Earnings Call: H1 2015

Aug 27, 2015

Welcome to the conference call of ASR on its interim results 2015. The call will be hosted by Chris Figee, CFO of ASR, and Jack Julicher, CIO, Financial Markets. Go ahead, please. Ladies and gentlemen, good afternoon. This is Chris Figee speaking from ASR. Welcome to the presentation of ASR half-year results. As is customary, I am accompanied by Jack Julicher, CIO of Financial Markets, and Jack and I will walk you through the results of ASR. Today, it is Thursday the 27th. There are two very important events today. First of all, Ajax is playing FK Jablonec tonight. Secondly, ASR is presenting its half-year results. In summary, if Ajax delivers only half the performance of ASR, we are looking forward to a very pleasant evening. With that opening, I would like to point you to page number three, where we have summarized the key messages, the key results for the group for the last six months. The net result of the group increased to EUR 397 million, up from EUR 171 last year. The operating result, which is a newly defined result metric, increased from EUR 221 million to EUR 280 million in the first six months of the year. The main difference between the two, as we will explain later in the presentation, is capital gains. In the course of the first month of the year, we adjusted the equity position of the group. To be precise, due to the increase in stock market valuations, the market cap, the market value of our equity portfolio drifted up and exceeded the risk management bandwidth. So we basically adjusted the portfolio drift, reduced our equity holdings, and with that, we realized a substantive capital gain. The main difference between the EUR 280 operating results and the EUR 397 is a capital gain that was derived from the rebalancing of the equity portfolio of the group. Needless to say, with both numbers at EUR 280 and the EUR 397, we are very pleased. Solvency levels. Solvency I at 297%, up 12 points from last year. Solvency II, standard model, estimated at 185%. The ECap ratio, economic capital model, which is our own proprietary capital model, up to 210%. Those numbers underline and underpin the robust and strong solvency position of the group. In terms of premiums. Premiums in non-life, stable, basically stable at EUR 1,375 million, down 3%, mainly because of the fact that last year we signed a single premium contract in the disability business. If you adjust for that, premiums in non-life segment were basically stable. The combined ratio in non-life improved to 92.5%, improved from 93.7% to 92.5%, below 100% for all product lines. In the life segment, a strong increase in growth in premiums to EUR 1.1 billion, partially driven by a single premium contract in the pension space. So almost a mirror image of the non-life situation, where in non-life, premiums declined for the last year because last year we signed a single premium contract. In pensions, we signed a single premium contract this year. In that sense, that explains the development of total premiums. OpEx, operating expenses at EUR 273, up a bit from last year, but that by and large is due to the inclusion of recently acquired Van Kampen Groep, a distribution service provider. If you adjust for those additional costs and the additional part of the ASR family, costs basically stayed the same. In terms of M&A, you may have seen in spring, we announced two complementary acquisitions, AXENT and De Eendragt. We basically acquired a mortality and a longevity book of roughly equal size in June. Our real estate development business, a.s.r. vastgoed ontwikkeling, has been classified as held for sale, has been valued at realizable sales value as per half year, which means, as you can see in the press statement, it is no longer presented as part of the core operations. It is classified as held for sale, and we marked down the value of the business back to sales value, which marked down the value of the business by EUR 92 million, which is already included in the EUR 397 million net profits. With that, I'd like to turn to page number four. Page number four gives an overview of the accounting and presentation changes. As part of our preparation to return to the private sector ownership, on which we made a number of statements and indications in our press release. As part of that preparation to become privately owned, we made a number of changes in our accounting policy and in our presentation policy. In our accounting policy, we valued our real estate portfolio at fair value instead of amortized cost, which effectively means that real estate investments have become part of equity. In our P&L, we no longer report the capital gains as such, but in our P&L, we report fair value changes and capital gains as far as they exceed the fair value changes. So an adjustment of the accounting of our real estate business was, we believe, in line with industry practice. Secondly, we wrote off the Deferred Acquisition Cost, which are on our balance sheet as per the beginning of the year. So the DAC, Deferred Acquisition Cost, has been written off. Which has a negative impact on our equity and a small positive impact on our P&L because we no longer amortize annually our DAC. The combined effect of those two changes are mostly visible in our equity. Equity as per the 31st of last year, up by EUR 682 million. Effective, that's an increase by EUR 800 million roughly from the real estate decrease of EUR 120 million from the DAC. Together, a net increase in the book equity of EUR 682 million. Also important to note that these changes did have an effect on our P&L. If we had not pursued these accounting changes in the first half year, our result would have been EUR 45 million higher on a pre-tax basis. The combination of no longer amortizing DAC, but also no longer recognizing capital gains on real estate above amortized cost, had a net effect of depressing, pushing down our pre-tax profit by EUR 45 million. Secondly, in terms of presentation changes, we opened up the famous segment Other into four segments: Banking and Asset Management, Distribution Services, Holding and Other, and the Real Estate Development, which is classified as held for sale and presented as outside the ordinary activity of the group. Finally, we have introduced and we will introduce the result metric Operating Results. Basically, it's the group result adjusted for incidental one-off investment returns, incidental gains or losses that are not related to the regular business, and accounting changes. With those amendments, we believe our disclosure and presentation is more in line with the industry and helps us prepare further for return to private sector ownership. To dive into that Operating Result definition, I would like to turn to page five, where we again summarize the definition of Operating Results. Effectively, it's a profit before tax, excluding capital gains, excluding one-offs that do not relate to the ongoing business. That result metric up from EUR 221 million to EUR 280 million on a pre-tax basis, which we believe is a sustainable solid set of results unaffected by financial market fluctuation or unaffected by incidentals. The EUR 280 million Operating Result to us is something we as a group are very proud of and very comfortable with. The footnote on the page summarizes the main delta as far as incidentals. As we explained, a chunk of the impact is explained by capital gains and a few other points which are explained on this page. Predominantly, they look at a settlement of current account balances, capital gains that relate to our own, the investments for our own pension fund, and a number of other elements that we took out last year and they did not repeat themselves this year. Again, up from EUR 221 to EUR 280 is a strong improvement, a strong increase in the Operating Results for the group. Before we go deeper to the business, a summary of the key figures on page six. Net results up to EUR 397. The corresponding ROE based on net results, 23.7%. It's a fairly high number, as said, pushed up by a series of capital gains. Operating Result at EUR 280. The corresponding return on equity is at 15.8%, which is safely above the target zone. Our target area is 8%-12%. With 15.8%, we believe the group is outperforming its own ambitions, we're very pleased with this Operating ROE. In terms of capital, EUR 297 respectively or EUR 185. We have been able to achieve a very solid ROE, also on a very solid and safe capital base. It's a combination of the two that for a CFO as me, makes it actually a very pleasant presentation. On the cost side, page seven, continued containment of the underlying cost base. You can see the development of the operating expenses on the left-hand side, continuous decline. In the first half of this year, our cost effectively remained stable. The increase that we saw was due to the inclusion of an acquisition. Like for like, our cost base was up by EUR 2 million, which is more than explained by the cost related to M&A. We absorbed in those cost levels increased investment in Solvency II, and increased investment into projects from a regulatory perspective, especially in the pensions area. Insurance companies like us need to spend money on IT projects that relate to regulatory changes, and those costs we've absorbed. The underlying cost development is demonstrated and underlined by the development of the internal FTEs. Again, if we strip out the add-on of the acquisition, our FTEs declined from 3,500 to just below 3,400. So a continuous gradual decline in staff numbers and continuous gradual improvement in group productivity. So we believe cost containment is still on the cards and is still an important feature of the DNA of our group. Going into the business segments, into non-life, page eight. You can see the results and the combined ratios of our non-life business. Operating results up 101 to 114. Net result also up from 92 to 122. A reflection of that, improvement in the combined ratio from 93.7 to 92.5. Our combined ratios are below hundreds for all our lines of business. Good to note that if you now take a longer-term perspective and multi-year view on our combined, you can see we've been below 100 for a consecutive period of time. Irrespective almost of the economic cycle, we've been able to run this business at combined below 100. That's why we dare to give ourselves an absolute return type of result or label the result as absolute return type of profits. Disability, a strong improvement in the combined operating ratio to 88.7% in a challenging/declining market. However, if we look at the recently published DNB statistics, it appears that we have been able to increase our market share last year. So in a declining market, our market share is up by a little bit less than 1%, and our combined ratio is better than last year by about six percentage points. Health combined ratio better than last year from 98 to 92.7, partially due to release of reserves from a review of the government calculations and the equalization system, but rather be small contribution to the bottom line. In P&C, combined ratio up from 90 to 95, partially because last year was extraordinarily positive. There were no storms last year, no fires last year. The 95 this year is more reflective of the long-term opportunity, the long-term trend. It is good to note that the claims ratio of the group was below 60 for the first half year. If you look at the individual months from January all the way now to June, there was no month in which the individual claims ratio was over 60%. So testimony to continued strong underwriting results in P&C. If you reflect on that P&C performance, we're a little bit more large claims than last year. There was one storm in the beginning of the year, a significant storm, and we had a small release of reserves, order of magnitude EUR 7 million, when we revisited the level of reserves that we had. Those were all affecting our in-depth combined ratio. If you'd normalize the combined ratio to taking out what I would call a surplus storm, taking out more than expected fires, and taking out the reserve contribution, the underlying combined is actually around 92%. We have that very healthy, very profitable business in the P&C area, combined ratios across the group below 100%, and all product lines very stably and safely below 100%. Moving into the life segment on page nine. Operating results up EUR 165 million to EUR 222 million. Net result up even more. That is because the capital gain that I talked about basically occurred in the life and pensions legal entity. Premiums up from EUR 900 million to EUR 1.1 billion. Technically speaking, that is because the Chevron buyout was booked in the gross within premiums this year. It was already mentioned in the APE in new sales last year and is in the gross within premiums this year. New production. ASR has been very restrained on new production of life and pensions, mainly because of the exorbitantly low interest rates. As a group, we decided that in a year where the ECB goes out, push down interest rates as far as they can, this is not the time to write massive new business. We've been focusing on retention of clients. We've been focusing on building a DC business rather than DB business. We've been holding back on chasing new contracts, and you can see that in the APE, which actually was a deliberate choice to hold back on writing new business in this area. That's why the cost ratio as a percentage of APE goes up. If you don't write much new APE, then your cost base over APE goes up. If you look at the cost base over premium levels, if you look at the cost base excluding the regulatory costs, basically, our cost and life pensions have been stable and absorbing many of the other investments that are required. Overall, in the life and pensions business, operating results up significantly, holding back on new production until market developments, until interest rates are restored. Strategy supported by M&A transactions, page 10. We decided this year that given the macro environment, given the rate environment, actually, it's better to grow the business by selective acquisitions than by chasing new volumes. What we did is we held back on new businesses, but we decided to buy two blocks of businesses. AXENT and De Eendragt. Both transactions were announced within a few days of each other. They were really executed in parallel. They both are closed. We have received a declaration of no objective from DNB. Both deals are closed. Effectively, we acquired EUR three and a half billion of AUM in two complementary equal-sized mortality and longevity books. Needless to say that the ROE of the combination of the two is actually very attractive because the net capital consumption from buying a longevity and a mortality book at the same time is very small. The ROE of this deal safely exceeds the ROE target of the group. Finally, last year, we acquired Van Kampen Groep. Basically, it's a distribution service provider, and those numbers are already in our figures. AXENT and De Eendragt will be consolidated the next six months as far as the remainder of the year is concerned. Finally, on non-insurance activities, page 11. We broke down the segment other. The segment other no longer exists, and there are four sub-segments. Segment banking and asset management, distribution and services, holding and other, and real estate development, which is now classified as held for sale and valued at realizable market value. The first two segments are still relatively small but are growing significantly. Our capital light business is where we see future growth. Holding cost, headline cost levels improved a lot from EUR -92 million to EUR 15 million, basically because the own pension arrangement, the own pension contract, where we effectively booked a capital gain on the assets that were against our own pension fund or own pension contract, and a positive result on a tax situation. We think it's better to look at the holding cost from an operating perspective, there, the holding costs basically are stable from EUR 56 million to EUR 61 million. A small increase in the holding cost because of M&A costs, because of Solvency II costs that were booked at the holding. We hope and believe that with this breakdown, we give everybody much more clarity on segment other, much more clarity on banking asset management, on distribution and holding, and clarity on the development of our cost levels. Again, real estate development now effectively no longer part of the insurance group, but reported as a separate line item. The moment you've all been waiting for, namely the discussion on solvency. Page 12 shows the development of our capital base equity up from EUR 3.7 billion to EUR 4 billion. The total equity to start included the contribution of real estate that was booked as part of the IFRS equity base. Again, a significant increase. Shareholder equity up to almost EUR 3.4 billion. Total group capital up to EUR 4 billion. Solvency I up to 297%. Solvency II up to 185%. At least that's the estimate based on the standard model. We've put a note, 185% is the standard model, not the internal model. Both levels that we feel very comfortable with. As is tradition, ASR does report the impact of the UFR on Solvency I. We've done it in the past, and we continue to do so. Solvency I, ex UFR is at 224%, up from 204%. A significant increase from Solvency ex UFR. It is important to note that there is various ways to calculate the UFR impact. In order to give you the right context, the way we do it is what we believe a very prudent way. We extrapolate the yield curve by keeping the 30-year zero rate as a constant. The 30-year zero rate is constant. That is extrapolated, and that is behind the ex UFR number. We can have a lengthy debate on alternative methods. We believe it is a very prudent and conservative method, we want to be very clear about it. Solvency I ex UFR comes out at 224%. The multi-year path of solvency on page number 13. You can see our solvency moves on S1 ECap, also we've included the historical estimates of our standard model. We are safely in the range that we as management feel very comfortable with, at an ECap of 209%, Solvency I almost 300%, S2 standard model at 185%. We've highlighted what we call the emerging SCR management range. Not everything in this field has been cast in stone, we believe from a management perspective, the numbers on the page are relevant. 120% SCR standard model is the formal ASR risk appetite approved by a supervisory board, agreed upon with our regulator. Effectively means if you drop below, if we were to drop below 120, you would expect remedial actions. 140 is our best estimate of where the cash dividend ability of an insurance company starts. It's a number that we feel comfortable with. That's safely above the risk appetite. It also comes out of a number of discussions we had with our regulator on various occasions, where we got the inclination that 140% is roughly for the standard model where the cash dividend capacity of a group starts. Based on that number, we believe above 160 is CFO sleeps well range, in a sense that if you're above 160, you are able to pay cash dividends, and you have room to invest in your business. 160 is where the comfort range is, and with the 185 number, we feel very comfortable with where we are. Also note that increasingly, you may expect the regulator to ask questions about Solvency II ex UFR. You may expect that this management range to be complemented with the request to keep S2 ex UFR above 100. These are the headline figures on the total SCR number. You may expect Solvency II ex UFR to be required to stay above 100. This is not cast in stone, this is where the discussions in the industry with the regulator, with our own supervisory boards, seems to gravitate to. For those of you who wish to know the difference between the SCR and the ECap numbers, what's the difference between our SCR ratio and the ECap ratio? The models look a lot the same. First of all, we do not apply for an internal model. We have not, and we will not. We don't think there's any need to do so. Secondly, we use ECap for our own asset allocation and for our own pricing, but not for capital management purposes. The main differences between the two are, 1, valuations of risks, especially we have proprietary market risk models. We have proprietary CAT model, CAT risk model. Secondly, source of difference is the treatment of the deferred tax asset. There's been a lot of debate in the industry on the deferred tax asset. In the SCR model, we've assumed that the fiscal unity concept does not exist. We already take it out last year. Although economically there is a fiscal unity, such a thing does exist. In the SCR world, we've taken out the exemption of fiscal unity, the 185 is excluding any fiscal unity. Every single entity, every carrier has to stand on its own two feet from a tax perspective. Although in the ECap model, we believe the tax, the fiscal unity does exist. Those are two main differences between the ECap model and the standard model. In terms of what's behind those numbers, page number 14. You can see development of the IFRS equity and the operating ROEs. You can see the composition of Solvency I capital, EUR 5.1 billion of available capital. Basically, it's the IFRS equity plus a number of adjustments, mostly is from moving to market value impact. This group runs at a significant liability adequacy surplus, both on a VFA level or an IFRS level. That is reflected in the available capital in Solvency I. Similar on Solvency II, the required capital of the group is around EUR 3 billion. The solvency ratio is about 185%, and we've given you the 100%, 140%, and 160%. We leave it to you to do the math to figure out the numbers that are behind this. What we find important is that the ROE of the group is significant. It's 15% or even 25%, but I think this is 15%, and this group is running at high solvency levels. It's not an official metric, but if I divide the net income by Solvency II capital, so income over Solvency capital, I get to a number about 25%. It is not an official metric, but it's an indication the fact that this group is running both at a robust capital level and at a robust earnings level. Before we move to investments, the financial risk indicators, you can see on page 15, the financial leverage at 22%, the interest cover 24.5 times, double leverage at 118%. Double leverage is a function of the fact that we keep the capital at the OpCos. Capital is not kept at HoldCo, but capital is held at the different operating entities. Were we to upstream the capital to the holding, the double leverage would quickly go back to 100%. That's why the number of 118% is something we feel very comfortable about, and our rating has been kept stable. Also, we note on this page the hybrid capacity, the headroom, easily exceeds EUR 1 billion that we could issue as recognizable additional hybrid capital. With that, I conclude this part of the presentation and hand back to Jack Julicher, who will talk us through the investment portfolio and the investment results. Thank you, Chris. When we turn to page 16, that page talks about the investment portfolio and the composition of the portfolio. The economic situation during the last half year was characterized by very volatile interest rates and uncertainty about Greece. We saw also the uncertainty about Greece, which led to widening of spread levels, also on spreads on peripheral sovereigns. In that environment, we kept the composition of our investment portfolio stable. The portfolio showed a satisfying performance with equities outperforming. As Chris explained, we have fully incorporated the Solvency II framework in accordance with the regulation of the delegated act in our capital investment policy, and we use the SCR model and also a partial internal model, the ECap model. Our investment results and our investment strategy strongly supported the strong solvency position under Solvency I and Solvency II. There were four reasons for that. In the first place, we reduced our interest rate hedge to diminish the sensitivity to higher interest rates. Secondly, we continued the shift from liquid, low-yielding assets to less liquid, higher-yielding assets. In that respect, we took advantage of an increased market value of the residential markets portfolio. Thirdly, the decision to increase the exposure to US dollar-denominated fixed income turned out to be beneficial. In the fourth place, Chris explained that already, we sold equities in our portfolio and realized capital gains. In summary, the asset base remains strong and of high quality, and the performance contributed to the strong Solvency I and Solvency II position. When we turn to page number 17, an overview is given of the fixed income portfolio and the mortgage portfolio. Due to the higher interest rates and the wider spreads, the value of the fixed income portfolio, including the value of the hedges, the derivative hedges, went down. In that environment, we decided to reduce, as I said, the interest rate hedge to become less sensitive to rise of interest rates. We implemented that by shifting from receiver swaps and receiver swaptions to payer swaps and payer swaptions. At the same time, we increased the share of less liquid assets in the portfolio to prevent the running yield from dropping too quickly. We increased investments in corporate bonds with EUR 880 million, also invested in residential mortgages. As a consequence of lower margins on the mortgages, the consumer rates dropped, which meant that the discount factor dropped and that the value of the mortgage portfolio also increased. 85% of our mortgage portfolio is invested in the low-risk segments, the lowest risk segments, like energy mortgages with a guarantee of the National Mortgage Guarantee scheme and mortgage with a very low loan-to-foreclosure value. We also reduced the peripheral exposure under the influence of the uncertainty around Greece, we increased the dollar-denominated corporate exposure to $400 million, and that created for us the opportunity to take advantage of the strengthening of the dollar. The risk profile of the financials portfolio improved further. We reinvested the redemptions of Tier 1 bonds, we reinvested the revenues in Tier 2 financials. We foresee an increase of the fixed income portfolio of about EUR 3 billion, that is due to the acquisition post-closing date of the funeral insurer, AXENT, and the pension insurer, De Eendragt. The fixed income portfolio of these entities consists almost completely of Dutch and German government bonds. We want to adjust the composition of these portfolios in line with the group of portfolio. We can conclude that the fixed income portfolio proved to be resilient in an environment of increasing interest rates and contributed to the strong solvency position, we continued the movement to less liquid, higher-yielding assets to prevent the running yield from eroding too rapidly. Let's then move to sheet number 18 with an overview of the equity portfolio and the real estate portfolio. The budget for market risk is directly related to the company's capital adjusted for the UFR impact. During the first quarter, the available budget for equity risk, which is one of the components of the total market risk, went down as a consequence of an increase in the UFR impact, and that was due to a drop in interest rates. The consequence was that we sold EUR 500 million of equities to remain within the risk tolerance levels. In the second quarter, this decrease in exposure was partly compensated by rising stock markets. We started purchases of equities to start the re-risking of the portfolios of AXENT and De Eendragt. We continued the policy of USD protection of the less liquid part of the equity portfolio by a put option hedge, and that has been sustained. We have now protected EUR 750 million of our portfolio. We accomplished a further diversification from European large caps to U.K. and Swiss corporates and decreased the emerging markets exposure. The equity portfolio showed strong performance, mainly attributable to the 5% participations. I come to the real estate portfolio. Real estate portfolio has been reduced, mainly due to the fifth placement of participations in the ASR Dutch Prime Retail Fund with a Japanese bank. In total, 60% of the exposure to retail fund has been placed with external investors. We also placed three tranches of the ASR Dutch Core Residential Fund that manages our housing portfolio with two Dutch pension funds. We doubled the investments in rural properties. That has to do with better market appetite as a consequence of an increase in scale and improved prospects in the farming and dairy farming. The exposure to commercial offices remained very limited. The refurbishment of our central office building in Utrecht has been almost completed. The performance of all real estate asset categories was better than the IPD benchmark, and the total real estate exposure is now at the lower end of our target range. Chris explained already that we changed the accounting model. As you know, asset management is one of the core skills of an insurer. We have built a track record in management of investments for our insurance companies. We have built a track record in managing of real estate funds for third parties. We founded a fund management company which manages investment funds on behalf of policyholders and separated accounts. At the end of the first half year, we managed in our fund company EUR 7 billion, and we also managed EUR 2.8 billion of the separated accounts. We intend to extend also our service with fiduciary management for third parties, particularly in the field of the Algemeen Pensioenfonds, the APF, in the pension sector. In summary, equity and real estate exposure has been reduced in accordance with the decreasing available market risk budget. Equity showed a strong performance, and the performance of real estate was also satisfying. That brings me to the overall conclusions. First, the asset base remained very solid and was supportive to the strong Solvency I and Solvency II position. We continued a controlled movement to less liquid assets. We further optimized our interest rate hedge, and we reduced the real estate and equity exposure in accordance with a decreasing available market risk budget. Chris, that concludes my presentation. I want to hand over to you. Jacques, thank you very much. Ladies and gentlemen, I'm at page 19 of the deck. Our concluding remark. I can reread this page, but I think we've gone through these numbers already, so there's no point in repeating myself. In terms of a closing of the presentation, maybe a small personal note. When I came in the office this morning, I got a text message from my wife. She goes, "Sweetie, good luck today. You have a busy day ahead of you, but I think you're going to have fun, and it seems you're well in control." She couldn't have summarized this presentation better. I guess life at ASR is busy, but we're having fun, and we're quite in control. That is, to me, the message I'd like to convey around the first half year. Net profit up to EUR 397, operating profit up to EUR 280, and solvency between the highest in the industry. A confident and proud management team. With these numbers, we believe there is a solid foundation to return back to private sector ownership and to return to an independent future. With that, my presentation ends. Ready to take your questions. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, you may press star one at any time. For your questions, please press star one. Go ahead, ladies and gentlemen. That's star one for your questions. Go ahead, please. The first question is from Mr. Cor Kluis, Rabobank. Go ahead please, sir. Good afternoon, Cor Kluis, Rabobank. I have a couple of questions. First of all, about the Solvency II ratios, which have been very strong, of course. Can you give an idea which part of the Solvency II ratio is the ultimate forward rate? Somewhat related to that is those targets which you have been giving, the 120, 140, and the 160 for the Solvency II ratio. Whatever the regulator is going to do, would you also consider those ratios on an excluding ultimate forward rate basis? What you presented was including, but let's say that the markets or regulators will focus more on Solvency II excluding ultimate forward rate. Would you still stick to those ratios, or would you then reduce those targeted ratios? That's on that item. Second item is more oil and commodities. Could you give an idea, your investment portfolio on the equities and the fixed income side, if you have exposure to that? If so, what kind of size and characteristics we talk? My last question is about the two acquisitions which you have done, AXENT and De Eendragt. What was the effect on the Solvency II ratio? Is that already in the presented Solvency II ratios which you presented the half year figures? Did you already take into account the rebalancing of basically the investment portfolios into that Solvency ratio? That's the three questions. Very good. Cor, thank you. I will take questions one, two, and four, and I guess Jacques will take question three. The first questions are around the UFR impact on Solvency II. Our perspective is that the UFR is an integral part of Solvency II. Whereas in Solvency I, one could argue it was an external parachuted phenomenon. In Solvency II, it's integral part of our Solvency II figure. The 185 is our best estimate of the outcome of the standard model. There is some uncertainty around that number. Not too much. My gut feel is you have a bandwidth of ±7.5% on either side, around the 185. However, if I were to strip down the Solvency II in terms of its underlying components, the uncertainty, the bandwidth, becomes bigger and bigger. That's why I'd be a bit hesitant to communicate S2xUFR today, because there's a fair amount of uncertainty in that decomposition of the S2 number. However, I can assure you the one thing that I am very comfortable with, we report a risk appetite of 120% Solvency II xUFR, as per end of June, safely exceeded that risk appetite level. Instead of giving you the exact number, I can tell you it's at least higher than the 120 that is in our risk appetite. Would you look at revisit your targets if the UFR would be stripped out? Yes, if that would be the case, you'd have to rebalance the framework. It is my expectation that the UFR is an integral part of the Solvency II environment. The UFR is here to stay. It's my expectation DNB will not strip out the UFR, but will want you to manage a group Solvency II xUFR above 100. If you have the ladder of management levels, 120, 140, 160 that we run with, you can add or complement that scheme with Solvency II xUFR to be above 100. I think that's the way the framework is evaluating. The two acquisitions, AXENT and Eendragt, together cost about 5 percentage points in terms of Solvency II. They were not yet in these figures because the deals were only closed as per end of August. They were only signed per June. The 5% impact you will see in the second half of the year. Needless to say that from a return on solvency perspective, they definitely increase exceeds the 15% in terms of what it cost us. The 5% will be impacted on the second half of the year. As far as the UFR, as said, we believe the UFR is an integral part of Solvency II with a framework for managing Solvency II, including UFR 120, 140, 160, under almost the bandwidth, the boundary condition that xUFR Solvency II cannot drop below 100. With that, Jack, can you answer the question on the oil and commodities? Concerning commodities, we do not invest in commodities. The reason is that we invest in instruments that generate a running yield. The second point is concerning investment in oil. In our, for example, European large cap portfolio, we invest in accordance with the index. We are now underweighted in oil companies, the reason is that we use very strict ESG criteria, and we only invest in those companies, and they comply with our ESG policy. Wonderful. Thank you very much. The next question is from Mr. Albert Ploeg, ING Bank. Go ahead, please. Yes. Good afternoon, all. Thank you for taking my questions. First question is on the, let's say, the figure itself, the 160 that you feel most comfortable with. That's basically, of course, a blended mix of businesses between life and non-life. Can you maybe give a little bit insight in how you actually arrive at the 160 figure itself? Second question is, you already mentioned that there are still some uncertainties also around 185, the margin is quite small. Is there also any discussion, let's say, on further risk add-ons, let's say, sovereign risk charge with the Dutch Central Bank, this is basically already quite certain to what the standard formula will be at this stage? The third question is, maybe I misunderstood, I think you mentioned that if you're above 160%, you have flexibility and you're able to pay a full cash dividend, so to speak. You mentioned that over 140%, that basically gives you the ability to pay a dividend. What does it mean between 140 and 160? Is that still a full cash dividend or maybe a partial cash dividend to be sure about that? Thank you. All right, Albert, thanks for your questions. First off, the level of solvency. Those are solvency levels at group level, right? Yeah. 120 is a formally stipulated risk appetite that we defined as a group, that we agreed with the supervisory board. That number is derived in combination with our ECap and the ORSA that DNB requires us to run. Basically, you run a number of stress scenarios, significant stress scenarios. We want to make sure that after stress, you don't drop below 100. You take 100, add stress, and that gives you the risk appetite. At 120, we believe this group is able to sustain significant amount of stress. That's where the 120 comes from. The 140 is a number that basically gravitates from various discussions with central bank. When we looked at various acquisitions and we did discuss with them, what does it take to get a declaration of new objectives? How do you look at dividends? It appears that 140 is a number that allows you to pay cash dividends. 140 pays cash dividends without entering into a challenge debate with DNB. Of course, everything is situation dependent, but it's our presumption that if you are around 140, you can more or less safely pay cash dividends. Out of 160, that's really the first law of Figee. Basically, it's 140 plus 20%, and life is not more complicated than that. If 140 is the limit, the level at which you can pay cash dividends, I'd like to run my business with a buffer, so I can be very sure to pay cash dividends even in a difficult year. I can pay cash dividends even if we make a significant investment. That's where a 20% markup comes from. In all honesty, there's no more sophistication behind it than that. However, our discussions with the regulators seem that they are comfortable with that number. The next step for us to align and make congruent the solvency levels at our OpCos, the different insurance entities. At this point, the minimum level for all the insurance companies that we have is around 130, 140, depending a bit on the business. In the next half year, we will work on calibrating the individual capital requirements on OpCo basis with this group-wide ladder of intervention, ladder of distribution. Again, the 20% is really, as I said, the first law of Figee, it's 120 plus 40%. Okay. Maybe one follow-up is then, I can imagine, of course, that the central bank also very closely looks at cash generation, basically, and also in comparison to the ratios and also your remark about the UFR at above 100%. I know you do not run the business, let's say, from a corporate holding perspective and remitting cash, et cetera. Can you give maybe somewhat color on what the cash generation has been? It feels to me maybe around EUR 180 million to EUR 200 million post-holding and financing costs. Is that something of an estimate that makes some directional sense? Well, Albert, we decided to keep the capital in the OpCos. There is no capital held at HoldCo. The capital is held at the OpCos. At this point in time, it's remitted to the holding on an if and when needed basis. When the group pays dividend to our shareholder, which effectively means you, and the taxpayer, we take our dividends from the OpCos. When we need to pay taxes or pay costs, we take our dividends. It's on an if and when needed basis. On the agenda for the group as part of the privatization preparations is to develop a more founded remittance policy. At this point, we keep the capital at the OpCos. If you look at the amount of fungible capital at the OpCos, what could we safely upstream to the group? Let me formulate it this way. Last year, we paid more than EUR 140 million dividends. We could at least cover the amount five times with the amount of capital that we have in the OpCos. Looking at the OpCo capitalization from different angles. We look at S1, S2, ECap per OpCo. We could at least cover last year's dividend by five times with the amount of fungible capital we have at OpCo level. As far as the operating annually derived or developed capital. The operating income of the group was EUR 280 million. That is after the subtraction of operating holding costs. The only thing you need to take out there is the hybrid spend. I think the EUR 180 you mentioned is on the low end. It's probably more EUR 280 pre-tax, take out tax, reduce the hybrid cost, then you have the actually really freely generated capital that we have actually developed that you could easily even distribute. If you look at the monthly generation of solvency capital in the last six months, on a Solvency I basis, the monthly creation of organic solvency capital was well above 2%, could even approach 3%. It's my estimate that the monthly generation of Solvency II capital, so standard model SCR, between 1%-1.5% per month is what this group has been generating in the past six months. Various ways to answer your question. One is the EUR 160 is where you can actually pay cash dividends and invest. The EUR 140 is where you can pay cash dividends. We believe the fungible capital at the OpCos is more than sufficient to cover a number of years of dividends. Finally, the organic capital creation, metric 1, the operating result of the group, is already reflective of holding costs. Metric number 2 is about either 1 to 1.5 or 2.5 to 3, is the monthly capital generation from an S2 or S1 perspective. Okay. That's very helpful. Thank you very much. The next question is from Matthias De Wit, KBC Securities. Go ahead, please, sir. Hi, good afternoon. I've got three questions. First, on capital, on slide 14, you mentioned that the required capital under Solvency II would increase to EUR 3 billion using the standard formula, which is significantly higher than the Solvency I required capital of EUR 1.7 billion. I just wonder whether this is a broad-based increase across the different business lines or whether you see some units suffering a higher impact than others in terms of required capital. Maybe just to continue on capital. Could you maybe comment on how the Solvency I and Solvency II ratio evolved in the start of the third quarter, which has been particularly volatile? Maybe to switch to the life business, could you comment on or provide some color on margins on new business in both DB and DC? I'm just wondering whether there is room to continue to offset the eroding individual life segment with writing profitable group business. How you look at life earnings going forward. Lastly, on financial leverage, you mentioned that you have more than EUR 1 billion in hybrid capacity. Just wondering how you arrived at this amount. Thank you. All right, Matthias, thank you very much. First, on the required capital of EUR 3 billion, the delta between S1 and S2, well, it's a completely different framework. The biggest increase in capital is, of course, market risk, whereas in S1, additional market risk is not or hardly charged, and in S2 world, it is charged. It's a delta in market risk. The other one, in terms of business, it's around the disability business, which is a reasonably longer tail nature. That long tail characteristic of that business is not recognized in an S1 world but is recognized in an S2 world. Those are the main gaps or the main deltas from S1 to S2. Have you got the specific number for the life business or You're just too quick, Matthias. I was just about to say, of the EUR 3 billion, the market risk is slightly above EUR 2 billion, life business around EUR 1.3 billion, total non-life, EUR 1 billion, and diversification and counterparty is the rest. That's actually a negative. Diversification detracts. It's EUR 2 billion for market risk, EUR 1.3 billion for life, EUR 1 billion for all non-life, which is the health, P&C, and disability together, and the remainder is diversification and counterparty risk. That's the rough breakup of the EUR 3 billion. How did S1, S2 develop in Q3? That's early to say. We haven't run the full numbers. We have a weekly solvency monitor, of course. Hard to say. It's too early to give real guidance. One thing I'm pretty sure it's a single-digit impact, nothing major as far as Q3 is concerned. Single-digit impact, but too early to give the full numbers on that field. Negative? I assume or positive. Slightly negative. Single-digit negative. Okay. Basically, it's a stock market development, although I think the markets we covered a bit today. We do monitor these numbers. We do monitor on a weekly basis. We don't manage on a weekly basis. In the life area, the life book is declining and will decline inevitably. On life, we do manage the book for what we call unnatural lapses. They have been stable at 1.6% for the last two to three years. The book is declining as per expiry, which means the book will decline, but will do so gradually. Roughly, if you look at the insurance liabilities, we believe they'll be down by 40% in the next 10 to 12 years. That is a rough speed of decline in the life book expiry. In terms of new business, on the pension side, we really focus on writing DC business. We have, as an E, DC proposition, where we now have more than 1,300 customers. We run one of the most effective PPIs. We think we have now about, let me say the number right, 33,000 individual customers in that business. The pension business will be growing, and we'll be trying to make up for the life business. The life business declines only gradually, so to speak. In terms of new margins, you'll find that any new business in funeral is margin positive. We are market leader in the funeral business. We've got some pricing power there. We don't write lots of new business, but the new business does go at significantly high, attractive new business margins. New business margins in new life products are around flat. Quite heavy competition, new business margin are around flat. On the pension side, DC margins are positive, although we have to build more scale to build full fruition. DB margins are still slightly negative. That is why I have been holding back on writing new DB business in a very low interest rate environment. From my perspective, the life book will decline. It will happen gradually. We are working hard on building up capitalized businesses, and that will add to the value of the group. But those are very scale-sensitive businesses, so that will just happen on a year-over-year basis. Finally, on the financial leverage, the headroom, we look at both the official regulatory headroom, so the rules for Tier 1 and Tier 2 capital. We look at the rules for S&P or the guidance from S&P from hybrid capital recognition. We look at the most binding constraint from an S2 perspective amongst all from an S&P perspective. The most binding constraint determines how much hybrid capacity we have. With that, I think we have about EUR 1.1 billion hybrid capital capacity. That is, what is the most binding constraint in terms of leverage? Is it S&P or Solvency II? Give me a minute. We will look it up for you. Let us take one more question and look up which exactly is the most binding constraint for you. Okay. Thank you. Ladies and gentlemen, for additional questions, please press star one. The next question is from Mr. Farquhar Murray, Autonomous. Go ahead, please. Afternoon, gentlemen. Just a very quick follow-up on the comments you made on capital generation, where you indicated about towards three percentage points per month under Solvency I, and around one to two percentage points per month under Solvency II. Roughly, I think the math of that suggests that the capital generation is slightly higher, but not by very much under Solvency II. Could I just check I'm broadly correct in that conclusion, and then could you just outline the dynamics behind that? Is there a degree to which that's just coincidence? I'm just trying to understand, given the frameworks are so different, how we can be arriving at roughly similar amounts in both. Thanks. Thank you, Farquhar, it's a very good question. It is in an environment where interest rates fluctuate significantly and where, especially in a Solvency I world, UFR then impacts your solvency. You need to take a number of assumptions and different routes, different ways to look at what's the underlying capital generation, because the profit you add and the interest rate impact both have an interplay. If I look at Solvency I, let me give you a number of indicative calculations. For example, the Solvency I number increased by 11%, from 285 to 297. We paid out EUR 140 million of dividends. If you add those two up, that would give a plus of 19%, right? 11% growth plus around 5% to make up for the dividend that we actually absorbed. The number x UFR increased by 20%, from 204 to 220. The net profit, EUR 397, basically all adds up into solvency over capital is about 23%. From various ways you look at it, the amount of capital generation, the increase in solvency is about a good 20% over the last 6 months. Divide it by 6, you get to about 3%. Do I run the same number on Solvency II? The number increased by about 9%, but we paid our dividends, which gives you about a gross increase about 14%-15% in the first half-year. If we look at the operating income, EUR 280 million, that's the number that really feeds into the Solvency II number. Pre-tax, I take out a tax rate divide by EUR 3 billion, gives me a number about 7%. If I look at the VA, the volatility adjuster, it moved from 21 to 27 basis points. One point in volatility adjuster, roughly as the second law of Figee as a rule of thumb, is about 90 basis points in Solvency II. The expansion of the Solvency II figure is for about 4% or 5% driven by an increase in volatility adjuster. If you add it up, I arrive at around a little over 1%, 1%-1.5% in the organic Solvency II generation. I think in this field, S2 is probably a bit higher than S1, but it's probably more the interplay of interest rates, where the interest rate affects a significant impact on the S1 world and the UFR than on S2. The fact that S2 is higher than S1 is probably more a coincidence and a byproduct of rate development than anything else. I would feel comfortable with saying, look, the relevant framework going forward is Solvency II. That is how the world will look at us and how we look at the world. Little over 1% monthly SCR generation is probably a good indication of what the underlying earning capacity of the group is. Okay, great. Thanks very much indeed. As to Matthias, your question, we've looked it up. We've got the winning answer. Yeah, the winning answer is that the Solvency II headroom is the most restrictive, and that is the figure that Chris mentioned of EUR 1.1 billion. Ladies and gentlemen, for any additional questions, please press star one. For any additional questions, please press star one. There's another question from Mr. Rock, UBS. Go ahead, please. Hello. Yeah, thanks for taking my question. Just a quick follow-up on the interest rate hedging. Can you maybe give a bit more color on how you readjusted your hedging? Secondly, are you now satisfied with the current status of your hedge positions? Yeah, what we did, as you know, we hedged based on the economic curve. That means when you look to the supervisory curve, including UFR, there is always an overhedge. As interest rates were at very low levels, extremely low levels at the end of the first quarter, we decided to reduce that hedge, as I explained, by investing in payer swap and payer swaption. We moved somewhat in the direction of the curve, including UFR, and we diminished the sensitivity to rising interest rates. We diminished the negative sensitivity to rising interest rates in that way. You can say that we are more hedged. We are now better hedged in an environment including UFR. You want to keep the current status of this hedge position? Yes, we feel comfortable with the current position. We feel very comfortable with the current position. Yes. Okay. Thank you very much. Next question is from Mr. Matthias de Witte, KBC Securities. Go ahead, please. Yes. Thank you very much. To take some follow-up questions. Just wonder on mortgage capital requirements under Solvency II, is there anything you could share on how that exactly works under the standard formula and what's your targeted allocation to mortgages? Because there are obviously limits to what insurance companies can absorb. Maybe one question, I'm not sure whether it was dealt with already, but the disposal of the CRE development activities. Can you provide some insight into why you do this transaction and what the potential impact could be on the Solvency II ratio? Last question I had was regarding reinvestment rates. How do you look at the low interest rate risks at this point in time? What are you getting as a reinvestment rate and do you expect to be able to keep your investment margin stable in this current environment? Thank you. Let's say the charges under Solvency II are calculated for in the counterparty module of Solvency II. On average, it's always a blended average of all the segments where you are invested in. You have the NHG guaranteed mortgage, and you have also mortgage in different foreclosure categories. On average, let's say the charge is around 5%. The target in the strategic asset composition of the portfolio for mortgages is 20% of the total investment portfolio. The reason that we kept that at 20% is that also you have to take into account that mortgages have an aspect that they generate relative high returns and low capital charges. On the other side, you have also to take into account the liquidity aspect of the mortgages. Is the DNB, in this respect, imposing any concentration limits or are they looking into the asset allocation, and are they concerned on excessive mortgage exposure or not at all? No, not at a concentration side. As long as you have a perfect collateral under the mortgages, you have all the individuals that are liable for the borrowing requirements. That means that it's in the counterparty box of Solvency II. Okay. All right. Matthias, in terms of your following questions on the real estate development business, that was a business that we effectively inherited upon the nationalization of the group in 2009, simply because the respective governments at the time drew a line at the border and said, anything north of the border is ASR, anything south of the border is Ageas or Fortis Holding. Real estate development happened to be north of the border, it became part of our group. We are not in the business of real estate development. We have a number of projects that we will continue to deliver. We'll live up to our commitments, live up to our responsibilities, we are not the best owner of a real estate development group. We are an insurance company. Believe, given the development of that business, the maturity of the business, the change in the economy, this is the time to start looking for a better owner of that business. What we have done is we marked down the value of all the portfolios to a discontinued/sale basis. You could even argue a fire sale, even a sale basis, a discontinued basis. That number is already in the profit and is therefore in the Solvency II number. The business is taken out of core activities. The loss has been taken, already reflected in any number that you've seen today. We believe the further sale may be some transactional costs, hiring the occasional investment banker, basically no further cost as to the sale of this business. In terms of one question we did not answer, apologies, I'll just ask a question on the capital add-ons in the Solvency II world, in the standard model world. Couple of perspectives I'd like to share. One is there's a debate in the industry on the fiscal unity. We have presumed in the standard model that there is no such thing as a fiscal unity. We know there is, in the world of Solvency II, there is not. We effectively had already taken that impact last year, anticipating that it would be a hefty debate. The fiscal unity has been let go already in the S2 numbers. We did a test in the first half whether our tax assumption would be prudent or aggressive. It appeared to be fairly prudent, the presumption that we've taken around tax recoverability. I could see some further upside from that in our solvency number, but it's too early to realize that. For this moment, we keep it as it is, there is no fiscal unity. As far as a capital add-on for sovereign risk, there is no formal debate on that. There's no guidance on that. If you look at our investment portfolio, for example, on page 17 in our document, you can see the bond portfolio. I would find it hard to see a capital add-on for home country bonds. I would find it hard to see a capital add-on for German government bonds. Anything but AAA-rated home country bonds, that is a portfolio of EUR 2.8 billion, roughly. You could debate on what a capital add-on would be, but it would not have a very meaningful impact. It would be unlikely to have a meaningful impact on our capital ratio. For example, add 50 basis points to 75 basis points capital add-on for a EUR 2.8 billion COVID portfolio. That would move the needle a lot on the standard model, the EUR 3 billion required capital. Even if that were to happen, I don't think the impact would be very major. To our perspective, we have a very robust set of assumptions around the capital model and have a policy to preempt and take any adverse impacts as early as possible. As per the reinvestment rate, Jack can comment on that. We run a portfolio at an average running rate of about 2.9%, and including release of the shadow accounting provision of about 3%. Important is to understand that our policy of increasing the illiquid part of the portfolio, of the part of illiquid assets in the portfolio, is driven by the fact that we want to avoid eroding and rapidly decrease of the running yield. When you look to our portfolio, you have a long duration portfolio, and that means that the process, suppose that interest rates would stay at the low levels as current, that this process of decreased running yields would be a process, a very slow process, a very gradual process, a very long-term process. I think as a matter of fact, the result that we've done, we did an analysis, I think, in April. We said, what if we reinvest the future cash flows at the current forward curve? Yeah. The forward curve as per last April when yields were really low. Yeah. That analysis showed that the investment yield would stay above 3% until beyond 2021. Yeah. If we reinvest cash flows at the forward curve as per April, a couple of months ago, and still the investment yield would stay about three, four, at least until 2021. We believe that that would give us sufficient time to further adjust our book and would give us sufficient time to further make decent distributions to our shareholders. Great. Thanks a lot for the opportunity. Thank you. The next question is from Mr. Steven Haywood, HSBC Bank. Go ahead, please. Well, hi there, good afternoon. Just have one question on the difference between your standard formula and the ECap model. Can you highlight the main differences that increase the ratio between the two? You mentioned the fiscal unity before, but if there are any other big deltas, could you let me know, please? Steven, thank you. The main difference between ECap and Solvency II, well, the biggest one is the assessment of risks, the modeling of market risks. If you look at the standard formula, there are actually a few odd phenomena when it comes to, for example, correlation matrices or correlation matrices that change upon shifts up or shift down. Now, there's no point in fighting EIOPA. That is just reality. In our world, we've taken, however, in our ECap model, what we believe is a more reasonable approach in terms of shocks. The main difference is actually the market risk. The capital requirement for market risk and for SCR is different. It's about EUR 300 million. The ECap market risk is about EUR 300 million less than the ECap for SCR. Second difference is the cost of capital. Standard model DNB prescribe a cost of capital of 6%. Insurers have some leeway to deal with that and have other numbers. We've moved the SCR to 6%, which I think is best practice of DNB. I believe some others may not be there yet. We moved to 6%. For the ECap model, the impact, we use 5%, that impact is very limited. Then there's the tax assessment, which is about six percentage points difference between ECap and SCR. Block one is market risk, EUR 300 million. Block two, a small block E, is actually the cost of capital between 5% or 6%. Delta number three is the fiscal unity assumption, which is at about six points. Excellent. Thank you very much. Ladies and gentlemen, for any additional questions, please press star one. For any additional questions, please press star one. There is another question from Mr. Robert Montague, ECM Asset Management. Go ahead please, sir. Yep. Good afternoon. Just a quick question on your hybrid bucket. You say you got EUR 1 billion or EUR 1.1 billion headroom. Do you anticipate tapping that bucket anytime soon? Robert, in terms of tapping the hybrid capital markets, you appeal to my entrepreneurial nature. We don't need more capital as such. With 185% S2 or 209 ECap, we have a fair amount of capital. At the same time, given where yields are today, given where spreads are today, it may be very attractive moment to pick up capital. If you look at the debate we've had in our investment committee, this may not be the time to add more market risk. If you don't want to add market risk, you got to take market risk, right? There's value on one side of the equation. Yes, we may tap the hybrid capital markets. We always like to be ready to do that. We believe the numbers are strong enough to convince investors. We don't need to, but we may. It depends a bit on market circumstances. Our recent hybrids have performed relatively well. If you look at the performance through the peers, they've done well. They've been received well. Yes, we may come to market for a hybrid in the coming months. Frankly speaking, we don't need to, so we will be having it dependent on capital market developments. Sometimes an opportunity is too good to let pass away. Does that answer your question, sir? That's fine, yeah. Thank you. Thank you. Ladies and gentlemen, for any additional questions, please press star one. For any additional questions, please press star one. There are no further questions at the moment. Mr. Figee, back to you, please. Yes. Ladies and gentlemen, thank you very much for your attendance. As always, my wife is much better at predicting how things will go. This was a busy call. It was a fun call, and I think we show we've been fairly much under control, as it is the situation for ASR. I'd like to thank you very much for your participation. Thank you very much for your well-informed and well-articulated questions. We look forward to meeting you either in person in the coming months, coming weeks, or talking to you again at the full year conference call in February next year. In the meantime, if you've got any questions, you will know where to find us. Thank you so much and have a good day. Thank you. Have a good day. Bye. Ladies and gentlemen, this concludes the ASR conference call. Thank you for attending. You may now disconnect your line. Have a nice day.