Ladies and gentlemen, good morning. Welcome to the Swiss Life presentation of the half-year results 2016. 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&A session. You can register for questions at any time by pressing star 1 on your telephone. Should you need assistance, please press star 0 to call an operator. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Patrick Frost, Group CEO, and Thomas Buess, 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 will start off, then Thomas Buess, our 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 from many companies. This is not different at Swiss Life, where the big picture did not do us any favors. This environment certainly did not 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 are 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 first half of 2016. I would like to highlight some key figures from our results.
Swiss Life again increased its earnings power and achieved an adjusted profit from operations of CHF 730 million, which is a 4% increase. Furthermore, we earned CHF 500 million in net profit. This is the best half-year result our group has achieved since the financial crisis of 2008. 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%, CHF 656 million, and the fee result by 16% to CHF 194 million. Our selective underwriting, plus a certain reticence from our customers, led to a 9% decrease in premium income in local currency to CHF 10.1 billion. As long as this does not 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 CHF 4.9 billion enabled us to increase our assets under management to CHF 44.4 billion. Overall, we had more than CHF 200 billion under management for the first time. An income at Swiss Life Asset Managers increased to CHF 288 million, 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 is 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 VNB 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 CHF 145 million to CHF 113 million 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 CHF 14.3 billion at the end of June, which was 18% higher than at the end of the year. Swiss Life had an SST ratio of 146% as of the 1st of January 2016. Solvency II stood at over 200%.
I would now like to hand over to Thomas Buess, who will give you a more detailed report on our figures. Thomas.
Thank you, Patrick. Good morning, ladies and gentlemen. In the next 35 minutes, I'll inform you in more detail about our half-year 2016 results. I'll start with an overview of the income statement. I'll provide some details on our major segments. I'll explain some specific P&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&L figures on page six of the investors' presentation. Gross premiums, fees, and deposits decreased by 9% in local currency to CHF 10.1 billion. 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 CHF 656 million, 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 CHF 2.3 billion due to lower net capital gains. Net insurance benefits and claims decreased by 1% to CHF 9.1 billion. This includes further reserve strengthening of about CHF 0.5 billion, which, among other factors, led to a lower average technical interest rate that preserves our interest rate margin. Policyholder participation decreased to CHF 261 million. 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 CHF 1.3 billion, primarily due to growth in our Asset Managers business and exchange rate effects. Profit from operations was up by 5% to CHF 729 million. The drivers of the increase were the substantially improved fee result and a higher risk result. Borrowing costs increased to CHF 85 million. There are two reasons for this. First, we issued CHF 600 million of Swiss franc-denominated hybrid debt in March 2016 for early refinancing of a hybrid later this year. Second, the EUR 750 million hybrid bond issued in June 2015 was larger than the EUR 350 million hybrid redeemed in November 2015. However, we expect borrowing costs to return to a level in line with the previous years. The income tax expense of CHF 143 million corresponds to an increased effective tax rate of 22%. Overall, net profit was up by 1% to CHF 500 million.
Slide seven shows the one-offs in our profits from operation. On the left-hand side of the slide, you can see the one-offs and currency translation effect in half year 2015 to obtain a comparable basis. On the right-hand side, we adjusted the half year 2016 profit from operations for restructuring costs of CHF 1 million. This leads to an adjusted profit from operations of CHF 730 million, 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 unit, premiums were down by 6% to CHF 6.6 billion, 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 de-emphasized 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 2015. Moreover, assets under management in our investment foundation grew to CHF 6.1 billion, compared to CHF 5.5 billion at year-end 2015. Fee and commission income was up by 22% to CHF 117 million. This includes increased revenues from Swiss Life Select, our real estate brokerage and pension consulting business. On a standalone basis, Swiss Life Select grew its revenues by 13%.
Operating expenses were down by 3% to CHF 183 million due to further efficiency gains and lower professional fees. This led to a further improvement of the efficiency ratio. Results improved by 2% to CHF 420 million, driven by a higher risk and fee results. The fee results increased to CHF 11 million, with a strong contribution from our own 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 a small acquisition. Our continuing pricing discipline led to lower volumes and to a decrease of the value of new business to CHF 65 million. 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 EUR 2.0 billion 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 bancassurance. 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 EUR 0.5 billion. 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 NEAT Health Reform.
We compensated for part of this decline with our successful shift to group contracts. Fee and commission income decreased by 9% to EUR 106 million as a result of lower banking fees, primarily due to lower asset valuations. Operating expenses increased by 2% to EUR 147 million. 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 segment results remained stable at EUR 125 million. 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 EUR 16 million due to lower banking fees. In the current capital market environment, the value of new business decreased by 8% to EUR 28 million.
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 unit, premiums were down by 5% to EUR 576 million, in line with the market. We continued to de-emphasize 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 offerings 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 CHF 166 million, given the strong contribution from our own IFAs that grew their revenues by 14%. The number of financial advisors increased by 4% against the prior year period. Operating expenses were down by 1% to CHF 91 million, mainly due to lower costs from professional fees. The efficiency ratio was further improved. The segment results increased by 13% to CHF 57 million due to a positive development of both fee and cost result. Fee result was up by 43% to CHF 29 million, based on the higher productivity of our own IFAs. The value of new business increased to CHF 9 million, driven by our comprehensive margin management approach. The overhaul of the product landscape puts the focus on the modern, traditional, and risk business, where we expanded our offering and increased volumes. At the same time, unattractive products were phased out and replaced.
The new business margin increased from 1.6% to 2%, supported mainly by favorable persistence experience and efficiency gains in maintenance and distribution. Turning now to the segment international. Premiums and deposits were down by 42% to EUR 651 million. We continued to see significantly lower single premiums with private clients. Periodic premiums in our corporate clients business increased, but were more than offset by lower single premiums. Under control with private clients decreased by 3% to EUR 16.8 billion. Fee and commission income was down by 6% to EUR 98 million. 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 EUR 44 million, due to lower staff costs and efficiency gains from the adapted operating model.
The segment results increased by 11% to EUR 22 million, due to a higher risk and fee result. The fee result grew to EUR 17 million, driven by tight cost management and a higher gross margin at our owned IFAs. The value of new business decreased significantly to EUR 7 million as a result of the already mentioned lower volumes in the business with private clients and a 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 manager segment that reports in Swiss francs. Asset managers income was up by 9% to CHF 288 million, 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 CHF 149 million due to organic growth and investments in the TPAM business. The segment result was up by 13% to CHF 115 million. TPAM increased its contribution to CHF 27 million. PAM contributed CHF 88 million. Asset managers overall cost-income ratio remains relatively stable at around 58%. Net new assets in our TPAM business amounted to CHF 4.9 billion. 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 CHF 44.4 billion. We are well on track to meet our Swiss Life 2018 target of CHF 50 billion.
Total assets under management were up by 9% to CHF 202 billion, thanks to the strong asset performance in our PAM business and the net inflows in our TPAM 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 CHF 1.3 billion, 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 CHF 676 million. We are pleased with the expense development in our insurance segments, with a 2% decline to CHF 517 million. Turning now to the investment result 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 CHF 56 million to CHF 2.2 billion. Our direct investment yield was stable at 1.5% on a non-annualized basis.
The net investment results decreased to CHF 2.3 billion, which led to a non-annualized net investment yield of 1.6%. This is about 40 basis points below the prior level, given lower net capital gains. Our hedging costs amounted to CHF 263 million, up from CHF 227 million in the prior year period. Despite the continuing low interest rate environment, we expect a net investment yield of around 3% in 2016. I am 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 low-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 CHF 0.3 billion and net purchases of CHF 0.7 billion in the first six months of 2016. We increased our gross equity quota to 4.4%. Our net equity exposure increased to 2.3%. We kept our duration gap below one. 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 CHF 147 billion, mainly due to net inflows of CHF 1.7 billion. In Switzerland, 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 a slightly negative development. Turning now to our shareholders' equity on slide 17. As you can see, shareholders' equity increased by 18% to CHF 14.3 billion.
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 am 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 will start with the first thrust by providing more details on our fee income and fee results on the next two slides. Commission income at Swiss Life Asset Managers was up by 6% in local currency. As already mentioned, strong net new assets from TPAM and the higher average asset base in PAM contributed positively. Our own IFAs increased commission income by 9% in local currency, supported by both higher productivity and an increased number of advisors.
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 positively. 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 CHF 194 million. The substantial increase is due to the strong contributions from asset managers and our own IFAs. Our next chart is 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 technical reserves, I mentioned it already, by CHF 0.5 billion, 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 1st of January 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 Group 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 a pricing discipline, we could compensate about three-quarters 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 CHF 113 million, down from CHF 145 million in the prior year period. Let me now move on to our next financial thrust, being operational efficiency. As of the 30th of June, we have already implemented CHF 43 million of our Swiss Life 2018 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 January 1st, 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 January 1st, 2016. I can confirm that our SST ratio was around 140% as of June 30th, 2016, and around the January 1st number as of today. Our Solvency II ratio was above 200% on January 1st, 2016. Please note that the Solvency II ratio is based on the standard model, excluding any transitional measure. Slide 27 shows our capital structure. We issued CHF 600 million of Swiss franc-denominated hybrid debt in March 2016.
This will be used for early refinancing of a CHF 500 million hybrid with call date in October 2016. Our total hybrid debt currently amounts to CHF 3.5 billion, while our total debt outstanding was CHF 4.4 billion. Our capital structure and maturity profile both continue to be well-balanced and a well-diversified denomination of debt in Swiss franc and EUR. Let me now move on to the cash remittance. In the first half of this year, we remitted CHF 557 million of cash to the holding company. This means that we have achieved one third of our cash remittance target under the Swiss Life 2018 program of CHF 1.5 billion 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 VNB 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. Back to you, Patrick.
Ladies and gentlemen, Thomas and I are now ready to answer your questions. Who'd like to go first?
We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands-free when asking a question. Anyone who has a question may press star one at this time. Our first question comes from Daniel Bischof, Vontobel. 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, let's say, in the current environment? 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 2040. 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 in Switzerland in the IFA business. Do you see the fundamentals intact that you can continue to grow at current rates in that field?
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 run-off scenario. Is it clear at this stage whether some of these proposals will become effective and what this means for Swiss Life?
On the reinvestment rate. If we look back on the first six months, we had a reinvestment rate well above 2%. For the rest of the year, we expect a reinvestment rate of slightly below 2%. Why? Because we are continuing to invest into real estate, which of course, supports it. The reason why real estate dipped as a percentage of the asset allocation over the last 12 months is not because we reduced real estate, but simply because the performance was below the bond performance. The result is simply a lower quota. In terms of margin. Yes, we can confirm the margin projection that we gave at the investor day, even at these lower rates. Please remember that only about 3%-4% of our bond portfolio comes due and is affected by lower rates.
Of course, the reinvestment rates that we've experienced, in reality, are much higher than what we used in the conservative projections. The third question was on the German IFA business.
Here, we now have more people working for us, more advisors. We have a much better pipeline. We have more than 100 advisors, more than a year ago. We have an improved productivity and a better margin. Going forward, while that remains to be seen. I think as long as the environment stays the way it is, I feel quite confident. You never know about upcoming regulation, be it on a European level or on local German level. That's difficult to know what the future will bring. 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.
We expect this to be implemented beginning of 2017, 1/1/2017 calculations. This then will be in line with how this is treated in Solvency II. The others, we really don't know currently, and there are still ongoing discussions.
Okay, thanks.
The next question comes from Peter Eliot, Kepler Cheuvreux. Please go ahead.
Thank you very much. Might perhaps ask three as well. The first one was, you don't mention it specifically on slide 29, 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. 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 target. 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 investment in 2015, but you don't seem to have taken much in terms of costs ahead from the investment in H1.
I'm just wondering what sort of improvement we should expect in light of that in H2 and beyond. Thirdly, on the cash remittances. Again, obviously there's a strong seasonality there, very strongly weighted to H1. 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 H2. I guess otherwise it looks like I would argue you're more than just slightly ahead on your target there. A comment there would be very helpful. Thank you.
Let me start with the last question. You asked it's about the cash remittance 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 CHF 557 million. I would say there is still some interest that will be paid and some guarantee fees. My expectation is that we will fall short of CHF 600 all in all, but not much short of CHF 600. Just to give you an indication. There's no one-off in there. There are regular dividend payments that we think are sustainable based on, obviously, current earnings.
If earnings would decline, it would be a different story, 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, CHF 25 million-CHF 35 million of restructuring costs between 2016 and 2018. We have five in the first half, actually even a little bit more. I do not expect here a big negative or positive effect from these. We would usually absorb these in our ongoing results. Therefore, as you've seen, we only had a slight adjustment in the first half of CHF 1 million 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 D ay, it's too soon to tell. A lot can happen until 2018. Of course, even on the slide, we have put slightly ahead on the fee result, which for me, was already a little bit too brave maybe to mention this, we put it on the slide. Therefore, I think we are confident currently that we are well on the way improving the quality of our earnings. Okay. Thank you very much.
The next question comes from Guillaume Horvat, Exane BNP Paribas. Please go ahead.
Yes. Thanks for taking our question. Actually, I have one. Just coming back on the SST, 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? 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.
Today, obviously we're a little bit better than at the end of June, as credit spreads have tightened, we're back around to the numbers of the beginning of the year. On the conditions, yes. Those are still the same conditions. There is no change here. 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.
Just you confirm that these conditions will be renewed for one year, and that the discussions on the standard won't lead to anything material by end of the year, right?
Yes. That's my expectation. Exactly.
Thank you very much.
Next question comes from Jonny Urwin, UBS. Please go ahead.
Hi there. Great numbers. Thanks for taking my questions. Just two from me today. Firstly, just going back to cash flow. Obviously there's a lot come up in H1 so far, over a third of the target. That's from last year's profitability, isn't it? You've started this year very well and you've moved more in towards capital-light products and fee income, et cetera. It does look like you're very much on track for that as Peter says. Is that target now conservative and how are you thinking about that? Secondly, on the net investment yield. 3% still expected for 2016. Hedging costs have gone up a bit and gains have come down. Obviously reinvestment yields are coming down as well. 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. Will they go up any further from here? Thanks very much.
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 at the first half. However, still six months to go. I think it's too soon, again, to revise any targets. Again, we also have put on the slide here that we are slightly ahead. I think that's fair. We are slightly ahead of our ambition given the cash flows that we had already to the company in the first half of this year.
On the hedging costs. Yes, we do expect the hedging costs to go up. That's also part of the plan. 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. Yes, I continue to expect higher hedging costs, probably something around CHF 100 million for the full year. That moves quite a lot.
Okay. Thank you.
The next question comes from Michael Huttner, JP Morgan. Please go ahead.
Thank you. This is my usual question. I'm really sorry. I must sound like an old-fashioned record. If you met somebody who doesn't know Swiss Life, in one of your marketing or roadshows, and they said your spread life business, Switzerland, where long-term interest rates are negative. How is it that you're still operating, let alone actually growing cash flows and slightly ahead on some of your targets? What would be your answer? I had this question here from my traders in spec sales. I said, "Well, look, the difference Swiss Life versus life business in continental Europe and the rest of the EU is they have this huge real estate." In a funny way, therefore, you should almost look at it as a real estate fund with a life business attached. Maybe that's completely wrong explanation.
If you could couch it in one sentence, that would be magic. Just in terms of more details, kind of fairly mundane stuff. I noticed the risk you say is on track, not ahead. I just wonder if there is 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 becomes a shrinking business? Are you still growing? The final question on the hedging cost. I noted the figure of CHF 263 million at the half year, annualize it to just over CHF 500. You are saying there may be an extra CHF 100, so that is CHF 600. Is that all at the expense of shareholders or if you share it with policyholders in what proportion? Thank you.
Can I start with the last question? Of course, we share that with policyholders. What I mentioned last year is that because of the move of the SNB towards much more negative rates, we had a quarter billion higher hedging costs than previously. You saw what effect in the end on net profit was, which was very low. Of course, we share that with policyholders. To your first questions, I will answer that in a bit more than one sentence, but I think we have been very active in managing our interest rate margin through ALM. That means we have 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. We can now use the strengthening of the reserve.
We can finance that through our current income. Just compared to a year, we have CHF 300 million 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&L. That is the first thing. Very successful management of our interest rate margin. Second is, of course, that strategically, we are 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. In addition to that, we had a positive effect on our risk results. All of that, of course, bodes well for our quality of earning. The second question was-
Also risk result
on the risk result. Yes, of course, I mean, that's one of our key targets because it's capital-like. 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. At the moment, actually, we're well on target here.
Brilliant. Thank you.
As a reminder, if you wish to register for a question, please press star and one. Our next question comes from Stefan Schürmann, Bank Vontobel. Please go ahead.
Yes, good morning. I have two questions. The first one is on the basically reserve additions. Can you give some more details where this exactly happened? I think mostly Switzerland. The second one, quite a small detail 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?
All of that was in Switzerland, of the reserve strengthening. On the fees, everything came from banking.
Okay. Thank you.
The next question comes from René Locher, MainFirst Bank. Please go ahead.
Yes, good morning, everybody. I would like to start with slide 14, where you see the net investment result of CHF 2.3 billion. If I annualize that, I end up at CHF 4.6 billion. If I allocate again some 15% to the shareholder, that would mean roughly CHF 750 million. To cover the guarantees, I need some CHF 1.8 billion reserves, strengthening from CHF 500 million. There is still some extra money left, roughly CHF 1.5 billion. I do know that you have a few more pockets like bonus reserve, the inflation reserve. Perhaps you can give a little bit of a big picture, how you allocate the remaining CHF 1.5 billion. Of course, I would also like to know if my assumptions or my big thinking is more or less right. On this net capital gains or losses, this CHF 238.
Here again, I don't know if I'm right, if you have revaluation gains on real estate, despite the fact that these are no cash earnings, they're running through the P&L account, right? You mentioned some CHF 0.3 billion in real estate revaluation, perhaps you give a little bit of clarification here. I go to slide 12. I'm very much surprised to see the strong inflow in net new assets. I was wondering, that's what I also saw in the press, that you are attracting a lot of assets from the Swiss second pillar business. Just a confirmation, then there is one on the guarantees. Yes, here again on slide 22. If you can give a big picture now, where do you expect what's going to happen in H2? Perhaps lower guarantees, again, further reserve strengthening.
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 the 1st of January. Thank you very much.
I was wondering when you were going to stop, when you started.
It's so interesting, that's why. It's so complicated, that's the other point.
Okay. I'll answer going forward, and Thomas will complete.
Yes
It. First of all, 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, the missing money that you mentioned will be either allocated to reserves, bonus reserves, possibly reserve strengthening in the second part of the year, if rates stay very low. The real estate revaluation, yes, that was very strong with CHF 300 million. It came primarily from Switzerland again. Of course, because we have five-sixths of the real estate portfolio in Switzerland, but also from France. On the net new assets on TPAM. Yes, that was a very strong showing for a half year. It was across the board. 40% of that was in risky assets. Real estate, equity, infrastructure. That does come from the second pillar, in Switzerland. 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 inflows, of course, are not as sticky as real estate. We had around 20% of our net inflows in money markets, which of course is less sticky. Also we have bond mandates, balanced inflows. It was really across the board, which of course makes me very happy. The last point was on the rate reduction in group BVG. Yes, we had already reflected that as last year's move at the end of this year. Maybe, Thomas, you could comment a little bit more on the net investment results or
Yeah, actually, what you mentioned, it correct. Obviously, if we have paid the guarantees, you still have to allocate part to the policyholder bonuses because we have legal quotas. Therefore, if you do your calculation, you have to take a 90/10 split-
policyholder and shareholders. 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. 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, I expect further strengthening. Overall, I think, as mentioned before, we are very well on the way, because we were really able to stabilize or even improve the financial margin a little bit. This helps also going forward. Our back book, the profitability of our back book, is very stable. Very stable.
Okay. Very clear. Thank you very much.
The next question is a follow-up question from Mr. Michael Huttner. Please go ahead.
Michael?
Mr. Huttner, your line is open. As a reminder, for questions, please press star 1. The next question is a follow-up question from Mr. Guilherme Rover. Please go ahead.
Yes. Thank you. Just a follow-up question on Stefan's on the reserve strengthening. You said it comes mostly from Switzerland. Can you give a little split between the group and the individual, please? The second, on slide 23 on the new business margin, the economic variance is 80 basis points of impact. As you shift the business to more fee, and less dependence, I would say, to financial markets probably, should we expect these 80 basis points to be lower in the future? The business mix to just more than offset these economic variances, if everything stays the same in terms of the macroeconomic environment, of course. Thanks.
On the first question, yes, the reserve strengthening comes from Switzerland, and it's more or less in line of the relevant sizes, group life and individual life. Your second question was on the offsets by repricings and the like. Yes, we expect this to continue. Let's say if rates increased, on the other hand, we would also not feel the full effect. If rates stay very low, it's very difficult to anticipate, and of course, all of this depends on where our business is growing. Overall, you'd usually see an offset. I think three quarters was a very good result. 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.
Okay. That's good. Thanks.
As a reminder, for questions, please press star and one. Gentlemen, there are no more questions.
That brings us to the end of our telephone conference.
Sorry to interrupt you, Mr. Frost. We have Michael Huttner. Please go ahead, sir.
Sorry about that. You mentioned a couple of times, both of you, the phrase too early to say or too early to tell. My question would be, when might you think that you could say, "Oh, we've done it, and we can reset targets?" Will we wait until the end of 2018, which is what you did for the 2015 plan? Or do you maybe next year say something? What is the new guidance from the Swiss government on the mandatory rate?
Actually, there is not yet a 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. Obviously, it's always better to underpromise and overdeliver than to overpromise and underdeliver. Therefore, I think, let's see. We are well on the way in most of the targets. We are challenged in one target mainly. 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.
Brilliant. Thank you very much.
Gentlemen, there are no more questions.
I'll try again. As this brings us to the end of our telephone conference, thank you again for your interest in Swiss Life. I wish you all a good rest of the summer. Goodbye everyone.
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