ability to provide our customers with this long term security remains fundamental to our business. We're doing the right thing by maintaining our discipline regarding profitability and the capital efficiency of our business.
We also target growth exclusively in those areas of real benefit to our shareholders and our customers. This discipline continued to pay off in the 2016. I would like to highlight some key figures from our results. Swiss Reiss again increased its earnings power and achieved an adjusted profit from operations of CHF730 million, which is a 4% increase. Furthermore, we earned $500,000,000 in net profit.
This is the best half year result our group has achieved since the financial crisis of two thousand and eight. The fact that we attained this result in such a challenging environment makes us proud. The key element of our new group wide Swiss Life 2018 program is our fee business. We increased our fee income by 3% to $656,000,000 and the fee results by 16% to 194,000,000 Our selective underwriting plus a certain reticence from our customers led to a 9% decrease in premium income in local currency to $10,100,000,000 As long as this doesn't affect our earnings power, we are not unduly concerned about that. Why?
Well, the main priority at Swiss Life is profitability and capital efficiency. We also succeeded again in reducing the average technical interest rate, which now stands at 1.58. Together with a stable direct investment income, this preserves our interest rate margin. Our third party business fared very well as net new assets of 4,900,000,000.0 enabled us to increase our assets under management to $44,400,000,000 Overall, we had more than $200,000,000,000 under management for the first time. And income at Swiss franc asset managers increased to $288,000,000 over 50% of which came from the external customer business.
2016 also marks the start of the group wide program, Swiss Life 2018. Positive results in the first half year make me confident that we will achieve our ambitious objectives. Our efficiency ratio significantly improved across the group compared to the same period last year, a strong indication of our operational progress.
The development of the new business margin and the V and D
were less pleasing at first glance. However, on closer inspection, these results were actually good. In spite of interest rates falling again and even negative interest rates, the new business margin is at the ambition level of 1.5%. In this environment, the value of new business fell from $145,000,000 to $113,000,000 due to profitability considerations and the resulting decline in new business volume. Our solid financial position provides us with a good platform to proceed with the implementation of our Swiss Life 2018 goal.
Shareholders' equity amounted to $14,300,000,000 at the June, which was 18% higher than at the end of the year. Swiss Life had an SST ratio of 146% as of the 01/01/2016. Solvency II stood at over 200%. I would now like to hand over to Thomas Buys, who will give you a more detailed report on our figures. Thomas?
Thank you, Patrick.
Good morning, ladies and gentlemen. In the next thirty five minutes, I'll inform you in more detail about our half year 2016 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 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. Gross written premiums, fees and deposits decreased by 9% in local currency to €10,100,000,000 This decline was, on the one hand, deliberate in Switzerland and Germany to protect our profitability in the low or even negative interest rate environment. On the other hand, in our French and international businesses, the expected premium catch up did not materialize. Fee and commission income increased by 3% in local currency to €656,000,000 due to a strong contribution from asset managers and our own IFAs in Germany and Switzerland.
The net investment result of the insurance portfolio for own risk decreased to €2,300,000,000 due to lower net capital gains. Net insurance benefits and claims decreased by 1% to €9,100,000,000 This includes further reserve strengthening of about €500,000,000 which, amongst other factors, led to a lower average technical interest rate that preserves our interest rate margin. Policyholder participation decreased to two sixty one million euros Deferred policyholder participation was substantially lower in France but offset by an increase in net insurance benefits and claims. Moreover, in line with the lower investment income, policyholder bonuses also decreased substantially in Switzerland. Please note that final policyholder participation and reserve strengthening will always be determined at the end of the financial year.
Operating expenses were up by 1% to 1,300,000,000.0 primarily due to growth in our asset managers business and exchange rate effects. Profit from operations was up by 5% to $729,000,000 improved fee result and a higher risk result. Borrowing costs increased to $85,000,000 There are two reasons for this. First, we issued CHF 600,000,000 of Swiss franc denominated hybrid debt in March 16 for early refinancing of a hybrid later this year. Second, the €750,000,000 hybrid bond issued in June 2015 was larger than the €350,000,000 hybrid redeemed in November 2015.
Going forward, however, we expect borrowing costs to return to a level in line with the previous years. The income tax expense of €143,000,000 corresponds to an increased effective tax rate of 22%. Overall, net profit was up by 1% to €500,000,000 Slide seven shows the one offs in our profit from operations. On the left hand side of this slide, you can see the one offs and currency translation effect in half year twenty fifteen to obtain a comparable basis. On the right hand side, we adjusted the half year twenty sixteen profit from operations for restructuring costs of €1,000,000 This leads to an adjusted profit from operations of €730,000,000 which is an increase of 4% on a like for like basis.
Moving now on to the segment results. Let me start with Switzerland. In our Swiss market union sorry, in our Swiss market units, premiums were down by 6% to €6,600,000,000 in line with the market. This decline is mainly due to our focus on profitability in the low interest rate environment. We redirected growth to capital efficient offerings and deemphasized capital intensive single premium products.
In Individual Life, premiums declined by 17% as a result of lower single premiums that decreased by 51%. Periodic premiums grew by 7%. The Individual Life market was down by 11%. Premiums in group life were down by 5%, in line with the market. Single premiums declined by 8%, while periodic premiums remained basically flat.
We continue to successfully offer semi autonomous and pure risk solutions. Their share has more than doubled and accounts now for 23% of new business production compared to 9% in the first six months of twenty fifteen. Moreover, assets under management in our investment foundation grew to €6,100,000,000 compared to €5,500,000,000 at year end 2015. Fee and commission income was up by 22% to €117,000,000 This includes increased revenues from Swiss Life Select, our real estate brokerage and pension consulting business. On a stand alone basis, Swiss Life Select grew its revenues by 13%.
Operating expenses were down by 3% to €183,000,000 due to further efficiency gains and lower professional fees. This led to a further improvement of the efficiency ratio. The segment results improved by 2% to €420,000,000 driven by a higher risk and fee result. The fee result increased to €11,000,000 with a strong contribution from our owned IFAs. Please note that the prior year fee result was negatively impacted by a write off in our pension consulting business as a result of small acquisition.
Our continuing pricing discipline led to lower volumes and to a decrease of the value of new business to €65,000,000 Active product management, such as guarantee reductions, product discontinuations in both group and individual life and selective underwriting, counteracted the effects of declining and substantially negative interest rates. As a result, we achieved a new business margin of 1.4%. 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 decreased by 2% to €2,000,000,000 in a market that was up by 3%.
In our Life business, premiums were down by 2% as our affluent clients were more cautious to buy life insurance products in this turbulent equity market environment. The overall market was up by 4% due to a strong contribution from BankAssurance. The unit linked share in our life premiums was 38%, while the market reported 19%. In our new business, the unit linked share accounted for 56%. Overall, net inflows were stable year on year at around 500,000,000.0 In Health and Protection, premiums were down by 1%.
Growth in our individual protection business was 4%. Our individual health business declined as a result of the anti health reform. However, we compensated for part of this decline with our successful shift to group contracts. Fee and commission income decreased by 9% to 106,000,000 banking fees, primarily due to lower asset valuations. Operating expenses increased by 2% to €147,000,000 Regulatory project costs in our Life and Banking business as well as investments into growth initiatives in Credit Life outweighed cost savings.
Thanks to the growth in Life reserves, the efficiency ratio was, however, further improved. The second result remained stable at €125,000,000 The improved loss ratios in Health and Protection led to a higher risk result. This compensated for the lower fee result, which was down by 21% to 16,000,000 due to lower banking fees. In the current capital market environment, the value of new business decreased by 8% to €28,000,000 In our Life business, the reduction of guarantees and the revised profit sharing partially offset the margin pressure from a lower share of unit linked business and lower interest rates. New business volumes increased strongly, mainly driven by the group health and protection business.
Overall, this led to a new business margin of 1.4%. Moving on to Germany on Slide 10. In our German market units, premiums were down by 5% to €576,000,000 in line with the market. We continued to deemphasize traditional products due to our focus on capital efficiency. We partly compensated for this decline by increased volumes of our modern traditional pension products and our offering for disability insurance.
Overall, we have substantially increased the share of risk products, which have lower premiums but higher margins. Fee and commission income was up by 5% to $166,000,000 given the strong contribution from our owned IFAs that grew their revenues by 14%. The number of financial advisers increased by 4% against the prior year period. Operating expenses were down by 1% to $91,000,000 mainly due to lower costs from professional fees. Efficiency ratio was further improved.
The segment result increased by 13 to €57,000,000 due to a positive development of both fee and cost results. Fee result was up by 43% to 29,000,000 productivity of our owned IFS. The value of new business increased to €9,000,000 driven by our comprehensive margin management approach. The overall of puts the focus on the modern traditional and risk business, where we expanded our offering and increased volumes. At the same time, other attractive products were phased out and replaced.
As a result, the new business margin increased from 1.6% to 2%, supported mainly by favorable persistency experience and efficiency gains in maintenance and distribution. Turning now to the segment, International. Premiums and deposits were down by 42% to €651,000,000 We continued to see significantly lower single premiums with private clients. Priority premiums in our Corporate Clients business increased but were more than offset by lower single premium. Assets under control with private clients decreased by 3% to €16,800,000,000 Fee and commission income was down by 6% to €98,000,000 Policy fees declined by 7%.
Commission income from owned IFAs was down by 6%, partly due to an adverse currency translation effect. Operating expenses decreased by 7% to $44,000,000 due to lower staff costs and efficiency gains from the adapted operating model. The segment results increased by 11% to 22,000,000 due to a higher risk and fee result. The fee result grew to €17,000,000 driven by tight cost management and a higher gross margin at our owned IFAs. The value of new business decreased significantly to €7,000,000 as a result of the already mentioned lower volumes in the business with private clients and the less favorable business mix, partially offset by pricing measures.
Overall, the new business margin slightly decreased from 1.3% to 1.2%. Let's now have a look at our Asset Management segment that reports in Swiss francs. Asset Management's income was up by 9% to $288,000,000 primarily driven by our third party asset management, TPAM, with strong inflows and higher transaction fees. In our PAM business, which manages our insurance assets, the income growth is the result of the higher average asset base, partly offset by a lower transaction volume in real estate. Operating expenses increased by 8% to €149,000,000 due to organic growth and investments in the TPAM business.
The segment result was up by 13% to €115,000,000 TPAM increased its contribution to €27,000,000 PAM contributed 88,000,000 Asset Management's overall costincome ratio remains relatively stable at around 58%. Net new assets in our TPAM business amounted to 4,900,000,000.0 We saw strong net inflows from institutional customers in both Switzerland and France across all asset classes. Assets under management in our TPAM business now account for €44,400,000,000 We are well on track to meet our Swiss Life 2018 target of €50,000,000,000 Total assets under management were up by 9% to $2.00 €2,000,000,000 thanks to the strong asset performance in our PAM business and the net inflows in our GPM business. Let's move back to the group and have a look at our operating expenses on Slide 13. Our overall cost base increased by 1% to 1,300,000,000 primarily due to growth in our asset managers business and exchange rate effects.
Operating expenses adjusted for restructuring costs, one offs and scope changes were €676,000,000 We are pleased with the expense development in our Insurance segment with a 2% decline to €517,000,000 Turning now to the investment results on Slide 14. Supported by our long asset durations, we were again able to achieve a strong investment result. Our direct investment income increased by €56,000,000 to €2,200,000,000 Our direct investment yield was stable at 1.5% on a nonannualized basis. The net investment result decreased to €2,300,000,000 which led to a nonannualized net investment yield of 1.6%. This is about 40 basis points below the prior year level given lower net capital gains.
Our hedging costs amounted to €263,000,000 up from €227,000,000 in the prior year period. Despite the continuing low interest rate environment, we expect a net investment yield of around 3% in 2016. I'm saying this with the usual disclaimer of any unforeseen developments in the financial markets. Our total investment result increased to 6.5%, again, not annualized. This is due to lower 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 increased to 33.7%, driven by higher valuations in this lower rate environment. This led to a relative decline of the share of other asset classes. The share of real estate was 15.3%. In absolute terms, we saw a revaluation of €300,000,000 and the net purchases of €700,000,000 in the first six months of twenty sixteen.
We increased our gross equity quota to 4.4%. Our net equity exposure increased to 2.3%. We kept our duration gap below 1%. Now foreign currency exposure on the insurance portfolio continues to be hedged. Let's have a look at our insurance reserves.
Our insurance reserves, excluding policyholder participation liabilities, were up by 2% to €147,000,000,000 mainly due to net inflows of 1,700,000,000 In Switzerland, insurance insurance reserves grew by 3% year on year, while they were up by 2% in our French business. Our German business reported a flat and our international business, slightly negative development. Turning now to our shareholders' equity on Slide 17. As you
can
see, shareholders' equity increased by 18% to €14,300,000,000 The main drivers were the higher net unrealized gains on bonds and the net profit attributable to shareholders. Let me give a short update on the progress of our Swiss Life 2018 program. I'm pleased to report that we had a good start with respect to all our three major thrusts being quality of earnings and earnings growth, operational efficiency and capital, cash and dividends. I'll start with the first trust 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.
As already mentioned, strong net new assets from GPAM and the higher average asset base in PAM contributed positively. Our owned Aliphase increased commission income by 9% in local currency, supported by both higher productivity and an increased number of advisers. The business with own and third party products and services was down by 4% in local currency, primarily due to lower banking fees in France, while real estate brokerage and our pension consulting businesses in Switzerland contributed positive. Overall, our fee and commission income increased by 3% in local currency. This led to an improved fee result, as shown on Slide 20.
This increased by 16% to €194,000,000 The substantial increase is due to the strong contributions from asset managers and our owned IFA. Our next chart, it's 21, shows 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 continued low or even negative interest rates. Moving on to the average technical interest rate on Slide 22. In the first six months of 2016, we further strengthened the technical reserves.
I mentioned it already, by €500,000,000 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 three basis points. Overall, our average technical interest rate decreased by six basis points to 1.58% or a total of 102 basis points since the 01/01/2010. This means that we were able to preserve 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 shifts have paid off. The share of traditional products in our new business production, including Groupe Life Switzerland, was down to 11% compared to 16% at the year end 2015. The strong decline of interest rates in the first six months of 2016 reduced margins by about 80 basis points. With an improved business mix and the pricing discipline, we could compensate about threefour of that. As a result, the new business margins of 1.5% is substantially above our hurdle rate and even at the ambition level.
Overall, our value of new business decreased to €113,000,000 down from €145,000,000 in the prior year period. Let me now move on to our next financial thrust being operational efficiency. As of the June 30, we have already implemented €43,000,000 of our Swiss Life twenty eighteen cost savings initiatives. All units contributed to this. On the next slide, you can see the improvement of our efficiency ratio.
At group level, the improvement is an additional two basis points to 28 basis points. All insurance segments have contributed to this positive development. Turning to the next financial thrust, capital, cash and dividends. On 01/01/2016, our Swiss Solvency test ratio stood at 146% as filed with FINMA based on our internal model approved with conditions. On the right hand side of the Slide 26, you can see our updated SST sensitivities as of 01/01/2016.
I can confirm that our SST ratio was around 140 as of June 3036, and around the January 1 number as of today. Our Solvency II ratio was above 200% on 01/01/2016. Please note that the Solvency II ratio is based on the standard model, excluding any transitional measures. Slide 27 shows our capital structure. We issued CHF 600,000,000 of Swiss franc denominated hybrid debt in March 2016.
This will be used for early refinancing of a CHF 500,000,000 hybrid with call date in October 2016. Our total debt hybrid debt currently amounts to €3,500,000,000 while our total debt outstanding was €4,400,000,000 Our capital structure and maturity profile both continue to be well balanced, and a well diversified denomination of debt in Swiss francs and Europe. Let me now move on to the cash remittance. In the first half of this year, we remitted €557,000,000 of cash to the holding company. This means that we have achieved onethree of our cash remittance target under the Swiss Life 2018 program of €1,500,000,000 over the three year period 2016 to 2018.
Let me sum up. We have again reported a strong set of results and have successfully kicked off our Swiss Life 2018 program. This makes me confident to deliver on our 2016 financial targets. We have improved our quality of earnings by substantially increasing the fee result, being now slightly ahead of plan with respect to our Swiss Life 2018 target. We have successfully defended our risk result, and we hold on to our V and D ambition, though the environment is challenging with ever lower interest rates.
We have continued with our strict cost discipline by already implementing more than 40% of the planned cost savings and by decreasing operating expenses at our insurance units. We have substantially increased our cash remittance to the holding company through disciplined capital management. This will positively impact our future dividend payout ratio. Finally, our adjusted return on equity was 11.1% 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, despite the tough financial market environment, enable us to deliver sustainable earnings and a more attractive payout to our shareholders. Now back to you, Patrick.
Ladies and gentlemen, Thomas and I are now ready to answer your questions. We'd like to go first.
We will now begin the question and answer session. Our first question comes from Daniel Pichov, Baderbia. Please go ahead.
Thanks. Good morning. Three questions from my side, please. The first one on the reinvestment rate, I think your guidance is 2% for 2016. That seems to be quite a high number.
What's your feeling would be the sustainable number in the second half standalone or in the current environment? And also in this context, obviously, the market is worried about the low rate environment. You provided a helpful disclosure at the last Investor Day showing the resilience of the margin until 2030 and 02/1940. Would you say this projection is materially different nowadays or is it still more or less intact? Second one, you talked about the progress of the fee growth in Germany and Switzerland in the IFA business.
I mean, do you see the fundamentals intact that you can continue to grow at current rates in that field? And then the third one on the SST, I think there is a new circular letter out there with a couple of proposed changes, one on the market value margin, then the scenario aggregation and then also the runoff scenario. Is it clear at this stage whether some of these proposals will become effective and what this means for Swiss Life?
Yes. So on the reinvestment rate, well, if we look back on the first half or the first six months, we had a reinvestment rate well above two percent. So and for the rest of the year, we expect reinvestment rate of slightly below 2%. Well, why? Because we are continuing to invest into real estate, which, of course, supports it.
So the reason why real estate dipped as a percentage of the asset allocation over the last twelve months is not because we reduced real estate, but simply because the performance was below the bond performance. So the result is simply a lower quota. Then in terms of margin, yes, we can confirm the margin projection that we gave at the Investors Day even at these lower rates. Please remember that only about three to 4% of our bond portfolio comes due and is affected by lower rates. And of course, the reinvestment rates that we've experienced in reality are much higher than what we used in the conservative projections.
Then the third question was on the German IFA business. Here, we now have more people working for us, more advisers. We have a much better pipeline. So we have more than 100 advisers more than a year ago. We have an improved productivity and a better margin.
So and going forward, worthwhile, that remains to be seen. I think as long as the environment stays the way it is, I feel quite confident. But you never know about upcoming regulation, be it on a European level or on a local German level. I mean that's difficult to know what the future will bring. But of course, it's very reassuring to see this development, which is much better than what I would have personally expected at the introduction of the LVRG in
treated. And we expect this to be implemented beginning of twenty seventeen, oneoneseventeen calculations. This then will be in line with how this is treated in Solvency The others, we really don't know currently, and there are still ongoing discussions.
The next question comes from Peter Eliot, Kepler Cheuvreux.
If I could perhaps ask three as well. The first one was, I mean, you don't mention it specifically on Slide 29, but the TPAM is a big factor in determining whether or not you meet your targets. You referred to it a few times on your presentation, Thomas. But I guess you're halfway to your target in just six months. I'm just wondering whether that means that you could be even more aggressive perhaps there in your targets.
So is there any reason that you think that might continue or might slow from here? Second question was on the restructuring costs. I appreciate that much of the improvement we've seen has come from investments in 2015, but you don't seem to have taken much in terms of costs ahead from the investment in H1. So I'm just wondering what sort of improvement we should expect in light of that in H2 and beyond? And then thirdly, on the cash remittances, again, obviously, there's a strong seasonality there, very strongly weighted to H1.
But I was wondering if you could just say whether there are any one offs in there and roughly what we might expect, if anything, in sort of H2? Because I guess, it looks like I would argue you're more than just slightly ahead on your target there. So comment there would be very helpful.
Yes. Let me start with the last question you asked. It's about the Here, obviously, as dividends are paid in the first half usually, at least in Europe, you can say that for this year, the lion's share is already funneled up to the holding company. We don't expect a big number in the second half to be added on top of the already very attractive number of €557,000,000 I would say there is still some interest that will be paid and some guarantee fees.
So my expectation is that we will fall short of 600,000,000 all in all, but not much short of 600,000,000 So just to give you an indication. And then there's no one offs in there. There regular dividend payments that we think are sustainable based on, obviously, current earnings. If earnings would decline, it will be a different story, but I have no reason to doubt the sustainability of the earnings. On your second question about restructuring costs, we expect overall and that's pre policyholder shareholder split, please, 25,000,000 to €35,000,000 of restructuring costs between 2016 and 2018.
And we have 5,000,000 in the first half, actually even a little bit more. And I do not expect here a big negative or positive effect from these. We would usually absorb these in our ongoing results. And therefore, as you've seen, we only had a slight adjustment in the first half of €1,000,000 restructuring charge. On the targets, I think after six months into a program, it wouldn't be wise to already question increase or decrease the targets.
Of course, our ambition is to exceed the goals that we have set at the Investor Day, but it's too soon to tell. A lot can happen until 2018. But of course, we have even on the slide, we have put slightly ahead on the fee results, which for me was already a little bit too brave maybe to mention this, but we put it on the slide. And therefore, think we are confident currently that we are well underway improving the quality of our earnings.
The next question comes from Guillaume Horvat, Exane BNP Paribas.
Actually, I have one. Just coming back on the SST and if you can give us a little bit more detail on where we stand today and maybe also more details on your internal models under condition, where are we with these conditions? Are they still in force? And of course, the standard model discussions regarding the group life business in Switzerland, Are you confident that this will still not be a major issue if you go to more standardized model going forward? Thanks.
So today, obviously, we're a little bit better than at the June as credit spreads have tightened, and so we're back around to the numbers of the beginning of the year. Then on the conditions, yes, so they're still the same conditions. So there is no change here. And on the standard model, that is now too early to tell. We have joint working groups together with our regulator working on this.
There is, as I said, too early to tell what the outcome will be there.
But just you're confident that these conditions will be renewed for one year and that the discussions on the standard won't lead to anything material by the end of the year, right?
Yes. I can that's my expectation exactly.
Next question comes from Jonny Urwin, UBS.
Just two from me today. So firstly, just going back to cash flow. So obviously, there's a lot come up in H1 so far, over onethree of the target. I mean that's from last year's profitability, isn't it? And you started this year very well and you've moved more in towards capital light products and fee income, etcetera.
So I mean, it does look like you're very much on track for that, as Peter says. I mean, that target now conservative? And how are you thinking about that? Secondly, on the net investment yield, so 3% still expected for 2016. I mean hedging costs have gone up a bit and gains have come down.
So obviously, reinvestment yields are coming down as well. So there's a few moving parts in there. I was just wondering if you could enlighten us on how you're thinking about 2017 and perhaps a comment on hedging costs as well. Mean, will they go up any further from here?
Okay. I'll take the cash flow question. Yes, indeed, that's based on last year's profits. We have seen a slight increase of profitability in the first half, however, still six months to go. I think it's too soon, again, to revise any targets.
But again, we also have put on the slide here that we are slightly ahead. And I think that's fair. We are slightly ahead of our ambition given the cash flow that we had already to Goldy Cup in the first half of this year.
And on the hedging costs, yes, we do expect the hedging costs to go up. That's also part of the plan. We now, of course, they'll go up a bit less than what we had priorly expected just simply because rate differentials have contracted. On the other hand, the FX basis has increased after the Brexit discussion. So yes, I continue to expect higher hedging costs, probably something around $100,000,000 for the full year.
But that moves quite a
lot.
Okay. Thank you.
The next question comes from Michael Huttner, JPMorgan. Please go ahead.
Thank you. This is my usual question. I'm really sorry. I must sound like an old fashioned record. But if you met somebody who doesn't know Swiss Life in one of your marketing roadshows, and they said your Spread Life business, Switzerland, where long term interest rates are negative, why you how can how is it that you're still operating, let alone actually growing cash flows and slightly ahead on some of your targets?
What will be your answer? I have this question here from my traders on spec sales. And I said, well, look, the difference Swiss Life versus Life business in Continental Europe in the rest of the year is they have this huge real estate. And in a funny way, therefore, you should almost look at it as a real estate fund with a Life business attached. But maybe that's completely wrong explanation.
If you could count it in one sentence, that would be magic. And then just in terms of more details, kind of fairly mundane stuff. I noticed the risk, you say, is on track, not ahead. So I just wonder if there's a blip there. The cumulative value of new business, you say, challenging.
If you miss your target for this metric, does it mean that Swiss Life effectively then becomes a shrinking business? Or is it or are you still growing? And then the final question on the hedging costs. So I've noted the figure of €263,000,000 at the half year annualizes to just over 500,000,000 You're saying there may be an extra 100,000,000 So that's €600,000,000 Is that all at the expense of shareholders or if you share it with policyholders in one proportion? Okay.
I'll start with the last question. Of course, we share that with policyholders. So what I mentioned last year is that because of the move of the F and B towards much more negative rates, we had a $0.02 €5,000,000,000 higher hedging costs than previously. And you saw what effect in the end on net profit was, which was very low. Of course, we share that with policyholders.
Then to your first question, I'll answer that in a bit more than one sentence, but I think we've been very active in managing our interest rate margin through ALM. That means we've continuously hugely lowered our average technical rates over the last couple of years. And again, in this half year alone by six basis points, whereas our direct investment income has stayed stable. So, we now have we can now use the strengthening of the reserve. We can finance that through our current income.
Just compared to a year,
we
have $300,000,000 more excess, let's say, current income versus technical reserves, which can be used in quotation marks to strengthen our reserves without having an impact on the P and L. So that's first thing. Very successful management of our interest rate margin. And second is, of course, that strategically, we're growing our fee and risk business, both of whose results have improved in the first half of the year. I mean, the whole increase of the operating profit comes from the increase in the fee results.
And in addition to that, we had a positive effect on our risk results. So all of that, of course, bodes well for our quality of earnings. And then the second question was on the risk result. Yes, of course, I mean, that's one of our key targets because it's capital light. There is no correlation of the risk result with capital markets.
That's why under our solvency regime, we have to put up very little capital for that because it diversifies very well. Of course, if we missed on that target, that wouldn't be great news. But at the moment, actually, we're well on target here.
Our next question comes from Stephan Schulman, Bankfontobil.
I have two questions. The first one is on the basically reserve additions. Can you give some more details where these exactly happened, I think mostly Switzerland? The second one, quite a small detailed question in France, the fee income decrease. Can you explain in more detail how much was due from lower banking fees and how much from the unit linked part?
So all of that was in Switzerland of the reserve strengthening. And on the fees, it was everything came from banking.
The next question comes from Rene Rocha, MainFirst Bank.
So I would like to start with Slide 14. Let's see the net investment result of €2,300,000,000 If I annualize that, I end up at €4,600,000,000 And then if I allocate again some 15% to the shareholder, I need that would mean roughly €750,000,000 Then to cover the guarantees, need some €1,800,000,000 reserves strengthening some €500,000,000 So there is still some extra money left of roughly €1,500,000,000 And I do know that you have a few more pockets like bonus reserves, the inflation reserves. So perhaps you can give a little bit of a big picture, how you allocate the remaining €1,500,000,000 And then, of course, I would also like to know if my assumption or my big thinking is more or less right. Then on this net capital gains or losses, this $238,000,000 here, again, I don't know if I'm right, but if you have revaluation gains on real estate, despite the fact that these are no cash earnings, they're running through the P and L account, right? So you mentioned some EUR 300,000,000.0 in real estate valuation.
So perhaps you gave a little bit of clarification here. And then I go to Slide 12. So very much surprised to see the strong inflow in net new assets. And I was wondering that what I also saw in the press that you are attracting a lot of assets from the Swiss second pillar business. So just a confirmation and then there is one on the guarantees, yes, here again on Slide 22.
If you can give kind of a big picture of where do you expect what's going to happen in H2, perhaps lower guarantees, again, further reserve strengthening? And then, yes, again, just for clarification, the drop in the guaranteed rate we have seen in the mandatory business, this was already reflected in the 1.64% you showed at January 1? Yes, I think it's so.
I was wondering when you were going to stop when you started. Yes. I mean, this
is so interesting. So that's why. And it's so complicated. That's the other point.
Okay. So I'll answer going through it, and Thomas will complete it. So first of all, I mean, it's never a good idea to simply annualize by multiplying by two. Just in very general terms, but also for the investment result. Now, of course, I mean, the missing money that you mentioned will be either allocated to reserves, bonus reserves, possibly reserves strengthening in the second part of the year if rates stay very low.
And the real estate revaluation, yes, that was very strong with €300,000,000 It came primarily from Switzerland again, of course, because we have five, of the real estate portfolio in Switzerland, but also from France. Then on the net new assets on TPAB, yes, that was a very strong showing for half year, but it was across the board. 40% of that was in risky assets. So real estate, equity, infrastructure, and that does come from the second pillar in Switzerland. But for the first time in a very long time, we actually had more net inflows in France than in Switzerland.
Please bear in mind, we said that before, some of those in inflows, of course, are not as sticky as real estate. So we had around 20% of our net inflows in money markets, which, of course, is less sticky. And also, we have bond mandates, balanced inflows. So it was really across the board, which, of course, makes me very happy. And the last point was on the rate reduction in group.
BBG, yes, we had already reflected that as the last year's move at the end of this year. But maybe, Thomas, you could comment a little bit more
on the net investment results or Yes. Actually, what you mentioned is correct. Obviously, if we have paid the guarantees, you still have to allocate part to the policyholder bonuses because we have legal quotes. So therefore, if you do your calculation, you have to take ninety-ten split, policyholder and shareholder. And what we also do within the 90 is usually we do some reserve strengthening, at least as long as interest rates stay where they are.
And let me be clear on that. I do expect a certain additional reserve strengthening for the second half of this year, again, because you all know that interest rates came down substantially in the first half. And if they stay where they are, expect further strengthening. But overall, I think, as mentioned before, we are very well underway because we have really able to stabilize or even improve the financial margin a little bit. And this helps also going forward.
And our back book, the profitability of our back book is very stable, very
The next question is a follow-up question from Mr. Michael Huttner. Mr. Hacker, your line is open. The next question is a follow-up question from Mr.
Gil Hemmhova. Just
a follow-up question on Stephane's the resource strengthening. You said it comes mostly from Switzerland. Can you give a little split between the group and the individual, please? And then the second on the Slide 23 and the new business margin, the economic variances so 80 bps of impact. As you shift the business to more fee and less dependent, I would say, to financial markets probably, Should we expect this 80 bps to be lower in the future and then the business mix to just more than offset this economic variances if everything stays the same in terms of the macroeconomic environment, of course?
So on the first question, yes, it's the reserve strengthening comes from Switzerland, and it's more or less in line of the relevant sizes, group life and individual life. And your second question was on the offsets by the by repricings and the like. Yes, we expect this to continue. So let's say, if rates increased on the other hand, we would also not feel the full effect. And if rates stay very low, it's very difficult to anticipate.
And of course, all of this depends on where our business is growing. But overall, you'd usually see an offset. I think three quarters was a very good result. So going forward, I'd expect a bit of a less of an offset. That's why we said that reaching the VNB target is actually challenging.
Gentlemen, there are no more questions.
So that brings us to the end of our telephone conference.
Sorry to interrupt you, Mr. Foster. We have Michael Hattner. Please go ahead, sir.
Sorry about that. Yes. You mentioned a couple of times that both of you the phrase too early to say or too early to tell. So my question would be when will you or when might you think that it you could say, oh, we've now we've done it and we can reset targets? Will we wait until the 2018, which is what you did for 2015 plan?
Or do you maybe kind of maybe And next year say then the new what is the new guidance, the new guidance from the Swiss government on the mandatory rate?
Actually, there is not yet the guidance from the Swiss government on the mandatory rate. There is, however, a request from the Swiss Insurance Association that will ask to lower it towards 0.5%. As a reminder, it currently stands at 1.25. On the target, we are very cautious people here. And obviously, it's always better to under promise and over deliver than to over promise and under deliver.
And therefore, I think, let's see, we are well underway in most of the targets. We are challenged in one target mainly. And I think as we go, we will obviously keep you informed on our achievements, but also on areas where we have not achieved what we think we can achieve.
Gentlemen,
there are no more questions.
So I'll try again as this brings us to the end of our telephone conference. Thank you again for your interest in Swiss Life, and I wish you all a good rest of the summer, and goodbye, everyone.
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 the lines. Goodbye.