Swiss Life Holding AG (SLHN) Earnings Call Transcript & Summary

Dear analysts and investors, welcome to our conference call of our '22 half year results. Thanks for taking the time. As usual, I will start with an overview of our results, and our CFO, Matthias Aellig, will then take over and comment on our performance in more detail. Afterwards, we will open the floor for your questions. So far, 2022 has been a very eventful year, characterized by Russia's horrible war, subsequent market turbulences, higher inflation, rising rates, and not to forget, the strengthening of the Swiss franc. I'm very pleased with the development of Swiss Life in this environment. Our business model is unique. In addition to our successful life insurance activities, our growing advisory and asset management businesses continue to deliver strong top and bottom line results. This shows that our value proposition towards customers remains highly relevant. Our employees and advisers did a great job and helped us in achieving a strong set of results, which is based, as you know, on several sources of profit, with more than 1/3 of the operating profit coming from the fee businesses. In the first 6 months of 2022, we increased net profit by 4% to CHF 642 million. This resulted in a return on equity of 11.8%, which is at the upper range of our annual target range of 10% to 12%. The fee result grew by 17% to CHF 349 million. This growth comes from different sources, such as from asset management and our owned IFAs as well as from the unit-linked businesses. And importantly, all business divisions contributed to a growing fee results. Cash remittance was up by 22%. This is a very important KPI for us, ever growing in importance. And we have expanded the reporting joint details by business division. The SST ratio was estimated to be around 215% at the end of June. We continued to be well above our ambition range of 140% to 190%. To wrap it up, this set of results marks a good start to our Swiss Life 2024 corporate program. I believe that we are very well positioned to successfully continue our Swiss Life 2024 journey, and we confirm all our 2024 group financial partners. I now hand over to Mattias Aellig, who will take you through our financial results in more detail.

Thank you, Patrick. Good morning, ladies and gentlemen. I will start with selected P&L figures on Slide 6. Gross written premiums, fees and deposits received increased by 2% in local currency to CHF 10.8 billion. Fee and commission income was up by 13% in local currency to CHF 1.2 billion. All sources contributed positively. Net investment result of the insurance portfolio for own risk increased to CHF 2.8 billion. Net insurance benefits and claims were down CHF 7.2 billion. This includes reserve releases of CHF 0.1 billion. Also, participation increased CHF 1.9 billion, driven by higher net capital gains. Operating expenses were up by 5%, CHF 1.9 billion, due to higher commission expenses, continued business growth and investments in Swiss Life 2024 initiatives. Profit from operations increased to CHF 907 million. This is mainly due to higher savings and fee results. Borrowing costs were at CHF 56 million and the income tax expense was CHF 209 million. Net profit increased by 4% to CHF 642 million. We adjusted profit from operations, as usual, to reflect and transformation expenses, similar amounts in both periods and the FX translation effects of CHF 22 million. The adjusted profit from operations increased by 6%, CHF 922 million. Moving now to the segment results, starting with Switzerland. Premiums for sale was CHF 5.9 billion. The life insurance market was down by 1%. Premiums in individual life were down by 2% to CHF 675 million as the market increased 1%. Periodic premiums grew by 2%, driven by unit-linked products. Single premiums were down 14%. Premiums in group life increased by 1% to CHF 5.2 billion, while the markets decreased by 2%. Single premiums increased by 3% due to higher premiums from employees entering existing full insurance schemes, while periodic premiums fell by 1%. As mentioned on previous occasions, the growth in the semi-autonomous business results in lower reported premiums. In that business, only risk and cost premiums are recorded, while the savings components are recorded off balance sheet as asset inflows in the respective foundations. Assets under management in our semiautonomous foundations increased to CHF 6.0 billion compared to CHF 5.6 billion at year-end 2021. Fee and commission income was up by 3% to CHF 163 million, primarily due to Swiss Life Select and the business with unit-linked solutions for private clients. Operating expenses increased by 2% to CHF 204 million, given investments in growth projects, as mentioned at the Investor Day last November, such as the wealth management initiative and the introduction of a purely digital channel. Expenses in 2022 included a positive effect due to planned amendment in the pension scheme of our owned IFAs of about CHF 5 million. The segment result increased by 10% to CHF 503 million, primarily due to a higher savings result, supported by high net investment results. The fee result increased by 17% to CHF 20 million, mainly driven by the pension plan amendment. As said at Investor Day, we expect a rather flattish development of the fee result until 2024 as we continue to invest in expanding into new customer segments. The value of new business significantly increased to CHF 116 million. This is mainly due to the high volumes in the semi-autonomous and group life risk business. In addition, we benefited from the positive development of interest rates. In line with our 2024 financial targets, our continued focus on cash, we include cash remittance on each business division slide. Cash remittance is based on local statutory accounts of Swiss Life Holdings subsidiaries as dividends are by far the biggest source of cash remittance. There's usually upstream in the first 6 months of the year based on the entire prior financial year. Other examples for sources of cash remittance are interest payments and related fees on internal loans. For Switzerland, cash remittance increased by 9% to CHF 422 million. Turning now to France. Please note that all figures quoted are in euros for our French, German and International segments. In France, premiums increased by 2% to EUR 3.5 billion, in line with the market. In our life business, premiums were up by 2%, following strong growth in prior year years. Market was up by 1%. Since the beginning of 2019, we have outperformed the market. Our premiums increased at a CAGR of 11% compared to 2% for the market. The unit-linked share in our life premiums was 62%, while the market was 41%. Life net inflows were EUR 1.3 billion versus total market net inflows of EUR 12.1 billion. Health and protection premiums increased by 3%, mainly driven by the individual business. The market was up by 5%. P&C premiums were down by 2%, primarily due to motor and home insurance products. Market growth was 4%. Fee and commission income rose by 15% to EUR 210 million. Unit-linked fee income increased based on higher average unit-linked reserves compared to the prior year period. We also had a strong contribution from the banking business, given exceptionally high revenues from structured products in a volatile equity market environment. Operating expenses grew to EUR 186 million. Increase of 8% is due to activity growth and investments in growth projects and related transactions, such as the international health initiatives mentioned at Investor Day. The segment results increased by 12% to EUR 147 million. The savings result developed positively based on a high net investment result. The cost result declined due to higher acquisition costs related to unit-linked business growth. The risk result was down due to higher claims in the P&C business. This was partly offset by higher risk result in health following some repricing. The risk result in health however has not yet recovered from the increased health coverage introduced by the government in 2021. The fee result was up at 38% to EUR 68 million. Main drivers were high contributions from the unit-linked and the banking businesses. The latter benefited from exceptionally high revenues from structured products. Value of new business decreased by 12% to EUR 82 million. The higher unit-linked share improved business mix in health and favorable interest rates were more than offset by lower volumes in both life and health as well as changes in the operating environment regarding pension and health businesses. Cash remittance increased by 60% to EUR 128 million, driven by a rebound in dividend payment to a more normal level. Moving on to Germany. Premiums were up by 5% to EUR 695 million due to modern, modern traditional and disability products. The market was up by 1%. Fee and commission income grew by 9% to EUR 321 million due to our owned IFAs. The number of financial advisers increased year-on-year by 14% to 5,844. This top line development needs to be put in the context of an extraordinary benefit in the prior year period of around EUR 50 million from a successful campaign based on the solidarity surcharge, as mentioned throughout 2021. Excluding this prior year benefit, income growth would have been 15% in the first 6 months of 2022. Operating expenses were up by 3% to EUR 118 million because of business growth as well as ongoing investments in Swiss Life 2024 growth initiatives, such as a further digitization of the advisory platform. The segment result was down by 21% to EUR 102 million, primarily due to the savings result. It was exceptionally high in 2021, given a very high net investment result based on higher revaluation gains on investments. Moreover, back then, we also realized significant gains in fixed income instruments in the context of the substantial ZZR buildup for the entire financial year. The fee result was up by 10% to EUR 61 million, driven by our owned IFAs. The value of new business decreased by 7% to EUR 35 million. The focus on capital-light business continued with an increased production of unit-linked products as the risk business contributed less. Cash remittance increased by 25% to CHF 69 million due to the positive fee result development in the 2021 financial year. Turning now to the International segment. Premiums increased by 16% to EUR 522 million due to higher premiums with private and corporate clients. Fee and commission income was up by 10% to EUR 166 million, driven by higher contributions from our owned IFAs, both in the U.K. and CEE. Income with private clients was also slightly higher. Operating expenses increased by 12% to EUR 56 million. The increase is due to business growth combined with investments in process optimization and digitalization. The segment result was up by 9% to EUR 46 million. The higher fee result was partly offset by a lower savings result. The fee result increased by 14% to EUR 38 million. This is due to higher revenues and productivity gains. The value of new business increased by 12% to EUR 21 million, mainly driven by the positive volume development with both corporate and private clients. Cash remittance increased to EUR 55 million due to the positive net profit development in the 2021 financial year. Let's move now to our Asset Managers segment that reports in Swiss francs. Asset Managers total income was up by 14% to CHF 505 million. This included the first-time consolidation of the Nordic company called SLAM Nordic acquired towards the end of 2021. In our PAM business, total income was up by 1% to CHF 184 million. Fee income from the real estate business increased, while fee income from securities decreased due to lower average assets under management following capital market developments. Now TPAM business total income was up by 23% to CHF 322 million. Half of that stems from higher recurring income on a higher average asset base, and to a lesser extent, from higher nonrecurring income. About 1/4 of the increase was due to inorganic growth from the mentioned acquisition. The remaining growth was due to enhanced income presentation at one of our subsidiaries. The share of total nonrecurring income for TPAM was 16% of total income, and thus at the prior year level. Operating expenses increased by 10% to CHF 293 million due to further organic and inorganic business growth as well as investments. The prior period included a one-off of CHF 7 million relating to the derecognition of a brand asset. The segment result increased by 10% to CHF 154 million. The contribution of PAM was down 3% to CHF 94 million, as the higher income was more than offset by higher expenses, for example, in the real estate business. TPAM increased its segment result contribution by 39% to CHF 60 million, thanks to strong top line development and expenses related to the derecognition of a brand asset in the prior year period. In our TPAM business, the cost income ratio was 74%. The ratio is calculated excluding Livit and real estate project development. Cash remittance increased by 22% to CHF 274 million. About half of the increase is based on the net profit development of the 2021 financial year. The other half of the growth is due to special dividend. Net new asset in our TPAM business amounted to CHF 3.0 billion compared to CHF 4.6 billion in the prior year period. We achieved inflows in real assets of CHF 1.1 billion, CHF 0.7 billion from real estate and CHF 0.4 billion from infrastructure. Inflows in other asset classes amounted to CHF 1.5 billion in equities, CHF 1 billion in net balance mandates and CHF 0.1 billion in bonds, more than compensating for outflows of CHF 0.8 million money market funds. Excluding money market funds, net new assets amounted to CHF 3.7 billion compared to CHF 2.9 billion in the prior year period. Overall, assets under management in our TPAM business were at CHF 99.7 billion compared to CHF 102.8 billion at year-end 2021. Positive net new inflows were more than offset by lower asset valuations in the context of the favorable capital markets and a negative FX translation effect. Total assets under management decreased to CHF 250 billion, driven by PAM, primarily due to lower asset valuations. Let's move back to the Group. Total operating expenses were up by 5% to CHF 1.9 billion, also due to higher commission expenses. Operating expenses adjusted grew by 8% to CHF 907 million. Direct investment income increased by CHF 11 million to CHF 1.98 billion. Equities and real estate contributed more as income on bonds decreased, non-annualized direct investment yield. The net investment result increased to CHF 2.8 billion due to higher net capital gains. Non-annualized net investment yield was 1.7% compared to 1.3% in the prior year period. Net capital gains amounted to CHF 1 billion, given a positive P&L contribution from the hedged equity portfolio despite impairments. We also had positive fair value change in real estate and infrastructure as well as a positive contribution from the hedge of the FX hedging costs. This was partly offset by net losses on bonds. FX hedging costs amounted to CHF 194 million compared to CHF 174 million in the prior year period. Unrealized net gains on equities were CHF 1.3 billion compared to CHF 3.3 billion at year-end 2021. Unrealized net losses on bonds amounted to CHF 4.0 billion compared to net gains of CHF 12 billion at year-end, 2021. Slide 16 shows the structure of our investment portfolio. The share of bonds declined, primarily due to lower valuations resulting from higher interest rates. The share of equities was at 8.9%. Our net equity exposure after hedging amounted to 4.0%. Following the drop in bond valuations, real estate exposure increased to 27.4%. It includes further net additions of CHF 0.3 billion and positive fair value changes of CHF 0.5 billion. Non-annualized fair value changes has amounted to 1.2%, essentially in line with the prior year period. All sectors contributed positively, most of all, residential. Let me reiterate the attractiveness of real estate. Real estate is an important asset class to back our long-dated liabilities in the context of our disciplined ALM. This means we hold real estate because of the regular rental income it provides and not because of our appreciation. Moreover, real estate is capital-efficient asset class under the SST regime. And the risk premium above 10 years Swiss current bond rates is still attractive. In the context of the recent increase in inflation and interest rates, I can report that about 3/4 of our total rental income is indexed to inflation or rates. Vacancy rates are at 4.5% compared to 4.2% a year ago. Tenant, asset and location quality is high in our real estate portfolio, which is the basis for its resilience. Shown in the appendix, about 75% of our real estate is located in Switzerland. Of the overall portfolio, 43% is residential, 30% is office, 15% is retail and 12% is other. Moving on to Slide 17. Insurance reserves, excluding policyholder participation liabilities, decreased by 3% in local currency to CHF 168 billion. Shareholders' equity decreased by 36% to CHF 10.1 billion. This was driven to a very large extent by the change in unrealized gains and losses on equities and bonds given the market environment. Our total outstanding financing instruments amounted to CHF 4.7 billion, resulting in a capital structure of 70% shareholders' equity, excluding unrealized gains and losses. The reference level is 65% to 75% for shareholders' equity or 25% to 35% for debt. That brings me to our Swiss Life 2024 program that started at the beginning of 2022. I will report on the business progress in the following slides. Fee and commission income increased by 13% in local currency to CHF 1.17 billion. Commission income at Swiss Life Asset Managers was up by 16% in local currency, primarily due to TPAM. As usual, commission income on this slide excludes other net income, such as income from real estate project development. Commission income from owned IFAs increased by 5% in local currency, while commission income from own and third-party products and services was up by 7%. The fee result increased by 17% to CHF 349 million, with an improvement in operating leverage in all businesses, except PAM. I'm pleased with the fee result development in this challenging market environment. That put the drag on the level of assets under management from both an equity and fixed income perspective, the last being important for PAM. As mentioned at last year's Investor Day, fee result is essentially unaffected by the transition to the IFRS 17 accounting standard in 2023. Let me also briefly comment on the other profit sources. The savings result increased year-on-year due to a high net investment result, that was partly offset by higher policyholder participation. Please remember that final policyholder participation will be, as usual, determined at the end of the financial year. The risk result decreased primarily due to France and the mentioned reduction in our P&C business. The cost result also decreased, Again, primarily due to France, the acquisition costs increased. Slide 23 shows our direct net investment yields. This compares to an annualized reinvestment rate of around 2.8% in the first 6 months 2022, which is above the direct investment yield. Our average technical interest rates decreased by 1 basis point to 99 basis points due to FX translation effects. New business margin increased to 3.8%, driven by our continued focus on margin management and the positive interest rate development. The value of new business slightly increased to CHF 254 million despite negative currency movements of about CHF 13 million compared to the prior year period. Turning to capital cash and payout. At the end of June 2022, our Swiss solvency test ratio was estimated to be around 215%. It is well above the ambition range of 140% to 190%. This compares to a ratio of 223% at the beginning of the year. The respective sensitivities are mentioned on the right-hand side of the slide. Cash remittance to the holding company increased by 22% to CHF 972 million. As mentioned, it includes a special dividend from Asset Managers and the catch-up in France. The cash remittance was relatively low in 2021, pertaining to the 2020 financial year that was affected by the pandemic. Let me mention that transition to IFRS 17 and IFRS 9 will not affect the way we manage the business and will therefore not affect our cash remittance. Liquidity at holding at the end of June amounted to around CHF 0.9 billion. This takes recent cash remittances to the holding company into consideration as well as outflows related to the dividend payment and the ongoing share buyback. Our CHF 1 billion share buyback is on track, with about half completed as of today. As announced, it runs until the end of May 2023. Let me sum up. We are very pleased with the first 6 months of 2022. We successfully started the Swiss Life 2024 corporate program. Cash remittance is slightly ahead of plan, and the remaining financial targets are on track. Also, in this environment, we confirm all our 2024 group financial targets. Thank you for listening. And back to you, Patrick.

Great. Thank you, Matthias. We're now ready to take your questions. Who'd like to start?

The first question comes from Andrew Sinclair from Bank of America.

3 for me, please. Firstly, it was just on the really good remittances in H1. And thank you very much for the new disclosure. Just really wondered if you can give us a little bit of an outlook for the second half. I know it tends to be very heavily H1. But there's usually a rebit of remittance coming through in H2. Just any guidance on that? And also, you mentioned that there were a few special dividends in H1. Just how much in H1 was special? Secondly, on real estate, great to hear the portion, which is indexed. But just could you give us some color on how rent reviews are going? And roughly, what proportion of the book has a rent review coming up each year? And thirdly, just with rates going higher, I was -- I think I heard you say that there were some reserve releases in H1. Just on the process of reserve strengthening, is that now complete? And what could we think about going forward? Is that going to be tilting towards perhaps reserve releases going forward?

Andy, so it's Patrick. So I'll take the first question and then hand over to Matthias for the other 2. So cash in the second half of the year, it's very similar to last year. You probably saw that it was CHF 36 million that came in the second part of last year. And so we expect a very similar amount this year. And so I'll hand over to Matthias.

And sorry, just how much in H1 was special?

That was the CHF 25 million that I think Mattias mentioned, that asset managers.

It was essentially half of the growth, as we mentioned, in the Asset Managers cash remittance, that was especially up. On the question on real estate, I mean it is not a system that you may know from the U.K. We have typically rent renews once a contract comes to end. We have in the commercial part, a thing that essentially runs continuously when things come new. In addition, I mean, as mentioned, we have this indexation of the commercial contracts to inflation rates over the entire portfolio. Both commercial and residential, we have around these 3 quarters that are either indexed to higher rates or inflation.

So if I may add, let's say, specifically, I'm talking about the Swiss portfolio, right, which is about 80% of our portfolio. So the way it usually works is that for the residential portfolio, there is a mortgage rate-related index, which has considerably -- considerable lags in there. So we expect an increase of this index somewhere at the beginning of 2024 because of these lag effects. And every 25 basis points lead to a 3% increase possibility in our residential contract, whereas the first couple of these steps only affect around half of our portfolio. So that's -- it's a bit of a special mechanism, which is very well known in Switzerland for the residential part. And for the commercial part, here, we basically have a continuous inflation linked. So even if contracts do not come due, we can increase our commercial rental income each and every year by the inflation rate or 90% of the inflation rate. That depends a little bit on the contracts. And now to the reserve releases, back to Matthias.

As mentioned in -- on previous occasions, I mean the reserve adequacy is assessed at every single closing based on the asset portfolio that are affecting the liabilities, also clearly taking into consideration of the reinvestment rate and the -- which are essentially based on what the spot rates imply. And these 2 considerations actually drive the amount of reserve strengthening, or as happened in the first half of the year, reserve release, which amounted to CHF 0.1 billion in the first 6 month.

The next question comes from Peter Eliot from Kepler Cheuvreux.

I would spoke essentially also on the cash, if it is okay. If I adjust the asset management for the CHF 25 million, then [indiscernible] and also the international segments, cash remittance exceed the segment results. So I was wondering if you could just comment on how sustainable that is? And in your commentary on France, you also talked about a catch-up from last year. So I just wanted to check whether you're saying the French result is sustainable at this level or whether it is sort of slightly above normal level. And secondly, obviously, you've up streamed excess cash in the asset management. Just wondering in your current view of whether there are other sort of pockets of excess capital around the Group. What -- yes, what your current view is on that? And whether you could also give us an update on the holding company cash level. And then maybe finally one, noncash related. Wondering if you could just give us some sort of current update or outlook for the momentum of each of your fee-based businesses. Obviously, we've seen results from H1, just whether there's sort of -- yes, anything new or changing? And I guess, in particular, the banking results in France would be of interest.

Okay. I start with the cash and then Patrick will take with the noncash question. First of all, going to the question about France. Yes, indeed, the prior year cash remittance. So the one that we up streamed in the first half of the year, which was the basis of the entire financial year 2020, that was affected by the pandemic, and specifically in France, was extraordinarily low. So it wasn't the 2022 cash remittance for France which covers the entire financial year. By 2021, there was not a catch-up in a sense that it was taking something from the prior year with it. But it's just, as you say, more normal level and more indicative of what's to be expected going forward. So that's, I think, the comment on the rebound in France. And you mentioned the comment, that the cash remittance was below the second's result. And again, the cash remittance is based on the prior year in -- on the entire year -- prior year. Not -- has nothing to do, if you wish, with the first half year segment result. In terms of the CHF 25 million of Swiss Life Asset Managers, this special dividend that we mentioned, that it has to be seen in the context of an optimization of the legal structure in Germany. And clearly, things like that happen. There may be additional things created. At that point in time, I just would say that we confirmed or that we mentioned that we are slightly ahead in terms of our cash -- bonds. And they are now the CHF 2.8 billion to CHF 3 billion on a cumulative basis until 2024.

So in other words, we expect that these cash generations, with the exception of AM, is the sustainable levels from which we want to further grow our cash remittances. So...

Sorry. Can I very quickly clarify? When I was comparing cash remittance to segment results, I was actually looking at the prior year. And I was talking about Asset Managers and International. So for example, Asset Managers, if I take out the CHF 25 million one-off, I still got a cash remittance of CHF 250 million. Sorry. I'm looking at half year figures rather than the full year. Sorry. Please ignore me.

I guess it wasn't the first time that exactly that happened in the past few years. Okay. So now for the fee income momentum. So obviously, the AUM-related fee income, here, we expect the growth rates to come down over the course of this year. Why is that the case? Well, I mean, the fee income is driven by the average AUMs of the first half of 2022 compared to the average AUMs of the first half 2021. So now of course, the market has rebounded somewhat. But still, we expect this AUM-related fee income growth to come down during the course of the year. However, we do confirm the historical much stronger second half of the year in the fee results. That primarily is driven by the nonrecurring fee income from the TPAM asset management business. Here, we were at 16% at this half year. We were at 16% also last year. And you might remember, for our Swiss Life 2024 program, we targeted a 25% contribution from nonrecurring TPAM fee income, so which we, again, don't expect to happen in the second half of the year. And then the bank, that was really a very strong showing at the beginning of the year, driven by the structured product campaigns. And here, the further development will develop -- will depend on further equity market developments. So that's too early to tell or to give any outlook here.

The next question comes from Thomas Bateman from Berenberg.

Congratulations on the results. Just on real estate, you touched there on the 25% of nonrecurring income. But I'm just thinking about the outlook for real estate and how that may impact the development fees that you generally record in the second half of the year. And just a second question, on France. Again, you touched on the fact that the structured products are dependent on the movement in equity markets. But in terms of a rule of thumb, should we expect that better equity markets might actually reduce the demand for some of those structured products in France? And finally, just on real estate allocation. I guess, as a percentage of the portfolio, it's increased year-on-year. And I think there's a limit imposed by the regulator. Is there anything to be concerned about here?

Well, first of all, I'll take the first question on the project development. So the project development we have, here we still see very strong demand for our residential project development. As you know, that is both in Switzerland as well as in Germany. We do see, of course, some cost increases in project development and that -- but we continue to be able to pass that on to buyers. Then on the nonresidential part, here as well, as long as -- and this is true very generally in the market. As long as you are in very good locations, CBD locations, that's where we are positioned, we still see very strong demand, both on the commercial office side and also on the retail side. And we can even increase our -- for new contracts, our rental income by more than we had anticipated at the beginning of the year. And furthermore, in the commercial area, you might remember that we have an initiative that has been going on in the area of logistics, which Stefan Machler presented at the Investor Day. And here, we still see very strong demand, and this is primarily in Germany. So this is really going well. So we really feel very comfortable with our real estate project development, on the one hand, but also with our portfolio overall. I just mentioned some of the lag effects that will come later on. So I guess the only real drag we see is that the euro has really depreciated a lot. Probably, we were at EUR 1.03 average euro rate in the first half of the year, and we're now at EUR 0.97 on the Swiss franc. But other than that, our portfolio is strong. Project developments, we confirm. Then I'll hand over to Matthias.

Coming to the French, the bank in France, I mean, as we mentioned, a very strong contribution in the first 6 month. They relate to the volatility -- to the high volatility that we're driving these extraordinary revenues, and therefore, the bottom line contributions from the bank. So I would put it more in the context of the volatility rather than the strongly growing equity market. In terms of the real estate allocation, you're right. There is a -- on certain businesses, a limit of 25% for real estate. That's to be kept in mind that this is a different valuation basis than the one shown in the slide deck, where everything is carried at market value for the determination of the regulatory limit of 25% in the tied assets. And that's only [indiscernible] backing the shareholder -- policyholder liabilities. There, we have the bonds, the fixed income instruments carried at cost. So the valuation losses following the higher rates, which you have seen in the slide deck, do not occur in -- for the purpose of this 25% limit for regulatory purposes. So it's a different view that is here at work and a different scope, if you wish.

The next question comes from Farquhar Murray from Autonomous.

Just 2 questions, if I may, both kind of following on from earlier questions in honesty. Firstly, on PAM, AUM down 13% due to higher interest rates. The response to Peter seem to acknowledge that's a little bit of a headwind. But I imagine it's relatively low margin. So I just wondered if you might help us frame the headwind there. And it sounds like, frankly, it probably gets buried by the seasonality. And then secondly, just to follow up on the earlier questions on real estate. You mentioned being able to push office rents up contract renewal, which I think is a kind of 10-year process. That's perhaps a little bit surprising to some. So I just wondered if you could explain the kind of client behavior behind that in terms of floor space usage, et cetera. And perhaps also maybe just give us a bit of detail on what drove the uptick in vacancy rate you saw in the first half.

Sure. I'll take the real estate question again, I hand over to Matthias for the other question. So I guess your question was now on commercial real estate. So we cannot -- we can also increase the rents in tandem with the inflation rate even if rental contracts do not come due. So it don't mature. So every year, in an existing contract, we can typically increase rental income by 90% of the inflation rate more or less. And then the difficult period, for example, as -- let's say, over the past 2 years, we made some concessions with some rent-free periods that like at the beginning of rental contracts that might have scrapped up from a few months to a few more months. But overall, with [indiscernible] in the CBD areas where we have our portfolio, we've been able to increase the rental income of contracts that are maturing way beyond or beyond our expectations and beyond the rental income that had come due. So here, we just see a nice support for our rental income. Then on the vacancy rate, this was driven by the -- that we newly included our Circle development, which we co-own with -- at the airport at the beginning of this year. This was not in the vacancy rate as of last year. Now it has come in, as far as I recall, with a vacancy rate of around 17%. And here also, there have been some new contracts that have been signed. And so this vacancy rate will come down. Remind you the Circle project next to the airport or in the airport in Zurich is the largest or was the largest real estate development in Switzerland over the past few years. Now it's nicely filling up. Now I'll hand over to Matthias. Any follow-on?

Apologies, I think my typing was coming through. But actually, do you then have a like-for-like vacancy rate at all just for reference?

I guess then it would have been more or less stable.

Coming to the PAM question. What this headwind means, I mean, in the PAM's security portion, which includes bonds, I mean, we have essentially a monthly charging. And as interest rates have gone up substantially, I mean, we have coming [indiscernible] via the averaging and depending on what the market. And specifically, the interest rates for the remainder of the year, we may face additional headwinds. Clearly, rates have gone down quite substantially since half year. So it's a bit difficult to say what this means for the full year. But I think it's important to understand that there is this mechanics of monthly averaging. And that's really what is driving the top line of the securities portion of -- and to a lesser degree, we also have the equity market developments that also feed in there. But clearly, the equity portion is much smaller than fixed income.

The next question comes from Jimmy Fan from UBS.

I have 2, please. First, coming back to that reserving topic. On Slide 24, I see there's overall impact on technical interest rate from statutory perspective. And could you help us understand how the reserve strengthening impact or reserve release impact will impact this year's local statutory earnings? Should we expect to see there will be some actual reserve releases coming through in the second half? And my second question is on reinvestment yield. What is your current reinvestment yield relative to that 1.2% direct investment yield?

So let me take the last question first. So the 1.2% that you mentioned, that is a non-annualized figure, right? So you'd have to multiply it by 2. So you come to around 2.5% in direct yield, if I'm not mistaken. And the reinvestment rate that we expect for the full year is way above that. So we expect -- or was it something between 3.5% and 4%, if I recall correctly. So we now really have this improvement of our direct yield, which is basically even -- in terms of basis points, right, it's even more pronounced because the asset base is decreasing. In the past, we've had never increasing asset base because of lower rates. So the direct yield contracted. And now we have it -- we see it going in the opposite direction. So we basically have 2 forces now driving up the direct yield, on the one hand, higher reinvestment rates, second one, with a certain lag. All the nice rental income increases, we'll see late down the road. And the other effect, of course, is the asset base. Now I'll hand over to Matthias.

Okay. The reserving, as in the past, is really done on a valuation basis. So we take into account the portfolio structure, the reinvestment rate and that -- what we have here then -- as this CHF 0.1 billion release. The question why this may not being that visible on Page 24, clearly, that's a relatively small number. There's some rounding that is to be observed. And then in addition, there are some reserves that are not, let's say, in the scope of this average technical interest rates because they don't have a technical interest rate themselves. Now what happened in IF -- let me first mention that. Clearly, such reserve releases are also part of, let's say, the sharing with policyholders. And you have seen on Slide 6, I believe, that this sharing with policyholder has gone up. One driver was the higher net investment result, but also, let's say, the swing in reserving half year on half year. And the same mechanic, if you wish, let's say, that, first of all, it increases. Let's say, the pre policyholder surplus that's also happening in statutory account but against that, also in statutory accounts, we have a sharing with the policyholder. So it feeds through, but it is mitigated by the sharing with policyholders, to cut the long story short.

The next question comes from Domenico Maggio from Jefferies.

Just one on that for me. Can you please discuss your thinking around the CHF 471 million of hybrid debt coming to call in November? And the results floating rate margin of 12.2% post the first call, and that seems quite expensive. Are you looking to refinance it in the coming months?

Look, we have an active capital management. But in the past, we refinance bonds, but we do not comment on specific transactions.

The next question comes from Rene Locher from KBW.

Yes. So I have to come back to this real estate again because I had a lot of discussion with especially investors outside Switzerland. So can you give me 1 or 2 key reasons why the Swiss real estate market's holding up so well compared to U.S., U.K., Sweden? So that's my first question. And then I'm on Slide 35, because I was checking on the rental income, which is slightly up. I have seen this 1.2% devaluation gains. I was just wondering, on the alternative investments, which is just about [indiscernible], what triggers here the CHF 156 million gain? Just for my understanding.

In terms of why is the Swiss real estate market strong, I mean, rates are low, right? And that is one obvious thing. Then net migration, right? I think in the first half of the year, we've rebounded to about 70,000 people coming in the country. So it's around 1% of the population migrating into Switzerland. We have a very competitive business hub. Plus, I mentioned this several times, we live in -- for a rich country, we live in very crammed conditions. So both -- especially on the residential part. I think the average person in Switzerland lives on 45 or 46 square meters, which is not a lot. And same is for retail surfaces. I think in the U.S., per head, it's -- they have 7x to 10x as much retail surface as we do in Switzerland. And then, of course, COVID helped a little bit as well, right? And people appreciate how they live. And the same thing in getting people back to the office. Attractive office space is required. So with all those doomsayers we listened to 2 years ago, this has simply not come true. So we still haven't seen any move away from our office space demand. So what else can I say? Well, we have a very competitive economy, right? And we have a lot of new companies that have been founded over the last few years during COVID and then very low default rates. still. So I mean that's -- I guess -- not all of these nice things I just mentioned also hold true in some of our neighboring economies, especially our neighboring economies. So Switzerland has a very strong competitive position, which, of course, then feeds through to real estate demand.

And maybe on the alternatives on the fair value changes there. Let's say there's one which may at first sound a bit more technical, if you compare that, for example, to prior year, we have seen less, let's say, distribution from the corresponding funds. So instead of having the income, if you wish, being distributed as income -- as current income, it's just accrued as a positive fair value change. So that explains a bit what the-- when you look at it period-on-period. And clearly, we have there various, let's say, investments, be it power stations, toll roads, what have you. And clearly, they benefit from the current environment.

We have a follow-up question from Thomas Bateman from Berenberg.

I just wanted to come back to the asset management, especially dividend again. How should we think about this going forward in terms of -- is it a measure of the amount of cash this division is generating versus the capital required for growth? Is it just lots of cash has been built up in this division, which is a kind of one-off special? Or is there potential for further special dividends in the future?

Well, it was really we -- the reason behind that is we simplified the asset management company structure. And therefore, the capital requirements were lower than over the past few years. So we released this special dividends. We call it special. It doesn't mean necessarily it's really a one one-off, right? Might repeat itself somewhere down the road. But for sure, you cannot expect this to be recurring, this extra CHF 25 million that we pointed out.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Frost for any closing remarks.

Well, great. So we're at the end of our conference. Thanks again for your time and your questions. And I look forward to seeing you again soon. Thank you, and goodbye.