Ladies and gentlemen, good day and welcome to the ASR conference call on the first half-year results of 2016. Today's conference is being recorded. At this time, I would like to turn the conference over to Michel Hülters, Head of Investor Relations at ASR. Please go ahead, sir.
Thank you, operator. Good afternoon, and good morning to those of you listening in from the U.S. Welcome to ASR's conference call on its first half-year results of 2016. Presenting today are Jos Baeten, CEO, and Chris Figee, CFO. Jos will start today's presentation with the highlights of our financial performance. He will also discuss the most recent business developments. Chris will then provide further detail on our financial performance, the investment portfolio, and last but not least, our solvency and capital position. Following the presentation, there will be ample opportunity to ask questions. Please do also review our disclaimer on forward-looking statements in the back of the presentation. Having said that, Jos, the floor is yours.
Thanks, Michel. Good day, everybody. Thanks for joining us. Michel already mentioned I would discuss some highlights. I think that the main highlight in the first half-year for ASR was our very successful IPO. It was an exciting and challenging period for us, and we are happy we succeeded just for Brexit. Following this intense period of preparation, and having met a lot of potential investors, it has been very rewarding to find such strong support for our equity story. Today will be the first time we report on the progress on our equity story. Our strategic principle is, as you know, value over volume. We believe that with our customer orientation very important in the Dutch market, strong underwriting skills and financial discipline, we are able to generate organic capital for the long term.
This organic capital generation for the long term will be in line with our guidance as communicated at IPO, assuming UFR drag as it is per today. We truly appreciate the trust and confidence our existing and new shareholders have given us at IPO. We look forward to building a constructive dialogue with them as our shareholders and with the wider analyst community. Let's now talk about our first half-year results. We are very pleased to be able to report very solid and strong results for the first six months of 2016. We believe our financial performance, strong solvency position, and organic capital generation underpin our equity story. Our performance is in line with or even better than the targets we have set for the medium term. Our capital position was further strengthened by high operating results and favorable impact from financial markets.
Solvency ratio, by the way, we still use the standard model, is strong at 191% and is excluding the effect of the recent agreed mass lapse reinsurance contract, which would add another 5% of SCR and is comfortably above our 160% management threshold. Our strong solvency level enables us to remain entrepreneurial and to pursue profitable growth going forward. Organic capital generation has remained strong as it was in 2015 and amounted to EUR 159 million, representing 4.7% of the required capital. This number, by the way, already includes the additional UFR drag, roughly EUR 75 million, as a result of the decline in interest rates. It also includes the runoff of the equity transitional, roughly EUR 21 million. The return on our investment portfolio exceeded our assumption, additional to the organic capital generation, we had a 6% of extra capital generation on our SCR.
Chris, later on in the presentation, will provide further detail on our investment portfolio and the capital generation and how we realized it. At the level of all of our operating units, we maintain solid solvency positions, all are above their and our thresholds. Cash remittance to the holding today is on track. We expect to meet the targeted cash position as we communicated of EUR 360 million at the end of the year. Mid-year, cash at the holding amounted to EUR 181 million. Talking about the operating result, this operating result is mainly driven by our strong business performance as well in life as in non-life. The increase in the life segment reflects higher investment income and the contribution of the recently acquired businesses of AXENT, De Eendracht, and NIVO. Our non-life operating results, as you may have seen, include the significant hail and water damage claims.
These claims amounted to EUR 25 million after reinsurance. I will come to that in a moment. Absorbing these claims led to a combined ratio of 96.4%, still ahead of our medium-term target of 96% for this year. I think we've done very well despite the severe hailstorms we had in the Netherlands, and we show better combined ratios than the average Dutch market. Excluding these exceptional claims, by the way, combined ratio would be 94.2%. Talking about only the P&C business, the combined ratio, including the claims for hail and water, was 99.5%, and excluding, 94.6%. Finally, on our financial results, the operating return on equity for our business was 14.5% and remained well above the medium-term target, which was up to 12%. Let's go to slide number three. At the introduction of the equity story of ASR, we have discussed the way we run our diversified portfolio.
The key message there is we focus on value creation. ASR's equity story is about cash generation. We have a very structured and disciplined approach for reviewing all of our businesses and assess potential opportunities in the market. Let me summarize our portfolio as we see it today and talk a little bit about the achievements we've made during the first half of 2016. First of all, we have several stable cash flow and value-generating businesses, mainly in the non-life area. We consider those business as business with a relative strong growth potential, and we focus running those operations cost-effective, focus on profitable underwriting, as proven in our numbers over the first half-year, and delivering absolute style returns.
For example, last year, ASR had the highest absolute return in non-life. Also having seen some of the numbers of our competitors the first half year, our absolute return in non-life was the highest in the Dutch markets. Our focus in those areas is predominantly on organic growth, expanding in distribution, and expanding in underwriting skills. The achievement in the first half year in this area was that we have announced the acquisition of Corins. The acquisition of Corins means an investment in underwriting skills. It is a capital-light investment. We didn't need a lot of capital for that. Now we are able to grow our non-life market for especially small and medium-sized companies. Second area of our business is our service book area, or if you want, our closed books, especially in individual life and pension DB.
Our focus in this area is preserve the value by lowering and variabilizing the cost, limit unnatural lapses, and balancing longevity and mortality risk. If there are any closed books available, we always will have a look at them, especially if they add mortality risk. What we've done in the first half year, our achievements over there, we are on track with our back book conversion which means that we are on track with variabilizing our cost in the individual life area. With the acquisition of NIVO, we have acquired mortality risk helping to offset the longevity risk in our books. Let me talk about the third area of our portfolio, which is the capital-light growth opportunities area, where we can either grow organically or inorganically, such as in pensions DC, asset management, and distribution and services. Achievements in this area is in the pension DC market.
We have seen strong increase in the sales of our employee pension product. We almost doubled the portfolio, mainly in small and medium enterprises. At the same time, we feel price pressure in the corporate DC markets. We are currently carefully balancing between increasing our market share in this area and profitable growth. The shift from DB to DC is happening, be it in a slow pace. In asset management, we have closed in the meantime and integrated the acquisition of BNG. It's now part of ASR. That was done in the second quarter, and there we have added third-party asset management capabilities and EUR 5 billion of assets under management. Finally, we've announced the acquisition of SuperGarant, a large Dutch broker specialized in disability. That was announced in July, and this adds disability distribution skills. Another capital-light initiative we've taken and already talked about is the APF.
Our application for the APF has been filed and is currently awaiting approval by the regulator. Hopefully, this will be in the next quarter. Finally, we also dare to divest. Last half year, we have divested two businesses, SOS International, and most of our real estate development projects, because for both businesses, we felt no longer the right owner for this business. Let's turn to page four and have a look to the effect of all of those acquisitions. Most acquisitions have driven the increase in our premium income. EUR 377 million of the premium income in Life was due to acquisition. They also drove the cost base in the first half year. I will talk about that in a minute.
Life premium income first half year was up 14% to over EUR 1.3 billion. As said, driven by the acquired businesses, not only by those businesses, we were also successful in getting new business. Part of the growth here was due to large new contracts, such as the transaction of AstraZeneca. The operational profit contribution from the acquired businesses during the first half was EUR 22 million, they add really value to ASR. All acquisitions, by the way, met our investment criteria as defined up front. In Non-life, premium income increased slightly to EUR 1.4 billion due to organic increase of the volumes in mainly P&C and disability. Of course, acquired businesses also raised the cost base. Let's turn to the operating expenses on the next slide, which is slide five.
Over the last few years, ASR is known for its capabilities to reduce costs on an ongoing basis. Cost efficiency is part of the day-to-day business culture. The underlying cost decline is ongoing. For the medium term, we've announced a cost reduction of EUR 50 million, we are on track to meet the medium-term targets. With the addition of the cost base of the acquired businesses, our operating expenses went up to EUR 283 million. Excluding those acquisitions, our operating expenses were stable, despite we had to absorb roughly EUR 8 million of one-off costs related to the IPO. If I take out the one-off IPO cost, the underlying cost decrease is ongoing, which is also proven by the decrease of the number of FTEs, as you can see on the right side of the slide. Cost is on schedule.
Let's move to page six and talk a little bit about our operating results. As mentioned, it went up 4.3% to EUR 292 million. The operating result in Non-life, as said, decreased by EUR 52 million. This was mainly due to the hail and water damage, EUR 25 million after reinsurance and EUR 34 million before reinsurance. Nine million was covered by our reinsurance contracts. Further, last year we had higher results in the comparable period in our health business. By then it included a settlement of the equalization system from prior years, which was EUR 17 million. If you take out the hailstorms and the difference from the equalization of health, operational profits roughly remains at the same level. The increase in Life operating result was primarily driven by contribution of acquisitions, as said, EUR 22 million and a higher amount from the realized gains reserve in our Life business.
In the non-insurance business, we see that the acquisition and distribution become material. They contributed already for EUR 10 million over the first half. In the results of bank and asset management, you will see the cost reflected due to the acquisition and integration of BNG. There we are a little bit behind schedule. Finalizing my part of the presentation before handing over to Chris. If I compare our performance with the targets which we have set at the IPO, for the medium term, we are on schedule. We are in line or better than our targets, we are happy with that given the Dutch market circumstances. We believe those medium-term targets are the right targets in this competitive and challenging market for the medium term. Having said that, Chris, let's hand over to you.
You will discuss further the financial results, investment portfolio, and especially capital generation and our solvency position. Thanks.
Very good, Jos. Thank you. Ladies and gentlemen, Chris Figee speaking. Going through the financials. Let me start on page number nine, the operating results. As you may recall, the definition of our operating result effectively is the full IFRS net result, excluding capital gains and excluding incidentals and results that do not relate to the core insurance business. The operating profit really is the all-inclusive profit of the insurance business, yet excluding capital gains or any results from methodology changes. You can see the bars for 2015 and 2016. If you look at the increase in the operating results from H1 to H1, EUR 280 million to EUR 292 million. In Life, operating result underlying stable, but up due to acquisitions and due to additional release from our capital gains reserve. In Non-life, operating result down mainly due to the hail and water damage.
Finally, in all insurance segments, stable in some parts and up in distribution due to the acquisitions that we've made. From the IFRS side, the full inclusive IFRS result, the deltas mainly originates from the fact that last year we made an additional provision to our real estate development business. We had substantive one-off capital gains in last year's half year's numbers. This year, our capital gains were substantially less. We had a positive contribution from the release of an IAS 19 pension provision due to the fact that we reduced significantly our inflation commitments to our retired employees. Effectively, IFRS profits down virtually stable, where a delta in capital gains to balance off a delta from IAS 19 minus last year's addition to the real estate development provision. Operating result up EUR 12 million from EUR 280 to EUR 292, actually mostly in the Life segment.
In Non-life, we were affected by the hail and water damage. Let me walk you through each of the different business lines. I go to page number 10 on Non-life. An absolute operating result of EUR 62 million. As we understand, it's probably still the highest absolute number in Non-life profit in the country. Down EUR 25 million due to the hail and water damage. You know, we had significant storms at the end of June. One of our reinsurance partners told me this was the most intense, they call, convective hail and water storm on record with, just an illustration, 20 millimeters of precipitation in the build in 10 minutes and the highest level of humidity ever measured in our country. That cost about EUR 25 million after reinsurance.
After absorbing a EUR 25 million net loss of net claims, our combined ratio in P&C is still at 99%, and excluding those storms, a combined ratio in P&C of 94.6%, so still underlying very strong. If you look at the claims ratios, they actually hover around 63% in the last half year. Actually, we're coming down before the storm. If you normalize before the storm, we're still around the 60%-63% claims ratio in P&C. A very healthy underlying P&C portfolio. In disability, a combined operating ratio of 90%. Again, still in the low 90s across all the lines, very stable and strong performance, and a combined ratio of 90% is commensurate to a very substantive and attractive ROE in this business.
It's our understanding that in both disability and P&C, you can see the volumes are up and we're actually quite proud of the combination of an underlying strong combined operating ratio and an increase in volumes, which is a sign of very healthy underlying market position. In our health business, results declined by EUR 17 million, mainly due to the fact that last year we had a bigger contribution from the National Health Equalization System. That contribution was down about EUR 17 million versus last year. It's our understanding that across the board, across all the health insurance companies, contributions from the health equalization system are down. On a full year basis, this effect may wash out because we tend to give back to customers what we receive back from the equalization system. Less receipts at H1 is less giving back in H2.
Over the full year, this impact will be much less. All in all, we're very proud of a non-life segment with an absolute return of EUR 62 million, absorption of a significant storm, and a combined operating ratio for the entire non-life segment of 96%, an underlying combined ratio in around 94%. A very strong continued delivery on the non-life side. If you allow me to move to page 11, looking at our life segment. Life, as you may recall, contains individual life, pensions, and funeral. Results up from EUR 222 million to EUR 273 million. Two broad causes for the increase. One is the contribution from the acquisitions, AXENT and De Eendracht, that we acquired last year, have added about EUR 22 million to the operating result.
The remainder is filled by additional release from a capital gains reserve, which is a combination of capital gains reserve release and gains on swaptions, minus additional amortization of swaptions premium and slightly lower direct investment yields. Net, a positive contribution from release on capital gains as a function of our shadow accounting. All in all, life business up half of the increase by acquisitions and half by additional releases from the capital gains reserve. If you further look at the individual life business, as Jos said, we manage it for cost and lapses. I think on cost, we are investing in the migration scales of our systems. We have a number of important migrations ahead of us in the next six to nine months. Those will deliver additional cost savings. We invest or manage for low lapses.
We saw a small uptick in lapses, mainly due to the fact that people are increasingly moving house in the Netherlands, paying down their mortgages, and also lapsing the corresponding life coverage products. A small increase in lapses due to the increased moving and housing behavior in the country. In funeral, we acquired last year AXENT. This year, we added the buyout of the NIVO portfolio. Together, the funeral business is now approaching EUR 5 billion liabilities. Busy life and funeral together, funeral is now a quarter of the entire life and funeral business. Acquisitions are adding EUR 40 million of premiums and about EUR 2 billion of AUM into our funeral business. Integration of AXENT and NIVO is going at, or in some areas even ahead of plan. In the pensions business, as Jos said, our focus is on defined contribution.
We've made a significant growth in our defined contribution portfolio in 2 sources. First of all, in the SME space, where we find it's very attractive to add clients. Those are small tickets, but very sticky tickets. The retention ratio in a defined contribution business is about really 99%, as a DC business. Second contribution is from the De Eendracht portfolio that we acquired last year, where we're migrating clients from DB to DC. As Jos said, the upmarket, large corporate market in DC is still characterized by pretty heavy price competition. That's why we're focusing on the less price sensitive SME and mid-corp client base. Finally, we note that actually pricing in the DB market is improving. We're not very active in DB, but we're seeing less price competition in that field.
Actually, the old-fashioned VNB measure that very few people actually use, we don't communicate because it's a very old-fashioned measure, but we were able to write new business at a positive VNB in the DB space. We don't do quite a lot of DB. We retain clients, we extend contracts, but that can be done today's market, today, positive VNB due to the reduction in competition in that field. Overall, very strong performance also in the life, pension, and funeral business. Page number 12, non-insurance consists of, in the operating side, banking asset management, distribution, holding, and other. Banking asset management, operating results down from EUR 5 to EUR 0, especially because we invest in third-party asset management skills. We're building up the team. We're investing in our franchise. We added BNG Asset Management to the group, adding almost EUR 5 billion of AUM.
Again, this is cost goes ahead of the benefits, we're investing today, and the benefits are planned to come once the APF approval has been received, and once the pension fund assets become really approachable to the insurance community, which again, is a function of the launch of the APF market. In distribution, results up from EUR 4 million to EUR 10 million, mainly because of the acquisition of Boval. We're actually very pleased with the acquisition we've made. In the last years, we've acquired Van Kampen Groep and Boval, which are 2 service providers in respectively P&C and distribution. This year we added SuperGarant, which is a specialist intermediary function business in disability in the supermarkets and retail segment. We added Corins, which is an underwriter/broker in the mid-corp segment.
With that, our distribution segment now really has body, and we believe it is moving towards a full year run rate earnings around EUR 20 million once business includes in it for a full year basis. Gradually, the distribution segment is getting really real body, real clout, has meaningful size in the group. Holding other results effectively stable. In non-core businesses, mostly around real estate development, as you may recall, we split that business into 2. Real estate development business, which is in run-off, which is the completion of a large retail project. In the last years, we made substantive contributions to the provision for that business. They were no longer repeated. The EUR 5 million is just the accrual of the NPV provision. In discontinued operations, we closed the sale in April, I think it was in the 26th of April, the closed sale of a substantive set of projects.
Of the remaining holdings in that for sale part, mainly the land banks, property development land banks, sales process is ongoing, and we revalue them, adding EUR 12 million to the IFRS financial results. In summary, non-insurance, banking and asset management, investing before benefits. Distribution, the acquisition and investments are paying off and start providing real meaningful contribution to the bottom line. In non-core, real estate development effectively stable or preparing and continuing the sales process with commensurate valuations. That turns me to the investment portfolio, which is on the pages 14, 15, and 16. I will not go to all the details in this portfolio. I will give you a few highlights. At ASR, we run a yield investment portfolio. Luckily, our Solvency II and our capital enable us to run an effective investment portfolio that adds value and adds to the bottom line of the group.
However, the market risk component, and we will talk about it later, market risk, it is still less than 50% of our total risk. The core of our business is underwriting, but it is supplemented with an attractive investment portfolio that makes up still less than 50% of our total risk. The total assets of the group, and I am on page 14, went up from 53 to 59, partially due to revaluations, partially the acquisition of BNG, and partially due to the decline of the life book, where actually assets gradually flow out. The quality of the book, the riskiness went down a bit. You can see in the bottom right that the share of fixed income assets and within fixed income, the share of high-quality assets, triple A and double A, moved up towards 63%. So 63% of our fixed income portfolio is double A or better.
Page 15 talks about further details on our fixed income portfolio. You can see we added about EUR 300 million in mortgages in our fixed income portfolio. Notably, the actual credit losses on our mortgage book are still less than one basis point. So the quality of our mortgage book is still very high. Both the government guaranteed and non-government guaranteed book losses less than one basis point. We made some adjustments in our portfolio in the first half, and I will talk about it later. Reduce some equities, reduce some credits, and we expand our interest rate hedge, but I will talk more about that in a few minutes. On page 16, the equities and real estate portfolio. We continue to believe that real estate, at least in our definition, is a core holding of our business.
I've seen some analysts and some market participants thinking we have a really aggressive real estate portfolio. Please note that of the EUR 2.8 billion, EUR 1.2 billion is in land and EUR 700 million is in housing. Two-thirds of our real estate portfolio is in land and in housing, both very stable, very sought after, high demand, yieldy assets. We believe that the quality of our real estate portfolio is very high. Second point to note, our offices do contain offices for own use. We have consolidated our own offices into one building. That means that the vacancy in total portfolio went up because we actually moved people, our own offices, to our central building. Mind you, the yield of the vacancies per [Hectar] is still 4.2%. A very attractive portfolio. Just to be sure, our land portfolio is agricultural land. It's not development land, not development properties.
It's agricultural land aimed at renting it out to farmers and getting farmers' yields. All in all, we believe we have an attractive yieldy investment portfolio in which we actually decrease the risk somewhat in the first half of the year by moving out of equities, moving back into some of the sovereigns, which actually served us well. We have an effective real estate portfolio, which is predominantly in yieldy land and in housing, and the offices consist of a significant part of offices for our own use. That brings me then to solvency and capital. I'm moving towards page number 18. As you may be aware, in solvency, we always talk about stock and we talk about flow. Both in today's day and age should be sufficient and should be strong.
In terms of stock, our group solvency ratio remains strong at 191% using the standard model. We run our capital base using the standard model. We have an ECAP model. We have an internal ECAP model that stands at the solvency substantially above 200%, but we manage our capital, we manage our dividend base using the standard model at 191%. All the solvency ratios of the operating companies exceed the risk capitalization, exceed our risk limits. In terms of flow, in terms of how much capital do we create, continued organic solvent creation of EUR 159 million, very much in line with the guidance and expectation raised during the IPO. If you allow me to page 19, development of capital. I always say, call me old-fashioned, but I'd like to look at multiple type of book values.
In this chart, you can see the IFRS equity, the SCR own funds and our ECAP own funds. SCR equity continues to go up. In the first half of the year, the headline IFRS equity declined from EUR 4.2 billion to EUR 4.0 billion. That really is an accounting phenomenon from an IAS 19 accounting of our pension exposure. If you correct for that, which is really an accounting phenomenon, excluding if that IAS 19 provision would have been stable, it's called actuarial gains and losses. Our IFRS equity would have been at EUR 4.5 billion or increased by about five percentage points. Underlying an increase in IFRS equity masked by actuarial gains and losses, which really is the accounting treatment of our pension obligations. SCR owned funds and ECAP owned funds both continue to increase. With that said, the ECAP ratio is solidly and safely above 200%.
Mind you, the difference between ECAP and SCR are that in ECAP, we have a more precise, more granular measurement of market risk. We use some of our own models in market risk, and especially on the LAC-DT, where we believe some of the SCR assumptions are fairly uneconomic. We assume a full fiscal unity for the group where, as you know, in the SCR world, you are made to believe that fiscal unity does not exist. Whereas in practice, of course, it does, and we correct for that in our ECAP modeling. Page 20 shows the development of the actual solvency figures, the numerator and the denominator. Our own funds, eligible own funds of EUR 6.5 billion, required capital of EUR 3.4 billion. If you divide one by the other, you get the 191% solvency ratio that we have communicated.
On the own funds, some key data points, factoids on the right of the page. Our Tier 1 capital is 85% of total own funds. Tier 1 capital alone represents 162% SCR. If we just had Tier 1, our Solvency II ratio would have been 162% already in our safe management zone. Any doubts on tiering, not in this building. Significant further headroom available. Tier 1, we have room for issue qualifying capital for EUR 1.1 billion. Tier 2, room to issue EUR 700 million of qualifying capital if we wanted to. We do not contain Tier 3 capital. On the required capital base, as I said, market risk is still less than 50% of our pre-diversification risk. Any claims that we run an excessively risky book, no, we do not. We have a reasonable and attractive market risk book, but the heart of our risk is underwriting risk.
Where were the deltas in solvency? In own funds, we will talk about it later, mostly profit creation. On SCR, we saw an increase in life risk, mostly because of lower interest rates. Lower rates increase the NPV of, for example, longevity risk. The deltas were in life risk, mostly interest rate effect. The deltas were in counterparty risk for two reasons. One is, we are long collateral in our derivatives book. Being long collateral increases counterparty risks to banks, counterparty risk went up. Secondly, we invested into our mortgage book, and with the increase in mortgages also our counterparty risk went up. The two source of increases in risk, the dominant source of increase in SCR, were life risk, mostly the NPV of longevity risk and counterparty risk from collateral against banks and from the mortgage book.
Again, very much in line with the 191% solvency ratio. Again, with the EUR 1.1 billion Tier 1 or EUR 700 million Tier 2, we have headroom to issue further capital if we wanted to. For the IAS specialists out there, our LAT, liability adequacy test numbers, all still very positive. Positive LAT surpluses in life and a positive LAT surplus in non-life. Page 22. 21 talks about our sensitivities. As you can see here, we have got our management range where we strive to run the business at a solvency level solidly and safely, consistently above 160%. That is our management level. At 191%, we are really on the upper end, but very stable and solid in that range. You can see sensitivities. On the UFR, a lot has been talked about it, a lot has been said about it, a lot has been asked about it.
We are aware there's an EIOPA consultation paper around that defines a preliminary UFR target 3.7. There are a number of discussions. As you know, our own regulator has sent a letter, published a letter saying that they would recommend the EIOPA to move to a long-term moving average UFR, which effectively would be around the 3.2 mark, depending on where rates are. Therefore, we disclose our sensitivity to those numbers because we think that's the range in which the UFR discussion in the industry at EIOPA takes place. The 3.2 to 3.7 is probably the range that's relevant to discuss. If the UFR would drop to 3.7, which is a 50 basis points drop, our Solvency II ratio would drop to around 179%. If the UFR would drop to 3.2, a full percentage point deduction, our Solvency II would be around the 166% mark.
In the range of discussions with EIOPA, with ECOFIN in the industry, any of those drops would still allow us to stay safely in the 160% plus, the management range. By the way, this is all still excluding our mass lapse reinsurance contract that was signed in July. You can see also the development on the VA. Roughly speaking, one VA point is one point of solvency. The volatility adjuster per 30th of June was 18 basis points, down from 22. From 22 to 18, we reduced the VA by four points, which affected us roughly also by taking out four points of our solvency. Reason being that the VA portfolio contains much more peripheral Italian and Spanish and Portuguese and Greece government debt that we have in our portfolio. Actually, we feel comfortable. We have our own asset mix.
We don't try and want to mimic the volatility adjuster. We follow our own asset allocation, which means that if spreads contract, especially if peripheral spreads contract, that causes the VA to decline relative to our portfolio and cost of solvency. Similarly, if spreads blow out, if there's a safe haven scenario, the VA tends to protect us. Roughly speaking, one point VA is one point in solvency. That's why if credit spreads widen and the VA spread widen, they tend to be supportive to us. You can see also the sensitivity against real estate and in equities. Those are really manageable numbers. Finally, on the right-hand side, you can see the interest rate sensitivity. Please note in the last half year, we increased our interest rate hedge, and I will talk about it more in a minute. We lengthened the duration of our portfolio.
That actually changed the sign of our sensitivity against an interest rate increase. Now it's minus two when interest rates go up by 100 basis points and plus five, interest rates go down by 100 basis points. The change in sign really is a function of the adjustments we took through our hedging portfolio. Talking about interest rate hedging, page 22 gives additional disclosure in our interest rate sensitivity and our hedging portfolio. We at a.s.r., we follow a dynamic hedging program. Basically, we take into account the actual cash flows of the business bucketed by durations, and we take into account the SCR as is. We'd like to stabilize the SCR as is as much as possible, but also prevent the SCR excluding, for example, UFR effects, excluding other measures, other what we call uninvestable areas, not to drop too much.
We look at the probability of developments on the various scenarios. Actually meant that when interest rates fall, we increased our hedges. We added about EUR 900 million notional of receiver swaps to our book to extend the money duration of our business. Means we're actually long duration versus the official SCR curve. We're substantially long duration. Means that if interest rates fall, our solvency goes up. If interest rates increase, our solvency goes down, which is a function of the fact that we are long durations versus the SCR curve. If you look at the implied UFR, we did some analysis on the implied UFR. At what UFR level would we be fully matched? That would be around the EIOPA target level.
That's not a goal in itself, but a de facto outcome of hedging policy, where we weigh cash flows, where we weigh durations, where we weigh solvency excluding UFR effect as well. As a result, when rates fell in the last half year, we added interest rate sensitivity and increased the duration, which also served us very well. Page 23 talks about our response to market developments. In the first half of the year, we saw interest rates going down, we saw credit spreads going down, and we saw volatility going up. Together, that led to, in our view, a reduced risk tolerance for the group. We believe that was the environment in which we wanted to reduce some of our risk exposure. We reduced some equities, reduced some credits.
You shouldn't think too much of it, there was a further optimization equities and credits taking out some risk, and we increased money duration mostly to receiver swaps and options, to reflect our reduced risk tolerance, which again, was a function of rates, of spreads, and of volatility. After the 30th of June, we signed a mass lapse reinsurance contract, which is not yet in the figures, simply because it was signed after half year. Pro forma, it would add about five points of solvency to our SCR issue. A bit of color to that, mass lapse is the sixth largest risk category in our books, relatively heavily charged. We signed a reinsurance contract, which actually is an actual risk transfer. This is not an arbitraged deal. It's an actual risk transfer with actual reinsurance counterparties.
We made sure that we actually signed a proper, almost like old-fashioned reinsurance contract. Not with some banana re from Bermuda, but with some old-fashioned classical reinsurance counterparties. I must say credits to Guy Carpenter and to RGA Munich Re for helping us structure this deal, effectively adding pro forma five percentage points of solvency. It's a UFR-independent solvency. For those of you who would love to add it to the notes, five points of additional solvency after the half year figures. As a result of all this, we believe we have a very strong balance sheet. Given market uncertainties, given political uncertainties, given low rates, we believe this is the time to build a fortress balance sheet.
This is the time to build strategic flexibility, and we believe the combination of optimization of market risk, increased interest rate hedging, and additional reinsurance programs provide us with the fortress balance sheet that you'd be looking for, provide us with strategic flexibility that allows us to optimize our position in the current very uncertain world. Page 24 is the page that most of you have been waiting for. I realize you've all been holding your breath to talk about organic capital creation, so I will do that just right now. At the end of last year, we noted, reported 185 percentage points of solvency with a modeling bandwidth of about 10%. We went through some of the day one adjustments. That shaved off five percentage points from that solvency figure.
From the 31st December to the 1st of January, we shaved about five percentage points from our solvency to day one adjustments. Where are they? First of all, in the disability space, where we have a future management action in our solvency. We added some additional prudency into the assumptions on how, if, and when to apply that management action. So additional prudency in the future management action in disability. And we made an adjustment to the calculation of interest rate and spread risks. Both of these metrics or adjustments affected very much the required capital and to a smaller extent, the available capital. So really an increase in the required capital. Gives us a starting solvency level of 180%. Actually, you get to the 180% by dividing EUR 6,076 by EUR 3,374. So in our day one, EUR 6,076 divided by EUR 3,374 gives you the 180% starting solvency.
We added organically created capital to it in market operational developments for a total increase of 11 points. Now, we believe it's important to disclose what is inside organic capital creation. There is one number, and the one number is relevant, and the one number is what we steer about. It's important to understand what's in there. In our view, there are three buckets. Business and operational capital creation, capital release from a net decline of the book, and finally, the technical components that represent the interaction between stock and flow. Key to show is that we generate capital from our business, from operations that we run, not just from the runoff of the back books. We are a capital generation story, a capital generation business supplemented with capital release from the back book.
We've got the cake, which is operating capital release, and the icing, which is the runoff of the back book. But both of these sources add capital. And finally, there are technical movements between stock and flow. Now let me start with the latter. The -3 is the 2.9% to be precise. It includes the UFR drag. As you may be aware, if interest rates fall, the UFR event goes up, but gradually declines over time. The UFR drag was about EUR 75 million in the first half year, leaving EUR 22 million for decline of amortization of the transitional rule. Please note that some insurance companies exclude transitional rule in defining organically created capital. We're all free to make our own choices.
We've included, but if you want to have a like-for-like, peer-for-peer comparison, the EUR 22 million would need to be added back to our EUR 159, getting to a total of EUR 180. Of course, the UFR drag is depending on the interest rate, but effectively it's outside our control. It is what happens. That's why we find it important to show it to you. If rates would fall, yes, stock would go up, flow would go down by increasing UFR drag. If the EIOPA would lower the UFR, you'd see the opposite. A lowering of the official UFR by EIOPA would reduce stock and thereby increase the resulting flow. We believe there's no point in calculating all sorts of sensitivities. It is more or less a given. Some of you are going to ask us about the amortization of the UFR book, so let me anticipate that question.
The UFR applies our life pensions and funeral book. Our life and pensions business is tilted towards the next 10 years, where the heaviest weight of the UFR drag takes place, but our funeral book has a much longer exposure. Is there a weight? Is there an average maturity of our life and pensions book? There is one, but it's actually meaningless to calculate because it's driven by life and pensions on the one hand, and funeral on the other hand. We believe you'll see a significant amortization of UFR the next 10-20 years, but there will be UFR effect with a much longer duration because of our funeral book. Please note, the way we run our funeral business, we do write new policies, we do acquire businesses. We will add UFR benefits to our portfolio even as they mature over time.
One step to the left, the net release of capital. This is the release of SCR capital, release of risk margin, net of new business strain. Roughly speaking, SCR minus new business strains, the release of required capital minus new business strain is about 1.6%. The release of the risk margin is about 1.9%. Together, around the 3.5% mark additional capital generation from running off our individual life books. Finally to the left, the business generation, the operational generation of capital is around 4.1%. In there is the assumption that our investments yield the long-term investment margin. You may recall, for those of you who participated in our IPO stories, the long-term investment margin assumes equities generate 3% above the Solvency II curve. Real estate about 2%, credits about 30 basis points or 50 basis points. Non-core sovereigns, 30 basis points, mortgages around 80 basis points.
If you throw that in the mix, we give a long-term investment margin, which we guided to about 50-60 basis points. It has been a bit higher in the first half year, giving us a significant long-term investment margin. That's fed into the operational capital generation. Any additional return over and above that long-term investment margin is reflected in market and operational results. The numbers that I showed you together give us 4.7% of capital, EUR 160 million on a net basis, EUR 180 million if you exclude transitional, and EUR 260 million if you exclude transitional and the UFR drag. Again, very much driven by both organic business capital creation plus the release of capital from our life business. Some of you are going to ask me about the conversion factor. Let me answer the question also before you can actually ask it.
We've guided you that the conversion factor in capital tends to be about the 75%-85% range. You really need to wait for the full year to run this number because it's a full year number that is actually relevant. But in the first half year, it was in line with about a 75% conversion ratio. It was 75% because part of the increase of the life operating profit was from release of the capital gains reserve. If you take the operating profit after tax and you compare to the EUR 160 million organic capital generation, the conversion ratio was about 74%-75%, slightly lower than the 80% because in life operating profit, there was a release of the capital gains reserve. A few words about the market and operational developments.
Again, this is market developments and business developments over and above what was in the organic operational capital creation. The 6 actually is a positive number from market and a small negative from business. In markets, we had the positive impact from our hedging program. We had a positive impact from returns over and above the long-term investment margin, minus a 4-point drag from a decreasing volatility adjuster. That was a significantly positive number and a small deduction from the business due to delta and life cost, where we took into account the investment cost and migration cost in life, and where we took into account the fact that in the mortgage business, the house moving behavior in the Netherlands goes up. People are buying and selling houses again. They're moving again, and therefore, prepayments are up in the mortgage side.
In summary, market is significant plus, which is returns over above the LTIM, minus 4 point VA, minus business changes, mostly in the mortgage book. Net-net, a 6% addition over and above the organic capital creation. At the end of the day, we end up with a 191% solvency to standard model level, up 11% versus last year. I once said last year, insurance investors look at capital the way Winnie-the-Pooh looks at honey. I think you guys still do that. But in today's day and age, it's a little bit like Snow White looking at the house of the Seven Dwarfs, looking for a place you can find shelter, looking for a place you can find safety. Well, with 191, I'm looking at seven dwarfs around the table. We have a very safe and stable building here. Finally, let's move to our balance sheet.
Page 25, balance sheet management. You can see that solvency ratios at all our insurance entities above the target solvency levels, enabling us to upstream capital. We paid EUR 170 million of cash of dividends to the NLFI. We remitted EUR 190 million to the holding company, predominantly from the life business. The cash remittance exceeded the dividend paid and exceeded capital generation. We're on track with the cash at the holding of EUR 181 to move towards a EUR 350 million year-end cash target for the group. Also, one thing to note is that we are in the process of integrating and merging the various legal entities that we have. We have received or are hopeful to receive the official approvals to merge our non-life entities into one entity and all our life entities into one. That allows even more flexibility and freedom with regard to capital management.
Please note that on a consolidated basis, all our operating entities exceed our solvency and ECAP ratio and are therefore able to upstream cash to the holding. Finally, before I hand back to Jos, our risk indicators. You can see our claim. We have a fortress balance sheet, financial leverage about 26%, interest coverage around 13 to 14 times. If you do this number not just on an operating basis but on an IFRS basis, it would be even higher. Rating confirmed at single A, neutral. Double leverage up a bit to 108.7, but that was really due to the accounting phenomenon, the delta and actuarial gains and losses. If you would keep the actuarial gains and losses element in our IFRS equity stable, our double leverage would actually have fallen to 99%.
All in all, we continue to have a very strong and very stable balance sheet, this fortress balance sheet, allowing us to stand and to provide shelter in volatile times. With that, I end my part on the financials and give the floor back to Jos.
Thanks, Snow White. To conclude this presentation, I think ASR delivered very strong results over the first half year with a capital stock of EUR 191 calculated based on the standard model, with potential uplift of 5% due to the mass lapse contract. We have a conservative calculated capital flow of EUR 159, 4.7 of the SCR, due to our strong operational results and disciplined execution of the strategy. We've been able to grow our top line profitably over the last few years, and all things being equal for the remainder of the years, we're confident that we will be able to deliver on targets. Having said that, I will hand back to the operator, and he will open the floor for Q&A.
Ladies and gentlemen, we will now start the Q&A session. In order to ask your questions, please press star one on your phone. Star one for questions. Go ahead, please. First question comes from the line of Mr. Ashik Musaddi of J.P. Morgan. Your line is open.
Yeah, hi. Good morning. Ashik Musaddi from J.P. Morgan. Just got a couple of questions. Can you give us some sense about the additional UFR drag that can happen because of year-to-date interest rate decline? I'm not sure if your numbers are based on the organic capital generation and UFR drag is based on the beginning of the year assumptions or the current assumption, because for other companies, this number has moved quite a lot. That's the first question. The second question is, can you give us some sense about
If I look at your operating capital generation, it looks at around, say, EUR 200 million, which is operating capital generation net of UFR and adding risk margin. Is that what is the main driver of dividend or is IFRS the sole driver of dividend? How should we think about that? Last one is, it looks like your capital is running off at around, say, 4%, which is SCR release. Will that impact life earnings as well? Or do you have other measures such as just M&A to counter that? Thank you.
Chris. Yes, Ashik . Very good. Thank you very much. On the UFR drag, it's our understanding, our estimate that we run the UFR drag based on the beginning of year numbers or take into account the developments during the year. At current level, at today's rates, yeah, the UFR drag will go up a bit. I think it actually not relevant to continue to carry the UFR every single day because interest rates move. As Jos said, at today's rates, at today's number, we feel confident that we can and will deliver on the guidance we've given at the IPO in terms of total capital generation. When it comes to the underlying capital generation of the business, well, there are various components, right? There's the component of the business capital creation, which is about 4%.
There's a component on SCR release and risk margin release, both in the 2% mark, more or less. Then there is a UFR drag and the transitional rule. We can all slice and dice however we want it to. I tend to look at the fact that both, if you look at the business that we have in the combined ratio that we show, the business capital creation, the 4%, is actually pretty strong and pretty stable. If you look at the underlying combined ratios that we have delivered for quite some years, they tend to be good. There are some downward pressure, of course, from low yields. Again, they're pretty strong. Please note that the LTIM assumptions in that number are pretty conservative. There's always a bit of spillover from organic capital creation, operational into market development.
If yields drop, there may be a decline actually in operational generation, the market component will actually increase. It will show up in a delta Solvency. It will just show up in a different bucket. Secondly, the net release of capital is pretty stable. The life insurance book will inevitably decline. That will continue to add capital. The technical movements are, again, a function of interest rates. They may increase. They may also decrease depending on where rates are. Net-net, we believe the guidance we've given at IPO and where the consensus is something we feel very comfortable in delivering that going forward. I look at the total number, whereas each, first the four and the four are both pretty stable, actually, especially if you combine it to the fact that some of the four operationals may spill over into market developments.
In terms of dividends, we've got an official dividend policy where we link dividends to our IFRS results. We've done that because that actually an audited and more stable number. At this stage, common industry practice to link dividends to operating results. We've stuck to that. If there's more capital available, of course, and we have sufficient capital, we'll find ways to share it with our shareholders. At this point in time, we believe it's appropriate to link dividends to the operating result.
Our official policy is between 45%-55% of the operational result. We will pay a cash dividend,[SR] and SCR of EUR 140, and we already last quarter at IPO communicated that we are going to pay EUR 175 of dividend over the full year 2016.
Yeah. Thank you. That's very clear. Just to follow up on the beginning question that I had with respect to UFR. The only reason I'm trying to get some sense around that is because in your prospectus, you somewhere mentioned that X UFR for 100 basis point decline, your own funds go down by, say, EUR 1.7 billion. That is Solvency I basis, but I think own funds for Solvency I and Solvency II, is that not that materially different for Dutch companies? That's a big number. Based on that understanding, I guess for first half interest rate decline, the UFR benefit must have increased quite a lot. I mean, EUR 700, EUR 800, maybe more. That could lead to a significant erosion of the third bucket, which you have shown. Instead of two points of UFR drag, it could be, say, four points.
That's the reason I'm just trying to get a sense. If interest rates don't go up, what would that number look like? Ultimately, your operational capital generation, the first bucket, is not changing. The second bucket is not changing, the third bucket can be a chunky number. That's the reason. Thank you.
Yeah. If interest rates don't go up or go down, of course, the UFR drag goes down. Again, that will probably both be compensated by the latter bucket, which is in market and operational improvements. That's why the total delta in solvency, I don't think will change that much from any interest rate changes. Secondly, as I said, we reiterate our fact that we believe there's sufficient room in the first two buckets to absorb any deltas in the UFR drag over time at current rates.
That's great. Thank you. Very clear.
Next question comes from the line of Mr. Albert Ploegh of ING Bank. Your line is open.
Good morning. Good afternoon, all. A few questions from my end. To come back to the mass lapse reinsurance contract. Can you give a little bit more background to this transaction, what the exact reason was? I guess that a lot of kind of guarantees you have on different insurance products are actually in the money, so to speak, with the current low yield environment. If a client lapses, it could actually release capital. I'm a bit confused what the reason behind this reinsurance contract is. The second question is on the ongoing shift from defined benefit to defined contribution. You see that continuing to happen, the pace in the future will only increase. What kind of implications might that have, let's say, for your cost flexibility assumptions?
Is there some more risk of cost overruns? I know you already took some conservatism last year in your Solvency II numbers on that. What does that mean for your release of SCR capital? Could that actually go up more than we expect now? On the closed book of individual life, can you maybe add what that actually contributed to the EUR 159 million capital generation over the first half? Thank you.
Albert, thank you. On the mass lapse, in Solvency II, one has to hold capital against a mass lapse event. Actually, Solvency II stipulates you have to hold capital against an instantaneous lapse event where 40% of your life customers actually walk, like within a second, instantaneously, which is a pretty tough capital requirement. At this point, really the amount of lapse is relatively low, but I can imagine scenarios where there will be sudden interest rate movements, where there will be sudden news events where mass lapse shock could take place. We found that we could attractively reinsure ourselves against this risk, there were reinsurance willing to take on this mass lapse risk from us. There is a certain attachment point and a certain detachment point.
We defined an area where we reinsured ourselves against such a mass lapse event, and we actually transferred the risk against such a mass lapse moment, mass lapse event. We did it because it released capital and released capital at a relatively attractive cost. There was a real risk transfer with real insurance counterparties, the cost of this capital was, for example, significantly below the cost of a hybrid bond. We felt that, one, it was a great opportunity to add capital to our business at a relatively attractive cost of capital. We felt, given the political uncertainty, market uncertainty, this is the time to build what I would call the fortress balance sheet to increase the strategic flexibility of the group. If you want to use the opportunity, it is the time to do it.
I also think when we had the IPO roadshows, many investors asked us, "How do you think about strengthening your balance sheet and various options?" We said, look, we have had room for capital market instruments. We believe actually from a cost of capital perspective, that reinsurance is at this point, a more attractive instrument than capital market instruments. Because there's a lot of reinsurance capital out there, a lot of reinsurance capital available. At the end of the day, it was a tangible risk that you might say get a significant charge in a Solvency II environment, but we actually transferred the risk, and pay a price, but it's a very attractive transaction to us.
Okay.
Albert, on your question on our flexibility, if the shift from DB to DC takes not place in the speed we expect or will be faster than we expect. Our current and old DB platform already has been outsourced, including 80 people, and there we already are on a more flexible cost base than we were in the past. Our new DC platform is a so-called software as a service platform, which is run by a subsidiary of APG, the Dutch pension company. On the leaving side of DB and the incoming side of DC, we already have a high level of cost flexibility. I think the speed of the transfer will not affect our ability to reach the cost objectives we have set ourselves.
Okay. That's very clear. Yep.
Next question comes from the line of Mr. Matthias Dewit of KBC Securities. Your line is open.
Yes, good afternoon. First question is on slide 24. Just wonder how M&A and the de-risking is captured in that slide. De-risking presumably had an impact on required capital. Just if you could quantify that and provide me with some comments on which bucket that de-risking is captured, that would be helpful. Secondly, also on that slide, on the 6% market and operational development impact, could you maybe be a bit more specific on how much the contribution was from investment returns above your assumptions. On what assets are you currently outperforming your assumptions? I'm just trying to assess whether this is a recurring benefit at current spreads or whether it is more sustainable in nature.
Lastly, I had one other question on capital generation, that is, if you could provide a breakdown between Q1 and Q2 for the organic capital generation, please. Thank you.
Okay, Matthias, thank you very much. I think we could all save us paper going forward. We'll only produce page 24 at next results. On the market operation on M&A, in the first half of the year, we didn't do any major M&A. There were some transactions that were closed after the 30th of June. The cumulative price of that was really less than one solvency point. That there's no numbers yet. If and when they come, you will not find them to be materially effective. They were relatively small transactions. In terms of contribution of historical transactions, they are either in the operational capital generation, in terms of the long-term returns they generated, and to some extent in the operational and market and operational developments as far as they deliver excessive returns.
I don't have the split by acquisition by bucket, trust me, in terms of new transactions, nothing in these figures is small, maybe one point, less than one point in the coming half year. From existing deals, they were basically in the operational and in the market development block. What's in the market development, again, this is 6%. If you take into account that the VA was a negative four and the market was a positive and the business was a negative, you'd safely assume that before VA developments, the market was safely above 10% in terms of market performance over and above the LTIM. I think it's mostly where did we outperform the ultimate assumptions. Mostly mortgages, credits, and real estate. That's really where the additional performance was over and above the market developments. In terms of the de-risking that was also in this bucket.
We sold about 300 million shares and 200 million notional in credits. That's still less than 10% of the total investment group. It did support the SCR ratio, but you shouldn't think too much of it. It wasn't the major driver, the largest driver in the market variances. In summary, market variances before the VA effect, solidly above 10%, driven by long-term investment returns in mortgages, credits, and real estate that outperforms LTIM, plus a contribution from de-risking in selling off some equities and some credits. That's a small portion. Minus the business developments, which as I said in my presentation, really were all about changes in the mortgage assumptions and changing some of the temporary cost assumptions in life. On your final question, do we provide a breakdown of capital generation by quarter?
No, we don't, because this is a number that you really look and track in the long run. Interest rates fluctuate over time, markets fluctuate over time, we're in the long-run business. I have no reason to believe that Q1 was really that much different from Q2. Frankly speaking, I don't have that number. We do it on a half-year basis.
Okay, that's clear. Maybe just one follow-up, if I may. Just to come back on Ashik's question. Your guidance for capital generation is still roughly in line with the guidance provided at the full-year results of around 9% organic capital generation, whereas spreads came down, rates dropped, you de-risked a bit. Just wondering what's offsetting that. Is it M&A? Is it the restatement which might have a positive impact later on? Could you maybe help me understand that better, please?
I think that number is still true. What is different? Yes, rates and spreads came down. At this point in time, our underwriting results are very strong in the first half year, excluding hailstorms, that's a very strong result. Although rates came down, we believe a significant part of our portfolio, for example, our real estate portfolio, our mortgages portfolio, continues to perform very well. We've actually added some mortgages to our book. After the 30th of June, after Brexit, we saw some real severe dislocations in the market. We re-risked a bit after the 31st of June, where we found there was value in some peripherals, some of the FIG paper.
There was some small re-risking after Brexit in combination with the stickiness of yields in our real estate book, in combination with the solid underwriting results, we believe we can continue with the 9%-ish type of guarantee. Finally, if rates fall, we just work a bit harder. Thirdly, the one thing where you may see some spillover is spillover between operational and market developments, because I find that if rates fall and returns go up, sometimes excess returns do show up in the market and operational variances. All in all, we believe that the guidance given at the IPO still holds.
Very clear. Thanks a lot.
Next question comes from the line of Mr. Ron Heijdenrijk of ABN AMRO.
Hi, good afternoon, gentlemen. A few questions. Firstly, on your combined ratios in the P&C business. You have a 94.6% excluding the June storms in P&C, which compares to the, I think, I seem to remember, 98% guidance on the medium term. What's the immediate outlook for that ratio? Secondly, the same question basically for the disability combined ratio, 90.2% versus 95% medium-term guidance. The outlook there as well, please. Secondly, you give the sensitivity of your solvency to a UFR drop of 50 basis points and 100 basis points. Could you also give the reduction in UFR drag on a 50 basis points and 100 basis points as well, please? That's it for now. Thank you.
Thanks, Ron. On the disability and P&C combined ratios, the medium-term target for disability is not 95 but 93. With 92, we're pretty much on schedule. The 93 stands, and we hopefully will do a bit better like we've done in the first half. The medium-term target for P&C is indeed 98. The hailstorm we had is a realistic storm, and we had to pay EUR 25 million. We just wanted to show what it would have been excluding hail to tell you something about the quality of the underlying book. But it is a real payment we had to do. Our medium-term, 98 for P&C stands, and we will have to work pretty hard because today, P&C is 99.5, including the hailstorm.
Both targets we've said there are still the right targets to our opinion because we already took into account that we expected in the P&C business, as we have seen an increasing number of weather events over the last few years. We already took into account that it could happen in the P&C business, and as we expected, it has happened in the first half. Both are still solid rock targets which we will be able to realize. The second question, Chris?
Yeah, on the UFR drag. What happens to the UFR drag if the UFR goes down by 50 basis points? Ron, the honest answer, I don't have that number. If the UFR goes down, also the drag goes down. We honestly do not calculate that number because we could speculate what the UFR could become. We think it's relevant to give the level of solvency stock for various UFR levels. Then calculating the various levels of solvency flow. I mean, the flow of capital generation to me is driven by business capital plus release of the book. The final components to me are technical components between stock and flow, which I have really no influence on. I'm a receiver of the outcome, not a driver of the outcome. Ron, the honest answer is I don't know, and I'm not going to try to find out.
I will just see what the UFR actually ends. I'm focusing on the business generation of capital and the effective release of capital from the book.
Fair enough. Thank you.
Next question comes from the line of Mr. Benoit Petrarque of Kepler Cheuvreux. Your line is open.
Yes, good afternoon, gentlemen. three questions on my side. The first one will be on the bank and asset management earnings, which were quite low this quarter, around zero. You said that you have been invested in the business, I guess, on the asset management side. What type of outlook you have on the profitability for this segment? Because the benefits from the investment in the APF could take some time. At least that's my understanding of the market. Are we going to model the business line in the coming quarters? That would be the first question. Second one will be on your statement that you have a significant headroom to increase Tier 1, Tier 2. I agree on the ratios, there will be some impact on the financial leverage. You currently stand, I think, above 26%, not that far from the 30% target.
How do you reconcile basically your leverage target to your statement that you have a significant room there to increase your Tier 1 and Tier 2? The final question, sorry for that, it's just maybe a lack of knowledge on my side, but on the IAS 19 adjustment of EUR 426 million on the equity which took place in H1, I think it mainly comes from lower discount rate. I do not see an impact on the Solvency II ratio from this adjustment. Thank you very much.
Very good. On the first question on the bank and asset management segment, you can see the operating earnings are around EUR 0. Actually, they're slightly misleading because the financial earnings are positive. In this segment, you've got real estate asset management, capital market asset management plus the bank. Actually, the bank has a positive IFRS income due to some capital gains on the bank's investment portfolio, but not a positive operating income. That's why the financial income in that segment is actually better than the operating income. On real estate asset management, last year, we had significant performance fee. That was not in the same numbers this year. We've been building up a team. We've been adding the cost base of BNG to our business.
We've been investing into new staff and investing in the APF. Of course, it will take some time before the APF pays off. When we IPO that business, we said in the long run, we're looking at a 7%-10% earnings growth on this segment using 2015 numbers as a starting point. We still believe it in the medium term, this 7%-10% growth is actually feasible, but it will fluctuate over time. Again, the cost will unfortunately come first and the benefits will come later. We're awaiting the formal approval for the APF. Finally, if that happens, we'll see asset management going up. I would model it as a long-run development where the actual benefits will come once the full APF permission has been received and once the APF and the asset management business can actually go live.
Secondly, please note there is a positive IFRS income in the bank, which does not show up in the operating income. In terms of Tier 1, Tier 2, your question absolutely right. We've got qualifying headroom for Tier 1 and Tier 2, yet we couldn't do all of it. We wouldn't go out and raise EUR 2 billion of capital because that would add EUR 2 billion of leverage to it. We just wanted to point out we have room to issue solvency qualifying capital. We've got about a good five points of additional headroom to issue leverage before we get to about the 30%. That will still be a significant issuance. Would we go out tomorrow and issue qualifying hybrid capital? Probably not, but it's great to have the opportunity. Please note, for example, in 2019, we've got two older issues coming up for call.
They have a 7% and 10% coupon, respectively. Of course, we can never give you commitments or can even give you the slightest guidance on whether we should call them or not. At today's coupons and today's refinancing rates, that decision whether to call up is relatively easy to make. You could, for example, imagine a scenario where you'd redeem EUR 200 million of existing bonds with EUR 500 million of new bonds. There is various ways to optimize the capital structure, use the headroom that we have, but not exceed our leverage targets. It's more the fact that we have Solvency II hybrid headroom. On IAS 19, if you think about the impact, we had actuarial gains and losses in our IFRS equity, which is an IFRS assumption change that does not directly impact Solvency. It's really an IFRS phenomenon.
It has to do with the fact that we at ASR are in a unique situation. We, ASR as an employer, reinsure our pension obligation with ASR as an insurer, and the insurer then subsequently adopts shadow accounting. Whilst we wrote the prospectus, we discovered we're actually the only insurance company in the world that has this phenomenon, where we actually are both our own client, and we apply shadow accounting, which leads to volatility in the actuarial gains and losses in the group. It is really an IFRS phenomenon. It is not a Solvency II effect. In Solvency, this really doesn't show up. In market value balance sheet, you don't see this. It has to do with the fact that actually the intercompany exposure is eliminated between the life business and the holding business.
Yet part of the exposures cannot be eliminated because they're in the shadow accounting methodology, especially, to be very precise, the interest rate hedge that the life business undertakes to hedge the interest rate exposure from ASR as a client cannot be eliminated because it's part of our shadow accounting treatment. Now, we've had auditors writing PhD thesis about this subject, but it's something that is really an almost unsolvable IFRS issue that will lead to an IFRS volatility due to rate environment changes. That's why there was another EUR 426 actuarial loss in this quarter. If rates go up, that actually might disappear. In Solvency II, this doesn't show up at all. This is the one thing where Solvency II actually is more clear than IFRS. In that sense, we're actually very pleased with this.
Okay. Thank you very much.
Next question comes from the line of, I hope I pronounce this well, Mr. Angel Kansagra of Barclays. Your line is open.
Hi. Good afternoon, all. I just have two questions. The first one is on the combined ratios on disability. I see that the commission ratio has fallen a lot to 9.5%. Is this something which will continue, so that we'll need to adjust the model, or this was just one-off? The second one was on the operating ROE. You're running quite ahead of your target of up to 12% in the medium term. Even excluding the impact of pension remeasurement, the ROE would be around 13.7%. What's your guidance for the full year? Would you be running significantly ahead, or do you see a fall in the ROE in line with your medium-term target? Thank you.
Thank you, Angel. On your first question on the disability commissions. Indeed, they are a bit lower than they were last year. There are two reasons for that. The first one is a change in the portfolio mix. Traditional, there is a higher level of commission in individual that was even sometimes up to 20%, that was lowered years ago to 17.5%. In the group business, the average commission is somewhere around 10%. Because the mix has changed a little bit, our portfolio slightly shifted a bit more to group business. That's one reason why the commission is lower. The second reason is a few years ago for individual business, there has been a ban on commission that didn't affect the existing portfolio, but it affects new business. Any new business, any real new business, new customers come in at a different commission percentage.
Over time, the commission percentage will be a bit lower than it used to be in the past. That actually doesn't affect the results of our disability business because if advisors take out the commission by customers, the price will be a bit lower. From our point of view, it doesn't affect the results of the business, but it only change the relationship between commission and premium. Is that clear?
Yeah. What you're saying is that in absolute terms, the commission might fall, but the ratio would not be impacted much.
The absolute business result will not be impacted over time by the fall of the commission ratio.
Okay.
Angel, on your ROE question. Just for the record for everybody, if the IAS 19 actual gains and losses would have been stable at the same level at the end of last year. If you hold pen and paper, the IFRS ROE would have been 19.8, operating ROE 13.4, financial leverage 24.3, and double leverage 99.4. Again, still very strong, very solid numbers. Indeed, it exceeds our midterm target of an ROE up to 12%. Is it time for us to change our earnings guidance? I think that's not the case. We stick to the guidance we've given at the IPO. Please note that the biggest threat to the ROE is the E, not the R at this point in time, which is, relatively speaking, a good problem to have.
Yeah, indeed. Thank you.
Ladies and gentlemen, before moving on to the next question, just to remind you may still press Star one for questions. Star one for questions. Next question comes from the line of Mr. Bart Horsten of Kempen & Co. Your line is open.
Yes. Good afternoon, gentlemen. From a few follow-up questions on capital creation. You indicated that the net release of capital also included the runoff of your individual lifebook, I was wondering what part of the net release of capital was that in the 4%? What can we expect going forward? Will this 4% be for a longer period, a release of capital due to this runoff? My second question is more a factual question on the solvency ratios of your subsidiaries, so life and non-life, whether you could give us these numbers. I have a more generic question on your health insurance business. In Dutch Parliament, there's currently a discussion going on whether health insurers would no longer be able to pay out dividends. I was wondering if that would pass this law, what would that mean to ASR? Thank you.
Let me start with your last question. Actually, the debate is a reverse debate. It is currently forbidden to pay dividends, there is a discussion ongoing whether it should be allowed to pay dividends. We will await the results of this discussion, as we have said at IPO, we will not further add any capital to our health insurance business. The health insurance business has to earn its own right of existence, has to earn its own capital, if they realize further capital growth, we will use it to invest it in the health business. The reason we are still in health business is it is connected to our disability business.
We have one very successful product where we offer the combination of disability insurance and health insurance for employers, where they are able to insure their employers and to help employers to return to work if they call in sick. That is from the viewpoint of the disability business, a very attractive business. Secondly, we sell a lot of health insurance through our Ditzo brands, we have a high level of cross-sell between the health business and the P&C business within Ditzo. For us, we don't add any capital. I think by heart, 1.5% of our total capital is in the health insurance business currently. It's very capital light. The takeaway from that business is that it provides us with growth in the disability and in the P&C business.
That to your question, Bart and I, for the two other questions, I think Chris is ready to answer.
On the question on the release of capital, what was the contribution from the individual life business, and how stable is the 4%? The 4%, really the bulk of it was individual life. If you think about our life business, it has life, pensions, and funeral. Actually, the funeral business continues to accrue liabilities. We invested in NIVO, and given the duration of those liabilities, it still tends to grow. So it actually consume a bit of capital because of the long duration of the assets, that the reduction, really think about the bulk of it, probably 80%-90% is the run-off of the individual life book. The smallest portion really is the gradual decline of our defined benefit business. So it's really predominantly individual life. Does it make the 4% stable? Probably, yes.
There will be some lumpiness over time because business capital runs off as portfolios expire. We have chunks of portfolios that were written in the past. You've got these, in Dutch, [Foreign language]jaarlagen[/Foreign language], annual layers, cohorts of businesses written in a certain year, that will expire in a certain year. In the long run, the next foreseeable period, this is a reasonable assumption, there may be some volatility as in some years, a bigger chunk of the book, a cohort of policies expire, the second half year, you have to wait for the next cohort to expire. A bit of chunkiness when different cohorts, groups of policies expire.
Okay.
On average, this is the number you should feel pretty comfortable at. In terms of giving the solvency ratios of our subsidiaries, at this point in time, we don't. The reason is we are in a process of merging various individual subsidiaries, creating one ASR non-life business and one ASR life business. We have already integrated Eendracht. We're awaiting approval for AXENT, we just received approval for our non-life businesses. Giving numbers on individual entities that are about to be merged-
doesn't make that much sense because they then can be outdated the moment you put them to paper. What we do today is let's give you the comfort and confirmation that the consolidated solvency level of these subsidiaries is sufficient, that we have been able to upstream significant amount of capital already to the holding, especially from our life business in the first half year.
Okay. Maybe a follow-up on that. Does it deliver any additional capital synergies, both on requirement or available funds with merging these separate entities?
Well, basically what it does, it pushes diversification benefits from the holding into subsidiaries. It makes them tangible because diversification across legal entities happens at holding. Once the merging happens into those legal entities. It does not mean it will go out upstream all these benefits immediately the day after the merger has taken place.
That would be not a responsible thing to do. Please note that we have a policy of moving towards a certain amount of holding cash at group, EUR 350 million. For the rest, we believe in giving and leaving the capital as much as possible inside the operating entities, because that really is where the money is made. As long as our operating entities generate attractive returns on capital, we feel very comfortable leaving the capital cash in the subsidiaries. At least it improve and enhances our flexibility when it comes to capital submission to the group.
Okay. Thank you.
Ladies and gentlemen, if there are no more questions, no further questions, I would like to hand over to Mr. Jos Baeten of ASR for the final remarks.
Well, everybody, thanks for joining us and being with us for almost two hours. ASR had an exciting first half-year with our IPO at the 10th of June and all the preparations. After that, we felt Brexit. We have seen some severe hailstorms. Despite all this, we've delivered upon the promises we've made at IPO, a capital stock of EUR 191 based on the standard model. We're meeting the target on the capital flow of EUR 159 over the first half-year, we execute our strategy in a very disciplined way. We're very confident that also the second half-year, everything being equal, will be a successful year, that ASR will be able to deliver its promises as made at IPO.
Hopefully, we will be able to report on that somewhere around the 22nd of February next year, because in that period, we will present our full year figures of 2016. I wish you all a good day. In the Netherlands, the sun is shining. Hopefully, you're somewhere where the sun is shining too, some of my colleagues promised me to look for a terrace and to drink a cool glass of beer on the results we've presented today. Chris will go back to Snow White and join his seven dwarf children. Thanks, everybody.
Thank you.
Ladies and gentlemen, this will conclude today's presentation. Thank you for attending. You may now disconnect your phones. We hope you have a very nice day.