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Edited Transcript of ASRNL.AS earnings conference call or presentation 23-Aug-19 8:30am GMT

Half Year 2019 ASR Nederland NV Earnings Call

UTRECHT Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of ASR Nederland NV earnings conference call or presentation Friday, August 23, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* H. Chris Figee

ASR Nederland N.V. - CFO & Member of Executive Board

* Jos P. M. Baeten

ASR Nederland N.V. - Chairman of the Executive Board & CEO

* Michel Hülters

ASR Nederland N.V. - Head of IR and Ratings

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Conference Call Participants

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* Albert Ploegh

ING Groep N.V., Research Division - Research Analyst

* Andrew Baker

Citigroup Inc, Research Division - Analyst

* Benoit Petrarque

Kepler Cheuvreux, Research Division - Head of Benelux Equity Research

* Cor Kluis

ABN AMRO Bank N.V., Research Division - Analyst

* Farooq Hanif

Crédit Suisse AG, Research Division - Head of Insurance Research in Europe

* Farquhar Charles Murray

Autonomous Research LLP - Partner, Insurance and Banks

* Fulin Liang

Morgan Stanley, Research Division - Former Research Associate

* Matthias De Wit

Kempen & Co. N.V., Research Division - Analyst

* Robin van den Broek

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Steven Haywood

HSBC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the a.s.r. Conference Call on the H1 2019 results. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Michel Hülters, Head of Investor Relations at a.s.r. Please go ahead, sir.

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Michel Hülters, ASR Nederland N.V. - Head of IR and Ratings [2]

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Thank you, operator. Good morning, everybody. Welcome to the a.s.r. conference call on our half year results.

On the call with me here today are Jos Baeten and Chris Figee. They will give you a presentation and a discussion and update on the results and the strategy. And after that, there is ample time to take any of the questions that you may have.

As is customary, please do have a look at the disclaimer, which is in the back of the presentation with respect to any forward-looking statements.

And with that said, Jos, the floor is yours.

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [3]

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Thank you, Michel, and good morning to everyone. Hope you all had or are still having a very good summer. So thank you for joining us on this call.

Ladies and gentlemen, as you have seen from the published numbers, we realized very strong results over the first half of this year, and we continue to deliver a very solid performance with a.s.r. The numbers reflect our commitment and focus on operational excellence and disciplined execution. And I believe our performance shows that we are well on track to meet the medium-term targets.

Having said that, however, we should be cognizant of the developments in the environment and the financial market in which we operate. These are, obviously, not within our control and can be challenging to navigate from time to time.

So let's move to Slide #2. As this slide shows, our performance over the first half of 2019 has been solid on every key metric.

Operating result amounted to EUR 459 million, significantly ahead of the strong result of last year. Operating results showed an EUR 80 million of increase, driven by very strong performance of the Non-life segment, which was up $56 million, but also by a marked step-up in our Life result of EUR 28 million.

Our costs remained well managed. Operating expenses were up, driven by incidental costs, predominantly due to the IFRS 17 project. When we look at the operating expenses from ordinary activities, which are part of the operating result, this declined by EUR 6 million when we adjust for the acquisition of the cost base of Loyalis.

So organic growth is fully absorbed by the existing platforms, while we're still being able to lower our expenses, and I'll come to that in a moment in Non-life and Life, due to reduction of FTEs systems as a result of the integration of Generali Netherlands and the ongoing migration of Individual Life portfolios on our Software-as-a-Service platform.

Our business yielded an operating return of 16.8% on an annualized basis, well over our target of between 12% and 14%.

Overall, I believe this is an outstanding achievement.

The combined ratio of a.s.r. stood at 93.5%, also better than the medium-term targets. The Non-life business showed solid performance across all product lines, and in particular, we see an improvement in visibility, driven by solid underwriting and the price adjustments we have made on the sickness leave portfolio.

Our Solvency II ratio remained very robust at 191% after the interim dividend. And as you know, we are still using the standard formula.

There have been many moving parts in Solvency II, and Chris will provide further details later on in our presentation.

But basically, we have been able to keep our Solvency II ratio robust, while absorbing the 19 percentage points impact from the VA and the decline of the UFR.

Organic capital generation amounted EUR 189 million, adding 5 solvency points to our Solvency II ratio.

Solid business performance fully absorbing the impact of the higher UFR drag from the decline in interest rates.

The quality of our capital also remained high with unrestricted Tier 1 capital alone representing close to 140% of the Solvency II. And then there is still plenty headroom to maneuver. In total, we have the possibility to issue almost EUR 1.3 billion of hybrid capital within the Solvency II framework.

Our strong solvency position enables us to remain entrepreneurial. As we have said, everything above 160% allows us to be entrepreneurial and to pursue profitable growth, which we have proven to do so with the acquisition of Loyalis, which took place on 1st of May, which has -- and already contributing to our results as well as the recently announced acquisitions of VvAA and Veherex, which we communicated officially this morning.

Deals like the latter 2 are obviously on the smaller side of the range but clearly meet our return hurdles in the bottom line and strengthen our strategic position.

I'm sure you have noticed the increase in the net IFRS result. In addition to the EUR 80 million increase of our operating result, we also benefited from incidental results from the acquisition of Loyalis as well as from higher indirect investment income.

We're happy to offer an interim dividend of EUR 0.70 per share, which is an increase of almost 8% compared to last year and represents 40% of last year's dividends.

Let's now move to Slide #3, and let me highlight some developments and achievements in the execution of our strategy.

First of all, we've almost completed the integration of the Generali businesses on the -- on to the a.s.r. platforms. The final part is the integration of the remainder of the pension book.

As a result of the integration and the merger of the legal entities, it's no longer possible to accurately report on its separate performance of Generali. However, more anecdotally, we believe we will achieve better business performance and results than anticipated. This will be likely more towards the EUR 35 million, EUR 40 million in net operating result instead of the EUR 30 million that we initially expected. And the fungible capital invested will be lower than we earlier expected.

While we still need to integrate to the last part of the Pension businesses, we feel comfortable stating that overall, this acquisition exceeds the final -- the financial expectations.

So let's have a look at our solid back books in Box B. We continue to migrate the remaining books towards Software-as-a-Service platform, making the cost base more variable in order to keep costs in line with the decline of the book.

The acquisition of VvAA, recently announced and comprising an annual premium of roughly EUR 28 million and provisions of EUR 430 million, will be integrated on to the same platform.

Looking at the capital-light space in Box B, we have made further progress as well. Within DC pensions, we see still very good momentum as employers decide to move to the so-called WerknemersPensioen.

This half year, we have reached over 75,000 participants, up from 50,000 participants end of last year.

And in the meantime, we are already over EUR 1 billion -- of EUR 1 billion in assets under management.

In asset management, there are also other good developments to mention. Just a year ago, we reported on the mortgage front that we had achieved the EUR 1 billion of assets under management. Now the EUR 3 billion landmark is already in sight, and we're very pleased with this success.

We also see that external investors appreciate our ESG funds, and we've seen an inflow of EUR 430 million in the first half there.

In the top left, in Box A, our -- you will find our businesses that provides opportunity of growing cash flows.

As we announced this morning, we are happy with the acquisition of Veherex, which is an income insurer for the personnel of railway and affiliated companies. This transaction perfectly fits in our business domain of sustainable employability, which you will find on Slide 4.

And as said, the acquisition of Veherex is the latest piece we added to this ecosystem, and it strengthens our proposition in the field of sustainable employability. While the transaction itself is relatively small, it really fits well with the rest in the ecosystem, and more importantly, it will be integrated onto the platform of Loyalis. This marks the effect that with Loyalis, we have gained unique access to semi-public sector organizations.

Later this year, as you may know, we will start with the rollout of our Vitality program, helping customers to live healthier and at the same time, reducing claims.

Having mentioned claims, let's talk about Non-Life, which you will find on Slide #5.

In the Non-Life segment, we reported a very strong performance, a EUR 56 million increase of operating results to a total of EUR 122 million. The increase is high-quality and driven by improvements in all pipelines, and we experienced EUR 20 million lower storm claims than in comparable period in 2018.

Also, bulk claims showed better performance, partially offset by some higher level of large claims.

And Disability, we particularly benefited from the strong underwriting and pricing adjustments in the sickness leave portfolio. As you may recall, last year we said we saw unfavorable claims development in the sickness leave portfolio, where we took pricing measures and -- over there, resulting in margin expansions within the sickness leave portfolio.

The combined ratio in P&C and Disability together was 93.5% in the first half, a strong improvement compared to the 96.7% in the prior year, and also ahead of our 94% to 96% targets.

Improvements across all business lines and driven by better results from expense, commission and claims. So we are very pleased with an expense ratio of 7.2% for our total Non-life business, which, as you may know, includes health with -- which shows a further improvement from last year. So clearly, broad-based improvements in the Non-life segment.

Also, our gross written premiums increased by EUR 4.3% overall, mainly driven by solid organic growth of $56 million and the inclusion of Loyalis, which added an $18 million in the first half.

Excluding Loyalis, organic growth in P&C and Disability combined was 3.3%, in line with the medium-term targets we have over there of between 3% and 5%.

I should also add that this growth number also includes the negative impact from rationalization of the Generali NL portfolio. So we see continued good growth opportunities to grow organically the Non-Life segment.

And moving on to Slide #6, we'll zoom in a little bit on P&C. I've already mentioned the strong performance of our non-Life business. Our P&C business has been market-leading in the past few years. While large claims and storms can impact the bottom line performance from time to time, over the years, we have built and strengthened the foundation of a successful and profitable P&C business.

We've optimized our processes and harmonized or migrated to the admin system of [Chris], improved the quality of our underwriting due to the use of [FRISS] and implemented product rationalization to the benefit of efficiency, service levels and customer satisfaction.

We've been able to absorb organic and organic growth onto our platform with only marginal expense impacts.

We've seen favorable developments in the Non-life markets, driven by market consolidation and commitments by various peers to adhere the rational and economic pricing.

This has been a favorable backdrop for our performance in recent years, which we believe may continue for the near term.

The graph, top-left hand, show the 3.2 percentage points improvement in expense and commission ratios over the recent years, while the graph at the bottom demonstrates the growth we have achieved in the same period.

Our expense ratio in P&C amounted just to 8.3%, which we believe is market leading. And with claims ratio as a remaining part, behaving as anticipated, this provides basis for sustained growth and profitability going forward.

Let us look at Slide 7, the Life segment. In Life, we saw a strong increase of operating result of 8.3% to EUR 368 million. This was mainly driven by an increase of investment margin of $25 million, about half of which is driven by a decline of required interest because all the part of the Life book -- books are expiring.

This has a positive impact on the investment margin as we managed to keep our investment income relatively stable.

The other part of the increase is mainly driven by an increase of the investment margin from the Generali Netherlands portfolio, which is the effect from an extra month of revenues. 2018 was 11 months, as you may recall, and also the impact from some rerisking activities last year.

We see most of the increase of the Life as sustainable. However, please bear in mind, that H1 is typically supported by dividends.

Furthermore, we are pleased with the continued inflow, which we see in the so-called WerknemersPensioen. The gross written premiums of the DC product increased by 55% and assets under management exceeds the EUR 1 billion mark. Together with the premiums of Loyalis, this partially offsets the decrease in premiums coming from Individual Life and Pension DB.

Cost containment is critical in the Life segment, and I'm happy with the Life expense ratio of 52 basis points, which is within the medium-term target range of 45 to 55 basis points.

On Slide 8, we'll have a look at all the other business segments. The operating results of asset management showed an increase of 30%, up to EUR 11 million. This reflects the higher fee income, particularly from mortgage funds and ESG funds as well as a higher fee income from our real estate funds.

This is driven by both new inflows as well as higher asset base from revaluations.

The operating result of the distribution and service segments declined slightly as anticipated to EUR 11 million. The decrease is primarily the result of the expected downward pressure on fee income of Dutch ID, as a result of adjusted tariffs for mandated brokers. This decline is partly -- partially offset by organic growth.

Operating results of the holding decreased mainly due to higher interest expenses, roughly $3 million on the newly issued EUR 500 million Tier 2 subordinated loan. The proceeds of this -- of the bonds were primarily used to fund the acquisition of Loyalis.

Then on Slide 9. This slide puts the financial performance of our businesses in a historical perspective.

As you can see, we've been able to sustain the growth of our operating results over time. While from time to time, business results may show some deviations, it is clear that we have been able to grow our results and deliver an operating return on equity, well ahead of the medium-term target. Operating result for the first 6 months this year is truly a record performance, and I'm pleased with the quality of the business that has been delivered.

Noteworthy here as well, the increase in the Non-life compared to the same period last year. While the January storm in 2018 provides for a favorable comparison in the $56 million increase of our Non-life operating results, clearly outstretched that and reflects the quality of our business.

Surely, a question on your mind is what we expect in the second half of this year. Now from my presentation, so far, you have gathered that we are really happy with the quality of our business and the performance it has been delivering.

So a good starting point would be to take the operating result from H2 last year. EUR 362 million included some nonrecurring items, which actually offset each other.

Additionally, one could assume somewhat improved business performance, as we have seen over the first half year and at the expected half year contribution from Loyalis. In line with our earlier guidance, when we acquired Loyalis, it may seem reasonable to assume an amount in the range of between EUR 15 million and EUR 20 million for the second half of this year.

So I now would like to hand over to Chris for further details on our capital and solvency.

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [4]

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Jos, thank you very much. Ladies and gentlemen, I'll go through the capital and solvency position of a.s.r. I have been [pressed] by Jos, the IR team and the entire communication department to be brief. So I'll try to restrain myself to maximum 2 minutes per slide.

Stock first then flow, and finally, sensitivities and some headroom.

Turning to Page 11. Our balance sheet, you can see the Solvency II ratio of our group at 191%, a robust and solid number. A couple of points to note, this number did absorb the UFR decline of about 3 points. It did absorb the VA decline in last half year, which cost about 15 to 16 points. That's all absorbed in the 191%, which it also shows on the right-hand side.

If you exclude the effect of the UFR reduction, which is in euro terms about EUR 91 million own funds, the lower VA, which could be over EUR 500 million of own funds, but also adjust for the fact that we acquired EUR 176 million of own funds to Loyalis. a.s.r. on a gross basis, pre all of that, added about EUR 550 million of capital in the first half year.

I don't want you to double that for the full year, but it is testament to a clear route to generate organically, capital in our group. Part of it is captured in the OCC, part of it is captured in the bucket other.

So by generating stand-alone over EUR 500 million, we're able to absorb the UFR decline, the VA decline when we acquired Loyalis.

So again, evidence of solid capital generation ability, which is also confirmed by the element of our book equity, which is in Appendix E. Our IFRS book equity grew by [another] EUR 300 million in the first half year and over EUR 500 million in the last 2 years. And again, numbers pointing into the same direction.

This chart also shows you the development of our required capital, more details in Appendix F. I would just like you to note that we did a conscious allocations of capital to the acquisition of Loyalis. We made an allocation of capital to real estate, we made an allocation of capital to our -- to the rest of our Non-life business, and we reduced capital in interest rate risk. We reduced capital allocated to concentration and counterparty default risk. And we absorbed or had to deal with increases in longevity charges, simply because of the rate decline. And we absorbed higher valuations of equity which lead to higher capital charges on equity. And the active capital allocation decisions were about real estate or about Loyalis acquisition and were about growing in Non-life, Disability and P&C.

Turning to Page 12, shows the flow of our solvency. Again, OCC of EUR 189 million. The chart shows from left to right, we have the Tier 2 issuance in the Loyalis acquisition. Those are, of course, exogenous factors. The second half of the chart shows what a.s.r. had done itself. OCC up to EUR 189 million, 5.1% of our required solvency.

What I would like to note, to point out, is that the increase in our business capital generation, compared to the restated numbers last year, up EUR 33 million, which is the number I'm actually pretty proud of because this is the capital generated by running the business, it's underwriting results, investment results, fee income and lesser cost.

Business cap gen up $33 million. Actually, that more than offset the increase in the UFR unwind. The UFR unwind H1 to H1, so first half this year to first half last year, was up EUR 13 million, 1-3. So we were able, in this half year, to overcompensate or counter the UFR unwind with bigger business results, actually better underwriting results.

Release of capital, down a tiny bit, some part of it is interest rate development but mostly development of our new business. We wrote new business which impacted the release of risk margin, because we were building up new risk margin and we're building up a new business strength, which is in evidence of our consequence of the amount of business growth and disability and Non-Life business.

So OCC, up from last year from EUR 179 million to EUR 189 million. Business cap gen up significantly, EUR 33 million, absorbing the increase in UFR. And then also, you can see the impact of our new business growth in a net release of capital.

I would also like to point to Appendix G, which shows you our OCC and our long-term investment assumptions that preempt the question that no doubt someone's willing to ask. We are having -- we're developing or defining our OCC based on relatively specific long-term investment margins if you look at where the actual rates are today, you can see that our long-term invested margins slightly overstate the contribution from government bonds, core and noncore. They understate the contribution of credit and mortgages, and they understate, actually, or make our -- are excessively conservative when it comes to the accrual of liabilities, where we're using a VA of 20.

If we were to harmonize the entire fixed income component of the OCC to the actual market rates that we observed to date, we lose a bit on govies, we win a chunk on credit and mortgages, we win on the VA. That will increase our OCC by about EUR 20 million. Then also our real estate on equity assumptions are also based on a spread over swap.

At this point in time, for example, real estate, we're assuming 300 basis points over swap. The direct rental income of our real estate business is already more than that. So leaving aside any capital gains, that's a very conservative assumption.

If we were to move, say for example, to 5% asset return on equities in real estate, you would add another EUR 30 million of OCC, which is somewhat something that, I think, the industry does.

So on a more harmonized or market consistent OCC definition, our number would be around EUR 50 million higher in the first half year. Details are presented in Appendix G for your perusal.

So that leads me on cap gen, solid cap generation on conservative assumptions, driven by what our business does and our business underwriting results have overcome and compensated the increased UFR decline. So actually quite pleased with that development.

Page 13 shows the sensitivity of our Solvency II ratio to the UFR. By now, a famous number, we think that the most appropriate way to look through the UFR, and we're aware of the UFR fetishes in the market and all the discussions on what the right number is or could be or might have been or should have been, we think that the right UFR is actually something in very limited or linked to your actual investment returns, which is between 2.2%, 2.4%. Every year, we'll revisit that number. This year, we [click] it at 2.4%, which is the cash income, the actual direct return on our portfolio. That gives a Solvency II ratio of 152%. Actually quite stable for the last year, again, also absorbing the VA decline in that.

And you can see the development between stock and flow, if you change your UFR assumption, increasingly clear that the UFR is a flow element, not so much a stock element, as long as your starting solvency is sufficient.

So again, a economic UFR, solvency at 152%, well above any norms that you might have.

Further sensitivities on Page 14. The page that [you will shift] as you will know with clarity, the spread sensitivities, excluding any corresponding VA movement, so it's a naked [set] spread movement. For the actual result, there will be a compensating VA movement on the side but that's to be determined on how -- what the VA looks like. But you can see our sensitivities. Key message is that, with reasonable sensitivities, there the 191% shows us to be safely above and inside the entrepreneurial range of 160%.

One other note I'd like to make. On the interest rate sensitivity, you can see if interest rates go up, our solvency goes up by 7%. If they go down, they go up by 1%, which is a correlation effect. We have really tightened our interest rate hedge in the last 6 months. Our capital allocated to rate risk is the lowest ever. We extended our hedge up to the point if rates decline from here, actually the dominant rate risk becomes rate up. Today, we're rate down, then becomes rate up. And modeling-wise, technically, that changes the correlations that we apply would give the solvency uplift.

We can question the economics viability of that, but modeling-wide, if rates decline significantly from here, rate up because dominant, which gives us a temporary solvency uplift. Just want to be clear on that.

And then our balance sheet on Page 15. In fact a strong balance sheet with ample flexibility. I think that's an understatement. Market risk, financial risk are both low. Financial leverage today is 30.4% on an IFRS basis, hybrid is a function of our own funds at around 24%. Please note this is based on our own IFRS accounts.

If you were to adjust for shadow accounting and the capital gain reserve, which is more in line with what the industry does, this ratio would drop to around 24%, which gives us a relatively low leverage versus the rest of the industry and a very strong interest cover around 15x.

Actually, it makes you wonder whether, if we were to call the existing, the older Tier 1 instrument that are up for call, if we were to call those and our -- our leverage ratio would fall to 28%, whether our group would not be a bit under-levered in today's very low rate environment. Something we're chewing on whether it's an opportunity to optimize our balance sheet, post that potential call. Again, the potential call notifications will come at the relevant formal notification base.

When it comes to market risk, market risk's about 43% of our total risk, which is something we're very comfortable with. As you can see, the risky asset as a function of unrestricted Tier 1, our risky asset ratio. It went up from 106% to 111%, [it really is a valuation thing]. We added about [EUR 160 million] of nominal exposure to the real estate. That was an active decision.

The other component is really revaluations, the valuation of our equity portfolio went up, the valuation of our spread portfolio went up. That caused the risk asset ratio to increase.

Just when you're getting at that decision. So the EUR 160 million of real estate would have capped the risk-asset ratio stable at 106%. So we feel very comfortable with the amount of risk assets we have on our balance sheet, certainly, in combination with the amount of the lower leverage that we have.

And before I give back to Jos, our cash position. Holding cash at the end of the period, EUR 354 million, up from last year. Last year at this point in time was EUR 229 million, so EUR 354 million of cash. A complete unused RCF. So our credit facility is undrawn, there's an undrawn EUR 350 million credit facility at the group.

We've upstreamed cash from our Life business and not more, simply because there was no need to. There were no impediments, there was no need to upstream. And we're very comfortable with EUR 350 million of holding cash and unused cash facility.

So OpCo solvencies, Life at 187%, Non-life at 191%. The Non-Life solvency ratio is slightly overstated due to the acquisition of Loyalis.

At this point, the Loyalis legal entities have not been integrated. That is scheduled for the second half of this year, which means in Non-life, Loyalis P&C is a strategic participation of a.s.r. and Non-life, which artificially lifts the solvency ratio of a.s.r. Non-Life. On the group life, it consolidates to away, so the solvency number at group life is unaffected.

But for a specific a.s.r. Life entity, the 191% to be overstated. The underlying number is 170 -- 174%.

Same thing counts for double leverage, post the integration and consolidation of the Loyalis legal entity, a double leverage will move to close to 100%. And it's all scheduled and planned for actually end of October.

And our debt maturity profile, as you can see, very robust. A weighted average life of 7.5 years and a next maturity date, 2024. And again, we've ample financial flexibility and room to add leverage to our balance sheet if we wanted to.

Closing out, I think I did well, spending no more than 2 minutes per slide. Comfortable with Jos, plenty of time for you to give a summary.

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [5]

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Thank you, Chris. I think, on average you're right. And you just bested a new world record in providing some detailed information in such a short period of time.

So ladies and gentlemen, to wrap up this call, I would like to conclude that we are very pleased with the operational performance and its financial results the business has delivered. As you may -- as you can imagine, the record operating result and the growth of our business, both organically as well as through acquisitions, reflect our discipline of our value of volume at all times.

Our balance sheet is strong with ample financial flexibility, allowing us to remain -- as Chris already said, to remain entrepreneurial and pursue profitable growth.

I've already provided some pointers for the second half of this year. And to conclude, I should mention that we will have a review of our capital management policy, including capital return in the second half of this year.

One of the reasons for us to review our policy is the notion that the current policy may be somewhat rigid, specifically with respect to capital return, which demands our Solvency II ratio to be at least [200%]. We may consider to move to a policy that offers us more flexibility with respect to decisions in capital return.

We will update you on that with the full year results.

So having said that, I would like to hand over to you, and the floor is open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Cor Kluis from ABN AMRO.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [2]

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Cor Kluis, ABN AMRO. I've got a couple of questions. First of all, on the Non-life premiums. You had in P&C, 2% growth; in Disability, 9% growth. What was that Non-life premium growth, excluding acquisitions for both, P&C as well as Disability? That's my first question.

Second question is about Tier 1. You currently have well below usage of your Tier 1 capacity versus peers. If you would issue some your solvency would usually be 10, 15 percentage points higher, given the current low interest rates and credit spreads. Are you considering to issue a Tier 1 hybrid in the near term? Or could you comment on that way of thinking?

My third question is about operating expenses in the holding. I think that was EUR 32 million, including EUR 21 million incidentals. Last year, I think it was [EUR 30 million] incidentals. Could you give a kind of long-term guidance of what the holding operating expenses might be? There will always be some incidentals like IFRS 17 or what will come up later. But at least, I think this quarter was a little bit high on the operating expenses due to a few one-offs like the integration expenses, et cetera. But if you could give some indication in that respect.

And last question is about -- more generally about M&A. The M&A pace continues, VvAA and recently the national railway disability insurance company. What's your view about M&A in the future because this year, you've done quite a few deals? And could you comment on that, and that in respect to the capital return story as well? They're my questions.

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [3]

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Thank you, Cor. I will take your last question and your first question, and Chris will take question 2 and 3.

On the developments -- the premium developments in Non-life, excluding M&A, if you take out Loyalis, which I think I mentioned the EUR 18 million of premium of Loyalis, then the organic growth of the Non-Life business, excluding health, would be 3.3%. Of that growth, 1.6% comes from P&C and that number is somewhat deflated because at the same time we have sanitized the portfolio of Generali assets and that also did cost some top line, and it's even more than EUR 20 million because some of the risks in that portfolio were not very much liked by us.

If you take a look at disability, excluding Loyalis, the growth was 5.8%, up from [577] -- sorry, up from [545] last year to 577 this year. So in total, 3.3%, 1.6% from that is in P&C, 5.8% is in disability, excluding M&A.

Then on your last question on M&A. We are happy with the deals we have done. As you know, we missed on VIVAT. So the team had some time, and we asked them to look into Greenland. But in the meantime, it has become clear that it's not for sale anymore. So we're now preparing the next pipeline because we first want to take some time to integrate all the smaller business we've acquired. They are maybe small in the thinking of some of you, but the work to integrate them, also reporting-wise, will require some time. And in the meantime, we will prepare for the next year, potential deals that we think that could be done. And we still think in the Dutch market as well as in the Individual Life space and funeral as maybe in other spaces, like distribution. We expect that we, looking forward, can do some interesting transactions for a.s.r. They may not be as big as Loyalis or Generali, but we still see some potential.

Having said that, Chris, I would like to hand over to you for the second and third question of Cor.

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [4]

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When it comes to our balance sheet, indeed -- well, first of all, I think our balance sheet, we've got headroom in each and every category, both in Tier 1 but also in Tier 2. So the Tier 2 headroom is about EUR 462 million, which for a small increase in SCR, a move towards EUR 500 million, which is a benchmark Tier 2 bond [the bond issued], that's one.

Secondly, if you need -- if we were to call the existing 2 instruments of EUR 200 million of grandfather instruments, indeed, we will be probably under using the RT1 space. We have an RT1 instrument out there, and we have probably an underlevered balance sheet.

So we will be very opportunistic on that, if we do something. Because we also need to have a proper application of the funds. We're not going to raise capital just for the fun of it. We need an application for that.

But again, if we were to do something in the current environment, and I will probably go for Tier 1 rather than Tier 2 simply because rates are very low, there appears to be cash to be invested by [bond] holders. We actually had some reverse inquiries by some of our bond holders where there would be room, whether there would be an interest, which is something to help them invest their cash, put their capital to work, it's always good to reflect on that.

So there's no yes or there's no no. We're going to be opportunistic. If we do something, more likely to be in the Tier 1 space than Tier 2. But again, we don't need to hold off and we need an application for the funds. The application could be found in smaller acquisitions, could be found in allocating capital to mortgages. Mortgage spreads have widened considerably, and today are very attractive to add new mortgages to your balance sheet. So we're going to be very economic on that.

On your holding cost question, my guidance would be stable for the next couple of years, declining thereafter. And the -- kind of, the most issued, of course, IFRS 17. We're spending more money on IFRS 17. If you look at this half year, project costs were up a bit from IFRS 17. There was some integration cost from Generali, which will grow -- greatly feed out. We spent money on the Vitality project, I just mentioned. So what we're going to see going -- hence M&A cost. So what you see, I guess, going forward is continued spend on IFRS 17 until that's really -- due date is there. Some decline in M&A integration spends as the recent acquisitions were lighter and require less M&A cost. Some spend on Vitality. And possibly, if rates stay where they are, some increase in pension charges.

So my best guess with you, stable from this level the next 2 years and decline thereafter, if IFRS 17 is behind us.

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Operator [5]

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Our next question comes from Albert Ploegh from ING.

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Albert Ploegh, ING Groep N.V., Research Division - Research Analyst [6]

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Albert Ploegh, ING. Maybe a few questions from my end. Maybe first question, a bit more strategic. You've clearly shown discipline when it came to the VIVAT file in terms of pricing. But in a way, the landscape has changed, of course, fundamentally, given the P/E interest shown.

So what have you learnt from this process? What surprised you the most? And then could this also have some implications for your own strategy going forward?

Are you, for example, willing to explore options to unlock capital locked in your closed books in the Netherlands? Or you actually will like to do more of the opposite, expanding that book? So somewhat color there would be helpful.

The second question is on the organic capital creation. I mean, the target 2021 is still EUR 465 million. It seems that clearly, operationally, you are very well on track. And if rates would not have moved, you very likely would have started to overdeliver potentially on that target. So do you still see, let's say, mitigation actions that you can still probably, even in the current rate environment, get close to that target? And maybe just stay a little bit closer to home for 2019. If I remember correctly, you were guiding for something like EUR 415 million OCC by the end of 2019, including something like EUR 15 million or EUR 20 million from Loyalis. But it still means a gap to bridge from the EUR 190 million and where rates are, yes, how comfortable are you with that? And can you still get somewhat close to, let's say, the EUR 390 million, EUR 400 million level for the full year? And I'll leave it at that for now.

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [7]

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Thank you, Albert, on the first question on what have you learned from the VIVAT trajectory. Well, one of the things we've clearly learned is that looking at a life insurance company and spending -- investing in a different way, seems to give a higher valuation in Life portfolios. However, we, as you may know, are a real insurance company and we balance the liabilities we have with our investment portfolio.

So from our point of view, our learning is there might be more space to be a bit more aggressive in terms of investing from your Life books. But on the other hand, we are a Dutch insurance company, and we want to live up to the obligations we have guaranteed to our policyholders, so we will always be careful with that. So I think that's one of the main learnings.

Would we be willing to divest our own Life book? Well, one should never say no upfront to any idea. However, you need to take into account our individual Life book as part of a larger Life book, it contains Pension DB, it contains Pension DC, our funeral business. It's all managed as one investment tool. So splitting that up would be quite complicated, it would require some time.

And another question is whether the valuation of a company like VIVAT, which is the first sale of a PE company in the Netherlands, could be equal in the second transaction. I think there was also a strategic premium involved. And we yet don't know how DNB is going to react, whether the price is the whole investment or given the low interest and other findings in the solvency of VIVAT. You need -- may -- then maybe need to add additional capital.

And then the question is whether the valuation of a next transaction would be at the same level as the first one. Or current strategy, and we will continue to do so, is that we are a good or maybe the best owner of our own individual Life book. We want to add volume to that as we have done with VvAA with the Life portfolio of Generali and Loyalis. And up until now, we think we're the best owner and at least in terms of running it at a very low-cost level, we were able to deliver very good returns also for our shareholders.

So from that perspective, we -- you shouldn't expect a big change in our strategy concerning Life.

And Chris on the 465, I think you're...

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [8]

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Let me add a few points on VIVAT, if I may. Three points, I'd like to add, stuff that we learned or we think we learned. I mean, one is, I cannot rule out that there are difference in assumptions when people set solvency numbers. And we don't do assumptions-based capital, so to speak. I mean, that might push up the numbers on the short term, but someone somewhere will pay the bill for that. So we will not go into assumptions-based capital creation. We want to have very robust numbers that -- I think that's one.

Secondly, on rerisking the balance sheet. Yes, there may be some opportunities, but we're going to be careful. This is not the time to load up on noninvestment-grade stuff. So we think there's opportunities to optimize the investment-grade side of our fixed income portfolio, so with relatively little capital spend, optimize the return on investment on our investment portfolio, maybe do a bit -- little bit more on mortgages, especially given where spreads are today. We'll optimize the investment-grade side. Actually, as a matter of fact, we'll reduce the noninvestment-grade exposure. We did have a U.S. leveraged loan mandate that we canceled because we wanted to move away from noninvestment-grade securities, so all the investment-grade space.

And finally, when it comes to unlocking capital. Indeed, we've seen the longevity swap being executed. We know there's talk about longevity swap, there is appetite in the reinsurance market to take on longevity risk. That's something we're actively contemplating, not something to be executed this side of Christmas, it takes more time to prepare that. But it's something -- that's a nice thing to have on the shelf, an unexecuted longevity option, with one little caveat. The impact of a.s.r. could be positive with not a double-digit solvency release simply because there's diversification. We have a fairly diversified book, so longevity risk diversifies away. So also longevity swap benefit will diversify away. And secondly, the impact of such a swap is bigger, if you've got more in payment annuities, and relative to others, we may have less in payment annuities. So a longevity swap will have a positive benefit but maybe not as large as some others have it.

And again, it's something that we are constantly evaluating. And there is appetite in the market, it's a nice add-on and a nice option to have. And we're also checking ourselves, whether -- if you want to think about raising capital, whether the cost of a Tier 1, it is probably more attractive than a cost of a reinsurance deal, and that's how we think about it. So what's the economic cost of attracting capital. My hypothesis that in the market today, if you see what [rates are] today, that in RT1 is a cheaper form of capital for us in the longevity trait. Although a longevity swap, of course, I mean, you want to have on your shelf.

When it comes to the OCC, indeed, we've targeted for EUR 465 million in a couple of years' time. Of all the components, the stuff that's in our control, namely what the business generates, is actually doing better than planned, is doing very well.

Also, the early contribution from Loyalis are in line with and promising to be slightly better than planned. So anything that's in our control will be better.

Of course, the one thing that's out of our control is where the UFR drag will be. I don't know, we'll see when we get there. Who knows how rates will be in that very year.

So I think on the components, the stuff that we are managing and it's under our control, are better than what we planned. And the final number will depend on where the UFR drags at and we'll be very clear and transparent on that.

As far as the second half of this year, you mentioned the number. It's going to be hard work. I mean, Loyalis will feed into the numbers, that's good, it means we have a full 6 months of Loyalis results.

But again, the UFR drag will be higher against the second half of the year. I see strong progress in business cap generation, strong progress in underwriting results. I see delivering as planned on SCR release, potentially countered by the fact that we are writing new business and new business trend is a bit higher. But with the combines that we have. I'm actually okay with that, I'd like to have new business trend, when your combined ratio is low 90s. And then what UFR and when it ends up, we need to see how rates develop in the second half of the year.

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Operator [9]

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Our next question comes from Farooq Hanif from Crédit Suisse.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [10]

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Just quickly on the underwriting in Non-life. I noticed that as much as you see a decline in loss ratio, you're seeing quite a big decline in commission ratios, particularly, when you look at commission ratio in the Disability segment, there's a big drop. Can you just explain what's going on there?

Secondly, going to your consideration of lowering the barrier for a capital return. What is -- what has changed? So when you set the 200% versus your 160% target, what were you thinking and what could change qualitatively? So what are the drivers that you're looking at to make a decision on that?

And lastly, could you remind us again where you are beating on the Generali Nederland portfolio. So you mentioned the higher profit versus target. So where is that beat coming from, and what could that imply for the other transactions that you've done recently?

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [11]

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Farooq, thank you. On the commission ratios, a few comments, especially in the Disability space. If you may recall, I mentioned that our distribution entity that we were EUR 1 million lower there, and that was due to the commission ratios that were down in the Disability area. The flip side of that is that we to all of our brokers we deal with, had to pay less commission because the average commission ratio went down over this year, that's one effect.

The second effect is that we, a number of years ago, decided as an industry not to pay any commissions anymore on individual disability. The existing portfolio was left out from that decision, so people that already had a contract with us there. We still paid commission, but new business is not anymore done with commissions. So over time, you will see that the commission ratio in Disability will be lower than it used to be over the last few years.

And then finally, the last thing, but that's more technically. We mentioned in the press release, the EUR 8 million of reinsurance in the Disability area, which was an additional profit and that affected also as a one-off, the ratio. Because it was a plus for us, but it was -- in our bookkeeping it is -- because it was commission that we got from the reinsurance company, so that's a negative on the commission paid.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [12]

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So just to basically -- yes, sorry.

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [13]

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No, go ahead.

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [14]

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Go ahead.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [15]

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I was just going to say, just to clarify what you just said. So although, there might have been a one-off element, that sounds small. So generally speaking, commission ratio should be lower and might even get a bit lower going forward?

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [16]

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Yes. In the long term, the commission ratio and especially in Disability will be lower because in individual Disability, we're not allowed to pay any more commissions in -- for the new business. Chris?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [17]

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Farooq, on your second question on the capital framework. What were you thinking? What we were thinking at that time was around when the UFR was higher and the VA was higher at this point in time. So we are cognizant of the fact that since then, the UFR has declined and also the VA has declined, but the VA, or UFR declining is structural. So if you don't act, there will be a bar creep, so to speak. We have 200% a year ago, it's actually less than 200% today. And we really -- we're not capital hoarders. We want to be disciplined in our allocation of capital as you can see in our M&A decisions and our capital is okay for this season.

So we think it's fair to assume that the entire framework has probably shifted down somewhat with the lower UFR. Although, tactically speaking, we need to weigh where the current market circumstances are. And that's why Jos said, we will review the entire framework with the notion of what is an appropriate level, given the assumptions and how they've changed over time.

And [as Jos said], we don't intend to sit on our capital and stare at it. Want to make it work, and we think there's other applications, most definitely are happy to give it back to our shareholders, every part of it. So with that in mind, we'll review the framework.

When it comes to where did we beat Generali. On many parts, I think most prominently on the cost side. I mean the business is integrated, so it's hard now to single out the total cost assumptions, but I think the FTE decline that we achieved was much, much bigger than initially planned. So it's on the cost side, is the first thing that springs to mind.

Secondly, I think the speed of integration on some of the operating business, Disability and Life, the speed of integration is faster. I think we beat on the rerisking, that delivered more than we anticipated even it wasn't in the initial case, there was even more than we did not include, so the rerisking was faster.

And on P&C, more volumes. It came in with more volumes in terms of claims where we work, kind of on claims level itself, it's kind of what we assumed, but the volumes were higher.

And I think we're now working on sanitizing the portfolio and improving the combined. That's why you saw some lower growth in the P&C business because we absorbed the loss of volumes, happily non-regretted loss of volume.

So a beat on cost, a beat on speed, a beat of rerisking and a beat on P&C volumes and meet, so to speak, on claims ratio.

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Operator [18]

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Our next question comes from Robin van den Broek from Mediobanca.

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [19]

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The first one is more a follow-up to Albert's question. I think your H1 reporting indicates that your year-on-year increase in UFR drag annualized is around EUR 25 million. But that's still based on the average interest rates of the swap curve average in H1. So I was just wondering if you could give some sense to how that would look on the back of the final H1 curve for H2? And if you could also maybe for a more actual rate curve?

Secondly, I think there's also an effect towards your OCC from the flattening of the curve. I think your real estate and equity assumptions are based on the 10-year curve point, which you need to rebase too early on the curve, so the fact that there's a massive flattening there will probably also take out some of your OCC generation. Can you specify those amounts as well?

And I was wondering to what extent the EUR 50 million you've given for H1 as a more market absorbable approach, what kind of further offset do you expect in H2 given that mortgage margins probably are better than the average in H1? So presumably, that EUR 50 million in H2 is going to counterbalance a part of the headwinds that we just discussed.

Then secondly, on mortgages, the fact that you use your 110 bps long-term investment margin and you correct for that in your market observable OCC. I was just wondering for your Solvency II ratio determination, I presume you used the same spread there. So I was just wondering if you would use a more observable spread in the market, what would the impact to your Solvency II ratio be?

Question on OCC. You mentioned you're looking at the capital return framework. But shouldn't you also look at basically redefining your OCC, given the market headwinds you're facing on the flattening of the curve, for example, I think, is a very counterintuitive move that's happening. Are you willing to look at that as well in that capital framework update you're contemplating? Because in the past, I think, after the IPO, you did make statements that your capital return is somewhat limited to the OCC you generate -- yes, and now these headwinds might give you a limitation. Just your thoughts there would be helpful.

And lastly, I mean, I don't cover the real estate sector in the Netherlands, but I did see some press articles suggesting that prime real estate in the Netherlands has seen write-downs in H1, and that there were some fears that there might be more to come later in the year. I appreciate you've always said you're focused on location. So I think you have some prime real estate in your books. Any worries there or still all very solid and comfortable?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [20]

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Robin, thank you. I don't know whether that's a question or a piece of advice. I'll take it as the latter. On the UFR drag, is about EUR 25 million on an annual basis. What the UFR drag will be for the second half year, it depends on rating, we need to look at where rates will be at the end of the year.

Clearly, there is -- the UFR rate has a tendency to go up, that's probably to -- what the number is? Bear with me, I'm not going to give any guidance because it depends on where rates are. I mean, rates already have been bouncing back, who knows what the Fed will discuss later. Yes, the tendency to go up, but bear with me what the actual numbers will be.

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [21]

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Chris, maybe just quickly, you said, it depends on where rates are at the end of the year. I understand from your peers that most of them basically will base the Q4 capital generation on the interest curve for Q3, but you have more an average approach of H1 and year-end to determine the UFR drag. Is that what I should understand from your answer here?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [22]

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That's correct. We take the full 12 months of the year, so we average on the entire year. So we take Q4 into account in the averaging of the year, indeed, correct.

When it comes to OCC, you're right. I mean, the OCC, of course, is a -- it's a contract guide. It's a way to break down the bridge in solvency between different buckets and there's always a bucket, other. Anything that's not captured in the OCC is reflected in other. So actual returns of your investments that are not in the OCC bucket are in bucket other. This is why I said, the EUR 550 million, if you take the minus EUR 92 million UFR decline, plus the VA, plus Loyalis, somewhere we created EUR 500 million of additional capital. That is partially excess returns above and beyond what's in the OCC.

So that means the flattening of the curve, that we rightly described, will put some pressure on the OCC but does not put pressure on the actual generation of capital, it will show up in another [phrase] in the bridge. That's why, of course, a [hard NIM of] 5% is probably hindsight a better representation of our capital generation than the spread method that we use.

So will we reflect on that? Yes, we will. There's actually something in line with the review of our capital management framework, whether the OCC properly reflects the actual capital generation ability to structure within a.s.r. is point of similar reflection. And because we accelerate -- of course, experiencing the same thing as you described. So any offsets will be, of course, in the bucket other, which is excess returns over and beyond the LTIM, that's one.

So when it comes to mortgage and evaluation of our Solvency II, we use the actual mortgage spreads. So the LTIM has a fixed yield, but the solvency number that we produce has the actual spreads as they were at the end of June.

So that's why, of course, there's always a bucket other that balances that, but the solvency is based on the actual spreads not the LTIMs.

Spreads are high, so there was a relatively -- mortgages on a valuation side underperformed our liabilities in the first half simply because mortgage spreads widened. At this point, mortgages are very attractive. I think our colleagues and other insurance companies also comment on that. NHG mortgages, government guarantees is around 130 in a 10-year segment, nongovernment guarantees goes to 160, 170 basis points already. So allocating new capital to the mortgage is very, very interesting.

But that number is reflected in our solvency level.

When it comes to real estate, yes, there was an article on potential markdowns in the retail space in the Netherlands, which is really driven, in my view, by one specific real estate asset manager. We just had a management change. To be quite frank, their real estate portfolio is not comparable to ours. It's much less core in terms of high street quality shopping in the core cities than ours. In our real estate portfolio, we see rents well protected, vacancies actually falling and still lots of interest. I mean, if you look at what we signed up on new leases in our real estate portfolio in retail, some very household names. And for example, the bankruptcy of [Twinkle Toys], left some initial vacancies, all those spots were filled very shortly with other stores wanting to take that prime retail space. Actually cynically speaking, some bankruptcies are actually welcomed by our real estate people because that gives an opportunity to refresh tenants and actually reset rental rates.

So when it comes to our real estate portfolio, I don't share that concern. I think the one thing I would say is the level of capital appreciation may be less in the past. But the rental income is good, and I don't see any immediate downside risk on that space.

So in summary, UFR decline, bear with us. We average out in the year, we'll see where rates are. The one -- the things we can control are all moving in the right direction. And in the first half of the year, the underwriting results more than compensated the UFR decline. Will that continue to happen? That depends on where rates tend to end up. On OCC, fair point, to the offset will flow in the bucket other, which is -- does not mean that our total cap generation goes down but that segment in the OCC will go down.

And indeed, a review of the OCC of a definition is a rightful question and something that really bears on our mind in the next [8 months].

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [23]

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Now maybe one last remark. I mean, I got what you're saying on the OCC and the market bucket. But I think for some, the perception will still be that one element is sustainable. The other one is more a one-off, and I get that your market bucket will be positively filled by this structurally. But I think it makes more sense, I think, to adjust your reporting to what's structural and what's not.

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [24]

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Very few people pay a multiple for other, right? But if you look at our -- the bucket other has been structurally positive in the last years.

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Operator [25]

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Our next question comes from Farquhar Murray from Autonomous.

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Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [26]

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Just 3 questions, if I may. Firstly, on the acquisition of Veherex, could you just work through the rationale for integrating into Loyalis and perhaps outline the nature of the synergies you're hoping to achieve from that?

And then secondly, are you seeing any consequences from the recent consolidation in the market in terms of ability to pick up business and more generally, how competition is behaving? On the call, you seemed a little bit more optimistic on the sustainability of pricing in Non-life and I just wondered what might have changed there?

And then finally, in the interim report, there's a reference to limiting the impact of the mass lapse hedge. Could you just outline the rationale around that, and perhaps whether it had any material impact at all?

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [27]

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Okay. The first 2 questions will be answered by myself, and Chris will take the third one, Farquhar. Thanks for asking.

Well, the strategic rationale for Veherex is -- it is -- it's a semi-public organization, it's the national railways and some affiliated companies. And with Loyalis, we also acquired a former pension fund owned Disability business, also existing out of lots of semi-public organizations like municipalities, hospitals, et cetera.

And so the nature of dealing with those kinds of customers is one of the core qualities of Loyalis. And that's why we've decided, well, it's better to implement this business within the Loyalis business, which is today, 100% owned by us.

In terms of synergies, as you may have noticed, it is in terms of premium, not a very large acquisition. So the number of people involved on that is not that big. It will be a number close to 1 million or something like that, but it will not be very significantly.

On your second question, what is the effect of the recent M&A activities in the Dutch markets on -- in terms of portfolio shifting. Well we always see -- what we did see when -- and then acquired Delta Lloyd that some distribution partners decided -- some brokers decided to move the portfolio partially to other insurance companies. We expect that the recent M&A activity, that the same will happen. So we expect that a part of our future growth will come from brokers that decides that too many eggs in the same basket is not good for their independent positioning and that we will be able to face further growth, especially in the Disability and in the Non-life area. So consolidation from a hardening of the market -- of the premiums in the market standpoint is good, but also from -- our distribution partners are not happy with the consolidation. But actually, to be honest, we are happy with what is happening because it will give us the opportunity to increase our position in the distribution area.

Third question, Chris, is for you.

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [28]

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Recently, Farquhar, we have a mass lapse reinsurance contract. Based on the recent specifications by EIOPA, the impact of those contracts should be limited. They will be fading out. In agreement with the regulator, we've agreed a fadeout scheme. So the benefit of that has reduced significantly. That has shades of actually 1% of solvency in this -- in the first half of the year, simply because we are lower. We take a haircut on the potential contribution. We think the mass lapse will be fading out by the end of the year, but it did cost us 1 point of solvency in the first 6 months.

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Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [29]

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Okay. And then just ask you a quick follow-up. I mean, you -- obviously, one of your Dutch peers, kind of discussed the change in the liquid asset treatment within Solvency II ratio. Have you heard anything similar to that?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [30]

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No, because our portfolio of liquid asset is very small. I mean, most of our liquid assets are mortgages, which is -- the treatment of that in the standard formula is pretty clear. There may be some enlightenments or lightening of solvency charges. If the next EIOPA review comes through, but nobody really knows where it stands. But I mean, you've all seen the EIOPA documents on this. And furthermore, our liquid asset -- our liquid fixed income would [probably be] relatively small, so we have not any major issues on that.

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Operator [31]

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Our next question comes from Fulin Liang from Morgan Stanley.

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Fulin Liang, Morgan Stanley, Research Division - Former Research Associate [32]

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I have 3 questions, please. So the first one, so you plan to review your capital policy in the second half of this year. Does that include, whether you want to continue on the standard formula or want to move to internal model because just in regard to that, will actually, for example, using standard formula give you some kind of disadvantage in bidding for large scale deals? So that's my first question.

And that second one is, looking at your asset mix on your slides, there is Appendix H. Looks like that your mortgage actually percentage actually declined from full year 2018. And just wonder whether the plan is actually increase your mortgage exposure in the following couple of months because thinking that the yield is coming down. And I think you probably will have some pressure from the investment return, where actually moving 2 mortgages helps you on that pressure?

And then the last question is, I noticed that you have -- in the first half of year, you haven't really have the -- despite the very good operating results for Non-life, you haven't actually upstreamed any pretty much -- very few cash from the Non-life business. Is -- why is that?

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [33]

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Thank you, Fulin. Chris will go into the second and third question. On your question, whether our capital policy remark we've made is related to a decision of moving to a partial internal model. The shortest answer is no, there is no relation between those 2. However, having said that, we -- as stated earlier, we are thinking about what it would mean to move towards an internal or partial internal model. We haven't taken any decisions on that yet because we first want to finalize the IFRS 17 trajectory that requires the knowledge and the time of the same type of people that need to look into a potential move towards an internal model.

So our capital policy decision will be independent from that. However, management always needs to take into the back of the mind everything that it is preparing for the future. So decision-wise, it's independent, but we -- of course, we'll also remind our future steps when we take any decisions.

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [34]

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Fulin, it's Chris. When it comes to mortgages, if you look at Page 8, the actual amount of mortgages went up, EUR 6.7 billion to EUR 6.8 billion. So there was a small increase in mortgage exposure. For the group-wise, I mean, the bank has been more or less deconsolidated. So the bank has, obviously, taken out some mortgages, but the Life insurance business has actually increased its mortgage exposure. We want to do more. Our mortgage production is up significantly. Gross production is up 10%. Net production is up by 25%. But also our clients are looking for mortgages. So the mortgage -- there's a battle for mortgages going on between the Life business, and our clients they all want mortgages. So we're looking for ways to accelerate the production allocation of mortgages. So it went up, and we are looking for ways to allocate more to that and then speed up the access to mortgages, especially at current valuations and current spreads.

When it comes to cash in Non-life. Why didn't we upstream any cash? Because simply because we didn't need to. I mean, our policy really is to have the cash in the operating entities, not in the holdco really because we're one legal entity with one regulator with the same statutory directors at group added business. So there's really no immediate need to have lots of holding cash. Our holding cash policy is a function of dividends that we plan to pay and holding costs. So we consciously decided to keep the cash in the business and we upstream when we need to.

There's no limit or no impediment to upstreaming our holding cash. We could upstream cash from the Non-life business if we wanted do. But at this point, there is no immediate needs. And whilst the operating entities we are always using solid ROEs. I mean, the ROI -- the ROE of the Life and Non-life business are both around 13% plus. We were very comfortable keeping the capital and the cash in the operating entities and where we need the money, we upstream it.

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Fulin Liang, Morgan Stanley, Research Division - Former Research Associate [35]

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Okay. Just to follow up on the standard formula question. I was wondering whether -- if you're doing -- trying to do a large scale, it's -- in the future. Will you actually -- you using standard formula while your competitors are using internal model actually puts you into a disadvantage?

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [36]

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We're fully aware of that potential disadvantage. And one of the reasons we are looking into new considerations, whether we should move towards an internal model or not is related to the role we had in the VIVAT process, then -- and we said, well, we at least need to look at it. But it will take some time before you can move towards an internal model. And I said, the decision is not taken yet, and we're fully aware of the disadvantage we might have in certain potential future transactions, if there would be any bigger ones.

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Operator [37]

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Our next question comes from Benoit Petrarque from Kepler.

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Benoit Petrarque, Kepler Cheuvreux, Research Division - Head of Benelux Equity Research [38]

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So the first one is on the market and other impacts. So you have 19 bps as percentage points or a negative from VA and UFR. Overall market handover is minus 15, probably have negatives from rates and mortgage spreads as well. So could you talk a bit more about, let's say, the positive effect, what have been the positive? I guess, overperformance has played positively. But just wanted to get a bit of granularity on that.

Second one is on the regulation. So just wondering if you could disclose the impact from moving the last liquid point on UFR to 30 years [for other]. What it will mean for the Solvency II ratio? And also linked to that, why are you reviewing the capital in H2? The framework, I mean, with this couple of regulatory uncertainties still for Life insurance. So I was wondering what is the purpose of that.

And the other one is on the business capital generation of EUR 163 million. I was wondering if you included the EUR 8 million positive nonrecurring on the commission on reinsurance in that figure? And then last point is on the 5% returns on real estate on the assumptions, I understood that your rural portfolio is yielding 2.2% renting yield. So I was wondering, what will justify your move to the 5% yield?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [39]

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Yes, Benoit. On the -- on what happens in our solvency. There is significant reevaluations on some of the real estate portfolio, especially in housing and to a lesser extent, in housing and land have been revalued. We do revaluation, we revalue our portfolio every quarter actually, every objective is officially tax valued by independent valuator, basically once a year, that's based -- the other the 3 quarters. So revaluation real estate, revaluation of equities.

We have some own implied haircuts on some of our solvency. We had some prudencies and conservativeness in there. And there was one portfolio, especially in the defined contribution business that was based on the assumption that our clients -- I mean, the Solvency II evaluation is based on -- are such that our clients would actually all leave after 1 year because it's a 1-year contract. And we know for a fact that the retention ratios are literally 99.7%. So there was excessive prudence when it comes to the modeling of our defined contribution portfolio.

Those are the main components, above and beyond what you mentioned. The valuation of real estate, housing and land to a lesser extent shops. The valuation of equity markets, some prudency in some elements that are in modeling, and especially on the retention rates and lifetime of our DC clients.

When it comes to the last liquid point, fascinating discussion, I think it's a very partial discussion. I think you can only discuss it when you see it in a integral framework with many other moving parts. If you were to move the last liquid point, I think you also going to discuss about the cost of capital and the risk margin. You just have to talk about the UFR as a whole, you can talk about whether the mass lapse assumption is the right one. So I think it's a bit dangerous to talk just about the last liquid point. If you do, it would be a stock versus flow thing probably, your stock would go down, the flow would go up significantly. I'd rather address it when I see the whole package going forward.

And the question, is the reinsurance benefit into the business capital. Yes, the EUR 8 million is in there. Although, also some other elements -- reserving elements are also in there. If you look at the Non-life results. Yes, there was a reinsurance benefit of about EUR 8 million. But as you can see in the document, there was also a dotation to reserves, alignment of IFRS and Solvency II reserves, and there was some dotation to the third-party liabilities that's also in there. So I would think that net-net, the Non-life results, the number that we produce is roughly what it is, and releases and dotations cancel out to be very, very specific.

When it comes to yield on land, indeed the portfolio is around [2.2%]. But for example, in our resident and housing portfolio is a direct income of about -- sorry, retail is close to 5%. Housing income -- houses are over 3%. Offices are well over 6%, and we've just launched a product about -- that is on Science Park yields and the Science Park rental yields are over 7%. So yes, land is a bit lower, but especially with -- retail and offices are much higher than that, to get it right with the total direct income from the real estate business, north of the 3% that we're issuing today and very close to the 5% of the return.

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Operator [40]

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Our next question comes from Matthias De Wit from Kempen.

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Matthias De Wit, Kempen & Co. N.V., Research Division - Analyst [41]

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I've got 2 questions remaining, please. The first one is on the guidance for the operating results in the second half. If I understood you correctly, you expect a somewhat slower progression compared to the one seen in the -- during the first half of the year on a constant score basis. So did I understand that correctly? And is there anything -- yes, explaining? Or is there any driver or any reason to expect a slowdown in the earnings momentum?

And then secondly, on capital, what was the reason to defer the update to the full year results? So are you waiting more clarity on the Solvency II review or -- and do you want higher rates before you're willing to launch a buyback?

And just linked to that, can you confirm that ex UFR Solvency II ratio is still above 100% or is it below at this point in time?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [42]

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Matthias, on the operating results. As Jos said, you take the second half of last year, add some additional results from the -- to that because we -- a.s.r. stand-alone, is actually outperforming a.s.r. stand-alone for last year. And as for [Loyalis], we're a bit reticent on the number. I don't think we'll add another EUR 60 million to EUR 70 million of -- on the second half of last year simply because Q4 last year was very good. But we think, overall, it's safe to add on average the markup versus the result of last year. I mean not the same, simply because Q4 was a great result last year.

When it comes to the capital policy review. We wanted to be thoroughly. Look, a lot of our smart people have spent lots of time working at VIVAT in the first half of the year and want to make a thorough, well-informed decision, don't be too hastily about it. And as more information is always helpful, but I doubt whether by the end of this year we'll have all the clarity on EIOPA that we want. I don't think you'll ever have full clarity what EIOPA wants with the day-to-day progressing framework. So that is not the issue, it's more like we want to spend our time and think it all through and make sure that the people who are working on this are fully available for this, and yes we had -- did spend quite some time on M&A in the first half.

And your third question was, on solvency ex UFR. Again, it's a partial analysis. Mind you, our solvency ex UFR is very solid. But there's no point in giving a number because it's a partial analysis. If you want to give me a solvency number ex UFR, that would assume that we'll also make no investment result whatsoever, is probably affected, there's also [a slight] -- the market risk component, which then boosts solvency again. And then you get a fully derisked solvency number.

Actually, I think the relevant benchmark for our solvency ex UFR, to be quite frank, is rather 0 than 100. I mean do you have any owned funds less, if you had no UFR, because 100% is an arbitrary mark, if you then still keep a full allocation to market risk. So -- and it's way, way above 0, the exact number I don't care. I don't look at it, I look at the UFR 2.4% because that's the number that we actually steer on.

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Operator [43]

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Our next question comes from Steven Haywood from HSBC.

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Steven Haywood, HSBC, Research Division - Analyst [44]

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Just a few questions from me as well, please. The -- thank you for the falling interest rate sensitivity explanation, but I see that your equity sensitivity has reduced significantly and now for falling equities, you have 0% change to Solvency II ratio. Can you explain what has happened here as well?

I think you highlighted that you would potentially look at optimizing the balance sheet as well later on this year. Would you consider potential debt issuance to pay for a share buyback in the future? Or is debt issuances more geared towards doing business acquisitions and sort of business growth organically as well?

And then finally, just out of curiosity, the Loyalis VvAA, Veherex acquisitions. I wonder if those were included in the number of possible small midsized businesses you discussed at your Capital Markets Day?

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H. Chris Figee, ASR Nederland N.V. - CFO & Member of Executive Board [45]

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Okay. Steven, it's Chris. When it comes to equities, I mean, the volatility change because of the way the equity dampener works, which is a technical thing in Solvency II. And secondly, we have got a put strategy on the equity that we optimized in the first half. So it's a combination of equity debt that we do, it's a technical thing, and our put strategy that limits the amount of downside risk from falling equities.

When it comes to issuing debt. I'm not sure that we can issue debt. We said that we're going to be opportunistic and if there's opportunities to raise capital cheaply, you should note that we'd go and it appears that at this point, RT1 is a relative attractive form of capital versus others. We've had [referred] inquiries, our balance sheet could sustain itself, some of it we're chewing on, but we need to have a right application.

Ideally your standard inquiring companies. Would you use it to buy back shares. Well, we're not in the business doing a leverage recap. But portion of this finance is could be done -- could be doable, if your total solvency allows. To me, a share buyback or capital returns is a function of your total capital base on what it looks like pre and post rather than a function of one specific single transaction. So we need to look at it in a more integral fashion.

When it comes to acquisitions, our famous pyramid is that we produce on the Capital Markets Day. Indeed, some of these businesses were implied in that pyramid. When we produce the size in our Capital Markets Day, of course, we were already working on Loyalis because we signed the deal 2 months later, that was something we knew was coming. Veherex and VvAA were distant, vaguely rumored at that time. So yes, these -- they were included in that potential pool of acquisitions.

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Operator [46]

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Our next question comes from Andrew Baker from Citi.

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Andrew Baker, Citigroup Inc, Research Division - Analyst [47]

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Just a couple. So a follow-up to the famous pyramid, I guess. So there was, I think, EUR 27 billion of GWP identified in that pyramid at the time. I appreciate that some transactions have come and gone. Is -- do you see the size of that pyramid now as similar or would it be reduced materially in any way?

And then maybe related to that, is there anything to read into the review of the capital policy and really freeing up the ability to potentially do buybacks as your outlook for M&A has -- and the pipeline for M&A has changed materially? And then just finally, can you just confirm, is there still 2-year lags between when you make a decision to go to a partial internal model, and when you can actually implement it? And have you actually started work on the partial internal model itself yet?

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [48]

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Andrew, thanks for your questions. To your last question, we haven't really started working on that, because as I said, all the bright and smart people are still working on IFRS 17, which is a must do. And from the start to the application and to the use in general, one will need 2 to 2.5 years, even up to 3 years if the right people in the market are not available, before you will see it in the numbers. The first year, you have to build the model, then you have to do the application. You have to prove that you use the model. So in general, it will require at least 2.5 years.

To your first question on the famous pyramids, as Chris already said, a number of opportunities that we, in the meantime have done, are in that pyramid. And we also have seen companies for sale that we decided not to bid on, those were also in this pyramid.

And there has been a -- it's already in the Dutch market for a number of years, there is one funeral insurance company that is for sale, and we have thoroughly looked at it and then decided that the value that we want to deliver to our shareholders will not be in such a transaction and that was also in this pyramid.

So yes, we still see opportunities. The size of the opportunities might be smaller than, for example, Loyalis or Generali, but there is still some stuff out there. So we're still optimistic about our ability to do transactions. But the number indeed has decreased because we've done some and some of the potentials that were still in there are refused to do by us.

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Operator [49]

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Well, at this time, we have no further questions in the phone queue. I would like to hand the call back over to you, Mr. Baeten, for any additional or closing remarks.

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Jos P. M. Baeten, ASR Nederland N.V. - Chairman of the Executive Board & CEO [50]

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Well, ladies and gentlemen, thank you for joining us during this call. Hopefully, it was helpful, again, to get the detailed answers on the detailed questions. We're looking forward to see most of you soon. Chris and I will be on the road show over the next weeks. And with some of you, we already planned the dinner and a lunch. And we're happy to see you there and have a nice day for the remainder of this happy Friday.

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Operator [51]

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This will conclude today's conference. Thank you all for your participation. You may now disconnect.