Swiss Life Holding AG

SIX:SLHN

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Swiss Life Presentation of the Q3 Results 2020 Conference Call. I am Sandra, 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 Matthias Aellig, Group CFO of Swiss Life. Please go ahead, sir.

[Matthias Aellig, Group CFO & Member of Executive Board]

Good morning, ladies and gentlemen. Thank you for dialing in and for your interest in Swiss Life. Today, we are reporting on selected top line figures for the first 9 months of 2020. Please note that all figures quoted are in Swiss francs and are unaudited. All growth rates mentioned are in local currency. Let me start with today's key messages. Afterwards, I will provide more details on our segments. Fee and commission income was up by 10% to CHF 1.4 billion. All sources contributed positively. Asset Managers grew by 12%, our owned IFA by 8% and our owned and third-party products and services by 5%. Growth rate in premiums, fees and deposits received decreased by 13% to CHF 15.4 billion. This decline is anticipated and, as previously mentioned, is due to the exceptional demand in 2019 in our Swiss Group Life business. Insurance reserves, excluding policyholders participation liabilities, grew by 1% to CHF 168 billion. Swiss Life Asset Managers reported net new assets of CHF 3.8 billion in third-party asset management. Total assets under management in our TPAM business amount CHF 86.7 million. Direct investment income was at CHF 3.0 billion. Non-annualized direct yield was 1.8% compared to 2.0% in prior year period. The net investment yield stood at 1.4%, down from 1.9% in Q3 2019, also on a non-annualized basis. Our SST ratio as of 30th of September 2020 was around 190% and, therefore, at the upper end of our ambition range. Our CHF 400 million share buyback program will restart on the 4th of January 2021. Total amount and end dates are unchanged. Let me now move on to our segment reporting, starting with Switzerland. Premiums decreased by 22% to CHF 9.1 billion. The overall market was down by 21%. Premiums in Individual Life were down by 8%, while the market was down by 3%. Periodic premiums grew by 2%. Single premiums decreased by 29%. Premiums in group life were down by 23% to CHF 8.1 billion, while the market [ decreased ] by 25%. Periodic premiums grew by 1%. Single premiums increased by 35%. As mentioned on numerous occasions, we reported an exceptional increase in premiums in 2019. Overall premiums in Switzerland in the first 9 months of 2020, excluding this exceptional increase, were stable. The share of semi-autonomous solutions in our group life new business production was 46% compared to 15% in prior year period. Assets under management in our investment foundation grew by 8% to CHF 11.9 billion compared CHF 11.0 billion at year-end 2019. Fee and commission income increased by 8% to CHF 215 million, primarily due to our mortgage business, investments solutions for private clients and Swiss Life Select. Turning to France. Premiums increased by 9% to CHF 4.4 billion. In our life business, premiums were up by 11%, while the market was down by 25%. This is a very pleasing achievement, which is supported by new pension products. The unit-linked share in our life premiums was 57% compared to the market average of 34%. In health and protection, premiums grew by 5%. P&C premiums were up by 3%, driven by [ modern ] products. Fee and commission income rose by 7% to CHF 243 million. Unit-linked fees increased due to positive net inflows but more than offset the negative financial market effect on assets under management. Unit-linked reserves were, on average, higher in the first 9 months of the year compared to the prior year period. Moreover, brokerage fees and revenues from structured products also increased. I continue with Germany. Premiums grew by 5% to CHF 982 million due to higher premiums with modern, modern traditional and disability products. The market increased by 1%, driven by single premiums. Fee and commission income was up by 14% to CHF 390 million, driven by strong contribution from our own IFAs due to an increased number of financial advisors and productivity gains, supported by our digital platform features such as video advice. The number of financial advisors increased by 9% year-on-year to [4,470].Moving on to our international unit. Premiums decreased by 22% to CHF 953 million due to lower single premiums with private clients in Asia as a result of the early and lasting COVID-19 measures. This was partly offset by higher premiums with private clients in Europe and with corporate clients. Assets under control for private clients declined by 7% to CHF 19.6 billion compared to year-end 2019 as negative financial market performance and surrenders more than offset new deposits. Fee and commission income was down by 10% to CHF 207 million. This is due to COVID-19 impact on the business with private clients, given lower assets and control as well as due to fewer client interactions at the owned IFAs. Let's continue with asset managers. Asset management commission income was up by 12% to CHF 630 million. As usual, the update on asset management in Q1 and Q3 focuses on commission income and does not include other net income from real estate project development. In our PAM business, commission income increased by 3% to CHF 274 million. This is primarily due to a higher average asset base. In our TPAM business, commission income was up by 20% to CHF 357 million. Recurring fees increased by 19% based on higher average assets under management. Nonrecurring commission income, such as transaction and performance fees increased by 23%. The share of total nonrecurring income for TPAM, meaning commission income as well as other net income, for example, from project development, was 28% of total income. Other net income includes gains of ongoing and completed real estate development project. So far, we have not seen material delays in our real estate development projects. Net new assets in our TPAM business amounted to CHF 3.8 billion compared to CHF 6.5 billion in the first 9 months of 2019. We achieved inflows of CHF 2.0 billion in real estate, CHF 0.7 billion in bonds, CHF 0.5 billion in balanced mandates, CHF 0.4 billion in infrastructure and CHF 0.3 billion in money market funds. Inflows in real estate and infrastructure were [indiscernible] at prior year level. Excluding money market funds, net new assets amounted to CHF 3.5 billion in the first 9 months 2020 compared to CHF 5.9 billion in the prior year period. Overall, asset under management in our TPAM business were up to CHF 86.7 billion compared to CHF 83 billion at year-end 2019. Turning to our investment results. Our direct investment income increased by around CHF 0.3 billion to CHF 3.0 billion. We have lower income on bonds due to past un-realizations and lower reinvestment yields as well as negative FX impacts 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 declined year-on-year, primarily due to the movements in our real estate funds in the first 6 months of 2020, which we discussed in August in our half year disclosure. The non-annualized direct yield decreased to 1.8% compared to 2.0% in the prior year period. Coming to the net investment yield. Our non-annualized net investment yield decreased 1.4% from 1.9%. It includes net capital losses composed of COVID-19-related realized losses on equities, revaluation losses on derivatives of our equity hedging strategy as well as impairments on equities and bonds. Those were partly offset by realized gains in bonds and positive real estate revaluations. Moreover, it also includes FX hedging effects, including losses resulting from the hedging costs as interest rate differentials narrowed this year in Q1 2020. This narrowing led to a decrease of hedging costs by around CHF 140 million to CHF 440 million and will lead to substantially lower hedging costs going forward. At the end of September 2020, unrealized net gains on equities amounted to CHF 1.1 billion compared to CHF 1.6 billion at year-end 2019. Unrealized net gains and bonds amounted to CHF 17.5 billion compared to CHF 15.1 billion at year-end 2019. Please note that there are legal quote mechanisms in most of our insurance businesses. This means that the investment gains and losses are subject to sharing with the policyholder. Now let me conclude the yield discussion with a forward-looking statement. For the 12 months of 2020, we expect to achieve a net investment yield of slightly below 2%. I'm saying this with the usual disclaimer of any unforeseen developments in financial market for the rest of the year. The asset mix remained in line with the half year 2020. The real estate exposure amounts to 21.1%. Let me give some additional color on the real estate portfolio. We had real estate revaluation gains of 1.3% compared to 1.8% a year ago, both on a non-annualized basis. Given our high-quality portfolio in attractive locations, our vacancy rate continues to be very low at 3.9% compared to 3.7% at year-end 2019. Moreover, in the first 9 months of 2020, rent collections amounted to around 96% of rental income due. The majority is due to rent deferrals as rent losses amounted to less than CHF 10 million. Please note that the rent collection differs from the P&L and accounting view. Rent collections simply reflect the cash collected compared to the rent due. Rent deferrals and rent not yet collected are recognized in the income in the P&L, the respective account receivables on the balance sheet. I can confirm that we had no impairments on rent receivables apart from the just mentioned rent losses of less than CHF 10 million. Moving to solvency, cash and payout. Our SST ratio was around 190% by the end of September 2020. As of today, SST ratio is at the same level and, therefore, at the upper end of our ambition range of 140% to 190%. Cash at holding amounts to CHF 1 billion as of today compared to CHF 0.9 billion at year-end 2019. Both our solvency and cash position continue to remain strong. As communicated in March, we temporarily suspended our share buyback in line with all other managed listed banks and insurance companies in Switzerland. We now reassess the situation as we communicated in August and decided to resume the CHF 400 million share buyback program on 4th of January 2021. Total amount and end date are unchanged. In other words, we will repurchase shares for the remaining amount of CHF 371 million by the end of May 2021. Let me sum up. Our business model proved resilient and sustainable in this challenging environment. Overall, we report solid results for the 9 months of 2020 despite COVID-19 headwinds. Especially, our fee income developed strongly despite financial market developments and lockdowns. As mentioned on several occasions, the main effects from COVID-19 for us arise from negative financial market developments and the related impact of our savings result. We expect the savings results to be below the 2019 level in the anticipated U shaped economic recovery. We continue to be on track with our Swiss Life 2021 program despite headwinds from COVID-19 and I can confirm 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 with a save the dates for 2021. Swiss Life will host an Investor Day next year to disclose a new strategic and financial program. The Investor Day is planned to be held on November 25, 2021. Thank you for listening. I am now ready to take your questions.

[Operator]

[Operator Instructions] The first question comes from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

Great results, and very good news on the share buyback. So I'm going to sound greedy with my first question. But I guess, given that you've decided to launch the share buyback, I'm just wondering what -- whether you can shed any light on the thinking of the timing of the start date? I mean, was there any reason for not doing it immediately if you've got the cash and you decided to do it? That was the first question. Second question was on asset management. I'm just wondering if you can give us the split of recurring, nonrecurring fee income and any insights into the outlook there. And final question, very strong results from the sort of financial advisor channel in Germany. Just wondering if you can talk about your sort of current recruitment and whether that drive can continue. I guess it comes from efficiency and higher number of advisors. And yes, just wondering about the sort of the outlook over the coming year given both of those trends currently.

[Matthias Aellig, Group CFO & Member of Executive Board]

Thanks, Peter, for the question. I'll start with the question on the timing on the thoughts behind that, as mentioned the thinking back to March, we said then that we suspended the buyback temporarily in line with other major Swiss banks and insurance companies. That was the reason that was driving the consideration back then. And now we reassessed the situation, as mentioned, and we decided to restart the share buyback on the 4th of January, and this is also in line with major banks in Switzerland. And besides that, I think what we also said is the timing in terms of [ earnings ] date and when the volume remains unchanged compared to the original plan. So that's about the thinking about the timing of the resumption of the share buyback. In terms of the split of the income of the commission -- fee commission as well as the other net income, we have had 28% in Q3. We also were saying this is typically a bit back-end loaded within the year that the nonrecurring business, there are always a bit uncertainties when and how much it will come. But I think it's fair to assume that we are for the year-end on a similar level. The 28% is that important on a year-to-date basis. This compares to 23% at half year, and there, you already see a bit this typically occurring fact that it is back end loaded out within the year. In terms of the IFAs, yes, we continue to see growth in the number of financial advisors in Germany, we have there 9% year-on-year. But we also have realized efficiency gains, both of which contributed to the growth of fee and commission income of 14% in the German business unit. With this, I think, worthwhile to mention is that we were able in the first 3 quarters of this year, not only to continue to serve our customers during this difficult times, some of which were really lockdown periods also in Germany, but we also could continue to recruit additional advisors, which will now undergo their certification, and this is really a proof that our, let's say, business model in Germany, the platform we have built is attractive.

[Peter Eliot, Head of Insurance Sector Research]

That's great. Could I follow up very quickly on that? Sorry, Matthias. I didn't quite catch your comment on the sort of nonrecurring. I heard that you -- that it was typically back-end loaded. I think you made some specific comments about the sort of the outlook for this year and whether it might be more or less than usual, I didn't quite catch that. And then on the adviser growth, I mean that's great news that you were sort of still able to recruit during this period. Those some comments sounds to be a bit more bullish than, I guess, I've heard from elsewhere in the industry. So I'm just wondering, do you think you're attracting more people than elsewhere? Do you feel you're taking market share there?

[Matthias Aellig, Group CFO & Member of Executive Board]

Coming back to the question of the recruits. We have, on average, a substantially younger advisory force in Germany compared to the market. So our average is maybe 37 years, that's what we also disclosed at the Investors Day 2018. I think the overall market has an average age of slightly above 50. So we have a younger advisory force, which is growing while the overall trend, in Germany in the advisory -- in financial advisory force is shrinking. And yes, one of the key points we have to offer to young people who want to pursue a career in that business is that we have a platform that supports them in being efficient and really to build their only kind of middle businesses, duration that makes us so successful in Germany. It's really this combination effect that makes us to grow continuously at that rate, as I mentioned, 9% year-on-year. In terms of the real estate project development, what I mentioned is we had 23% at half year. That is a share of nonrecurring income in the total income, including other net income. That was 23% at half year 2020. We now have 28% at Q3. And that shows, as I said, the fact that the nonrecurring business is typically back-end loaded within the year. Now if you look back on what we have shown for the full year 2019, we were there at 27%. And that if we go back 1 year more, we were in full year 2018, at 33%. And we always said, going back in 2018, we knew that 2019 was going to be a weak year, because there was this historic project development pipeline of a business acquired in Germany in 2014 that would come to an end in 2019. So to cut the long story short, we expect for the full year 2020 something which is at the Q3 level or a bit higher.

[Operator]

The next question come from Michael Huttner from Berenberg.

[Michael Igor Huttner, Analyst]

I guess, as Peter said, well done on the buyback and well done on the overall results. Just 2 questions. One is on the granularity of the development, and the other one is a more general question on how you see competition from your peers in real estate asset management. And, oh yes, and as the last question, because I couldn't work it out, I got very confused. From granularity of the development, on I think you have a development called CIRCLE, in -- near the airport in Zurich. I just wondered if you could update us a little bit on the progress there in terms of lettings and whatever, I don't know. Any new indications? I think it's quite a large development. The second is on the competition from peers. So Baloise said at their Investor Day last week, they want to grow more real estate asset management. They mentioned some figures, which are still very small, not -- they're clearly not much. But I just wondered if you see any signs of dilution of any kind from competition, from then, from [indiscernible] and some others.And then the last one is on the buyback, I was trying to work out in the, I guess, 5 months that you will have to complete it to May, what kind of percentage of average daily volume it could be? I got so confused, I worked out 2%, which seemed very low, but anyway.

[Matthias Aellig, Group CFO & Member of Executive Board]

Okay. Thank you, Michael. I didn't understand [ acoustically ] the first question on granularity, the very first thing. What was that?

[Michael Igor Huttner, Analyst]

I beg your pardon. Yes, sorry about that. Can you hear me better now?

[Matthias Aellig, Group CFO & Member of Executive Board]

Yes. It was the granularity of what?

[Michael Igor Huttner, Analyst]

Yes. So the -- I think you have a development near Zurich Airport, called THE CIRCLE, is that right? And I just wondered if you can update us or whatever it's called a big thing, which will have a hospital and hotels and things. And I just wondered if you can update on progress on this and how much is pre-let and whatever.

[Matthias Aellig, Group CFO & Member of Executive Board]

No -- but -- thanks. I'll start with that one, THE CIRCLE, I you say, it's a large development at the Zurich Airport. There is, as you said, there is a hospital, which is already in operation that's University Hospital of Zurich. We have there big companies that are moving in, we have now restaurants, shops that are opening. The official openings will be in, I think, tomorrow, so that is quite imminent. The [ quota ] of letted space is at 83%. And it's important to understand the context there is that while it is at the airport, there is also a large traffic, say, connection hub there, which is not the end of the air traffic, so there is lots of commuter traffic that is going through Zurich hotel. So this is really going well, as I said it will open tomorrow. Now in terms of the share buyback that you mentioned, if you look at numbers, the average volumes, at the 5 months and the remaining CHF 371 million turns out to be around CHF 75 million or something like that a month, and this is essentially the same level of volume that we have done in the share buyback that we announced in 2018, the CHF 1 billion that lasted for 13 months, so that's absolutely comparable to the previous buyback. Now in terms of competition in the real estate area here in Switzerland, we still see this as an attractive place. We have long-standing experience. We have been entering the business of third party asset management in the real estate area many years ago, as we have built up here a track record and a reputation. We now have in the TPAM area, essentially the same amount of real estate as on the balance sheet, which is essentially CHF 35 billion, or a bit more. So we are well positioned there in the -- we have the track record and the experience. And given the local nature of that real estate business, we still see that the margins are attractive.

[Operator]

Our next question comes from Farooq Hanif from Crédit Suisse.

[Farooq Hanif, Head of Insurance Research in Europe]

Congratulations on some very solid results. Just 3 areas, if I may. Firstly, can you talk a little bit about the correlation between the fee income and your fee result in the life business? Especially I can see the link in asset management, but just whether we should expect a similar level of growth in the fee result? Secondly, I believe you made an increase in cash remittance in the first half, I think CHF 748 million. But there is always some residual in the second half, I think. And I was just wondering if you can comment on what kind of level compared to last year you may expect. And the last question is on second lockdowns in the markets that you're having that you have -- that you're in, sorry. Just what impact is this having on kind of year-to-date -- sorry, I mean, Q4 to date net flows, real estate as well. So just the impact on your asset management business, if you could comment on that.

[Matthias Aellig, Group CFO & Member of Executive Board]

Maybe starting with the question of the lockdowns, and there we're focused a bit on, probably first on the [ Swede ] situation. If we look measures that have been in both Swiss government, they are less far-reaching their loans in the first wave, this March and April. So in Switzerland, we now talk about a lockdown. There are really measures in place. But in Switzerland, we do not have a lockdown. There are home-office recommendations by the government and what have you, but we don't have a lockdown in Switzerland. So the activities here are much less affected as we speak compared to first lockdowns in March and April. I think that's from the first important statement.The second statement, I think, is to make that while we have been in a position to really stay open for business to maintain business activity in the first half of the year, as we have shown in Q2 and also now, it still took some time to get used to just the processes and I think we're now much better prepared to act forward, is ahead of us. And I think we have here shown to be resilient even though I have to be transparent, we don't know how this will turn out. Now in terms of the fee income. Let me point probably a bit to the half year results. Back then, we have a growth of the top line of 10% as the result has increased by 6%. As we have mentioned in the half year, we have undertaken investments into digitalization given the COVID-19 situation, which were a drag on the results in the half year. But this should give you at least some indication on how things have developed. We expect to see some operational leverage to come in Germany. That's probably also the [stake] we can make. And what's important in the -- this is sometimes forgotten, if we look specifically at that insurance part of the business, there is a lot of unit-linked business unit-linked amounts, particularly in France. And there, the amount or the underlying in the unit-linked business is more geared towards a [indiscernible] rather than an [ MSCI ] world. So we have still some effect also in French business, because the clients there have a home [ bias ].Now in terms of cash remittance, as you said, most of the cash remittance takes place in first half of the year. We have seen this uplift versus prior year. I think it's safe to assume that the pattern will not be that different from what it has been in prior years.

[Farooq Hanif, Head of Insurance Research in Europe]

If I may just come back on one question that I forgot to add. Are you seeing -- you've seen a really good pickup in net flows in 3Q versus 2Q. Are you seeing similar pickup perhaps in October?

[Matthias Aellig, Group CFO & Member of Executive Board]

Well, I'd say in Q3 standalone, we had in asset managers, in TPAM business really a strong quarter. But on the other hand, we also have to say some of that business is relatively big and a couple of deals can make a big difference, but we have seen a strong Q3.

[Operator]

The next question comes from Ken Shapiro from Morgan Stanley.

[Kimberly M. Shapiro Fustic, Equity Analyst]

Just a follow-up question on if there were to be a second lockdown in Switzerland, would you have to offer further -- would you have to offer rent concession?

[Matthias Aellig, Group CFO & Member of Executive Board]

Well, I think that's a rather hypothetical question because in Switzerland, there seems to be -- or there is a political consensus that a lockdown as we have seen it in first half of 2020 has to be avoided because of the economic damage because of the social damage. And to that end, I can see that question to be a bit hypothetical. So we have measures in place, where the interaction between people is reduced and that's what the current consensus, they should also be enough. There is this parliamentary initiative about 60-40 split of the rent for commercial tenants up to a certain amount of I think CHF 20,000 monthly rent. If this would become effective this rule, we would have an expectation, a loss of maybe CHF 10 million. With the current approach that we have taken, it is less than CHF 10 million, and this compares to -- a total rental income of about CHF 1 billion, just to give you a base [ feel], the order of magnitude.

[Operator]

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

[Andrew Sinclair, Vice President]

That's three from me, I think, if that's okay. Firstly, just again on real estate rental collection. 96%, a really good number. Just really wondered if you could give us an update on differences by sector. I think you gave a bit of color on that at half year as well. Secondly, it was just on solvency, really strong number even after allowing for the buyback, top end of the range. Just really how should we think about that number being where it is as we go into the final year of the current plan period. And third for me, was just any update on recommendations for mandatory rates into 2021 from the relevant bodies.

[Matthias Aellig, Group CFO & Member of Executive Board]

Okay. Maybe I'll start with the rent collection. We gave some color on that, I think, at the half year. The rent collection was highest in the residential area, and it was a bit, let's say, in the office space. And in the retail, it was the lowest, and this is essentially what we continue to see there. So there's no relative update there.Now in terms of the solvency number, I'm not sure whether I got fully your question. But I think what is important to mention that the CHF 190 million that we disclosed already includes the full deduction for the share buyback. So the execution or the of redemption the share buyback on 4th of January will not have an additional effect on the SST ratio, because the full amount has already been deducted. But I'm not sure whether that was your question.

[Andrew Sinclair, Vice President]

Well, really just kind of point out that, that number remains very, very strong, even after the buyback and how you'd think if it continues to drift up, but perhaps one that you need to wait for next year's Investor Day.

[Operator]

The next question comes from Simon Fössmeier from Vontobel.

[Simon Fössmeier]

Two questions. One is on real estate. You mentioned the rent collection, and I appreciate that. You also mentioned the positive revaluation gains. And I was just wondering if it's fair to assume that the revaluation gains year-to-date are anywhere between 0% to 1%. If you want to disclose that? And the second question is on the corporate pension business, the BVG business. If the guarantee would be lowered to, let's say, 0.75%, can you remind us of the mechanics? Does this mean that you could release reserves, which would be noncash? But still -- is this the only thing that would happen? I'm just wondering if you could [ give us the mechanics ].

[Matthias Aellig, Group CFO & Member of Executive Board]

Maybe on the revaluation gain. So year-to-date, they were 1.3% on a non-annualized base for the first 9 months. This compares to 1.8% in prior year. Clearly, this 1.3% is not absolutely uniform across the portfolio, but There should not be any huge, huge, huge deviation from that 1.3%. There may be certainly a bit more in the residential area and a bit less in the other areas. But it's also important to understand, there is clearly a detailed approach total evaluation, which is by the way done by an external agent. Now in terms of the BVG business, if this guaranteed interest rate is at a different level for best to think about it like a bank account on which we have to pay a certain amount, be it 1%, be it 0.7%, so this is not something that releases reserve. Neither, let's say, to the policyholder nor to the shareholders, we just pay a bit less as guarantee and then a bit more as surplus to policyholders or use it for other things like strengthening of the old age reserves in the BVG area. So to cut it short, the 0.7% or whatever it is, is more like a credit to bank account. And the gross legal quote we have then governs the distribution of what goes in excess of that guarantee. What is important also to keep in mind is that the mandatory part, which you were referring to is only about half of the total savings account, in the Swiss BVG business. The other half, which is also same order of magnitude is non-mandatory. And there we have a lower rate of 0.125%. Both blocks are essentially each CHF 20 billion worth. You can find additional details on that on the half year [ book ] on Page 26.

[Operator]

We have a follow-up question from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

Two quick points, if I may. The first one on real estate. Again, I mean you've said in the past that you still consider it to be a very attractive asset class and still investing into it. Is it fair to assume that you see residential as more of an attractive asset class at this point? I mean it would be natural to assume that your investment focus would be on residential and maybe less on commercial and in particular, office buildings. But I was just wondering if you could give any comments on how you're thinking about the sort of investment opportunity across the space? And then second question was, again, just coming back to Germany. I guess there's a bit of a political drive there to reduce commission rates at the moment. I'm just wondering whether you think that might have any impact on you or whether there's any reason we shouldn't be worried about it. I mean any comments would be great.

[Matthias Aellig, Group CFO & Member of Executive Board]

Maybe covering first the real estate question. Residential is in our portfolio today, about 44%, office 30%, 15% is retail. And so we have always looked that we have a good balance that we have high quality portfolio in strong operations that are robust. And at the end of the day, it's about risk return, I mean clearly residential is within the real estate space, so only bit less risk. It has lower returns. Office is a bit riskier relative to residential has big value returns. So for us, it's really important that we have excellent objects that we have in our portfolio and that this risk-return tradeoff is good. So to that end, we really look at the individual objects and look at their potential, at their risk, at their returns, because as you said, real estate continues to be very attractive asset class for us, because the high pickup provides risk free and the [ long-dated ] cash flows we are really looking for. In terms of the [ term ] situation, this question every now comes up. In our perception, we see that in Germany, there is also within politics now the notion or the insight that it is important that people get advice for their old age provision that they get professional advice how to manage their financial situation that they really do not fall to poverty once they get old. So I think German politics has also acknowledged that if there is not a commission-based model, but if it were more a fee-based, not like in the U.K., many people in Germany would not get that advice any more they need. So we see there a relatively remote chance that there will be a fundamental change of that model going forward. And if it were, nevertheless, to happen against the expectation, it would affect only a part of our financial advisory business, because it's not only life that we offer, it's also mortgages, nonlife, health and what have you.

[Operator]

The next question comes from Rene Locher from MainFirst.

[Rene Locher, Director]

Yes. And so just a follow-up question again on real estate. So -- but that's really where I get the most pushback from clients. I mean you've spread your real estate portfolio. So I think with a [ 44% ] residential, especially in Switzerland, I mean, [ usually it's ] very positive, so rents are going up. And also prices are going up. So office, it's still quite [indiscernible]. I guess this 15% retail and 11% other, could you just, yes, a little bit more detail? But for example, what's in the retail? So that's the first one. Then the second one, on the second pillar business. I mean you don't have a full coverage product in place. You have the semi autonomous product in place. Now this one e-solution coming more in favor in Switzerland. So my question is your sales force, how are they getting paid? Is there a difference, if they are selling full cover then as an autonomous pension scheme. And then the third question is CHF 2.8 billion net new money in real estate. I was just wondering if this shopping center, you build for your clients, is this already included here? Or is this -- will be excluded in 2021? And the first one, might perhaps a little bit naive question, but I was just wondering, this net investment [ lead ] the 1.4%, can we split and so the negative impact can be splitted into cash and noncash investment? So let's say like -- I do believe impairments [ support ] on equities are noncash, while hedging costs might be a cash. I don't know, just wondering if you could give your thought.

[Matthias Aellig, Group CFO & Member of Executive Board]

Okay, thanks a lot for this wealth of questions. Maybe on the retail first, I mean, we have there, as mentioned before also [ folks ] and very good locations. We have a lot of the grocery stores, so really shops that are catering to people that they really have a need. What is interesting to know in terms of the retail spaces that we have there within our portfolio, the lowest vacancy rate. So in the retail area, our vacancy rate is slightly below 2%. So that shows how diligent we are when it comes to retail objects, how well positioned, and they also attract interest. Now it's also worthwhile mentioning that in that area that we have only a low exposure to hotels and restaurants, so we have less than 1% of the rental income that is from hotels and restaurants. Now in terms of this shopping center that we purchased for our third-party clients for the TPAM business, this will be reported in the fourth quarter and in our expectations, so it was not in the Q3 figures that we mentioned. That shopping center, by the way, is very attractive also for shops. So there's actual waiting list for shops to enter that centers where we really take it very seriously that we have excellent locations that we go after. Now in terms of the net investment income, we had 1.4% at Q3, and we said for the full year, we expect something slightly below 2% given nothing unforeseen happens. Now in the 1.4%, I would consider or we would consider the real estate appreciation to be noncash. The equity impairments, the realized losses, this is typically close to cash as are also hedging costs. This is a running cost if you wish, and also the movements on the hedging cost is cash like.

[Rene Locher, Director]

Okay. can you just -- on the second pillar business, so the remuneration for the sales guys?

[Matthias Aellig, Group CFO & Member of Executive Board]

Well, we have here clearly a policy in place that we look at what is suiting the clients, which accounts, we actually still want to include in the full insurance business. We have tight underwriting criteria. We look at what is the average age, how many ailments do we expect over time? And so I think that's clearly a key consideration when underwriting new business and because [ like ] to situation that we now have more than 46% or essentially 46% of the business in the NBP. So I think it's always more important to think about that in terms of our underwriting criteria, which really exclude some accounts from getting into the home insurance space.

[Rene Locher, Director]

Okay. And if I may quickly, I saw I guess it was this cost may bet someday [ press ] your large real estate project in [indiscernible], I mean talking like 120,000 square meters. I was just wondering would you follow there your build and rent strategy? Or what should we expect? I mean it's perhaps still some way to go, but I was just wondering if you could give us little bit more insight here.

[Matthias Aellig, Group CFO & Member of Executive Board]

We have to say that a very large project that we acquired, I think, this year -- last year, and this is a development that will stretch over a decade. We have some existing buildings on that. It is really relatively open what we will do. This is a kind of part of the city, if you wish that we have acquired, and it is not the project where we clearly see today this and this and this will happen so this will take time. And there may be here and there with that [indiscernible] but it offers the potential to go into many directions, so.

[Operator]

Next question is a follow-up question from my Michael Huttner from Berenberg.

[Michael Igor Huttner, Analyst]

And on the guaranteed yield, I think the figure I last saw was 1.12% from the average of the portfolio. And I just wondered if you can give a feeling for where we might land in January 2021? And the second question is, given you clearly, well, you're incredibly well run and you've got solvency and stuff. Are you -- should we expect some maybe deals in asset management in the near future?

[Matthias Aellig, Group CFO & Member of Executive Board]

Okay. Maybe on the first question, the 1.12% average guarantee, that's what we have disclosed in [indiscernible] that was including the reserve strengthening that we have made until the half year. We do assess the reserves for half year and the full year closing. so I think that what we can say there, there are various things that go into that decision, how much strength in the reserves. So that's this part that is very much dependent on things like bond [realizations ], the interest rate environment and what have you. There is also one thing that is driving the big average rate, so that's government decision on what the mandatory rate will be. So there are a couple of variables that play a role here, I think it's too early to tell. Now given the track record, if you look back, where we have been a couple of years and how this average rate has developed, it's probably not a big surprise to say that it is more likely than not that we will be lower at yearend because we have this ongoing shift to products with longer guarantees, which also show up in the average technical range.Now in terms of the deals and M&A, I think we can reiterate what we always say the plans that we have put forward Swiss Life 2021 is an organic plan. If there is something that we have a strategic fit, if there is a rationale, if the cultural fit, if rates are -- we may particularly look at it, but when is organic, and we have concerns that plan for 2021.

[Operator]

We have a follow-up question from Andrew Sinclair from Bank of America.

[Andrew Sinclair, Vice President]

Sorry, I think I got cut off last time. I just wanted to follow up on one quick thing, which is the 96% rent collection. Should we expect similar at the full year? Or do you think -- I know that at half year, you did 95%. You thought that you could get some catch-up over the second half of the year, just your thoughts there.

[Matthias Aellig, Group CFO & Member of Executive Board]

The fact, I would say or we had a low rent collection in the second quarter as the number [indiscernible] has gone up in the third quarter. So we have moved the average from 95% to 96% of year-to-date. I think it's a bit too early to predict what the fourth quarter will be. In a normal year to give you an indication, we may have a rent collection of around 99%. But we are stating, you're obviously not in a normal year.

[Operator]

[Operator Instructions] There are no more questions.

[Matthias Aellig, Group CFO & Member of Executive Board]

So thank you for your interest in Swiss Life and for your questions. I wish you a nice day. Stay safe and healthy. Goodbye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.