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

Ladies and gentlemen, welcome to the Swiss Life Presentation of Half Year Results 2020. I am Myra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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 the presentation of Swiss Life's half year results. Thank you for taking time for us today. I'll start by explaining some key figures as usual. Matthias Aellig, our CFO, will then take you through the half year results in more detail. We are, of course, looking back over very demanding 6 months. I'm proud that we've worked so successfully during the COVID-19 crisis despite developments on the financial markets, uncertainty among our customers and the associated sociopolitical debate. The resilience of our business model is one factor that kept us on track. However, it wouldn't be much use if we haven't been able to rely on the tremendous engagement of our staff. The Swiss Life teams working exclusively from home at one stage showed strong drive to ensure we could accompany our customers through these difficult times. Our considerable investments in digitalization in recent years helped us in that regard. Let's now go to the specifics. Net profit decreased by 13% to CHF 537 million compared to the same period in the previous year. The decrease of CHF 80 million is mainly due to the lower savings results in connection with financial market developments and a positive tax one-off of CHF 30 million in the context of the Swiss corporate tax reform in the previous year. Foreign currency effects also had a negative impact. Positive developments in the fee and risk results did not fully offset all those factors. Given the circumstances, I'm very satisfied with the earnings development. We again achieved an adjusted return on equity of over 10% for this half year. The fee result improved by 6% to CHF 267 million. We also increased the cash remittance to the holding company by 6% to CHF 748 million. Regarding the value of new business, we recorded an expected decline of almost 50% to CHF 204 million despite an increase in the margin to over 2%. There is a straightforward explanation for that. The volume of new business last year was exceptionally high due to the exit of a competitor from the BVG full insurance business in Switzerland. As you can see on Slide 4, COVID-19 has, of course, also left its mark on our results. In view of the extraordinary situation, allow me to give you some details on how the pandemic impacted our profit sources. It mainly affected our savings result. This remains the most important profit source in our business, even if we have continuously reduced its share in the past decade, particularly in relation to the fee result. With regard to our investment portfolio, I would like to mention that the negative impact on equities was partially offset by realized gains on bonds as well as real estate revaluations. Our risk result was not affected by the pandemic. On the contrary, there was no perceptible impact on life insurance and we even showed positive development in the nonlife business in France. As I already mentioned, we also posted a pleasing performance in the fee business. It would have been better still if the crisis had not reduced the value of assets under management and slowed down business activity. The impact on the cost result was negligible. Our assumptions for the second half of the year are based on our internal economic outlook, which assumes a U-shaped recovery in the developed economies. The recovery is already visible in some relevant indices and in the fact that certain industry sectors have bounced back quickly. Within Europe, we can expect -- we expect Switzerland to outperform other economies in terms of growth momentum and to return to its pre-crisis GDP level in the second half of 2021. Let's go to Slide 5 now. Overall, despite an extremely challenging environment, we're on track and are able to confirm all our financial targets for Swiss Life 2021. This entails those targets like the return on equity of 8% to 10%, and that are valid for each and every year, including 2020. That's because the resilience of our business model has proved itself in the following ways: we were able to continue our business without interruptions, thanks to our digitally supported advisory networks. On the financial markets, we reduced our equity exposure to secure and statutory financial statements. Moreover, we can confirm that our positive interest rate margin remains safeguarded for more than 3 decades. Furthermore, our real estate holdings with historically low vacancies and further revaluations once again proved the haven of stability, which is very important in times of great uncertainty. Real estate continues to be attractive with revaluation gains of 0.8%, not annualized and a low vacancy rate of 3.8%. Rent collections amounted to around 95% of rental income due in the first 6 months. Finally, our financial strength is reflected in the increased cash remittance for the holding company and our dividends paid and our strong solvency, which stood at over 185% as of midyear and is therefore at the upper end of our ambition range of 140% to 190%. Now over to our CFO, Matthias.

Thank you, Patrick. Good morning, ladies and gentlemen. I will now provide more details on our financial performance in the first 6 months of 2020. Please note that all figures quoted are in Swiss francs, unless I state otherwise. Let me start with selected P&L figures on Slide 8. Gross written premiums, fees and deposits received decreased by 16% in local currency to CHF 11.6 billion. This decline was anticipated and, as previously mentioned, is due to the exceptional demand in 2019 in our Swiss group life business, as our largest competitor pulled out of the full insurance business in 2018. Fee and commission income was up by 10% in local currency to CHF 916 million. All sources contributed positively, asset managers, our owned IFAs and the unit-linked business. The net investment result of the insurance portfolio of own risk decreased to CHF 1.9 billion in the context of COVID-19 related financial markets development. Net insurance benefits and claims decreased to CHF 9.3 billion, in line with premium development, mainly due to Switzerland. Policyholder participation decreased to CHF 0.5 billion, primarily due to a reduction in Switzerland and Germany. Overall, we strengthened the technical reserves by about CHF 0.25 billion. Please note that, as usual, final policyholder participation and reserve strengthening is determined at the end of the financial year. Operating expenses were down by 3% to CHF 1.6 billion, primarily due to lower commission expenses. Profit from operations decreased to CHF 765 million. This is essentially the result of the COVID-19-related financial market developments that primarily affected the savings result due to lower net investment income. The reduction also includes negative FX translation effects of CHF 19 million from our foreign operations and their profits. Borrowing costs decreased to CHF 59 million. This includes the effect of the refinancing in 2019 of a matured senior bond with a comparatively high coupon and positive FX translation effects on Eurobonds. Our income tax expense increased to CHF 169 million. The effective tax rate was 24% compared to 20% in the prior year period. Last year, we reported a positive tax one-off of CHF 30 million. This was a noncash accounting effect in the context of the implementation of the Swiss tax reform in several cantons. We expect the tax rate for the 2020 financial year to be around the half-year level, depending on the geographic split of profits generation. Our net profit went down by 13% to CHF 537 million. This is a reduction of CHF 80 million. Thereof, CHF 30 million pertaining to the just-mentioned tax one-off in 2019 and CHF 30 million pertaining to negative FX translation effect from our foreign operations. Slide 9 shows the adjustment to our profit from operations. On the left-hand side, you can see last year's adjustments, including a CHF 19 million FX translation effect relating to the decrease of the euro by about 7 cents year-on-year. On the right-hand side, we adjusted the half year 2020 profit from operations to reflect restructuring charges and program costs related to the new accounting standard. The adjusted profit from operations decreased by 6% to CHF 780 million. Moving now to the segment results. I will start with Switzerland on Slide 10. Premiums decreased by 24% to CHF 7.3 billion. The overall market decreased by 23%. In individual life, premiums were down by 7%, while the market was down by 4%. Periodic premiums grew by 2%. Single premiums decreased by 26% due to lower COVID-19-related business activity. Premiums in group life were down by 25% to CHF 6.6 billion while the market decreased by 27%. Periodic premiums grew by 1%. Single premiums decreased by 40%. And as mentioned on numerous occasions, we reported an exceptional increase in premiums in 2019. This was driven by additional demand as our largest competitor pulled out of the full insurance business. Overall premiums in Switzerland in the first 6 months of 2020, excluding the exceptional increase in premiums in the prior year period, are 2% above the prior year level as we acquired new accounts and achieved higher premiums with existing clients. The share of semiautonomous solutions in our group life new business production was 42% compared to 20% in the prior year period. Assets under management in our investment foundation grew by 6% to CHF 11.7 billion compared to CHF 11 billion at year-end 2019. Fee and commission income was up by 5% to CHF 141 million, primarily due to our mortgage business, investment solutions for private clients and real estate brokerage. Operating expenses remained stable at CHF 194 million, in line with continued cost management. The segment result declined 10% to CHF 415 million, primarily due to a lower savings result. The savings result declined in line with a low net investment result due to the COVID-19-related financial market developments, while the risk and cost results improved slightly. The fee result was down by 8% to CHF 14 million, mainly due to COVID-19-related expenses. The value of new business decreased by 69% to CHF 87 million. This is mainly due to the exceptional demand in group life in 2019, following the mentioned withdrawal of a competitor, while volumes in individual life increased with a high share of capital-light products. The improved business mix in both individual and group life business was offset by lower interest rates. As a result, the new business margin was stable at 1.7%. Turning now to France. Please note that all figures quoted are in euro for our France, Germany and International segment. In France, premiums increased by 7% to EUR 2.7 billion. In our life business, premiums were up by 9%, while the market was down by 27%. This is a very pleasing achievement, which is supported by new pension products, both in the individual and group life business. We also reported a high level of premiums in our savings products even though business activity in this area was slightly reduced in Q2 due to COVID-19. The unit-linked share in our life premiums increased by 12 percentage points to 58%. This compares to a market average of 35%. Life net inflows were at EUR 0.9 billion versus overall market net outflows of EUR 4.7 billion. In health and protection, premiums increased by 5%. P&C premiums were up by 5%, driven by motor products supported by new partnerships. Fee and commission income increased by 9% to EUR 152 million. Unit-linked fees increased due to positive net inflows that more than offset the negative financial market effect on assets under management. Unit-linked reserves were, on average, higher in the first 6 months of the year compared to the prior year period. Moreover, brokerage fees and revenues from structured products increased in times of volatile markets compared to the prior year period. Operating expenses increased by 3% to EUR 170 million due to business growth and investments in growth projects such as the new pension products and digital client solutions. The segment results decreased by 8% to EUR 125 million, mainly due to lower savings and cost results. The savings results decreased due to a lower net investment result in the context of COVID-19. The cost result was down due to higher acquisition costs related to strong new business growth in life. The risk result increased due to lower claims in health and P&C during the COVID-19 lockdown and partly offset the lower savings result. We expect claims, especially in health, to catch up in the second half of 2020. The fee result was up by 13% to EUR 39 million, in line with fee income development. The value of new business increased by 13% to EUR 65 million due to higher volumes in life with a considerably increased unit-linked share. In health and protection, we also improved the business mix. The new business margin increased to 2.4% despite the strong decrease in interest rates. Moving on to Germany on Slide 12. Premiums were up by 4% to EUR 629 million due to higher premiums with modern, modern traditional and disability products. The overall market was up by 4%, driven by single premiums. Fee and commission income grew by 16% to EUR 247 million, driven by a positive contribution from our owned IFAs due to an increased number of financial advisers and productivity gains, supported by our digital platform with features such as video advice. The number of financial advisers increased by 8% year-on-year to 4,317. Operating expenses increased by 9% to EUR 111 million because of business growth as well as ongoing investments in growth initiatives such as digital tools and the interfaces for customers, product partners and intermediaries. The segment result was up by 9% to EUR 92 million, primarily due to a higher fee and savings result. The risk result was at the prior year level, while the cost result decreased slightly due to higher acquisition costs, in line with increasing unit-linked business. The savings result increased in the context of ZZR financing as we realized higher gains in bonds. We expect less ZZR-related realizations in the second half of 2020. The fee result was up by 11% and to EUR 44 million, driven by a strong contribution from our owned IFAs. The value of new business increased by 15% to EUR 27 million. We achieved high volumes with modern products, which further reduced the overall guarantee level. The new business margin remained at a high level of 3.2%. Turning now to the International segment. Premiums decreased by 14% to EUR 694 million due to lower premiums with private clients in Asia as a result of early COVID-19 measures leading to postponement of face-to-face client meetings and medical underwriting. This was partly offset by higher premiums with private clients in Europe and with corporate clients following new contract acquisitions. Assets under control for high-net-worth individuals, one driver of fee income, decreased by 5% to EUR 18.6 billion compared to year-end 2019, as financial market movements and surrenders more than offset new deposits. Fee and commission income was down by 9% to EUR 130 million. This is due to COVID-19 impact on the business with private clients given lower assets under control as well as due to fewer client interactions at owned IFAs. Operating expense has decreased by 5% to EUR 48 million. This is due to disciplined cost management in all lines of business. The segment result increased by 2% to EUR 36 million. The risk and cost results developed positively, while the savings result was stable. The fee result declined by 8% to EUR 26 million, in line with income development. The value of new business improved by 36% to EUR 18 million. The high contribution from corporate clients and improved product mix were partly offset by a lower new business production with private clients. The new business margin increased to 2.8%, also due to continued margin management. Let's now move to our Asset Managers segment that reports in Swiss francs. Asset Managers total income was up by 9% to CHF 419 million. In our PAM business, total income was stable at CHF 177 million. Higher asset management fees on a higher average asset base in the securities business were offset by lower real estate transaction fees. In our TPAM business, total income was up by 16% to CHF 242 million, primarily due to higher recurring fees that were up by 17%. Other net income also increased and outweighed lower real estate transaction fees. Other net income includes gains in ongoing and completed real estate development projects. Both nonrecurring income for TPAM, meaning transaction fees and of net income, came to 23% of total income compared to 23% in the prior year period. This share tends to be lower in the first half of the year as the nonrecurring income is more back-end-loaded within the year. Operating expenses increased by 10% to CHF 253 million due to further growth, primarily in real estate and due to accelerated amortization of customer relationship assets, which is a noncash effect. The segment result increased by 7% to CHF 135 million. PAM was down by 6% to CHF 98 million. This is the result of stable income development being more than offset by higher expenses related to long-term real estate projects such as a large development project in Basel. TPAM increased its segment result by 73% to CHF 37 million. This is due to a growing commission business and also due to higher other net income. Other net income is, by definition, already net of expenses and thus has a noticeable impact on the segment result in the period it occurs. Net new assets in our TPAM business amounted to CHF 1.4 billion compared to CHF 6.2 billion in the first 6 months of 2019. We achieved inflows of CHF 1.4 billion in real estate, CHF 0.5 billion in bonds, CHF 0.4 billion in balanced mandates, CHF 0.3 billion in infrastructures. Those were partly offset by outflows of CHF 1 billion in money market funds and CHF 0.1 billion in equities. Excluding money market funds, net new assets amounted to CHF 2.4 billion in the first half of 2020 compared to CHF 4.9 billion in the prior year period. Q2 stand-alone showed a trend back to inflows, supported by more favorable financial markets. Q2 stand-alone net new assets amounted to CHF 1.4 billion with a flat development of money market funds. Overall, assets under management in our TPAM business were stable at CHF 83 billion. The split by asset class is 42% real estate, 21% balanced mandates, 21% bonds, 7% equities, 5% money market funds and 4% infrastructure. Total assets under management came to CHF 256 billion compared to CHF 254 billion at year-end 2019. Let's move back to group on Slide 15 and have a look at our operating expenses. The overall cost base decreased by 3% to CHF 1.6 billion, mainly due to lower commission expenses. Operating expenses adjusted for restructuring charges, program costs for a new accounting standard, scope changes and FX increased by 4% to CHF 820 million. In our insurance segments, adjusted operating expenses increased by 2% to CHF 573 million. As explained, this is primarily due to Germany and France. Turning now to the investment result on Slide 16. Our direct investment income was down to CHF 2 billion. We had lower income on bonds due to past bond realizations and negative FX impact, both on translation and coupons. We also had lower income on equities due to a reduced exposure and due to lower dividend payments in the COVID-19 environment. Income from real estate also declined year-on-year. First of all, we had movements in our real estate funds. We have fully sold some funds, which led to lower income. We also have substantially reduced our ownership in some other funds. This is in line with our co-investment strategy in TPAM funds. Initially, our stake is often higher and then reduced over time. This leads to a deconsolidation of funds from an accounting point of view and thus to a shift from direct rental income to dividends and gains on real estate funds, meaning that the overall net investment result from real estate remains unaffected. Moreover, the reduction includes also effective rent losses and the negative FX translation effect that were offset by higher rental income on past real estate acquisitions. Please note that real estate income is not developing fully in line with recent acquisitions. Some of the real estate acquired in the past 12 months is in the development phase and is thus not yet generating income, such as a large real estate development project in Basel. Our direct investment yield decreased to 1.2% on a nonannualized basis compared to 1.4% in the prior year period. The net investment result decreased to CHF 1.9 billion. The nonannualized net investment yield was 1.1% compared to 1.3% in the prior year period. This includes net capital gains of CHF 36 million composed of COVID-19-related realized losses on equities, impairment on equities and bonds and positive revaluations on equity derivatives as well as realized gains in bonds and positive real estate revaluations. Moreover, it also includes FX hedging losses resulting from the hedge of hedging costs as interest rate differentials narrowed. This led to a decrease in hedging costs of CHF 40 million to CHF 336 million and will lead to substantially lower hedging costs going forward. The mentioned bond impairments pertained largely to senior secured loan funds and amounted to CHF 66 million, most of which are valuation losses rather than defaults. We continued to have high unrealized gains on bonds of CHF 16.2 billion compared to CHF 15.1 billion at year-end 2019. Our total investment result, including changes in unrealized gains and losses on investments, was at 1.1% despite higher 10-year govie rates in Switzerland. Slide 17 shows the structure of our investment portfolio. The share of bonds increased slightly to 57.7%. 95% of our total bond portfolio is investment grade, 5% is below investment grade, primarily due to our senior secured loan funds that are included in our corporate bond portfolio. The share of real estate increased to 21.1%. We had further real estate revaluations of CHF 0.3 billion and a further net acquisition of CHF 1.1 billion. Real estate continues to be a very attractive asset class from an ALM and SST perspective, providing stable rental incomes at an attractive risk premium that match our commitments on the liability side. You can find more details on our real estate portfolio in the appendix on Page 59. As a result of this high-quality portfolio, our vacancy rate continues to be very low at 3.8% compared to 3.7% at year-end 2019. Moreover, in the first 6 months of 2020, rent collections amounted to around 95% of rental income due. Our net equity quota decreased to 2.7% compared to 4.1% at year-end 2019. In the context of the COVID-19-related financial market developments, we have sold some equities and increased our hedging. Our duration gap was at 1.3. It has increased slightly due to a lower asset duration contribution in 2020, resulting from credit spread widening. Please note that our foreign currency exposure on the insurance portfolio remains hedged. As mentioned on previous occasions, we do not hedge the FX translation effect from our foreign operations and their profits. I will now move on to insurance reserves. Our insurance reserves, excluding policyholder participation liabilities increased by 1% in local currency to CHF 167 billion, primarily due to Switzerland and Germany. Turning now to shareholders' equity on Slide 19. Shareholders' equity decreased by 5% to CHF 15.2 billion. The main drivers of this reduction were lower gains and losses in bonds and equities as well as the dividend paid to shareholders. This was partly offset by net profit attributable to shareholders. Slide 20 shows our capital structure. Our total outstanding financing instruments amount to CHF 4.3 billion. Our total hybrids, including hybrid equity, amount to CHF 3.3 billion. The share of equity within our capital structure is 71% and therefore within our reference level. The capital structure and maturity profile remained well balanced with a diversified denomination of debt in Swiss francs and euros. That brings me to our Swiss Life 2021 financial targets. Let me start with the Swiss Life 2021 progress reporting and the development of our fee business on Slide 22. Commission income at Swiss Life Asset Managers was up by 8% in local currency. Commission income from our owned IFAs increased by 8%, with the largest contribution from Germany. The business with owned and third-party products and services increased by 6% in local currency, driven by France and Switzerland. Overall, our fee and commission income increased by 10% in local currency to CHF 916 million. The fee result increased by 6% to CHF 267 million. Even though not shown on this slide, I would like to comment on the other profit sources. The savings results declined year-on-year due to a lower net investment result in the COVID-19 context. This decline came from Switzerland and France and was partly offset by a slightly higher savings result in Germany. The risk result increased primarily due to our claims in health and P&C in France and also due to slightly better claims ratio -- claims development in Switzerland. The cost result declined slightly due to higher acquisition costs in France and Germany, in line with strong unit-linked business production. Our next slide shows the 2020 half year yield development. Our direct investment yield on a nonannualized basis declined slightly in this challenging environment to 1.2%. This compares to our annualized reinvestment rate of 1.6%. Moving on to the average technical interest rate on Slide 25. In the first 6 months of 2020, we further strengthened the policyholder reserves by around CHF 0.25 billion. This led to a 1 basis point decrease of the average technical interest rate. In addition, the shift to a more favorable business mix led to a further reduction of 1 basis point. Overall, our average technical interest rate decreased by 2 basis points to 1.1% as of the end of June 2020. This rate is annualized while the yields on the previous page are not. We are very pleased that we were able to reduce the average technical interest rate in Switzerland to 78 basis points. Turning to the value of new business and the new business margin on Slide 26. Our margin management paid off in all segments with measures such as improved business mix in Switzerland, continued shift to products with low guarantees in France and Germany as well as the continued focus on risk business in international. This led, despite the substantial decrease of interest rates, to a new business margin of 2.1%, which is above our ambition level of 1.5%. The value of new business decreased to CHF 204 million due to the exceptionally high new business production of full insurance solutions in Switzerland in 2019. Let me now move on to operational efficiency. In life insurance, the efficiency ratio improved by 1 basis point to 18 basis points, primarily driven by the increase in life insurance reserves. This ratio is not annualized. At our owned IFAs, the distribution operating expense ratio improved slightly as high commission income outweighed higher expenses and it stands at 25%. In our TPAM business, the cost-to-income ratio improved to 94% from 96%, in line with growing net commission income and improved efficiency. This half year 2020 ratio includes the mentioned accelerated amortization of customer relationship assets. Excluding this, the ratio would have been 86%. Please note that the cost-to-income ratio tends to be higher in the first half of the year as the operating expenses are more linearly incurred while the income is more back-end-loaded within the year. Turning to capital, cash and payout on Slide 28. By the end of June 2020, our Swiss solvency test ratio is estimated to be above 185% and therefore at the upper end of our ambition range. As of today, the SST ratio is around 190%, in line with more favorable financial markets. Supported by our disciplined asset and liability management, our solvency remains strong, even after financial market developments in 2020. Yes, this SST ratio includes the entire year share buyback of CHF 400 million, which is temporarily suspended, in line with other major listed banks and insurance companies in Switzerland. On our next slide, you can see the SST ratio and our Solvency II ratio at the beginning of the year. On the right-hand side of the slide, we report, as usual, our SST sensitivities as of 1st of January 2020. As I mentioned a few minutes ago, we have almost halved our net equity exposure since the beginning of this year. This means that our SST sensitivity towards equity market developments is now reduced accordingly. Let's move on to Slide 30 that shows our cash remittance. In the first half of 2020, we remitted CHF 748 million of cash to the holding company. This is an increase of 6% year-on-year. Cash at holding as of today amounts to CHF 1 billion compared to CHF 0.9 billion at year-end 2019. This is after accounting for the dividend of CHF 20 per share for the financial year 2019, which was fully paid in 2020 as planned. At the end of July, we canceled the remaining shares repurchased under the CHF 1 billion share buyback. This share buyback was completed on 5th of December 2019. The current share count as of today is 32 million. Our new share buyback, which was started on March 3, 2020, is being temporarily suspended. We will provide another update on the situation at our Q3 result disclosure. Let me sum up. Today, we report pleasing 2020 half year results given the COVID-19 situation and its headwind. Our business model has again proved to be resilient. The main effects from COVID-19 for us arise from negative financial market developments and the related impact on our savings result. This was mitigated by higher fee and risk results in the first 6 months of 2020. In the anticipated U-shaped economic recovery, we expect the 2020 financial year savings result to remain below the level of 2019. Our solvency remains strong at above 185% and thus at the upper end of our ambition range. We have further increased our cash remittance and have paid the entire dividend for the 2019 financial year. We are on track with our Swiss Life 2021 program despite headwinds from COVID-19 and I can confirm our Swiss Life 2021 targets. This also pertains to those targets like the return on equity of 8% to 10% that are valid for each and every year, including 2020. This brings me to the end of my speech. Thank you for listening and back to you, Patrick.

Thank you, Matthias. Dear analysts and investors, the microphone is now yours. Who would like to ask the first question?

[Operator Instructions] The first question is from Andrew Sinclair from Bank of America.

Three from me, as usual, if that's okay. Firstly, just on the real estate experience. I just really wondered if you could help me reconcile the 95% collection of rents with real estate investment income, direct investment income being down about 10% year-on-year, I thought -- despite the real estate growing over the year, maybe I'm missing something completely obvious, but just if you can help reconcile that for me. Secondly, it was just on the suspended buyback. I realize you said you'll give an update at Q3. But is it sufficient to have regulators back on board for buybacks? Or would you want the SST ratio back above 190%? How are you thinking about that? And thirdly, just on the corporate bond portfolio, actually. Just with -- you've got about 38% of the portfolio BBB and then about 12% sub-investment grade. Just really wondered if you could give us some more color on sector exposures of those holdings. I think, as far as I've seen, unless I'm mistaken, the portfolio breakdown -- sorry, the sector breakdown is only at portfolio level, but just really wondering, amongst those BBB and sub-investment grade, if you could give us a bit more color.

Okay. Let me start with the buyback question. You had as said, we will give you an update in Q3. In regard to the question you had, when we suspended temporarily the share buyback in March, we said we have done that in line with other major banks and insurance company in Switzerland. So that was the trigger and that's what we can say in that. And the next update is in Q3, which is November sometime. In terms of the real estate, maybe I have not fully understood the question, but I try to phrase it as follows. We have essentially the rent collection, which is measured on the rent due. So that's where we have the 95%. So we look what is due. And there, the rent losses where we have forgiven the rent for 1 or 2 months is not included. The rental losses are below CHF 10 million. And of the rest, the collection is, as I said, around 95%. Now what has driven, let's say, the direct investment income on -- the income on real estate has come down year-on-year, is, as we said, an accounting effect that is driven by the deconsolidation of funds, which has led to the fact that what was previously direct rental income is now, after the consolidation that took place in the -- since half year 2019, this income is now recognized as dividend income and revaluation gains. And that's the reason -- one of the reasons for the decline. And then we have, as mentioned, also, FX translation effects, the mentioned rental losses. On the other hand, on the positive side, we also invested again into new real estate. But also, I've mentioned some of the investments we have undertaken in the past 12 months was into real estate development projects that do not yet generate income.

Well, I mean, on the corporate bond side, you just see -- as we already mentioned in the disclosure we have on the total portfolio, so we don't have a disclosure on, let's say, the BBBs, BBs and Bs. But as far as I recall, there's nothing really special to mention on that side, let's say, vis-à-vis an index. I think the thing that is important to mention is that we have practically no exposure to the weaker part, so to the CCCs, CCs and so on. And as you can see, we had, even in this difficult period, very low impairments in the bond portfolio. And the impairments that we have disclosed, I think it's on Page 37 of the booklet...

38.

38 of the booklet, where you see that we have the CHF 66 million of impairments. This was primarily because of the loan portfolio, which is held indirectly and that was not because of default. So we did have 1 default of an energy company, I think, which haven't been generating -- which was not even the default, but it was an impairment, around CHF 16 million. And the rest is basically simply a lower market value of the indirectly held loan portfolio. And that is most of the high-yield portion anyway, so we don't hold [ coupon ] yield bonds anymore.

The next question is from Peter Eliot from Kepler Cheuvreux.

Perhaps if I could just start with just a quick follow-up on that rent collection, the 95% figure. I'm just wondering, could you give us what that was last year or what you might expect that to be in normal period, just for comparison? Would it be very close to 100%? Or -- yes, that was one. Secondly, on cash, impressive number. I mean, I guess, cash always lags earnings to an extent, and so I'm just wondering if you can give us any guidance on the outlook for next year or any sort of hints on things that might impact the cash flows to expect for next year. I mean, in particular, maybe sort of the ease of upstreaming in the current environment. And finally, I guess on the running yield, I think, I mean, the half year figure is probably exaggerated a little bit from the sort of the loss of dividend income, et cetera. I'm just wondering if you could give us a guide to what the sort of the annual running yield of the portfolio is, what the sort of drop is from last year? And I mean, on that one, I appreciate the 3 decades of interest rate margin safeguarding that you've reiterated. Apologies for my poor memory, but I was wondering if you could just remind us of exactly the assumptions going into that in terms of reinvestment rates in particular?

Okay. So I'll have another go at the rent collection part. I mean, so the reason why we mentioned this is because there was some very low rent collection at some property companies in the U.K. And similarly, so we thought it would be helpful to give you some guidance on where we stand. And actually, this 95% is actually fairly conservative. So the figure is actually a little bit higher. And so it includes basically, the rent collection that is due but that was not paid in cash. So we still expect most of those missing 95% to be collected in the second half of the year as the actual -- the rent that was not collected because of defaults or because we forgave the rent to the leaseholders was actually below CHF 10 million, so a very low figure. So we do expect to catch up to in the second part of the year. And last year, this rent collection figure was around 99%. So you have the comparison. And as basically the missing part, accounting-wise, does not show up because we still expect to collect it. Of course, this has nothing to do with the deconsolidation effects that Matthias mentioned on the lower rental income that we've disclosed, which is primarily due to deconsolidation effects because we sold off some of our indirect fund holdings on real estate to third-party investors. I hope that clarified that point.

Yes. That's great.

I'll hand over to Matthias for the other two.

Maybe in respect to the question on cash, I can confirm that this year's cash comes up as planned, so we have year underway as planned. And prospectively, I just can confirm that we say that all Swiss Life 2021 targets are valid. This includes, first of all, the dividend payout ratio of 50% to 60% and also the cash transfer to the holding, which is accumulated to CHF 2.25 billion. So that is what we confirm. And that's really then also the basis for the dividend payout which is paid in cash. In terms of the question on the running yield, I think that, given that we now do not hold too much equities anymore, I think it is probably a rather good approximation to think about doubling that. Yes, there is a bit more in the first half of the year, but I think essentially doubling is not too bad an approximation. And then the last question, I think, was on the interest rate margin, if I understood that correctly, what the assumptions were. Is that what you asked?

Yes, exactly. So you've reiterated the 3 decades. Yes, exactly. Just want to remind myself the assumptions behind that.

Yes. So I think that's a disclosure we have made on the Investor Day in 2018. I think, first of all, it's important to know that we do not include any gains on risk there or risk profit or fee income. I mean it's purely the interest rate margin, excluding the other income sources we have. We project there existing portfolio of bonds and other assets, and we assume the reinvestment rate to be based on the forward rates with a marginal pickup, given the fact that we also include a bit risk debenture bonds. But that's essentially what we assume in terms of the BVG business. We also include conversion losses, especially on the mandatory part, which are substantial, as we all know.

Next question is from Jon Hocking from Morgan Stanley.

I'm just coming in for my colleague Fulin. I've got 3 questions, please. Firstly, could you give some comments in terms of whether you've seen any persistency impacts, particularly on the investment products in the first half? That's the first question. Second question, on the third-party asset management cost-to-income number, I know there was the one-off that you highlighted from accelerated amortization. But are you still confident in your ability to hit the 75% target in 2021? And then finally, sorry to come back to the rent collection piece. But on the property portfolio, how should we think about the valuation impact of the rent collection? Is it just a very temporary effect in the first half and shouldn't have any particular impact on the valuation of the portfolio?

So I'll take the easy question, which is the rent collection part. Yes, so you cannot -- you should not extrapolate that for the whole year. This was really a temporary thing that -- as we mentioned. So I don't expect any impact on valuations of our real estate portfolio. And I think one thing that really underlines that is that our vacancy remains -- our vacancy rate remains very close to the historic low we hit at the end of last year, where we were at 3.7%. And we are now at 3.8%, yes. I expect that to go up slightly over the course of the rest of the year, but I don't expect a valuation impact to the best of my knowledge at this point in time. The rest for Matthias.

Maybe first, concerning the persistency impact, overall, we have essentially not seen any noticeable change in surrenders of the policies. They may be in the low, very low percentage points or fractions of percentage points. There may have been variations, but nothing that we see as a major concern. In certain areas, we have seen that there are deferrals of premium payments that have marginally gone up, but that's typically more in the savings rather than the investment product space. So to cut the long story short, there, we have not seen substantial impact in terms of persistency behavior. Coming to the TPAM cost-to-income ratio, we confirm all the Swiss Life 2021 targets, including the TPAM cost-to-income ratio of around 75%.

Next question is from Thomas Bateman from Berenberg.

Just going back to real estate a little bit. I am thinking slightly longer term. I appreciate that you don't expect valuation impacts in the shorter term, but given large office users like sort of BP and Allianz are saying that their demand for offices could shrink. How do you think that sort of trend might impact your portfolio?

Of course, there are always certain risks to office portfolios given the economy slowdown, given social trends. A time back ago, we thought that the inner cities would not be competitive with much more modern office space at the periphery. In the end, it showed that, since Roman times, people like to be where all the others are. So the city center vacancy rates we had 10 years ago when we bought a lot of buildings from banks, they filled up very quickly. So I cannot exclude that at some point in time we will have a reversal of such trends. But at the moment, I suspect that this COVID-19 crisis will lead to a higher office demand simply because the space and distancing rules will remain important. And we've all learned that people don't like to be crammed into tiny offices. And our portfolio is really geared towards city centers and the CBDs of the different cities. So I also remain optimistic for the longer term that there will continue to be an office demand. Of course, I might be wrong. But the other trend we've been talking about now for 10 to 20 years is that the Internet retail sales will kill off high street retail space and other retail space. I'd just like to remind you that the segment of our real estate portfolio with the lowest vacancy rate is actually not our residential portfolio but is our retail portfolio, where our vacancy rate remains below 2%. And so that's another trend that the Warners over the past decade and more have been wrong about. People like to go to the city centers and I continue to be optimistic about that. Of course, there are tons of people who say otherwise. In the end, you'll have to make up your mind yourself. But we remain very confident about our real estate portfolio.

[Operator Instructions] The next question is from Jonny Urwin from UBS.

Just 3 for me, please. So firstly, thanks for the real estate commentary. It's been reassuring. I mean when we're thinking about investments in new real estate assets, I wondered, has there been any need to change your investment framework or your return hurdles, i.e., has there been any shift in the underlying view of risk? So that's number one. Number two, what's your expectations for the BVG rate-setting process outcome delivered in the autumn? And thirdly, are you expecting any changes to SST model calibration post COVID-19? Is there any reason for the regulator to tighten the model again? I'm mindful that we've only really just seen some stability in the last couple of years, so I'd be keen to know your thoughts there.

Let me take the real estate question, again. So yes, I mean, our hurdle rates have definitely come down over the last decade, year by year. Of course, as we have been buying real estate, these hurdles have come down. Why? Because we primarily look at it as a surrogate for long-term bonds to source Swiss franc-denominated cash flows. I mean that's the main reason because our government almost issues no very long-term debt. For us, the need to source cash flows on assets, which will be around into the rest of the century and possibly into the 22nd century, that's the reason why we buy real estate. And we price that real estate, those price -- holdings vis-à-vis the very long-dated bonds in the portfolio. And that rate differential remains very close to the all-time highs we saw last year. So that's the way we think about it. We don't have, let's say, absolute hurdles to buy real estate. And yes, we have ventured into, over the last 5 to 10 years into some real estate that we didn't do before. As you know, we bought payoffs, for example, where we had some light industrials and some logistics. We also, several years ago, built up a small portfolio in the health care area in Germany and France. And those 3 segments are actually doing very well from the changes we're seeing in our societies around the Internet shopping, delivery of packages, care for the elderly and the like. So we're seeing a very strong performance of that part. Then we've also have a very low part in hotels on our balance sheets, which we've had for quite some time. For example, our former headquarters in Germany has been converted into a hotel. And we have some other very low hotel exposure. I think it's around CHF 300 million overall. And of course, those assets are suffering. We will also in -- with THE CIRCLE development at Zurich Airport, where we own now 49% of, have another hotel or convention center exposure here. Here, by now, 83% of the space has been rented out, but we will see some delays in, of course, the cash coming through vis-à-vis the original expectations from those convention centers and hotels. And then we have very, very low exposures to restaurants, to the rest of the travel industry. So again, yes, here and there, we have some special assets, but that's included basically in the other part of the portfolio, but a large part of that is actually doing very well and benefiting from that with the exceptions of hotels where we have a low exposure. For the other questions, I hand over to Matthias.

Thank you. Coming first to the question on SST. We have had, as an industry, very long discussions with FINMA to establish this SST standard model, which is now really a solid base. So the model itself, I think we do not expect changes there. There are -- there's a process which is called maintenance. That's a model maintenance. There, we do not see big things coming now. There's one certain aspect in terms of calibration of the model. What do I mean? The capital charge -- and I'm sorry, it's becoming a bit technical. The capital charge is essentially the average of, let's say, historical volatilities. And now as we progress, we have included the high volatilities, especially in the corporate spread area, in the month of March and April. And this leads systematically to an increase of the capital charge for corporate bonds. This is an effect of around 10 percentage points. And these 10 percentage points are already included in the SST figures we have disclosed today. In terms of the BVG rate setting, that's -- how should I say? This is a political process. This is a parliamentary decision, which is typically taken in the fourth quarter of the year. So I think it's too early to speculate what it is. I think 2 or 3 comments that are important, first of all, the level of the guarantee is not that relevant for us because it is a gross legal quote. So as long as we are above the guarantee, it doesn't change our profit. And the second one, which is also important to keep in mind, and I refer here to the booklet on Page 46 in the appendix, you see that we have a total of insurance reserves of around CHF 183.7 billion. Out of this amount, it's essentially those CHF 20.5 billion at the very right-hand side at the bottom, which is the mandatory part of the BVG business, which is subject to this parliamentary or essentially a decision of the Federal Council, I have to say. So yes, there is something going on. But as indicated, we're not that much affected as it may seem.

Next question is from Rene Locher from MainFirst.

So I would like to start with Page 5, just a clarification. They just highlight the balanced portfolio of mortality and longevity risk. And I was just wondering, if I look in the SST report 2019 on Page 55, I would conclude that you are much more exposed to longevity than mortality. I mean, just as a clarification. And then the second question is on Page 29. I have to admit I am not an SST specialist, but that's quite interesting to see that sensitivity to interest rates now -- in H1 '19, it was minus 4 bps or 50 bps moving into say -- now it's down to minus 1 percentage points. So I was just wondering how you can explain that. Third question is on -- interesting to see that nobody asked that question before, but I remember, a few weeks ago, there were quite a little bit of action in the market when Generali was forced to increase the reserves in the Swiss book. And yes, perhaps you could just share with -- a little bit of a flag on how you see your reserves position in Switzerland. Next one on Glattzentrum. I'm just wondering if you could provide a few key figures here. And yes, if I may, last one, I mean, Switzerland used to be kind of a role model in old-age provision now first and the second pillar business. Now it's, yes, a little bit stretched. So in the press, you can see a lot of articles that politicians would like to push a little bit the third pillar business. So that means individual savings for old age. And yes, I was just wondering what your view is on this topic.

Well, obviously, we don't have anything against pushing the third pillar as that's an important part of our individual business, which tends to have a higher profitability than the second pillar. So we, of course, like to hear that from the political side. Now on the Glattzentrum which is the most successful shopping center in Switzerland, just outside of -- just north of the city boundary of Zurich. It's very well located, with extremely low vacancy rates. All of that has been bought for third-party clients. It's really the best-run center in Switzerland. We expect the closing at the beginning of the fourth quarter. And we have not disclosed an agreement with the seller any figures. Then I hand over to Matthias on the other question.

Thank you. Maybe first coming to the question of the financial condition report. What you see there, let me show you -- refer to Page 6 of the financial condition report. When you compare the components for insurance and in mortality risk, I think what you need to keep in mind is that the numbers that are shown there refer to what happens if there is a long-term change of mortality or longevity assumptions. So I wouldn't extrapolate what you see there to the situation we have right now in a pandemic where we have kind of a spike, a 1-year event, so to speak, that takes place. But therefore, I would not translate one into the current situation. But as you say, we have a balanced portfolio of mortality and longevity risk. And that's the reason why we have not had a noticeable impact on the risk result due to the life insurance business. As mentioned, we had a positive impact in the current situation from the other business lines in the risk result. Now in terms of the reserving, well, we do not comment on what others do. What our approach is that we assess the adequacy of our technical reserves on a semi-annual basis for half year, for full year. That includes the traditional reserve and that also includes unit-linked portfolios that we have on, for example, on our Swiss book, also those that have guarantees in there. And to give you a figure, in our book in Switzerland in the individual life business, we have around CHF 0.5 billion of unit-linked reserves with a guarantee, which is roughly speaking, 2% of our individual book in Switzerland.

Okay. Just quickly on Page 2019 sensitivities. Okay. If I compare H1 '19 with H1 '20, for H1 '19, interest rates moved 50 bps, minus 4 percentage point, now it's down at minus 1 percentage point.

So Rene, I didn't mean to not answering this question.

Sorry.

Yes. I think what you essentially see both with the minus 1% and the minus 4% is that in the standard model, we have essentially no significant interest rate sensitivity. So I think that's the key message of that sensitivity. And I wouldn't attribute too much weight to that change from the minus 1% to the minus 4%. What is important is that we have the duration management based on an economic view and not on the SST standard model, which gives, given its structure, a bit of a different interest rate sensitivity.

There are no more questions at this time.

So that brings us to the end of our conference call. Once again, thank you for taking part. I hope you enjoy the rest of the summer and hope to see you soon. Thank you and goodbye.

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