Good day. Welcome to the ASR conference call on the nine-month trading update. Today's conference is being recorded. Before we start, I would like to ask you attention for the disclaimer on slide 12. I would like to turn the conference over to Mr. Chris Figee, CFO of ASR. Go ahead, please, sir.
Good morning, everybody. Welcome to the conference call corresponding to the ASR Q3 trading update. As you've experienced, luckily, ASR is better in selling profitable insurance contracts than organizing conference calls, although I can assure you that our client contact center is slightly more effective than the call today. Rest assured it is not normal practice for ASR. Having said that, let's talk about the third quarter or nine-month results of ASR. As you will be aware, this is a trading update, a relatively light set of reports. We don't report full IFRS profits in a quarter, in quarterly numbers. We're also a bit more light on the depth on solvency reports. We'll give you a little bit more color on the voice line along the way. Q3 was a fascinating quarter in the sense that a lot of significant strategic events happened in that quarter.
We may have already forgotten, we actually did announce the acquisition of Generali in the third quarter. We announced the acquisition of First Pensions Investments in the third quarter. We managed to sell the final stake of the Dutch government in the third quarter. On the brink of the fourth quarter, we launched and placed its 300 million inaugural EUR Tier 1 instrument. On the strategic side, lots of things going on, lots of good development at ASR. On the business side, a reasonably ordinary quarter where things happened as planned, happened as we envisaged. The businesses continued to work its way through our plans. If you go to page two on the presentation, which I've hoped you'll be able to see on our website. You can see the numbers, operating results year to date EUR 550 million, up almost 24% versus last year.
Result in the quarter, EUR 165 million, up about 13% versus last year. Operating ROE, north of 16%, still well above our target of up to 12. A robust solvency ratio, 193%. We'll give you a little bit more color on that later on. In that number, we absorbed a three point worth of share buyback at the final sell down of the state. We believe a continued set of solid results, ASR to operate structurally at an elevated level, given even in the Q3 where we tend to have more claims in non-life, more claims, especially in the travel and leisure insurance business. In that quarter, elevated performance versus last year, up 23% on the year to date. If you flip to page two, you can see the results on a quarterly basis. The quarter 2016 or the quarter 2017.
As you noticed last year and this year, Q3 is the result indeed where our travel and leisure insurance business tends to receive its claims. As a matter of fact, Dutch people do take out their caravans in the summer. They drive them around. That's the time when they have their claims, and they have no claims in the winter. That's a very peculiar Dutch phenomenon, and as a travel and leisure insurance business, that's something we have to reckon with. Think about EUR 8 million of additional claims due to that seasonality effect in the summer. There's a few interesting points to note on that very business. For example, due to the lower roaming charges, we see actually more people taking their phones with them on holidays, actually receiving more claims on damaged phones along the way.
You can see some of the societal developments being reflected ultimately in the insurance business. Again, typically in the third quarter, we incur the claims on the Europeesche Verzekeringen of the travel business, and they no longer reoccur in Q4. Also in Q2 to Q3 for the development from the second to the third quarter. In the second quarter, we always have our dividend reporting season, the dividends flow into the operating earnings. That's about EUR 20 million of seasonal plus seasonal benefits in the second quarter. If you look at the year that we've gone through so far, the movement of Q2 to Q3 actually is a loss or relatively disappearance of EUR 20 million of dividends that we only have in Q2, and the typical Q3 occurrence of EUR 8 million of travel and leisure claims.
That together explains and drives the move from Q2 to Q3 in this year. Then compared to last year same time, both years had similar claims in travel and leisure, 2017 reports about EUR 19 million higher earnings predominantly in the life business, where the impact of our more yield-y investment portfolio is structural and is there on an elevated level. EUR 19 million more versus last year where you have a seasonally adjusted comparison. As from our perspective, you can see the developments in the quarter, during the year, and versus last year. Let's move to page 4. You can see the segmental results. All segments drive strongly increasing operating results. All our business segments continue to do better than last year. Most notably the core businesses, non-life and life Totally EUR 104 million up versus last year in the first three quarters.
In the quarter itself, Q3 to Q3, we find non-life stable versus last year, and we find life elevated by about EUR 20 million, EUR 22 million to be precise, in terms of elevated earnings in the quarter. Also slightly in the holding where in Q3, as in most quarters, we do have slightly higher pension charges. As you may be aware, the annual current net service cost is to some extent driven by the level of interest rates. Lower interest rates increase for this year the current net service cost. In Q3, stable in non-life, up significantly in life and like for like, slightly higher holding costs, slightly higher pension charges, reducing the holding other elements, eliminations terms in our P&L. Overall, all segments continue to do better than last year.
EUR 104 million up in the core segments and about EUR 5 million up in our growth segments, banking and distribution, asset management distribution. We feel very comfortable and confident with the amount of trading that this group actually shows and displays. Moving to page five, premiums. If you exclude one-offs or one-off single life premiums up 3% on the year. In life, decline a bit, 2%. In life, we are observing that, of course, our life book is gradually declining. Such a decline of the business that is reflected in the development of the life premiums, countered by significant growth in the defined contribution business, albeit from a relatively lower base. Today, DC makes about three quarters of our new pensions business, and it is very attractive. Low margin, but zero capital requirement business. From a return on capital perspective, you can see an ongoing growth in attractive businesses.
In life, the decline of the back book countered by growth in defined contribution, and that is exactly strategically the shift that we want to make. For net, that is small decline in life premiums. In P&C, premiums versus last year up about 5%, versus the last nine months of 2016. We continue to see good growth in new production in P&C, although we are actually on the process of sanitizing our portfolio somewhat. If you double click, if you zoom in on the P&C volumes, you will see a couple of developments. I think Generali gaining in market share in the intermediary channel. It is a plus. There is gradual sanitizing of our business portfolio and using the current conducive market circumstances to support our margins and to selectively grow our business.
Finally, you will see gradually feeding in some tariff increases that we announced and put through in autumn, and that will gradually feed into our premium levels as policies are renewed. Overall, we see it as a healthy development in premiums in line with our value over volume mantra towards DC, towards high return on capital business in pensions, and towards profitable new business in P&C. Talking about non-life, moving to page six shows you the results in the non-life business. You will be able to read the text on the right-hand side, but let me give you some color on the different business lines. Disability. You can see actually premiums in disability recovering. Remember in the first quarter of the year, we had some headwinds where the new BeZaVa market shaved off some volumes in disability. That is recovering. We see some business flowing back to us.
Actually premiums are stable to slightly up last year, where we were looking at a small decline at the beginning of the year. Top line recovery on the disability side. Q3 was a very good quarter for disability. Combined ratio year to date is still at the 90s. In Q3, we were actually below 90 combined ratio of disability. Very strong and very stable when it comes to inflow of new claims. Comfortable on the disability business, very profitable, and Q3 was actually very, very strong. In property and casualty, premiums up significantly from EUR 844 to EUR 887. Continue to gain market share, as we said. You will see going forward some further support for top line from tariff increases as they will gradually feed into the business. In terms of claims performance, bulk claims very strong.
Bulk claims, I mean, the ordinary guy who puts his car against a tree, someone who loses their phone, burglary, like really small average claims. Our bulk claims ratio continues to hover around 45%. That's a very attractive level, and that's unabated Q1, Q2, Q3, good performance on bulk which is the bulk of the claims that we have. We have some larger claims in the quarters. In Q3, some larger claims for a total of about EUR 8 million. They were not top claims, but mid-sized fires. To give some color, that was just not additions to the bodily injury reserves. It was just a number of property claims, fire claims that we had to absorb. That's part of our business that happened in the summer. The month of October already normalized.
That's a couple of one-off events in claims in property and casualty, no sign of a trend there. If you think about our non-life business in the quarter, in Q3, think about an uptick in earnings from disability of about EUR 8 million. Think about EUR 8 million higher claims in travel and leisure. Think about EUR 8 million in higher claims due to large fires. Those travel and leisure and large fires are typical issues for that season, that's why they then appear not to be continuing in Q4. Overall, we feel very comfortable with the underlying performance of the non-life business, especially as our bulk claims ratio, which is the majority of our claims, is still every quarter now around 45%, 46%. Comfortable on that business line. Moving to Life, page seven, the Life segment.
Operating results year to date up 15%, driven mostly by the investment margin up EUR 85 million in the year. As you can see, part of it was due to co-management actions. Before some of you claim that's a one-off event, no, these management action actually is a dedicated re-risking of our investment portfolio to create structurally higher direct investment returns. The EUR 34 million is something that you've seen, I guess, in the first quarters and is here to stay, i.e., a more elevated level of direct investment income due to allocation to real estate, allocation to mortgages, and allocation to credits, and the higher release of the capital gains reserve of EUR 51 million. Our capital gains reserve was EUR 3.5 billion at the beginning of the quarter and about EUR 3.5 billion at the end of the quarter. No erosion yet of the capital gains reserve.
This makes us feel comfortable allowing more elevated level of trading in the Life business with, most notably, good EUR 30 million of actually higher cash investment income from higher coupons, dividends, rental income and what have you. Capital gains reserve stable at EUR three and a half billion. Other good thing to note, in the first quarter, first and a half quarters, we had a lower result on mortality due to an influenza wave in the winter. That actually appears to be influenza wave in the winter, has not continued in the summer. In the third quarter, we saw the result on mortality stabilize, confirming that this was actually coincidental. Finally, again, in terms of new business, no pursuit or very limited pursuit of large single premium business. We have very strict value criteria before we write single premium products.
If they don't meet our value hurdles, we just don't underwrite these contracts. A lot of good movement in the defined contribution business, which is now 75% of our new business. We have upped our DC target and are already meeting that upped target even if it's only November. We're very pleased with the development of our defined contribution business. Even if it's from a low base, the development of the growth is actually quite promising. Solvency ratio, page eight, the number you've probably all been waiting for. Standard model, 193%. We do not provide you the full bridge in the quarter simply because those numbers are not supposed to be looked at on a quarterly basis. Let me give you some color on where we are. Please note that the own funds of ASR before share buyback increased by EUR 92 million.
There's a continued amassing growth in own funds, out of which we paid, we got EUR 101 million back to our shareholders as part of the government sell-down. Organic capital creation in line with our earlier guidance. In terms of the bridge, you guys will all have pen and paper ready. Think about the following developments. Start the quarter with 194%. Organic capital creation adds about 2.5% in the quarter. The net of market movement and model movement adds about 2%. The VA declined in the quarter. That caused it to drop, shave off about 2%. Slightly higher SCR due to rate effect increasing the longevity charge shaved off about 0.5%, will give you a gross movement of +2%. You buy back shares for 3%, you get back to 193%, where we were.
Just to repeat, 194% start +2.5% OCC, +2% net markets and model adjustments, -2% VA contraction, -0.5% higher capital charge due to longevity risk gives you a gross movement of +2%, and we paid back 3%, which brings the number back to 193%. The result we've seen is fully, as far as we can see, in line with the guidance and suggestions we've given before, and supports a very stable and predictable organic capital generation. The organic capital generation itself was slightly lower on the P&C side. We said we had some large claims, that feeds into the organic capital generation in the quarter, but higher from an investment side. The re-risking that we engaged in during the year actually starts to feed into the OCC. That's now compensating the higher claims in the third quarter.
Good to notice solvency of our main subsidiaries, the life insurance solvency to north of 190%, the P&C license solvency to north of 180%. Very solid solvency levels across the board and consistent and predictable capital generation. We did place the inaugural RT1 in October. Technically speaking, it's not part of our trading update, but we mentioned it here at a pre-tax coupon of 4.625%. It was something we're very, very pleased with. Partially used to fund the cash payment of the Generali acquisitions. On Generali itself, we announced the transaction in the quarter. We spent lots of time on that transaction around the sell-down. Please remember we provided to you as a guidance of EUR 30 million profits over a EUR 200 million of fundable capital contribution, for about a 15%-ish ROE.
If you were to allocate EUR 100 million from the hybrid to the Generali deal, that would actually boost the ROE in the transaction a lot more simply because of the very attractive cost of capital of the RT1. Bringing me to page nine, rounding off that presentation. Not before I said that Generali integration, as far as it comes to the preparation of the integration, is still fully on track. We have submitted the request for a DNO, a declaration of no objection. When do we expect it back? We don't know. It's now in the hands of our regulator, but it's safe to say that we expect the closing of this transaction to be happening in the first quarter of the year, somewhere between the first working day and our full year results presentation, we expect the closing.
End of January, early February is where we'd see the closing to take place. The integration preparation work that we've done so far suggests that what we're seeing is in line with the assumptions that we made when we embarked on the acquisition altogether. We feel comfortable and confident on this deal. Where does it leave us in the quarter? Well, a reasonably uneventful quarter when you look at the numbers. Eventful when it came to strategic developments. Uneventful because the numbers confirm the trend that we've been displaying so far when it comes to profit, when it comes to capital generation. Some seasonality effects. The different season is unfortunately over in the summer with some higher claims on travel and leisure. Some large claims in the P&C business, countered by continued strong performance and even better performance in the disability business.
Leaves us with a result of EUR 550 million, about 24% up from the last year, an ROE of 16% and a solvency level of 193%. We're still proud of the robust end result that this group is able to deliver. Having said that, back to you, and happy to take your questions.
Thank you very much. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, please press star one. The first question is from Mr. Cor Kluis from ABN AMRO. Go ahead, please, sir.
Good morning. Cor Kluis, ABN. I got a few questions. First of all, about the premium growth in disability. As we calculated this, there was a 13% premium growth in the third quarter year-on-year, then in H1 it was -2%. You explained, of course, that it was due to the less headwind from the BeZaVa legislation. What can we expect on disability premium growth going forward at Q4, but also going into 2018? Will we see a structural growth improvement there? Could you give some comments on that one? Also about premium. The health premium was quite high in the first half of the year, 90% growth. I think in Q3 it was a flat health premium. Could you also comment on that? Why is there suddenly a lower growth on health premium? Are you becoming more selective or did something technical change there?
Second question is about the solvency ratio. You've got the 193 plus the eight and nine for the hybrid, so you're around 201%-202%. Could you give a little bit more on update on your Solvency II ratio in the fourth quarter? We're already two months in the quarter, of course, giving the market circumstances and other developments. Last question is about Generali. I don't know if you already have full access to the books, et cetera, but could you give some comments about how the results are developing over there? Those are my questions.
Very good. Cor, thanks. In terms of premium growth and disability, indeed, in the first quarter, we lost some business due to the BeZaVa development. That actually reversed or is much less pronounced as the year progressed. Actually, we're seeing the resumption of some growth in disability, but it has to do mostly with, I think some of the BeZaVa trends not following through and some of the clients actually sticking to the private sector rather than going back to the public sector. What's the long-term growth outlook? I would reckon, generally speaking, growing in line with GDP is the safest way to predict it. Although in one particular segment called absenteeism, verzuim in Dutch, we would expect to see for us and the market, some premium increases in the coming year, which means 2018.
In the long run, grow with GDP with some uplift for price increases, tariff increases in the verzuim, absenteeism business. In health, premium level in health during the year only varied because of technicalities. Last year's sales season in health gave us about 20,000 new customers. That is the uptick in the growth within premiums. There are also various elements that have to do with the health equalization system that actually flow through the premium line item. Movements during the year tend to have a technical nature. There could be some volatility, but it has nothing to do with us underwriting more tightly or not. Your underwriting moment is once a year. We gained 20,000 customers last year, that was it. I'm not sure whether we'll return or keep growing at that level.
If you look at the pricing level of health, we're pretty strict, moving to a mantra of value over volume. I don't think going forward you'll see the same level of growth in health. During the year, there could be fluctuations that are more technical in nature. Third question on the SCR. You pointed out at 193 plus RT1. Where does it go to from here? In principle, our solvency ratio is developing as planned. You need to be aware of that the VA is declining during the quarter. The VA lost about four or five points quarter to date. That is a technical thing that provides a bit of headwind in our solvency.
If you look at the VA reference portfolio, our fixed income portfolio compared to the reference portfolio is a bit overweight in Dutch and German govies, is a bit underweight in corporates, most notably financials, and a bit underweight in peripherals. When spreads tighten, paradoxically speaking, we have some headwinds because the VA premium declines a bit faster than the spreads on our actual portfolio. Rule of thumb, one point VA is one point of solvency. Again, if spreads widen, if the market is zero, that works the other way around. It works for us. The VA is a bit of a dampener in both directions. It takes away the punchbowl when the party is getting hot. Again, it provides a bit of a fuse when the market is turning against us. In Q4, we still have a month to go.
Take SCR as your RT1, but adjust for the technicalities from the VA. Of course, in the final year number, we'll also put the number X dividends. We'll give you full disclosure on that in the fourth quarter numbers. As far as Generali Nederland is concerned, we have not closed. We're in this interbellum between signing and closing. There is interaction, but we're very careful on not sharing undue information on the business whilst we're not officially the owner. We're preparing the integration but don't have control of the business. This is not the time and the place to report on the results of Generali NL. I think that's something for Generali to report. Again, there's nothing there yet that keeps me awake at night, if that could help you answer the question.
Absolutely. Thank you.
The next question is from Albert Ploegh from ING. Go ahead, please, sir. Oh, one moment.
From my end. First, looking at the investment portfolio and the re-risking budget potentially for Q4. Should we expect any re-risking of the investment book in Q4 or maybe the first half of next year? Maybe just some guidance around the capital consumption of that. The second question is on the cost result in Life. I think it was clearly down year-over-year. You were flagging cost discipline. Can you maybe give some color on potential additional measures to address the cost base on the Life side? The third question is a bit more top-down on the, let's say, on the target set at the time of the IPO, where you're clearly ahead on many. I know Q3 is probably not a logical stage to come back on the targets.
How are you looking at your, let's say, overall combined ratio group targets that were set at the IPO and where you're currently running and also on your, let's say, return on equity as well? Should we expect some sharpening of targets maybe at the full year stage? Thank you.
All right, Albert. Thank you. On the investment portfolio, we've gone through a significant re-risking program that is by and large now completed. Don't expect a re-risking run in Q4. That's not something that will add or take away. It will add solvency but not take away solvency, because the re-risking basically is done. At this very point, we are actually running the strategic asset allocation studies. They're going to be on the board's agenda in the coming weeks. Early to say whether we'll continue to re-risk. My left pink tells me there is some opportunity to continue to re-risk during the year, given our solvency base, but it hasn't been formally decided yet. Something we'll give you more color in when we do the full year results, because by that time we'll have the formal decision-making around it.
There could be some opportunity there, but not in Q4. We need to weigh your portfolio development in the market as well. In terms of cost discipline in Life, you will see, I guess what you saw on the year is a sharp decline on the cost result on Life. The result on cost, which is a function of the declining Life book. We are countering that by migrating all our policies to variable cost platforms and by taking down staff costs as well, shrinking the cost base. I think that is going in line. The migrations are happening as planned. You will see the majority of the migrations behind us in 2018. We've done a couple of complicated ones, and we've been successful in that.
With that, I think our cost countering measures in terms of migration and shedding individual staff are going as planned. I would believe that the cost result from here, I think the worst is behind us, and you'll see some stability, at least for the coming period. Perhaps in the long, long run, if the book really declines further, we'll need to take further measures. In the medium term, we're comfortable with the measure we're taking on the cost side, and you'll gradually see more stable cost results in Life. In terms of our targets, as you rightly point out, a trading update is not the venue, the place, the time to revisit the official targets.
If you look at the results today, it would be hard to argue that we would not be comfortable where we are, which is a very complicated way of saying, actually, we're doing well. We're doing better than our targets. The trading update is not really the moment to go into details on that. The business is doing better than that.
Okay. Maybe one brief follow-up on the cost result. You mentioned the migration to the more variable cost platforms. By and large, that seems then completed. Are you basically ready, and maybe a second question, would be also willing to consider maybe to add some small closed books on your existing platforms, or is that not yet on the agenda?
Actually, we are doing it. If you look at the Generali business, it has a small to mid-size life business. It is EUR 100 million premium equivalent life insurance book. The Generali deal effectively will be the first test on the actual integration. There is a bit of pensions in there, the Generali life insurance business de facto is a small closed life block. I think sneakily, we started doing that on the back of what basically was a non-life oriented transaction. There is a life closed block that comes along. That will be the interesting first test to see how we manage that migration. I think the teams are confident that they can actually pull off this migration in parallel to the existing migration that we still are to do.
When that is in progress, then we know for sure how good we are about it, and we have got the real proof point. The Generali one effectively, Albert, is the first life closed block transaction that we are adding on our life business.
Yep. Thank you very much.
The next question is from Farooq Hanif from Credit Suisse. Go ahead, please.
Good morning. Thank you very, very much for taking my question. Firstly, there's obviously been a very, very big merger in the Netherlands between two companies involved in pensions and also life and non-life. In the context of the non-life business, firstly, what impact is this having on the landscape in the short term while these guys are busy trying to integrate? What do you think it might do to tariff increases generally in the market? Do you think this could be a positive development? That's question one. Question two, on the DB business specifically, what do you think is outstanding generically in terms of acquisition opportunities from others that want to shut down or leave that market? Do you think that there is still quite a lot of potential, both in bulk and in companies in the DB space to acquire? Thank you.
On the larger merger, I think in general we applaud consolidation in the Dutch insurance markets. When we say it's a bit like the French Revolution, right? It's too early to say if it's successful or not. In principle, the merger between NN and Delta takes out a competitor. We think in general it's good. We do expect it to support rational pricing in the markets. We do expect it to support healthier developments. Whether it will lead to increased tariff increases. I think there is a trend of hardening in the market today which is happening kind of independent from the NN Delta Lloyd merger. We're seeing competitors that have unprofitable books and increasing prices no matter what happens in The Hague or not. To me, it's a bit disconnected. I think in general, we're seeing a hardening market. We've seen a hardening market.
I personally believe that you will now see a slight pause when it comes to tariff increases because most of our peers have gone through a significant round of price increases, and people want to see how the dust settles before we resume that trend. I would expect a healthier market going forward, possibly to be continued next year. A little pause today because most of our peers and everybody wants to see if you have gone through a 10% price increase, what does that do? Secondly, taking out a competitor is always a good thing. We think this will support a more structural rational pricing in the market. When it comes to volumes, hard to see. There is volumes coming our way. It's not always easy to see where it actually comes from.
When it comes to defined benefit books, I think very few people today write new DB business. We've seen some competitors coming up with interesting pricing on DB contracts, and we're happy to let go of those. On defined benefit and bulk annuities, the market's fairly quiet. Most customers that we see are contemplating defined contribution or APF solutions for new business and seeing what to do with the existing business. Little volumes today, little appetite from competitors as far as I can see. That part of the market is relatively slow. There could be opportunities, we are very cognizant of the capital consumption of bulk annuities. They tend to be more capital-intensive business. We've got very strict return hurdles. We'll try to do them on a reinsured basis. Effectively, our first perspective is always reinsure the deal to limit capital consumption in our book.
That's how we look at it. At this point, the market is actually very quiet. The action is actually in the DC space. That's where the excitement is in the pensions market.
If I may just quickly return on that topic. Do you think you need a DB book to write DC?
No, you don't.
A bigger one. Okay.
Well, it helps. You don't. If you look at the DC business, there are various DC players that do not have a DB business to write this. I think DC, the name of the game is scale. You want to scale to get good pricing and get margins. Second is portals. Clients, for some reason, still want workstation, workplace marketing, and all sorts of portals. Surprisingly little usage of the actual portals, but still customers want to see it. I think the success factor in DC is more volume, is your ability and willingness to invest in portals and systems, and then it's to get decent investment results. That together drives success in DC. Having a defined benefit book on the side helps but is not the determining factor.
It helps to say to the client, "Look, if you bring your DC business to me, we're willing to consider your DB book as well." That is the order of the discussion that we're having, not the other way around. I think having a defined benefit book helps, but it doesn't necessarily change the outcome of the selection process in defined contribution.
Okay. That's really helpful. Thank you very much.
The next question is from Robin van den Broek, Mediobanca. Go ahead, please, sir.
Yes, good morning, everybody. My first question is on the impact of UFR coming through as of next year. I was just wondering if you can share your thoughts how this might speed up the consolidation in the funeral insurance business, given the fact that that business will have a quite long duration. Your thoughts there. I was wondering if the run rate you mentioned with H1, basically saying that if you would align assumptions with peers and you would get a gun against your head, capital generation could be EUR 50 million-EUR 100 million higher. Is that the similar run rate you would see in Q3? Thirdly is on the pending standard formula revision, which is quite a lengthy document.
I was just wondering if you could share maybe some initial thoughts on the potential impact for ASR. Seems that, in particular, NHG mortgages could get a more favorable treatment, which for you guys is about, I think, 10% of the asset mix. That could be quite a big positive move for you. That's it for me. Thank you.
Very good, Robin. Very good. Well, as you are about to point a gun to my head, I'm very glad we're doing this call rather than a physical meeting. In any case, I'll still answer your questions even without the gun, Robin. No. When it comes to the UFR lowering, first, the lowering of the UFR will shave about three points of solvency, given where the development is, which for us is a immaterial event. It will take out some solvency and add back some flow. It's a trade-off between stock and flow. What does it do to funeral insurance companies? You'd have to ask them. I think for funeral insurance companies, the lowering UFR could be a challenge. If you refer to the EIOPA consultation paper, there is discussion on mortality charges, which might be difficult for a funeral business.
Generally speaking, I would say whatever happens in Solvency II, and I make a step to your third question, the more diversified you are, the better you're shielded against changes in models, changes in regulation. What does it do to funeral insurance companies? Definitely, it will be a challenge for them to absorb a lower UFR, to absorb a higher mortality charge. What it do strategically, I don't know. You'd really have to ask them. It helps having a diversified business. When it comes to the EIOPA consultation paper, if I jump on that. It is a consultation paper, and if you look at the past, from consultation paper to final recommendation has seen significant movements and shifts.
In terms of timing, we expect [end of September] advice to the European Commission, then the European will debate, discuss, and then convert some or all of it into law, and we expect the final to be introduced January 1, 2020. In that document, which is 200 pages of hard work to read through all that stuff. There are still really many moving parts. It's kind of hard to say what the outcome will be. If you look at the document and you actually manage to reach the last page, which is an achievement per se. A couple of points that let me share with you, couple of points that we look at without giving you a final conclusion with a count. We look at the recalibration of premium risk. There's a piece on premium risk recalibration. There's a discussion on recalibration of mortality risk, which is of interest.
Indeed, the document recognizes that NHG mortgages, government-guaranteed products should have a lower counterparty charge. There's a portion on interest rate risk where EIOPA discusses a number of alternative downward shocks as well. Finally, there's a PhD thesis on LAC-DT, where you find interestingly, that for most elements, the document gives options and recommendations or emerging recommendations. LAC-DT is the only component where there's no blue box in the document with a clear advice. EIOPA just makes notes of different applications across Europe. Those are the five points that we've been, and we are studying and trying to get through. There are many moving parts. Each of those five parts can move individually. The sum of those parts can also move significantly. It's too early to draw a conclusion from it.
Our view is, if I go through it and look at all those moving parts and see what the upsides and the downsides are, note first is having a diversified business helps. Monoline businesses are much more vulnerable to a single change than diversified businesses. Secondly, I feel pretty comfortable with this. I lie awake from the amount of work that comes from this. We do not yet lie awake from the outcomes of those results. Also, we know at this point, it's mere speculation, and we don't know what the ultimate outcome will be. I've given you the five matter of substance that we look at that could have each individually an impact, but collectively they might diversify, might mitigate, and might result in a reasonably flat outcome. And that's the best where we hope for at this point in time.
We can say more when we see the final results. When it comes to your question on OCC, indeed, if you look at the long-term investment margin and the actual spreads that we have, you will find that the entire fixed income book, ranging from govies, including mortgages, is about flat versus the LTIM. As is the beginning of the year, our LTIM assumption on governments actually overstates the actual returns on mortgages. It understates the actual returns, but the fixed income book is relatively flat. The accrual of liabilities still assumes a VA of 20. Well, I think that actually is an overstatement of the actual VA, and thereby an understatement of the actual OCC. Equities and real estate have done well.
In the quarter, our organic capital generation added about two and a half points, then the net of all the other points added another two points to our solvency, two points of market movements. If you zoom in on that two points of market movement, actually, the market movement was a bit higher than two. During the quarter or during the year, we are observing a higher level of lapses in the life insurance business. Dutch people are redeeming their policies, most notably to pay down mortgages. We've modeled through a structurally higher lapse level. We think it's fair to say if these observations are there for nine months, you have to put them through in your best estimates.
In the bucket other, when it comes to solvency movements, the net effect is two, but there's a gross effect that's marketed plus and a small minus from models to lapses to give you two. That illustrates that we believe that the LTIM assumptions we've used are still reasonably conservative, and there's a structural continued adding to solvency from that. It's a very long-winded answer, but I want it to be as complete as possible.
No, that's very helpful. Thank you very much.
The next question is from Matthias de Wit, Kempen & Co.
Hi, good morning. A few questions remaining. First is on P&C. Can you be a bit more specific on the quantum of the rate increases you've implemented there, first of all? I also wondered to what extent the hardening of the markets you referred to what extent that's a reflection of higher claims inflation that could be expected going forward. Should we, in other words, expect combined ratios to benefit or not from the higher rates? Secondly, just to continue on regulation. Next to EIOPA, there was also a DNB document on supervision and supervisory outlook. Just eager to get your thoughts on whether or not there was anything impactful or worth mentioning there. Lastly, on capital. As I look at your solvency position pro forma for the RT1 and generally, it still looks quite strong.
Can you elaborate on how you plan to spend any excess going forward? I guess it will be a mix of re-risking buybacks, M&As. Any color would be helpful there. Thank you.
Very good, Matthias. Good to see that you've landed well.
Thank you.
On P&C tariff increases, think order of magnitude 5 percentage points on generic motor house, what have you. Think about a 5% is order of magnitude in terms of price increases. Oh, by the way Feed in gradually, right? It's 5% on new business and then the same 5% on renewals. That will take about 12 months to be fully factored in before the existing client base is completely renewed. I don't think it's, at this point, a function of claims inflation. It's a function of the combined ratios and claims ratios as they were, as they are today. If you look at the Dutch P&C market, I feel there's a cohort of P&C insurers that has low margins on P&C business.
I think tariff increases are more a function of profit as it is today than a reflection on expected claims inflation or tariff inflation in general. That's not in the cards yet. Honestly, we don't see at this point major claims inflation. There is some upward push in the bodily injury side, which is not so much claims inflation, but more a regulatory change. We've seen some action in the market there. Again, we have looked carefully and are still looking carefully at our portfolio. There's no reason to update the reserve there. On bodily injury, it's the only area where you can see prices moving up in response to general claims inflation. That's a specific market segment. Nothing for us with the existing book. It's just where we are very careful in pricing new business. DNB supervisory outlook, nothing to report there.
We are taking note of the EIOPA documentations. We are taking note of the exit value discussions of DNB, but nothing that concerns us in particular. When it comes to solvency, indeed, you will see in the coming months adding the RT1, taking out Generali, which gives still a relatively high number on the standard model. What do we do with all this? Our strict criteria is the cost of capital, the cost of equity. To be very precise, the cost of unrestricted Tier 1 to be fully Solvency II compliant in solvency speak, we consider to be 10%. Anything we do needs to exceed 10%, ideally 12%. The four areas we have to deploy this capital is market risk, which is the most straightforward and simple to execute, where we also look at market. The return on capital applied should also be substantially north of 10%.
Secondly, we would like our market risk budget to stay less than 50% of our total risk, because after all, we're an insurance company, not an investment fund. There could be deployment in market risk as long as the return on additional market risk capital exceeds 10% by a margin, and as long as the total market risk does not exceed 60%. We'll be looking at acquisitions as we continue to do. We believe there are opportunities in the Dutch market. They will take time to develop, will take time to mature. I will also be very much aware that the P&C and individual life business is probably busy during the year integrating, and you can't load acquisitions on acquisitions. You want to make sure that what you acquire is fully and effectively integrated.
If we do something else, you probably see it more in the adjacent businesses than in the P&C and life business as such. We'll also look, and you know our return hurdle is 12%, return on fundable capital, and that's pretty clear for us. There is giving capital back to shareholders through dividends. Share buybacks is something that are always on the cards. Don't expect a share buyback in the remaining 4 weeks of this year. Next year, we'll look at our distribution policy, where we look at the actual dividend. We'll also be looking at an interim dividend next year, safe to say. That will together make up a decent amount of capital distribution to shareholders. Matthias, it depends a bit on how the acquisition space develop and what we see there.
Okay.
Yeah. That's clear. Thanks a lot, Chris.
Okay.
The next question is from Shaikh Musabi, J.P. Morgan. Go ahead please, sir.
Okay. Just a couple of question. First of all, after you raised this recent debt, it looks like your IFRS leverage ratio is more or less around 30%, maybe a couple of points lower. How do we think about that IFRS leverage hurdle that you have of 30%? Is that relevant or you can be at around 30%-40% for longer term as well? That's one question. The second question is, how should we think about this realized gains that you book on the life earnings? Because for past 3 years, this number has gone up. Is it fair to say that next year also this number could go up because you have a lot of reserves in that? Or is there a formula as to how this number moves? Because based on my understanding, shadow accounting means your total investment income should not move up.
Your direct income goes down, but your realized gains reserve goes up. It looks like this realized gains reserve is going up every quarter. Any thoughts on those formula? Thirdly, it would be a bit simple if we can move to a bit more market consistent assumption on the fixed income assets. For OCC, just because to see what is the real number versus the assumed numbers. Just a suggestion, but totally up to you. Thank you.
All right, Shaikh. I see. When it comes to the leverage ratio on IFRS basis, it moves towards the 30. I think we'll end the year still below 30, as far as I can see. I have a look at our balance sheet. It will be south of 30. I think 30% is a decent number. I think in the ratings space that we have in our own capital policy, we could move up to 40, although 40 we'd consider to be a relatively high number. Something that hovers around 30 is something that we're very comfortable with. End of the year, we'll probably be somewhere below 30, given what I know and what I can see today. Depends a bit how book equity develops. It depends a bit on how you define your book equity, right? We don't have realized capital gains in our book equity.
We didn't have unrealized capital gains in our book equity. If you look at our leverage ratio compared to book equity, 30 to 40 is actually pretty fine. If you look at it compared to our own funds, our leverage is still relatively low. I'm pretty comfortable with where we are, and I think the headline number will drop a bit in the last couple of months of the year. When it comes to the realized capital gains reserve, I think interestingly, I have no control on this number. It's a formulaic approach. When you realize a capital gain because you switch, you change an asset. Actually, the capital gain is amortized over the lifetime of the corresponding liability. To me, it's a given.
The only way I could tweak it is by realizing a huge amount of capital gains, then the number would go up, but then you would immediately see it in my IFRS equity when equity goes up because of capital gains realizations. That's something you do not see at this point. It's not that we're gaming or playing this.
No, this is what I'm not able to understand is why will it go up? I get your point that-
Yeah
You're not tweaking anything, you mentioned that you can realize more capital gain, put in the reserve, and then that number will go up. This is what I'm not able to understand.
Yes.
Why could it go up even in that scenario? Anyways, maybe we can take it offline.
That number goes up, but there's something else goes down. In principle, you're right. If the number goes up, your direct investment income should go down and the sum of the two stays relatively stable. What you find today is that the direct investment income has gone up because we re-risk and move to other more yield-y asset classes. That actually compensates that development. Where we are today, it's about EUR three and a half billion in terms of reserves. I would expect this number to be relatively stable in the coming year. This year, it has gone up due to a variety of reasons, mostly technical in nature. Going forward, expect the release of the capital gains reserve to be stable. That is the way I plan it.
Okay.
When it comes to assumptions in the OCC, we believe we're reasonably market consistent. At least we're giving you a fair amount of disclosure on this. Maybe interesting point, we also include the hybrid expenses and hybrid charges in the OCC, which is about a good EUR 15 million a year, which others, I think, do not. The market, there is no one consistent OCC definition. Your point is noted. Something to chew on. We'll try to give you as much color as we can, but also not complicate and not change the model over time. In essence, it's a fairly complete number, but your point is noted. Something for us to chew on.
That's very clear. Thanks a lot.
The next question is from Johnny Vo from Goldman Sachs. Go ahead, please, sir.
Yeah. Thanks very much. Just a couple of questions. Just in terms of the cash in the holding company, I guess at the first half, you had cash in the holding that stood around about EUR 200 million, and that was before the buyback and the acquisition. You've obviously raised money. Where are you in terms of cash? Then also just in terms of the operating profits. In terms of some of your assets are mark-to-market through the P&L. Is there any mark-to-marketing of some of those assets through the P&L in the operating line or not? Finally, just in terms of, again, the realized gains were higher than it has been. How much higher is it above the normalized level? Thank you.
Johnny, could you repeat the last question? I didn't get your last question completely.
Just in terms of the realized gains. You made a note in the press release that the realized gains were a little bit higher than normal. How much higher than normal is it?
Okay. When it comes to cash at holding company, Johnny, it's not a metric we steer on a lot. I think you are aware. Indeed, the holding company has got the proceeds of the RT1 issuance. What you see during the year, there will be a combination of things where we will continue to upstream cash from the opcos. As I told you, the life opco is above EUR 190 and P&C above EUR 180. Expect a couple of points. Expect some further upstreaming from the opcos during the year. We'll end the year with a cash level north of EUR 350. I'm pretty comfortable with that, it's not something we spend a lot of time on. We'd rather have the cash in the opcos, it will be north of EUR 350 by the end of the year for sure. Many things play there.
There's tax payments, there's pension charges, there's upstreams, et cetera. We'll feed them into together. If you think about The capital gains. In the operating result, there's no real mark-to-market effect. All the mark-to-market effects are not in the operating result. The operating result really contains the direct investment income.
Okay.
Finally, when it comes to the realized gains, there's a release of the realized gains reserve, which is EUR 51 million during the year. As I said, I think that's kind of a given. I think that level will be at that level going forward as a reasonable continuation of that thing. I can see what the model spits out. I can't steer it. I can see what the model spits out. If you look at the investment margin line, there are EUR 34 million really higher direct investment income, which is coupons, yields, dividends that are coming in in cash, and there's EUR 51 million of increased capital gains reserve release. That's what we're going to push there.
Okay, great. Thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. Go ahead, please. There are no further question. Please continue.
Everybody, thanks so much for the call. A lively call for a trading update. Sorry for the late start. Good for all of you to hang in there and listen to our story. We look back at a good, solid quarter, trading as it was, trading as it is, and comfortable with where we are today with our group executing our strategy. Thanks for your questions, and hope to see you all in person sometime soon. Hopefully without a gun this time, hope to see you in person and continue to answer your questions.
Ladies and gentlemen, this concludes the ASR event call. You may now disconnect your line. Thank you. Have a nice day.