Earnings Call: Q3 2016

Nov 18, 2016

Good day, and welcome to the ASR Conference Call on the Q3 2016 Results. At this time, I would like to hand over the call to Mr. Michel Hilters, Head of Investor Relations at ASR. Please go ahead, sir. Good morning, everybody. Welcome to ASR's call on the Q3 trading update. With me is Christophe He who is going to present the results and is available to answer all of your questions afterwards. But before I hand over the call to Chris, I would like to point your attention to the disclaimer that we have in this presentation and I would appreciate it if you take a minute after the presentation to go through it. And having said this, Chris, floor is yours. Very good. Michel, thanks for handing me the mic. Ladies and gentlemen, good morning to you. Welcome to the ASR press call on our first inaugural trading update for the Q1 of 2016. The numbers are on in the pack and in the press release that you've seen. Our own perspective is in a world where the unexpected and the unplanned is becoming the norm, it's going to be exceptional by delivering on expectations. So on Page 2, you can see the headline numbers. A premium level of €3,500,000,000 operating result year to date of €442,000,000 a result in the quarter of about €150,000,000 operating profit and operating ROE of 14.6% year to date. So we believe we're proud to present a fairly predictable you might have seen boring yet predictable and rock solid profit in the quarter. Operating result again of €442,000,000 €150,000,000 in the quarter, effectively equal or stable to the average quarterly profit in the 1st 2 quarters of the year of 1.46. So our earnings power on a quarterly basis is actually stable and very robust in the year. Year to date, combined ratio of 95.7 percent in the quarter, in the 3rd quarter itself, a combined ratio of 94.4%. Again, to our view, underlining our underwriting focus, our underwriting discipline. To our view, very clean and stable and sensible numbers. We'll give you some more feeling for these numbers in the course of the presentation, but this is kind of the headline. As part of a trading update, we only formally present the operating result. We don't have an audited IFRS figure. But if you wanted to estimate the IFRS number, take the operating number, add about €100,000,000 and change the word pretax or post tax, and you get a pretty clear indication of where the IFRS profit would have come out had we published that number. It's a fairly indication. Let me walk you through the presentation. Let me walk you through the numbers. Start with the business update on Page 3. After we're running an insurance business. And we believe the operating performance of the group, operating delivery is what's behind the operating results. First of all, good progress in one important strategic thrust, namely developing of fee based capital light earnings business. We got a license for the general pension fund at IPF. We called it Het Nederland and Pershund Funds. We obtained our authorization to operate, signed up our initiating customer, and we closed 2 acquisitions, 2 minor acquisitions in the distribution space, Super Herrond, which is a specialist intermediary and disability, especially in the retail segment and Kourins, which is a mid market commercial lines underwriting brokerage business. They have been closed and thereby strengthening our distribution business. So here our strategic objective is to build more fee based capitalized earnings. We made moves. We closed moves in terms of getting a license for the ABF and closing 2 acquisitions. Other strategic thrust has been to acquire smaller and midsized Dutch insurance companies. Last year, we acquired, for example, the Eimdrag and Aksent. As a cause of this, we merged the various legal entities. So all the legal entities in our group have been merged into 1. We now have 2 legal entities, ASR Life and ASR Non Life, except for the Health businesses, which is mandatorily separated. So integrating those legal entities causes a significant operational simplification and increases fungible capital of the group. So the completion of the legal mergers of the various nonlife entities was completed. And we merged Eindracht and Accent. And lastly, we'd like to point to the integration of Accent, zoom in on the latter. We're actually pretty proud of the integration performance that was delivered by the teams. The integration of Accent, the funeral business was completed in the quarter. We converted about 2,400,000 policies on our platform on October 1, actually on plan and ahead of the final due date. To give you an order, if you will, for the amount of work done, we send about 600,000 letters to clients, another 185,000 letters to go that will be done before the end of the year. 600,000 letters are out. Legal entity merged. And in terms of cost savings, we acquired roughly about 75 FT feet feet feet feet feet feet feet feet feet feet feet Es. Today, obviously, there are less than 10 still working in this business. The rest is all voluntarily and on a friendly basis left the combination. But we're running this 2,400,000 additional policies with less than 10 additional FTEs. And the temporary scale up of FTEs due to the migration will also be scaled down quickly. So I've learned in my previous term life the word Autoboss, which means on time, on budget, on schedule. I think the Autoboss qualification is very much in place when it comes to the Accent integration. So we're proud of our integration skills. So before we go to the financials, at the end, this is all about running an insurance business. And we're pleased with the progress in building fee based business and delivering on the integration objectives that we set out for ourselves. Let's move to Page 4, premiums. Premiums increased during the year, dollars 3,200,000,000 year to date to €3,500,000,000 year to date. And in the quarter, it increased by roughly €100,000,000 actually a good performance in what is still a saturated market with maintenance of our margins. In Life, the increase in premiums basically took place in the first half year. So no material movements in the Q3. Premiums increased due to the acquisition of Nivo, the funeral portfolio, which is the next one, Alastair, to integrate it to migrate. Growth defined contribution and there was one larger buyout that we concluded in the first half of the year. So that's no news in this quarter, but to reflect the numbers year to date. In Non Life, growth in disability, growth in P and C, I will elaborate more on that when we get to those segments. In P&C, growth in retail and also in the space, both at very healthy margins. So we are able to keep up our volumes in what is still a saturated and fairly competitive market. So pleased with that. But of course, part is due to acquisitions and part is due to the integration of our buyout constructions in the Life business. Page 4 talks about our Page 5 talks about our cost base, our operating expenses, up from $3.79 to $401,000,000 6% up, but basically driven by the additional cost base of the acquired companies. So if you look if you correctly bought or acquired cost basis, our costs are effectively stable. In that, we absorbed increased costs for finalization of Solvency II implementation, some additional costs regarding the IPO, although the IPO costs themselves classified as nonoperational. This is standard, more weight, more work done by people in the finance department than I can speak from experience. So we've absorbed all that. And underlying, the cost reduction issues are on track, and we're still on track to meet our longer term and medium term cost target. So cost up due to acquisitions, underlying performance in line with what we plan to do, what we want to achieve. Operating results, let's move to Page 6. On Page 6, you can see the bridge and the buildup of the operating result of the group. We believe the performance in the quarter was strong, euros 442,000,000 in the year this year, euros 443,000,000 in the year last year, a profit of CHF 150,000,000 in the quarter. If you compare these two numbers, you have to note that last year, operating profit displayed a slightly different aberrant pattern, mostly due to timing differences that were very specific to that very period, mostly in the pensions area. You're honestly, we'll figure out that operating profit in Q3 last year was 163,000,000 in Q4 it was 78,000,000 So we think it's better to compare the profit in the quarter this year to the average quarterly profit of last year. That means you compare €150,000,000 this quarter to the average which is €120,000,000 last quarter, which means a fair comparison, our quarterly profit is up about 25%. Again, we don't publish IFRS results, but it would be safely above 500 in the year. Add 100 and change the word pretax and post tax and you get a pretty good feel for what the IFRS result would be due had we published it. But again, strong performance. And to compare apples to apples, compare the $115,000,000 this quarter to the average of the last two quarters in last year. Then into our just before we go into the Life and Non Life, the smaller segments, Distribution and Services and Banking and Asset Management. In Banking and Asset Management, you can see a decline in profits. That's basically because of two reasons. 1 is we're making investments to build a commercial asset management operation. We acquired B&G Asset Management. The good news is that franchise is now fully integrated, actually starts to deliver on its commercial promise, winning its first mandate, but their costs are ahead of revenues. Secondly, we continue to invest in new real estate products, a real estate product pipeline. And finally, in the bank, our profit this year showed up in the financial result less in the operating results. So the total profit of the bank is actually stable, but it's in financial result rather than operating results. In distribution, earnings up from €5,000,000 to €12,000,000 basically because of the acquired cost basis. And gradually, you'll see Superground and Coolrins kick in during the year. I think this business is on track to become something like €20,000,000 to €30,000,000 dollars operating profit fee contributor on a runway business. So on a full year basis, distribution segment is in line with our plans. Let's move to Non Life, Page number 7. Premiums increased while the combined ratio remained stable at a level of 95 0.7%. As you can see on this page, continued strong combined operating ratios for all non lifelines. We present the numbers including the water, the hail and water storms impact. So there's no disturbance in the numbers. There's no profit before trouble or what have you. These are the numbers as they are. For P and C, this means a combined ratio year to date of 98.7%. We show the Hill and Water damage. You could subtract them if you want to, but 98.7 year to date and actually that's substantially lower. Health 97.2 percent, disability, 89.8 percent, so continue to run at below 90s. If you were to be interested in the numbers during the quarter, disability during the quarter, we continue to run below 90s, about 88.9% in the quarter. For P and C, combined ratio in the quarter was 97.3. And for Health, the quarterly combined ratio was also significantly below 100%. So the quarterly results without any storms, any reserve releases, clean numbers all ahead of our targets. In that, we're also proud to show a growth in volumes, about €68,000,000 growth in P and C, while the combined ratio is still below our target and growth of about €40,000,000 in disability at a combined ratio still below $90,000,000 So we're very pleased with the combination of maintaining very attractive combined ratios year to date and during the quarter in combination with gradually accelerating growth in top line. Please note that this top line also allows us to further work on margins. You may see in the coming period that we'll use the positive volume momentum to further strengthen the margins, especially in the P and C book. I mean, there are always lines and sub lines where you find pricing could be better. This volume environment, the pricing environment enables us to, if you want, spend a bit of volume on further improving the margins in the P and C book. So we're just very pleased with the Non Life performance and there's room for us to further squeeze and improve our combined ratios. And again, these numbers are clean numbers, including the hail and water storm, and there is no meaningful reserve releases to it at this peak half. So the numbers are what they are, clean, possibly a bit dull, but at least stable and predictive. In Life, Page 8, you can see increase in operating results and increase in premiums. Again, premiums up due to the acquisition of Accent and or Nivo during the year, the buyout increased volume and defined contribution. Actually, we're moving and migrating the indirect customers. Remember our acquisition last year, we're moving these customers to either the asset management platform or the defined contribution platform. In terms of results, up €35,000,000 from €365,000,000 to €400,000,000 year to date. There are 2 ways to look at this. From an accounting perspective, there is an increase in result from amortization of our capital gains reserve and lower amortization of the swaptions costs. Think about a plus of around €30 odd 1,000,000 of that magnitude. And there is about €20,000,000 additional contribution from the acquisitions. And a negative last year, we had around €10,000,000 reserve release in the pension space. That did not reoccur. So the plus in last year did not occur this year, which is a negative in the bridge. So from an accounting perspective, it's kind of plus 30, plus 20, minus 10. That's where you get to roughly the and a slightly higher cost due to the integration of the AgSend business and due to the investment in spending on migration of life. That will bridge from 365 to 400. If you take the organic perspective, result on interest, result on cost, result on mortality, what have you, you have about €25,000,000 of increased result on interest cost and mortality, about plus 25%, plus 15% result on other and minus 5% increase in a decrease in a nontechnical result basically because of lower interest rates. So it depends on how you want to look at this from an accounting perspective or an actuarial perspective. I believe we should say a 30 odd contribution from capital gains reserve, 20 odd contribution from acquisitions and there's a minus 10 from a nonrecurrence reserve release and minus 5 roughly from gradually a one off increased cost base due to integration projects and into the life migration projects. Other point to note, you may not know that we're busy migrating policies to target platforms with a number of important and successful migrations during the quarter where some of the more complicated products of our internal book were migrated to our target platform with significant success. And we're also pleased that the investment in the migration skills starts to work out. Then I guess the page you all be waiting for, which is on Solvency II. I think it was 1, and let's Page 9. I think it was 1, and as you said this morning, who cares about profits when there is a Solvency number? So Page 9, there is Solvency II. Our number about 188% based on the standard formula. You could see our own funds of CHF6.3 billion required capital CHF3.3 billion at the end of the third quarter. During the quarter, a number of things happened. As you may recall, we reported half year results of 191, so on C2 number. What is the basically high level bridge, 191. We signed a mass lapse reinsurance contract. That contract is still the actual solvency recognition is work in progress. Think about about plus 3.5% contribution to the solvency at this point in time. There is still some work to be done there. So think about 191 plus 3.5 percent, then the decline in the volatility adjuster and the change in the reference portfolio, remember the VA declined from 18 to 10 basis points, including a change in the reference portfolio, that took out about 10 points out of our solvency. So think about 191 plus 3.5 minuteus 10, that will give you to 184.5 as a kind of baseline number. During the quarter, we increased our mortgage book a bit. We absorbed new mortality tables. Together, that is another cost us more or less 1.5% of solvency. And the remainder, the delta, is actually organic capital creation plus reflection of lower cost in our best estimate liabilities because of the integration of the funeral business. Overall, really, the development from $188,000,000 per the half for this quarter from $191,000,000 to take into account the Maas Labs contract, the 10 basis the 10 points headwind from the VA increase in our mortgage book is all consistent with the capital generation that we strive for and that we have delivered in the first half year. So we believe we're on track with a resilient solvency level and we have an organic capital creation as RISD stable and is reflected in the existing number. Please note continued strong tiering. Tier 1 capital loan is about 84% of the owned funds. Had we only had Tier 1 capital, 157 percent SCR ratio and still significant headroom for additional restricted capital. We've got €1,000,000,000 Tier 1 ratio and well over €600,000,000 of Tier 2 capital. But again, the key message from us is a resilient level of solvency able to absorb headwinds from volatility adjusters due to organic capital generation capabilities in the group in line with what we reported previously. All our insurance entities after the legal mergers are well capitalized. Think about a number a bit north of 180 percent for all our insurance entities, so able to upstream capital if and when needed. That brings me to the end of this short presentation. Page 10, continued strong result, as we said, in principle, an uneventful quarter. We jokingly see say, people went to the office, sold the policy, paid a claim, created capital and went home again. So pretty clean, solid yet boring results in the sense that we produce lines results in line or better than our targets, able to absorb volatility in our Solvency II portfolio. We believe our results are founded in tangible operational improvements. Witness our operating ratios, our combined ratios, witnessed the inclusion of the acquisitions, witnessed the emerging contribution from B and G and witnessed the and on time, on budget, on targets at least for the 1st three quarters of the year. We'd like to point that we've managed to grow our non life premiums by about €75,000,000 €71,000,000 about 4% whilst media combined ratio targets. And we see there's room to further improve the quality of our book. Our operating ROE at 14.6%. Our IFRS ROE, think about it as a number just north of 19%, including capital gains, on a high solvency at 188%. So pleased with those results as they are again clean results, not pro form a numbers or profit without misery. These are the numbers as they are and included with the Helene and Walkerstrom results. With that, I'd like to end this short presentation and short set of comments. Happy to take your questions. The first question comes from Mr. Korklajs. Please go ahead. Good morning. Korklajs, ABN AMRO. A few questions. First of all, on the Solvency II ratio after the U. S. Elections, can you give some indication what it is? Because based on the sensitivity of the half year results and rising interest rates, it's marginally negative, but it was positive again. So should it be around the current level of $188,000,000 That's my first question. 2nd question is about the merger of legal entities in the quarter. Does it have any impact on your Solvency II ratio in this specific quarter? And my last question is about, the Non Life business. We've been reading, of course, that companies like Independent.nl have been saying that the premiums on car insurance are rising by around 20 percentage points. We see your growth of non life premiums. What's your take on that? And can you explain what you see in the nonlife insurance market, especially in the motor insurance market? Thank you. Hey, very good. Kare, thanks. On your solvency, we thought about defining something like a solvency before Trump. But I think that's not an unofficial metric yet. Pro form a. Pro form a number. No, hard to say. I guess the impact we had on our solvency during after U. S. And X was increasing interest rates, slightly increasing volatility adjuster, slightly increasing equities. And I think I don't give a number of I think the net net is a small negative. I think the increase in yes, we're long duration versus the Solvency II curve as is. We don't do for COVID prudential hedging using the 4 0.2 QFR as true, but with slightly longer duration because we think the economic reality is a little bit different, which means that if rates go up, that will shave a bit of our solvency. At the same time, the increase in volatility will help us. The VA and Credit Suisse will help us. I think the increase in equity will help us. So I don't have the number yet, but I think you have a small downward adjustment to your solvency because of our long duration position. If you think about a world with in an ex UFR environment or a lower UFR environment, actually, our solvency has gone up. So almost some downward push on your headline solvency, but a significant strengthening of your economic solvency. And ultimately, for this industry, gradually rising interest rates is good. On the legal merger, the legal mergers themselves did not affect the Solvency II ratio as is, but they increased the fungibility of capital. Basically, when you merge with legal entities, there is a diversification benefit that was recognized at holding. That diversification benefit is now recognized in the legal entities. So the S2 ratio as such doesn't change, but it crystallizes the diversification benefit and pushes it down into the odds where you can grab it and becomes actually something meaningful. So that's a positive on that one. On your third number, on the Non Life premium development, yes, we're seeing premium increases, not with the level Independencies. Independencies is a pure online player and is overrepresented in the some of the pure direct players. And we felt some of the pure direct competitors were severely underpricing business. So you see in the price increase across the board in motor, most heavily when it comes to the pure direct players because they were mostly behind. So that increase there you see that 10% to 14% increases are not abnormal. Then the broker based segment where we were active, we're also seeing some premium increases, but not to that extent simply because that business was less off in terms of its pricing than where the pure Internet players were. But there is price support and that will gradually feed in. I mean that price increase in fact happened during the year as the year progressed. So you see that effect gradually going into your P and C premium levels if the year progresses if 2017 actually starts. Okay, wonderful. Thank you very much. The next question is from Mr. Matthias de Wit at KBCS. Please go ahead. Yes, good morning. The first one is on consolidation. Are you planning to participate in any large in market M and A transaction. So could you share your view on this topic please? Or would you rather remain focused on smaller deals like you have been in the past? So that's the first question. The second is on the organic capital generation in the 3rd quarter. Could you provide the number excluding the impact of the lower cost in the best estimate liabilities you referred to during the presentation? And it would also be helpful in this respect if you could provide some sensitivity around rising interest rates on the organic capital generation because I guess that the number for the organic capital generation is based on the balance sheet at the end of the Q2. So it could be helpful if you could update us on that. And lastly, could you provide an update on LAG I guess your assumptions are quite conservative now that profits are relatively strong and that capital and liquidity at the HoldCo is also good. So yes, and linked to that, there is a DNB review ongoing on this topic. So could this lead to any changes? Thanks. Very good. On the first question on conservation, Matthijs, I'll give you our group policy. And as a matter of policy, we only share our policy. We always look at consolidation opportunities in the market. That's what we're paid to do. That's the fiduciary responsibility. Whatever we do, we do it from a very risk perspective, risk appetite and objective perspective and a third element of our policy that we never comment on those. So I'll leave it with that. No comments on acquisition translation whatever, whenever. Secondly, when it comes to organic capital generation, we guided the market at the IPO of a 9% annual capital generation as a rough guideline, we believe the Q3 was perfectly in line with that guidance. I think personally when it comes to those numbers, there's less relevance in producing those bridges every quarter. I mean insurance is a long term business. These numbers kind of will fluctuate over time, so we shouldn't get carried away. But I can share with you that the organic cap generation based on our own reasonably conservative assumptions actually do or kind of were maintained as per the guidance that we gave during the year. So consider that to be very stable and resilient. Impact of rising interest rates, yes, that's in principle good. Although, of course, there's always interplay between stock and flow. If interest rates go up, the way we're hedging as core set, that will eat a bit into our stock, but improve a bit our flow. So in terms of if interest rates move up by about 20 to 30 basis points, a significant portion of that will feed into the organic capital generation. It may reduce my market variance. It will be a small drag in market variance. It will increase my organic capital generation simply because the UFR unwind will be less. And the way the industry models this, the run rate will go up. So increasing interest rates generally pushes up organic cap generation. It's not a one for 1, but very close to a 1 for 1 comparison. So any one basis point higher government bond yields is very close to 1 basis point higher, count generation if all else equal, why the spreads stay the same. But in Q3, you were like that number is based on the balance sheet at the end of Q2, I guess? Exactly, exactly. Yes, yes. So with rates now rising, it's fair to assume that you could do a bit better than your 9% guidance for the on a yearly basis or It surely helps. It also depends on how frequently do you update your model. But underlying it helps. Yes. And on LACDP, I think our LACDP for the group is 53%. So we round all the legal entities to either 25%, 50% or 75% and then take the weighted average of that. So, it's just above 50%. We feel very comfortable with that. I think the D and B review to us could be ongoing, but I don't think it's not in my place to comment on any regulatory reviews. I think we feel very comfortable with our lag DT. I think our next step is to further underpin or substantially the lag DT by moving the DTLs into our life balance sheet. There are a number assets where we have deferred tax liabilities, which are held by real estate entity. So we're working on getting those assets, which are helped indirectly by the Life business and having them help directly by the Life business so that the detail of those assets can actually straight and directly support your LACBT. Let's finish that project before we give a further update. But we think at this point in time, the 55% or the 50 odd percent is pretty well supported. Okay. Thanks a lot, Chris. The next question comes from Mr. Moussedi from JPMorgan. Go ahead, sir. Hi, good morning, Chris. Just a couple of questions. First of all, the sorption related earnings, can you just explain a bit more on what this is? I mean, is it going to stay here? Is it going to increase in next year? Is it going to decrease in next year? So So I'm trying to understand what this is related to and what will be the moving parts going forward with respect to the $30,000,000 that you flagged? So that's number 1. Secondly, with respect to your capital generation, just going back to Matthias' point, I just wanted to check one thing. So at the ITU you flagged, you guided for 9% capital generation. Post the massive decline in interest rate at first half, you said capital generation will be 9%. And now when rates are going up, you're saying capital generation could nudge up higher. So what are we missing here? Is it that your downside protected on falling interest rate and you have full exposure to upside on rising interest rates? Any thoughts on that? What are we missing here is so that's what I'm saying that's my second question. Thank you. On the swaptions, basically, the €30,000,000 is the result from what we call a shadow accounting methodology, where basically if you record a gain on fixed income and derivatives that are invested against our life liabilities, that capital gain is moved to a capital gains reserve and amortized over time according to the lifetime of the corresponding liability. So, the €30,000,000 is actually an amortization of a gain over a multiyear period. So think about this contribution from capital gains to be pretty resilient and stable for the coming years. Eventually, that amortization will run out. But the liabilities that it's put against are pretty long. So think about this capital gains or lower amortization cost of swaptions to be linked to maturity of the liabilities. So that's something that's going to stay here for some time, not till the end of our lives. But the liabilities in the life book tend to have a pretty long duration. So it's going to be here to stay. And sorry, just one more thing, just to follow-up on that. So is it based on where interest rates are at the moment? And so because see, this year the issue is this year, the interest rate has been amazingly volatile, up, down, up, down. So how should we think about this number for next year? Should it be going up? Should it be going down? Based on my assumption, if it is linked to interest rate, it should be going up next year. If you realize a gain, a capital gain on an instrument or a derivative, right, that capital gain is booked into a capital gains reserve, which is amortized over time. And to be very specific, the capital gain on the fixed income bond is amortized at the corresponding insurance liability. The capital gain on the swap is amortized of of the lifetime of the derivative instruments. So if you realize a capital gain, this adds to a capital gains reserve release. That's the principle of shadow accounting, right? Yes. Going forward, it would be great if we can get a bit of color about what you're realizing. So at least we can know what is the stock of capital gain that will be covering the shadow accounting in earnings. So yes, because it's very difficult to forecast just on that without that basis. So just such a request. It's something we will share more around the full year disclosure, which is nothing useful for a quarterly result. But if we think about a capital gains reserve at this point in time, that starts with a $3,000,000,000 it's over $3,000,000,000 The realized capital gains reserve is around €3,000,000,000 plus at this point in time. Yes. Thank you. In terms of capital ratio, look, the way this thing works, and it's a bit of a in all honesty, a quirk in the way the industry thinks about this. You take your asset mix, you multiply it by an investment spread over the discount curves. You've got a discount curve in your solvency for each asset class you define as spreads. So you multiply the asset mix by a spread and you add operating results from your insurance business to it. You take out costs and then you've got your organic cap generation. And you take out for that's what the business generates, then you add the release of capital from your book, SCR risk margin release, and you subtract the UFR unwind. That's roughly how the industry has defined the organic capital generation. When interest rates move up or down, if they move down, right, that increases the UFR unwind and it generally puts some pressure on the excess spreads that you make over the discount curve. So during the first half year, of course, there was when rates fell, we believe that 9% was actually a feasible number, and we still believe that 9% can be realized. But if interest rates go down, there is pressure on that number. If interest goes up, that number tends to be supported. You just don't keep on adjusting your number every week, every day on interest rates. So, formally, we do this once or twice a year, beginning of the year and the second half of the year. At that point, also, we recalculate the U. S. Bar drag to be online or be at market where the UFR drag is. So, in the first half year, we took into account some of the increased UFR drag. We presented the half year numbers. I know some of players in the industry only do it once a year and maintain the UFR drag as per 1st Jan. We do it twice a year. So the number we produced in this quarter actually is still consistent with the 9% guidance that we gave, where we have based ourselves on the balance sheet as per the 30s of June. And at the 1st Jan, we'll recalculate the numbers. So underlying this, 9% is stable with some downward pressure in the first half. And actually, some further if interest rates continue to move like this, support going forward. Okay. That's clear. Thank you. The next question comes from Mr. Stephen Haywood from HSBC. Go ahead, sir. Good morning, Chris and Michel. Thank you for taking my questions. It's in terms of Q4, what kind of seasonality do you usually see in Q4? I'm assuming there's a small pickup in claims in certain business lines due to a winter impact. But considering you're so far ahead of sort of the run rate at the 9 month stage in terms of earnings and also on your operating ROE. I just want to see what kind of potential negative or seasonality there might be in the Q4? And then I noted in your holding and other business line, in the Q3, it's reduced from $20,000,000 last year to $15,000,000 this year. Is there any specific thing here? I guess there might be some removal of project costs or Solvency II costs. But if you could let me know what is specific here, that would be great. And I just wanted to confirm on your shadow accounting. You've got a realized gains reserve of over €3,000,000,000 And I kind of assume that, that will be amortized over 15, 20, 25, even maybe longer years. If interest rates go up, you probably won't be realizing anymore And therefore, that realized gains reserve probably won't move much in the future. Am I correct on this? Thanks. Okay. First question, Stephen. Thank you. Stephen, on the seasonality, limited seasonality in the 4th quarter. Interestingly, we used to have in the 4th quarter the receipt of any benefits from the health equalization system and those are for premiums. That will happen in the Q3. So in the Q3 this quarter already, we took in the operating results. The receipts from the health equalization system previous years and the provision for future price setting. So and that's one. So, no health seasonality this year. That was already moved into the Q3. Typically, yes, there could be storms in the Q4, but history tells us that the storms used to be in August. This year, they have it in June. So I think there is not so much of autumn is nearly behind us. So I think the storms, by definition, unpredictable. But historically, they happen more in Q3 rather than Q4. So except for U. S. Election and Intellia referendum, I can't see any seasonal patterns in Q4 happening. So there's nothing on the cards that I am at this point aware of. No seasonals that we at this point should take into account. On the holding costs, mainly it's lower pension charges. We had lower pension charges in this year. That reflected the lower holding cost expenditure. In terms of the capital gains reserve, please note to make the story whole, we have a realization or revaluation reserve that is unrealized and part is realized. The realized portion is over €3,000,000,000 and also an unrealized with basically the delta in market values. If you trade an instrument, the reserves go from unrealized into realized, right? So there's an overflow in these two buckets. Will it go up? Will it go down? It depends on whether you trade securities, whether you trade bonds, whether you trade derivatives. Now as a matter of policy, we don't trade and really we do not trade these things to manage that reserve. We only trade securities to optimize our investment position, to optimize our hedging position. And the capital gains reserve is a byproduct from that. So will it move a lot? I don't know. I don't think so personally and honestly, because we're pretty comfortable with our current hedging position. So we'll amortize over time. We will amortize a little bit less than 25 to 30 years, probably a bit shorter. But again, if rates go up or rates go down and you change investments, there might be additions or subtractions from that reserve. For us, I think it's fair to assume it's going to be relatively stable, except if you have very wild swings in interest rate moves and you roll over derivatives, you roll over bonds, then there might be new realizations. But that really is a byproduct from the way we hedge our book. And I like to think about it like this. In a matched book, we don't write a lot of new policies. If rates go up, my direct investment yield goes up, but there may be some drag on my capital gains reserve. And rates go down, the opposite happens. So effectively, the combination of your direct investment in your coupons and your interest rate receipts plus amortization of capital gains actually makes for a pretty stable number and they complement each other. They're communicating vessels if you wish. But think about a substantive unrealized revaluation reserve and a substantive realized capital gains reserve that will amortize. 20 to 30 years is probably on the longer end, but it depends on the instruments and the life obligation was backing it. That helpful, Stephen? Yes. That's absolutely brilliant. If I could just follow-up on the health equalization reserve. What sort of impact did you see in the Q3 from this? On net net, we have as a matter of policy, what we receive, we give back to customers. Okay. What we received was given back. And sometimes, there's a small difference between it, a small net positive as a reward for our capital. But basically, by and large, at group level, the impact is actually very limited. Yes. Thanks very much. Next question is from Mr. David, KBCS. Go ahead, sir. Yes, thanks for taking my follow-up questions. On the Solvency II ratio, could you provide some indication about the legal entities where we are following the merger of the life and non life entities? And in this respect, is there anything you could share about how we should think about remittances for the second half of the year? So you monetized or you monetize diversification benefits. So could you upstream that to the Holdco? Secondly, you referred to Solvency II implementation costs during the presentation. Do they include any costs linked to your to fine tuning of your ECAP model or to the development of an internal model? Or do you stick with your standard formula approach for the time being? And then thirdly, on the asset portfolio, what were the most important changes during the quarter? I remember you plan to re risk a bit following the derisking at the end of Q2. So what happened? And what are your plans going forward, please? Thanks. Matthias, on Solvency II and legal entities, we merged our legal entities. So we have 2 core legal entities, as a Schade and as a Liebe, which means that we dissolved effectively Accent, the Eindracht, the Opece and the Amerswortze. Eindracht and Accent were merged into AZ Leve. AZ Scherge, Aze, the Amsofit and the Obezho merged into 1. Again, that didn't really boost solvency as such, but boosted fungible capital. Think of a number north of €100,000,000 of in these diversification benefit that we pushed through crystallized in those legal entities. The Solvency II standard formula number of those entities per quarter, both above 180%, so very strong solvency. So there is no link, no as far as we understand, no limitations, no blockage as to the remittance of cash to the holding. Now one perspective when it comes to cash at holding as a matter of policy, as long as the operating entities exceed the cost of capital and create value, I don't need to hold lots of cash at the holding. I think there's an element of, excuse the word, holding cash fetishism out there where people like, any European holding is worth more than €1 at the up call. Well, as long as we deliver an operating ROE, mind you, not a full ROE, but an operating ROE of 14. Something percent, then I think there's value to have the capital at the outsourced. Secondly, please note, we're in one jurisdiction with 1 regulator, so there's no equivalent rules or issues to transfer money across borders. Secondly, the Board of ASR, the Executive Board is also the Executive Board of the OXXOs. So I can see some of my colleagues moving cash back to holding, moving from one country to one to the mother country, they have it all in one jurisdiction. Or if you have different statutory boards, there might be a way to discipline boards by upstreaming capital. In our situation, if I were to discipline if my left hand were to discipline my right hand because my left hand is at the holding and the right hand would be the op goal, that would be fairly sign of schizophrenia. So we believe because we run both the holding and we run the operating companies, there's less need to upstream every single euro to the holding as long as the business delivers its cost of capital. So we've given a group cash target, which we will we're on track to deliver. And secondly, as long as the OpCos are sufficiently capitalized, as long as remittance is actually acceptable and happens and takes place on a seamless way, I am comfortable to generate value, generate profit and keep the cash in the up close. So our capital at holding is at a target level. We'll get there. And for us, I'm happy to make money in the business. When it comes to Solvency II implementation cost, some is spent on ECAP optimization. The most actually is spent on model validation, on data quality and on installing or creating the ability to deliver quarterly QRTs to our supervisor in a very short time period. So yes, there's always work to be done on ECAP, but it's more spend make sure that all the models are fully validated, that the data quality all is in place. That's very useful for whatever you want to do. If you ever want to move to a different type of model, internal model, you have to go through it anyway. So that's, in principle, money well spent. And for that, it's about streamlining the reporting process. But the amount of reporting requirements from Solvency II every quarter is pretty onerous, and it has to be sped up as well. So it's also investing in what I would say speeding up the delivery of a lot of documents every quarter to our supervisor. And that whole process needs to be automized, needs to be put in place. That's where most of the spend is. On your final question on reorder risking, we added some more exposure to our mortgage book. We've added some exposure in equities during the quarter. But on a it doesn't move the needle as such. We moved we re risked a bit after Brexit. We felt spreads and risk reward is completely out of line. So that's why we took some rerisking in the Q3. There's more an increase in the mortgage book and that's kind of where it is. All right. Very good. Thanks a lot. The next question is from Mr. Van Veen, UBS. Go ahead, sir. Thank you. Two questions, if I may. Firstly, on solvency management actions. So on the mass lapse, at the half year, you said the impact would be roughly 5%. You're saying it's 3.5% now, but I think you indicated there's more to come on that, so just double checking that. Other than LAC DTU, which you referred to, is there other sort of any major things you can do managing action wise to improve solvency? And I assume that despite your comments about internal model just now, you're not really that that's not really on the agenda on a medium term basis? The second question is on the Life Insurance business. It's 80% of your profit, yet you give very little disclosure around that in the quarterly and then also there's a less disclosure on that in the half year. So I'm just asking if you can give maybe a bit more color there on the underlying life insurance margin. And also request as per one of the previous questions, if you could think about giving a more regular update on life insurance margin because at the moment we only get it once per year and it's obviously a key driver of future earnings. Very good. Ayat, on Solvency and Management Excellence, indeed, we at first half year, we said Solvency II is now 191. There is a mask left contract pending. Pro form a, we said 5. The real the final calculation, the finalization of the contract was around 3.5. And there's some work to be done to finalize, but this is the order of magnitude where it will come out. So we feel more comfortable when we finalize the solvency impact to share something about it. But there's still some work to be done. In terms of LaggedyT asset, we are working on moving deferred tax liabilities into our life legal entity. As we try to stay away from what I say assumptions based solvency as much as possible, but base your solvency on tangible elements like a tangible deferred tax liability that is identifiable with an investment entity. So in terms of management actions, we believe that the best management action actually is to make money. So think about Solvency II management actions to improve our combined ratio, to improve our investment assets and to create organic capital. That's why we believe the best way is to manage your solvency at this point. In terms of Life exposure, yes, we've heard you, we've heard others as well. We'll take it into account in the full year results. I can give you the results. The Life business are in line with the Life Insurance margin that we guided for the IPO, so 3.4%, 3.5%. What we're seeing today is actually in line with that number. But that's something we'll develop more clearly in the full year results. But we've heard you on this argument. Okay, perfect. Thank you. The next question is from Mr. Horsten, Kempen and Co. Please go ahead. Yes. Good morning. I have a few questions remaining. One is on your first APF customer. Congratulations on that. And I was wondering, has it changed the capital you have to allocate to this contract? Understood it was an existing contract of Eindhard and that it now moved to the APF. So how are the dynamics in terms of allocated capital to contract? And can we expect more deals like this? Or could you give a bit more color on the pipeline? And my second question is more on some clarification. If I look on a quarterly basis to your operating result in Non Life, I see you report in Q3 €37,000,000 and in Q2 it was €30,000,000 And I would have expected having a very low combined ratio in Q3 compared to Q2 that the Q3 number would be somewhat higher. So what am I missing here? Was it something in Q2 in terms of investment gains or anything else? Thank you. Okay. Thanks. Have If they move, they will release some capital. But again, yes, in principle, moving a customer from a DB contract to an ABF releases capital. So that, in principle, is a strategy for us to see if we can migrate larger clients to the ABF. One contract itself will not change our capitalization. If we have €3,300,000,000 of required capital in 1 new contract, we'll not change our SCR itself. So but in principle, you're right. If you move customers from DB to APF, that will release capital. Actually, I mean, I'm even more interested in getting new customers signed up to the group at all on a capital light basis. So our first effort is to get new customers signed up. So there's sales effort going on to engage with pension funds to get them to the APF. And at the same time, we offer this to customers, especially those with expiring DB contracts that have to look at either absorbing a significant premium increase, and the APF becomes a very attractive alternative. When it comes to the 37 profit in Non Life, I guess what you're saying is in the first half of the second quarter, it was €30,000,000 but you did absorb the hailstorm. So how does that work? Well, there are 2 things in play. 1 is in the second the third quarter, the direct investment income on P and C was a bit lower simply because near the short end of the interest rate curve is still under pressure and kept declining. So there's lower direct investment income. Secondly, in the first half, as you may recall, we had a hail and water storm and we had a small reserve release because the way we account for mandatory agents and to be very specific in mandatory agents or volmacht in Dutch, we used to have a methodology where the premiums were only covered in part and claims came in, in full. So we actually understated the profitability of those mandatory agents, but fully taken us down any claim. Now we think how the pro rata element of the premium received. And we amended that to give a better view on the profitability of that product and give a small one off reserve release. Actually not that big, but the combination of lower direct investment income plus a one off in the first half year by moving to a more representative and a more appropriate reserving model, especially in the Walmart and the military agent area, supported non life profits in the second quarter. Okay. Maybe if I may one follow-up on this APF required capital. Could you give an indication, let's say, if under the old contract your required capital would be 100%. What would be the required capital under the APF contracts in terms of percentage relative to the 100? I don't know by heart rate. It's something really less than 25%. I haven't done the numbers, but I think it's very low. I mean, we only hold operational risks, so probably even as much as that. Yes. Okay. Thank you very much. The next question is from Mr. Plueg from ING. Please go ahead, sir. Yes. Good morning, all. I'd like to come back to some answers given on the organic capital generation. It feels to me that basically that your asset class spreads assumptions are quite conservative and that you basically are over earning on what you assume in your organic capital definition. And in the Solsys II roll forward, basically, the over earning part goes into the bucket, I guess, of market developments, where we basically put no value to when looking at ASR. Because basically, the 9% still is around €300,000,000 capital generation. So in reality, is that not higher? So you're not being too conservative. And I understand you will not review those kind of policies in the Q3, but is that something you might contemplate with the full year results to maybe review your excess spread assumptions? Albert, I fully concur. I think the spreads we gave are relatively conservative, especially when you compare it to some what's happened you see in the industry. That means there's overflow in the market variance bucket. Now I can be very cynical like should give a value to it. That's kind of what the analysts are supposed to do. But let's be fair. We are looking at our spreads. I think the quarterly trading update is not the right time or the place to make those amendments. But we are reviewing the spreads in light of what actually is actual in our investment portfolio. So that's something we'll probably do in the first in the full year results. I want to make sure that the 9% guidance that we gave is based on those conservative spreads. I don't want to I'm not in a position I don't want to be making my target by changing the model. No, we make the target within the model and then we may change our spreads. And I agree that today there is cap generation in the market variance bucket that people attach no multiple to. I wish people would, but that's anyone's choice to do so. But for us, it's something we will report back to you on the full year basis. I think the 9 month trading update is not the time to do that. But please note that the 9% is within the existing modeling assumptions. Okay. Thank you. That's very clear. The next question is from Mr. Petrarque from Kepler Cheuvreux. Please go ahead, sir. Yes, good morning, everyone. First question is on the sensitivity to increasing interest rates. I think in H1, you've shown a negative sensitivity, slightly negative. Are you planning to change your aging policy looking at what is happening on the market now? Are you kind of still keep the aging unchanged there? And then second question will be on the Non Life. I mean, you've been talking about stronger volumes and margin improvement potential. How much improvement of combined ratio are you looking for potentially looking at potential repricing? Thank you. Okay. Very good. On hedging policy, we believe we produced in the first half or about half year numbers our interest rate sensitivity. We believe in the concept of discipline. So, I don't think we will not be changing our policy based on what we're seeing in the market. I see interest rates go up, but I can also envision scenario where the whole thing collapses and if it goes down again. So, we believe very strongly in maintaining our policy in the sense that there's no point in hedging against a curve that implies a UFR that you will not make. So, we have hedging policy, as we said, where we take into account the solvency curve, we also take into account other levels of UFRs that we deem to be more economic. The one thing we do and we are doing is reducing the swap spread exposure. Please note that the swap spread is wider than the last years. That has been beneficial to most insurance companies because your liabilities are discounted at swaps and your investments are part in government bonds. So that's something where we feel the swap spread exposure could be that gain could be locked in, if you wish. That's something that's on our mind that we're working on. But in principle, directional exposure to curves interest rate as such, we believe in maintaining a very disciplined approach across the cycle. That has helped us in the past, and we will stick to that. In terms of online, whether you want your combined ratio to be, well, as low as possible, I'd say, within what's reasonable to our customers. I think we've given you targets. In Equity Store, we stick with those and we'll try to outperform those targets. So far, we've been able to be successful in outperforming the target combined ratios and achieving volume growth. That to me is as close to Nirvana as you can get being a P and C operator. So that's what we tend to do. I think at this point, we'll focus on I think there's room margin improvement. But at the end of the day, there's always room to if margins are like this, then it becomes attractive to grow a bit more in volume. But again, we stick to our margin over volume policy and we're pleased with where we are. Great. Thank you very much. Next question is from Mr. Moussedi from JPMorgan. Please go ahead. Hi, Chris. Sorry for a follow-up on this shadow accounting again. I'm just trying to understand the bit that bit a bit better. So you mentioned that it is nothing to do with I mean, see, ultimately what matters is you have a matched book, so your yields are more or spreads are more or less locked. Now if you realize the capital gain, okay, ultimately your current earnings will go down, but then your shadow accounting will help you to make up for those earnings. So I don't perspective. So why is this a positive delta in your earnings is what I'm trying to understand, like $30,000,000 is a positive delta, I. E. Ultimately, it should go down and then come back again. So that's the first part. Just to on a simple example on this would be, in my view, the way I'm thinking is, let's say you have a bond at the beginning of the year and there is an interest rate collapse, so you sold it, realized all the capital gains, put it into shadow accounting. Now next day bond yield go back to the same old rate. So ultimately, you'll be sitting on an unrealized loss. So shouldn't that unrealized loss be compensated by that shadow accounting net net zero benefit on IFRS? So what are we missing here? Any thoughts on that would be good. Sorry, it's a complex topic. So I just want a bit of clarity. Thank you. Thanks. Ashik, very good. Thank you. On the Hydrocan, I think in your first point, in the long run, that's true. I mean, the rates and direct deals are more or less communicating vessels, although there may be timing differences in the way a lower coupon works out and the way the capital gain works out. So in principle, in the long run, that's actually true. Although in the short term, that may be different than maybe development for them. So in this point in time, I can see a continued contribution from shadow accounting reserve release, capital gains releases into our P and L. Also because, for example, if you sell a bond, realize the gain and then move into mortgages, right, the mortgage will deliver a higher spread. So it's not all it's not completely one for 1 if you sold the bond and buy another one. If you sold the bond and move to mortgages, there are other effects playing through. So our policy is to keep the direct investment income as high as possible by, for example, increasing our mortgage exposure by investing in real estate. So that pushes supports the direct investment income. And then there is the realization from the capital gain if you buy or sell a bond. So in a like for like transaction, that's actually true. But if you sell a bond and move into mortgages, there's an additional effect of a higher coupon. So that there's an interplay on the investment mix as well. The combination of that gives us comfort given where we are and what we know about the capital gains reserve and the projection and the level of our coupons and direct investment income that there is a substantive contribution to our P and L for the foreseeable future if rates stay where they are. If rates go up, then of course, that only affects the unrealized portion of the capital gains reserve. And if you have realized those, it moves into the capital gains reserve. So please, if you have a €3,000,000,000 capital gains reserve plus an unrealized capital gains reserve of a similar magnitude, it takes a bit of time before you actually move into a very negative contribution from the capital gains reserve. So yes, in principle, you're fine. You're right. If rates go up, the opposite happens. And again, you have a significant chunk of unrealized capital gains before you hit the realized capital gains. But again, noting this, I think there is this point in time where we spent probably like an education session, which we did with the syndicate analyst when we IPO ed on explaining how shadow accounting works. But in principle, Ashik, your comment is fine, except in reality, there's an investment mix changing coupons that plays through it, changing your investment income fees. Yes. That's very Secondly, there is also a significant unrealized capital gains here on our balance sheet. Okay. That's very clear. Just one thing. Can you just give us some high level thought on the timing difference? How does it work? Your coupon would be, say, 30 year. Your share accounting would be 20 year or any sort of that or too early for that? Ashik, good question. Shall we take it offline? Because I'm afraid we're Yes, sure. No worries. That's fine. We'll take it offline later on. Yes, yes, sure. No worries. Thank you. Thanks for the explanation. Chair, there are no further questions. Please continue. There are no further questions. I'd like to thank you for being in our call. Thanks for very detailed and well thought through questions. I think there's any message I'd leave behind is actually was a we performed according to plan, slightly better than planned. In terms of management actions, nothing beats capital creation than making money. And I think that's what this company is all about. To our point of view, a solid quarter, a clean set of numbers and no management actions in the numbers rather than just selling profitable policies and reducing our costs. So we're profitable, but we're pleased with the results and the operating ROE. I hope you are too. And any questions in the follow-up, we know where to find this. And then I'd like to thank you for your time and your questions.