Welcome to the Swiss Life presentation of the half year results 2018 conference call and live webcast. I'm Iruna, the call operator. I would like to remind you that all participants will be listening only remote, and the conference is being recorded. After the presentation, there'll be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions in writing via the relevant field. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Patrick Frost, Group CEO of Swiss 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's not business as usual for us, i.e., simply presenting the details of our performance over the first six months of the year. We didn't just disclose our figures today. We also announced that Thomas Buess, our CFO, will hand over to our Chief Risk Officer, Matthias Aellig, with effect from March 1st, following 10 highly successful years in that position. It was Thomas's 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 Buess's work.
After all, he will continue to serve Swiss Life as CFO through our Investor's 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 Buess deserves a great deal of credit for our successful completion of three 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 here and now, let's take a look at the Swiss Life key figures for the first half of 2018. Our half year results fit seamlessly with the strong progress we have made over the past few years.
Thomas Buess will present the figures to you in more detail following my brief introduction. We maintained our good performance in the first six months of 2018 and became another step closer to the successful implementation of our Swiss Life 2018 group-wide program. At CHF 561 million, net profit was up 7% relative to the corresponding prior year period. We increased adjusted profit from operations by 3% to CHF 808 million. One highlight that stands out for me among these good results is the fact that we increased fee income by 10% to CHF 798 million and raised the fee results to CHF 248 million, 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 four insurance units. Our premiums increased by 4% to CHF 10.7 billion in the first half year.
We increased the direct investment income by 2% to CHF 2.24 billion. The non-annualized direct investment yield was stable at 1.5%. In our third party business, we achieved net new assets of CHF 3.7 billion. As a result, assets under management for third parties amounted to CHF 64.6 billion 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 CHF 212 million. The new business margin, meanwhile, remained at the prior year level of 2.6%. Last but not least, the adjusted return on equity came to 9.7% in the first six months. 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 three 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 first six months of 2018. Please note that all figures quoted are in CHF unless I state otherwise. Let me start with an overview of our P&L on page six. Gross written premiums, fees, and deposits increased by 4% in local currency to CHF 10.7 billion. All insurance segments except our international market unit contributed to this. Fee and commission income increased by 10% in local currency to CHF 798 million due to strong contributions from our own life phase, our own and third-party business, as well as Asset Managers. The net investment result of the insurance portfolio for own risk increased to CHF 2.6 billion as a result of higher net capital gains. This increase was primarily driven by realizations due to tactical shifts in our investment portfolio.
We have used those to strengthen the policy holder reserve. Net insurance benefits and claims increased to CHF 8.1 billion, mainly due to France. Policyholder participation grew to CHF 1.1 billion due to higher realized gains on bonds in Switzerland. Overall, we have strengthened technical reserves and policyholder bonus reserves by about CHF 600 million. 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 CHF 1.5 billion, mainly due to higher commissions and growth initiatives in our Asset Managers business. Profit from operations increased to CHF 801 million. The major driver of this increase was the improved fee results. Borrowing costs decreased to CHF 71 million. 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 2017 from the early refinancing of the EUR 590 million denominated bond. Our income tax expense increased in line with our profit to CHF 169 million. This corresponds to an effective tax rate of 23%. Finally, our net profit was up by 7% to CHF 561 million. Slide seven 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 first six 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 CHF 2 million and for program costs related to a new accounting standard of CHF 5 million. Adjusted for these one-offs, the profit from operations increased by 3% to CHF 808 million. Moving now to the segment results.
Let me start with Switzerland on slide eight. Premiums were up by 3% to CHF 6.1 billion. 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 CHF 8.4 billion, compared to CHF 7.5 billion at the year-end 2017. Fee and commission income increased by 9% to CHF 125 million 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 CHF 190 million as we continued to focus on strict cost management. The segment result improved by 4% to CHF 439 million as a result of higher savings, fee, and cost results. While the risk result was stable. The fee result increased by 21% to CHF 14 million. Our own IFAs, the real estate brokerage and pension consulting business, as well as the sale of third-party products, contributed to this. The value of new business increased by 15% to CHF 105 million. 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 EUR 2.6 billion 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%.
Net inflows amounted to CHF 0.9 billion, with a unit-linked share of 74%. Total market net inflows amounted to CHF 12.2 billion, driven by the unit-linked business. In health and protection, premiums increased by 1%, while the market was up by 4%. Our P&C premiums remained stable in a market that was up by 2%. Fee and commission income increased by 8% to CHF 141 million as a result of the strong unit-linked business and increasing banking fees. Both reported strong net inflows. Operating expenses grew by 2% to CHF 149 million. Efficiency improvements were offset by the strong business growth. The segment result declined by 3% to CHF 130 million. 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 CHF 37 million due to a higher contribution from the unit-linked business and from banking. The value of new business increased by 26% to CHF 61 million. 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%. Moving on to Germany on slide 10. Premiums increased by 2% to CHF 589 million, primarily due to higher periodic premium with disability and modern traditional products. The overall market was up by 4%. Fee and commission income grew by 17% to CHF 198 million 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 advisors was up by 9% year-over-year. Operating expenses decreased by 3% to CHF 93 million. 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 CHF 79 million, 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% to CHF 41 million based on a substantially higher contribution from our own IFAs. The value of new business increased by 19% to CHF 22 million 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 CHF 810 million, 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 remain stable at CHF 17.6 billion as new deposits offset surrenders. Fee and commission income was up by 2% to CHF 106 million, primarily due to the growing commission income from our own IFAs in the U.K., partly offset by a negative FX translation impact. Operating expenses decreased by 1% to CHF 44 million. The segment result increased by 26% to CHF 29 million due to the positive development of the risk and fee result. The fee result grew by 17% to CHF 20 million, driven by higher gross margins at our own IFAs and at our business with private clients.
The value of new business decreased by 14% to CHF 10 million 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 income was up by 3% to CHF 326 million. 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, non-recurring transaction fees and the net income from real estate project development accounted for 15% of total income in the first half of 2018, compared to 21% in the prior year period. Operating expenses increased by 12% to CHF 179 million due to business growth in PAM, mainly in the real estate business and the negative FX translation effect. The segment result decreased by 4% to CHF 118 million. PAM increased its segment result by 7% to CHF 94 million based on higher income at stable costs. TPAM reported a decline in its segment results to CHF 24 million. This is entirely due to lower transaction fees and net income from real estate project development in combination with higher operating expenses. 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 CHF 3.7 billion. We saw strong net inflows of CHF 1.6 billion in balanced mandates, CHF 1.4 billion in fixed income, and CHF 1.3 billion in real estate that more than outweighed the CHF 1.2 billion money market outflow. Excluding money market funds, net new assets were CHF 4.8 billion, compared to CHF 3.8 billion in the prior year period. Overall, assets under management at our TPAM business now amount to CHF 64.6 billion. Total assets under management were up by 1% to CHF 225.1 billion, 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 expenses. Our overall cost base increased by 11% to CHF 1.5 billion 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 CHF 739 million. We are pleased with the expense development in our insurance segments that reported stable operating expenses of CHF 552 million. Turning now to the investment result on slide 14. Our direct investment income was up by CHF 49 million to CHF 2.2 billion, supported by higher dividends on equity investments and an increasing rental income on our real estate portfolio. The non-annualized direct investment yield remained stable at 1.5%, given a higher average asset base. Please note that we kept the half-year direct yield stable for four years in a row. The net investment result increased to CHF 2.6 billion due to higher net capital gains. We reduced our exposure to long-dated US 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. Valuation of our equity hedges increased and was only partly offset by realized losses on equities. We also reduced our private equity exposure and thereby realized gains. All those effects more than outweighed lower revaluation gains on real estate and higher FX hedging costs. Our total investment results, 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 to spread widenings. Slide 15 shows the structure of our investment portfolio. The share of bonds decreased to 59.5% as a result of the already mentioned portfolio shift from long-dated US dollar-denominated bonds into EUR 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 CHF 1.3 billion contributed to this. Sorry, real estate revaluations of CHF 4.3 billion and further net acquisitions of CHF 1.3 billion contributed to this. The risk premium on real estate remains very attractive. We kept our duration gap below one, 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 CHF 160.4 billion, given net inflows of CHF 2 billion, 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 CHF 14.7 billion. 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. 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 targets. Let's first have a look at the development of our fee business on slide 19. I am very pleased with the 11% growth of the commission income from our own IFAs. All units contribute to this, especially our German market units. 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.
Finally, commission income at Swiss Life Asset Managers was up by 2% in local currency. Our fee and commission income increased by 10% in local currency to CHF 798 million. This led to an improved fee result as shown on slide 20. The fee result increased by 6% to CHF 248 million. 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 yields in this challenging environment. This is demonstrated by the dark red line and shows stable non-annualized direct investment yields of 1.5% for the past four years, supported by an increasing real estate and equity portfolio.
Moving on to the average technical interest rates on slide 22. In the first six months of 2018, we further strengthened the technical reserves, which led to a decrease in the average technical interest rates by three basis points. In addition, the shift to a more favorable business mix led to a further reduction of one basis point. Overall, our average technical interest rates for the Swiss Life Group decreased by four basis points to 1.33% as of June 30th, 2018. We are happy that we were able to reduce the technical interest rate in Switzerland to below one, 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 efficiency, 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 levels. Overall, our value of new business further increased to CHF 212 million from CHF 177 million in the prior year period. Let me now move on to our operational efficiency. As of June 30th, we have already implemented CHF 99 million of our Swiss Life 2018 cost savings initiative and are very close to the target level of CHF 100 million. All units contributed to this, as you can see on the slide. Our next slide shows our efficiency ratios.
We further improved our efficiency ratio by one basis point to 27 basis points. All insurance segments contributed to this positive development. Turning to capital cash and dividends on slide 26. You can see that on January 1st, 2018, our Swiss Solvency Test ratio was at 170% 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 SST sensitivity. As of June 30th, 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 of 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 CHF 4.2 billion. Our total hybrid debt increased from CHF 3.2 billion to CHF 3.7 billion, as we issued CHF 600 million of hybrid debt in March 2018. Part of this will be used to redeem a CHF 300 million bond due on the 22nd of 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 CHF 657 million of cash to the holding company. Since 2016, on a cumulative basis, we have so far remitted CHF 1.9 billion of cash to the holding. This is already exceeding our 2018 target level of CHF 1.5 billion. Let me sum up.
We have again reported a strong set of results in the first six months of 2018. We have further increased the fee result 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.
Back to you, Patrick.
Thank you, Thomas. Dear investors and analysts, the floor is now open for questions. Who'd like to go first?
We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. The first question from the phone comes from the line of Mr. Peter Eliot with Kepler Cheuvreux. Please go ahead, sir.
Thanks very much. The first question was on asset management, actually. You gave some good comments, Thomas. I'm just wondering if you can sort of quantify those any more. In terms of the pipeline that you're seeing for H2, can you confirm that would at least make up the sort of CHF 12 million year-on-year decline that we saw in the TPAM result? 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. Second question was on the solvency ratio. On a gross basis, as of the 1st of January number.
Unless FINMA was 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. I'm just wondering if you're able to quantify what that move is worth to you at all, or give us any better guidance there.
Sorry, Peter. I did not understand this net basis that you mentioned on the-
Sorry, you include policyholder capital bonuses which are-
Now I understand. Okay.
Yeah? Thank you. The third question was, it's 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. If I can be very cheeky and just ask a fourth, just a quick clarification point. Thomas, obviously it'd be very sorry to see you move on. I wasn't completely clear from the statement from 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.
On the U.S. tax situation, there is nothing new to report here. For the other questions, I hand over to Thomas.
First, the 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, TPAM pipeline. Yes, the pipeline is really full, you have heard that last year we had, overall, in asset management, 21% of our fee income was transaction fees or project development results. This year, in the first half, it was only quote unquote 15%. We expect, on this basis, a catch up in TPAM, yes. On the solvency ratio. The solvency ratio next year will be based on the standard model starting 01/01/2019. 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, the field test includes also the 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 already.
Thank you very much. Could I just ask, just one follow-up on that last, 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 the first of January, everybody else was on the net basis.
Yeah, everybody else will also be on the gross basis starting first of January 2019. Okay. Thank you very much. You're not able to give us any sort of quantification of what the difference means to you or what you would've been if you don't. Stay tuned.
We will give more granular updates at the investor day. I said already, I think enough. I'm very optimistic, 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 three years of strategic plans, Thomas. Really well done. That's fantastic. Also beating my estimates today, me being too pessimistic, rather. Three questions, please. The first one, the total assets under management in TPAM, the CHF 64 billion, 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. If I may have two more questions. One is, what do you think the government will do on the guaranteed rate for group business?
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%-10%. I just wondered what you can say on this at the moment. Thank you.
Okay. We 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. I'd expect that to persist. The government, we don't have any indication yet on what will happen on the minimum rate. For the other two, I hand back to Thomas.
Yes. First, on the TPAM assets under management. If you go to page 50 of the booklet, fifty, five-O. There you see the split. When I do the math correctly, breakdown by asset class in percent, CHF 5.9 billion is in money markets, it's the 9% that you see there. There was the question on the risk result. In the first half, the German risk result was a little bit light.
However, more than compensated by a very nice cost result and fee result in Germany, I've seen. Switzerland so far is in line. Overall, what we said was that we want to keep the risk result within a CHF 350 million-CHF 400 million range. So far, every year, we were at the upper end of this range. 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. Any thoughts on capital management?
On capital management, of course, we have a substantial growth of our shareholders' equity. 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. 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 investor 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 go. We wish you well. Three questions from me. 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're 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. Is there any change in your underlying G 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. Are you seeing any attractive new business opportunities? Finally, any further updates on the regulatory front?
In particular, how are discussions going around obtaining diversification benefit between market and credit risk? Thank you.
Thank you for the questions. 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 transactions fees that are very likely to be higher. Please note that we also had a very good diversification of our fee results. 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 as a reaction to our competitor's discontinue of offering full group coverage already this year. There are always quite significant lags in this development. I'd expect to see the realization of some growth opportunities here over the next year or even the year after that.
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. It's very unlikely that we'll make further progress here as FINMA is very tough on this subject.
Okay. Is that a change versus the last update?
No.
You managed expectations a little bit at Q1, but it sounds like it might be a little less likely than that.
No, it was always difficult.
Yeah.
The discussion on this topic was always very difficult, and our expectations were low, and so far, our low expectations are confirmed, at least on this topic.
Good. All right. Thank you.
The next question comes from Daniel Bischof with Baader Helvea. Please go ahead, sir.
Yeah. 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&C, or are there also some losses? Could we also quantify the impact of the new business strain? Secondly, on M&A, one out of two areas you see as potential for inorganic growth is the independent financial advisory business. Could you remind us what are the key criteria here that such an asset has to tick? The last one is just, you reported a reinsurance transaction. Could you provide some more details here?
I would 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. As we have a diversification benefit, when we write longevity and mortality business, we are using this. What our strategy is that we will only take on accounts on our balance sheet if the primary reinsurer keeps skin in the game. We will not take the full risk. We will only share with them in taking risks. These are only the big ones. For example, we have quite some business with Hannover Re, with SCOR, and the usual suspects. It's big reinsurers.
We have written longevity swaps this year in the first half, two big accounts. So far, we are very optimistic, and it gave us a substantial boost into our new business value in the first half. 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. On the French earnings decline, quote unquote, in the first half, 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. 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.
At the same time, this year we did not see the same amount of investment income in these two non-participation companies. 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. On the M&A criteria for acquisitions, we clearly go after fee business. We need, on the one hand, strategic fit. We need something that meets our hurdle rates when it comes to net present value generation. We need something that also fits our geographic criteria. We are not on a M&A spree, I mention this all the time.
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. Of course, we may also look at areas like owned IFAs. Okay, thank you very much.
The next question comes from Andrew Sinclair with Bank of America Merrill Lynch. Please go ahead, sir.
Morning. Thanks everyone. A couple of things from me. A final point of clarity on Swiss Life Asset Managers. I just wondered if you could give us color on whether there has actually been any underlying margin pressure or have margins been steady. It was just those one-off factors of individual fees. I wondered if you could also give us a bit more clarity on that reinsurance point you were making there. If you could quantify the longevity exposure you've taken on. Actually, sorry, a third one from me as well, if you could give us any guidance on reserve strengthening for the full year. Thanks.
On asset management, yes, there is a little bit of margin pressure outside of real estate products, as seen by many other asset managers. As we've 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 non-recurring, i.e., our primarily real estate transaction fees. The other question, Thomas?
Of the longevity swaps, we do not disclose the size of the contracts, but the nature is very similar to the exposures that we already have on our books. As I said, it's very capital efficient, therefore, capital consumption is minor. The third question, I did not understand, I think.
You were mentioning that the reserve strengthening discussions happen towards the end of the year. I just wonder if you're able to give any guidance at this stage on-
We have put CHF 600 million, about half into lowering the technical rate, and the other half is in the policyholder participation reserve. When I mentioned in my speech that the final reserve strengthening will only be determined at the year-end, this means that this split may change at the year-end.
That's appreciate it. Thank you.
The next question from the phone comes from the line of Mr. Stefan Schürmann with Bank Vontobel. 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 managers. The second one on the average guarantees. You have decreased them a lot over the last few years, standing at 133 now or even below 1% in Switzerland. 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. The amount of strengthening here depends, of course, also on the asset allocation. 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. With the existing portfolio and the existing level of rates, this is exactly where we should be. Yes, we're happy with the amount of reserve strengthening done throughout the last couple of years. Maybe then on some more color on the IFA growth, I'll hand over to Thomas. It's a combination of growth, productivity growth, and of growth in the number of sales advisors, 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, also 9% more advisors. 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. In Switzerland, we have about 3% growth of the returns in the financial advisor space. Here, mainly driven by productivity growth. In France, 6%. In international, 7.5%, this was entirely driven by the U.K. In the U.K., we have acquired Medical Money Management, a small IFA that we have integrated already into Chase de Vere. 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. 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 Hebgen with KBW. Please go ahead, sir.
Hi, guys. Good morning, Ralf Hebgen 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? I know the basis has, I think, shifted because 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 the TPAM segment has increased further and perhaps is now out of line with the target which you originally indicated at the Investor Day. Just any commentary to put that dynamic into perspective would be helpful. 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?
Could you just, sorry for that, repeat what you did with it? You did say, Thomas, CHF 300 million, I think, went into the placeholder reserve, I didn't hear what happened to the rest. Is there any element of that gain which made it into net earnings? Thank you very much. These are the two things.
Yes, I can confirm that our third-party asset management cost income ratio is above the indication that we gave, we expect a strong catch-up in the second part of the year to get that back in line. On the gains, here we sold $3.6 billion of long-dated U.S. corporate bonds. We sold those because of the very flat yield curve and because of the very tight credit spreads at the beginning of the year. We reinvested those proceeds into hedged equities on the one hand, into shorter dated EUR corporate bonds, and into a much smaller quantity into some U.S. municipal bonds. 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 had to readjust our reserving rates on the one hand. On the other hand, the other half went into the bonus reserves. We will decide on that fate at the end of the year.
Okay. 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 quota works on a cross basis. The top line is relevant. Here, yes, you did have some positive effects on the Swiss group life profitability. Because the legal quota is 90, at least, the effect is not very big. Yes, you did see some of the, I believe CHF 15 million in increase in the savings result or in the segment result in Switzerland comes from the savings result.
Most of the realizations were in individual lives and not in group lives. On the cost 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 CHF 183 is not currency adjusted. Therefore, we have a currency effect of about CHF 8 million on this. About CHF 8 million of the cost increase is currency effect. There is also a substantial part that comes from our investments into the various real estate initiatives. 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.
Usually on the projects, we make a realized gain at the end of the project when we sell it off, for example. Of course, there are some pre-investments in here in these projects, and that's why, and this is actually was a substantial amount when I look at it. This was one of the reasons why we see this substantial growth on the asset management cost. We think that these investments are worthwhile. We think that this will enable us to further grow Swiss Life Asset Managers and the TPAM business.
Excellent. Thank you very much.
The next question from the phone comes from the line of Mr. Frank Hopfinger 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, the dividend season is mainly over. You reinvested also in shorter duration EUR bonds. Would you expect that we see a negative effect on the direct investment income going forward? Then second question is on the German life business. There's a discussion and of probably, I think, a high possibility that the provisions paid on life insurance in Germany will be limited going forward. How does this affect your IFAs in general? 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 also on biometric risk products in Germany, which are not affected by this regulation. The regulation holds for retirement savings products. 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. If everything comes through as we expect, yes, we do expect some pressure on the overall fee level compared to, if it had not come about. 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. We have a very good platform here to take on new advisors, productive advisors. I continue to be optimistic for the growth of our fee business in Germany for the reasons I just mentioned.
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 one and a half percent, four years in a row now. We do expect some lowering of the direct investment income. On the other hand, of course, because hedging costs are much, much higher in US dollars than in euros, we have some benefits on the hedging cost. Overall, yes, the effect, as this has been a risk reduction, we also expect some pressure on the direct investment income. I don't expect this to be, let's say, sizable or of an important size.
Perfect. Thank you.
We have a follow-up question, which comes from the line of Mr. Michael Huttner with JP Morgan. Please go ahead, sir.
Thank you very much. Two questions. The first one is, in Germany, there's likely to be a reform of the ZZR calculation. I just wondered how that might impact Swiss Life and the earnings in Germany. The second, a little bit cheeky question is, we've now had news that you, Mr. Buess, 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's nothing to report here. On the first question on the ZZR, 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 ZZR for quite some time. The political process has been dragging on. 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 ZZR. You could even say on the contrary, because we've realized some gains in the past to cover the ZZR. You've had some benefits on the IFRS profit in Germany. As you know, the ZZR 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.
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 unrealized gains we need to cover any ZZR requirements, even if there is no reform.
Brilliant. Thank you very much.
For any further questions or comments, please press star one on your telephone. 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, could you give us any sort of guidance or indication of where you see perhaps the savings results to go on a year-over-year basis? 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 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, and all the best, and see you very soon. Goodbye.
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