Good day, welcome to the ASR conference call on the Q1 2017 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michel Hülters, Head of Investor Relations at ASR. Please go ahead, sir.
Good afternoon, everybody, good morning for those of you listening in from the U.S. Welcome to the ASR conference call on our first quarter results. With me here today is Chris Figee, our CFO, he will talk you through the numbers that we have published this morning, and we'll be happy to take all your questions you have after that. Before I give the floor to Chris, I would like to point out the disclaimer that we have in the back of the presentation, and we'd appreciate it if you would take a minute or two to review that after the presentation. Having said that, Chris, it's yours.
Very good, Michel. Thanks very much. Good afternoon and good morning, everyone on the call. Very pleased to walk you through the first quarter results of ASR in 2017. We have provided you with a small presentation that I will walk you through that slide by slide with some further comments and color, and of course, time for questions afterwards. To start, as you are aware, we're only giving a trading update. Insurance is a long-term business. We're in this for long-term strategies, we believe in the interim quarters, it's only appropriate to give trading updates and fully audited figures and full numbers as per half year basis. The current quarter, however, trading was good. We have a very solid and benign quarter behind us. Strong financial performance and improvement in earnings quality in the first quarter. Page two talks you through the key figures.
An operating result in the first quarter of EUR 191 million. Operating result means a result before taxes, before capital gains and before incidentals. Up 38% versus the first quarter of last year, corresponding to a very attractive 17.3% operating ROE. Operating result EUR 191, operating return equity 17.3%. Well above the targets that we set ourselves at IPO. A Solvency II ratio, according to the standard formula of 188%, down one percentage point versus the end of last year. Please note that in that delta, we've absorbed a share buyback in January as part of the government sell down of 2%, and we allocated capital to market risk about five percentage points as well. The delta in the solvency assumes full absorption of a two percentage point or two ratio point share buyback and about a five ratio points additional market risk allocation.
If you adjust for that, the underlying accretion, the underlying growth in our solvency was about six percentage points. In a sense for us, a very decent number. This is a trading update and the business was trading well, as evidenced by our combined ratio of 92.1% in our non-life business. Ahead of target and ahead of last year. We believe that the quality and quantity of earnings have further improved in the first quarter. Let me walk you through the details. Go to page three, talking to you about the premium levels. In understanding the premium developments versus last year, you have to adjust for a few factors. One is last year, we had the results with the premiums from NIVO. We had a portfolio transfer of a funeral business called NIVO of EUR 323 million. Those were a one-off transfer.
That was in those numbers last year. For comparison purposes, you'd take it out. This year, we had a slightly different methodology of recognizing premiums in disability, especially premiums in the mandatory agent channel, where we changed the recognition of those premiums. That's a delta of about EUR 50 million. Estimated EUR 50 million to speak, that one has to adjust for in comparing premium to premiums. If you look through those adjustments, you find that the life premiums effectively stayed stable at EUR 516 million, and that our non-life premiums went up from EUR 841 million to EUR 884 million. Premiums increased about 2.9% compared to last year, mainly in property and casualty, and premiums and life effectively stable. On the cost side, page four, an increase in our cost base from EUR 129 million to EUR 137 million, 6.2% up.
A couple of points to note, the increase in cost is to one part driven by additional cost bases of acquired companies. Last year, we acquired SuperGarant, Corins, and BNG Asset Management. They were not in last year's cost base but are in this year's cost base, the acquired cost bases explain part of the cost increase. Some cost increase are linked to the buildup of our asset management business, most notably the ASR Dutch Mobility Office Fund. Last year, we acquired the portfolio from the Nederlandse Spoorwegen. This year, we went to the effort of marketing and equity raising that fund, and I'll talk a bit more about it during the page on asset allocation. There is a cost to launching and raising that fund. Finally, additional pension charges due to the fact that we have an annual pension cost.
The official term is the current net service cost. That went up because of the interest rate that was used last year. We fixed the current net service cost at the end of last year at a lower rate than the year before, which means that this year we have to deal with a higher regular contribution to our pension obligations. That could be a temporary phenomenon. If rates stay where they are this year, then in 2018 that decline or that increase will be reversed and the current net service cost will decline again. It's a function of fluctuation in interest rates. The underlying cost development in the group is still attractive, in line with our long-term cost reduction objectives.
To give you a bit of color for what we're doing on the cost side, in the first quarter, we have started to consolidate a number of head office functions, leading to the reduction of jobs in our head office by bundling together services-oriented functions in head office. We're on the way and will go further in integrating our P&C platforms. Remember, we have a broker-based P&C platform. We have a travel and leisure insurance platform. We have a direct insurance platform, and on the back end of those platforms, we have started to integrate, and we'll integrate further to further save costs. Finally, the life migration plans are still progressing according to plan. We've once more completed a pretty challenging migration, so the 2018 completion time table still looks realistic. In funeral, we have commenced the integration of this NIVO book. We added the portfolio last year.
We first finalized the integration of AXENT, now we've commenced the integration of the NIVO operations. Underlying operational cost developments are in line with plans, a number of additional initiatives have been taken. If you look at the operating result on page five, we're pleased to report that all segments witnessed an increase in operating results. Non-life, life, also the smaller ones, banking, estimation, distribution, all went up for an operating result of EUR 191 million. This is a pretty safe and stable number. It is not a profit before trouble type of metric. It's all included, excluding capital gains, excluding incidentals, there were hardly any incidentals during the quarter. We do not report an IFRS profit number. We do not report a net profit number during the quarter.
If we had to produce one, think of a number around the 180-ish mark for a net profit. Again, operating profit number that to our view, is stable and robust. Although there were some slight headwinds in the first quarter that caused it to be very attractive. Those tailwinds bring me to our non-life business, page number six. In non-life, the operating result went up from EUR 32 million to EUR 54 million in this quarter compared to first quarter last year. Premiums went up. Most notably, we observed a premium increase, an underlying premium increase in P&C, about 6%, from EUR 325 million to EUR 345 million. In disability, the increase that you're witnessing is to some extent adjusted or affected by the different calculation or recognition of our mandatory agent premiums. If you adjust for that, the EUR 50 million, what we estimate to be the effect of the different recognition pattern.
There's a stable to slight decline in the disability book, which is a function of the BeZaVa product. Last year, we announced that the government would privatize or attempt to privatize part of the Social Security system. The UWV, the government agency, is still active, we've seen some of our clients moving back into the public sector, which ultimately cost us some premium in the beginning of this year. We believe that in the long run, those clients will flow back to the private sector as the advantage that the government has will effectively run out in a couple of years' time. What we're actually more interested in is the combined ratios as we steer a business on value of a volume, on margins of a volume.
In disability, we're able to hold on or even improve a tiny bit, a very strong combined ratio at 91.2, Continue to be strong. Health combined ratio improved to 93.3. There was a small benefit from the health equalization system, about EUR 7 million. Excluding that, the health combined ratio would be around the 96 mark, which I think is slightly more representative of the underlying performance of the health business. Finally, in property and casualty, our combined ratio moved to 91.8%. There's an internal competition between P&C and disability, who will have the lowest combined ratio? The P&C guys are catching up, Let's see what next quarter brings us. Very pleased with a 91.8 combined ratio in property and casualty. Honestly, we need to give a few bit of color to this.
In the first quarter, everything that went well or could have gone well, actually went well. It was Murphy's Law revenged. We had no storms, no frost, no snow, and also no large, we call calamities, no large claims. The 91.8 is an actual number. We did book in 91.8. Again, we have to be honest to ourselves, we were just having a bit of tailwind as well. Had we had the normal set of storms, the normal set of large claims, the stuff we budget for, the underlying combined ratio of P&C would have been around the 95% mark. We're very pleased with a very strong quarter in non-life operating profit from 32 up to 54.
If you look up at the underlying performance, I think it was between EUR 10 million and EUR 15 million of Additional results that we actually booked in health and in P&C that may have a one-off nature or may have a temporary nature. At some point, larger claims will kick in, but that's something we'll have to see during the year. For us, we look back at a very strong quarter with continued strong, uniquely strong combined ratio in disability, improving combined ratio on health with some support from the equalization system, and a significant improvement in the combined ratio of P&C, possibly one of the better ones in the country, with some tailwinds from the benign winter. Overall, premiums increase as well, and we want to take note of the fact that in P&C, our volumes grew by 6% and the combined ratio improved to 91.8.
We see that's a very healthy development in our non-life business. Moving on to life, which takes us to page number seven. Further improvement in performance. Operating results up from 121 to 149. Premium levels down a bit because of the fact that last year there was a one-off portfolio transfer that did not reoccur. If you correct for that, premiums effectively stable, profits up. Profits up mostly from higher investment results, both really direct results and increased contribution from the capital gains reserve, AKA shadow accounting capital gains release. The direct results from the investment portfolio were at group level across all businesses, life and non-life, about EUR 44 million increased direct results, EUR 18 million real cash income, coupons, dividends, what have you. EUR 5 million reduced depreciation on swaptions prices, an additional increase or an increase in the capital gains reserve release of EUR 21 million.
As a group level, EUR 44 million of increased direct investment income. Again, EUR 18 direct yields, EUR 5 less depreciation on swaptions cost price, and EUR 21 million increase in capital gains reserve. The bulk of it is reflected in the life insurance business, as most of the assets are in life. Our life insurance profits up due to increased direct investment results, offset to a small extent by lower mortality results and lower cost results. On the mortality side, if you remember, we have a significant funeral book, and there was a wave of influenzas in the first quarter that causes increased amount of casualties and deaths, increasing our funeral payouts.
A lower mortality cost Q1 this year versus Q1 last year due to the increase in influenza observations in the first quarter, and gradually some pressure on the cost result in our life business as the business, the volumes gradually decline. We were very pleased that the investment income, the direct cash investment income definitely held up and overcame any downward pressures on mortality results, giving us a very solid handle to the life insurance profitability. We did add some more capital market risks as we said in our opening. Page eight shows you a bit more on that market risk developments. In January, we kicked off a review after our annual strategic asset allocation. We're optimally using the capital base that we have, and we initiated a small but meaningful reallocation of capital to market risks. Effectively, what we did, we allocated more to equities.
We allocated a bit more to real estate, allocated more to mortgages and credits at the expense of governments. The equity risk program is basically complete. We've done that. That has run its course. We are where we want to be. On real estate, last year, we acquired the office portfolio of the Nederlandse Spoorwegen. At that point in time, it accounted for as in a small overweight in real estate. The reallocation of capital now shows that this is actually the level of capital where we want to be. The overweight in real estate became the target weight in real estate. We allocated more to mortgages and credits. The mortgage reallocation is about 70% underway, executed. The credit reallocation, about 60%, 70% executed. That means we're nearly done on re-risking. Some small activity still flew over into the second quarter.
On this real estate portfolio, as you remember, last year, we added EUR 275 million of equity of real estate capital. That was in a fund on offices. In January, we sold EUR 60 million of non-core assets, and during the first half, we've been very busy signing up external customers. Without giving undue information, I wouldn't be surprised if at the end of the second quarter, we show you that we will be sold out on this fund as well because there appears to be significant interest from institutional investors to participate in this fund. In summary, reallocation of assets to a more risky asset. On equities, EUR 300 million done. On real estate, last year's overweight is now our target weight, which will be reduced a bit if new customers sign up. Mortgage and credits, about 60%, 70% underway in achieving our target weight.
To preempt one of your questions, how did French government bonds feature into your solvency? We did have a portfolio of small government bonds, about EUR 1.1 billion in OATs. They tend to be smaller, short duration French government bonds. The spread widening in the run-up to the French elections had a very small impact on our valuations, had a very small impact on our solvency. We were not concerned about it at all. We continued, or we rounded off the swap spread trade that we announced last year. We traded about EUR 400 billion in government bonds and moved them into long-dated swaps to finalize the hedging of our swap spread exposure. All in all, the reallocation of assets to more risky assets, the completion of the swap spread trade will in the long run support the annual capital generation.
Think about a number around EUR 15 million to EUR 20 million on annualized basis. In terms of your models, we believe it is fair to have that additional number kick in the course of the year. Not so much per 1st of January, but in the course of the year, the run rate capital generation will go up. Think about an annualized number of about EUR 15 million to EUR 20 million because of this re-risking. Of course, depending on your return and spread assumptions. Solvency, page number nine. Eligible own funds and required capital both increased for a net delta in our solvency ratio from 189% to 188%. The required capital up EUR 133 million. That EUR 133 is made up of roughly EUR 144 million increase in market risk, EUR 33 million in insurance risk and EUR 21 million in counterparty risk.
Shows you market risk up, insurance risk up because of portfolio growth, counterparty risk up due to mortgage allocation. You subtract from that diversification benefits and a DTL effect on the higher SCR gives you net-net an increase in required capital of EUR 133 million. We're very pleased against that, a very robust and solid increase in the eligible own funds of EUR 240 million. Net-net own funds up EUR 240 million, required capital up EUR 133 million. We're very pleased that we're, even a challenging rate environment, able to continue to grow our own funds and add EUR 240 million own funds in the quarter. It's consistent with an underlying increase in solvency of about six points in the last quarter. Please note that Q1 capital, very strong, 85% of the own funds. We have no restrictions on tiering. Restricted the scope for Tier 1 over EUR 1.1 billion.
Tier 2 and Tier 3 room, EUR 725 million. We do not have any tier capital usage. Actually, we ended last year with a DTA. Small DTA of EUR 11 million. That flip side now has become a DTL in the first quarter. We're very pleased that the solvency level is strong, the accretion is strong, but also the build-up is strong with a significant portion of Tier 1 capital and no tiering restrictions. Actually, headroom in Tier 1 and Tier 2 and Tier 3, which makes this a very safe and stable and solid number. Like to note, for those of you who have a history at ASR, the quarterly solvency numbers, I mean, I looked it up yesterday evening. Between the first quarter of 2016 and the first quarter of this year, there have been five quarterly numbers.
Our solvency ratio actually fluctuated between 186% and 191% in those quarters. On a quarterly basis, the fluctuations tend to be very small and manageable and have been very, very stable. If you exclude last year's first quarter, we've for about four quarters in a row had a solvency between 188 and 191. A very stable and robust set of solvency numbers. That brings me to the conclusion, to the end of our presentation. Although not before I've said that our solvency at a UFR of 2.2, we've talked about it before as a interesting level of solvency, a more economic type of solvency level. That is now 143%. At a UFR point at 2.2%, our solvency ratio would be 143%. Significantly above 100, significantly above 120, showing you again a pretty robust solvency level. To conclude, strong financial performance in the first quarter.
Great operating profits, strong operating ROE. Some tailwinds, especially in non-life. Estimating the amount of tailwinds is judgment. I would personally estimate that if you exclude those tailwinds, the underlying operating profit was in the EUR 175 million mark, which still corresponds to a 15.5%-16% ROE. The actual delivery is EUR 191. Excluding a bit of luck, it's EUR 175, and that's a pretty robust and solid underlying number, and still an ROE of 15%-16%, and above the quarters of last year. Above first quarter last year and above the last quarter of last year. We feel that the Q1 was a strong and solid quarter in which ASR demonstrated to continue to That discipline underwriting ultimately will bear fruit, and that the generation of capital also allows us to allocate capital to more risk-bearing assets and further support our profits.
We've just come out of the AGM this morning, where all resolutions have been accepted. Most notably also the fact we are now allowed to buy back shares up to 10% of the outstanding shares. We now have a market conformers buyback mandate, but also all the other resolutions have been Approved. It took us three hours, but it was three hours well spent. With that, I'd like to end our presentation on the first quarter numbers. Hope to have given you some color and some feel about what happened, and leave the floor open for questions.
Ladies and gentlemen, we will start the question and answer session now. If you have a question, please press star one. Star one for questions or remarks. Go ahead, please. First question is from Mr. Cor Kluis, ABN AMRO. Go ahead, please.
Good afternoon, Cor Kluis, ABN. I got a few questions. About the share buyback, the 10% share buyback approval. Can you remind us how much of share buybacks you could do this year, taking into account the capital return targets that you have mentioned? Which part of the 10% for 2017? Second question is about P&C, 6% premium growth. It seems that you have been winning some market share. Can you indicate in which product lines that is? Is it across the board or fire or motor? Could you give us some comfort that this is high-quality business? My last question is more on check, if I fully understand it, on the re-risking and the effect on the earnings/cash flow. I thought you mentioned that the re-risking was around EUR 18 million positive operating result pre-tax for one quarter.
You said, I thought for the full year, that's EUR 15 million-EUR 20 million higher for the full year. How can we relate, after tax, of course, but how can we relate those two figures? That were my questions.
Cor, thank you very much. On the share buybacks, we've got a market consistent mandate of about 10% of the outstanding share capital. It does not mean that we're going to spend it tomorrow. It's good to have a decent mandate. We've always said we think it's fair that, especially in a year where the shareholder may be willing to exit and has been demonstrating to be willing to exit, to support sell downs with share buybacks. We think that's a wise way to allocate capital. We've said also as a long-term plan, it's fair to assume that the maximum capital distribution due in any year, on average could be the annual capital generation. Could be a bit more, could be a bit less, depending on the circumstances, depending on the year.
That's a good guidance, which means mentally we have a share buyback budget of up to EUR 100 million. If and how and where we'll spend it depends. We have the headroom. We think it's fair to assume to spend some of it during the year to support and help management sell downs, especially if they come at a discount. We find the ROE on buying our own shares at a discount is relatively attractive. It depends on the time. In the long run, we believe annual capital generation is a good guidance for what you can return to shareholders in the long run. Again, that on top of that, depends also on other allocations, other means of deploying capital. We surely we're not going to be capital hoarders just sitting on capital.
We will think about what's the best way to spend, to allocate it. On property and casualty, it indeed appears that we have been winning some market share. We only have the full market data, but 6% growth in P&C appears to be ahead of general market growth. Where did it take place? It's very much retail business. It's retail business in brokers. 50/50 split between the provincial broker and the mandatory agents. The bulk of the retail growth actually is in packages. Customers sell or acquire motor, home, fire, a combination of products. It's a combi product that tends to grow pretty well. We feel that this is quality business because it comes through brokers that we know. A lot of it is a provincial intermediary, retail combi package, which tends to be, historically has been highest quality business.
Please rest assured that every performance review that we have as a board, as a management board with the P&C team starts with the question, What about margins? What about underwriting criteria? We're comfortable that growth that's coming in is not at the expense of underwriting criteria. The underwriting criteria are as strict as ever. We actually decline more business than we write, than we accept, and we only accept the business that we feel is actually value creating. Finally, on the re-risking. What you're alluding to, Cor, are two different metrics. The EUR 18 million is a direct cash investment income. Coupons, rents, dividends received in the first quarter. They were up versus last quarter. Now, this is actually when they come in. Coupon and dividend quarter, dividends tend to take place in the first half of the year rather than the second half of the year.
Most companies pay dividends in Q1 or in Q2. This is actually upon receipt, you book these results. The EUR 20 million is the increase in long-term investment results according to the OCG definition. In our operational organic capital generation, we have a number of long-term spreads that we assume the EUR 20 million basically multiplies the delta and asset allocation times the long run spreads. The first is the actual received. Have actually received coupons, dividends, and rental incomes. The latter is really the modeled long-term investment income that we'd expect. Better clear. Thank you.
Next question, Albert Ploeg, ING Bank. Go ahead, please.
Good afternoon, everyone. Thanks for taking my questions. The first question I have is basically on the Life operating result, which was clearly quite strong. You mentioned to have basically re-risked the investment portfolio by around 70%-75%, so something extra could still come. How sustainable is this run rate? Can we basically start annualizing this number, or do you think there's still some seasonal element in there or some underlying pressure that makes that conclusion maybe a bit too optimistic? The second question I had is on the individual Life book. You mentioned that due to the shrinking, you have some cost overrun, basically. Does this also make you actually more eager and willing maybe to look for some small bolt-ons in this space as well? My final question is on the re-risking budget.
Is it fair to assume that in the second quarter, there might be a further drag from market risk of around two, maybe max three percentage points? Thank you.
Very good. On the Life business, we believe the run rate is pretty sustainable. The increase is due to direct investment income and an increase in our capital gains reserve. This appears to be a pretty sustainable number. As I said, the tailwind was more in Non-Life than in Life. There will always be some fluctuations in your operating investment results in the Life business due to the fluctuation of when the actual direct investment incomes will occur. There is nothing peculiar or particular to mention around volatility in this number. It appears to be pretty stable number. On the cost side in Life, there's not so much a cost overrun. We don't have a cost overrun in Life, let me be clear. The cost margin, we have a positive margin on cost.
We make a result on cost, but the result on cost is gradually declining as the book declines and as the cost coverage declines. We still have a positive result on cost, but it's less than a year ago. Our response against that is to variabilize our cost base and to move cost policies on external platforms where we're paying on a cost per policy basis. That program will be completed in the beginning of 2018. At this point, the program is ongoing and so we're making programmatic cost, there is migration costs. What you're seeing today is that the cost coverage from the book is gradually declining, and the measures to counter that create a number of one-off migration costs that we'll have to absorb.
Net-net at this point, the cost margin, the cost benefit actually, is actually gradually declining and should be stabilizing as of 2018 and possibly grow a bit again. In terms of Life consolidation, we think it is good for the industry and good for the life insurance sector as Life books generally consolidate because this, after all, is a scale game, so more scale in Life is actually good. Does not mean we're about to go on an acquisition spree in Life. In general, consolidation of Life books on single platforms to absorb the declining cost bases or declining coverage bases is actually a good idea. In terms of re-risking, there's some small re-risking to be done. I said mostly on the mortgage side and on the credit side. Will that be a capital drag less?
First of all, these are the lesser capital-intensive instruments, so equity and real estate consume much more capital than mortgages and spread products. Secondly, if and when we reduce some of our equity exposure to clients, if they participate in the office fund, that will create some capital relief. In Q2, the amount of additional drag or additional allocation of capital to market risk net-net is expected to be very limited.
I can maybe have one follow-up on the share buyback program from Cor earlier. You mentioned clearly to have preference to participate in sell downs. That depends on the intentions of your shareholder in the end. Is it fair to assume that you will first await their decisions and not start, let's say, a normal underlying buyback program beforehand?
That's fair to assume. Look, it's fair to say, in terms of our capital policy, we want to create value for our shareholders organically, inorganically, or by buying back shares or paying dividends. We believe it's fair that with the ROE that we have today, we think we demonstrate that we're doing good stuff with shareholder funds. If you look at the first quarter, the operating ROE was 17%. One can debate the cost of capital, but unlikely to exceed 17%. We think we've created value to shareholders. We believe the sell-down of the government prevent or create a unique situation to support shareholders and buy back some of the shares. It's a unique situation where, of course, especially if your existing shareholder wants to reduce overhang, does so at a discount, it's a great moment for a company to support that.
The sell-down of Daniel Levi is a special moment, a special situation that actually makes it very attractive for us to hand back cash to shareholders through share buybacks. Is this the ultimate program that will last forever? No. It's really centered around the share buyback program of the government. We're living on the assumption that they're going to sell until the last share is sold. It's probably wiser to wait for additional capital distributions and participate in their programs than launch anything on top of that.
Okay. Very clear.
Next question, Steven Haywood, HSBC. Go ahead, please.
Good afternoon, gentlemen. Could you split up on the walkthrough of the Solvency II capital generation? I know you disclosed that it was organic capital generation, business and market developments, but if you could split that 6 percentage points up between the three or any model adjustments or other assumption changes, that would be very helpful to us. On your 45%-55% payout ratio target range for your dividend, how fixed is this range, or are you willing to pay slightly above and below? Finally, you mentioned your first quarter adjusted operating profit around the EUR 175 million, maybe EUR 180 million mark. If you annualize that, obviously you get to about EUR 700 million, then you take away the perpetual coupon and also tax, you get to around a EUR 500 million net operating profit.
Is this the run rate we should expect for the rest of the year and ongoing, or maybe you can't answer that question. Thanks.
On the first question on Solvency II, we believe that the operational cap generation, we find actually the delta in solvency the most interesting element of it. Just how much own funds does one create, minus how much required capital does one actually absorb. The market's used to, or is asking, to bucket it into an organic capital generation and other. We believe that's something you should not follow so much on a quarterly basis, more on a semi-annual to an annual basis, because that is more in line with the long-term nature of the insurance industry. If you look at what happened in this quarter, the 6%, the effect of 6% decreasing in capital, there were no benefits from actually modeling changes. We didn't model up our solvency. We definitely did not. There were no changes in there.
The 6% is a function of underwriting results, long-term investment results, and capital gains and capital appreciation of the investment book. We don't really split it, formally disclose it to the different sectors. Let's assume the 6% divided by two, half of it is extraordinary market development in the first half or first quarter, which are good. They're booked in. The other half is more long-term on the run capital generation that we have based on underwriting and reasonable assumptions on investment returns. Again, there was no modeling benefits. We didn't model up the solvency. It really was all own funds based on underwriting results and markets. We have to acknowledge the markets were pretty good in the first quarter. Splitting those 50-50 is probably a reasonable amount. In terms of our payout ratio, we have an official policy that specifies 45%-55%.
The chance of us going below that, I would find that pretty slim. Actually, it would be real strange it would be below that number. Above that, we think if we get in the situation that we feel that we want to distribute more, we would have sufficient flexibility between special dividends or share buybacks. The ordinary dividend will be between 45% and 55%. It's reasonable to assume that we'll stick to that policy. It has just been approved by the AGM. Dropping below that, highly unlikely. Going above that, we have sufficient means to distribute capital if that is relevant. In terms of giving guidance for the year, we hear your calculation. Does not seem unreasonable to us, but at the same time, we're only one quarter on the way, and we do make a policy not giving guidance. It's too early for us to give formal guidance.
The numbers are well noted.
Excellent. Thank you very much for your help.
Next question, Nadine van der Meulen from Morgan Stanley. Go ahead, please.
Good afternoon. Thank you for taking my questions. Firstly, the underlying operational ROE that you mentioned of 15, 16%. Can you remind us why you're guiding for an ROE of up to 12% given your track record so far? The second question is to have a bit of a better understanding of the income support from the amortization of the current realized gains reserve. Could you remind us of or give an update on what the realized gains reserve now is, but also what is the shadow accounting reserve? Because I think you last disclosed that at the one H results. I think it was just over EUR 6 billion. If you can give us an indication how volatile that is or where that is now.
Lastly, given your capital generation, and particularly given your comment just now of three percentage points longer term, I assume that includes the EUR 15 million-EUR 20 million increase from the re-risking. Given that level, if you annualize that's quite significant, and you have a very solid Solvency II ratio as it is. Can you comment on your plans to grow? In the past you've done successful small-scale acquisitions. What are the areas that you're particularly interested in, or is there anything in the pipeline on the distribution side, funeral and asset management? Do you also consider participating in the Dutch Life consolidation as well? That's it.
On the operating ROE. I said the achieved ROE was 17%. We believe the underlying ROE, stripping out tailwinds, between 15.5% and 16%. We are aware that at the IPO we guided for something called up to 12%. That was basically the average of what we achieved in the years in the run-up to the IPO. It was a reasonable mechanical assessment. We understand the challenge of the markets. That's something that we are actually reviewing and thinking about, although it's less than a year since we were IPO'd, so it might be early days to give new formal guidance about the ROE. Again, we feel comfortable with the current trading that we have. In terms of shadow accounting and capital gains reserve, I need to be a bit careful. Those are official IFRS type of numbers, and we're not supposed to show IFRS numbers in a trading update.
If you go back to last year's annual report, it's fair to assume that the capital gains reserve stayed remarkably stable for where it was at the end of last year. The shadow accounting reserve, which is the unrealized portion, obviously it fluctuates more. It fluctuates more with interest rates. I don't think someone will kill me if I say it's still a four-digit number and it still starts with a 3. That's about as far as I can go without going too far into the IFRS domain. Again, capital gains reserve, very stable. Shadow accounting fluctuates more with interest rates. In terms of capital generation, if you think about the 6% accretion, 50/50, half of it is more longer-term, direct-ish replicable yield. The other half is great capital market runs, and they may continue, they may not.
In those 3%, there is some benefit of the de-risking, but not all of it, because the 3% was realized during the first quarter, so the actual influx of solvency in Q1. The de-risking was executed during Q1. It wasn't completely completed. You may see some support going forward from that number. Finally, Nadine, how to spend that money, do we participate in M&A? As part of our strategy, we always like to deploy capital in the most effective manner. We, of course, do look at M&A situations. Honestly, Nadine, in terms of communication, when it comes to M&A, there are two communication regimes. Regime A says there's nothing to say. Regime B says there actually is something to say. We're still very much in regime A mode. If we shift to regime B, you guys will be the first to know.
I'm saying we always look at files. We're very disciplined. Actually, we turned down more files than we've accepted in the last year because we have very strict criteria. Operating ROE needs to be met. Need to explain to our shareholders that we actually meet or at least can stand up in the face of a share buyback as an alternative. Rest assured, that's something we will apply in any future transaction. Again, there's nothing to say until there is something to say.
Thank you.
Next question, Benoit Pétrarque, Kepler Cheuvreux. Go ahead, please.
Yes, good afternoon. Couple of questions on my side. The first one will be on the de-risking budget. Sounds like a 2017 budget, which has been executed in the first quarter, and you will be done in Q2. What about the long-term de-risking strategy, long-term asset allocation strategy? Are you going to review that again in January 2018? Is there more de-risking potential beyond what you have done? Obviously, linked to that, your Solvency II ratio is at 190%, good level, low leverage, standard formula. Long you will have a good level on Solvency II, can we expect more de-risking going forward? Linked to that, have you seen any compression or tightening on the expected investment returns in the first quarter? By the way, also in Q2, do you see something special on mortgages, for example? Do you see something on other asset class as well?
Second question will be on the combined ratio. I was just wondering if you have seen any prior years' provision releases in your combined ratio in the first quarter, something unusual. The last one was on the asset management business. I think you are targeting a growth of your third-party business. You clearly invest a lot to push the business. How much has been the inflow so far in the year, and how much you expect for the rest of the year? Thanks.
Benoit, thank you. In terms of de-risking, we run an annual strategic asset allocation process every year. We do that in the autumn of every year. Last year we ran the asset allocation process, we actually felt in November, December, that there was room to do more. We continued the analytical work on asset allocation into January, at which point we concluded there was room to allocate a little bit more budget to market risks. At this point, we feel very comfortable with the targets allocation, except where there is some room to do some runway to go in the credit and mortgage side. We have an asset allocation that we feel very comfortable with. Will we re-risk more over time? Honestly, I don't know. It depends on how market develops, how spreads develop, how the available capital develop. We run a process every year.
The next run will be in November in our regular annual strategic asset allocation program. For now, I feel it's safe to assume that this is a reasonable. The asset allocation is where we want to be in the long run. If our book grows, suppose we grow our asset base, it will grow in these proportions. Further allocation to market risk, we feel comfortable with where we are. How do we look at spreads in the first quarter? Obviously, on the equity side, we've seen a great run. Whether equities are cheap or dear or rich, hard for me to express an opinion. Dividend yields appear to be holding up reasonably well. Credit spreads have been holding up also reasonably well. We've seen some signs of compression on the mortgage market. Competition in the Dutch mortgage market is still pretty strong.
There's some sign of mortgage compression. At the same time, mortgage losses are nil. I had a chat with the head of our bank. We have a small bank. They run an EUR 800 million to EUR 1 billion mortgage book. They had literally EUR 18,000 of foreclosure losses on the entire EUR 1 billion book last year. We're seeing some compression in spreads, but also a complete evaporation of credit losses on the mortgage side. Net spreads are still attractive. We believe that the spreads that we're making and are able to generate are still very safe and sound as compared to our long-term investment assumptions. That gives us some comfort around these numbers.
In terms of combined ratio, I can assure you there were no releases, no reserve releases in this book, except real regular when you close a file and you may have reserved a bit more than you actually need to settle the claim, but certainly no extraordinary reserve releases. Also, no rotations. They were a clean quarter. In asset management, the inflow of new asset management was between EUR 300 million and EUR 400 million of AUM in the first quarter. We've just launched our mortgage fund, our mortgage product in the first quarter. That's where we expect to see inflows. We would expect to see some inflows in our credit proposal, and we expect to see inflows in the ASR Dutch Mobility Office Fund during the year. We believe that EUR 300 million in the first quarter is a good run rate for the year. Can you multiply it by four?
Ask me again in Q4. It seems to be ongoing well.
Great. Thank you very much.
Next question, Robin van den Broek, Mediobanca. Go ahead, please.
Yes. Good afternoon, gentlemen. First question is coming back again to the mental budget you mentioned for share buyback. I think the last sell-down of NLFI had a 60-day blackout period of lockup period. That's going to end soon. If they keep that 60 days intact going forward, they could basically sell down in full, probably this year already. Would you still stick to that EUR 100 million budget in that scenario? That's only 2.5% roughly of market cap. You've just asked and received approval for 10%. To me, also given your statements that your return on equity, it's a sensible investment, basically. Would appreciate some more color on that. Secondly, on capital generation, you mentioned that there's an uplift from re-risking of EUR 15 million to EUR 20 million. I guess we should look at the full year, the 2016 run rate of EUR 350 million to compare that.
I think you also mentioned that the 3 percentage points in the first quarter is not fully reflecting that re-risking. If I would look at 12 percentage points of capital accrual in the year, you would get to over EUR 400 million for the full year. I'm still a little bit in the dark on how I should look at capital generation for ASR this year. Those are my questions. Thank you.
Okay, Robin. In terms of the mental budget, we said, given the dividend that we paid out, given the shares we bought back in January, if you link it to the EUR 350 million capital generation we realized last year, the mental budget between EUR 80 million and EUR 100 million. If, how, where we spend it depends on the situation. First of all, I don't know, honestly, if, when, and where the government is going to execute its next sell-down and to what stake. Really is not our decision to make. We're only followers of that. We would like to make sure that we want to participate. You can count on us participating in a next move. How much? It depends. It really depends. We think that a share buyback as part of a government sell-down should be in line with the amount of shares offered.
Were the government to sell its entire stake before the summer, we may need to think carefully how we participate in that. That to be seen. At this point, believe if there's a reasonable gradual rundown, the number we mentioned is probably fair to assume. There could be upside on that depending on the situation. In terms of capital generation, indeed, 3% of the first quarter times four is 12. That will be a significantly high number. We said, look, in the first quarter, some things went really well. The P&C returns were quite strong. We need to see how sustainable they are. It's fair to assume that the EUR 15 million to EUR 20 million is an annual run rate. You could compare it to the EUR 346 million we generated last year.
What the actual number will be during the year also depends on whether the exceptional P&C performance will continue. Things are looking good. Even the first months in the second quarter appear to be okay. Again, we still have 8 or 9 months to go before the full year is over. We feel comfortable with the guidance we've given before on capital generation. We feel comfortable that re-risking will contribute to that. We feel comfortable that the first quarter, actually, we were trading at the level that was above that. If, how, and when that will continue, we can only tell when the year progresses.
Okay, thank you.
Next question, Syed Anuar Akbar, Kempen & Co. Go ahead, please.
I have 2 quick questions. One of them is about the potential share buyback. Will you guys act in open market or would you guys be waiting for an NLFI placement? The second question is on the non-life market. In the motor insurance market, this might be a bit specific, but I just wanted some color on this. In the motor insurance market, we've seen that you guys are the most aggressive when it comes to pricing, compared to your peers. What are the trends that you're seeing over there? Because the market is quite heated up. Do you see this kind of pricing going forward, or do you see something else happening over there? Lastly, on the tier 1 instruments and subordinate debt, are you looking for increasing this part because you have quite a lot of room in this space. Thank you very much.
When it comes to deploying share buybacks as a technique to return capital to shareholders, we believe sell-down events should take center stage here. Buying back shares in the open market, if you are sure that there will be sell-down events going forward. How many? We don't know. What blocks? We don't know. But that they will come, that's pretty sure. We think it makes most sense to wait for those events as opposed to buying back in the open markets. It would be a waste of capital and shareholder returns if you'd buy something in the open market if next to that, an NLFI sell event would take place. Think about centering those around sell-down moments.
Okay.
In terms of non-life, we actually do not see us as the most aggressive in motor. Actually, the opposite. Thinking if you compare us to peers, we're probably one of the most conservative prices. Actually, we have two product lines or brands, two attacker brands that are based on the mandatory agents and really focused on internet only, called Click and Go and [Budgio]. It's fair to say those will experience pretty hefty price increases in the coming months, actually. We're going to use the current benign trading environment to focus on margin expansion. You may see in the second quarter, actually, we're going to further strengthen our pricing positioning in the motor market by holding or changing the pricing on two of our more aggressive channels. In general, we believe we are definitely not the most aggressive in motor pricing.
There are peers and players who actually have much more sharper pricing than we have. But again, our focus will be further margin expansion over volume. In tier 1 instruments, look, we're pretty safe and sound when it comes to capital. We're very pleased with the headroom that we have. Do we look at issuing restricted capital instruments? Always. We always assess the opportunity to attract capital at very favorable terms. I'd say very important, we're very pleased with the fact that we do not have any tiering restrictions. No tier 2, no tier 3 restrictions. And those can come in handy in various situations. If it comes to raising capital, we will make sure that we'll always protect the tier 2 and tier 3 headrooms that we have. We're looking at capital instruments all the time and always.
We're also aware that there has been no tier 1 instrument in EUR issued yet, at least not in the public markets. I've seen something between a holding company and a life insurance subsidiary, but I'm not sure we want to replicate that example.
We do look at instruments out there, and if we do something, we'll definitely protect and make sure there is remaining headroom in tier 2 and tier 3.
Okay. Thank you very much.
Last question, Arjan van Veen, UBS. Go ahead, please.
Thank you. My operational questions have been answered. I just have a quick question on the unit-linked mis-selling that there's been a bit more press. Particularly, there was an article today about two of the main claimant organizations joining forces and encouraged by one of the rulings against you in Den Bosch last month. I'm just curious, could you give us an update as to how you're looking at the situation and maybe give some numbers around where the number of policies were in 2006, where they are today, ongoing outreach programs, et cetera? Thank you.
Okay. When it comes to the mis-selling situation, there have been a few rulings from Kifid, the ombuds, in the first quarter. They have been generally positive for us, the Kifid rulings. There has been one court case called the Woekerpolis affair in Den Bosch, which has been a negative for us. To be quite frank, when our lawyers look at it, we are bewildered by the logic that has been followed. We're still assessing whether we'll take it to the Supreme Court. We haven't made up our mind yet what we do and how we deal with it. We deeply disagree with the outcome, and we question the legal logic that has been applied. How we deal with it going forward is something that has not been decided yet. For the rest, no further cases.
Any case we've seen have been postponed, that were planned, have been postponed further. There's nothing coming up in the very short run. The next cases are scheduled for July, but they may be postponed again at time. At this point, it's too early to say if there's anything meaningfully changing, except for this one court case where we're still assessing what to do with that outcome. In terms of the number of policies, as an indication, the number of active unit-linked policies has fallen back to around 220,000. We started with over 1 million in 2008, when we had the compensation arrangements. Today, there are less than 220,000 policies still active, and the rest has either been settled or has been lapsed. The rest, no real news on this topic rather than some press noise, but no real material changes.
Understood. The 220 you're still actively having an outreach program to those to reduce that further?
Yeah, they will either automatically lapse. Some of them will lapse as part of the compensation program. Finally, for all the policies, we followed the AFM program of customer activation. AFM asked us if you have a customer that may have a defunct policy, activate the customer so that he or she is aware and that he or she makes a conscious decision to either lapse the policy or continue the policy. There we're completely in line with AFM regulations.
Perfect. Thank you very much.
There are no further questions. Please continue.
Well, that leads me to the end of this call. I say thank you very much for your interest and for your questions. We look back at a very strong first quarter, actually a record profit and a record ROE. If you strip out some of the tailwinds, still a very strong, possibly even a record, still a record quarter and still a very high ROE. Whichever way you look at it, a very benign quarter. It's a result without reserve releases, without undue elements. It is just by doing honest insurance business, I would say. Solvency, underlying growth of about 6 points, invested into sharing back with our shareholders and investing into market risk, which will eventually, again, feed into new capital, feed into new profits. With that growth in market share in P&C at very favorable underwriting criteria.
We look back at a good quarter. We look back at a solid quarter. As you know from us, we do not get carried away by 1 quarter, so we stay firmly sober and realistic. The year couldn't have started better. Very good. Thank you very much for your attention, and we hope to see you soon on the road. Very good.
Ladies and gentlemen, this concludes the ASR conference call. You may now disconnect your line. Thank you.