Good day, and welcome to the a.s.r. Conference Call 2018 results. Today's call is being recorded. There will be time for Q&A at the end of the call. If you would like to ask a question, you can signal by pressing star one on your telephone keypad. At this time, I would like to turn the conference over to Mr. Michel Hülters. Please go ahead, sir.
Thank you, operator. Good morning, everybody. Welcome to the a.s.r. conference call on the full year 2018 results. On the call, we have Jos Baeten, CEO, and Chris Figee, our CFO. They will present and give you an update on the financial results, strategy, and solvency and capital position. After that, there's ample time for Q&A. Before we start, I would like to mention that we have a disclaimer at the back of the presentation, and I would like you to review it at the end, whenever you have some time today for that. Without further ado, Jos, can I give you the floor?
Thank you, Michel, good morning, everyone. Happy to have you all here. Thank you for joining on this call. As you may have seen from the numbers, ladies and gentlemen, which we have published this morning, 2018 was financially a strong year with overall surpassed the record operating performance of 2017. 2018 concludes a string of three consecutive years since our IPO in 2016, during which we showed consistent delivery against ambitious medium-term targets. All targets have been met or exceeded. As announced at our Capital Markets Day, we have raised the bar further for the next plan period. Also from a strategic point of view, we are very pleased with the progress that we delivered in 2018. We acquired Generali Nederland, the integration is running smoothly and ahead of plan.
Generali is, as you may have seen in the numbers, also delivering higher results than originally planned for this year. We're also quite excited about the acquisition of Loyalis, which we believe is a truly promising transaction that enhances our unique position in the field of sustainable employability. Further strengthening our position is the exclusive cooperation with Discovery and agreement to introduce the Vitality program to the Netherlands. In sum, clear financial success and disciplined execution of our strategy. Now, without further ado, let's look into the financial highlights of 2018, which you can find on page two of the presentation. As this dashboard shows, our performance in 2018 has been really solid. Operating results amounted to EUR 742 million, exceeding the already record level of 2017 by EUR 14 million.
Despite the EUR 30 million impact on the severe January storm in 2018, while 2017 had an exceptionally favorable claims experience. Underlying our Non-life performance continues to be very strong, and each of the other segments reported higher results, reflecting higher investment margin, particularly driven by the acquired business of Generali and good momentum in the fee-based business segments. Our business yielded an operating return of 14.2%, well over our targets of up to 12%. Combined ratio of ASR stood at 96.5% ahead of our target of 97%. This number includes the impact of the January storm of roughly 1 percentage point and the Generali Nederland portfolio with a combined ratio of approximately 100% for 2018. We also remain sharply focused on our cost level. Operating expenses declined 3% or EUR 17 million when adjusting for the cost base of the acquired Generali business.
Our Solvency II ratio remained robust at 197% after the proposed full-year dividend. As you know, we are still using the standard formula. Organic capital generation amounted to EUR 372 million being 10 solvency points. Our solvency ratio also takes into account the 9 percentage point impact from the acquisition of Generali and roughly 6 percentage points impact from the forthcoming lower tax rates, which we decided to take upfront. There are a number of other items that impacted solvency in the past year, and Chris will provide further details on this later on. Our strong solvency position and financial flexibility enables us to remain entrepreneurial.
As we have said at our Capital Markets Day, we see good opportunities to be entrepreneurial and to pursue profitable growth for both organically and through acquisitions, which we have proven to do so with the acquisition of Generali and the announced acquisition of Loyalis. Based on the strong performance and our confidence in the outlook for 2019, we propose to raise our dividends almost 7% to EUR 1.74 per share. Taking into account the interim dividends which we paid in September, there remains a final dividend of EUR 1.09 per share . In line with our dividend policy, we strive to offer our shareholders a stable to moderately rising dividends per share for the long term. Let's now move to slide three, which reports on the progress made in executing our strategy.
I will not discuss all the developments we listed here, and which we have reported in our press release, but let me just mention some key developments and achievements in executing our strategy. Starting with our solid back books in box B. We finished last year the migration of three individual life books towards the software-as-a-service platform, making costs more variable and in line with the decline of that book. The Generali individual life books are next in line for migration, and this will be fully realized in 2019, and the pension book of Generali will be completed early 2020, which will be roughly 9 to 10 months ahead of our schedule. We also completed the integration of the funeral portfolio of Generali and the PW Hoofd funeral book in October.
Key message on this box is we got a team that has actual experience in buying and integrating books of business successfully, we are open for business. New books will just be added to the queue for smooth integration. In the top left, the Non-life business that provides opportunity of growing cash flows. Very pleased to report that we have continued to deliver solid organic growth in gross written premium of 4.7% overall in 2018. This is business that generates profitable growth through attractive combined ratios. Key message in this box is our products and services clearly appeal to customers, allowing us again to outstrip overall market growth. Also, not mentioned in this slide, we recently completed a major migration in our P&C business. Over 1 million policies have been migrated from the mainframe to a new software-as-a-service platform.
Another step in simplifying our organization, as this business is now running on one single system. In the asset management related growth business, we have made considerable progress as well. Within DC pensions, we continue to see good momentum for the Werknemerspensioen. We have reached over 55,000 active participants, assets under management for this product rose to roughly EUR 675 million, up from EUR 480 last year. In new business, we are a clearly top three player. Another example of interesting developments in asset management, our mortgage fund continues to appeal strongly to institutional investors. Mortgage fund recorded an inflow of EUR 1.3 billion, driven by third party mandates permitted external assets under management exceeds, in the meantime, EUR 2.3 billion. Key message in this box is we are gaining traction in the shift to generating income from capital light products.
Now, most recently, we announced the acquisition of Loyalis, I can add, as said in the introduction, the exclusive cooperation with South African Discovery. These two play very well to our strategy in the disability ecosystem. Let me now show our unique proposition in this domain on the next slide, being slide four. This graph fits our unique coverage in the field of sustainable employability. It encompasses capabilities in four areas of expertise. First of all, distribution. We are able to target the right customer with the right product. We have added prevention and added services, which is aimed at enhancing employees' productivity and reducing absenteeism. Thirdly, claims management aimed to be shortened the duration of absenteeism, to provide income during absenteeism. Lastly, price and risk selection to optimize our underwriting result.
As you can see, both Loyalis and Vitality proposition of Discovery fit and complement our coverage in this area. This is another example of how we execute our strategy, both to pursue profitable growth and to remain socially relevant. Let's now move to slide five on our group operating results. This slide shows the momentum in our operating results since the beginning of 2017. Despite the severe January storm, we managed to surpass last year's result, which benefited from exceptionally low level of claims. Comparison of the first half of 2018 to the same period of the prior year shows the impact of the storm on Non-life. Also clearly visible to the performance in the second half of 2018, compared to the second half of 2017, this shows healthy recovery with an increase of 5.6%.
Higher results from life, plus EUR 31 million bank and asset management plus EUR 11 million, and distribution and services plus EUR 8 million more than offset the decline in non-life and holding. IFRS net profit is above net operating profit for both for the full year and the two half years. Overall, also below the operating result line, there has been a positive contribution from non-operating and incidental items to the net IFRS results. Let's have a closer look at the business segments, and let's start with non-life on slide six. We are generally pleased with our performance in non-life. While operating results show, as said, the impact of the storm in January and a higher level of large claims, the underlying business performed strongly and better than previous year. The bulk of the claims, so to speak, showed ongoing favorable developments. Claims frequency in bulk improved from 43.1% to 42.7%.
The combined ratio of 96.5% beats the target of 97%. The Generali portfolio ran at a combined ratio of approximately 100% and did not yet contribute to the operating results. When adjusting for the exceptional impact of January storm and taking into account the higher combined ratio from the acquired Generali portfolio, a normalized combined ratio would be in the 95% range. Fairly stable to the prior year. Our gross written premiums increased by almost 17%, driven by a solid 4.7% organic growth by all business lines and the inclusion of Generali Nederland. As mentioned earlier, we continue to be upbeat on the organic growth opportunities in the non-life segment. In the breakdown of the combined ratio, the uptick in the commission ratio is a mix of business effect as a consequence of inclusion of the Generali Nederland portfolio.
This portfolio comprises mostly P&C products, which in general come at a higher commission ratio. Our cost ratio improved from last year's 7.6% to 7.3% in 2018. If we were to look at a combined ratio for each of the different business lines, you can see continued strong performance in the disability portfolio. Last year, however, we experienced unfavorable claims development in the absenteeism portfolio, but we took measures over there, resulting in margin expansions within this portfolio. Nonetheless, we will continue to monitor claims experience in this business closely in order to keep pricing appropriately in sync with the underwriting risks. Let's now turn to slide seven on life. In life, we saw a solid increase of operating result of 4.7% to EUR 663 million.
This increase was mainly driven by an increase of investment margin of EUR 37 million, mostly driven by the addition of the acquired Generali business. The increase of investment margin was driven by a number of factors. Firstly, our direct investment income benefited from de-risking of the investment portfolio, including the Generali portfolio. This more than offsets the impact of the decline of the individual life portfolio on direct investment income. It also offsets the decline in amortized realized gains, i.e., from our shadow accounting. Furthermore, as the individual life book runs off, there is also a decline of required interest, which is positive for the investment margin. The addition of the Generali portfolio had only limited impact on required interest. Generali Nederland had a total contribution to the operating result of approximately EUR 40 million, mainly within the investment margin.
While there were some non-recurring positives in the technical results, we believe that going forward, EUR 30 million is a sustainable recurring number for the Generali portfolio. Gross written premium is up almost 8% and reflects both organic growth and the addition of Generali assets. I already mentioned our continued success in the DC pension products. Currently, 73% of new business APE is for new DC solutions, which is a very positive development from our perspective. Let's now turn to the other segments where we are clearly gaining traction, and that's on slide eight. Operating results for the two fee-generating segments, asset management and distribution services, combined amounts to EUR 41 million and is now already adding a full percentage point of organic capital creation on an annual basis. Asset management showed a very strong increase to EUR 16 million.
This was driven by strong inflows in the mortgage funds and in the ESG funds, which resulted in additional fee income from third parties for the asset manager and higher fee income from the real estate funds. As bank has been classified as non-core, it's no longer included in these results. Operating results of the distribution and services segment increased to EUR 25 million. This was driven by a strong contribution from Dutch ID, which we acquired two and a half years ago, and the contribution from the Generali Nederland distribution companies, namely Aonach and Stutenberg. However, we anticipate some pressure on fees in 2019 as a result of lower commissions for mandated agents. The operating results of the holding amounted to a minus of EUR 108 million.
The decrease is mainly due to a one-time alignment of personal benefit schemes. In addition, interest paid also increased due to the full-year inclusion of the interest on the RT1, which we issued in October 2017. Let's now move to slide eight and measure our performance against our targets set at the IPO. Our performance has been strong on all key metrics in 2018. We've been able to keep our business momentum at a high level, and our performance is better than our medium-term targets. The strong ongoing operating performance of the various segments, the disciplined execution of our strategy, and our robust capital position make us confident that we can continue to attain the operating results of recent years throughout 2019. Having said this, I would like to hand over to Chris for further details on our capital and solvency.
Thank you, Jos. Ladies and gentlemen, let me walk you through our solvency and capital position. In order to speed up and quickly go to the Q&A, I'll take what I call a magpie approach to presenting, taking just the nuggets, the shiny elements, and not going through each every slide in the fullest detail. Picking out the key elements, let's move to slide number 11. You can see the development of our Solvency II ratio moved up to 197%. Couple of points I'd like to make, irrespective of what's said on the right-hand side of the chart. The solvency number includes the tax effect, so we already implemented or reflected the lowering of the corporate tax rate in the LAC DT that shaved off about six percentage points of our solvency. If we had not done that, our solvency would have been around 203, 204.
The solvency also includes the benefit from the VA. Admittedly, the VA includes what I would call an Italy premium. From a VA perspective, we are short Italy, so when Italian spreads widen, our solvency is supported. We estimate the Italy effect to about 4 VA points or 4 points of solvency. If you take that perspective, the 197%, you add that, the tax take out, the Italy effect, your underlying, we end up around 200% after dividends. Interestingly, in the absence of future M&A, that 200% and the ongoing capital generation brings us in spitting distance of what we would call the capital distribution moment, as we communicated during our Capital Markets event. Of course, we're always trying to deploy capital in the business organically or inorganically if and when it meets our existing and unquestionable return targets.
Again, the solvency level moves closer and closer to the distribution threshold that we have communicated. Second point to make, we still have a net DTL position. I'm actually very proud of that. It is a great asset to have. We have sufficient amount of tiering headroom. As you can see on the page, the Tier 3 headroom itself was only EUR 500 million. If you actually include Loyalis, which is not on the page with pro forma, we would estimate that adding Loyalis would add another EUR 100 million to the Tier 2 headroom and another EUR 50 million to the Tier 3 headroom. Which actually means that if you think about funding the Loyalis transaction with the hybrids, we always said we consider either Tier 1 or Tier 2, taking potential transactions and capital synergies in mind.
We estimate today with the amount of Tier 3 capacity we have, we could issue a Tier 2 hybrid instrument, still be left with well over EUR 300 million of surplus Tier 3 capacity after this instrument, which would give us more than ample room to absorb any ineligible capital of potential acquisitions. What I am trying to say is, including Loyalis, we have sufficient headroom to issue a Tier 2 and have remaining room for capital synergies going forward. Final point on this chart I would like to make is that we managed to still grow our own funds. The eligible own funds grew about EUR 100 million even after dividends and after the rocky second half of the year. Own funds and Unrestricted Tier 1 both grew in absolute amounts.
Here in the long run, looking at book values or looking at market values still is a good measure for performance. Moving to page 12, the Solvency II ratio movements throughout the year. The chart is by now well known, the way we decompose or bucket the delta and solvency in the various components. You can see the organic capital generation of EUR 372 million for a year. Taking out dividends leaves you with 197% solvency post year. Again, 3 things I would like to point out on this chart. EUR 372 million OCC for the year. If you compare H1 to H2, actually, we added EUR 14 million of cap gen in H2 over H1. OCC went up by EUR 14 million in the year and EUR 9 million versus last year.
If you look at the business capital generation, the stuff that the business generates, excluding book release, excluding UFR unwind, was EUR 283 for the year. Actually, that was up significantly. It was EUR 130 in H1, EUR 153 in H2, so the business cap gen actually went up by EUR 23 million during the year. In that perspective, we've seen an increase in capital generation in the year, driven by an increase in business capital generation in 2018. Business cap gen up EUR 23 million for H1 and up EUR 14 million versus the same period last year. Second point I'd like to make is the market and operational developments. You can see minus EUR 59 in EOF.
Actually, the number in H1 was minus EUR 53, which meant that the other element of own funds accretion was flat in the second half of the year. I'm actually very proud of that, given the fact that we've seen financial markets go down, significant movements there. We've been able to keep the own funds generation above and beyond what's in the OCC, keep that flat, in a couple of months where we see rocky development on the financial markets. Third point to preempt the question that undoubtedly will come. What is the impact of your long-term investment margins? As you know, we report an OCC based on long-term investment margins. We confirmed that stance again during our Capital Markets Day in October.
If we had actualized and took the actual end of year long-term investment, actual spreads, plotted them into the OCC, our OCC would have been roughly EUR 330 million higher. To look at the individual components, you see governments moving a bit away from our long-term investment margins, but non-core sovereigns, credits, and mortgages actually moving towards or even above our long-term investment margins. At this point, our mortgage assumption and credit assumption is actually conservative versus the actuals that we observe today. Where we can move from long-term investment results to actual investment spreads, our OCC would have been EUR 30 million higher. Even had we moved our equities and real estate to an absolute return number to do a spread, indicatively, if we plotted 7%, we would add EUR 130 million of additional OCC.
That's something we will not do ourselves, but for comparison purpose, it's always good to have that in hand. No doubt, you can ask questions on the further details on the OCC and business CAP, we'll leave that to the Q&A. Page 13 talks about the sensitivity of your Solvency II ratio. As you will understand, the UFR is likely to decline. The formal decision is about to be announced, but we expect it to decline by 15 basis points from 405 to 309. That would take out another three to four points of our solvency. Similar as happened in this year, it will add about EUR 8 million to our annual flow from stock to flow, EUR 8 million to our OCC. At a UFR at 2.4, which we consider to be the most economic form of UFR.
A UFR that's consistent with or in line with the actual cash returns we make on our investments. UFR in line with the coupons, dividends, rental income, and what have you, at 2.4%, gives a solvency of 156%. At 156%, we actually did adjust any tiering impact of that level as well. It's a fairly robust and kicked solvency ratio at 156%, safely above our risk appetite of 120%. Again, there gives you comfort on the robustness of our solvency. Final point, if we were to strip out the UFR altogether, our solvency ex UFR is over 130%. Actually, it went up a few points during the year. Page 14. Strong balance sheet with ample financial flexibility. We show a number of pages, the interest and debt capacity that we have. In our thinking, our balance sheet drives the amount of debt capacity.
Our solvency drives actually the amount, the instance we would choose. Our balance sheet has sufficient amount of debt capacity. The leverage is around 26 percentage points in the year. Interest cover is still safely above 10x. On an S&P leverage ratio, the last time S&P looked was 2017. At a 19% ratio, we think that number is broadly unchanged. We have surplus capital compared to the AA, and depending how you look, even AAA component of the S&P model. Sufficient room to absorb additional debt if we wanted to. Just for your perusal, at 26.7% leverage, if we wanted to move that leverage to 30%, we could add a net of EUR 300 million of debt. If we wanted to move to 35%, we could add net EUR 800 million of debt to our balance sheet.
Given the fact that we've got two instruments up for call for EUR 200 million, and of course, the call decision we can and will only make at the time of call, but these are 10% coupon instruments, we need for you to see humongous spread movement for us to make another decision. Assume that net EUR 300 million or gross EUR 500 million debt increase will bring us towards a EUR 500 million room. As I said, we've got Tier 2 and Tier 3 eligibility, and the pro forma analysis, including Loyalis, shows us that if we were to raise a Tier 2 instrument, we still have surplus Tier 3 capital available. Final point, financial leverage at 26.7%. If we were to include our realized capital gains, which is industry practice, but we don't do that given our shadow accounting methodology.
If we were to include capital gains reserve in our leverage calculations, that ratio would drop to just over 20%. On a like for like basis or more like for like basis, our leverage ratio is more like 20%, including the capital gains reserve. Page 15, our holding cash. We take a very mechanical approach to holding cash. It may be by German ancestry, but we take a model. Holding cash per annum plus dividends is your holding cash. Aiming at EUR 394 million and ending up at EUR 394 million. We upstreamed about EUR 216 million in the second half year versus EUR 179 million in the first half, more upstreamed in H2 than H1. Not just on life, but also, for example, in the supplementary health business, we upstreamed a tiny bit of capital to show that every business unit in our business contributes to holding cash.
We have streamed our capital to the holding and achieved our holding cash targets. You can also see our Solvency II ratios of our legal entities. Life is very strong at 202. Non-life is 154. We are a bit less pleased with that, to be quite frank. Five reasons why our solvency in non-life is, I would say, temporarily lower than we would normally strive for. Of course, the tax effect, so we fast-forward the implementation of tax, which affected the LAC DT in the life business. Market effects where the VA, the corresponding VA effect, has less impact on non-life than in life. It is the growth of our book. We grew our non-life business substantially. Organic growth was about EUR 100 million of premiums in P&C and disability. It is the impact of Generali. Net Generali acquisition was a positive.
We spent less capital on Generali than we originally anticipated. All the pluses were in life, and the drawbacks, the additional reserves, the reservations were in non-life. For a net-net, less capital investments, but the plus is in life and additional reservations in non-life. Finally, we made a small additional reservation on the absenteeism business because we see sickness leave actually growing across the board in our country. The trend is up, and we applied our trend. That together caused a low life solvency to move to 154. If I look at the business today, I would expect it, I am pretty confident, moves to something north of 165 before the summer already. That will restore itself organically. Page 16, asset and financial leverage. Of course, we are living in an unstable environment with lots of risks, lots of volatility, and volatile financial markets.
As we did in the Capital Markets Day, present our leverage from a liability and an asset perspective. Our leverage is actually stable on a solvency basis, down a bit on adverse data, it is up a bit, but effectively very stable, lower leverage. On the asset side, we reduced our market risks during the year from 46% to 43%. The risky asset ratio, the asset leverage ratio, is effectively stable. It is a more old-fashioned approach. Some would say we are riding coach and horse through market risk models, but in times of fluctuation, I think we should move from market risks, move to nominal exposures. We have given you lots of details in the appendix. H2L, you can see more details on our investment portfolio before, and also the calculation of the asset leverage, which I think is increasingly an important metric for us to look at.
It looks at the nominal asset risks compared to the solvency cap that we have. It is effectively stable. For those of you with a sharp eye, you can see it is slightly twisted, slightly amended per the Capital Markets Day. We made a little bit more deeper analysis on our nominal exposure on risky assets. To remind you, it is the equity position. It is a real estate excluding land, because we think land is really not a risky asset. It is collateralized lending to firms. We took out, as opposed to the Capital Markets Day, the real estate own use, because our own office, we are our own tenant, so that is a less risky position.
We actually added mortgages with a loan to value of over 110 out of the deck, we went a bit deeper into the whole non-rated fixed income segment, almost on a line-by-line item to estimate which of those elements have a lower rating or not. This includes equities, real estate excluding land, and non-investment grade debt. That is about 100% of our Unrestricted Tier 1, a ratio that we feel comfortable with. We think it's very important to look at nominal exposures in these volatile times as well. The summary of my perspective is stable and low on financial leverage, stable and very well controlled on the asset leverage, which has allowed us to sail relatively well through the volatile financial markets. Before I give back to Jos, some final perspectives from the CFO. Good H2.
Capital generation up from an organic perspective and a business perspective. Operational profit up in H2. Underlying metrics have been good. Combined ratios in H2 have been better than in H1. Production in DC better in H2 than H1. Solid underlying performance by the business. Secondly, I think we sailed relatively well through the volatile financial markets in H4. You can see that we managed to still grow our own funds and our Unrestricted Tier 1 during the year. The solvency impact of those market fluctuations were very well manageable. We reduced our market risk and kept our nominal asset exposures very much in check and given you more disclosure on the asset exposures in our appendix.
As Jos said, I can only confirm comfort on the earnings outlook 2019 if I look at the way we ended last year and the momentum that we have in the beginning of this year. With this, I give back to Jos.
Thanks, Chris. If this is the less detailed version of the story, I would love to hear the detailed one later on. As you may have noticed, we are quite pleased with our financial results, the operational performance of our business, and the strength of our balance sheet. This makes us, as Chris already reconfirmed, very confident that we can continue to attain the operating results of recent year throughout 2019. Where does this lead us in terms of dividends for 2018? We propose a full-year dividend of EUR 174 per share, which is an increase of almost 7%. This outstrips the growth of the operating results and reflects our confidence in the outlook for 2019. This provides us the comfort to raise the payout ratio to 48%. Within the framework of the existing dividend policy, it's our intention to offer shareholders a stable, slightly growing ordinary dividend.
Capital that we generate in excess of our ordinary dividend will be deployed for profitable growth and value-creating opportunities. As we've pointed out in our earlier meetings and on our Capital Markets Day, we believe a very disciplined and rational approach to capital management. Excess capital that we cannot deploy, as said before, will be returned to shareholders. Before my final conclusion, a remark on larger scale consolidation that may take place in the Netherlands. As we have done in the past and what we continue to do today and in the future, our approach is a rational one, and we will maintain, in all cases, our strict financial discipline when evaluating emerging opportunities. You all are well-informed on our strategic priorities and our views in the importance of maintaining a strong balance sheet post any transaction.
Frankly, at this point, there is not much we can add to this. I do not want to add to any speculation or be in the way of any orderly process. As soon as there is information to share, we of course will do so. To wrap up this call, I would like to conclude that I am very pleased with the strong set of results. We were able to surpass our records of operating results of 2017 despite the impact of the severe storm in January. Our businesses all are performing very well, and that enables us to remain entrepreneurial. We have shown that we put our excess capital to work. I said, we started 2019 with lots of confidence, and everything being equal, we are convinced to be able to deliver strong results on this year.
With that, I would like to conclude the presentation and to hand over to our operator.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name as well as your company before posing your question. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll now take our first question from Farooq Hanif of Credit Suisse. Please go ahead, sir.
Hi, everybody. Thank you for that. I just want to go back, Chris, to what you said about organic capital generation. All other things being equal, ignoring UFR in part or ignoring Loyalis, are you basically indicating that the second half, we can basically multiply by two as a basis? That's question one. Question two, on the combined ratio, as you integrate and improve Generali, can we see the P&C going back towards the 95%-96% level over time? How quickly will that happen? Very lastly, if I may just say, on your getting close to the distribution threshold, what does that practically mean for us? Thank you.
Thank you, Farooq. On your question, could we multiply this? The OCC in the second half was EUR 193, first year was EUR 179. Could we multiply it by two? I think that's a reasonable approach. I can make a very long story short, but the answer is probably yes. What will happen in the next year is that if you look. Let me spend a few minutes on this now that we are talking on this, and Jos wants to have more details, so I'll take that on. If you look at what happened during the year and during the second half of the year, the UFR unwind in our OCC was less than last year. H1 to H2 stable but less than last year given the fact that the UFR declined. That actually is going to continue probably into the next year.
If you then look at the release of capital, some changes happened in H1 to H2. We made a small restatement during the Capital Markets Day, I'm referring to those figures. We saw in this year slightly higher release of SCR, a slightly lower release of risk margin, but also a significantly higher new business strain because we actually wrote more new business. Organic growth and Non-life was higher. If you look at the release of capital buckets, H1 to H2, effectively, the SCR release was roughly stable. The BEL release was less. Why is that? SCR release is stable. SCR was up a bit, but new business strain was also up. Net release of required capital was stable. Risk margin release was a bit less. On the new business, we also write more new business margin.
The new business strain actually takes out a bit of additional release of book is netted out. On the business capital generation, we saw actually during the year gradually moving up technical results in Non-life, no storm in the second half of the year. Technical and underwriting result up. Investment results relatively stable. Holding cost up a bit because of one-offs. I think we explained in our press release.
Finally, fee-based business up versus last year. First half a bit higher than H2, not really meaningful. In that number, we can see gradual decline of the UFR unwind
Gradual decline of a risk margin release captured by an increase in SCR release, new business strain may hold back capital at this point. Obviously, we think it's a good point because our Non-life business clearly is value creating. New business strain on Non-life to us is often a prediction of good results to come in the future. Thirdly, on the business side of things, gradually improving technical results towards the level that you expect it to be, irrespective of any storms, investment results stable, holding cost off by a one-off. It's a long story short, we're saying multiply the second half by two, probably, yes. I wanted to give you a little bit more clarity and detail on that. On your second question, Farooq, on the combined ratio, the main driver that influenced the combined ratio this year was threefold.
First of all, we had a storm that influenced the P&C combined ratio negative with 2.1 percentage points. If and when we wouldn't have such a storm or a comparable event in this year, that would be a positive. Secondly, the combined ratio of the Generali portfolio is still not to the level where we want to have it. We're working on that. That will definitely add some positive trend. The third driver in the combined ratio for Non-life is in absenteeism. As Chris said, we have added some reserves because of the underlying trend we have seen in sickness leave in this area. If that doesn't need to happen again in the ongoing year, your assumption that we would return to the level within our target as combined ratio, the answer to that question is clearly yes.
If we can figure a different distribution point, we said on our Capital Markets Day the threshold at which we will distribute capital through a supplementary additional distribution to shareholders is when a solvency ratio is 200 and something. That's where we got to. The something depends on where the market is and what the economic situation is. At that point, we will, of course, take out some of the, for example, lesser economic factors like VA support by spread widening Italy. A new government in Italy should not improve our solvency, it actually does.
When I say I adjust for the Italy effect, I adjust for the tax effect, I mean that the underlying solvency, the more economic solvency moves towards 200%, which means in the absence of M&A, in the absence of deploying our capital to a large extent in value-enhancing activities, we get to the point that we meet this 200 and something mark of economically justifiable capital. Then I think it's fair to engage in a debate with our shareholders whether we should deploy it and in what way. I think we are getting there. Again, if there would be ways to deploy this capital on a meaningful and value-creating way in line with our investment philosophy and our thresholds, that's probably a better use of capital to our shareholders.
Again, I'm looking at a situation where maybe in a year from now, no M&A has happened, then we might look at things differently.
Thank you very much. Very candid. Thank you.
The next question will come from Cor Kluis of ABN AMRO. Please go ahead.
Good morning. Cor Kluis, ABN AMRO. I have a couple of questions. First of all, on your investments in real estate, I think it went up by EUR 0.5 billion approximately in half a year, especially the category other funds. Could you elaborate a little bit on what the expansion is there? Also related to that, have you done some real estate revaluations in the second half of the year? If so, what was the size of that turning the solvency ratio? Second question is about the partial internal model. You've been doing quite a few acquisitions now, Generali, Loyalis, and who knows more, how are we looking to PIM? I understand, of course, that you still believe the standard model is more logical. You've been looking somewhat towards the PIM. The larger you are, it might have more benefits.
Could you give some progress or what you think about it going forward and if you have already some insights on that one? Last question is about the solvency ratio. I thought that you said during your performance that the solvency ratio of the market effects rose by a few percentage points year-to-date in the piece where you were talking about the actual SCR solvency ratio. Could you elaborate a little bit on that, what the solvency ratio was of markets effect separately year-to-date? Thank you.
Chris? Yes. On real estate, Cor. Yes, we are investing in real estate. If you recall the investor call we had in the summer, we said we think there's value or room to re-risk and spend some money on capital on risky assets.
Yes.
The initial thinking there was possibly equities. We quickly adjusted given where equity markets were and given the real estate opportunities that we saw. We are predominantly invested into Dutch domestic and Dutch direct real estate, where we think those assets are, in today's fundamentals, I think more or less decoupled from global market generations. Never fully, of course, but trade wars, Brexit, do not take away the shortage of housing in the Netherlands. We're looking for asset classes that have their own supply-demand dynamics and their own fundamentals. If you allow me to walk you quickly through where we are on real estate on the directs and the other funds. We invest in high streets in our retail fund. Actually, we've got a very strict investment policy there.
We invest in high streets of the top 20 cities. Actually in those high streets, we look at the best parts of those streets. If you challenge our real estate people, they tell you that the investable space in retail is less than 10% of the total retail space in the Netherlands. It's high streets in top 20 cities plus effectively Albert Heijn, Ahold supermarkets. That is our universe, about 10% of the universe in the Netherlands. Vacancy rate today is literally 1.4% in those high streets. We've got an office strategy. Again, very strict. We invest in offices that are in walking distance from train stations. It's actually literally 750 meters away from an intercity station and 500 meters away from a non-intercity station. That's literally the investment guideline that we have.
Vacancies are less than 5% in those offices and filling actually rapidly. Again, that investable universe within walking distance from train stations, offices less than 10,000 sq m is around 10%-12% of the investable office universe in the Netherlands. A very focused strategy. We have residential housing. We invest in middle-income housing. I mean, the average monthly rent is EUR 922. The bulk of our business is between EUR 700 and EUR 1,200. It is actually affordable housing where there is real shortage. I mean, it's estimated that the Netherlands has 230,000 too few houses at this point in time, 240,000 houses or apartments. We're building 70,000 a year, and we need 100,000 a year. The shortage is increasing by 30,000 a year, which doesn't mean that house prices can't go down, but we think they're really well protected.
Vacancies are less than 2% as well. Then we've got, of course, our land portfolio, which is 80% agricultural positions, and effectively it's the leases to farmers with land as collateral. That is the heart of the investment portfolio, and our strategy is very core, very disciplined on a very small focused investment universe, and don't do anything outside. That actually drives our investment in real estate. On the side, we do a couple of funds. We invest in a few housing funds in the Netherlands by some of the larger housing asset managers, simply because they came available, and we got to buy them relatively cheap, and we want to add housing experience in the Netherlands. We've done a little bit in Europe. You can see we've partnered with BlackRock on their European core funds, where we can act as an anchor investor in those funds.
As an anchor investor, you tend to have relatively good terms in terms of fee, in terms of co-decision rights, in terms of co-investment rights. We have a small portion of what I call other, which is funds by other investment managers. Often it's actually supplementary to our Dutch real estate business, and it has some European exposure to it. That is actually at the heart of our real estate portfolio. If you look at the total risky assets, the increase in real estate actually is a mirror image of the decrease in equities. Effectively, we move out of equities into real estate. We think at this point in time, that is a more protected, more robust investment strategy.
On your second question, Cor, where are we on the discussion on PIM? Let me put it this way. PIM is a good friend, but still at a distance. We have added Generali and Loyalis but that actually didn't change the profile of the company. From that perspective, there is no direct reason to invite PIM to live with us. We, however, have said before that if and when we would do a large transaction, that would be the first moment to reconsider that view. From that point in time, we would need two to three years to implement it. Currently, we prefer to implement the acquired businesses to get IFRS 17 done and not spend too much time on implementing a partial internal model.
However, if the future of the company in terms of profile would become different than it is today, then we would reconsider that viewpoint.
Okay. Cor, to your point of what happened, what are the market movements that went through our solvency? Market movement back to your solvency in a couple of points. You can see decline in your own funds as the market value of your assets decline. You can also see a compensating decline in required capital because if your assets value decline, the required capital also declines, and then there is the VA. If you net own funds and required capital, excluding the VA, just what happened to the asset class and if the VA hadn't moved, we probably would've lost around 5 points of solvency, which is minus 2 to 3 for equities, minus 2 in credits, minus 2 in sovereigns. On real estate, our valuations were plus 3% in the year. That gives you a net of minus 3, minus 4 on market movements.
That is then compensated by an increase in the VA, of which a part is the Italy effect, which we see. We take it as it is. It's great that the solvency go up, there is a non-economic component to it. Think about growth effect minus 5, minus 3, minus 4, which includes around a 3 percentage points revaluation of our real estate business. How do we do real estate valuations? All our assets are physically revalued once a year. Basically, we have a quarterly process. Every quarter, we do 25% of all our buildings and objects are visited in person, and the remaining three-quarters have a desk revaluation based on the physical revaluation and based on market trends. Next quarter, another round. Every asset, every piece of brick and mortar is visited in person by a valuator once a year.
Every asset is being revalued once per annum during the year.
The year-to-date development?
On what, the asset class, on real estate?
No, on the market movements.
Oh, 2019, you mean? Yeah.
Yeah. Correct.
Relatively stable. Sorry. The market's up, so that's a plus. VA down. I think net neutral. I mean, the VA moved down a bit. I think it's good that there's some air of the VA. Some of the Italy effect actually appears to be disappearing. I think the year-to-date market effects were relatively neutral with the decline in VA countering the positive revaluations on equity markets and the contracting spreads.
Wonderful. Thank you. Very clear.
Our next question will come from Ashik Musaddi of J.P. Morgan. Please go ahead.
Hi, this is Ashik here. I'm using Jackie's line. I have a few questions, if I may. First of all, Chris, you mentioned about the business operating capital generation during the first bucket of the three. I look like that there's a significant increase from EUR 118 million in the first half to EUR 283 million. That's like a 50% increase in the second half. What's driving such a big jump? Because you have reduced your equity exposure as well. Any thoughts on that would be great. Secondly is if I look at your remittance for the full year, it was EUR 395 million. Which if I look on your full-year operating profit before holding company costs, it's around 70%. How shall we think about this remittance? Because you're releasing capital from back book as well. Non-life is all cash business.
Shouldn't this number be more like 80%, 90%, or even 100%? When shall we expect this number to move towards operating earnings? Thirdly, I think, Jos, you mentioned about you want to maintain a strong balance sheet after M&A. At the same time, you mentioned that going to PIM may take two, three years. Without PIM, how would you define a strong balance sheet immediately after an M&A? Any sort of metrics you can give like, okay, this is a Solvency II ratio, it should be above this, et cetera. Any thoughts on that would be great. Thank you.
Okay. On the first one, the business cap, you're right, it decreased. There was a small restatement, which we explained in the Capital Markets Day, Ashik.
Oh, okay.
It has to do with the reclassification of risk margin. The EUR 118 moves to EUR 130 on a restated basis, EUR 130 is comparable to EUR 153. The EUR 23 million really is the improvement in underwriting results, by and large.
Oh, it's okay. Yeah.
It's effectively no storm, it's a bit more larger claims than HQ. That's what it is.
Yeah.
On the remittance, Ashik, our policies, we don't need to hold cash at the holding. That's been our policy, I understand that it may deviate from some other market practice. We feel very strongly about it. Holding cash is a function of holding costs. What we keep at the holding is one times the operational holding cost of full-year holding costs plus the committed dividends. That means if we were not able to upstream cash at holding, we could then pay Jos and my salary for a year and other holding people as well. It's one year holding cost plus dividends. The remainder we keep in our business as long as the business yields an attractive return. If you look at the ROEs, the return equities of our business, I may dwell a bit, but I think it's important.
In Non-life, the return on equity was around 10%, 10.3%. Excluding storm, if we hadn't had the storm, the Non-life ROE would have been about 13%, operating ROE. The life operating ROE is about 30%, 12.7% to be precise. Our businesses create ROEs that exceed their cost of capital. We feel comfortable keeping the cash in those businesses. If we want to, if we need to, we can upstream. Every year, as I said, it's mechanical. We say what's annual holding cost plus dividend commitments. That's what we want to have at holding. If we were to, for example, distribute more cash to our shareholders, say we increase dividends or special buybacks, we upstream the cash, keep it holding until we distribute. That's the model we work. There's no impediment to upstream in cash.
It's just our policy that we keep our cash in the business, not as holding.
Yeah.
As to your point, what does a strong balance sheet look like? What do you want to have for a strong balance sheet? I think today we have a strong balance sheet. As I said, in terms of leverage, in the capital markets that we outlined, 35% is a ceiling that we could live with, not something we need to strive for. We could live with a leverage up to 35%. Above 35%, you need to have a very good cause, and you want to bring it back. Moving it to 30% would give you sufficient room to absorb an increase of 35%. Levels up to 35% would be variable and consistent with a single A rating. In terms of solvency, our solvency today is very strong. We don't need to hold 197% per se. It depends a bit on the situation at hand.
I think what we want to have is make sure that your solvency in a UFR of 2.4 is safely and significantly above the 120, and you want the solvency as is to be able to absorb the decline in the UFR, the decline in the UFR to 3.6, and then still be safely above 160. I worked my way back technically saying, look, our management level is 160. The UFR is going to decline. I want to make sure that I can absorb that UFR decline, add that back to 160 because a small buffer, and that's going to be the lower limit for which you want to run a standard model solvency and still claim to have a robust balance sheet.
Yeah, that's very clear. Thank you.
Our next question will come from Johnny Vo of Goldman Sachs. Please go ahead.
Yeah. Hi, guys. Thanks for allowing me to ask my question. Just the first question, I noticed that there's an extra senior loan of a bit over EUR 105 million that you've issued since the half-year stage. Was that issued at the holding company, and what was the purpose of that? The second question is just, can you give us an update on I think you've given a little bit of an indication on the refinance of the bridge loan that you took out for Loyalis. Can you give us an update on when you hope to refinance that bridge loan? The third question is just in regards to the EUR 200 million of debt that is due to mature this year. Are you still committed to paying that off, or will you look to refinance that?
Just one more final question, just in regards to the dividend payout. I know you lifted the dividend payout now to 48%, how do we determine where in the range of between 45%-55% you are likely to go with that dividend payout? Thank you.
On the senior loan. That is actually very opportunistic. It is a Holdco loan. At the end of last year, we set our holding cash target to EUR 394. Literally, Johnny, we had ready to upstream on the push of a button, EUR 100 million from the life business. We found that a couple of banks who were really washed with cash wanted to offer us holding financing at a negative yield. We thought, I can finance myself at a negative yield, or I can take out cash from the life business where the ROI is north of 12%, and we thought having a negative yield financing to be hard to resist. It is really opportunistic, but negative yield financing at Holdco to benefit from-
Chris
the amount of cash that Yeah.
Yeah.
Johnny? Yeah
on that, the remittance that you say from the life business of EUR 300 and whatever, EUR 100 of that is actually a senior loan that you've issued.
No. The remittance
The cash in the Holdco.
The senior loan is in the other. It's in the bucket other.
Is in the other. Okay, fine.
Yeah. That's net. The EUR 395 is actually what is really remitted from the Life business. The bucket other. Yeah, the bucket other contains a senior loan from another bank, minus Holdco cash payments, minus during the year, the injections that we made in the Generali businesses as well. Actually, the EUR 395 is actually what is actually upstreamed in cash from the Life business. Okay?
Okay. Thank you. Yep.
On the bridge. We haven't taken out the bridge yet because the deal with Loyalis needs to close. The terms and conditions are all committed, are firm. If and when the day comes Loyalis closes, we'll take out that bridge, which I assume to be early May. If we look at the timetable at which we submitted the request for a DNO by DNB at the normal time period, I think it's going to be early May for closing of that transaction, and then we'll take out the bridge. In terms of refinancing it, as I said, we have the option to use either tier 1 or tier 2 instruments.
As we said at the Loyalis call, it requires a bit of a look through on potential M&A opportunities to determine which instruments you would want to use, because it might be the case that you want to protect your tier 3 eligibility for future capital synergies. That means that you'd rather issue a tier 1 or a tier 2. However, Johnny, if you look at what happens in the second half of the year and you add the pro forma Loyalis situation to it, we think the tier 3 headroom that we have is actually quite large, and it is estimated that if you were to issue a benchmark tier 2, because they tend to come in benchmark sizes, you still have sufficient tier 3 capacity left.
We will keep our options open, but working hypothesis is that a tier 2 at this point is more likely than a tier 1. It's cheaper, it's simpler to place, and the tier 3 headroom is actually far sufficient to capture any future capital synergies. Baseline is tier 2. When we will do it? When the time suits, somewhere during the year. Depends on market, depends on preparation, and you need to be very opportunistic in it. The bridge loan on Loyalis has a two-year maturity at reasonably effective rates, we're not at all in a hurry to do that. When it comes to the tier 1s, Johnny, I can't commit to confirm whether we'll call them or not. There's a call date, an announcement date at which we will make that formal decision.
It has a 10% coupon, so that call decision is probably relatively easy. As we've seen in the AT1 markets, easy decision when it comes to calls no longer exists. It's fair to assume that we'll make the easy decision, but we can only make the decision really when we get to that point. We have sufficient cash in the life business to upstream and refinance it at 202% solvency. It's all baked into our plans. That's what you probably should expect as plan A, but we can only confirm it when we get to that point in October. As for the dividend payout ratio, interesting to note that our dividend payout ratio today is 48% of our net operating profit. It's about 65%, 66% of our OCC. It's about 80-something percent of our business cap gen.
If you look at our business today, it's not a law, but I would think that you should be very careful not to commit to dividends that exceeds your business cap gen. If you want your capital to be supported by release of your book, at some point, the release of book will be over, right?
Yeah.
I think it's fair to assume that what your business generates should drive your dividends. Interestingly, which is pure coincidence, but sometimes things work out nicely. If you were to move the dividends today to EUR 283, that would exactly be a 55% payout ratio today. I think if you look at the business as it is today, we committed to EUR 245. As ASR is today, you could move it to EUR 283, and be still in line with your payout ratios. Where will the payout ratio move? We'll be very careful. We want to make sure that our dividend never goes down. We want to be the quality stock and behave as a quality stock that our investors expect from us. We want to have a safe and gradually moving up dividend, and we'll set our payout ratio in line with that.
Okay. Thank you.
Thank you. We'll now take our next question from Albert Ploegh of ING Bank. Please go ahead.
Yes. Good morning. Albert Ploegh, ING. A couple of questions, maybe coming a little bit back also to the previous questions on the dividends. I heard what you said to Chris on linking that with capital generation. When looking at your Capital Markets Day plan 2019, 2021, in terms of operating earnings, it seems you're pointing towards something like 2%-5% growth, again, without any bolt-on M&A. I think the OCC growth, as of this year's base, is probably around a 3% CAGR as well. Stable and growing. Should we then link also your, let's say, base case dividend growth in line with something like 3%-5%? As you now already did 7% and you expressed quite some confidence in 2019, that will be a little bit on the conservative side, maybe you can grow it by 5%+.
Maybe a little bit color there still. Then two small questions on outlook, if you like, on Life and Non-life. On the Life, your operating earnings were EUR 664 million, flagging EUR 10 million kind of one-off. I guess, let's say the Capital Markets Day guidance or some kind of flattish outlook excluding this EUR 10 million is still a reasonable starting point, again, excluding any bolt-on M&A impacts there. On Non-life, I think if you add back the storm, you basically report something like EUR 175 million operating earnings level. Is this also a good starting point? Is this reflecting, let's say, what you would say a normalized level of large claims in that kind of figure as a starting point for our models? Thank you.
Albert, this is Jos. Let me start with the last question. That's the most simple one to answer, that's yes. The EUR 175, I think that's a number that we would recognize and not argue that you have seen it wrongly. On your first question on dividends, I think the scenario you painted is not an unrealistic one. Let's call it the base scenario. However, including your summary, you said, well, not accounting with all kinds of acquisitions you do. In the meantime, we have done Loyalis, we will add Loyalis to our potential dividend stream. I think the way you mentioned it is the base case scenario, running the company based on a base case scenario is not as exciting as building a franchise. We keep on building the franchise, looking how we can deploy capital in the most efficient way to investors.
Let's assume your numbers could be the base case.
Okay. On the life outlook?
Albert, on the life outlook, I think our life earnings were supported by the inclusion of Generali. Generali really added a fair amount of profit to the life business, both from a re-risking but also from a mortality and technical result perspective. If you allow me to give a little bit more color on life. Investment margin was up by EUR 37 million, both actually in absolute terms and in relative terms. The capital gains release was down a bit, which is actually fine. Obviously, the quality of the earnings goes up. We think that is a reasonably sustainable level. Generali had a few one-offs, but I think that level is probably reasonably sustainable. On the technical result, it was down from 99 to 90, mostly due to the decline of the book. Some one-offs. I'm reasonably okay on technical results. Assume it to be relatively stable here with this twist.
A tendency to decline as your book runs off. Cost result was 24 to 26, stable. I think the movements that we see today in our cost base will allow us to keep our cost base stable. I think both technical results cost, sorry, technical result and result on cost may have, in the long run, some headwinds because the book that the client took every year may shave a bit off from that.
Although the short-term outlook is relatively favorable and on the investment income for EUR 37 is probably reasonably sustainable. To make a long story short, I'm okay with keeping the Life earnings where it is. If you want to be conservative, take the average of 2017, 2018. That's probably a reasonable estimate for Life earnings going forward.
Okay. Thank you for the details.
Thanks.
Thank you. We'll now take our next question from Robin van den Broek of Mediobanca.
Yes, good morning, everybody. My first question is on the financing of M&A. You basically connect that to hybrids. I was just wondering also in the line of the remittance flexibility you seem to have, surely the excess capital within your units are not generating the return on equity of the average. I was just wondering to what extent could the remittance power of your subsidiaries become a financing source, and at what cost would that actually come? That's my first question. The second question is on Generali Nederland. Could you give a little bit more indication on the path? I think you mentioned EUR 10 million, EUR 20 million, EUR 30 million from a net perspective when you did the deal. I think you said that re-risking should come on top. For Life, you have EUR 30 million sustainable growth already.
Can you tell us what's going right there and to what level should we expect this to grow on a revised basis? Thirdly, I'm still a bit confused on the guidance for OCC. Did you say 193 times 2 basically is reasonable? In the answer to that question, I didn't get whether Loyalis probably still needs to come on top of that and potentially also the further improvement of Generali. Could you talk a little bit more about the operational building blocks rather than the technical ones? Thank you.
Robin, thanks. On the source of financing. Indeed, we could remit cash up from our operating entities and use it to finance acquisitions. The cash is not idle at the operating entities. Effectively, it's invested. It supports the business, but effectively the surplus cash is invested. We look at that surplus capital and the investments. I want to make sure it's invested into assets and asset classes that add some value to our shareholders, value from a return perspective and value from a sourcing perspective. If you think about the Life business, where surplus capital is mainly invested into mortgages and real estate, because those are assets that we can uniquely source. Most of our shareholders cannot source mortgages or Dutch real estate themselves.
We add value by sourcing those assets, and we add value by creating value with the return on those assets. I take it maybe the surplus return on the marginal EUR in the Life business is not 12 point something %, but I think it's certainly above 10. It's usually investment in the Life business. Could we upstream it? Yes. Honestly, Robin, any acquisition, I would need to look at the balance sheet of what you acquire and take a NewCo approach. There is no impediment as such to upstream cash from the Life business. But if you were to acquire, for example, a Life legal entity with a Solvency of 156%, you need to take into account because ultimately you want to merge it to Life entities.
To me, it's more a function of what does NewCo look like and how do you construct a balance sheet of NewCo that is robust, solid, and can withstand any market gyrations. Then we'd solve around that. That means there is no impediment to upstream cash for Life, but it starts with what do you want your target balance sheet to look like.
work your way back. On the OCC, indeed, all numbers that we've guided to are ex Loyalis. We still don't officially own Loyalis. The ownership of Loyalis will only come early May. The Loyalis results will probably kick in and count for 7/12 of the year. What we're guiding to today is ex Loyalis. The 193 times two is, I think, a reasonable guidance. There could be a bit of upside indeed if the Generali Non-life performance is gradually improved, but also, the renewal of the Generali P&C portfolio takes place on a commercial basis. We've done a lot of technical migrations. The Generali P&C portfolio, we renew commercially, which basically means that everybody who has a Generali policy gets an a.s.r. policy in return. Which means it takes about 12 months for that to take place.
Some of it will happen during the year, the first half, some in the second half. The Generali Non-life operating improvement will gradually kick in and fade in during the year. I'd be hesitant to add a huge number to that. Therefore I think 193 times two is probably a good estimate if you look at what's happening on the line. On the Generali earnings contribution, I think the operating result contribution actually is quite large this year. It's around EUR 40 million, to be quite precise. It contrasts with the 10, 20, 30 prediction that we had. Delta one is, of course, the investment result. The 10, 20, 30 is the operating result contribution, not so much the investment result.
There is an investment element to it. Secondly, there's one or two, what I say, non-recurring elements, more PPA effects, purchase price accounting effects in the Generali numbers that I would not see as recurring. The recurring level of Generali earnings contribution this year, X invest portfolio, is probably on the EUR 25 million-EUR 30 million mark. I think that's reasonable to assume, and that we should be able to grow further. I think what it all tells us that the Generali benefits will be achieved certainly earlier than planned, and probably go up a bit higher than planned, not double. The idea of 10 and 10 expected, 40 achieved does not mean we're going to go multiply the numbers by four, but it's earlier than planned, and it's going to be a bit more than planned.
Okay. Maybe on the OCC generation, I mean, your market risk is still, I think it's 43% compared to 50%, where you feel comfortable. I think your re-risking assessment always takes place at the end of last year, I guess. Any conclusions there?
Conclusion for now is we think our market risk is stable. We need to be a bit opportunistic here. I think you expect our market risk to be broadly stable. I feel comfortable in today's volatile markets with only 43% in market risk and be a bit away from the 50% in today's environment.
No re-risking plans, basically.
Nothing major. Certainly less than what we did last year.
Okay. Thank you.
I'll take our next question from Steven Haywood of HSBC. Please go ahead.
Good morning, everybody. Thank you. On your 2019 to 2021 targets, which one of these targets do you think is going to be the hardest medium-term target for you to achieve? Secondly, I wondered if you can give us a update on the process or how you're finding getting a new member for the Executive Board. Thank you.
Thank you, Steven. I think all the targets we have set are realistic and doable, otherwise we wouldn't have set them. I think the most challenging one will be combining profitable growth in the Non-life area and at the same time keeping up the combined ratio in the lower side of the set target of 94%-96%. I think that will be most challenging because that is also set by market developments, competitive behavior. I think that will be the most challenging one from a managerial perspective. The other ones, like the EUR 40 million in the Capital Life business, as reported, we are close to delivering that in a sustainable way.
We delivered a bit more this year, said also that in the business of the distribution, we already know that the commissions will go down a little bit because all the insurance companies, like ourselves, have lowered the commissions on mandatory agents. That will influence that number a little bit, but it's not going to be challenging to move towards the EUR 40. All in one, we feel confident that we are able to deliver on those targets. However, it will be hard work. On your second question, where are we in selecting a new Board member? We've seen a number of candidates of which we are quite enthusiastic. We are in the middle of the process, hopefully, within a number of weeks, we can take a decision on the right candidate.
As you may know, then we have to take the DNB hurdle, and normally a process at DNB for new people takes around two to three months. Hopefully somewhere in May, we can be clear on this.
Okay. That's great. Thank you very much.
Our next question will come from Kepler Cheuvreux. Please state your name before posing your question.
Benoit Pétrarque.
Your line is open.
Hello?
Benoit, go ahead.
Yeah. Hi, guys. Sorry. Yeah. A question on the side on the business capital generation in H2. I think you've done EUR 163 million. It's up EUR 4 million versus H2 2017.
Benoit, can you repeat your question? We could not hear your question, actually. The line is pretty bad. Benoit, can you please redial? Because perhaps you would have a better connection, and then we can hear you. Operator, can we go to the next question, please?
We will now take our next question from Mr. Andrew Baker of Citi. Please go ahead.
My question. Just on the debt side, can you give me a little bit more detail on how you guys are thinking about interest coverage? I know you have the minimum level, which is four times, but what's the level that you'd actually be comfortable running the business at there? And then just on Solvency II, can you give a quick update on where we are in the Solvency II standard formula review? There were three elements that I think impacted you guys. The interest rate risk shock, the government guaranteed mortgages and LAC DT. I think the interest rate risk is being pushed out to 2020 review now. Are you still expecting the benefit from the government guaranteed mortgages? And I don't think you changed your LAC DT assumption in these results today, correct me if I'm wrong there.
Is that still a potential benefit to come through? Thank you.
Perfect, Andrew. It's Chris again. Thank you. On the interest cover, the single A target rate is four to seven times. We want to be safely single A, assuming we want to be at the upper end or above that four to seven times. I think, if you were to move to four in today's environment, you'd be pushing it in terms of your rating. I think at today's amount of debt, you'd have a humongous amount of debt in order to get to a four times interest cover. Think north of four to seven times. Let me just, for full clarification purposes on the debt and refinancing side. On Loyalis, we'll finance it with a hybrid. We'll pre-finance with a bridge. We'll just issue a bridge, which is a senior.
That gives us time to optimize the hybrid capital situation, pick the instruments, and pick the moment we need to issue the instruments. Hybrids today can become relatively cheap. In terms of picking the instrument we choose, we will weigh potential future M&A and protect our capital eligibility. With that, which turns it into us thinking you wanted to have more clarity on the FLAOR situation because that drives whether you want to issue a Tier 1 or Tier 2. The new insight we have this year is that our Tier 3 capital is actually quite large. Loyalis as Tier 3. Actually, we have less need to wait for that situation to evolve, because base case is we can do a Tier 2 anyway and still have sufficient capital headroom to absorb ineligible capital by someone we acquire.
That means plan A is probably the Tier 2 instruments, actually we've got more flexibility to do that. On top of that, there is the call option on the Tier 1 instruments, which we have in October. We can and will only make that decision at that point in time. It's fair to assume or to expect that we could do it if you look at the coupons, we can only and will make a decision at that time, and we have got plenty of cash in the life business to upstream cash to do that. In practice, think about Loyalis as a hybrid with a bridge, allowing us to pick and choose the moment to issue the hybrid at the most attractive rate for our shareholders.
There is the refinancing of the Tier 1s, which we will do in principle out of existing cash from the live business. That all together will integrate into one funding plan, but that's the way how we think about it. I just want to make that very clear to all of you. In terms of interest cover, four to seven times is what the single A rating stipulates. We want to be on the upper end. We want to be a very safe and sound single A credit. Think about north of the four to seven times cover. When it comes to the Solvency II review, interest rate delta has been pushed out a bit. The impact of that is limited. Our interest rate risk is small. Actually, our rate exposure has declined in the second half of the year.
I think that is something that could be a small negative, but relatively small because our rate exposure has declined. Recognizing the non-sort of government guaranteed on NHG mortgages is a small plus, and on LAC DT, it's kind of neutral to a plus in the sense that we've been very conservative on our LAC DT assumptions, LAC DT usage. We've actually increased the life factor a tiny bit from 70% of potential to 75% of the potential in this last half year. Which is still not full, we could take it further than that. If we really wanted to max out the model, we could take the life factor up by a fair amount. Today, the use of what I would say the future profit component in LAC DT substantiation is still relatively small.
It's less than a third of the potential that's included today. Life went up to 75 a tiny bit. We will be unaffected by the LAC DT review because the elements that the LAC DT review refers to are actually not used by us. That means LAC DT neutral, upside left, government guaranteed mortgages a plus, interest rate risk could be a small minus, but less than we thought before because we've tightened our interest rate risk.
Very clear. Thank you.
The next question will come from Matthias De Witt of Kempen. Please go ahead.
Hi. Good morning. I've got two questions remaining, please. First one is on the 2019 earnings guidance. You mentioned that you want to attain results similar, compared to the one in recent years. Just wonder, does that include Loyalis? I'm a bit surprised by the flattish guidance, because of the growth we see in Non-life, the Generali synergies coming through, et cetera. Can you be a bit more precise on that, please? The second question is on M&A. I think you mentioned in the past that you're targeting a return of at least 12%. Does that incorporate any benefits you could get from an internal model, that could lower the requirements of the targets? Or would you not be willing to share those in calculating these hurdle rates? Thanks.
Matthias, I think the message we try to bring across is that we are very confident that we can keep on running ASR as it is on the base, on the healthy business. As said, if and when we wouldn't have a storm like we had last year, that would be a plus in our earnings. The guidance we have given, it does not yet include Loyalis. As Chris already said, we don't own that business yet, we haven't included that into our guidance. On the 12%, the answer can be very brief and short. That's a no. That's based on how we look at our solvency today and how we calculate our today's numbers. I think we have been clear on the partial internal model.
If and when we would do a large transaction, we would start to build that model and to add it to ASR. In assessing whether a transaction is a good transaction, we should not yet take into account any potential further movements towards an internal model.
Okay. That's clear. Thank you.
We will now move to our final question from Benoit Pétrarque of Kepler Cheuvreux. Please go ahead.
Yes. Thanks for taking my questions. The first one was on the business capital generation in H2, EUR 153 billion. It is up only EUR 4 billion versus H2 2017. I would say despite the consolidation of Generali, strong non-life earnings in H2 2018, also better asset management and distribution earnings. I was wondering if you comment on the kind of increase H2 2018 versus H2 2017, especially if there is any kind of one-offs on the life capital generation. I would be interested by that. Second one was on the premium growth outlook in non-life for 2019. I think you have grown like 7% underlying this year. Could you talk a bit about your outlook on the growth and also on pricing? The last one was on the re-risking.
I have seen exposure to financials up EUR 4 billion, especially in H2, so it looks like you have taken opportunities in the market in the fourth quarter. Could you maybe come back on that? What is your plan here to re-risk going forward? Thanks.
Yeah. Benoit, on the first question on your business capital generation H2 to H2, the second half of 2017, the second half of 2018, plus EUR 14.14 million. Basically what happened there, it is a combination of things. Technical result up. Also we had somewhat more large claims in the second half of the year. In our P&C business, we see in the absence of storms, the book claims ratio falling. Claims frequency is actually below that of last year and going down. Large claims were up, so a little bit more higher large claims in the second half of the year. Secondly, for the last year, with slightly higher hybrid costs because of the RT1 financing we did last year, and with slightly higher holding costs, and those are one-offs, as Jos said, a one-off holding cost metric, a one-off holding cost that fed in.
In the year-on-year comparison for the last six months of the year, book claims ratio much better. Excess returns up a tiny bit, compensated by higher larger claims, and higher holding costs and some higher hybrid costs. That explains the delta between second half of last year and second half of this year.
Benoit, on your question on growth and pricing, let me start off with pricing, especially in the P&C Non-life area. We still see price increases. The market still is hardening and is getting better. I don't think we are yet there, especially in car insurance. I think the combined ratios are not at the level where they should be. We expect, and we will raise our prices ourselves also, over the next few months. We expect further price increase in the P&C business. If I take out the storm and fire insurance, I think the results are satisfying, but still room for improvement in terms of pricing. We expect that prices will go up slightly, not as fast and as high as we have seen over the last 18 months, but there will be continued price increase in Non-life.
In terms of growth, if I take a look at how the year started, we are confident that we are able to deliver on our growth objectives, especially in the P&C and disability business. P&C continued in the same pace as we closed the year, still lots of new business. Same for the disability business. Positive developments in terms of new production there. Also in the pension DC, which we aim at, we still see the same trend as we have seen over the last year. We are confident that we will be able to deliver the growth pace organically that we have delivered over the last 12 months.
Onto your third question, the investment portfolio, you indeed see some increase in financials. Actually, in the second half of the year, when spread widened, especially on the banking sector, we added short-dated. We thought there was value in relatively short duration financials or investment grade. As you can see the amount of non-investment grade assets hasn't barely moved. It's basically short-dated, subordinated paper quality banks. That's exactly what it is. Triple B and up subordinated paper by quality banks with relatively short durations. We felt from a return on capital perspective, that's where we saw value after the spread widening in the second half of the year, and those don't consume that much capital. That explains actually the movement in financials. Maybe one final point to make on guidance on the coming year. We talked about our business capital.
We talked about our organic capital generation. We talked about multiplying numbers. Ultimately, there are a number of moving factors in this. Multiplying H2 by times two is a safe bet, but it's also a reasonably conservative way of looking at our solid generation. We know we like to under promise and over deliver. We will try to do this, continue to do that. Multiplying H2 times two is always a good idea. Gives you probably the floor and the lower end of what we can deliver next year. That's the number we can probably confirm to. You know us, when we confirm to a number, often we try to outperform that. Should I get back to Jos for some final words of wisdom?
Yeah. I think I couldn't spread more wisdom than you have done in your last comment. Thanks for joining us, and hopefully you feel that we are very confident in how the company runs at the moment. The business is doing well. People at ASR are happy. We are very confident to keep on delivering the results as we have done before, and we look forward to meet some of you in due time. Tomorrow we will start our roadshow in London, and I believe Michel and his team have invited some nice people to have dinner with us tomorrow night, and then we can continue to discuss ASR and the market in a broader way. Thank you for being with us, and I wish you all a very nice and good day.
This concludes today's call. Thank you for your participation. You may now disconnect.