Welcome to the Swiss Life Presentation of the Health Year Results 2018 Conference Call and Live Webcast. I'm Iruna, 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 Mr. Patrick Frost, Group CEO of Suez Life. Please go ahead, sir.
Thank you. Dear analysts and investors, welcome to our telephone conference on Swiss Life Group's half year results. Thank you for taking this time for us today. Needless to say, today is not business as usual for us, I. E.
Simply presenting the details of our performance over the 1st 6 months of the year. We didn't just disclose our figures today, we also announced that Thomas Buas, our CFO, will hand over to our Chief Risk Officer, Matija Zelik, with effect from March 1, following 10 highly successful years in that position. It was Thomas' wish to take on tasks and roles during the next phase of his life that do not entail an executive function and yet call for his experience in a variety of ways. It's still far too soon to start appraising Thomas Buch's work. After all, he will continue to serve Swiss Life as CFO through our Investors Day in late November until the 2018 financial statements are out in February of next year.
Let's just say at this point that with his wealth of experience and entrepreneurial flair, Thomas Buress deserves a great deal of credit for our successful completion of 3 group wide programs in a row since he started here in 2009. He has modernized the CFO area and together with his teams, ensured that Swiss Life enjoys top financial health. In short, Thomas has done an outstanding job. Returning to the year now, let's take a look at the Swiss Life key figures for the first half of twenty eighteen. Our half year results fit seamlessly with the strong progress we have made over the past few years.
Thomas Buys will present the figures to you in more detail following my brief introduction. We maintained our good performance in the 1st 6 months of 2018 and we came another step closer to the successful implementation of our Swiss Life 2018 group wide program. At CHF561,000,000 net profit was up 7% relative to the corresponding prior year period. We increased adjusted profit from operations by 3% to CHF808 1,000,000. One highlight that stands out for me among these good results is the fact that we increased fee income by 10% to CHF 798,000,000 and raised the fee results to $248,000,000 a 6% increase.
I'm especially pleased to see that the increase in the fee result comes from an improved contribution by each of our 4 insurance units. Our premiums increased by 4% to $10,700,000,000 in the first half year. We increased the direct investment income by 2% to 2,240,000,000 dollars The non annualized direct investment yield was stable at 1.5%. And in our 3rd party business, we achieved net new assets of $3,700,000,000 As a result, assets under management for third parties amounted to 64.6 $1,000,000,000 at the end of June, an increase of 5% from year end. It's also great to see the increase in the value of new business, which rose by 20% to $212,000,000 The new business margin meanwhile remained at the prior year level of 2.6%.
And last but not least, the adjusted return on equity came to 9.7% in the 1st 6 months. So we can report excellent progress with the implementation of our Swiss Life 2018 group wide program. Indeed, we will even exceed some of the goals that makes me proud as Group CEO. It also makes me confident for the Investors Day at the end of November when we will present to you, dear analysts and investors, our plans and goals for the next 3 years. I'll hand over to Thomas now, who will provide a more detailed account of our figures.
Thomas, the floor is yours.
Thank you, Patrick. Good morning, ladies and gentlemen. I'll now provide more details on our financial performance in the 1st 6 months of 2018. Please note that all figures quoted are in Swiss francs unless I state otherwise. Let me start with an overview of our P and L on Page 6.
Growth rate in premiums, fees and deposits increased by 4% in local currency to €10,700,000,000 All insurance segments except our international market unit contributed to this. Fee and commission income increased by 10% in local currency to EUR 798,000,000 due to strong contributions from our own divest, our own and third party business as well as asset managers. The net investment result of the insurance portfolio for own risk increased to CAD 2,600,000,000 as a result of higher net capital gains. This increase was primarily driven by realizations due to tactical shifts in our investment portfolio. However, we have used those to strengthen the policyholder reserve.
Net insurance benefits and claims increased to SEK 8,100,000,000 mainly due to threats. Policyholder participation grew to SEK 1,100,000,000 due to higher realized gains on bonds in Switzerland. Overall, we have strengthened in technical reserves and policyholder bonus reserves by about €600,000,000 Please note that final policyholder participation and reserve strengthening is determined at the end of the financial year. Operating expenses were up by 11% to SEK 1,500,000,000 mainly due to higher commissions and growth initiatives in our asset managers business. Profit from operations increased to €801,000,000 The major driver of this increase was the improved fee results.
Borrowing costs decreased to €71,000,000 This is mainly due to the convertible bond that was fully converted at the end of last year. We also had an overlapping effect in the first half of twenty seventeen from the early refinancing of the EUR 590,000,000 denominated bond. Our income tax expense increased in line with our profit to SEK169,000,000. This corresponds to an effective tax rate of 23 percent. Finally, our net profit was up by 7% to EUR 561,000,000.
Slide 7 shows the one offs in our profit from operations. On the left hand side, you can see the restructuring costs and the currency translation effect in the 1st 6 months of 2017 to obtain a comparable basis. On the right hand side, we adjusted the 2018 half year profit from operations for restructuring costs of SEK 2,000,000 and for program costs related to a new accounting standard of SEK 5,000,000 Adjusted for these one offs, the profit from operations increased by 3% to SEK 808,000,000. Dollars Moving now to the second results. Let me start with Switzerland on Slide 8.
Premiums were up by 3% to CHF 6,100,000,000 The overall market decreased by 1%. In Individual Life, premiums declined by 1%, while the market was flat. Single premiums decreased by 7%, while periodic premiums grew by 2%. Premiums in Group Life increased by 4%. Single premiums grew by 9%, primarily coming from existing clients.
Periodic premiums were flat. The overall market was down by 1%. We continue to successfully offer semi autonomous solutions where new business production was up by 36%. The share in our new business production was 30%. Moreover, assets under management in our investment foundation grew by 12% to SEK 8,400,000,000 dollars compared to $7,500,000,000 at the year end 2017.
Fee and commission income increased by 9% to CAD 125,000,000 due to Swiss Life Select, our real estate brokerage and the sale of mortgages and investment solutions to private clients. Operating expenses decreased by 1% to 190,000,000 as we continue to focus on strict cost management. The segment result improved by 4% to EUR 439,000,000 as a result of higher savings, fee and cost results, while the risk result was stable. The fee results increased by 21 percent to CHF 14,000,000 Our owned IFAs, the real estate brokerage and pension consulting business as well as the sale of 3rd party products contributed to this. The value of new business increased by 15% to CHF105 1,000,000.
This is mainly due to the improved business mix in individual life with a higher share of periodic premiums and the higher volumes in the assumed reinsurance business. The ongoing selective underwriting in Group Life resulted in lower volumes with higher profitability. The large transactions in assumed reinsurance, though clearly priced above our ambition level of 1.5%, led to a decrease of the new business margin from 2.9% to 2.6%. Turning now to France. Please note that all figures quoted are in euros for our insurance segments, France, Germany and International.
In France, premiums increased by 15% to $2,600,000,000 in a market that was up by 5%. In our Life business, premiums were up by 24%. We benefited again from our strong positioning in the high net worth individual and affluent client segments, our attractive unit linked product offering as well as the high quality of our distribution network. The overall market for both traditional and bank insurers was up by 6%. The Unit Linked share in our life premiums increased to 54%, which is again substantially above the market average of 30 percent.
Net inflows amounted to €900,000,000 with a unit linked share of 74%. Total market net inflows amounted to $12,200,000,000 driven by the unit linked business. In health and protection, premiums increased by 1%, while the market was up by 4%. Our P and C premiums remained stable in a market this was up by 2%. Fee and commission income increased by 8% to 100 and and $41,000,000 as a result of the strong unit linked business and increasing banking fees.
Both reported strong net inflow. Operating expenses grew by 2% to €149,000,000 Efficiency improvements were offset by the strong business growth. The second result declined by 3% to 130,000,000 This is primarily due to the lower savings result in the Non Life business and the lower cost result in line with the strong new business growth. The fee result was up by 25% to 37,000,000 dollars due to a higher contribution from the unit linked business and from banking. The value of new business increased by 26% to $61,000,000 The continued high share of unit linked business, increased volumes in life and health business with related efficiency gains on acquisition expenses as well as the lowered future tax rates contributed positively.
As a result, the new business margin improved to 2.6 percent. Moving on to Germany on Slide 10. Premiums increased by 2% to 5 $89,000,000 primarily due to higher periodic premium with visibility at modern traditional products. The overall market was up by 4%. Fee and commission income grew by 17% to $198,000,000 due to a positive contribution from our owned IFAs and higher policy fees.
Our owned IFAs increased their revenues by 16% on a standalone basis. The number of financial advisers was up by 9% year over year. Operating expenses decreased by 3 percent to €93,000,000 Staff costs increased due to the strong new business growth, but were more than offset by lower expenses for professional services. The segment result increased by 22% to €79,000,000 dollars primarily due to a higher fee and cost result. Please note that this is an unusual strong first half result.
I do not expect a linear development in the second half of the year. The fee result was up by 26 percent to $41,000,000 based on a substantially higher contribution from our owned IFA. The value of new business increased by 19% to $22,000,000 as a result of higher new business volumes, in particular for our modern traditional products. Moreover, lowered guarantees led to a considerably increased new business margin of 3.7%. Turning now to the International segment on Slide 11.
Premiums declined by 17% to $810,000,000 mainly due to lower single premiums with private clients that have more than offset the positive premium development in the corporate clients business. Assets under control with private clients remained stable at 17,600,000,000 dollars as new deposits offset surrenders. Fee and commission income was up by 2% to 106,000,000 dollars primarily due to the growing commission income from our owned IFAs in the UK, partly offset by a negative FX translation impact. Operating expenses decreased by 1% to 44,000,000 The second result increased by 26 percent to CHF 29,000,000 due to the positive development of the risk and fee result. The fee result grew by 17% to CHF 20,000,000 driven by higher gross margins at our owned IFAs and at our business with private clients.
The value of new business decreased by 14% to CHF 10,000,000 dollars as a result of the reduced new business production with private clients, which was only partly offset by a higher contribution from corporate clients. The new business margin was stable at 1.4%. Let's move to our Asset Management segment, which reports in Swiss francs on Slide 12. Asset Management's income was up by 3% to CHF 326,000,000 PAM income grew by 5% due to an increased real estate asset base and the related property and portfolio management fees. TPAM reported income growth of 2%.
Recurring fees increased due to the growing asset base, while transaction fees and net income from real estate project development were significantly lower. Overall, nonrecurring transaction fees and the net income from real estate project development accounted for 15% of total income in the first half of twenty eighteen compared to 21% in the prior year period. Operating expenses increased by 12% to $179,000,000 due to business growth in paired EPAM, mainly in the real estate business and the negative FX translation effect. The segment results decreased by 4% to EUR 118,000,000. PAM increased its second result by 7% to EUR 94,000,000 based on higher income at stable costs.
TPAM reported a decline in its segment results to CHF 24,000,000 This is entirely due to lower transaction fees and net income from real estate project development in combination with higher operating expense. We expect higher transaction fees in the second half of this year as we have several real estate transactions and projects in the pipeline. Net new assets in our TPAM business amounted to SEK 3,700,000,000. We saw strong net inflows of SEK 1,600,000,000 in balance mandates, SEK 1,400,000,000 in fixed income and SEK 1,300,000,000 in real estate that more than outweighed the €1,200,000,000 money market outflow. Excluding money market funds, net new assets were $4,800,000,000 compared to $3,800,000,000 in the prior year period.
Overall, assets under management at our TPAM business now amounts to SEK 64,600,000,000. Total assets under management were up by 1% to CHF 225,100,000,000 mainly due to the mentioned net inflows in TPAM and despite a negative FX translation effect. Let's move back to the group and have a look at our operating expense. Our overall cost base increased by 11% to EUR 1,500,000,000 due to the higher commissions and growth initiatives in our asset managers business and the currency translation effect. Operating expenses adjusted for restructuring charges, scope changes and program costs for a new accounting standard increased by 1% to EUR 739,000,000.
Dollars We are pleased with the expense development in our insurance segments that reported stable operating expenses of €552,000,000 Turning now to the investment results on Slide 14. Our direct investment income was up by €49,000,000 to €2,200,000,000 supported by higher dividends on equity investments and an increasing rental income on our real estate portfolio. The non annualized direct yield remained stable at 1.5 percent given a higher average asset base. Please note that we kept the half year direct yield stable for 4 years in a row. The net investment result increased to EUR 2,600,000,000 due to higher net capital gains.
We reduced our exposure to long dated U. S. Dollar denominated corporate bonds given a flat yield curve, tight credit spreads and high FX hedging costs. This led to higher realized gains on bonds. Moreover, valuation of our equity hedges increased and was only partly offset by realized losses on equity.
We also reduced our private equity exposure and thereby realized gains. Overall, all those effects more than outweighed lower revaluation gains on real estate and higher FX hedge income. Our total investment result, including changes in unrealized gains and losses on investments, decreased to 0.3% on a non annualized basis due to slightly higher interest rates and the spread widening. Slide 15 shows of our investment portfolio. The share of bonds decreased to 59.5% as a result of the already mentioned portfolio shift from long dated U.
S. Dollar denominated bonds into euro bonds and lower valuations. We have increased our gross equity quota to 8.1% in order to benefit from attractive dividend yields. Our net equity exposure slightly increased to 3.6%. The share of real estate increased to 18.7%, real estate revaluations of 0.3% and further net acquisitions of 1,300,000,000 contributed to this.
Sorry, real estate revaluations of SEK 3,000,000,000 and further net acquisitions of SEK 1,300,000,000 contributed to this. The risk premium on real estate remains very attractive. We kept our duration gap below 1 and our foreign currency exposure on the insurance portfolio is hedged. Let's have a look at our insurance reserves on Slide 16. Our insurance reserves, excluding policyholder participation liabilities, were up by 2% in local currency to €160,400,000,000 given net inflows of €2,000,000,000 accrued interest and market movements.
In Switzerland, insurance reserves grew by 1%, while they were up by 3% in local currency in our French business. Our German and international businesses both reported an increase of 1% in local currency. Turning now to our shareholders' equity on Slide 17. Shareholders' equity decreased by 5% to SEK 14,700,000,000. The main drivers were lower unrealized gains on bonds and equities and the dividend paid to shareholders.
Those effects were offset by the net profit attributable to shareholders. Moving on to an update on the progress of our Swiss Life 2018 program. This is Slide 18. We are well on track to achieve or exceed our Swiss Life 2018 target. Let's first have a look at the development of our fee business on Slide 19.
I'm very pleased with the 11% growth of the commission income from our own divest. All units contribute to this, especially our German market unit. The business with our own and third party products and services increased by 6% in local currency, primarily due to the higher unit linked banking fees and banking fees in France. And finally, commission income at Swiss Life Asset Management was up by 2% in local currency. Overall, our fee and commission income increased by 10% in local currency to 7.90 8,000,000.
This led to an improved fee result as shown on Slide 20. The fee result increased by 6% to SEK 248,000,000 This increase is due to the strong contribution from all our insurance segments. As already mentioned, our Asset Management business reported a lower fee result. Our next slide shows that we continue to benefit from our disciplined asset and liability management. We are particularly pleased with the resilience of our direct investment yield in this challenging environment.
This is demonstrated by the dark red line and shows stable non annualized direct investment yields of 1.5 percent for the past 4 years, supported by an increasing real estate and equity portfolio. Moving on to the average technical interest rates on Slide 22. In the 1st 6 months of 2018, we further strengthened the technical reserves, which led to a decrease in the average technical interest rates by 3 basis points. In addition, the shift to a more favorable business mix led to a further reduction of 1 basis point. Overall, our average technical interest rate for the Swiss Life Group decreased by 4 basis points to 1.33% as of June 30, 2018.
We are happy that we were able to reduce the technical interest rate in Switzerland to below 1, I. E. 99 basis points. This means that we have again successfully protected our interest rate margin. Turning to the value of new business and the new business margin on Slide 23.
Our ongoing margin management efforts and the product shifts continue to pay off. We slightly increased our new business margin to 2.6%, which is considerably above our ambition level of 1.5%. The strong new business production and the continued focus on capital efficiencies such as the reduction of guarantee levels in Germany, the selective underwriting in the Swiss Group Life business and the ongoing high unit linked share in France safeguarded our remarkable margin level. Overall, our value of new business further increased to CHF 212,000,000 from CHF177,000,000 in the prior year period. Let me now move on to our operational efficiency.
As of June 30, we have already implemented EUR 99,000,000 of our Swiss Life 2018 cost savings initiative and are very close to the target level of EUR 100,000,000. All units contributed to this as you can see on the slide. Our next slide showed our efficiency ratios. We further improved our efficiency ratio by 1 basis point to 27 basis points. Polytrion segments contributed to this positive development.
Turning to capital, cash and dividends on Slide 26. And you can see that on January 1, 2018, our Swiss solvency test ratio was at 170 percent as filed with FINMA based on our internal model approved with conditions. On the right hand side of the slide, you can see the respective SSD sensitivity. As of June 30, 2018, our SST ratio was above 170. Overall, capital market developments evened out.
We had a positive impact from the hybrid bonds issued in March. As of today, the ratio is slightly higher due to positive capital market movements since June. Our Solvency II ratio was above 200% on the 1st January 2018. This Solvency II ratio is based on the standard model excluding any transitional measures. Slide 27 shows our capital structure.
You can see that our total debt outstanding amounts to $4,200,000,000 Our total hybrid debt increased from $3,200,000,000 to 3,700,000,000 as we issued SEK 600,000,000 of hybrid debt in March 2018. Part of this will be used to redeem a SEK 300,000,000 bond due on the 22 August 2018. The capital structure and maturity profile continue to be well balanced with a diversified denomination of debt in Swiss francs and euros. Let me now move on to the cash remittance on Slide 28. In the first half of this year, we remitted already EUR 657,000,000 of cash to the holding capital.
Since 2016, on a cumulative basis, we have so far remitted €1,900,000,000 of cash to the holding. This is already exceeding our 2018 target level of EUR 1,500,000,000 Let me sum up. We have again reported a strong set of results in the 1st 6 months of 2018. We have further increased fee results and improved the quality of our earnings. We are on track to exceed our Swiss Life 2018 targets.
We are also very pleased with our value of new business. On a cumulative basis, we are already ahead of the 2018 target level. We have continued our strict cost discipline. We have increased our cash remittance to the holding company through disciplined capital management. On a cumulative basis, we have already exceeded our 2018 target.
Finally, our return on equity was 9.7% and thus within our target range. We will continue throughout 2018 with our disciplined execution of the Swiss Life 2018 program. I can confirm that we are well on track to achieve or even exceed all our 2018 financial targets. Thank you very much. And back to you, Patrick.
Thank you, Thomas. Dear investors and analysts, the floor is now open for questions. Who would like to go first?
The first question from the phone comes from the line of Mr. Peter Iliad with Kepler Cheuvreux. Please go ahead, sir.
Thanks very much. The first question was on asset management actually. I mean, you gave some good comments, Thomas. I'm just wondering if you can sort of quantify those anymore. I mean in terms of the pipeline that you're
seeing for H2, can you confirm that that would sort of
TPAM result? And I guess more generally, the earnings from the Asset Management division haven't maybe quite kept pace with the AUM development. I'm just wondering whether you can give us any comments on the outlook or how you'd be modeling that if you were in our position? And second question was on the solvency ratio. The I mean, you're on a gross basis as of the 1st January number, we I unless Finn has given the guidance that I'm not aware of, I would hope and expect that you might be able to move to a net basis at the full year.
Just wondering if you're able to quantify what that move is worth to you at all or give us any better guidance there?
Peter, I did not understand this net basis that you mentioned
on the end of
the year. You include policyholder capital bonuses, which obviously don't
I understand. Okay. Yes.
Thank you. And the third question was, I was probably optimistic, but just wondering if you can give us any update on the U. S. Tax situation or any guidance on when we might hear anything? And if I can be very cheeky and I just ask for just a quick clarification point.
Thomas, obviously, I'd be very sorry to see you move on. I wasn't completely clear from the statements from Patrick's what Patrick said at the start whether you would still be involved with Swiss life after March next year. I was wondering if you could just clarify that. Thank you very much.
So on the U. S. Tax situation, there is nothing new to report here. And for the other questions, I hand over to Thomas.
First and last question about my personal decision. I'm looking forward to do something else and stay tuned. Of course, in due time, I will inform what this may be. On the asset management, pipeline, the SG and A, the pipeline is really full. And you have seen you've heard that last year, we had overall in Asset Management 21% of our fee income of transaction fees or project development results.
And this year on year, in the first half, it was only 15%. We expect, on this basis, a catch up in TPAN, yes. Then on the solvency ratio, the solvency ratio next year will be based on the standard model starting Oneonetwenty 19. And it will still be on a gross basis. The projection of the BVG business is shortened in this.
There is currently still the field test ongoing. Actually, it's individual Life business. We can look optimistic into the future because so far, we have clear indication that FINMA has kept its promise that this new model will not lead to higher capital requirements. On the U. S.
Tax, you have responded on.
Thank you very much. Can I just ask just one follow-up on that loss on the solvency, Thomas? If you're saying you're staying on a gross basis, my understanding was that everybody would be working on the same basis on the new standard model. Obviously from 1st January everybody else was on the net basis. Yes.
Yes. Everybody else will also be on the gross basis starting 1st January, 2019.
Okay. Thanks very much. And you're not able to give us any sort of quantification of what the difference means to you or what you would have been if you don't?
Stay tuned. We will give more granular updates at the Investor Day. But I said already, I'm thinking of, I'm very optimistic and I'm very seldom optimistic when it comes to FINMA. I'm very optimistic that the number will look good.
That's great. Thank you very much.
The next question from the phone comes from the line of Mr. Michael Huttner with JPMorgan. Please go ahead, sir.
Fantastic. Thank you very much. Well done for achieving or beating 3 years of strategic plans, Thomas. Really well done. It's fantastic.
And also beating my estimates today, but that's me being too pessimistic rather. And on three questions, please. The first one, the total assets under management in Key Pan, the CHF 64,000,000,000 how much is money market? Just to get a feel for how much more switching there is. The second, the risk margin target is the only one of your earnings and earnings growth targets where you're on track rather than ahead.
And I just wondered if you can give a little bit of granularity. My feeling is Germany is missing and Switzerland is beating, but it's just a feeling. And if I may have 2 more questions. One is, what do you think the government will do on the guaranteed rate for group business? And then the final one is, can you say anything on capital management?
It doesn't seem to be any source of pressure you're achieving near the top end of your target ROE of 8% to 10%. But I just wondered if what you can say on this at the moment. Thank you.
Okay. On the just have this usual half year effect where the ROE is always a little bit higher at the first half of the year. We've had that for a very long time now, and I'd expect that to persist. And the government, we don't have any indication yet on what will happen on the minimum rate. And for the other 2, I hand back to Thomas.
Yes. First on the TPAM assets under management, if you go to Page 50 of the booklet, 50, there you see the split. And when I do the math correctly, breakdown by asset class, SEK 5,900,000,000 is in money markets. It's the 9% that you see there. And then there was the question on the risk result.
In the first half, the German risk result was a little bit light. However, compensated by more than compensated by a very nice cost result, the fee result in Germany, you've seen. Switzerland is so far is in line. Overall, what we said was that we want to keep the risk result within a EUR 350,000,000 to EUR 400,000,000 range. And so far, every year, we were at the upper end of this range.
And therefore, I'm pretty positive that at the end of this year, we will also be at the upper end of this range. We will, of course, again, discuss what we will do in the area of risk products at the Investor Day.
Thank you. And on any thoughts on capital management?
On capital management, of course, we have a substantial growth of our shareholders' equity and the profits have not kept track with the development of the shareholders' equity. Having said that, we have also started to increase the payout ratio. And I also said in many conference calls or meetings that we will revisit the payout ratio and give more updates on capital management at the Investors Day.
Excellent. Thank you very much.
The next question comes from Jonny Urwin with UBS. Your line is now open. Please go ahead, sir.
Hi, good morning. Thank you. Thomas, sorry to see you, but we wish you well. So three questions from me. So firstly, is there any change in your underlying view of the fee result growth potential after today's results?
Obviously, 6% growth is a bit slower than we used to, but of course, there are lower transaction fees in there. And if you adjust for those, I think the level is still double digits. So is there any change in your underlying view there? Secondly, please could you update us on the dynamics in the group life market after AXA's move earlier this year? I see there's a bit more growth in there in 1H, but it sounds like that's driven by existing clients.
So are you seeing any attractive new business opportunities? And finally, any further updates on the regulatory front, in particular, how are discussions going around obtaining diversification benefit between market and credit risk?
So thank you for the questions. So we don't see any changes in the underlying dynamics of the fee results. As mentioned, we expect some catch up in the TPAM because of the transaction fees that are very likely to be higher. And please note that we also had a very good diversification of our fee results. So the drag that we saw in asset management in the first half was more than made up for by the other sources of fee results.
Now in Group Life, I wouldn't expect anything to happen already in as a reaction to our competitors' discontinue of offering group full group coverage already this year. So because there are always quite significant lags in this development, so I'd expect to see the realization of some growth opportunities here over the next year or even the year after that. And on the regulatory front, as Thomas has just indicated, we're making good progress in many areas, but not on the diversification of market and credit risk. So there is it's very unlikely that we'll make further progress here as FINRA is very tough on this subject.
Okay. Is that a change versus the last update? I guess you finished the expectation a little bit at Q1, but it sounds like it might be a little less likely than that.
No, it was always difficult. The discussion of this topic was always very difficult. And we our expectations were low. And so far, our low expectations are confirmed, at least on this topic.
The next question comes from Daniel Bischoff with Baader Helvea. Please go ahead, sir.
Thank you and good morning. I have also three questions. The first one is on France. I was a bit surprised to see an earnings decline given the unit enjoys quite strong momentum. Could you explain here a little bit why the savings result decline?
Is it simply the effect of the low rate environment in P and C? Or are there also some losses? And then could we also quantify the impact of the new business strain? Secondly, on M and A, I mean, one out of 2 areas you see as potential for inorganic growth is the independent financial advisor business. Could you remind us what are the key criteria here that such an asset has to tick?
And then the last one is just, I mean, you reported a reinsurance transaction. Could you provide some more details here? I'd be interested to know what sort of underlying exposure you wrote here and what the client's motivation was?
Okay. Let me start with the reinsurance. The reinsurance transaction, we are a player in the reinsurance. We accept retrocessions from large reinsurance companies. I've mentioned this because it is very capital efficient to write mortality and longevity business on our balance sheet.
As you know, our balance sheet is dominated by market risk and as we have the diversification benefit, when we write longevity and mortality business, we are using this. What our strategy is that we will only take on account on our balance sheet if the primary reinsurer keeps skin in the game. So we will not take the full risk. We will only share with them in taking risks. And these are usually are only the big ones.
So for example, we have quite some business with a normal read with SCOR and the usual suspects. So it's big reinsurers. We have written longevity swaps this year in the first half and 2 big accounts. And so far, we are very optimistic and it gave us a substantial boost into our new business value in the first half. So that's the reinsurance business.
Of course, we're also writing mortality, but that's not the same big accounts as mentioned on the longevity side. Then on the French earnings decline in the first half, the major reason or the main reason was that last year we had in the first half, so it's a basis effect, we had most of our realized gains or our investment income in the first half in the Non Life and in the Health business. And these two companies do not have policyholder participation. And therefore, there was an unusual high investment income in the first half of last year in the French market unit. And at the same time, this year, we did not see the same amount of investment income in these 2 nonparticipation companies.
And that's why we had a negative effect. I expect to catch up towards the end of the year. Clearly, in the French market unit when it comes to the bottom line. Of course, there was also I mentioned it in my speech, an effect of the very strong new business and therefore the cost result was lighter than last year was more negative. And then on the M and A criteria for acquisitions, we clearly go after fleet business.
We need, on the one hand, strategic fit. We need something that meets our hurdle rates when it comes to a net present value generation and we need something that also fits our geographic criteria. And we are not on M and A's pre, I mentioned this all the time. But yes, we are looking into assets. You have seen our recent announcement of acquiring Beos, the German real estate developer, where we are close to closing.
And of course, we may also look at areas like own diaphase.
Okay. Thanks very much.
The next question comes from Andrew Sinclair with Bank of America Merrill Lynch. Please go ahead, sir.
Good morning and thanks everyone. Just a couple of
things for me. Just a final
point of clarity on Swiss Life Asset Managers. Just wondered if you could give us color just on whether there has actually been any underlying margin pressure? Or have margins just been steady? It was just those one off factors of individual fees. I wonder if you could also just give us a bit more clarity on that reinsurance point you were just making there.
If you could quantify the longevity exposure you've taken on. And actually, sorry, a third one for me as well is just if you could give us any guidance on reserve strengthening for the full year? Thanks.
Okay. So on Asset Management, yes, there is a little bit of margin pressure outside of real estate products as seen by many other asset managers. But as we've just mentioned before, by far the absolutely dominating driver was the effect on the lower non recurring income in the first half, I. E. The effect that Thomas mentioned that only 15% of the income of asset managers was in fact nonrecurring, I.
E, are primarily real estate transaction fees. And the other question, Thomas?
On the longevity swaps, we do not disclose the size of the contracts, but the nature is very similar to disposals that we already have on our books. And as I said, it's very capital efficient. Therefore, capital consumption is minor. And the third question, I did not understand.
Just you're mentioning that kind of the reserve strengthening discussions happened towards the end of the year. I just wonder
if you've got able to
give any guidance at this stage on
Yes. Okay. We have put 600,000,000 euros about half into lowering the technical rate and the other half is in the policyholder participation reserve. And when I mentioned in my speech that the final reserve strengthening will only be determined at year end, This means that this plate may change at year end.
That's appreciated. Thank you.
The next question from the phone comes from the line of Mr. Stefan Schurman with Bank Von Taubel. Please go ahead, sir.
Yes, good morning. Just two questions. First one on the IFA growth. Maybe just can you explain me why or where the drivers have been of this strong growth maybe by counties or by products? I think it doesn't match with the growth of underlying customer relationship management?
And the second one on the average guarantees, you have decreased them a lot over the last few years standing at 1.33 3% now or even below 1% in Switzerland. So I mean, are you happy now with that level? Or do you need or want to go further here going forward?
Maybe on the last question first. I mean the amount of strengthening here depends, of course, also on the asset allocation. So for example, if we have realized gains as we did in the first half, where we lower than the expected further yields expectations, we also then have to lower our average technical rates. But with the existing portfolio and the existing level of rates, this is exactly where we should be. And yes, we're happy with the amount of reserve strengthening done throughout the last couple of years.
And maybe then on the some more color on the ISA growth, I'll hand over to Thomas. It's a combination of growth productivity growth and of growth in the number of sales advisers, but Thomas has the details.
Yes. As I mentioned in my speech, the main driver of the 11% growth was Germany, where we grew almost 16% standalone. The reason there is substantially higher productivity, but also 9% more advisers. For us, it's really moving very nicely in Germany. I think a lot of investments that we made in the past are now bearing fruit.
Then in Switzerland, we have about 3% growth of the returns in the financial advisor space here mainly driven by productivity growth. Then in France, 6% in international, 7.5%, but this was entirely driven by the UK. And in the UK, we have acquired Medical Money Management, a small IFA that we have integrated already into Chase the Bear. So these were the main drivers of our growth. Product wise, it's a little bit different country by country.
Of course, the French market is clearly the unit linked business that is being sold. In Germany, it's actually across the board, moving very nicely. So that's more or less what we can say.
Okay. That's very helpful. Thank you.
The next question comes from the line of Mr. Ralf Hepburn with KBW. Please go ahead, sir.
Hi, guys. Good morning. Ralf Hepburn from KBW. Just a few things to clarify. First of all, would you be able to comment a little bit on the expense development in Asset Management?
But I know the basis has, I think, shifted because you now include the income from real estate project development, whereas previously you did not, if I understand this correctly. Nevertheless, it appears as if the cost to income ratio in TPM segment has increased further and perhaps is now out of line with the target which you originally indicated at the Investor Day. So just any commentary to put that dynamic into perspective would be helpful. And second, the gains harvesting. Can you just perhaps add some color on your reasoning why you harvested gains of that order of magnitude now?
Was it opportunistic? And then could you just sorry for that, repeat what you did with it? You did say, Thomas, €300,000,000 I think went into the pre shareholder reserve, but I didn't hear what happened to the rest. And is there any element of that gain which made it into net earnings? Thank you, Raj.
These are the 2 things.
Okay. So yes, I can confirm that our 3rd party asset management cost income ratio is above the indication that we gave, and we expect a strong catch up in the second part of the year to get that back in line. And on the gains, here we sold $3,600,000,000 of long dated U. S. Corporate bonds.
We sold those because of the very flat yield curve and for and because of the very tight credit spreads at the beginning of the year. And we reinvested those proceeds into hedged equities on the one hand, into shorter dated euro corporate bonds and into some much smaller quantity into some U. S. Municipal bonds. And on the realized gains, Thomas just mentioned that we put that on the one hand into the reserve strengthening, about half of it because of the lower expected yields in the future.
We have to readjust our reserving rates on the one hand and on the other hand, the other half went into the bonus reserves and we will decide on that fate at the end of the
year. Okay.
And did yes, just to clarify, did any of the realized gains make it into net earnings or is it just completely neutral?
It's more or less neutral. The only area where you do see that is in Group Life because here the legal quote works on a gross basis. So the top line is relevant. So here, yes, you did have some positive effects on the Swiss Group Life profitability. But because the legal quote is 90 at least, the effect is not very big.
But yes, you did see some of the, I believe, 15,000,000 in increase in the savings result or in the segment result in Switzerland comes from the savings result.
But most of the realizations were in individual life and not in group life. On the costs in Asset Management. First of all, when you go to Page 13, you see at the bottom, the cost development plus 8% on a like for like basis. However, this SEK183 1,000,000 is not currency adjusted. Therefore, we have a currency effect of about SEK 8,000,000 on this.
So about SEK 8,000,000 of the cost increase is currency effect. Then there is also a substantial part that comes from our investments into the various real estate initiatives. And you have to understand that especially in real estate, you cannot operate with a usual cost income ratio. We mentioned this many times. As we invest into real estate projects, we have to hire people to run these projects.
And usually, the project on the project, we make a realized gain at the end of the project when we sell it off, for example. And of course, there are some pre investments in here in these projects and that's why and this is actually what is a substantial amount when I look at it. This was one of the reasons why we see this substantial growth on the asset management costs. We think that these investments are worthwhile. We think that this will enable us to further grow asset managers and TPAN business.
Excellent. Thank you very much.
The next question from the phone comes from the line of Mr. Frank Kopfinger with Deutsche Bank. Please go ahead, sir.
Yes. Good morning, everybody. I have two questions. My first question is also on the investment income. Looking at the flip side of this on the direct yield, on the flip side of the realized gains, Given that you sold long dated corporate bonds and you reinvested into equities, dividend season is mainly over.
You reinvested also in shorter duration euro bonds. Would you expect that you that we see a negative effect on the direct investment income going forward? And then second question is on the German Life business. There's a discussion and probably I think a high possibility that the provisions paid on life insurance in Germany will be limited going forward. Do you think this or how does this affect your IFAs in general and also the way you distribute life policies maybe in the future and ultimately your fee income there?
On the last question, please bear in mind that we specialize on also on biometric risk products in Germany, which are not affected by this regulation. The regulation holds for retirement savings products. And yes, of course, there is a certain risk here as there's always been a certain risk that we see continued regulatory tightening on that side. We if everything comes through as we expect, yes, we do expect some pressure on the overall fee level compared to if it have not come about. But on the other hand, we're very well positioned in terms of productivity gains and also in terms of the further consolidation in this space.
Many people are exiting the business and we have a very good platform here to take on new advisors, productive advisors. So I continue to be optimistic for the growth of our fee business in Germany for the reasons I just mentioned. Then on the direct investment income, yes, we do expect some pressure on the direct investment income. Please remind you, we used to give guidance that we expect a dilution of around 10 basis points per year for quite a number of years. So far, we've been able to protect that.
We've had 1.5% 4 years in a row now, but we do expect some lowering of the direct investment income. On the other hand, of course, because hedging costs are much, much higher in U. S. Dollars than in euros, we have some benefits on the hedging cost side. But overall, yes, the effect as this has been a risk reduction, we also expect some pressure on the direct investment income.
But I don't expect this to be, let's say, sizes or all the important size.
Perfect. Thank you.
We have a follow-up question, which comes from the line of Mr. Michael Huttner with JPMorgan. Please go ahead, sir.
Thank you very much. Two questions. The first one is on in Germany. Is there there's likely to be a reform of the ZZR calculation. And I just wondered how that might impact Swiss Life and the earnings in Germany.
And the second, a little bit cheeky question is, we've now had news that you, Mr. Busse, have decided to leave after you report the full year results. Is there any other kind of impending or deferred or whatever change in the management team, which we could expect? Thank you.
Well, on the second question, there is nothing to report here. And on the first question, on the ZZL, well, we've been hoping for some reform or let's say, the insurance industry in Germany has been hoping for some reform on the ZZL for quite some time, but the political process has been dragging on. And we have very limited visibility now after the summer vacation on what will happen. The impact for us is actually quite limited as it has been quite easy to cover the ZEP You could even say on the contrary, because we've realized some gains in the past to cover the ZZL. You've had some benefits on the IFRS profit in Germany.
As you know, the ZZL is only a local statutory reserve and not an IFRS reserve, whereas some of the realized gains in the past have affected our IFRS net profit positively. So overall, we at Swiss Life are quite relaxed. What this decision is concerned simply because we have a very long duration asset portfolio with the gains we need to cover the with the unrealized gains, we need to cover any etcetera requirements, even if there is no reform.
The next question is another follow-up question from Mr. Hebgen with KBW. Please go ahead, sir.
Yes. Hi, it's me again. Sorry, just a short follow-up. In light of the realized capital gains, you give us any sort of guidance or indication of where you see perhaps the savings results to go on a year on year basis? So in 2018, is it going to be likely to be higher or at the same level as 2017, that sort of indication?
I'm pointing to Patrick and Patrick is pointing to me, which means that we do not give forward looking guidance.
Okay. Excellent. Thank you very much for pointing this out.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Frost.
Well, ladies and gentlemen, that brings us to the end of our phone conference. Thanks for taking part, and I wish you a wonderful rest of the summer All the best and see you very soon. Goodbye.
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