Good day. Welcome to the ASR conference call on the acquisition of Loyalis. Today's call is being recorded. At this time, I would like to turn the call over to Michel Hülters. Please go ahead, sir.
Thank you, operator. Good morning, everybody. Welcome to the ASR conference call on the acquisition of Loyalis that we announced earlier this morning. On the call are Jos Baeten, CEO, and Chris Figee, CFO. They will talk you through the transaction highlights from a strategic rationale and the financial metrics. Jos will kick it off. After that, we'll open up for Q&A. As is customary, please review the disclaimer that we have in the back of the presentation as well as any forward-looking statements that we have. With that, Jos, it's all yours.
Thank you, Michel. Good morning, everybody. I'm sure you all have seen the announcement this morning. Let's not waste too much time. I'll briefly mention the highlights of the transaction before we take any questions you may have. As you can understand, we are very pleased to announce this transaction so shortly after our CMD of the 10th of October, in which we detailed our plan to actively pursue profitable and inorganic growth next to the normal organic growth, especially aiming for bolt-on acquisitions in the SME space. I believe we have been able to present an offer that, beyond an attractive financial package, also resonates well with our strategic principle of putting clients first. This transaction truly ticks all the relevant boxes. We will discuss that during the Q&A from a strategic point of view as well as financially.
With Loyalis, we significantly strengthen our position in the disability market. We gain unique access to an important cluster of customer groups and expand the product offering. In disability, we grow our market share to 28%. In life, the acquisition fits very well with our strategy to consolidate service books. We can unlock the synergies by rationalizing and migrating these books to the Software as a Service platform, what we already have. As you can see on this slide, the transaction that comfortably meets the financial criteria we maintain for M&A and demonstrates our ability to deploy capital to enhance the value of the organization. Pro forma impact on Solvency II ratio of ASR at closing is minus nine solvency points, equal to the Generali transaction. When the integration work is successfully done in 2022, the impact is minus eight solvency points.
Return on investment is expected at well above 12% on all metrics. This is calculated on a fungible capital investment of roughly EUR 200 million. The transaction is expected to contribute EUR 40 million to the net operating result and EUR 35 million organic capital creation in 2022. This represents an EPS accretion of more than 8% based on our last full year results in 2017. Transaction will temporarily be financed with a short-dated bridge loan, ASR maintains a very strong financial flexibility. The financial leverage of ASR will, due to this transaction, increase to roughly 29%, well below our target of maximum of 35%. Let's move to the next slide, where I will provide an overview about Loyalis.
As you may know, Loyalis is an insurance company currently owned by APG and is located in Heerlen, a town in the south of the Netherlands. It employs roughly 300 employees. Loyalis is mainly a non-life company with EUR 161 million gross written premium in non-life and EUR 105 million of gross written premium in life. The IFRS earnings of Loyalis were EUR 71 million in 2017. There are some differences in accounting standards. Loyalis, for instance, applies fair value accounting, where market movements, including interest, flow through.
Therefore, this is not a number you should expect going forward. Estimated standalone run rate of net operating earnings is approximately EUR 30 million, and this is based on ASR's accounting standards. Loyalis' balance sheet is just above EUR 3.3 billion and is fairly well capitalized with strong Solvency II ratios for the operating companies. Important to note is that Loyalis carries no debt.
The cooperation between Loyalis and APG will be continued and is covered under long-term agreements with APG. The cooperation pertains to knowledge sharing on the sector, which enables Loyalis to develop insurance products in the future and will remain closely related to the collective labor agreements of the sectors Loyalis and APG currently serve. Let's have a closer look at disability and life, starting with disability. Loyalis strengthens ASR competitive position in sustainable employability segments as it offers a broad portfolio of disability products with a strong emphasis on WIA, accounting for 86% of gross written premium in 2017. Out of the total earnings of Loyalis, 80% is in a non-life predictable earnings stream. With Loyalis, we also will have meaningful access to new customer groups, governments, and education, offering the opportunities for ASR's disability suite.
Complementary to ASR's strong position in the disability market, particularly for individuals and small companies, is Loyalis' strong presence in the area of mid and larger sized corporates with over 100 employees. Our objective is to safeguard current profitable proposition. To do so, we aim to continue running the business from Heerlen. As such, it will be only a partial integration of staff functions and IT rationalization. The relation with APG on knowledge sharing, product development, and efficient client solutions will continue. We will keep the Loyalis brand intact, being well-recognized in the sector they service. As you can see, there is also a relatively small absenteeism portfolio which will be managed as a closed book, and no future offering will come via the ASR product line. Turning to life, this part will be fully integrated into ASR's platform in Utrecht. Migration expected mid-2020.
As mentioned, this fits very well with our strategy to consolidate the individual life markets, here we can actually lever our proven integration and migration skills and experience. Loyalis adds scale to our existing service books and increases the cost coverage. We will manage the EUR 2 billion investment portfolio in life. Let's move to slide five. For those who attended our CMD in October, this is a familiar slide. It depicts how we look at the various players and roles around sustainable employability. It is an entire ecosystem in which we have a strong and unique position with the various entities that we either fully or partially own, or with companies which we work closely together. With Loyalis, we strengthen our position in underwriting and targeting significant classes of customers with products that meet their needs.
This ecosystem will continue to develop, I would expect us to continue to our aim to further expand this in the future. As is shown on the right-hand side, Loyalis will increase our market share to 28% and become co-leader in the disability market. Now turning to the impact on Solvency II. That's slide six. As you can see, the pro forma impact on Solvency II, when all capital and cost synergies are taken into account, amounts roughly 8 points. I will briefly run you through the major changes. Day one pro forma solvency impact is 9 points, this consists of the purchase price. As you have read, it is EUR 450 million cash out, partially offset by capital synergies, which includes diversification in eligible capital, as well as the alignment of assumptions and the impact of combining the businesses.
Given the fact that Loyalis already has very strong balance sheet, the impact of the latter is close to zero. At legal merger, the impact is - 1 point, reflecting the remaining capital synergies and further alignment of assumptions. After the legal merger, we will pursue to realize cost synergies, which are expected to increase the Solvency II ratio with 2 points. This number includes the capitalized cost benefits and is partially offset by non-recurring restructuring expenses. When determining the return on this transaction, we look at the amount of capital which is required based on ASR Solvency II level above the dividend threshold for the operating companies. Tangible capital deployment amounts to EUR 200 million. This number takes into account the capitalized cost synergies we expect to realize. Excluding these capitalized cost synergies, the tangible capital investment amounts up to EUR 260 million.
Let's turn to a snapshot of the financial metrics from this transaction, that's on slide seven. The acquisition of Loyalis is expected to deliver a return on investment of well over 12%, based on operational and capital synergies. Loyalis is expected to contribute EUR 40 million to the net operating result as from 2022, after realizing all the cost synergies. Loyalis is expected to contribute EUR 35 million to the OCC to be realized in 2022. I'm sure you will understand, we are very pleased with this acquisition. Not do only all the financials ticks the boxes, but also this acquisition is in the core of our strategy. Having said this, I would like to conclude this presentation, let's go over to Q&A.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digits one on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. Please press star one to ask a question, and we will pause for just a moment to allow everyone to signal. We will now take our first question. This comes from Cor Kluis from ABN AMRO. Please go ahead.
Good morning. Cor Kluis, ABN AMRO. Congratulations with this acquisition. A couple of questions.
It's midnight for you, I believe.
That's correct. No problem. I've completely got a question about the difference between the EUR 450 million and the EUR 200 million. Could you help us a little bit more with the pieces between? I know we see the slide on six, of course, but could you give a little bit more granularity on legacy piece, which probably is not at Loyalis excess capital, which you see there, assumption alignments, where you're a little bit more conservative than they are. So a little bit more granularity for that gap between those two figures. My second question is about the APG contract. You talked about a long-term contract. Could you elaborate a little bit more on how that works? How long can you contact new APG clients, or do you put them on their website, or how does that work?
My last question is about the OCC, which piece, the EUR 35 million, which piece is a capital release SCR effect because the life book is shrinking somewhat there. To what extent is that included in that, probably the disability piece is growing, so that consumes probably some of that. That's my questions.
Okay, Cor. Good morning. It's Chris. I'll take your question on the capital spend. There's a couple of points to note. This is a business that is well capitalized. If you look at the own funds that are present in the two operating entities, Loyalis Leven, Loyalis Schade, and you're excluding any adjustments we may or may not make, but as it is today, the own funds in this business are EUR 560 million. You could argue we're paying EUR 460 million for EUR 560 million of own funds. Now, that of course, pre-value, there will be some adjustments, but it shows you that these businesses are well capitalized, running at solvency levels of stand-alone 172% in Loyalis Schade, 175% in Loyalis Life. That's one. Second thing, what I like about this business, we're buying effectively a non-life earnings business.
If you look at the profit of this business, also especially on ASR accounting standards, ASR, 80% of the profit of this business is non-life. It's a non-life earnings stream. We're acquiring own funds with very limited UFR or VA sensitivity. As I said, the own funds of the two business are EUR 560 million. If you took out the UFR and the VA as a whole, that would drop to EUR 520 million, before any adjustment. We're looking at a business with sufficient, a significant amount of capital in there, which have limited UFR/VA sensitivity. The walk from the EUR 450 million to EUR 200 million is we paid cash out EUR 450 million at this point. In our assessment, there is EUR 100 million of that will fundable capital required.
You could say we're paying a euro for a euro, but that's just capital in this business based on our own dividends and our capital management ladder. We're paying EUR 450 million for EUR 100 million of additional fundable capital. It's a euro in for a euro out. There's about EUR 90 million of net capital synergies. They consist of diversification benefits, DTA, and I'll elaborate more, but those are the main components.
It brings you to EUR 260 million of spend of capital, and there's about EUR 60 million of capitalized cost benefit in solvency. The lower expense charges in your Solvency II would bring you to the EUR 200 million. The bridge up is EUR 450 million minus EUR 100 million, minus EUR 90 million, brings it to EUR 260 million, and take out EUR 60 million, you get to EUR 200 million. In those capital synergies, as I said, the dominant one is diversification benefits.
Disability is a risk factor that naturally diversifies very well in existing insurance book. Next to mortality is the second-best diversifier in your risk base. Effectively, 20% of this business is mortality and 80% is disability. Secondly, there is an ineligible DTA on the Loyalis book which will become eligible in our side. There are a few smaller ones where on the negative side, we'll have some adjustments on the mortality assumptions in the Loyalis book, where we have a slightly different approach on quantifying and reserving for mortality risks. It's a small negative from dealing with profit sharing, where we don't follow their methodology yet on how you account for profit sharing and to be quite a bit loss-absorbing capacity of technical provisions, like TP. Previous owners, which we don't apply yet.
There is a small amendment on the interest rate risk charge and a small positive on further synergies in disability solvency. In summary, diversification and DTA are the main drivers. Small number of adjustments for mortality and profit sharing. Those are the negatives, the actuarial function alignment, and the number of positives, mostly around reserving and treatment of disability expenses. The core conclusion is that you will pay EUR 450 million for a business with north of EUR 500 million own funds. XVA, actual bar, still north of EUR 500 million own funds. We take out some EUR 100 million of where we're paying a euro for a euro. It brings it to EUR 350 million. Take out EUR 90 million of clear capital synergies that will be there already, actually, very quickly within the first six months.
There's about EUR 60 million of opportunity on reserving, which will show up if and when we complete the integration. That will take a bit more time, but we've got confidence that we will deliver on those.
on the contract-
Sorry, Cor. Go ahead.
on the contract-
No, no. It's great to hear. Thank you.
We aim that it will be an indefinite contract. However, we have agreed that every five years, we will evaluate how the collaboration works. After five years, we have the first evaluation of how we have worked together over the last five years, and then aim at continuation of the contract going further. The aim of the contract is to keep on offering the current product suite of Loyalis under the Loyalis brand, which mainly is WIA business. As said, 86% of their non-life portfolio is in WIA business, and there is a small sickness leave portfolio involved also, but they are not currently offering active sickness leave. We have agreed that we will be able to build on their current customer portfolio and offer also other ASR products. For example, they don't offer any sickness leave today.
We could decide to start on offering sickness leave and all kinds of other additional products too. Going forward, it is keeping the current products in place and adding new products that are not offered yet by Loyalis. All the non-life business runs at a very profitable combined ratio. If we would apply our own way of calculating the combined ratio, their combined ratio is already in the target level of ASR's combined ratio for disability. In the very low 90s and sometimes even below 90. Having said that, keep the business in place. That's what we have arranged with the contract, and extend the business going forward.
Cor, to your question on the OCC. What's in there. As I said, this is 80% a non-life business. The profit in 2017 was EUR 71 million, but that's on fair value accounting, which we don't apply. The numbers in 2017, when spread narrowed, kind of overstate, especially the life earnings when you compare to our accounting standards. On our standard, it's 80% non-life profit and about 20% life profit. Also shows up in the OCC. The OCC really is all about underwriting result and new business result in the non-life business. Think about risk margin release of, say, EUR 2 million- EUR 4 million in the first year, FCR release of EUR 3 million- EUR 4 million in the first year. About EUR 5 million- EUR 7 million of capital release. The remainder is old classic insurance business and returns.
Over time, you can see the risk margin to decline gradually from EUR 4 million to around EUR 2 million in 2022, and the FCR release will also be around EUR 3 million. Please note that in the OCC assumption, it also assumes a reasonable amount of new business. The capital release is actually netted, which gives you about EUR 2 million- EUR 4 million of net contribution from risk margin and FCR release. In the long run, if we were to stop writing new business, which in the long run is not a good idea, but if we were to do that, then the OCC would jump by another EUR 5 million.
I think the key point to make is that out of, say, the EUR 30 million or EUR 35 million of capital release of OCC we're seeing in 2021, only up to EUR 5 million is really book release, and the other EUR 30 million is underwriting business and returns.
Okay. No, wonderful. Thank you. Thank you very much. Thank you.
Thank you. We now move on to our next question, and this comes from Farooq Hanif from Credit Suisse. Please go ahead.
Hi there. I hope you can hear me. I'm calling from home. Just on two questions. Firstly, on the debt, the short-term debt that you raised, what is your intention there? If you need to fund another deal, what would you convert that into? If you find you don't need to fund another deal, what are you going to do in terms of long-term leverage? That's question one. Second question is on some of the things you haven't talked about. The uplift from looking at their investment portfolio and the uplift from cross-selling other products that are not currently on the suite. What kind of case study can you show us in the past that might be relevant here in the potential uplift? Thank you.
look, it's Chris. First of all, congratulations. When I dial in from home, you hear dogs barking, kids screaming. Well done on keeping your house under control.
I think that mouths up to kind of.
Well done on leading the charge there. On the debt side, we think this business lends itself very well for hybrid financing. It's a EUR 450 million cash out acquiring a stable and predictable non-life earnings stream with long-term client relationships and a good combined. This thing smells, breathes, eats hybrid financing. We will hybrid finance this transaction in the long run. However, the instrument itself, the choice of instrument, is something that needs to be on other M&A files that are out there. Now, I don't want to have a call on other files, but please know that if Loyalis was to be the last acquisition we do, this thing would be financed with a Tier 2 instrument. Hybrid capital keeps the solvency stable at the lowest cost possible.
However, if you take into account that there are potential other transactions out there that may or may not start, that we may or may not buy, and who knows, but it might be the case in other transactions, you'd rather use a Tier 1 financing to protect your Tier 3 headroom, protect your Tier 3 space. In a year from now, we will know better or we will know what the optimal financing against this strategy is. Will we use a Tier 2, which you take on a standalone basis, or would you rather issue a Tier 1 instrument, which may make sense if you include other transactions out there. With that in mind, we said that we will do this with a hybrid financing, so our solvency will be stable against this transaction.
However, the instrument itself, it's fair to choose, better to choose in a year from now than to choose today in order to protect and preserve optionality. With that in mind, we are going for short-term financing or one-year financing. Options there could be either a public, a one-year senior in the capital markets or a bridge financing with a bank. We have until closing to do that. I think hypothesis is that a bridge financing with a bank is slightly more, offers more flexibility in a space. It's flexibility what we're looking for, and the cost of financing today are relatively low. Most banks have a fair amount of liquidity and are willing to extend short-term credit at attractive rates. Our view is, one, solvency of the deal will be unchanged because we will fund this with hybrid inside the leverage ratio that we have.
However, it's not wise to choose today which instrument it is. Preserve optionality, take one year loan out at a very low rate. The option doesn't cost a lot these days, and that actually provides time and room to pick the final instrument when we're there.
Just to interrupt, I hope you don't mind. When you say solvency will be neutral, I mean, actually it will go upward if you raise Tier 2 or Tier 1 without EUR 450 million Tier 1 funds. Is that what you're saying?
Yeah, exactly. Yes. The EUR 450 million out will be matched by at least the EUR 450 million cash inflows. For example, your Tier 2 is going benchmark size of EUR 500 million. You'd expect if you issue a Tier 2 bond, you'd issue a EUR 500 million Tier 2 bond, which nearly perfectly matches the cash out on this.
Okay.
On Tier 1 that's, I mean, a little bit less evidence of what a benchmark Tier 1 bond is. It's probably in the same order of magnitude. The own funds out will be matched by the own funds in from a hybrid issue.
Okay.
To the other point, uplift on the investment portfolio. It could be a small uplift in there. It's not in the numbers yet. Their portfolio bears a reasonable amount of asset risk. It's slightly less yieldy than our portfolio. There is some room to add mortgages and real estate. If you compare the Loyalis investment portfolio to ours. The uplift is not in the numbers at this point in time. Similar to Generali, we think that re-risking an asset book is never the key reason to do a deal or to justify doing a transaction. The ROIs, as you see, are solely based on operating and underwriting synergies. Re-risking itself is the icing on the cake, which is not justify the case. You're looking at relatively single-digit numbers.
If you look at the asset base and what we can do, there's a couple of million we could add probably. That's not going to move the dial. In terms of cross-sell, something similar. We can see opportunities for cross-sell, but we haven't quantified them yet. Maybe Jos can elaborate a little on those.
Yeah, I would say, as very conservative. We haven't assumed any top-line cross-sell assumptions going forward. Between signing and closing, we will start developing plans with the management team on what the product demand from their customization, which we can add. For the time being, we have said, let's assume no further additional growth to justify the business case. The business case is based on the current product suite without any future cross-sell involved.
Okay. That's very clear. Thank you very much.
Thank you. We move on now to our next question, which comes from Robin van den Broek from Mediobanca. Please go ahead.
Yes, sir. Good morning, gentlemen. Congratulations on the deal. My first question is, what kind of cost of financing have you assumed in the EUR 35 million of OCC you've guided for? That will be question one. The second one is, you lean back on the 140% Solvency II ratio. I think that was also the rate you used in the Generali Nederland deal. I was just wondering, this doesn't really talk about the quality of capital. Loyalis clearly has no debt on the balance sheet, so that 140% for them is a lot better than it would be for potentially other assets.
I was just wondering if you could explain to us how your rebalancing act on the capital position works if there would be more leverage in place. The last question is on whether this deal makes you come closer to a potential internal model validation process. Thank you.
I will ask the first question. I need a little more clarification on the second question. The first question, we assumed a small couple of million cash out for the funding. When you look at the bank loan where it could be all-in funding for a one-year bank loan, including commitment fees and ULC interest rate fees, it's probably up to 70 basis points as we re-enrich. Negotiations haven't been closed. We were not done there yet. Think about it, EUR 2 million-EUR 3 million of financing costs in the first year. For later years, we have not yet included those because that depends on the final deal we will make. In principle, think about EUR 2 million-EUR 3 million in the first year. The second question. I'll think of your third one. Will this bring us close to the internal model?
A tiny step, but not the final step, so to speak. It adds a EUR 3 billion AUM portfolio to our assets. The re-risking will be done in areas of mortgages and real estate that, to some extent, are less affected by the internal model. Real estate a bit more. Internal model helps, but it is not moving the dial or making the final call on requiring internal model for the deal to work. This deal works standalone with or without an internal model. Your second question, could you elaborate? I can talk to that.
Loyalis, basically all the on-premise is unrestricted Tier 1. If you would look at, I guess, the big elephant in the room here is VIVAT, then you have a lot more other Tier 1 and Tier 2 capital in there as well. If you then would do a rebase of capital towards 140%, you could even argue that VIVAT has excess capital. Just wondering how leverage basically is affecting that excess capital within these M&A frameworks.
Let's keep this call to Loyalis, not hypothesize or speculate on other files that may or may not come. On the Loyalis situation, this business is actually fully debt-free. What I find very important is not so much the amount of leverage, but also the sensitivity about the VA and UFR. Loyalis, our estimate, if you exclude the UFR, exclude the VA, it would still have, for example, a life solvency north of 140%. Loyalis life solvency ex UFR, actually is 149%, and in PAT, we still be around the 170% mark. At this point, we think it's fair to assume that for this transaction, which is a non-life business, not sensitive to UFR, not sensitive to VA, that our existing management letter is fully consistent and could be applied in this case.
In that sense, I'm more looking at sensitivity to assumptions, mostly UFR and VA, to accept the 140% level of business. If you would buy somebody else with different level situations, we may want to revisit it. In a previous transaction, both Generali and Loyalis, business without leverage, and with very limited UFR and VA sensitivity, we think the 140% makes perfect sense. If you were to run the number at, say, 160%, that means our capital commitment, assignable capital, would be roughly EUR 60 million higher. We did do the test. What if we did not define fungibility on 140%, but on 160%? The EUR 200 million ultimate capital commitment would become EUR 260 million and divide EUR 40 million by EUR 260 million, the deal still holds. Even if you do the transaction, the numbers on a 160 basis, you'd still be north of 12% ROI.
Secondly, you still are north of beating, for example, spending the same amount of capital on buying back our own shares. In short summary, we talk about Loyalis only. Sensitivity to UFR and VA is more important than leverage at this point in time. The 140 holds for us, holds for them, holds for Generali, but also at 160, the deal still washes safe.
Thanks for that, Chris. I agree with you, by the way.
Thank you. We'll move on to our next question, and this comes from Albert Ploegh from ING Bank. Please go ahead.
Yes. Good morning, gentlemen. Two questions from my side. First one is maybe on the customer base currently of Loyalis, the 450,000, I think it was mentioned. What percentage is that, basically, what you would call a civil servant? I guess Loyalis is also opening up to other customer base as well. You mentioned retention rates are still high. Can you give a bit more color what they are and what the trend has been in recent years as far as you have, of course, that information?
The second question is related to the cost synergy potential of the EUR 10 million-EUR 15 million, and let's say the guidance of OCC and net operating result of EUR 35 million-EUR 40 million, where you put a year 2022, of course, still some years away. Can you maybe give us a bit more color on the phasing of that? I guess it's a bit back-end loaded due to the, let's say, consolidation of the life portfolios. A bit more color would be helpful there. Thank you.
To your first question, roughly 80% is in the area of universities, schools, and civil servants of the portfolio, mainly disability portfolio. 20% is in the area of large corporate institutions, like, for example, some hospitals. Hopefully that answers your first question. That's the area where we aim at further growth going forward, but what is not yet included in the deal specifics and in the financials. Chris?
Yes. On the synergies, Albert. Think about there will be already in the initial set of synergies in 2019, mainly around the asset management space, where in-house, the asset management today is done by APG. We'll bring back the asset management to our own business, that is, of course, highly scalable activities. Secondly, there are some cost allocations from services provided by APG to Loyalis that we'll deliver from ASR.
That there will be some savings already in year one. Think about something like up to EUR 5 million in 2019. That will move to around EUR 8 million in 2020. When we think around 2021, we are pretty close to the run rate of up to EUR 16 million synergies. In the first year, it's savings on services provided by APG that ASR will put on board with very limited additional cost. Then there's the further cost savings will commence in 2020 and mostly 2021. I think by 2021, you'll be looking at closer to EUR 16 million run rate synergies.
Okay. Thank you very much.
Thank you. We now move on to our next question, and it's from Steven Haywood from HSBC. Please go ahead.
Thank you, and good morning. Just to clarify on one point earlier, you mentioned about a low nineties combined ratio. Could you be a bit more specific on that combined ratio, whether that's been achieved or whether that's sort of the forecast you expect to get from Loyalis? Then secondly, on your service book consolidation process, can you remind me of where we are, particularly with regards to your internal books, your Generali Nederland book, and then where the Loyalis book will come into the consolidation process here? Then finally, is there any chance you can give us a ASR standalone Solvency II ratio or sort of guidance towards what it should be for the end of Q3 or even for the end of November? Thank you.
Hi, Steven. This is Jos. On the combined ratio, we recalculated their combined ratio based on our way of calculating the combined ratio, and they have been in the space between 85 and 90. If I say low 90, I actually mean it's 90 or even a bit lower. That's within the target range of our own disability targets going forward, being between 92 and 94. This perfectly fits in our disability targets going forward, and we don't have to do a lot of repairing on that, like we had to do in the non-life business of Generali, for example, where the combined was above 100. It's a healthy portfolio. On your second question, Steven, where are we in the integration of the different individual life books? We have finalized all the own books except one. There was actually an outsourced book to India.
We're now considering whether we should in-source that again and bring it over to our own Software as a Service platform. Even when we decide to do so, then it will be done half 2019, so half of next year. Also, the Generali integration will be finalized somewhere in the second or third quarter next year. If we take three to four months for closing the transaction of Loyalis, preparing the integration of the Loyalis book, we will be able to start the integration of the Loyalis book as from the end of 2019, and finalize it, as said in my introduction, in 2020.
To your question, Steven, on solvency for Q3, we don't disclose solvency on a quarterly level, so let's not go into there. The numbers you can see on the pack work on the pro forma half year numbers. Without disclosing too much, I think you'd be very safe to work with these numbers as the basis.
Okay. Thank you very much.
Thank you. We will now move on to our next question. This comes from Bart Jooris from Degroof Petercam. Please go ahead.
Yes. Good morning. Thank you for taking my questions. Only one strategic like. Another one is more a little bit detailed. First, on the life offer for Loyalis, is there any unit linked, any DC in there, or should we just see this as additional service books that will be run off? How is the maturity hedging of the liabilities regarding the reserves? Talking about reserves, there are EUR 3.4 billion, while in the press release you're talking about AUM of EUR 3.1 billion. Could you explain the difference? Finally, probably on the cost savings, there will be some restructuring charges. What is the amount and the timing of this? Thank you.
Bart, could you please repeat your first question? What was that on?
On the life offer.
On the life portfolio. We have looked into the life portfolio. There is a very small amount of unit life policies involved. Hardly any legal cases on them. They have delivered on all the agreements that were made with the government and with AFM to deliver on compensation. From a risk profile of the transaction, our judgment is that we are not onboarding additional risk on the unit linked file. On the difference between the EUR 3.1 billion and the EUR 3.3 billion, the EUR 3.1 billon is the assets we are going to manage ourselves. If you look at their balance sheet, there is some liquidity. The difference between the EUR 3.1 billion and EUR 3.3 billion is mainly liquidity.
Are the books maturity hedged liabilities assets?
Bart, it's Chris. We have a slightly different hedging profile. I think the existing hedging profile by Loyalis is more aimed at protecting the IFRS balance sheet and less on Solvency II, because they run IFRS mark-to-market balance sheet. Their hedging strategy is slightly different from ours. What the relative is our strategy will, once we control the business, move it into our interest rate hedging policy, which effectively is a combination of duration and maturity hedge. We try to be as much as possible cash match in terms of our duration. Effectively there will be some practicalities that not always require you to completely be cash match, especially through longer reviews. Fair to say that the relatively short maturity book of Loyalis will be, when it comes in our balance sheet, predominantly be cash and maturity hedge.
The cost of all this integration and restructuring?
On the timing, we assume that most will be done end of 2020. The results will kick in as from 2021. On the cost, we haven't yet disclosed an exact number, but given our experiences in integrations, you can assume that the numbers we have presented, and those already include the integration cost, that they are fairly conservative.
Okay. Thank you very much.
Thank you. Again, ladies and gentlemen, as a reminder, it is star one to ask the question. We will now take our next question from Benoit Pétrarque from Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Just one on the combined ratio on my side. Could you talk about the closer cycle, combined ratio for the business? Obviously, Loyalis is a business we know well, typically. Just wondering how is the behavior in terms of combined ratio through cycle, also in more difficult terms in the cycle what you have seen in the books. Into that, is the 85%-90% a kind of average across the cycle, or any kind of current level you expect in the current cycle? Thanks.
Thank you, Benoit. Over time, we have seen a relative stable development of the combined ratio over the last five years at least, which has been consistently based on our way of calculating the combined ratio between 85 and 90. It's a very healthy and stable portfolio going forward, and that's what we assume that we are able to continue to deliver going forward.
Thank you.
Thank you. We move on to our next question, and this comes from Robin van den Broek from Mediobanca. Please go ahead.
Yes. Sorry to come back on the cost of financing question I asked before, but Chris, if I understand your reasoning during the call correctly, you indicate that Tier 2 financing would be the most logical way to deal with Loyalis. I think your Tier 2 debt currently has a yield of 4%. When I asked the question, what's baked into that EUR 35 million of OCC, you seemed to imply that that's not 4% of the potential financing, which would be probably more than half of the EUR 35 million if you pay 4% on the EUR 500 million. Am I seeing something wrong here, or could you elaborate a little bit?
To some extent, yes. To some extent, no. Indeed, we've baked in the one-year funding cost in the OCC. Going forward, the new round we haven't. At the same time, if you were to raise another EUR 500 million of hybrid, that would probably change the asset allocation of the business somewhat because that would mean you have more capital spend on the risk asset side. Today, we keep the asset mix as it is, and that's why we're spending 9 points of solvency on this. If you were to fund it with a Tier 2 hybrid, which for example, could cost you EUR 400 million, you'd have say EUR 500 million of capital that you could also spend supporting a further market risk allocation. That would also be added to the OCC.
If you do the OCC numbers correctly, you take out some funding costs, but you add more market risk income at that time because you have EUR 500 million of more capital in your base. In today's situation, we spend 8% of solvency points, but we keep the existing investment portfolio. Both sides have a gain for me.
You would assume that those sectors basically cancel out against each other, if I understand your reasoning correctly?
Yes.
Okay. Thank you.
Yes.
Thank you. As there are no further questions, I will now hand the call back to Jos Baeten for any additional remarks.
Thanks for attending this call. As you can imagine, we're very happy with this transaction. Hopefully we have clarified some of the questions that we got already this morning when we announced the transaction. We think from a strategic perspective, but also from a financial perspective, it is a very value creative transaction which perfectly fits in our strategy to build an ecosystem in the area of disability. As you may expect from us, we will deliver on the integration targets that we have set and also we will deliver on the timeline. This concludes from our perspective, our call. Thank you for attending. For those attending, one of our colleagues in the U.S., have a great day in the U.S. the next week. Thank you very much.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.