Good day, and welcome to the ASR investor call, annual results 2017. This conference is being recorded. At this time, I would like to hand the conference over to Michel Hülters. Please go ahead.
Thank you, operator. Good morning, ladies and gentlemen. Welcome to the ASR conference call on the full year 2017 results. On the call with me here today are Jos Baeten and Chris Figee. We're here to discuss the results and give an update on the business performance. After that, we'll open up for Q&A. We have scheduled this call till 12 o'clock today, so 90 minutes. Before handing it over to Jos, please, as is customary, have a look at the disclaimer that we have at the back of the presentation for any forward-looking statements. Having said that, Jos.
Thank you, Michel, good morning, everybody. Ladies and gentlemen, from a management perspective, 2017 is a year to remember with a very strong set of results. Happy stakeholders across the board, customers, employees, shareholders, including our former shareholder, the Dutch state. In particular, I am pleased to see that this is driven by continued solid performance of each of our business in delivering great results. Also the sale of the remaining stake, the acquisition of Generali Nederland, and First Investments. Before we dive into the financial, I would like to mention that we are also proud of the performance on non-certain, non-financial criteria. During the past year, we have seen more and more happy customers and intermediaries doing business with ASR. The net promoter score has gone up to a score of 40 points and 57 points for intermediaries.
Let's not forget that happy customers turn into loyal customers, and they provide our license to operate and our future profits. In addition, recognition of the ASR brand has risen in the past year, and customers increasingly appreciate all of our efforts to be a social responsible insurance company. As you may have seen in the past weeks, we announced to team up with Triodos Bank and jointly committed to invest EUR 600 million into ESG and sustainable projects. Another example is the ESG credit funds that we have established in 2017, which is now open to third-party investors. These are just two example of many initiatives we have taken in this respect.
In short, we aim to be relevant for our customers and contribute to society at large, as this is the foundation on which we build our company and create long-term value for all of our stakeholders. Having said this, let's discuss our financial performance and progress of our business, that's on slide two. Performance is said over 2017 has been strong on every key metric. Let me highlight some. Operating result was up 17.2% to EUR 729 million. By the way, a record high result. This yielded an operating return of 15.6% compared to our target of up to 12%, also up compared to the 14.6% of last year. Our IFRS result, net of tax, also highest on record at EUR 906 million. Combined ratio of 95.1% has improved from 2016 levels and reflects continued underwriting excellence, as well as the improvement in our cost ratio.
I'm also pleased to see that these healthy and market outperforming combined ratios, our non-life business delivered close to 6% top-line growth. Our Solvency II ratio remains robust at 196% after deduction of the proposed dividend. As you know, we are still using the standard formula. This is a seven-point increase from the beginning of the year. The main moving parts are strong organic capital generation of EUR 377 million and favorable financial markets that outstrip the impact of share buybacks, seven percentage points, VA decline, nine percentage points, and the re-risking of the investment portfolio, which accounts for another six points. The quality of our capital remains high as well, with unrestricted Tier 1 capital alone representing almost 152% of the Solvency II.
There is still plenty of headroom to maneuver in Restricted Tier 1, more than EUR 800 million in terms of Tier 2 and Tier 3, almost EUR 700 million. Our strong Solvency position enables us to remain entrepreneurial. As we have always said, everything safely above 160% allows us to be entrepreneurial and to pursue profitable growth. Our strong Solvency has also enabled us to participate three times in the sell downs from the Dutch state. In 2017, we purchased 9 million own shares for a total amount of EUR 255 million. Including paid dividends, we have returned over the last year EUR 440 million to our shareholders. Speaking about dividends, given the strong results of ASR in 2017, we will propose a record high dividend of EUR 229.7 million, which is EUR 1.63 per share. This is an increase of 28.3% compared to last year's dividends of EUR 1.27.
We assume going forward a stable growing dividend per year. I think everybody realizes that an increase of 28.3% is beyond what I would call stable growing. Hence, I would caution you on that, I believe that in our industry, low to mid-single digits, ordinary dividend growth assumptions sound more realistic. Let's now turn to our business portfolio and the key developments in 2017. I'm sure you're, in the meantime, familiar with this matrix in which we plot our businesses. Let me highlight some recent developments and achievements in executing our strategy. Let me start in box B on the left angle down. There you will find our large service books. Maintaining a low cost base and variabilizing the cost base is crucial. In lowering the cost, we were able to decrease the cost per policy with 3%, from EUR 66 per policy to EUR 64 per policy in 2017.
This despite a 3.2% higher than planned lapses. We continued in the same area to migrate our service books to the new platform and plan to finalize two new books in the first quarter of this year. With the acquisition of Generali, we also acquired a new individual life book, which we will migrate towards this platform. In executing initiatives to migrate pension clients to capital light solutions in 2017, we were able to close down nine separate accounts and to move them towards our DC solutions. In the top left, in box A, are our businesses that provide stable cash flows. Here we focus on organic growth. In P&C, we do not only talk about robotics, we actually use robotics for tender process to make offers towards customers from an intermediary competitor portfolio which we acquired from Achmea.
We are learning from this how to use robotics in migrations, which is going to be helpful in future non-life migrations. Furthermore, we saw a top-line growth of almost 6%. This doubles the Dutch GDP growth, which we set at our IPO would be our growth guidance in the P&C area. Within disability, we see a stable top line with some moving parts underneath. As mentioned in the past, our value over volume principle led us to lose some customers due to the BeZaVa legislation. This is compensated by other segments in disability, resulting in a stable top line, all in all, a satisfying growth of EUR 8 million to EUR 765 million in this area. The last segment in box A is our funeral book. We completed the Deventer migration within budget and within time.
Our funeral business people is ready to migrate the 300,000 Generali policies in 2018 and is also ready to absorb any future further organic or inorganic growth, if and when. In the capital light space, box C, we have made further progress in 2017. In the asset management space, we have, as you may know, our buy and build strategy. In 2017, we acquired the First Investments, a niche investor with some specialized skills and adding EUR 0.6 billion of assets under management. Furthermore, we built this segment with the successful launch of the ASR Dutch Mobility Office Fund with external placements and the successful launch of the ASR Mortgage Fund with EUR 0.5 billion of firm commitments already in 2017.
The pension DC solution of ASR called the Werknemers Pensioen, is gaining traction and had a very good year in 2017 with 25.6% of new recurring growth written premiums. In terms of new business, DC is now 77% of our total new business. ASR, in the meantime, has become the number 3 DC pension producer in the Netherlands. Gross written premiums are up 42% compared to last year. Furthermore, with the conversion of the old DC solutions towards the new Werknemers Pension, the assets under management in this proposition doubled in 2017. Assets under management base is up EUR 200 million and now close to EUR 500 million in total. We are also very happy with the retention rate of our existing customers. This retention rate was last year 99.6%. Lots of happy customers in the pension area.
For the Distribution and Service segment, we have a medium-term target of 7%-10% growth. With this year's growth of 39.5%, we significantly outperformed this target, mainly due to the strong growth from Dutch ID. The acquired companies are now fully contributing towards the operating result. This segment is well on track to achieve EUR 20 million operating result. Finally, box D, the potential divestments, the real estate projects are no longer classified as held for sale, although it is still excluded from the operating results. We made progress there. Higher rest result was EUR 17 million pre-tax in 2017, by an increase in the sale of the residential housing. Furthermore, 77% of the retail space is rented. Overall occupancy rate over 80% is achieved. Now let's turn to what the overall operating result has done per half-year in the next slide.
That's slide four. As mentioned in my introduction, operating results are up with 17.2% compared to last year. 2017 was a strong year. Business momentum maintained at a very high level. As the chart shows, the 2017 record operating result was driven by an extraordinarily strong first half-year of 2017, where we benefited from favorable weather conditions within Non-life and the dividend season within Life. Second half-year showed, from our viewpoint, a more normalized result, because as we already indicated at half-year results, H1 ran roughly EUR 30 million above what we would consider as a normalized level. Slide five shows the breakdown of the operational results, as said, at EUR 107 million to EUR 729 million. As you can see on this slide, all four business segments contributed to the higher results. Non-life, EUR 36 million to EUR 172 million, while Life was at EUR 74 million.
I will talk about those two segments in a moment. First, a few comments on the other segments. Banking and Asset Management improved due to an inflow of assets under management, resulting in higher fee income, partially offset by placement fees due to the launch of new funds. As mentioned, we see good business developments in Asset Management. This segment has the potential to grow to a EUR 20 million business in some years' time. Acquisitions of Corins and SuperGarant contributed to an increase in the operating result in Distribution and Services. This segment is geared up and is gaining further mass and could potentially contribute, as said, EUR 20 million to results this year already. To finalize, Holding and Other declined. A decline of EUR 12 million shows impact from higher current net service costs for pension obligations own personnel, due to lower interest rates.
Overall, a strong increase in operating results, driven by gains across the various businesses. We are happy with that. Let's turn to slide six, where we highlight the developments in our expense ratio. Our ongoing focus on cost containment is one of the key drivers of operating earnings and long-term value creation. We believe we may well be the leader in terms of cost discipline and culture, as demonstrated by the expense ratios in our Non-life as well our Life business. Overall, operating expenses increased with 2.6%. Those include absorption of the additional cost base of the acquired businesses, the additional current net service cost of EUR 11 million, and a one-off because we granted all of our staff an extra monthly salary in 2017 due to the successful privatization and the results over the last few years. I will provide some more insights on the next slide.
In non-life, the expense ratio improved from 8.3% to 7.6%, driven by the strict cost discipline and portfolio growth without any FTE growth. In fact, we have been able to fully absorb the top-line growth in non-life in our existing platform, and the nominal cost base in non-life is approximately EUR 4 million lower compared to last year. Also in life, the expense ratio improved from 11.7% last year to 11% in 2017. Gross written premium decreased, but operating expenses decreased even further, benefiting from the efficiencies of acquired portfolios and regular cost savings due to our migration projects and 18.18% lower FTE base. Let me now turn to slide seven to provide some insight in the operating expenses related to our target of EUR 50 million cost savings over the medium term.
This slide is to provide an overview of the development of our cost base since IPO and to assess whether we are on track to deliver our targets. At IPO, when we announced the cost-saving target of EUR 50 million, we had a cost base of EUR 575 million. This cost base needs to be revised for acquisitions that added EUR 32 million. Next year, the cost base, and that is not in the graph, will also be added for Generali, and for comparison reasons, you need to adjust EUR 44 million of additional operating expenses for Generali. The current net service cost, which is a result of interest rates, decreased in 2016 as a result of interest rate increase in 2015 from 2% towards roughly 2.5%. These interest rates declined in 2016 towards 1.73%, resulting in EUR 11 million additional expenses.
As this interest rate development is largely outside of our control, this fact was not taken into account at the time of setting the cost saving. An additional final adjustment we have made is what I already mentioned, the allowance we gave to all of our staff of roughly EUR 10 million to EUR 11 million, because we did a very successful privatization and the result of ASR, and that is also to consider as a one-off. If we were to correct for these items, this would lead to a EUR 23 million cost saving in 2016 and EUR 18 million already realized on the structural cost base in 2017 of EUR 18 million. We have realized EUR 41 million out of the EUR 50 million planned cost savings. Another EUR 9 million needs to be done in 2018.
I dare to conclude that we are well on track to achieve our targets to realize these cost savings. Let me now turn to the next slide where we can look deeper into the non-life segment. In non-life, our expense ratio is market leading, combined with our underwriting expertise, leading to a very strong combined ratio. All non-life product lines showed combined ratios below 100% again for the third consecutive year. As you can see in the graph at the bottom right-hand corner. Operating results increased with 26.5% to EUR 172 million. The increase was driven by excellent underwriting and claims handling, the absence of large claims and favorable weather conditions in the first half year of this year. While last year we had EUR 25 million of claims related to hail and water damages. This is reflected in the favorable development of the combined ratio in P&C.
Allow me already to make one remark on 2018. The first half will definitely be less favorable than last year. In January, we already used our annual storm budget due to the hefty January storm on the 18th. We estimate a EUR 30 million of claims in total, which is equal to the average of the storms in the past four years. Returning to 2017, gross written premiums rose by 6% due to the growth in P&C and health. The market developments towards more rational pricing allowed us to grow our top line while maintaining our value of volume discipline. The P&C business, the increase was mainly driven by the success of the renewed 48 ticket. Also in disability, we stuck to our discipline and experienced a pull from the government-owned UWV proposition for BeZaVa customers. Nonetheless, we managed to keep the gross written premium and disability stable.
The value of volume focus resulted in switching health customers since the pricing was a bit more tailored to the top end, leading to a decline of approximately 20,000 customers. Overall combined ratio 95.1, well below the target of 97. An improvement of 0.5 percentage points compared to last year. This reflects improvement in the expense ratio also. Claims ratio of non-life rose slightly from 72 to 72.8. This significant improved claims ratio in P&C, due to the absence of large storms, was offset by higher claims in health and disability. In health, the claims ratio increased due to mainly the high cost calculation of 2016, leading, for instance, to higher expenses for medicines in hospitals. In disability, the claims ratio increased mainly as a result of more claims in absenteeism.
In response, we raised prices on average with 20% for 2018. This will compensate the impact going forward. Let's now turn to slide 9. Operating results of the life segment. This increased with 13.2% to EUR 633 million. The investment margin increased with EUR 70 million due to higher direct investment returns. Those were up EUR 19 million as a result of the re-risking into higher yielding investments, mainly equities and mortgages within our investment portfolio and the higher contribution from realized capital gains. Those were up EUR 53 million, partially offset by higher interests on liabilities. Result on cost is stable at EUR 24 million. Decline in cost coverage for the individual life is absorbed by improved cost result for pensions and funeral. Strict cost control, migration of books and cost synergies from acquisitions were partially offset by higher than expected lapses. Technical results remain stable despite decline in the life individual book.
In the first quarter, we experienced adverse mortality results due to the influenza, which has been offset by improved mortality results in the last quarter of 2017. Life segment premiums decreased mainly due to the one-off effects of the two acquired portfolios in 2016. Recurring premiums decreased 2.8%. Higher gross written premium in pension DC were offset by lower premiums in the individual life. Going forward, growth in life premiums should come from DC business. In 2017, we added more than 500 employers to our portfolio, and we have become, as said, the number three pension producer in the Netherlands. We trust we can continue to grow our DC business going forward. I'm on slide 10. Let me provide with an update on the Generali acquisition. The closing has been finalized on the 5th of February.
This is for us the starting point of integrating the business. Let me remind you of the strategic rationale for this acquisition. This is a compelling opportunity to further consolidate the Dutch market and a bolt-on acquisition of the type we prefer. The cash consideration has been paid after the closing and the recapitalization of the operating companies has been done. The guidance from the announcement still stands and therefore will be a pro forma impact of nine percentage points on our Solvency II ratio in Q1. A few remarks what we have done since the closing already. We already established the reporting lines towards ASR. All control functions in the meantime are reporting to ASR. Control asset allocation and interest rates hedge is now over to ASR, and we, as said, injected capital according to earlier commitments and started the re-risking of the Generali portfolio.
On the progress going forward, the merger of the top holding Generali NL into ASR will be before the summer. Legal merger of the non-life and life entities will be right after the 30th of June this year. Relabeling of all the businesses from Generali to ASR brands will be done within six months. Finally, all the staff will be moved this summer to the ASR building, and the Generali building is available for sale, and we already identified the first interested buyers. Please bear in mind that we will first have restructuring expenses in 2018 before Generali can fully contribute to its potential. This will happen over time with an expected impact of EUR 25 million of Organic Capital Creation in 2020 and EUR 30 million contributing to the net operating result at the latest in 2020.
On slide 11, the comparison with our targets, I will cut this short a little bit. We have met and exceeded all of our targets, and we're proud on that. Before I hand over to Chris for further details on our capital and solvency, I would like to conclude with a final slide on our dividends. Clearly, as this chart demonstrates, over the past year, we have built a very solid track record in paying dividends. Our ambition is to pay a stable growing dividend. The strong increase in operating results drives the higher proposed dividend for 2017, maintaining at a payout ratio of 45%, and this leads to the already mentioned EUR 229.7 million dividend payout. Proposed 2017 dividend per share is, as you know, EUR 1.63 per share, an increase of 28.3% on the 2016 dividend per share.
This year, we will introduce an interim dividend with a payout ratio of 40% of the last year's dividend. Based on proposed 2017 dividend, this would amount to EUR 0.65 interim dividend per share payable in 2018. We've also proven not to be hoarders of capital. In 2017, a total of 9 million own shares have been purchased for an amount of EUR 255 million. Since the IPO in June 2016, EUR 672 million of capital has been returned to shareholders, including proposed 2017 dividend. As we have mentioned before, we are keen to deploy capital first, both in organic or inorganic growth opportunities. Should those not materialize, then we will explore appropriate ways to return capital over time. Chris, the floor is yours.
Very good. Jos, thank you so much. I will continue our presentation and move to the solvency and capital section. If you follow me and flip to page 14, where we will discuss and elaborate on our multi-year equity and Own funds movement. These are the book values that we report, book values from an IFRS perspective or a Solvency II perspective. We're proud to show a continued growth in book value. IFRS equity grew again, even excluding hybrid capital instruments. Book equity moved up by EUR 662 million, especially when you may consider that absorbs a cash distribution to shareholders in the year of over EUR 453 million. That means net EUR 652 million, after we've shared with our shareholders EUR 450 million in cash. We're proud that we are able to combine an increase in IFRS equity with also a 100 basis points increase in our ROE.
The numerator and the denominator both went up, which is confirmed by the perspective on Solvency II. You can see the eligible own funds moving up to EUR 5.3 billion unrestricted Tier 1, EUR 6.8 billion of full own funds. Hybrid instruments now compose only 23% of our total own funds. Solid growth, solid development in book values. We still believe that development in book values, in the long run, provide a good indication of where companies are heading. Now that we're talking about stock, I'd like you to turn to page 15 on our solvency, the solvency stock. This page shows own funds and required capital to 196% solvency ratio, up seven points in the year. If you look at the longer-term perspective, up from 186% in the first quarter of 2016. If you go back two years, end of Q1 2016, we're 186%.
Today, we're at 196%, despite us returning, in that very period, almost EUR 700 million in cash to shareholders. We gave back 20 points of solvency to our shareholders, roughly, and still increased our solvency to 196%. We're proud of the level of capital and the composition of capital. It's 196% in the standard formula. Unrestricted Tier 1 is 77%, the unrestricted Tier 1 ratio would be 152% or Tier 1 as a total is 166%. No Tier 3 capital at this point. There is no tiering risk. We don't use any Tier 3 element in our solvency. We have headroom in all the available solvency categories. The combined Tier 2 and Tier 3 headroom is now at EUR 697 million, increased again from last year. A significant amount of financial flexibility. Market risk is still under 50% of required capital at 47%.
Appendix E in the presentation gives more feeling on the composition of the SCR, the required capital, and the deltas. There you can see market risk still below 50%. Our claim that we're an insurance company, not just an investment fund, is with that plan still substantiate. Finally, the LAC-DT, the ever-famous loss absorbing capacity of deferred taxes, is at 74%. It increased. We moved the LAC-DT of life from 60% to 70% and non-life from 75% to 90%. Please note that increase is solely due to the increase of a DTL. There are no future profits in the substantiation of our LAC-DT. In this year, we made various efforts, we created a significant DTL in the year. As a matter of fact, both our life and non-life entities now have a net DTL position. No DTAs in the net DTL position.
It's the increase in the Deferred Tax Liability that we felt comfortable to use to further strengthen our LAC-DT ratio. Very well-founded, no future profits, Delta really is only a DTL movement, moving our LAC-DT to 74%. In a later page in the pack, you can see the solvency of the underlying entities, both life and non-life, are solvency at 185% mark. In terms of solvency stock, we feel comfortable with the level of solvency that we hold. Moving from stock to flow, page 16. As you know, there are various ways to decompose or to bucket the delta and solvency. From beginning of year to end of the year, our ratio improved by seven points. One way of analyzing that delta is by using capital accretion, which is on page 16, in where we define sources and uses of capital.
Source of capital is operational capital generation. What does the business generate in terms of long-term investment margins and additional returns? What is the book release of capital? What are the deltas or net effects of assumption changes and business developments? That would generate EUR 1.1 billion organically and EUR 300 million of additional Tier 1 issuance. The use of capital is absorbed by the UFR in mind, absorbed by the cost of hybrids, and capital that we invest into market risk, leads to a capital accretion of EUR 742 million, out of which in the last year, we paid out roughly two-thirds, EUR 255 million in share buybacks, two-thirds in dividends, and we retained one-third in our balance sheet. One way of depicting or decomposing the delta in solvency is capital accretion sources and uses of funds.
The alternative, more classical way, is on page 17, which is the organic capital generation, as that our solvency increased from 189 to 196, or about seven points. Of this, in our definition, which is reasonably conservative, we find an Organic Capital Creation of EUR 377 million, or about 11 points of striking solvency. Appendix G in the pack, in the back, gives more information on that very number. There's a lot of analysis going out there on the assumptions that are embedded in your OCC, especially around market returns. There is a great piece of work by Farcar, actually, on looking at various metrics that people use. In the appendix, we try to give you alternative views. Page 17 is our definition on our long-term investment assumptions, the way we run the business.
We don't mind providing a service to the analyst community, we've done some work for you in aligning it to market-consistent numbers. On the pack, please note the total own funds in the year increased by EUR 712 million, EUR 712 million. If you add the numbers above the line, delta EOF EUR 712 million, which includes the absorption of the decline in VA. In the standard formula, the VA during the year declined by nine points, which shaved off nine points of solvency. Let me say, even excluding the VA, we would have generated growth almost 30 points of solvency in the year. Other points to note, the risk margin release is kind of similar to the UFR unwind. It's not our achievement, but it's a nice coincidence, which means UFR unwind, risk margin release, roughly similar. It means the SCR release actually really contributes to free capital.
Note that our dividends as a EUR 230 million of ordinary dividends represents about 60% of the organic capital generation and 80% of the operating business capital generation. This means the 60% is a number that those of you who have been following us since the IPO are familiar with. We pay our dividends based on operating profits, 45% of operating profits. Given that the OCC tends to be around 70%-75% of the operating profit, 45 times 70% equals roughly 60%, which is the payout ratio as a function of capital. Our ordinary dividend is about 60% of the total organic capital or 80% of the operational capital generation. That's the capital excluding book release. That means our dividend payment, from our perspective, is sustainable and well-founded in replicable capital generation. Page 18 shows the sensitivity of the Solvency II ratio to the UFR.
You know, the UFR will be lowered, actually, it has been lowered, in the beginning of the year from 4.2 to 4.05. That will cost us three points of solvency, which is a given. Interesting to note that we steer the business increasingly on an economic UFR. We've talked about it before. At this point, we've estimated economic UFR at 2.2, because 2.2 is the UFR that is consistent, safely consistent, with the investment yield that we're generating today. At that level, our Solvency II ratio would be 150%, and we believe that number should be compared to 100% plus a margin, 100% plus a buffer. We could even see throughout the year that if interest rates continue to go up, the 2.2 might be gradually moved upwards.
We'll do some careful homework before we go out with formal guidance, the direction on that number, the direction travel is up rather than lower. The 2.2 should go up rather than down, given where markets are. This should give you comfort on the economic UFR-adjusted solvency position of the group. If you were to strip out UFR and the VA altogether for what some people claim to be an exit value, for the group, that's safely over 130%, and for the life business, also significantly above zero. Ex UFR, ex VA, the group is at 133%, and if you adjust for tiering would be 122%, then you get into the refinement of the model. Safe to say, ex VA, ex UFR, this group is still very solvent and very well able to pay any dividends.
We're happy to say that the UFR ratio at 2.2, our economic UFR actually also increased by eight points in line with the headline increase. From Solvency II balance sheets, page 19 shows you our numbers on our balance sheet. We would think, or we are convinced, that we have a strong and resilient balance sheet. You can see the solvency position and the headroom that we have, the leverage and the maturity profile. A couple of points to make. You can see the financial leverage of the group stable, 25.2%-25.3%. Despite adding a EUR 300 million RT1, the financial leverage ratio stayed stable. To pre-empt your questions, if you had a debt-to-equity, a very basic D/E calculation, that also ratio would have stayed stable at 33.7%-33.8%. There's no numerator denominator play at hand here.
Leverage of the group, very stable. Actually, if you look at our leverage, we report 25.3% on an IFRS basis. If you adjust for the fact that we have a shadow accounting IFRS scheme in which we do not add realized capital gains to our book value, if you were to adjust for that, the leverage ratio would be in the low 20s, around 20%. If you think, if you take into account that the S&P leverage ratio is 18%, the norm for the group is 40%, also really well below the single A norm. Finally, if you look at solvency as a percentage of capital or leverage as a percentage of solvency, it is about 28% of unrestricted Tier 1, which is low for the industry. In summary, headline leverage 25.3%.
Actually, if we redeem the T1 notes where we pre-financed the call, that leverage will go down to 22%. Shadow accounting adjusted, let us put it that way, is low 20s. S&P leverage 18%, only half of the 40%, and in Solvency II rated, only 28% of unsecured T1. Guys, it is a long way of saying we have substantial financial flexibility. We have room to add leverage. Because we have got all the instruments out there, we have got headroom, we can pick and choose the instrument that we like. We have headroom in T1, T2, T3. We have got various T1, T2 instruments. We can pick the instrument we like were we to add leverage. There is no constraint from our balance sheet whatsoever. Page 20 is called unencumbered access to pools of liquidity.
Not sure who came up with this title. I guess our IR team was close with Karma when they made the pack. I think what we are trying to say is that we have been able and are able to upstream cash to the holding. You can see the bridge from holding cash at the beginning of the year to the end of the year at EUR 580 million. Totally upstream funds up 27% in the year from EUR 407 million to EUR 518 million, which is excluding, by the way, the benefit that we have from creation of DTL. The DTL creation led to an inflow of EUR 200 million of cash, which we deliberately kept in the life insurance business. Upstream is up from EUR 518 million to the holding. Whilst we upstream cash, think about the EUR 518 million, probably EUR 400 million in life, the remainder in non-life.
Whilst we upstreamed, the solvency ratio of the entities are at 185% and 186%, up +5% or +4% during the year. The life and non-life entities upstreamed cash during the year and still increased the solvency by four to five points. Our remittance, it exceeds the organic capital generation. It actually exceeds the result after tax and after hybrids. Finally, also low double leverage. To compound and to build on the previous sheet's message, we can raise debt if we want to. We have got substantial flexibility. Also, there is no blocking issues to cash. We can upstream cash to the holding. We just decide strategically to hold the cash in our operating entities. The combination of upstreamable cash, solid solvency levels at the operating entities, low double leverage, gives a huge amount of financial flexibility for the group.
Happy to take your questions if you have those in the Q&A. Jos, back to you for wrap-ups and some final words of wisdom.
I hope that's not a message according to my age. Thank you, Chris. I will conclude with the key takeaways from a management perspective. We are pleased, as said, with the strong operating results. We had truly a very good and record year. Driven by strong performance in all of our business segments, we deployed the capital profitability generating and operating return on equity at 15.6%, and we can offer our shareholders quite a considerable increase in the dividend per share and the prospect of an attractive interim dividend starting in this year. Our balance sheet is strong, as Chris explained, and we have substantial financial flexibility. The insurance entities are highly capitalized, offering ability to upstream cash to the holding if and when needed. On all counts, we are outperforming current medium-term targets.
Put differently, our business delivering top quartile performance, while this provides us a comfortable start into the new year. However, while we strive for nothing less, it does represent a level that is very challenging to outperform this year. Before we open up for questions, a few words on how we look at 2018. Based on the strength of our balance sheet, our financial flexibility, and current high performance of our operating businesses, we believe we are in excellent shape to seize all key insurance opportunities over the medium term. Our businesses are simply doing well. Our dividend paying capacity is strong, and we assume a stable growing dividend going forward.
At the same time, when taking into account the already high level of operating result in 2017, which is partially driven by exceptional favorable operating conditions in 2017 and the low amount of large claims in Q1, the uncertain developments in today's financial markets, as a result of which direct investment yields have been reduced, and the EUR 30 million impact from the January storms, we reckon with a slightly moderated earnings level in 2018. This will be partially countered by the earnings contribution from the Generali acquisition and selected de-risking. The earnings contribution from Generali will normally grow over time as synergies are received. Also, we will act responsibly in further de-risking our balance sheet given the state of financial markets. With that, ladies and gentlemen, we are happy to take all your questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will take our first question from Cor Kluis from ABN AMRO. Please go ahead.
Good morning. Cor Kluis speaking, ABN. A couple of questions. First of all, about the Solvency II ratio, the roll forward from the third quarter to the fourth quarter, the outcome is around, of course, 193, the dividend is minus six, the VA is minus three. Could you give all the components in specifically in the fourth quarter? Second question is about operational capital generation, especially for the own funds piece. I think if I calculate it, I come to around EUR 40 million in the fourth quarter. That was somewhat lower than previous quarters. My last question is about this Solvency II ratio year-to-date. We had a volatile start of the year, of course. The VA probably went up somewhat.
Can you give at least the market effects year-to-date for your Solvency II ratio? That's my questions.
Okay. Cor Kluis. When it comes to the roll forward of Solvency II in the third quarter, net we moved up from 193 to 196. You're roughly thinking that the VA took out about three points from that number in the quarter. The dividends took out about seven points in the quarter. The LAC-DT addition added about five. The remainder is the combination of three things, which is business capital generation, excess return in markets, and further investments into required capital into especially real estate. In the fourth quarter, into required capital, we added more real estate to our balance sheets. The lowering interest rate in the fourth quarter increased the SCR requirement simply because the capital charge on longevity lapses go up. Simply, it's an MPC phenomenon. When rates go down, life capital goes up.
Basically, you take out 10 for VA and dividends, add five for the LAC-DT, which will give you to 188. We got to 196. The remainder really is the combination of operating capital generation, good financial markets, and addition of capital. The own funds development in the fourth quarter was it lower than expected? I think it was roughly in line with where we were. The fourth quarter, as you see of the business, was a slightly lower contribution from non-life in the fourth quarter from disability, but in line with the average of per year quarter. To us, nothing peculiar, nothing that was out of the ordinary in the fourth quarter. In terms of market development this year, solvency, a couple of things happening. Three. One is UFR is officially lower, so that takes out three points out of your solvency.
Secondly, markets were down a bit. That shaved a bit of solvency out as equities were lower and the VA was up a bit. Basically, the solvency, take out the UFR at three points, would bring you from 196 to 193. I think the market are a very small drag. The last time I looked was a week and a half ago, and since then the markets are up. We don't really look at it on a weekly basis. Think of it as roughly stable in the year.
Better clear. Thank you.
We will now take the next question from Arjan van Veen from UBS.
Thank you, gentlemen. A couple of questions on the life side and one on the integration, please. The life risk risking of the asset side, has that helped your investment margin in 2017? Just curious as to how much more to go, should we expect that to drive earnings a bit more in 2018? The second question is more on the reduction in the life gross written premium as well as new business AP. Just curious as to whether that's in line with your plan, or are you a little bit disappointed with the growth in the life given the missed consensus on probably on both metrics. Finally, just on the Generali acquisition, what date do we assume, or what date do the earnings start coming through into the numbers? It's just for our modeling purposes.
I assume you'll update on that in more detail at the Capital Markets Day on the 10th of October.
Very good. Arjan van Veen, let me talk about life and risk risking. The Appendix L from below has actually more details on the life segment. There you can see the direct investment income in the year. It moved up from EUR 981 million to EUR 1 billion, actually, direct cash income during the year. They really received coupons, rents, et cetera, no capital gains separate at all. You can see how this thing developed during the year. Normally, the first half tends to be higher than the second half because the dividends are recorded in the first half. You can see, if you read that, there was EUR 19.19 million of additional direct investment income, partially as a consequence of the de-risking of the business. How to think about it going forward, best estimate is to have it stable. There are a couple of things at play.
One is, yields are still depressed and falling. It's getting more and more expensive to buy a certain earnings stream these days in the markets. Whether it's you buying a stream of rental income, whether you're acquiring mortgage income, whether you're acquiring credit spread. There is some downward pressure on direct investment yields. Also because in a mortgage book, some of the very profitable vintages here, the 2018 vintage year is being redeemed as we speak, and replaced by lower rate mortgages. That is inevitable trend that all financial institutions have. However, we see some room to continue to add risk to a balance sheet. At 47% market risk, we can continue to add risk to the balance sheet of ASR. We can probably compensate the gradual downward push on yields with gradual de-risking.
We're putting through a number of initiatives like the Triodos Bank initiative Jos mentioned, to acquire more in liquid assets. We believe there's opportunities to continue to add to real estate business to keep the direct investment income in the life business stable. It will require some gradual de-risking in the year, where we see opportunities mainly in the real estate space. Stable, and if we continue to de-risk during the year, there might be a bit of upside. It depends a bit on how markets develop. Before I get to Jos, on the Generali earnings, we indicated a EUR 30 million potential net operating profit contribution from Generali. That number still stands. Our work on the integration all we've seen so far confirms that opportunity. I would safely say that is not going to come overnight.
Safe would be a third, a third, a third for the next three years, with some room to move to a little bit faster in the first year as we start cutting costs, add the investment business to our book. EUR 30 million at one third each of the three years, with some upside in the first year if we indeed succeed on the moving of staff and the legal merger that we plan to conduct in the second half. Meaning the moving of Generali staff into ASR buildings, the legal merger, that will be important triggers. If we indeed succeed in that, we may outperform that rough timeline.
Just on Generali, from an IFRS and to see it through your account, it starts from the 5th of February or is there a different date we should think about?
Meaning the 5th of February to 1st of January.
Okay. It'd be backdated against the 1 January.
Earnings before cost cutting are not so big that one month will make that much of a difference. First of year.
Okay. Thanks.
Arjan, this is Jos on your second questions on the development of the gross written premium in the life area. To judge that, you should take into account in 2016, we had to add, in total, roughly EUR 500 million of one-off single premium due to the acquisition of NIVO and a large pension contract, they call the Asta contract. If you strip those two out and you would compare the organic development of the life premiums, we are relatively satisfied given the fact that in the Dutch market, the individual life books are declining, and we were able to almost compensate them, not fully, by the growth in our pension book. The total decline of life premiums, if I take out those two one-offs in 2016, is roughly 2.5%-2.6%, which is in line with our expectations.
We will not be able to fully compensate the decline of the individual life book by growth in our pension business as long as we keep up to our strategic value of volume. We only want to do business in this area if we can offer prices that enables us to deliver the value also from a shareholder perspective. Nothing unexpected from our perspective. Yes, it is down a little, but we are happy that we were able to compensate those rough premiums that declined in individual life with the new business in pension DC.
Okay. That's very clear. Thank you.
We will now take the next question from Farooq Hanif from Credit Suisse.
Hi there. Thank you very much. Just wanted to go back quickly to Generali Nederland. I remember you talked about roughly, I think EUR 15 million or EUR 17 million of synergies, which I think are included in your EUR 30 million already. As you look at the business, what are the main areas that you've allowed for in that? What have you not allowed for in that? Then secondly, in the disability business, at what stage will you get an indication from UWV on pricing for the basis for 2018? Do you anticipate a time where that will become more reasonable given the data that's coming through, and allow you to step into that market to grow more? Thank you.
Farooq, it's Chris. On the Generali synergies, those EUR 15 million-EUR 17 million are all cost synergies. There's real cost that's in there, because it really is a cost play. That's something that what is not in there is the benefits from de-risking. Because we think there could be potential value from that. But that will require a commitment of capital. At this point, we have reserved 2-3 points of solvency capital to re-risk the Generali business. But we'll do it carefully given the state of financial markets. We're not going to go overboard and play risk. The business case in Generali should be a cost save. We want to meet our targets that are based on generating cost synergies as we planned. So the EUR 15 million-EUR 17 million is cost, and those are all on track. With that, we'll meet our return hurdles.
That could be on top of that additional room for re-risking, which will gradually feed in during the year. Think about 2-3 points of solvency that we could add. Think about between EUR 5 million and EUR 10 million of potential additional investment earnings that will feed in during the year.
Farooq, I'm happy to take your second question on the disability. The UWV calculates its premium based on the claims cash out in a certain year, and they divide this to the number of customers they have, and that is the actual premium in a certain year. As an insurance company, when we calculate a premium, we have to take into account future claims, Solvency II developments, et cetera. To your question, it will take a number of years before we will be able to compete with the cash-based system that is used by the government. But as soon as their customer base grows, their claims will grow, and so the average premium they have to calculate will go up. Somewhere in near future, the premium level of the government will meet ours. So we are in the market.
We have customers in the BeZaVa, but the growth was not as big as we projected at the IPO. Because we also need to make money, so we want to be careful to compete with structural, unprofitable premium from an insurance point of view. So it will be not from the 3rd January of this year to the 3rd January of next year. It will grow gradually over the next 2-3 years.
Very clear answer. Thank you very much.
The next question comes from Robin van den Broek from Mediobanca.
Yes. Good morning, everybody. Referring to slide 19, it seems that you have quite a bit of firepower on the S&P framework. On your website, you've also disclosed a document on the RT1 issuance, which stipulates a cover of only 5.7 times. I think that S&P in the past did indicate that if you would drop below four times, that would mean a downgrade for the group. How does that tie into the flexibility on financial leverage these slides are telling us? That's question one. Question two, if you have that much space on financial firepower, what should we think about what you will do with it? I think you've been quite clear that you have a focus on M&A at the moment, but you've thus far always focused on small bolt-on. Could you consider larger deals?
I think press was recently indicating that C thought and maybe even Achmea Life books could be up for sale. Is that something you would look at, or would you remain committed to small bolt-on M&A? How would that affect your capital distribution policy? The DPS announcement today is very welcome, it seems you could do more. Last year, you indicated that your capital distribution would be capped at the capital being generated in the year. Is that something we should also consider for this year, or will you deviate from that path? My third question is on the life operating result for the fourth quarter came in at EUR 167 million. Do you feel comfortable with this level going forward, excluding the potential add-on effects from Generali? Or are there some one-offs in that EUR 167 number for the quarter? Thank you.
Let me start with the middle question, and Chris will come back to the first and last one. The way we look at the market currently in relation to our capital position is that the base of our strategy is organic growth combined with inorganic growth in certain areas. Like we have said in the past, that is in the funeral business. We like non-life portfolios. That is why we acquired the Generali book. If we would find further potential investment opportunities in the asset management area, we would certainly look at it. That is the core of our strategy. In terms of would you be willing to look to other opportunities, like you mentioned, the potential individual life books from Dutch competitors that want to get rid of it.
Now we almost have concluded the conversion of our own books to the software as a service platforms. We are perfectly willing to look at further consolidation of the Dutch individual life market. I think we are well-positioned. As far as I know, we are the only insurance company in the Netherlands with a variable cost platform in life. But we have always said we first want to do our own books, and that is not fully done, but we are now convinced that we are able to transfer portfolio to this platform. The first one will be the Generali portfolio going forward. But if and when there are interesting opportunities in the Dutch market regarding to individual life books, we certainly will take a look at those. That is the way we would love to deploy capital.
We are happy with our current capital position and willing to deploy towards all kinds of organic and inorganic growth. On top of that, we have announced the interim dividend, stating that we are willing to deploy capital also to shareholders. As said in my presentation, if and when we cannot find any organic or inorganic growth opportunities and our capital continues to grow, we are willing to look how to deploy this capital, and that is why we, as said, have announced the interim dividend already. The last remark to make is if and when there would be something big in the Dutch market, we have always said that is not our primary aim. We are not calling people, but if somebody would call us, we are always willing to have a talk and to have a discussion whether it fits within our strict financial criteria.
Good. Jos has explained how we will deploy the funds. Let me shed some light on what we can raise. Your point on 6 charge cover is valid, although the prospectus really had 4 of our numbers, as I recall, using last year's operating profits divided by the interest charges of the hybrids, including Tier 1. This year's operating profit number is already substantially higher. If you run it at this number, I think you have a 5.9 or a 6 times interest cover. Secondly, on an IFRS basis, it is 16 times. It is not 100% clear which number S&P will look like. I think S&P does not necessarily look only at operating profit. They look at a sustainable earnings power. Probably in their perspective, the number is between the operating cover and the IFRS cover. Operating is now at 6 times.
IFRS cover is at 16 times. Know that in that is two very expensive hybrids at a 10% coupon. If those are being called a refinance or even called, because we did the RT1 with the aim of calling these old T1s. That EUR 20 million pre-tax interest charges drop out. The very expensive ones drop out. That means if you do that, the interest cover goes back to eight to nine times on an operating basis and an IFRS basis even higher. My IR people tell me that actually, S&P tends to look at IFRS rather than operating income. Operating is our own conservative view. If you take it into account from a leverage perspective or from an interest cover perspective, there is no limitation or there is some limitation, but not an immediate limitation on the horizon.
If we were to raise EUR 500 million to EUR 1 billion, that is something that the group could bear. If you allow me to make a statement about the 30% mark, because there's some misconception on the 30% leverage norm. We said we strive to have a norm that's below or around 30% on an IFRS basis. In my little speech, I showed to you that there are various metrics that we could look at. I think we should not take, given where rates and yields are today, given where the interest cover is today, and given the way our balance sheet is structured, I think we could even live with something at north of 30. Below 40, between 30 and 35 leverage would also be definitely feasible for us. In terms of financial flexibility, we should not feel ourselves to be overly constrained.
Final question was on the-
On the liability links. I think, as I said, the income from investment is probably stable. As I said, the operating income from the capital gains reserve is stable. It's now EUR 3.2 billion. It has been north of EUR 3 billion for, I've been here for four years, as long as I can remember. It's substantially above EUR 3 billion. We think the release from cap gains reserve should be there. I think on the cost side, our cost result is likely to be stable. The one thing where you can see some downward pressure is the mortality result, simply because the book will shrink over time. You may see some downward pressure on the mortality result. Fair to say, stable to a gradual downward pressure from the inevitable shrinking of the book over time. We feel pretty comfortable with that.
Are there one-offs in the life business? Yes, a few. A few positive one-offs, but my history tells me you always have one-offs. Even if they don't reoccur, that will not be such a massive change in my earnings.
Okay, thank you. Those are very clear answers.
As a reminder.
Jos just tells me, in the end, we're all one-offs. That's a very good way of looking at our business.
As a reminder, to ask a question, please press star one. We will now take our next question from Kunal Zaveri from JPMorgan.
Hi. This is Ashik here. I am just using Kunal's line. Just a couple of questions I have. First of all is your IFRS book value has gone up considerably in 2017. Can you give us some sense about what is the reason for that? I can understand that operating profit and dividend, there is a bit of difference, but I think there is something to do with cap gains as well. Why is cap gains reflecting in our assets book value if you follow shadow accounting? What are we missing here? Any thoughts on that? Secondly, just for modeling purpose again, if I look at your amortization of this realized gains reserve, should we keep it at stable at 2017 level, which is around EUR 320 million, or do you reckon that it could go up or down?
Any color on that would be great. Thank you.
Hey, Ashik. The book value went up because of a couple of points. Retained earnings, non-payout dividends. Secondly, revaluation of those assets that are not shadowed in a shadow accounting reserve. Shadow accounting has fixed income, but those assets that are not fixed income, i.e., real estate or equities, those revaluations are reflected in our IFRS equity. Not in our operating profit. Operating profit only has direct investment yields, no cap gains. In the IFRS equity, the cap gains on those asset classes are not part of shadow accounting are a positive contribution. Finally, there is an IAS 19 deduction, which declines a tiny bit during the year. It is a smaller negative actually becomes a positive.
Those three elements, retained earnings, revaluations of asset classes not part of shadow accounting, and a smaller deduction from our IAS 19 pension accounting, those account for the delta in IFRS book value and your capital gains reserve release. I planned with a stable number. If you look at our multi-year budget, that has a number stable over time. We feel comfortable sharing that message with you. Stable number.
Yep. Thank you.
We will now take the next question from Johnny Vo from Goldman Sachs.
Yeah. Hi. Thank you very much for letting me ask my questions. Just a couple of questions. If I look at the solvency of the life entity alone and forget about the consolidated solvency, which is influenced by debt issuance and so forth, it actually declined by one percentage point, half on half, despite you actually adjusting the LAC-DT, which added north of five percentage points to solvency. It looks like you significantly paid out more than you generate. Is this remittance coming from the entity abnormally high? That's the first question. The second question just comes back to further buyback potential. If I look and I take into consideration your solvency is likely reduced by nine percentage points for the transaction with Generali. You'll have some negative adjustments for UFR of 3%.
Cash in the holding will have to reduce by the dividend you're yet to pay. Your dividends are going up and there's a bond that you need to redeem in 2019. Unless you raise further debt, it doesn't look like you have that much cash available. Given the pressure on solvency, it also doesn't look like you can sustainably transfer high remittances out of the entities. Can you comment on that as well? Thank you.
Johnny, thank you. When it comes to our solvency in the life business, it declined by one point during the year. Note, it increased by one point in last half year, but it increased by four points during the year, in spite of in total, I think about EUR 400 million that we upstreamed from the life entities during the year. In spite of a EUR 400 million upstream, it moved up by four points during the year. One point decline in half year, solvency ratio is 186%. If we were to each one point per half year, we could continue to eat for a long, long time. If you think about a solvency in the life business, ex UFR or ex UFR and VA, that's still substantially high. Actually, at a UFR of 2.2, the life solvency level is about 122 of the life insurance entity.
The economic solvency of the life business is still safely well above 100x over the UFR of 2.2. I'd say the 2.2 is more likely to go up than to go down. With that, we feel that the life insurance entity itself is very well capitalized with EUR 400 million upstream in the year. If you think further about the solvency, indeed, the EOF during the year is about EUR 5 billion. It declined by EUR 100 million in the first quarter, in the second half of the year because of upstreams. What happened to the solvency ratio, especially the addition of risk? We added more real estate risk in the fourth quarter. We had a higher charge from longevity capital and from lapses because the rate fell.
The below the line numbers increased from real estate asset allocation and from longevity and from lapses. We are not at all concerned about the solvency level of life at 186 standard formula increasing by four points during the year, at 122 standard formula at 2.2 UFR. These are just very solid levels that give no concern about what, if, and how we can upstream to the market. If you look at the amount of fungible capital or the amount of EOFs, still EUR 5.1 billion. In that sense, we are not concerned about further upstream ability. When we look at share buybacks and our potential, fair enough, we ended the year at 196 solvency. Take out the initial nine points of Generali, which will add solvency back during the year within the integration.
The first closing of the deal and the merger of a lower Solvency business with a higher Solvency business will erode 9 points of Solvency from our group, take out 3 points of Solvency from the UFR, will give you a slightly lower Solvency level, but the UFR decline will also add back to OCC. It's basically a move from stock to flow. The UFR decline as such, I'm really not worried about, and that's already taken into account when we look at the 2.2 metric. We see no impediment to return capital to shareholders. The Generali will take up some capital in the beginning, but there will be capital synergies during the year or later on as the integration takes place. The Generali business will add to earnings. You should see our business as a dividend stock with substantial dividend paying potential.
Dividend as a function of organic capital generation of our own fund generation is still very, very safe. We've committed to year to year, or we aim to give over EUR 300 million of capital back to shareholders in a base dividend and an interim dividend. I do not see why that would not be sustainable as even the combination of this year as base dividend plus interim dividend is less than the OCC that we generate. If we continue to do this and distribute EUR 300 million plus to shareholders, which I think is about 6% of our current market cap, meaning then still the life business would not erode Solvency except for the gradual decline in the UFR that will get back to flow in higher OCC. Johnny, I hear your point, in terms of numerical analysis, you're probably correct.
In terms of what the business is doing and our policies, we see no limitations there.
Okay. Thank you.
We will now take the next question from Benoît Pétrarque from Kepler.
Good morning. It's Benoît Pétrarque from Kepler Cheuvreux. A couple of questions on my side. The first one will be on your long-term investment return assumptions. Any updated levels into 2018 on your assumptions? What do we need to plug in our models on that one? On the cost base, you have a cost-cutting target of EUR 50 million. You reached EUR 41 million. Out of the EUR 41 million, I was curious how much is actually coming from the M&A you have realized since the IPO. Much has been coming from the inorganic, well, basically consolidation of the cost base and the cost reduction on M&As versus what is coming from the organic cuts of the cost base. Then maybe the last one will be on the partial internal models. A clearer guidance on potentially your view on the standard formula.
Looking at the plan changes on the formula. Any thought on that? Any plans to move to the partial internal models? Thank you.
Okay, Benoît. Thank you. I'll take a question. Finally, someone asked a question about the Appendix Z. We thought you guys would be all over it, but apparently it's clear. Let me go through Appendix Z and our market consistent assumptions. We will not change our long-term investment assumptions. They are public, and we look at our business to move. We measure it across the cycle. We believe these are across the cycle assumptions. Where do they move over time? Where have they moved? What we're seeing, if you look at the actual spreads and the model spreads, that the government bond spread has moved closer towards our model. The smaller drag from core govies to what we assume that they've moved very close to where we are. That drag is actually kind of meaningless today.
Our swap spread hedging trade has worked well. Remember in this year, we hedged the swap spread risk, that trade has come out very well as a swap spread between core government and swaps has narrowed. We're seeing the drag, if you wish, from govies, core government has narrowed substantially. At the same time last year, this credit spread have also tightened. There's a bit of a drag from the credit side. There's still a plus from the mortgage side. Mortgage still yield more than the OCC assumption. Non-core peripherals have also tightened a lot, although that has changed in the past few weeks. We don't change our long-term investment assumptions. We believe they are fair over the cycle, where core governments are getting closer to our model. Credits have drifted away a bit.
Sovereigns have drifted away but are recovering, on the mortgage side, there's still a substantive spread. If you look at Appendix Z, the net of all of it, there are still about a EUR 9-10 million understatement of the OCC from this perspective. On equities and credits, the 300 basis points or 330 basis points are still fairly conservative. If you work with 7% as some of our peers do, that would add substantive more to the OCC. We continue to work with these spreads, this is actually what has been realized. The actual return on equities last year was even larger than that. Maybe if you allow me to make few other remarks. We've also showed the impact of our hybrids. It's unclear where the industry is landing in terms of hybrid expense and OCC.
If you exclude the EUR 56 of hybrids, this is the number. Of this EUR 20 million base stuff that goes through the P&L, EUR 36 is curves that go through OCI. You can play around with these numbers. Finally, it's the UFR drag. We've noted that there's also various ways to deal with the UFR drag in the industry. We take a reasonably conservative view. 31st of December pinpoint or actually Q4 last year UFR drag and Q4 this year's UFR drag gives EUR 101. If we had done a more frivolous calculation, I could have argued the number was like EUR 10 million better. That will gradually show the numbers as rates develop. We still believe we've got a fairly conservative way of doing stuff where the UFR drag, you could have argued it's EUR 10 million less.
We could have argued part of all the hybrids, not in the OCC, you could have argued how you work with spreads, we work with a long-term across the cycle assumption that's in line with how we run our business. We will stick to that. Hopefully, Appendix E gives you a little more handle to analyze these numbers. Should I also take your question on the standard formula?
Yeah.
Yeah. Then I'll take the cost question, Chris.
We are running on a standard model. We firmly believe in that. It's a very cost-efficient way to measure capital. However, we are aware that EIOPA will come with a review of the model sometime soon. It is probably expected any day, any week now. That could give us potentially reason to revisit the standard model if we feel it's null or much less appropriate than what it was today. Sometimes we look at where some of the numbers are that other players use, or give a slightly different outcome. It's not that we're in principle against internal models, certainly not. For now, we think it's the most cost-effective way to use the standard model. We will keep a close eye on the EIOPA rules and regulations.
We will keep a close eye on the progress on IFRS 17, because, yeah, moving to an internal model will keep the same people busy that also do IFRS 17 implications. We certainly do not rule out ever moving to an internal model.
Thanks, Chris. Benoît, on your question on which part of the cost reductions already realized in 2041, which part came out of the M&A and which part is, let's say, organically. The larger part is organically. It's not exactly to pinpoint how big the exact numbers are because an integration never takes place overnight. They flow in gradually. Let me give you a few examples. Last year, for example, we did no integrations in the P&C business, there the cost reduction was EUR 4 million. In the non-life business, we reduced the cost per policy from 66 to 44. That was mainly organically. There was one cost reduction which I can put a number on, that was the cost reduction on Axent. That was last year, EUR 5 million.
Let's say roughly two-thirds to a bit north of that is organic cost reduction, and the remainder is due to already in 2015 announced M&A transactions.
Okay, great. Thank you very much.
Does that answer your question, Benoît?
Yes. Thank you very much.
Okay.
Thank you.
Well.
Thank you.
We've understood there are no further questions, so thanks everybody for joining us today. As said, we were very happy with the results we were able to present. Some of you we will meet over the next few days. We're looking forward to that. Others we may meet at the 10th of October when we will organize our first Capital Markets Day. In the meantime, we continue to do all the good work to deliver the results as promised. As said, we are fully convinced that our underlying business will deliver performance again in 2018. However, we, of course, see the movements in the financial markets, and we already have had our first storm in 2018. Having said that, we're fully convinced that we will be able to deliver healthy and market-outperforming results going forward. Thanks, everybody.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.