ASR Nederland N.V. (AMS:ASRNL)
Netherlands · Delayed Price · Currency is EUR 64.56
+0.58 (0.91%)
Apr 30, 2026, 5:38 PM CET
← View all transcripts
Earnings Call: H2 2015
Feb 18, 2016
Good afternoon, ladies and gentlemen, and welcome to the IS Air Annual Results 2015 Call. At this time, all participants are in a listen only mode. Today's call will be hosted by Mr. Chris Villek, CFO and Mr. Jack Jullicker, CIO.
The call will start with presentations by the 2 hosts followed by Q and A session. At this time, I would now like to hand the call over to Mr. Chris Vighay, CFO. Go ahead please, sir.
Very good. Good afternoon, ladies and gentlemen. Welcome to the ASR annual results presentation. I'm here joined by Jacques Huttiger. As his customary, Jacques, who heads up our Financial Markets and Asset Management business and myself, CFO, will guide you through the results of ASR over 2015.
Before we start, I'd like to make 2 points of order. As you may be aware, the Minister of Finance, our shareholder, has made a decision on the privatization process of ASR, which has been endorsed by Parliament. That process is ongoing, and we have agreed not to, at this point, comment on that very process. There will be a time and a place for that, but today is not the time or the place. So we cannot and will not give any comment on that very process.
And secondly, you will understand in the light of that process, we cannot and will not give any forward looking statements. So again, there will be very strict in our answers in the Q and A. And we hope and trust you understand that. So my final forward looking statement for today is that I will make no forward looking statements in this call. Having said that, I'd like to start with the presentation and walk you through the numbers.
My lawyer suggests me to read to you Page 2, but I'll leave it to you to do it in your own time. Let's move to Page 3, where you find the key messages on the ASR results. The operating result of the group increased to €521,000,000 from last year, up about 25% from last year. The operating ROE of the group is up 13.9%. The net result increased to a little over CHF 600,000,000 up from €423,000,000 last year.
The difference between the 2, you may or may not recall, is, first of all, capital gains and fair value changes and secondly, incidentals and one offs that do not relate to the insurance business. And the fact that the IFRS result exceeds the operating results is a reflection of the significant capital gains and fair value changes we realized or we achieved during the year. But both measures up significantly to a very healthy set of levels. The group solvency, estimate at a €185,000,000 post dividend. We'll talk a lot more about it in the course of the presentation.
We apply a certainty or uncertainty band with around 10 percentage points plus or minus around that. We'll elaborate much more on that in the presentation, but solvency after dividends of €1.85 For comparison purposes, it was €1.90 before dividends. So end of year, €190,000,000 before dividends, €185,000,000 after dividends. And Solvency I, we'll miss a little France, Solvency I, but we go out on a bang with a Solvency 1 level of 3 0 5%. Premiums, roughly stable in non life stable at €2,400,000,000 in life segments, stable at €1,800,000,000 where this year the significant pension buyout that we closed last year as part of last year's new production was reflected in the gross written premiums of the Life business this year.
Operating expenses up to €575,000,000 primarily because we acquired new cost basis. The bulk of the increase in cost was due to acquisitions, which is acquired new businesses that brought staff and brought existing cost base. The remainder of the cost increase can be explained by 1 off projects, mostly from a strategic or regulatory nature. Finally, what makes me most proud is the step up in the pace of our balance sheet and portfolio optimization. We made a series of acquisitions during the year and we optimized our balance sheet.
And if you actually look from a distance at our numbers, I'm proud of what I call the triangle between a high ROE and operating ROE of about 14%, Solvency II above 185% and double leverage back to 102%. So to me, it's a combination of a high ROE, a high ROE, a high solvency and low double leverage that make ASR stand out and it makes me as a CFO very proud and very pleased with the results that we actually achieved in the last year. Now let's turn to Page 4 when we go into the operating result development. Here you can see the difference between the IFRS profit and the operating result in 2014 and 2015. Now again, let me stress, our operating result is a very clean and neat result.
It is actually the result in the insurance business, excluding capital gains. It is not a profit before trouble. It is not a profit before misery. Now all the insurance effects are in there, but we take out incidentals that do not relate to our core business and we take out fair value changes and capital gains because we believe this number is the best reflection of the underlying delivery we achieved in 2015. As you can see in this chart, our 2015 before tax IFRS profit of 7.80 percent, we take out 3.71 percent of capital gains and fair value changes.
The bulk of it compared to last year is actually a large capital gain realized in H1. We rebalanced the equity portfolio. As you may recall, the value of the portfolio drifted upwards. We put it back in line with our strategic investment policy. And doing that, we realized a capital gain.
So the bulk of the increase versus last year is a capital gain on equities portfolio. Then we take out incidentals. Last year, it was a write off of the Volba, which we found not to be core to the insurance business. This year, the biggest incidental actually is a €91,000,000 notation to a provision for real estate development business. On top of that, there is social plan cost and spend on
M and
A and on strategic projects. The remainder, €5.21,000,000 really is the earnings that are core to the insurance group. So here you can see operating result up CHF 104 1,000,000 versus last year. The key figures summarized again on Page 5. You can see the operating results and the operating ROE and a net result and a net ROE.
The operating result of 5.21 translates into an operating ROE of 13.9%. And here, we applied a simple statutory tax rate of 25%. The detailed calculations are found in the appendix. So operating ROE of 13.9x capital gains and net income ROE of 17.2x including capital gains, two numbers that we are quite proud of that we present a very strong delivery in 2015. Dividends at €170,000,000 up 22% in last year agreed about with our shareholder taking into account taking into our mind the operating result level and operating result improvement.
And finally, the Solvency II, according to the standard model, which I will elaborate more on later in this project on this discussion, so amplitude 185 midpoint estimate and for certainty purposes, a small modeling related bandwidth of plus or minus 10%. ASR is known for its strategy to contain costs on a regular basis. Page 6 shows you the continued containment of the underlying cost base. On the left hand side, you can see the gradual decline in our cost base from $614,000,000 in 2011 to $5.19 today or $575,000,000 including one offs. The bulk of the cost increase, as I said, was acquired new businesses.
We made a number of acquisitions and we added FTEs and cost base to the group. If you strip for that, what remains is a small increase that can fully be explained by incidentals and one offs, M and A projects, strategic projects and some additional spending on regulatory developments. With that, the underlying cost decline is ongoing, which is best reflected if you look at the FTEs. The FTEs of the group keep on being reduced. Productivity keeps on increasing.
Even this year, if you strip out acquisitions, the amount of people dropped by 200 people to our FTEs in our group, whilst overall profit and premium levels stayed the same, a signal of continuous gradual improvement in productivity. Now I will dive into and go into the returns by the different business lines. Before that, we felt it was good to give you on Page 7 the overview. How does the results stack up between the various business lines, both on an operating basis or on a net basis? And on this chart, you can see how the 5.21 in 2015 breaks down into a non life profit and life profit, small segments and holding and other eliminations.
Here you can see the difference between operating results and net results because the left hand chart does not contain real estate development. We consider that non operating. The right hand chart does contain real estate development. And secondly, you can see on the life side the difference between the operating result and the net result, which is the capital gains that were basically realized in the Life business segment. But again, you can see how the different lines together stack up and how the total profit of CHF521 or CHF601 is being built up.
Let me talk you through the businesses. 1st, going to Non Life. The absolute profit in Non Life this year amount to €169,000,000 We are very proud of that number. It's a significant positive and large number. We are a significant and profitable non life operator with a stable and predictable and high operating profit in non life.
Our premiums were roughly stable, reflecting an increase in health, small decline in disability and increase in P and C. In disability, last year in 2014, we understood that our market share increased in a by the way, declining market, but our market share increased. In 2015, we cannot say yes at this point in time because our market figure is not available. But we are pretty comfortable with the numbers that we actually produce. In P and C, our total volume went up.
Our premium level went up whilst writing a 98% combined ratio. And the combination of a small increase in premiums whilst maintaining a 98% combined to us is very satisfactory. The group combined ratio was stable at 95%, which you can see on this page. If you zoom in on disability, our combined ratio improved to 89%. As a matter of fact, our disability business excluding the Veiglia effect, we've had a combined ratio below 100 since 2010.
And if you look at individual quarters, about 8 of 12 quarters, our combined ratio has been safely below the numbers that you are seeing here. So it's a continuously profitable business. Our P and C combined ratio went up from 95% to 98%. Two reasons. One is we actually priced around 98.
That's the long term combined ratio that we price our products for and have priced our products for. Secondly, in 2015, there were a number of storms, especially the storm at the end of August with quite the hailstorm caused quite some damages. Effectively, the 5 storms together in last year represent about a 1 in 5 event, 1 in 5 year event. We had a number of fires. We had a number of small reserve releases.
If you add that all up, the whole complex of storms, large fires and reserve releases pushed up our claims ratio by 0.5% if analyzed last year's figures. Take into account the exceptional storms, the exceptional fires, plus the benefit of my new reserve methodology, together my combined was pushed up by almost 0.5%. If you look back at the P and C business, in the last 9 out of 11 quarters, the claims ratio was below 65%. So to us, we run a very healthy P and C business with continued low claims ratios, the occasional spike from storms or large fires, but sustainably below 100. So we're very pleased with the achievement what we realized last year.
Air and Health, a combined ratio of 95.5%, predominantly due to some positive results on the Health Equalization System. In summary, in the Non Life business, an absolute profit of €169,000,000 up from €165,000,000 so a very solid absolute number. Secondly, we're able to run a P and T business at a combined of 98 and still grow volumes. And we're able to keep we have been able to keep our market share and disability historically stable to up with a combined of sustainably low last year below 89%. So very satisfactory and strong performance in the non life space.
If you move into our Life business, you can see the operating result in Life, up from 349 to 4 34. The increase mainly explained by 2 factors. 1, last year in 2014, we made notation to a provision to compensate customers for surrender value floor payouts in the past. That compensation, that provision did not recur. So there was a one off negative in 2014 that not reoccur in 2015.
And secondly, you may note we run an accounting system called shadow accounting, where the life results of where the results of fixed income securities that tied to the life liabilities actually are reflected in our balance sheet. And only capital gains out of those are added to the investment margin. Last year, we realized some capital gains in the life business in this matched book and our accounting methodology, these are then amortized over the lifetime of the securities. That also led to an increase in the Life result. So our matching portfolio added sustainably to the 2015 result.
That increase or explains the operating result increase. We've invested restraint in writing new business. You can see new production down from 140 to 92. That is to a large extent deliberate, because we feel in the current interest rate environment, there's no point in changing large amount of volumes. And we are holding back on new business volumes.
Last year, we had the APE, a large pension buyout. This year, there was one similar type of contract. That is in the numbers, but of a much smaller magnitude than last year. Premiums up. That was because the buyout of last year was in the premiums of this year.
And finally, operating costs are up, but that's mainly because the acquired businesses, the acquired cost basis land in the Life business. We acquired Accent. We acquired the Eindacht. Those businesses are accounted for in the Life segment. And so that explains the bulk of the cost increase.
But in summary, Life was up significantly, partially because of a non recurrence of a negative last year, partially because of a capital gains reserve that's now amortized over the lifetime of the book related to the matching portfolio. And secondly, very much pricing oriented, value oriented pricing holds us back on new business and that is deliberate. Let me talk about the strategic acquisitions. We made a number of acquisitions and I'm turning to Page 10 at this point in time. We made a number of acquisitions last year.
And it's important to show to talk to how they actually hold together, how the consistency between those acquisitions. In the top end of Page 10, you can see the Eindracht, Aksend and Nivo. The Eindracht is a pension operation, AUM of €1,800,000,000 Aksand is a funeral business, AUM of €1,700,000,000 and Nivo is a funeral business that we acquired using Bayer technology. Together, this represents a significant increase in scale and volume in the life and pension field, but with a balanced mortality and longevity book. As a matter of fact, the mortality oriented assets from Axenta and Nivo exceed the longevity oriented assets.
So we do add scale to the business, but we do that in a very balanced and measured way. On the bottom page, you can see BH Asset Management. We acquired the asset management function of the bank Nederland surgemeinten. We believe the pension market has actually developed in the last year towards more of an asset management market And we feel it's good to position ourselves in that field and to add a professional asset management, a third party asset management firm to our group to build on the existing asset management skills. And there you can see a little arrow.
The asset management skills that we have will help or this have helped us support the client of the Eindracht. Secondly, we acquired 2 distribution businesses, Van Kampen and Dutch ID, also called BOVAL. Those are service providers that service different intermediaries in the country, Van Kampen in the P and C space and Boval in the disability space. Those add to our distribution skills. They do 2 things.
They add basic fees. It's a fee based business, so they make money in their own right. Secondly, they help us put our ear to the ground and be much closer to the actual field, the intermediary field in disability and P and C. Are ears to the ground and we hear every trample through those acquisitions. So together, you can see the consistency between the various acquisitions.
On the right hand side, we do discontinue operations. We sold SOS International. We are not the best owner of an emergency center, emergency call center. That sale was announced relatively recently. And the sale of Real Estate Development that we announced is ongoing.
That process is ongoing at this point in time. So you can see how we strengthen scale and volume in non life in life in a very measured fashion. And we add distribution skills to our non life areas, so we can actually run our factory, but add volumes there. And finally, we strengthened our asset management business through the acquisition of B and K. Then I turn to the non insurance activities.
I would ask you to read Page 11 12 more or less simultaneously. I hope and trust you can. We have a number of segments, subsegments. In this field, we opened up the former segment other into categories 1, bank and asset management, a segment distribution, holding other and a segment real estate development. Banking and asset management is core to the group.
The operating result increased from €7,000,000 to €12,000,000 in the year. Honda Bank, who by the way runs about 2% of our capital base, has a core Tier 1 ratio of about 20%, so a safe and solid savings bank. Saving deposits increased by 14% to €1,100,000,000 The group originated about €1,400,000,000 in mortgages and the total mortgage portfolio is now about €6,500,000,000 in size. If you look at the newly added mortgages, about 60% was NASD and the remainder 20% at a loan to value of less than 85%. So we continue to write very conservative and prudent level of mortgages.
In Distribution and Services, we added some company involved. The effect of that acquisition was small because they came in during the year, Boval as late as November. And we reclassified SOS International and discontinued, which you can see clearly on Page number 12. In the holding, the operating result improved from negative 102 to a negative 93. These are the holding costs, pension expenses and a number of other costs.
What is particularly important, some small increase in operational expenses, mainly due to specific projects around regulatory issues, around M and A and also around Solvency II implementation. But to compensate, we had lower costs for our pension expenses in the group. Finally, in Real Estate Development, we broke down the Real Estate business into a runoff business and a discontinued business. We have a business in runoff where we have ongoing commitments to build Leidser and Santo predominantly, which we will and live and shall and will live up to, but we provided for those costs to businesses to make sure we're as conservative as prudent as we can. Total provisions about €173,000,000 now cumulative on NPV basis.
So with that, we have provided for the business really significantly. And the remainder is up for sale and a sales process ongoing. And we further marked down the values of those assets to realizable sale value. And the right hand column of Page 12 gives the total. So in summary, we broke up, we opened up non insurance business into a number of segments.
2 are core and are continued. There we can see an increase in operating results, a gradual decrease in holding costs and a careful and very prudent revision on the real estate development side, both for the runoff piece and for the discontinued piece. With that, I'm closing off the presentation on the business developments. We talked about life, non life and non insurance. I'd like to hand it over to Jacques to talk about the investment portfolio.
Thank you, Chris. When we turn to slide number 13, we see an overview of the investment portfolio. Last year's economic environment was characterized by upcoming optimism around economic recovery, extremely low interest rates and uncertainty about the growth in China. Despite the increase of interest rates after historic lows at the end of the Q1, the investment portfolio showed a satisfactory and solid performance with all asset categories outperforming the benchmarks. The composition of the portfolio remained unchanged, and the investment results delivered a stable contribution to the performance and strong capital position of the group.
Total investment income amounted to €1,250,000,000 of which about €350,000,000 can be attributed to indirect investment income. And the direct or running yield, including releases of the provision shadow accounting, was 3.2%, which is well above the average level of the guarantees on the life products. The strategic asset allocation is based on a partial internal ECAP model, which is more granulated than the standard model and is fully compliant with Solvency II requirements. The total investment portfolio increased as a consequence of the acquisition of funeral insurer Accent and pension insurer De Indraft. The reasons for the satisfactory performance are as follows.
In the first place, in the second quarter, equities were sold and capital gains were realized. Secondly, the movement from liquid assets to less liquid assets like residential mortgages have been continued. And thirdly, additional investments were made in corporate bonds and lower tier 2 bonds. And in the 4th place, we took advantage of the weakening of the euro against dollar by taking a tactical position in dollar denominated credits. So to summarize, the asset base remained resilient and robust, showed a good performance and contributed to the strong capital position of ASR.
Let me turn to the next slide, slide number 14, with an overview of the fixed income portfolio. The value of the fixed income portfolio went up by 2%. And the increase of €2,500,000,000 of the fixed income portfolio related to the acquisition of Aksand and Ingracht was for the most part compensated by a drop in value of the derivatives portfolio and the overall impact of the net increase of interest rates. The high quality of the portfolio is reflected in the rating distribution as was presented on the previous sheet. 70% of the fixed of the bond portfolio is invested in Dutch and German government bonds, and only 5% is below investment grade or not rated.
And the share of AAA increased due to the upgrade of the Netherlands from AA to AAA status. And the exposure to EU peripheral countries has been reduced in the Q2 due to the uncertainty around Greece. Last year, the volatility adjustment has been introduced under Solvency II. As you know, the volatility adjustment is an additional spread that is added to the Solvency II discount rate and is derived from a reference portfolio of an average insurance company. Compared to the volatility adjustment reference portfolio, our fixed income portfolio is overrated AAA Sovereigns, overrated non financial corporates and underrated EU peripheral government bonds and financials.
Given this deviation in a flight to safety scenario, when spreads widen, the VA spreads widens more than the spreads on our fixed income asset base. And the consequence of that is that our own funds go up and that has a positive impact on the Solvency II ratio. We have applied in the current low interest rate environment, dilemma is whether to hedge the interest rate risk in the regulatory environment, including BUOVR or to hedge based on the economic environment, excluding the ultimate forward rate. ASR decided to immunize the SCR ratio from rates movement based on the curve including U of R. And a boundary condition is that the STR ratio excluding U of R does not drop below 100%.
As a consequence of this policy, the interest rate hedge was reduced by shifting to payer swaps and swaptions, and that resulted in a lower value of the derivatives portfolio together with the overall increase of interest rates. In order to protect the running yields from dropping too quickly, the controlled shift from liquid assets to less liquid assets was continued. And that is illustrated by net increase of the residential mortgage portfolio with 1,000,000,000 dollars and an increase of the corporate portfolio with 1,200,000,000 dollars The risk return profile of the financials portfolio improved. Within the financials portfolio, the share of lower tier 2 bonds and senior bonds has been increased at the cost of tier 1 bonds. And Tier 1 bonds, the Tier 1 portfolio is 1% of the total fixed income portfolio.
Let's turn to the mortgage portfolio. The residential mortgage portfolio remains of a solid credit quality. About 90% of the portfolio has loan to foreclosure value lower than 100% or is NHG guaranteed. Under Solvency II, residential mortgages are classified under counterparty risk. And the average charge is between 5% and 7%.
And due to the tightening of spreads, the market value of the mortgage portfolio went up to R240 1,000,000 And the decision of the supervisor not to grant a beneficial treatment to energy guaranteed mortgages had no impact, as these mortgages were not treated differently from non guaranteed mortgages. The conclusion is that the risk return profile of the fixed income portfolio and the mortgage portfolio remained solid and showed further improvement. A controlled shift to less liquid assets has been continued to protect the value yield and immunizing the SCR ratio, including U of R, has been given priority. That brings me to slide number 15, with the equities portfolio and the real estate portfolio. During the Q1, the available budget for equity risk, which is one of the components of market risk, when down as a consequence of the drop of interest rate to the lowest level ever.
And in such an extreme rate environment, the boundary condition of SCR, excluding U of R, became restrictive. And the consequence was that we sold $500,000,000 of equities to remain within the risk tolerance levels and realized a cap gain of €150,000,000 As interest rates recovered, we started to reinvest in equities and real estate funds in the completely de risked portfolios of Accent and Indart. And including unrealized value changes during the year and additional net investments in other insurance companies, the equity portfolio increased with €700,000,000 to €2,700,000,000 We continued the policy of downward protection of the left liquid part of the equity portfolio by a put option hedge, and the amount hedged was about 700,000,000. The equity portfolio showed a strong performance, and that was mainly attributable to the 5% participation. We have applied the transitional rule that defines a 22% downward shock instead of a 39% downward shock.
We have applied that for the equities held as of the end of 2015. Furthermore, in accordance with Solvency II regulation, the look through principle has been applied for participations in investment services. So let's move to the real estate portfolio. The real estate exposure has been reduced. As sale of participations in the Dutch Prime Retail Fund and the Dutch Core Residential Fund to 3 pension funds, 1 Dutch insurance company and 1 Japanese bank, resulted in a decrease of the portfolio with €369,000,000 In addition, properties with a market value of 102,000,000 were sold.
Total acquisitions of rural and retail premises and our own office building amounted to 170,000,000 Indirect investment income from real estate amounted to €145,000,000,000 mainly attributable to renovations of rural real estate and residential real estate. And exposure to commercial offices, where vacancy rates went up, remain limited, and almost 50% of this portfolio consists of own use properties. The performance of all real estate categories was better than the IPD benchmark. The portfolio remains of high quality, and that is driven by our dynamic acquisition and the investment policy. Vacancy rates for retail and residential remained low, and impairments on the properties that were leased to the defaulted retail store V and D were €15,000,000 As Chris explained, asset management is an important non insurance segment.
Managing portfolios on the basis of the characteristics of liabilities have been one of our core skills for a long time. We have built a track record in management of real estate funds for third parties, and we attracted funds from institutional investors. And ASR manages funds on behalf of policyholders and separated accounts. The total assets under management amounted to RMB44 1,000,000,000. During the last year, we invested in our asset management skills to be able to offer to institutional clients and to the ASR, general pension fund, the ASR APS, an integrated fiduciary management proposition.
And the acquisition of B&G Asset Management with a specialized asset management team can be seen as supportive to this strategy. In summary, the real estate exposure has been reduced and we reinvested in equities And equities showed strong performance and the performance of real estate was good as well. That brings me to the overall conclusions. 1st, the asset base remained of high quality and proved to be resilient, and the performance contributed to strong capital position. Secondly, the controlled movement to less liquid assets has been continued to protect the running yield.
And thirdly, real estate exposure has been reduced, and we reinvested in equities related to the rerisking of the acquired portfolios of Accent and Indoch. We continued to invest in our asset management skills to be able to offer the ASR, ABF and institutional clients an integrated proposition. That brings me to the end of the presentation of the investment portfolio. Chris, I want to hand over to you.
Thank you. Jacques, thank you. Ladies and gentlemen, let's turn to Page 16 on solvency and balance sheet management. It's my understanding that this day and age, most investors look at insurance capital the way Winnie the Pooh looks at Honey with lots of interest and lots of excitement. Since I was spending a considerable amount of time on Solvency II and really further boosted our disclosure in this field.
I'm going to talk about the level of solvency, the level of SCR. I'm going to talk about the movements in our solvency ratio. I'm going to talk about the sensitivities of our solvency ratio. And my conclusion is over the past year, we've achieved a lot of progress and our approach and numbers are consistent. You will find or at least we find over the past year consistency between the level of solvency, the sensitivity of solvency and the management ladder by which we'd actually operate.
So bear with me whilst we walk through these detailed pages. Page 17. Some people call me old fashioned, but I'd like to look at book values over multiyear periods. The development of book values, owned funds over multiyear period of time often give a good indicator of underlying trends. On this page, Page 17, you can see the IFRS equity, the Solvency II owned funds and our ECAP owned funds.
A little note on the letter. We have an ECAP model. It's an internal model, but we have not applied that model for regulatory purposes. We have not applied the model for approval for Solvency II. We have only used it so far to steer our own asset allocation.
The main difference between the FCR and ECAP is in our own model. We model risk factors differently. We model correlations differently and model tax treatment differently. Historically speaking, rule of thumb, there's a 20 points difference between the 2. That varies over time, but historically, it has always been around 20 points.
This year, our SCR last year to this year went up by 15 points. ECAP went up by 20 points. The difference mainly is the treatment of taxes, the LAC DT, but we'll talk about it later. In the SCR, we've provided for a markdown on the LAC DT. In ECAP, we have not because the SCR world tells us there is no such thing as fiscal unity.
As a fact, in practice, there is. So the ECAM model does contain the reality of fiscal union where the SCR does not. But again, back to this page. All numbers go up. Whether you include hybrids or exclude hybrids, the way you look at the numbers, we see growth in IFRS Equity, SCR owned funds and ECAP owned funds.
That to me is a good signal of the underlying trend of the business. If we then zoom in on our Solvency II SCR calculation, please turn to Page 18. Page 18 has the SCR according to the standard model. You can see the owned funds and the required capital, the numerator and the denominator. In the owned funds, the unrestricted Tier 1 common equity and retained earnings is about 84% of owned funds.
So not only in our view do we have a large amount of capital, we also have high quality of capital. 84% of the funds is Tier 1. As a matter of fact, if you do the numbers Tier 1 over SCR, you get an SCR ratio of about almost 160%. So the Tier 1 capital alone represents about 160% of our SCR. That is not a target we don't manage by that, but it's something I'd like to have a look at and tells you a bit about the quality of the capital.
We have significant headroom available, Tier 1 headroom. Basically, Tier 1 is defined as 20% of total available capital. That's the max. So if you take 20% of the total available capital minus what we have, the Tier 1 headroom is below €1,000,000,000 In Tier 2, we have headroom of €656,000,000 And Tier 2 headroom, you calculate, is about 50% of the SCR, 50% of the required capital. If you run that number, you get to 656 available headroom for Tier 2.
We had one security reclassified of grandfathered as Tier 1. That's the old perpetual that was issued in 2008 and 2,009. The remainder was classified as Tier 2. And we did not go into a large debate with the regulator whether they should or should not be reclassified as or grandfathered. We treated the new securities, the ones we issued in the last 2 years, all as Tier 2.
So again, available own funds, €6,100,000,000 Required capital, €2,300,000,000 in market risk, €2,400,000,000 in insurance risk. I'm very pleased with the fact that the insurance capital still exceeds the market risk. We are an insurance company. And market risk is an important element of our business, an important contributor to P and L, but the insurance risk still exceeds the market risk. We are underwriters.
And you can see the other elements. I'd like you to point to the diversification benefit, €1,600,000,000 diversification benefit. That's due to the fact that we are, even if we're only active in one country, a well diversified business. We have, roughly speaking, over the years, a fifty-fifty live, non live mix. It changes over time due to large one off contracts.
It changes over time to acquisitions. But when you look at the take a bird's eye view, we're a fifty-fifty life, non life business. And that diversification benefit shows up in our capital. Zooming in market risk, the main factor in market is spread risk, followed by equities in real estate. The main risk factor in insurance is longevity risk, followed by lapses.
But again, the longevity risk diversifies away neatly with the mortality risk, which then shows up in the 1.6 diversification benefit. So overall, a solvency ratio of 185 percent after dividends, 190% before dividends that we're very pleased with. And for those of you who would like to tick boxes on treatment of various measures, yes, we do use the volatility adjuster. We do not use matching adjustment. We have limited use of grandfathering, only €200,000,000 of securities grandfather was Tier 1.
And we did apply the traditional rule for equities, and we'll talk about it in a minute. All in all, we believe it's a very prudent way, conservative way to estimate and to calculate your certainty too. And again, the 185 is a certain bandwidth. We're finalizing the numbers in the beginning of this year when 20 16 SCR is the official number. There's some work to be done on interpretation of the delegated X.
And for security purposes, we apply a plus or minus 10% bandwidth around the number. But even with that, 175 to 195 standard formula is a very robust and healthy that of solvency. Let me turn to the next page, Page 19. This is something we're proud of. You can see on this page our management letter.
You can see on this page the Solvency II development and ROE. The management lever on the left hand side is how we manage our capital base. 100% is the SCR. Below 100%, you're effectively out of business or at least have difficulty maintaining your license. 120% is our official risk appetite, which means if our Solvency II would drop below 120, we'd immediately go into recovery mode.
Recovery mode means cut spending, fire people, stop new production, get back to 120 as quickly as you can. It's a formal trigger level. 140 is a redefined in the cash dividend level. That means at 140% SCR Solvency II standard formula, we'd still be able to pay cash dividends. If we had a small drop down of 140, we might be able to pay dividends.
But today, we use €140,000,000 and we have used €140,000,000 as a trigger for cash dividends. €160,000,000 is a level that we manage on, above 160 or in what we call the comfort zone. As we are above 160, you can invest in your business, you can grow the business, you can make the occasional acquisition and pay dividends and are able to absorb potential negatives. So the 160 plus range is where we feel comfortable in managing the business. And on the right hand side, you can see the ROE.
And you can see the ROE walk up the business from 8.9% all the way to 13.9% this year on an operating basis. So our operating ROE has been increasing whilst our Solvency II level also has been increasing. Jointly, that makes to us a very strong performance over the past years. Now how did solvency develop over time? Page 20 shows a bridge between the 170 last year and 185 this year.
Please remember, last year, we estimated Solvency as €175,000,000 That was before dividends. Take out dividends paid out, you get to €170,000,000 After that, the organic growth of 9%. By organic growth, we specifically defined this year as basically the performance of the business from the unwind of the Solvency curve plus new business initiatives. So effectively, it's assumed that the investments make the returns in the Solvency II curve, which is SWAP plus VA minus spread gross margin, ultimately moving towards the UFR. So the organic growth assumes the investments return to Solvency II curve, plus underwriting profits, plus new business minus new business trends.
Then the market developments are any returns we make over and above that. So the returns we make over and above the Solvency II curve. The first is 9%, the second is 16%. Now one could argue, given the fact that we deliberately strategically have run a rerisked yield investment book, that part of the market movements should be part of the organic business, right? If you run a yield book, if you run a risk bearing book, you would expect in the long run to outperform the Solvency II curve.
For the sake of clarity and simplicity, we decided to not make a split between these numbers, between the 16%. Here is what the business performed over and above Solvency II. And we can leave to anyone's guess how you would allocate it. For simplicity purposes, We've got the operating return, which is the S2 curve and the rest is what we actually achieved on top of that. Then there was a contribution from hybrids and acquisitions.
At 11%. We issued a €500,000,000 hybrid this year. So anyone with a calculator can figure out what the net contribution was in or that investment was in acquisitions, mainly €500,000,000 minus what it takes to finish up the 11% number. In business developments, basically was the implication or calculation of the results from review of our longevity and mortality factors, lapse factors and profit sharing. So business developments deduct about 10% of our solvency.
Then there's a block of what we call methodology changes. To many of us, I'd say, methodology changes in Solvency II are a bit like the Eurovision in some context. I mean, you really don't want to be part of it, but you stay up late to watch the outcome. However, in this presentation, I will dive into these numbers to show you what we've actually done in this field for full transparency purposes. We marked down our LAC DT assumption to 50% recoverability.
We applied a transitional rule for equities. We implemented full fledged look through. And finally, we reviewed the cost allocation in Life. Net net, these methodology changes took out about 14% of our solvency. Finally, the concept of other, basically application of a different curve in our liabilities.
We had an IAS 19 pension liability where we applied the proper curve, the Solvency II curve, and there was a dividend that we paid out. So together, this explains the walk from the €170,000,000 last year to €185,000,000 this year. Organic growth at €9,000,000 Market Development at €16,000,000 Hybrid and Acquisitions at €11,000,000 So total significant organic increase in the business. And then with this year, we really looked carefully at all our liabilities. We kicked the tires off our solvency calculations and strengthened where we felt it was new or useful and tried to be as prudent and conservative as possible.
Now let me talk you through some of those. The transitional measure, we applied the transitional measure of equities, which effectively means that for a certain class of equities, eligible equities, you can reduce the downward shock. The shock officially in Solvency II is 39%. We applied 22% over time over the last year. This will run out in 7 years.
So it added 15 points to our solvency base, but that will run out over time. We applied the look through approach. Basically, the look through approach stipulates that if you invest in an investment fund, we should look at the underlying lines for specific risks in those investment funds: currency risk, spread risk or equities risk. And we apply to look through very thoroughly and very diligently on all the individual investment funds. That made us specify and deep dive on the various risk factors.
That took about 7 points of our solvency. Then lab DT, the loss absorbing capacity of deferred taxes. This is a highly debated topic in the insurance industry these days. We decided for prudency purposes to take a very conservative approach. We've used a 50% recoverability of the tax sector.
Now let me explain how this works. 1, in Solvency II, you absorb a shock. Solvency II is a shock based system, a stress based system. If you suffer losses in such a shock, you should be able to recover some of the losses through taxes. Losses are tax deductible.
The question is, can you recover the tax deductibility in full or in part? In order to recover such a tax loss or the tax deductibility, you either have deferred tax liability, you have current year profits and you've got future profits. Four components are the marked on this slide. And heavy debate, how big and how heavy could you weigh component 4? Could you assume that post shock, your earnings will recover sufficiently, so in a tax loss carry forward, you can actually recover tax benefit from this one off loss.
One thing that we took in mind is that if you depend very heavily on component 4, the LAC DT could actually act as an amplifier. For example, if I have a great year, I make great profits, I have great perspective on future profits, my lag DT goes up. Because I make a profit, I've got more tax loss carried forward. Simultaneously, if I had a very bad year, I make low profits, my outlook goes down and therefore, my LAG DT goes down. So if you apply this factor naively, your LAG DT acts as an amplifier.
It helps solvency on the way up, but hurts solvency on the way down considerably. What we did with last year took a very conservative approach to this model, to this method. We felt we don't want to have an amplifier. And certainly, in this very complicated modeling field, we don't want to be too aggressive. So effectively, we went through all those 4 components.
We took component 23 and a small portion of component 4, where we applied very much haircuts and prudential measures to end up with elective heaters little over 50%, and then we marked it down to 50%. So now we've assumed a 50% tax recoverability factor from LACDET. That took up significant portion of our capital, but we felt that at this point in time, it's the most appropriate and most conservative thing to do to make sure that we're fully prudent and well reserved in this field. The one thing to look out for is a DTL deferred tax liability. But this year, we took out taxable profits and a small portion of component 4 to end up at a 50% tax recoverability.
Then Page 23, expenses and technical provisions. The delegated acts stipulate that insurers should take into account the costs that are made to service policies in the future. Now in our country, the life books inevitably are in decline. The life books are all they were formerly in one off, but there is no growth in the life business. So over time, the volume, the scale of the books intent are expected to decline.
This poses a challenge for your cost base because how will we serve life insurance policies in the future? What does it mean for fixed and variable costs? And that has various relevance when you forecast the cost base going forward. What we did with last year, we reviewed our cost allocation methodology and we decided that it's proper and prudent and conservative to assume that a fixed cost portion stays fixed and stays on for longer. So as you can see on this page, we actually assume it on life the fixed cost base stays stable per policy, the fixed cost share in pension doubles and the fixed cost share in funeral triples.
So it actually you model out as if the fixed cost portion in a per policy base actually increases over time. We almost model that we hardly variabilize our cost base. At this point, we felt that's the most appropriate and prudent perspective you can take in modeling out your cost base and in modeling out your liabilities. Furthermore, we have not included cost per policy synergies from the recent acquisitions. We think they first need to materialize before we actually can take them out and project them into the future.
So again, here we've taken what we call a very conservative and prudent approach to policy to cost allocation. Finally, the volatility adjuster. You can see on this page the relative position of ASR versus the VA reference portfolio. Jacques already talked about it, were overweight AAAs, underweight low rated securities. We're overweight govies, overweight corporates and underweight financials, effectively saying we are protected by the VA in a flight to quality safe haven scenario because we overweight AAA governments, all with corporates and underweight financials and underweight peripherals.
So for us, the volatility adjuster is not something we try to manage, not something we mimic, but the organic design of the asset portfolio has a side effect that the VA helps us when we need it most, namely in a flight to quality scenario. Brings me then to the sensitivities on Page 26. You can see the management letter on the left hand side. You can see a horizontal line with different sensitivities and it crosses at 185. The 185 does not show on the page, but if you extend the lines, you can see there's a cross point 185.
It's where we are post dividends, As you can see the sensitivities. If the U of R would be lowered by 100 basis points, we estimate we'd lose 17, one-seven point of SCR, so a manageable amount. So last year, we would have lost 70 percentage points SCR if the U of R would have been declined by 100 basis points. And you can see on the equity side, we would have lost 5%. Exposition rule would have been 9%.
We have lost 5% if the equity markets dropped by 10% by 20% and so on and so forth. You can see the beneficial effect of the VA. If the credit spreads generally widen, the VA works for us. Actually, a widening effect supports us because the VA does its work by widening more than the VA than the widening of our own asset portfolio. You can see the interest rates in the activity as well.
Finally, on the right hand side, we've depicted the modeling bandwidth, plus or minus 10%. What's in there? It's the final interpretation and finalization of the delegated X and some of the analysis that we're doing. For example, refinement of the LACDT, we've taken a very conservative approach. Refinement of the cost assumptions, especially for those businesses not yet integrated.
It has to do with the application of unblocking our way disability, but also with very technical things like applying the VA in determining the risk margin or spread risk modules in segregated accounts. Now I will not bore you with those details, but there's a whole range of little things and bigger things we need to work through. Safety to say, let's use a bandwidth of plus or minus 10% around those numbers. But if you apply those, the 185 would effectively 175 to 195. Still a very solid number and very safe in our management range.
Again, all numbers as per December last year. Finally, balance sheet management, operational remittance. The Page 26 shows the amount of capital remitted to the group. Operational remittance up 200, 245 and incidental remittance up as well. Operational remittance is a remittance for holding expenses, internal expenses and what have you.
Incidental remittances were for M and A holding cash, so one off remittances. You can see a solid increase in remittances. And you could actually do your own numbers and relate, for example, the remittance level to the operating profit last year or you could relate the remittance level to the organic capital creation. And you can all see that is in line and pretty safe and solid. If you look at the underlying businesses, we manage our group on a segment level on Life and Non Life.
In aggregate, all segments are able to remit capital to the future. So integral basis, the Life segment meets the target SCR and the Non Life segment meets the target SCR and ECAP. So all segments underneath meet the targets required to submit further capital to the whole, at least they met it at the end of last year. Let me make sure I stated correctly. So in this field, we have remitted capital to the holding.
We have had no impediments to remit capital to the holding and our operating entities on segment level are all sufficiently capitalized so that by the end of last year, we could have remitted even more to the holding. Brings me to the financial risk indicators, Page 27. They remain at a very strong level. Leverage, 25.1%, almost exactly where we want it to be. We aimed at 25%, so in line exactly where we want the leverage to be.
We guide we hoped to achieve below 30%. We achieved 25% last year. Interest cover, headline, 14.6 times last year. On operating basis, we ended last year with 9.8 times interest cover, holding rating BBB plus and we managed to bring down double leverage from 121 to 102 as per the end of last year. So very safe and sound balance sheet from our perspective.
That then brings me to the final chart of this presentation. If I look back at 2015, what we realized, we had a number of objectives. 1, to further improve and differentiate on the financial performance. We believe with the delivery of €521,000,000 operating profit, 13.9% operating ROE, that objective was met, a solid outstanding operational and financial performance. And we enhanced financial disclosure, both in segments and hopefully, you will agree with me in this round also on Solvency II.
We strengthened the competitive base of the group, continued organic reduction on FTEs and workforce, continued increase in productivity and a series of operating improvement and changes in the business, which you can see a few examples on this page. We further optimized our balance sheet. We enhanced capital management. Solvency II stands for a very strong, midpoint estimate 185 after dividends, ECAP at about 205 after dividends and our balance sheet further optimized with leverage, interest cover and double leverage all ended last year in very safe and effective territories. And finally, last year, we strengthened the business portfolio of the group.
We added scale in life and pensions, whilst maintaining the risk balance. We added volumes and scale in distribution services. We strengthened 3rd party asset management and then run up to an APF as a business model. And we divested business where we're not the most effective owner. With that, I'd like to conclude this presentation and leave the room for questions and answers.
Thank you, Chairman. Ladies and gentlemen, we are starting the question and answer session now. Our first question is from Mr. Cor Kluis from the Rabobank. Go ahead please.
Good afternoon. Cor Kluis, Rabobank. I've got a few questions. First of all, about interest rate sensitivity on Solvency II. You mentioned that if interest rates rise or decline by 100 basis points that in both scenarios it will be 5% positive for your Solvency II ratio.
And so that's not the key thing, of course. Could you also indicate what the effect would be on the Solvency II ratio, excluding the ultimate forward rates, like you have been disclosing under the old Solvency I regime? And also on the interest rate hedge, which you mentioned that you reduced the interest rate hedge in 2015. When was that exactly? And how is the current situation?
And second question about exposure. Could you indicate what your exposure is on the asset side towards energy and towards the Cocos? Probably small, but could you at least give some indication on that? And my last question is about your remittances. The remittances, operational remittances at least were around €245,000,000 That's around 7.5 percent of your SCR.
You mentioned in the past that the SCR growth every year would around 12% to 18%. How do we have to relate that that you remit less or it will be also to take the non operational part as part of the normal remittances? Those were my questions.
Cor, it's Chris. I will answer this question with Jacques. Jacques will go into details on the hedging program. 1 point on Solvency II ex UFR, we do not disclose S2 ex UFR. We believe, yes, at this point in time, the UFR as such is an integral part of Solvency II.
And estimated it makes sense to estimate the sensitivities. You can see them on the page. We show sensitivity what happened to the UFR is marked down. Estimating Solvency II ex UFR is a pretty hazardous exercise because it depends on what curve you issue in or ex credit risk margin. What do you do it's not something we feel it's appropriate to disclose.
We do disclose sensitivity against UFR. And in terms of rate sensitivity, think Jacques can talk about the effect that you mentioned.
Yes. With respect to, let's say, the sensitivity in the upward and downward interest scenario, both plus 5, What is important to understand that the firstly, the complexity profile of the asset differs from the complexity profile of the liabilities. And that has an impact on the own funds. And then secondly, there is also an impact through the required capital because also the required capital is interest sensitive. So for example, when you look to longevity risk, there is interest sensitivity.
And when you add all those impacts and all those effects, then yes, intuitively, the peculiar impact is that in both scenarios, there is a plus in the sensitivity.
And
then concerning your question on exposure to energy and focus, what I can say with respect to energy is that we are underweighted in energy sector. Gross and mortar you can say the weight in our portfolio is about half of the weight of the indexes that we apply. And the COCO exposure is limited. Yes, it's around €50,000,000 €60,000,000
Okay. Cor, it's Chris again. On the remittances, last year, indeed, we mentioned some number, but that was about capital generation, not so much capital remittance. So if you strip it to the capital remittance this year, operational remittance was €245,000,000 And historically, over the last year, we had a policy where we remitted if and when needed. So when there was a bill to be paid, an expense to be paid, hybrid cost we paid, we remitted.
So we remitted on an if and when needed basis. That number we realized last year was 245. In terms of the capital that we generated last year, on Page 20, the organic growth was 9%. The market developments was 16%. Together, that was 25%.
We can debate with what extent the market movements are natural. The numbers we mentioned last year were basically all inclusive so include organic growth and a series of a set of capital of market movements. So the answer to your question is comparing the 1% to 1.5% per month and the operational remittance is apples and oranges. The one is actually remittance. The other is capital generated.
And we're going to compare that. Take Page 20 and compare to the 9% and the 16%. And you can see we're still in line with that statement that we made last year.
Okay. Wonderful. And good disclosure. Thanks.
Very good. Thank you.
The next question is from Mr. Matthijs Debit from KBC. Go ahead please.
Yes, good afternoon. Also a number of questions from my side. Could you, 1st of all, on Solvency II, provide the breakdown in the movement in the full year, so obviously, tool ratio, but also maybe in H2 and even Q4, breakdown between market movements. Also, M and A is relevant, I think, organic capital generation, so more for the second half and Q4. So that's my first question.
Secondly is regarding the ECAP and possible application of an internal for an internal model. Do you have any plans to apply now that some of your peers have approved internal models? Or is it not on the agenda? And then maybe a last question on the cost assumptions. What are you exactly assuming now?
Is it rising unit cost versus flat unit cost previously? Is that a correct understanding? And your ability to cut the fixed cost is presumably also linked to the phase of the runoff of the individual book. So could you provide any indication or update on how fast it will run off? And in this respect, I also wondered, you guided for a doubling of fixed costs per policy in the pension business.
But I thought this was more treated as a going concern, like not really as a runoff book. So do you see this as a runoff? And could you also provide some insight into the pace of the runoff of the presumably the DB pension book? Thank you.
Hi, Matthias. Thank you. In answering your questions, I'll be very careful not to make any forward looking statements. You can only reflect what we did in the past. So bear with me, Matthias, in my answers.
In terms of development of Solvency over time by quarter, Honestly, it's actually less relevant. I think it's my estimate that the organic growth is roughly equally spread quarter by quarter. The market movements as well, although the bulk the great markets were in the first half of the year, the second half of the year were more challenging markets. The exact split, I don't know. But roughly speaking, I think we did a little over half within the first half of the year, less the other portion in the second half of the year.
The methodology changes all occurred in Q4. So, if you look at the solvency in Q4 headline, you would see that we didn't add that much solvency in Q4 because that when we did all the work on the methodology changes. So from our perspective, if I look back at last year, looking it on a quarter by quarter basis is less relevant because the methodology changes peaked in one certain season.
But if you just look at the Q4 movement and you strip out the methodology changes, could you provide any indication of what's how the movement maybe directionally?
Well, I would say take the organic growth divided by 4 and market developments. If I make a rough estimate over last year, I would take 65% of that was in H1, 35% in H2, and you can divide by month. That's roughly what I need what I estimate looking back.
And with the volatility now in Q1, like the 1st month January 1st week, any update on the sensitive based on sensitivities? That you could provide?
You will understand, I can only refer you to Page 25. There are the sensitivities and they will allow you and enable you to make your own estimate at this point in time.
Okay.
In terms of the impact of the acquisitions, again, we issued a €500,000,000 hybrid. If you look at an 11% growth out of roughly a €3,000,000,000 capital base, you can easily back out the acquisitions. But that effectively is net net cash out or capital contribution and or diversification benefits. The net capital effective acquisition is sometimes a cash out, sometimes it's a capital injection for business that we acquired for very little cash out or it's actually mitigated by capital relief by diversification. But if you take €500,000,000 minus 11% times the capital base, you get a pretty good feel for the net effect of the acquisitions, which is around 4% to 5% of solvency that we spend effectively across all deals together in acquisitions.
On the ECAP model, again, I need to be very careful with any forward looking statements. But historically, we have not applied for an internal model. So up to the last minute of last year, we have not applied for an internal model. And we've applied we've used a standard model. In terms of the cost situation, affected what you assume is that the fixed cost base grows, so the variable cost actually the fixed cost proportion grows.
In life, the book has declined and it's fair to issue. But if there is no new business in this country, the books tend to develop together with what generally expected in the industry. So there, we work on a fixed cost per policy assumption. In the pension market, we have witnessed in the past a shift from DB to DC, from DB products to DC and asset management products, which means that the DB book has declined, but the asset management book has actually grown. The DC book has grown considerably.
Going forward, we've assumed that the fixed cost portion on the per policy basis actually stays actually goes up, which effectively means that the cost per policy in this modeling is assumed to go up over time. That might be mitigated if we indeed deliver on further prioritization, outsourcing of costs. In the last year, we've outsourced our pension business to Infosys. We have outsourced part of the Life business to leanappskeylane. If we continue to deliver on that, that would further support the fixed variable cost assumption.
In the past, we felt it at the end of last year, proven to assume at this point in time actually an increased fixed portion of the traditional life and pension business.
Okay. Thank you.
The next question is from Jan Willem Knoll from ABN AMRO. Go ahead please. Mr. Knoll, you can open your line now and ask your question.
Yes, sorry about that. I was on mute. Good afternoon and thanks for taking my questions. On Solvency II, first on the LEC DT, you've marked down to 50% recoverability. Was this guided for by the regulator or was this your own decision?
And if this was your own decision, are there scenarios possible where you would increase the recoverability percentage again? Because it looks to me you've looked for an argument to mark the LAGTT down and you obviously found 1. And then on available capital, what do you regard as an optimal capital composition as you have significant Tier 2 capacity? Are you planning to use this anytime soon? And what sort of your current core Tier 1 or your Tier 1 capital percentage of total available capital is roughly 80%.
Is that to you an optimal percentage or could it be 70% So some clarity on that will be helpful. And then on non Life, you reported again a very strong combined ratio. Would any prior year reserve releases in the numbers we should be aware of? And more generically, what are the pricing and claims trends in the different business lines? So some color there will be very helpful.
And more specifically on visibility, do you see any benefit from the economic recovery in your claims trends? Your claims trends have been moving down nicely. So some insights there would be helpful as well.
Yes, Menlo. Thank you. There are 4 questions in one. On Lagged DT, you asked whether we kind of solve to lower the lag DT. Well, let me tell you, there are very few insurance companies who solve for lower solven DD days.
We've actually worked very hard on the lab DP. There are a couple of components. The guidance that the regulator has sent out in the industry is that be very careful in using component 4. So component 1, 23 are hard and DTL is a tangible thing. Profit last year and this year is a tangible thing.
Components for profits after a shock is a weak component in substantiating underpinning your lab BP. Secondly, that was more or less translated. If you cannot and should not assume that after a shock, you can recapitalize and use the earnings on the pro form a to be received recapitalization as a substantiation of your lag DT. With that in mind, we went through our lag DT and calculated it. Roughly speaking, we do not have a deferred tax asset on our life balance sheet at this point in time, But we used the tax in previous years and a small portion from the earnings post shock in future years.
As a matter of fact, in what we did in component 4, we took our own multiyear budget. You marked it down after a shock And mark it down by saying that after shock, we have to derisk the business. After a shock, we have to assume that risk margins are less. And we have to assume that actually we applied a haircut to that to be conservative. And then we translated operating earnings into fiscal earnings.
Now that turns into an Excel model of 500,000 lines to actually get to a number. But applying that gave us a very conservative LAPT approach. We didn't solve for 50%, but we rounded down to 50%, because we felt at this point in time that would be the right thing to do to be conservative and prudent around it. Had we had last year a deferred tax liability, that would have made life a lot easier. I cannot at this point speculate on future scenarios.
I think that's not appropriate for this call. But I sort of leave it with that.
So just maybe just jump in on that. So there has been soft guidance from the regulator on component 4. And you have, let's say, interpreted that in a quite conservative way in my own words. And that's how you got to this well rounded sort of 50%
number. Yes. That's a good way of summarizing, yes. In terms of capital, yes, we are have a conservative capital base. We have HettoM in Tier 1 and Tier 2.
How do we think how we thought about it in the last year. We issued a Tier 2 instrument last year. We had Tier 2 remaining capital. At this point, we look at we have looked at our capital in relationship to the return on capital. So the number that we had fell into our comfort zone, and we realized an ROE of about 13.9%.
Together, we feel very comfortable with that. And we've looked at the capital headroom that we had also from a safety valve perspective, if and when needed, we could have raised additional capital as a safety valve if something happens. So we ended last year comfortable with the buildup of the capital, knowing that there is headroom available, but also knowing that the capital that we have today yields sufficient ROE. So we can talk about various scenarios. Looking back, we are comfortable with the conservative buildup and the headroom that we have, the safety valve it produces and the significant ROE.
In terms of non life, we had a small reserve release last year, basically from changing our reservation methodology that added about 1 percentage points to the combined ratio, which supported the core by 1 point. But again, we also had a number of storms. You may remember the August storm, which exceed much more significant than in the past. And we have a number of large fires. So from our perspective, the 3 one offs is increased hail and storm activity in the summer, making effectively a slightly exceptional year.
We had large claims and combined and a small reserve release together that pushed up actually upwards combined by 0.5 percentage point. In terms of pricing, at the end of last year, we have witnessed an improvement in pricing, especially in the motor field. We have observed players in the market increasing their prices a bit. And that's something that we watch and we that's a market development that we actually prefer to see. So last year, we've witnessed some margin support at the end of the year in terms of especially the motor market.
I will not disclose our competitive strategy here in detail, but it's something we actually like to see. In disability, we have delivered the funny thing is, you asked the question, did you see economic developments feed into your combined ratio? Actually, we have not. But also, we never saw downturn developments into our disability combined ratio. If you look back at the past, the combined ratio in our disability business has proven to be relatively inelastic versus general trends in the economy.
There is always a factor, but the way we've priced claims and the way we've managed claims has enabled us to have a more absolute return inelastic combined than you'd expect. So yes, the numbers there may have been some support from the economy. But again, if you look back, the fluctuations in the economy in the past have not correlated well with the combined ratio because we've been below 100 for the last 5 years since 2010. So from my perspective, if I look back at our business, we the way we run the business makes us relatively inelastic for economic developments.
Okay. Very clear. Thanks a lot.
The next question is from Albert Ploegh from ING Bank. Go ahead please.
Yes. Thank you for taking my questions. First of all, many thanks for the good presentation on Solvency II. I've got a question on 2 slides, number 20 and number 26 basically. On slide 26, where you talk about the operational remittance and already some remarks were made on difference with the operational capital generation.
If I look at that operational capital generation comments with more links then to Slide 20 and the components of organic growth in the market movements And basically also your operating results concept, I know that last one is on a pretax basis, But it doesn't do you believe basically that your operational results, if we as analysts look at that one over 2015 and compare that with the operational capital generation that they are quite closely linked and that, as a result, we can, for example, look at the €245,000,000 let's say, the remittance and link that a little bit to the operational result that we get a reasonable feeling for what payout ratio or the remittance ratio has been? That's my first question. And my second question is on Slide 20. If I look at the organic growth in the market developments, I understand your comments that maybe part of the 16 points is also somewhat organic related as well. Is there basically also already some form of relief of the release maybe of some individual books in there?
Or is this purely, let's say, over 2015, really the organic generation of the insurance business, so to speak?
Alvaro, thank you. On the first question, the link between remittance, capital generation and operating profit. In the last years, yes, they were linked, but not 1 on 1. The biggest gap between the 2 is the release from the shadow accounting provision. Our shadow accounting methodology says fixed income investments backing life liabilities are linked to those liabilities.
So any market movements in those assets are reflected in the provisions on our balance sheet. That's the accounting methodology, right? If you realize a capital gain by, for example, trading those securities and optimizing your hedge, that capital gain is added to a capital gains reserve and amortized over time. That does feed into your operating profits, right? However, the capital gains Solvency II is a market value balance sheet.
So the capital gains is already reflected in your Solvency II balance sheet. So the operating profit does not lead 1 to 1 or has not lapped 1 to 1 in terms of operating profit is capital release, because part of the operating profit is a capital gain, which was already in the Solvency II figure, right? So you cannot translate €1 operating profit in Life is not €1 capital generation. What you can do, if you look at the numbers that we've provided, the operating profit for the last year was €5.21 Take out taxes, you get to €390,000,000 And you could actually compare the organic growth, 9% over €3,000,000,000 cost base to the €390,000,000 after tax operating profit. And you get the fair you will get a fair feel how over the last year, the operating profit translated to capital generation.
If you then compare the remittance to it, you can see the consistency between operating profits and the organic capital growth and the capital remittance. But in order to make the full translation, you'd have to take out the contribution from capital gains reserve, shadow accounting and Life to capture the operating profit. Now if I can make one forward looking statement, at some point in the future, we will disclose more about this, but this may not be the day to really go into that. Yes. Your other question was on the organic growth.
In the numbers that were produced was indeed some portion well, in fact, the business strain effect was in the organic growth. It's the unwind of the liabilities against the Solvency II curve, including new business. So, the 9% includes a net effect of the unwind of the LifeBook, but also the increase in business, for example, the P and C business. It's my estimate that last year, there was a small contribution in the 9 from the capital on capital a small contribution from capital strength capital relief from running our books in last year.
Okay. That's very helpful. Thank you.
The next question is from Mr. William Hawkins from KBW. Go ahead please.
Hi. Thank you very much for taking my call and thanks for the presentation. Could you help me again, Chris, on Slide 9, your Life segment, you've already mentioned this, but I'm still getting a bit confused. Can you just be a bit clearer about the increase in the operating result from $349,000,000 to $434,000,000 You mentioned some rather big items, but I'm not quite sure what those numbers are and then what's going on an underlying basis. And then also, if you can just maybe help me, if I take that slide and add the operating expenses back to the operating results, your revenue is something like €650,000,000 last year.
Is there any chance you could give a hint of how that would break down between investment margin, fees and technical results? And then secondly, the €170,000,000 dividend that you're paying, would you consider that kind of a normal dividend as part of normal capital management processes? Or are you still sort of in what you would consider abnormal circumstances, given your ownership structure? And around that, how did you exactly arrive at €170,000,000 So just as a range, why wasn't it €150,000,000 or €200,000,000 for the sake of argument?
Okay. William, it's Chris. Thanks. On the Life side, turning to Page 9, the operating result increased from €349,000,000 to 4 €34,000,000 The most important components was the non recurrence of a provision we made last year. That number is around €40,000,000 made in 2014.
2nd element was additional cost or basically reserve release to fund effectively project cost and pension spending, about €10,000,000 to €12,000,000 The remainder is other plus the increase contribution to the BNL from the capital gains reserve. So €14,000,000 in non recurrence of attains to provisions, €12,000,000 of a release of a provision made in 2014, released in 2015 that we used to spend on regulatory projects. The remainder, by and large, the increased contribution from the capital grade reserve.
I'm sorry. I may be butting in. I may be getting confused, but this time last year, there was a €93,000,000 VOBA charge. Is that outside the operating result line?
Yes. Outside that does not feed into it at all. Yes. Okay. In the investment margin, if you continue to talk about that, the underlying increase, the investment margin, therefore, is an important factor that increases the live results, right?
The underlying increase in the is basically due to the higher amortization of realized gains and lower cost of swaptions. So, basically, gains on the shadow accounting and the swaptions, that portion really is the increase in the investment margin of the business. So that's how you should see the delta between $349,000,000 and $434,000,000 A significant portion is really an increase in the investment margin from the capital gains reserves from the shadow accounting release. As far as the dividend, the €170,000,000 was determined between us and the shareholder. In that, we took into account the level of operating profit, the growth in the profit.
And at this point in time, with all I can say about it, it was carefully considered by all new parties to reflect the underlying trends in the business. And at the end of this magical calculation, this was the number that came out. There will be a time and a place in which we will give more clarity on our future dividend policy. But again, that's not this is not the time and place. The €170,000,000 was agreed between us and the shareholder, taking into account the developments in the business.
The next question is from Markus Roussalt from 12 Capital. Go ahead please.
Good afternoon everybody. A couple of questions for me. Chris, first of all, can you help us out please on the seasonality in the holding and the other line? I think at half year, it's about 61% and I think full year, around 93%. What's more typical half year run rate, please?
Secondly, on the real estate development, I can look at my notes that you took a charge back in 2013 of just over €100,000,000 on this portfolio, and you're taking over charge today. Could you give a sense of why you're comfortable maybe that's it, if it's done now, whether there's more to come there? The third question for me is on, again, the Solvency II chart. The business development is negative 10 points. Is that a normal sort of level of adjustment we should expect to see?
And does it sort of really relate to, if you're thinking in embedded value terms, assumption changes on the business? And then just a final one, again, you've been pretty active in buying businesses like the funeral business. I mean, how has that helped you in terms of does that really help you support the diversification credit? And are those sort of deals are you done there as well? Or do you think there's more I know you might this might be a forward looking statement.
I'm just trying to think maybe if you look at the if you're looking backwards at the size and shape of the group, are you happy with the diversification of it within the Netherlands? And maybe could it be improved? Thanks.
All right, Markus. A couple of questions into one. Let me first comment on the Real Estate Development business. Indeed, with the past years, we've made significant contributions to the provisions for that business. We feel we felt as we are comfortable with the provisioning that we made.
We look at the business from a couple of perspective. We do look at the work in progress and guarantees. That's what we could call the total exposure. And we run worst case scenarios. And with that in mind, we provisioned we provided for the business in careful agreement with the auditor.
It's a level of provisions that at this point we feel comfortable and we feel we can actually substantiate. I can't make any statements on the future, but at the end of last year, we felt comfortable that really significant portion of that business was actually provided for. On an NPV basis, the provision was 173,000,000 Those are the facts. I'll come back to you on the holding cost. There are some looking up that need to be done.
In terms of the business developments, we have characterized that in the past year as one offs. So it was a one off lapse update, was a one off profit sharing update and a one off mortality and longevity update. So last year, we have classified this as a one off deduction from our solvency, where we wanted to make sure by the end of the year last year, we were rock solid in all our assumptions.
So we wouldn't expect to see that sort of movement, you think, as you're getting trapped in for looking forward, certainly. But this is one off in nature, okay.
We've looked last year, we actually taken a one off perspective and make sure that at the end of the year we were rock solid. In terms of diversification benefit, we're very pleased with the diversification of our business. Now I can't say anything about potential future acquisitions, as you are aware. But we're very pleased with the acquisition that we made. And the strategy that we pursued was that adds scale in life and non life whilst maintaining mortality and longevity.
Secondly, add distribution skills to support what intrinsically is a very good underwriting machine. So that's how we looked at the acquisitions last year. And that's all I can say at this point as you understand. In terms of holding expenses, I think what you see in the holding expenses fluctuations is the operating expenses in the holding tend to run relatively stable over time. Where you can see fluctuations is pension charges that run through the year, sometimes because of interest rate developments.
There are changes of one off costs, for example, the implementation of Solvency II or, for example, M and A projects, strategic projects. If you run an M and A project, we did more in the first half year and less in the second half year. The heavy ones were done in the first half year. So that's where you can see those costs emerge. Secondly, in the second half of the year, we issued another hybrid Tier 2 instrument with expenses actually run through the holding.
So various factors play a role, but the underlying operating expenses, the cost of running head office, the Board, audits, communication, etcetera, are running relatively stably over time. But the final number gets amplified by projects, by pension costs and by the hybrid expenses that start to add to the holding cost base after September.
Brilliant. So one can just quickly also, I know you mentioned about the running yield on your Life book about just over 3%. Where you were investing new money today, please?
Jacques?
Yes. What I mentioned was that running yield of 3.2% and that it was well above the let's say the guarantees on the life products. We reinvested on the basis of our strategic asset allocation, so our general investment policy. That means in general, you can say when you look to the composition of the investment portfolio as it is, what's still important is that we in the past always reinvested based on the composition of the investment portfolio. So that is what I can say about it.
For the future, it's I'm not in a position that I can comment on that.
You may say roughly what were you investing at the end of 2015 at then?
Yes. Where we are investing is the majority, of course in fixed income instruments. That's the majority because we have a matchbook, about 16% to 18% in mortgages, small parts in equities and also a small share in real estate.
Sorry? Yes. Markets, I think at the end of last year, as Jacques said, we invested into credits, into mortgages, into real estate and equities. If you look at the direct yields of those instruments, it is hard work to stay above 2%. But think by the end of last year, we're still able to stay above 2% in new money direct yields.
But as you are aware, it's hard work these days to find these instruments.
Thank you very much.
The next question is from Stephen Haywood from HSBC. Go ahead please.
Hello everyone. I just wondered if you could answer a couple more questions on the investment portfolio as well. Do you have an estimate or a rough kind of guide at what sort of duration average duration your fixed income portfolio is? And then could you also relate that to the average duration of your sort of life and pensions liabilities? And then you've spoken about the running yield being higher than the guarantee average.
If you can provide us with the average guarantee on your life and pensions back book, that would be very helpful. Thank you.
To start with the first question, in last year, the average yield was, as I said, running yield of 3.2 and the average guarantee level at 2.6. And when you look to duration versus liabilities, yes, we have a matchbook, a long term matchbook. And when you look to last year, duration levels were around 16 at liability side and 14 at the asset side. But it is important to take into consideration also the complexity here because this only looking to liabilities is not indicating really the, let's say, the interest sensitivity.
We have no further questions, sir.
Very good. Well, if there are no further questions, that leaves me to close-up this call. And I would say, from ASR perspective, we are proud and pleased with what we've achieved. And I guess, a triangle of ROE, Solvency II and balance sheet strength is something that we think has shown this group is able to deliver has delivered in 2015. We're very pleased with the step up in pace of strategic activity that we've achieved in 2015.
So with that, we're very pleased with the results. I hope we've given you further insight into Solvency II, especially the methodology behind it. And it was sometimes boring and complicated. Sorry about that, but that's just a given for all of us. But hopefully, we've given you more disclosure, more clarity on how Solvency works, how we've applied it and how we try to be as prudent as possible.
I'd like to thank you for your questions and especially for your understanding on what we can and cannot answer at this point in time. I would like to thank you for the your understanding and the discipline way you've asked your questions. And so one moving forward looking statement I can make, I guess, we'll see I hope we see each other in the future. Thank you very much for your time and I wish you all a fantastic day. Thanks so much.
Bye bye.