ASR Nederland N.V. (ASRNL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the ASR Full Year Results 2022 call and webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand over to your speaker, Michel Hülters. Please go ahead, sir.

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us today. Welcome to the ASR conference call and our full year results 2022. Now, on the call today with me are Jos Baeten, our CEO; and Ewout Hollegien, our CFO. And Jos will kick it off with the highlights of the financial results. He will also give a brief update on where we stand with the Aegon transaction and discuss the business performance. Then Ewout will talk about the developments of our capital and solvency position, and after that, we'll open up for Q&A. Now as usual, please do review the disclaimer that we have at the back of the presentation on any forward-looking statement. And having said that, Jos, the floor is yours.

Thanks, Michel, and good morning, everyone. I hope everyone is doing well. I'm sure you all agree that 2022 was a very special year for ASR, not in the least because it's another year in which we have been able to demonstrate strong financial and operational performance, but also a special year because of the acceleration of our strategy with the announcement of the business combination with Aegon Nederland. It's truly a unique opportunity to create a leading insurance company in the Netherlands. So let's turn to Slide 2 for the financial highlights of 2022. And I'm sure you have been able to review the presentation this morning already, so let me just briefly discuss the key achievements. Operating results improved with 3% to EUR 1,039 million, a new record for ASR, and it was driven by strong business performance across the organization. Our organic capital creation is up by 10% to EUR 653 million, quite happy with this growth in business capital generation as this increase underscores the strong business performance. Higher interest rates led to a significant decline in the UFR drag. At the same time, we also experienced lower net capital release, partially reflecting the higher new business strain and higher rates. The combined ratio of P&C and Disability together amounted 91.7%, well ahead of our targets of 93% to 95%. This is including the impact of the normalization of claims due to more increased traffic and travel intensity in P&C post COVID lockdown measures, the impact of February storms, and also improved underwriting levels in individual disability and sickness leave. Our continued strong commercial momentum in the second half of the year, resulting in an organic growth of 9.1% for P&C and Disability for the full year and 21% premium growth in our Pension DC product, WerknemersPensioen, and in addition, EUR 400 million of net inflow in assets under management from our DC product, Doenpensioen. Our operating return on equity at 12.8% is somewhat lower due to the EUR 0.6 billion share issues for the financing of the Aegon Nederland transaction, and still in our target range. Excluding the share issue, the operating result -- the operating return on equity would have been 13.5%. Our solvency stood at 222% after interim dividend and including the issues of new shares. Ewout will elaborate further on solvency and the OCC later on. In October, we already announced the step-up of almost 12% in dividends to EUR 2.70 per share, reflecting our strong business performance and confidence in the Aegon NL transaction. So let's go to Slide 3 and have a look how we are progressing against the medium-term targets. So 2022 was the first year for us to deliver against the medium-term targets up to 2024. And I think we did well, both on the core group targets and on the various business targets. The targets are set such that we aim to run the company on the basis of a robust balance sheet, with capital available to invest in profitable growth that yields good returns and allows us to offer shareholder -- for shareholders' attractive returns. On all counts, we have ticked the boxes in 2022. Notwithstanding the acquisition with Aegon Nederland, which obviously will require a lot of our attention, our business continue to focus on servicing our customers and intermediaries to add profitable business to our books, and I believe we are well on track to deliver on these targets going forward. The transaction with Aegon means that we will have to reset the various targets. We already guided that we think that the transaction will deliver an OCC of EUR 1.3 billion in 3 years after completion of the transaction and reflecting our confidence in merits of the transaction, we have upped our dividend ambition to mid to high-single digit growth till 2025. After closing, we will aim for a smooth integration, and I would expect us to be able to present new medium-term targets for the combined entity after the publication of the full year results in Q1 2024. So let's have a quick look on how we are progressing on achieving our other objectives and our prudentials in looking after the interest of all of our stakeholders, and that's on Slide 4. I'm very pleased with the progress we've realized last year in delivering sustainable value for all of our stakeholders. As an asset manager, we take our role as a sustainable investor seriously, with ambitious goals in lowering our CO2 footprint, a 65% reduction by 2030, a target we actually did achieve already in 2022, but this is partially driven by lower economic activity and lower CO2 exhaust from the companies we invest in due to the COVID-19 lockdowns and other restrictions. We believe this is partially a temporary impact. As we are also making good progress with our impact investments up to EUR 2.8 billion by the end of 2022, where new investments amounting to EUR 700 million in, for example, wind and solar farms, have been partially offset by lower valuations, driven by higher interest rates. I'm very pleased to see our workforce engaged with our mission and strategy, which is essential in delivering value to our customers. We are working towards improving the appreciation from our customers and aim to be above market average in 2024. In 2022, however, we moved in line with the overall market and experienced a slight deterioration in the net promoter in the NPS-r. All in all, confident we will be able to achieve these targets. And as we show in the bottom half of this slide, we continue to receive very positive external recognition for our ESG profile from international indices and benchmarks. And I'm pleased to see that we rank among the best in sustainable value creation. Let's now move to Slide 5, a brief update on the progress we are making in relation to the Aegon NL transaction. Since the announcement, we've been working closely with Aegon to fulfill the conditions for the completion of this transaction. Our shareholders, just as Aegon's, have voted almost unanimously in favor of the transaction at the EGMs in January. The financing of the cash consideration is largely in place. On top of the EUR 500 million from our balance sheet, we raised already EUR 0.6 billion through a share issue and EUR 1 billion via a Tier 2 issue. We are well on track for expected closing at the first of July this year. The request for Declaration of No Objection from DNB is progressing as planned, and the request with the Authority for Consumers & Markets has been filed in the meantime. In the meantime, we have already started with meetings with senior management of Aegon Nederlands on the preparation of the integration process, and we have work streams in place for each different element of the integration. In addition, in line with our initial plan, the work on the implementation of the PIM has already started. Through the close collaboration, we have been able to validate our assumptions of the investment case, and therefore, confirming our cost synergy target of minimal EUR 185 million. We are clearly committing to keeping you up-to-date on the progress we are making. Assuming the closing in July, we intend to provide an update on the integration of the business towards the end of this year. Probably, we will organize an investor update early December. With respect to the medium-term targets for the combined businesses, this will require a bit more time. And for now, I would expect an update on the end of Q1, early Q2 in 2024. Let's turn to Slide 6 to look at the business performance in our Non-life segment. I'm pleased to see that our Non-life operating result held up that well and went up by EUR 3 million, driven by strong organic growth in P&C and Disability and favorable claims experience in Disability which more than offset the decline in Health, also absorbing higher claims due to the triple storm in Feb compared to last year. The impact of the storm at EUR 39 million after reinsurance, roughly in line with our annual storm budget. Combined ratio for P&C and Disability stood firm on 91.7% and is still ahead of the medium-term target of 93%, 95%. In Disability, favorable claim experience mainly in individual disability and sickness leave resulted in an improved combined ratio of 89.3%. In P&C, the combined ratio increased with 2 percentage points to 93.9%. This reflects the triple storm in February, increased number of large-sized claims and further normalization of claims, for instance, with increased traffic intensity. The underlying bulk claims ratio, however, really representing the bread and butter business of our company, remained strong. Although this does not yet show a heavy impact from inflation, we are planning to increase prices during the year for P&C products to reflect the inventory environment. In Health, we combined -- the combined ratio increased due to adverse claims development and lower cost coverage. In addition, higher commercial expenses to support the growth in the Health portfolio of 2023 are included in the 2022 combined ratio. If we would deduct that, that would bring the combined ratio slightly below 100. Organic growth of more than 9% in P&C and Disability, exceeding the target of 3% to 5% growth per annum and is driven by higher sales volumes and tariff adjustments. In addition, we landed a large collective disability contracts through Loyalis, which is a nice proof point for our product proposition. So let's now go to Slide 7 and talk about the Life business. Operating result of Life segment increased EUR 14 million to EUR 768 million. The increased operating results reflects a higher technical result, partially offset by lower results on cost and investment margin. The higher technical result is mainly driven by higher mortality results, non-recurring disability results related to including recovery assumptions, and pension was offset by strengthening of unit-linked provisions as a result of lower equity markets and higher interest rates. The lower investment margin was impacted by additional provisioning in Funeral to reflect CPI indexation within required interest, that amounted to EUR 25 million, and lower amortized realized gains due to higher interest rates partially offset by higher indirect investment income, which increased due to the asset optimization and higher contribution from renewables. GWP increased by 3.1%, mainly due to the commercial success of our pension DC products, where premiums increased with 21%. The total assets under management of Pension DC also included our IORP increase with EUR 0.3 billion to EUR 5.4 billion. The net inflow was EUR 1.3 billion, partially offset by negative market effects. And finally, our operating expenses expressed in amount of basis points of our Life provision are up 3 bps to 48 towards the upper end of our target range. This reflects higher operating expenses to support the ongoing transition in our pension business and a lower basic Life provision. Let's now turn to Slide 8 for the other segments. Operating results of our fee business remained stable at EUR 64 million. Operating result consists of 2 fee-generating segments, Asset Management and Distribution and Services. In Asset Management, the result increased with 8% to EUR 39 million as a result of growth in assets under management and real estate, and the acquisition of the consulting firm Sweco in March 2022. Total assets under management for third parties remained stable at EUR 27.9 billion as a result of a higher inflow in mortgage funds, real estate funds and also the expansion of our IORP business. This offsets the negative revaluation due to market impacts. Operating results for the D&S segment is EUR 2 million lower, mainly due to increase of operating expenses due to the further investments in the D&S holding strategy, as we already mentioned at the investor update in 2021. Finally, Holding and Other operating results improved with EUR 11 million to minus EUR 119 million, mainly due to the release of an employee-related provision. So this concludes the financial highlights and business overview, and I will now happily hand over to Ewout who will discuss, among others, our solvency and capital generation.

Yes. Thank you, Jos, and good morning to everyone on the call. Jos already mentioned that 2022 was a rather eventful year with large financial market developments, the announcement of the business combination with Aegon, but for the financials also, the preparation for IFRS 17. Happy that I didn't know this all before I said yes to this job by the end of 2021, because conversations would have been more difficult with my wife. So even more proud that despite all these developments, we report a record operating results, a record OCC and strong solvency numbers. The introduction of IFRS 17 for the year 2023 make today also a special day. Our finance colleagues made the last IFRS 4 booking by end of January, and today, we bring IFRS 4 to its last resting place. The focus on solvency and capital generation will be even stronger going forward than it is today. So let us go to Slide 10 and start with the movement within our solvency. Of course, I'm happy to see that our balance sheet remained robust in these volatile markets, where our Solvency II ratio increased to 222%, and yes, we are still on the standard formula. And just to be sure that we are on the same page, this number includes a positive impact from the ABB we did in October for financing the Aegon NL transaction. However, the Tier 1 -- the EUR 1 billion Tier 2 we issued in November is excluded in the number because recognizing it as capital is continued on the closing of the transaction. Excluding the ABB impact, we are at 204%, which proves the resilience of our balance sheet and is a strong position to start the year with. The ratio benefited from very strong OCC, adding over the solvency points to the ratio. I will talk about OCC in more detail on the next slide. Market and operational developments at 6% points positive impact on the ratio. It reflects positive impact from higher VA, higher interest rates, positive real estate valuations and lower equity markets, which together more than offset the lowering of the UFR, higher inflation, market spread widening and some adjustments to non-economic assumptions, most meaningful being the update of mortality tables, 10% increase of minimum wage in the Netherlands and the higher cost-related insurance liabilities. These non-economic assumptions, the sole position of ASR to offer disability contracts for the eldercare sector, and the sum of OCC minus capital distribution were also the main drivers behind the decrease in H2. The capital distribution over 2022 amounts to EUR 460 million in total, EUR 130 million interim dividend, EUR 75 million for the share buyback, which we executed in the first half of this year, and EUR 254 million for the proposed final dividend. Very happy to see that the increased dividend, while remaining a very strong solvency level at the end of the year. Let us now have a closer look at our OCC presented on Slide 11. The OCC came in very strong at EUR 653 million, an increase of almost EUR 60 million compared to last year. And the increase was driven by EUR 50 million higher business capital generation, EUR 100 million lower UFR drag, partly offset by EUR 90 million lower capital release. The increase in business capital generation reflects the strong business performance in Disability and Life and improved excess returns. Business performance in P&C was not at the same level as last year due to the decline in cost benefit, but performance remained very strong. We did face a decrease in the contribution of Health. We had adverse claim development this year, lower cost coverage to shrinking of the portfolio. And like Jos explained, EUR 9 million pre-tax higher acquisition expenses given growth in 2023, where the expenses are already recognized in the 2022 results. The improved excess return was due to portfolio optimization by a higher contribution from mortgages and credits. The lower net released capital of EUR 91 million is mainly related to 2 items: 1/3 has to do with business growth in mainly Health and Disability, leading to a higher new business strain as in our OCC, the business strain materialize before the manifestation of earnings. So OCC is lower as we have invested -- as we had the opportunity to invest capital in organic growth and future profitability. Secondly, the sharp increase in interest rate this year leads to a lower SCR, and therefore also a lower release of SCR. The high interest rates, of course, also have a positive impact on UFR unwind, which is EUR 100 million lower compared to last year. At H1, we expected to reach an OCC of approximately EUR 660 million for the full year. We almost delivered this number, but there are some developments I should highlight. Higher rates contributed additional EUR 5 million by lower drag. And in H1, we already recognized EUR 20 million impact from 2.5% additional minimum wage increase, which will reverse in the second half of this year as this item has been classified as non-operational, given the incidental and extraordinary character. So adjusting for these elements, OCC expectation would go up to EUR 685 million. However, due to strong organic growth, new business strength was EUR 30 million higher than expected in the Non-life segment, equally divided between Health and Disability. And we had a bit lower capital release than expected due to higher rates and a higher ratio. Looking ahead there are some developments to take note of. Firstly, if interest remained flat in 2023 compared to end of December rates, the outlook offers upside potential. Based on our methodology of averaging the UFR, we would also expect positive UFR echo drag into 2023 of around EUR 70 million. We expect capital release to be in the same area as 2022, given higher interest rates environment which lowered SCR and as we maintain our growth ambition in P&C and Disability. However, the growth in Health and the extra strength that we had in 2022 is not what we foresee for 2023. In addition, we expect excess return to be slightly lower, somewhere in the range of EUR 15 million to EUR 20 million due to lower equity exposure and real estate valuations. That brings us in an OCC area on a stand-alone basis of around EUR 720 million, fully in line with business plan. Please note, this is before the EUR 1 billion Tier 2 issuance, which carries a coupon of 7%. So annual costs through OCC of roughly EUR 50 million coming from this. But of course, we will get OCC in return after the deal is closed. Let's go to Slide 12 to talk about the investment portfolio. The investment portfolio remains robust and well diversified with a strong skew to quality and over 75% invested in fixed income assets, which includes mortgages. We want to highlight mortgages and real estate, as we noticed increased shareholder attention over the last half year. So mortgages to start with. The mortgage portfolio represents 25% of our assets. It's a high quality, which is underlined by a low average loan-to-market value of only 62% and of which 23% is government guaranteed. In addition, the payment arrears of 90 days is below 0.03 basis points, so that's difficult to even put, I would say, loudly, and credit losses are at 0.1 basis points. We don't see increases in the level of arrears or credit losses underpinning the quality of the Dutch mortgage market. The fixed rate periods are skewed to longer periods. Over 76% of the portfolio has a fixed rate period of over 10 years, resulting in a stable and predictable monthly mortgage payments for our customers and limited refinancing risk. On the slide, we also show the net market spread development over time. This shows the relative stability over time with some short-term volatility. Therefore, it can lead to a spike in valuation on a given reporting date, not reflecting the actual risk on potential credit losses. I believe that one should look at this on a through-the-cycle basis where on OCC spread methodology, I would see around 80 to 100 basis points as a realistic number. Another asset class that received increased interest is real estate, so let's go to Slide 13 and look at our portfolio in a bit more detail. On this slide, you can see the diversification of our EUR 5.1 billion real estate portfolio. We have a strategy in real estate of diversification and quality, with contracts linked to inflation. Our real estate is, with the exception of renewables where the interest position is hedged, fully equity financed, and therefore, not directly sensitive for interest movements. Almost 40% of the portfolio is invested in rural land, where we are the second largest landowner in the Netherlands after the Dutch state. The contracts are long term and inflation indexed. Valuation is driven by rates, inflations and land prices. The good farmland is scarce. We have seen and expect to see land prices go up over time. The average total return per year over the last 15 years was above 7.5%. The other categories, Residential, Retail and Offices, are skewed to quality with strict investment criteria in the specific ASR real estate funds, as mentioned on this slide. For all of the asset class, we see that quality results in low vacancies and level of arrears. There are some increase in vacancies in offices which is related to part of our own building, which we rented to a third party for which the lease ended, and we are now in discussion with a new potential tenant. All contracts, as said, are inflation linked, and we see direct investment return going up in 2022 and we will see further growth in 2023. Only for Residential, the index is top at average rates increased to safeguard for [indiscernible] housing. Looking to valuation, we see that Retail remains stable because most revaluation already took place during COVID crisis. For Offices and Residentials we see in H2 pressure on valuation, not as a result of yield drop, as explained, but due to some pressure on transaction prices. I think it is fair to assume the same direction of revaluation in 2023 as we have seen in H2 2022. Anyway, I can talk for ages on this subject, but most important to flag that quality together with index-linked contracts, safeguard direct yields where diversification helped to be more stable on value development. Having said that, and for time's sake, let's continue to Slide 14. The balance sheet of ASR remains strong. Unrestricted Tier 1 capital represents 55% of own funds and 167% of the SCR, and we continue to have ample headroom available within the Solvency II framework. As mentioned earlier and shown here on the slide, the own funds include the share issue of EUR 600 million that excludes the EUR 1 billion Tier 2 issuance given its non-eligibility, and the Solvency II due to the contingency on deal closing. The Tier 2 issue does, however, impact some of our headline ratios, like financial leverage and the interest coverage ratio. The ratios on this sheet are excluding the impact of EUR 600 million share issue and the EUR 1 billion Tier 2 issue to give a better representation of the underlying stand-alone situation. Financial leverage in that case amounts to 28.7%, and the increase compared to 2021 is mainly the result of a decrease in IFRS equity. When we included transaction financing, leverage would go just below 35%. On a solvency basis, we are around 28% leverage. Our S&P single A rating was confirmed by S&P after the Aegon Nederland announcement in October, and this has a stable outlook. Our debt maturity profile, as you can see, is nicely staggered and the first goal date is 2024. And again, we have ample financial flexibility and room to add leverage to our balance sheet. Let's move to Slide 15. The holding liquidity at the end of December stood at a record level of EUR 2.1 billion, excluding the equity raise and Tier 2 proceeds, holding liquidity stood at EUR 568 million in line with ASR's policy of maintaining capital at the operating companies and upstream cash to cover dividends, coupon and holding expenses for the current year. Cash upstream of EUR 720 million consists of EUR 490 million from the Life entity and EUR 176 million from Non-life. The solvency position of legal entity remained robust, with the Life ratio at 186% and Non-life at 162%. And together with the strong capitalized legal entities, this provides ample cash flexibility also with the aim to finance part of the Aegon NL transaction at the moment of closing. And this concludes my part. And now back to you, Jos, for the wrap up.

Thanks, Ewout, and the wrap up is on Slide 17. And I think we dare to say that we again delivered a record operating result this year, really reflecting strong underlying business performance. We are on track with the Aegon NL transaction and we are able to confirm our assumptions related to the cost synergy target of minimum EUR 185 million. Commercial momentum in P&C, Disability and Pensions remain very strong, driven by both sales volume and pricing increases. Our balance sheet has proven resilient as we reported higher solvency with a very strong growth in organic capital creation. And last, but certainly not least, we proposed a step-up of 12% in our dividend per share to EUR 2.70, and this reflects both our increased business performance as our confidence in the Aegon NL transaction. And with that, I would be happy to hand over to the operator and start the Q&A.

[Operator Instructions] And the questions come from the line of Cor Kluis from ABN AMRO ODDO BHF.

Indeed, Cor Kluis speaking. Congratulations with the results, and especially thanks for the OCC outlook for 2023 of EUR 720 million. A few questions, first of all, on the Non-life business. Could you give us some idea of how it's currently developing in 2023? We hear in other countries also, there's quite some claim inflation because long waiting times for repairs that you have to pay as an insurer for the car rentals for a long time. So could you give an update on the claim development in the Netherlands and Europe. You took some provision for claim inflation at the end of last year? Have you also done that, that's on the claim inflation side for Non-life? And then secondly, a technical question on the eligible own funds. I saw that in the release of capital of the own funds in H2, there was a minus EUR 15 million. In H1, it was a release of plus EUR 53 million, and in H2 it was a minus EUR 15 million, so that's on Slide 10. Why was there an own funds decline? That's my second question. My third question is on Aegon, Aegon Nederlands. You've not given an update on the pro forma impact of the Solvency II ratio. You have done some issuance of active cost in hybrids. Does this mean there's nothing changed, or will that comment on later, later stages? That were my questions.

Okay, Cor, thanks. I think the first and the last question will be answered by me, and I think Ewout, you will take the second one. First of all, on the Non-life developments. Over the last year and actually that continues in the first couple of weeks of the year, Cor. We have seen a slight increase due to inflation in repair costs. However, the frequency -- the regular frequency in repair remains quite low. And therefore, we don't, in general, see a very adverse development in claims. Having said that, given the fact that we do see a slight increase in average claims, we already decided that we -- and we're preparing that right now that we will increase premiums later this year in the P&C business, and that will be somewhere around a low mid-single-digit number because we -- one can expect that claims inflation will impact the results going forward, and that's why we've already decided to a premium increase there. To your question on additional reserving, by heart, I think we've done a very small addition, somewhere around EUR 10 million at the end of last year. So that was a relative small number. Maybe Ewout, I'll take first the third question, and then you'll take the second one. We haven't said anything on the solvency, the assumed start solvency of the combination, and that's because we are still on that 190 number. As soon as the closing is done, we will come up with precise numbers, but we don't see any reason to change that number right now. So still confident that, that is a good starting point.

Yes. Go ahead. On the -- on your question on the eligible own funds, so what we -- what you see is that when -- so the release of capital was at a lower level. So what related to -- sorry, I have to put it like this. Related to the SCR is also the risk margin. And what we have seen is that with the release of capital, also the strain was -- risk margin strain was higher due to the new business strain, and it also has to do with the seasonality in H2 for new business.

We are now going to proceed with our next question, and the question comes from the line of Benoit Petrarque from Kepler Chevreux.

So a couple of questions on my side. The first one will be on the EUR 720 million. If you could do the math again, sorry for that. So I start with the EUR 650 million full year, I think you have this obviously echo drag of EUR 70 million, which will be positive in 2023. But on the several kind of items, you have the lower risk margin release, could you maybe quantify that for next year? And also, I understand that the contribution from new business will still be, well, a negative -- well, relatively high, let's say, in 2023. And just wanted to check with you how much that could be? Because we've seen obviously a large collective disability agreement this year, I'm just wondering if it's fair to assume that the new business trend will still be at the 2022 level in 2023? So that's the number one. The question number 2 will be actually on Aegon Bank, sorry to come back on that one. But you see a much, much higher OCG (sic) [ OCC ] from Aegon Bank. I think Aegon reported that last week due to the higher interest rates, higher net interest income, and I was wondering if you have maybe a different view on the banking business in the current interest rate environment, if you might prefer to keep that business in-house? If you could just update us on that. And then just maybe on the PIM migration, the impression that you had 3 to 4 years in mind for the full integration of PIM that you wanted to press quite obviously for the legal merger to get implementation on the Life model. But could that be a bit shorter than the kind of 3, 4 years' time horizon? Because that sounds it's quite -- it's quite a long period of time.

Thank you, Benoit. I'll kick off with the second question, and then Ewout will take the first and the third one. On Aegon Bank, actually there is not an update. We've, of course, seen the results. And I think it's a strong brand, and they delivered quite well. What we have said earlier is that we will have a conversation on the future strategy with the management of the bank. We will consider a number of scenarios, and given the fact that we are not owning the bank, it's too early to go into those scenarios and to predict what the outcome will be. We will have a serious discussion with the management what is the best strategic future for the bank. And at this moment in time, we want to keep every option open.

Yes, Benoit. On your question related to the OCC outlook, indeed, so the EUR 650 million, if you add the Aegon, which indeed is EUR 650 million, that brings us to EUR 720 million. What I tried to say is, well, when we look to the growth ambition that we have in P&C and Disability, that is something that we maintain. So the new business win in that area would be more or less in the same direction of travel. For Health, we believe it will play out differently, so we don't expect to grow there next year. So that's why I think that the new business strain that we have seen in Health due to the strong growth being roughly EUR 50 million can be added, so that brings us at EUR 735 million. However, due to lower real equity exposure and also a bit lower real estate valuations, we believe that excess returns will be a bit lower and that brings us back, well, around to EUR 720 million. And then on -- the question on the internal model. So what we said today is that we are, well, working very hard together with the Aegon team in -- well, in clean teams, it's called like that, to ensure that we can maintain the internal model of Aegon within the ASR group. That is progressing very promising, and it's very nice to see actually also the cooperation between Aegon and ASR people. What we expect going forward is, well, first finish this and actually finish this before closing. Then the second step is that we also want to bring the ASR portfolio to the internal model of Aegon Life. To do that, we have to ensure that we have the right data in our own system to -- to have the same substantiation to use internal model as Aegon and Aegon Life currently has. And that will take time. The second element that will take time is that we also have to embed it in how we steer the company. Two examples that can be for where you have to embed it is, for example, in where you manage your interest rate position. Another example is how you deal with it in pricing and also proofing that, so it's actually difficult to use this. Will take time. This is the main reason that we have said, well, we expect 2 to 2.5 years to bring ASR Life to the Aegon Life internal model. And despite the fact that, well, the progress is very promising. The way we cooperate is very promising, it's too early to change the ambition on the internal model and moving ASR Life to the internal model of Aegon Life.

We are now going to proceed with our next question, and the questions come from the line of Andrew Baker from Citi.

So the first just on Non-life. Are you just able to provide a split of the 9% organic growth rate by rate increases versus volume? And then if you need to call out that large collective disability agreement, if that's material, then that would be helpful. And then secondly, on -- just back to Aegon deal. So obviously, the -- when we look at the total capital return payout ratio, it's lower going forward versus the pro forma numbers that you've provided. How are you thinking about deployment of any excess cash and capital build, and specifically in relation to Aegon potentially selling down its stake over time?

Take the first one, Ewout.

Absolutely. So let's start with P&C, Andrew, because I think it's wise to split in Non-life P&C and Disability. So when we start with the P&C, premium has gone up with EUR 65 million, so EUR 65 million. When we look to the drivers behind that growth, actually, we can see that well, so -- and that's 4% of the P&C portfolio, right? So when we look to the drivers, 3% is real growth, so adding new customers to ASR's P&C portfolio, only 1% has to do with indexation. So from the 4%, we actually see that 75% is really related to adding new customers to our book, which we absolutely like. I think Jos had already described that when we -- well, when we look to 2023, we actually expect their growth coming from indexation to be a bit higher. Two reasons for that. One is that we have index-linked contracts, and we have seen that -- well, CPI has gone up, so all CPI-related indexes will result in higher premium in 2023. And secondly, we -- given the fact that we do see the average claim amount increasing a bit, we also expect to at least increase premium a bit during June 2023. So for 2023 and 2024, we expect higher contribution. But in 2022, the contribution was really by adding new customers to our book. So that's on the P&C side. On the Disability side, well, strong growth, almost EUR 200 million. I think to say something about the buildup of this, so EUR 66 million is related to the contract that we have with the sector of eldercare, so that's an -- we are the sole offeror of that. But EUR 66 million is a single premium because there's a run-in risk that we accept, and we recognize the -- and there's, well, a single premium opposite to that and that EUR 66 million. So actually, that should be taken out. So then you have EUR 110 million -- over EUR 130 million growth. From that, 1/3 is due to premium increase and 2/3 is due to growth. But in growth, I think there's also an element which we should highlight. I think half is really growth by adding new customers, the other half is related to the fact that salaries of the employees that are part employees' increases, and we see also the number of participants in the -- by the employees increasing as well. So with that, you actually see -- so in the portfolio there's -- in the -- on the portfolio, there's organic growth as well. So that brings it all down. And maybe to finalize on this, so the eldercare is what I've just mentioned. So EUR 66 million is the single premium. Going forward, we expect a contribution of around EUR 42 million. Well, it's quite precise actually. We expect EUR 42 million to add to the Disability business from '23 onwards, and that is our recurring premium.

And on the -- on your second question, the key answer to that question is we like flexibility. With combining the 2 businesses -- and I said, we aim to create in the third year, at least EUR 1.3 billion of organic capital generation, and we are happy with the strategic partnership with Aegon going forward. Having said that all, the flexibility comes into play if and when Aegon -- and we don't know when are they going to decide and when they're going to take a decision on that. But if they would take a decision on selling down our position, we would love to have the flexibility to buy the shares like we have done when the government started to sell down their position. Having said that all, going forward, it's our aim to bring the payout in the direction of [ 75% to 70% ] in the longer term. But we, first, want to create the flexibility to take action if and when Aegon might decide to sell down the position. And as you know, Andrew, at the end of the day, we don't want to be capital hoarders.

We are now going to proceed with our next question, and the questions come from the line of Ashik Musaddi from Morgan Stanley.

Just a couple of questions I have, it's so first of all, how do I think about remittances going forward? Now if I remember correctly, I mean, you have always said that OCC is more or less equal to the remittance. So is it fair to say that if you are suggesting that EUR 720 million would be the OCC for this year, if I add back the holding company cost and debt cost, that means that the subsidiaries will have an OCC of about, say, EUR 900 million? So is that fair kind of remittance going forward? Or is there any other thing that we need to keep an eye on? That's the first question. And second question is with respect to your real estate, I mean, you mentioned that there is some similar impact on the office portfolio and on the residential portfolio in 2023 as well. But how would you think about rural portfolio doing? I mean would you say that as of now, you don't expect any negative impact on solvency ratio because of your real estate? Or would you say, I mean, it will all depend on how rural portfolio develops? And just a bit of clarification on rural returns. I mean the 7.5% over the past 15 years looks very impressive. But is it possible for you to give us some color about how this has shaped in the past 3 and 5 years?

First question, if I take it literally, you have to answer it yourself because you asked how do I think, but I think you meant to ask how do we think. So I think, Ewout, you have a view on the cash remittances.

Yes. So thanks, Ashik. Yes, so maybe on the remittances. So the policy that we have on remittance is what we will have also going forward. So that means that we will remit actually the cash from the legal entities that we need to cover the holding expenses, the coupons and the dividend for the current year. The number that you mentioned is, I think -- so when we look to 2022, that was already at the level of EUR 720 million, so the number of -- the direction of thinking of you is I think not wrong. Maybe it's a bit at the high end, but it's -- again, we stick to the policy that we have, but probably, you're not that far off. That -- on the remittance side. I think on the real estate, yes, of course, the valuation depends also a bit on how the rural portfolio will develop. What I tried to say is that, well, we have a diversified portfolio, and the diversification helped us in H2 to actually don't see a large deterioration of value in the real estate portfolio. I think the outlook for the rural land, so real good, rural land is really scarce and the outlook for that is still positive. Whether it's the same, well, revaluation, as we have seen in -- during 2022, that's not something that I wanted -- that I dare to say. So I expect it to be slightly lower. So we might see a couple of percentage points impact from real estate on our solvency. But I think given the fact that we have a diversified portfolio, it will not be large. And that's actually what we try to also explain by giving this overview of different real estate categories that we have in the portfolio. On the average return, it's something that we have to look -- that we have to look into what the exact average return is over the last couple of years. But in general, we have seen good developments also in the last couple of years on the rural side.

We are now going to proceed with our next question, and the questions come from the line of Michael Huttner from Berenberg.

Well done on record results. I had a few questions, one on debt, one on health and one on -- a question you might say was not for you to say, but maybe on investors. And on the debt, 34.6%, I think, would be pro forma leverage ratio. My experience, and I don't want to [ state the experience pub ], but it seems high. And I know you've probably spoken about it, but can you give us a kind of path of when it returns to a more normal level? To me, normal would be below 30%. I don't know if that's how you see it. The second is on the health. So the impression I have itself is a challenge, but I can't put my finger on it. So if you could give a little bit more kind of granularity on this book of business, that would be really helpful. And the final one is on the rotation of investors. So I think the conversation I've had with investors, you might say, was none of your business but maybe you can talk a little bit about it, is that they were a little bit disappointed with the share price performance. And my feeling is that there's a bit of rotation between investors who used to be pure value, they just wanted cash, to now investors who kind of see potential for growth and maybe less demanding of cash. And I just wondered where in that process, if I'm right -- if -- where you think we are.

Yes, thanks, Michael. More than happy to answer your question on the debt side. So we have a target range for the leverage ratio of 25% and 35%. Actually, when we would have included the ABB and when we include the EUR 1 billion of Tier 2 that we have raised to finance the Aegon transaction, we are still within that range. So that's the good point. But I do agree that we don't -- well, that we don't target to be at the high end of the range. I think on a stand-alone basis, we see that we are at 28.7%. And I think when the combination is formed, so when the closing is -- when the closing is there, we will have a balance sheet without any depth to it. And that will -- then you will also see that the leverage ratio will come down, well, at least to the same level as we have on a stand-alone basis, so the 28.7%, but it might be even lower. So I think it's purely an effect of the fact that we already put financing in place to -- for the Aegon transaction, and that, well, resulted in a reported -- somewhat higher reported leverage ratio, still within the range, but at the high end of the range. When the deal has closed, you will see that leverage ratio goes down as we have towards the level of a stand-alone basis or maybe even below that.

And on your second question, the dynamics on Health. First of all, Health business is about cost coverage of Health cost. So it's not the Disability business, to be clear. In the Netherlands, there is an obligation to have health insurance, and the health insurance market could be divided in actually 2 different markets: The basic health insurance markets and the additional coverage market. The basic health insurance market, the product, so what we need to cover is directed by the government. So the government decides what needs to be in the health insurance package. So what we have seen in development over the last 3 years, during COVID actually, the health consumption in the Netherlands went down. All the hospitals and all the doctors were focusing on curing COVID and treating people with COVID. So the last year, we have seen an adverse development that hospitals were open again, the number of people that needed to be treated for COVID was lower. So hospitals started to treat people that were postponed during the COVID. So that's why we have seen some adverse development in the Health business, and let's hope that, that will normalize going forward. And that's why the combined ratio ended, all in all, including the additional cost we have made to build our portfolio at [ 100.8% ]. And if I would exclude those additional costs, it would be just below [ 100% ], and we are aiming for the health business because it's less capital intensive. We're aiming at 99% combined ratio. So that hopefully answers your question on Health. On the -- your question on rotation of investors, if I look back to our IPO and look at the investor base and the quality of the investor base we have, we are still very happy that a large number of first-year investors are still in the top 25 of our investment base. And of course, on an annual basis, we may see some shifts that sometimes investors take profits. And then a couple of months later, we see them coming back, so that's -- I think that's good. All in all, we don't see the twist you subscribed. The only thing that we do see is that there are a bit more index funds invested. They weren't there when we IPO-ed the business in 2016. And going forward, with an increased market cap after closing, one might expect that there will be an increase of index investors going forward. But all in all, we are still very happy with the balanced -- with the balance in our investor base.

We are now going to proceed with our next question, and the questions come from the line of David Barma from Bank of America.

My first one is on Non-life. Sorry, can you just come back on how you see the underlying underwriting performance in 2022? Should I understand from the bridge you gave on OCC for this year that underlying and headlines are actually not that different? And secondly, on the growth in business capital generation that you showed on Slide 11. How much of that EUR 49 million is attributable to the portfolio optimization that you referred to, and should we expect any more of that in '23? And then lastly, on Aegon and Asset Management, can you please just remind me what the implications are from your asset management plans with a guard on the fees in your Asset Management division?

Yes, so on -- David, thank you for your questions. To start with Non-life and also related to the OCC business, I think it's a fair question to ask. So actually, we have seen that underlying 2022 was a really good year. So we have the 91% -- the high 91 percentage number. We are actually below the target range that we have. So I think it's fair to assume that we, well, that we will be back in the target range in 2023. So let's say, 1.5% higher. On the other side, and that's -- I think that's the positive contribution, we don't expect Health to be in the same area as it is today. So we expect a better contribution from the Health segment. Absolutely, we expect further growth and that will also benefit to the higher -- in high contribution from Non-life and the [ OCC ]. And we believe that those elements are more or less offsetting each other, and that's why we presented the press as we have done. Then on the question on the business capital generation, so how much is related to excess returns? I think that's the underlying question as a result of optimization of the portfolio. I think it's roughly 50%, as said. We do see that during the 2022, the valuation of equities was at a lower level, and due to that, we also expect that the excess return was -- will be, in 2023, EUR 15 million to EUR 20 million lower than it was in 2022, which was also part of the OCC bridge in the forecast that they provided. So -- and then your third question was on the Asset Management side at Aegon, but I didn't -- I didn't write it down fully. So maybe you can repeat it? Sorry, for that.

Yes. Can you just remind me what the implications are for your fee generation and the transfer of the UN if that's meant to happen?

Yes. No, no, absolutely. So to come back to the agreement, I think the main element in the -- in how it's impacting the capital generation in the fee business is related to the mortgage funds that we manage for third-party funders. That will be transferred to Aegon Asset Management, and as a result, we believe that somewhere -- well, the impact will be around EUR 10 million for that, which is included also in the -- well, in the expectation that we have had in the -- that we have for the OCC of the combination. So that's -- that's actually the main element that is impacting the operating result. The capital generation of our -- as a result of the Aegon agreement.

And just to come back on Non-life. Are you -- what was the contribution to CC of Non-life in '22?

So the exact number is not what we provided. But when you look to the operating results in the Non-life segment, I think that gives us that -- at least on the -- that gives it a good indication.

We are now going to proceed with our next question. The questions come from the line of Nasib Ahmed from UBS.

One of them is just a follow-up from the last comment you made, Ewout. On OCC versus earnings, there was a EUR 27 million reversal of a provision you took in 1H on D&A. I believe that's not impacting OCC, only earnings, if you can confirm that? And then on the solvency ratio, just on a normalized basis, I think you provided this in the past, if market kind of stabilized, I look at Slide 12 and the mortgage spreads are kind of in line with the average. But to me, it's a little bit higher. So if markets kind of normalizes, what would be your solvency ratio? And then on -- sorry to come back on [indiscernible] bank. So I understand that you don't have a bank and you closed your banking business, but are there any other areas of the Aegon deal which do not contribute to the EUR 1.3 billion target, or where you would like to have the flexibility that you talk about on looking at options? And then finally, on the sensitivities, I see interest rate sensitivity has flipped signs on the solvency and the whole sensitivity is a little bit different as well, if you can comment on that?

I think that -- those are 4 questions. I will take question #3 and Ewout, 1, 2, 4.

Yes, absolutely. So let me start with the minimum wage. We tried to be -- at least on the -- open and transparent on the fact that we needed to reverse the minimum wage in impact of H1. So in H1, we had an impact post-tax in the OCC of EUR 20 million from the minimum wage. So we expected at that moment in time if there was an indication that we would have to add additional 2.5% of increase of the minimum wage, which we all recognized at that moment in time in the operating result and thereby also in the OCC. But given the fact that we needed to reverse that actually and take that out of the operating result, that also results in the fact that the OCC goes up with EUR 20 million on that. That's why we said, "Okay, the 60 million that was, I think, more or less in the market. You should add a bit higher rate environments. And you should add the EUR 20 million because we had -- we needed to reverse that." So it was -- it is part of the OCC that we presented. Then on the mortgage spread. I think what you see is that it is just below the average over the last couple of years, but perfectly within the -- in what we see as the bandwidth of a normal OCC spread of 80 to 100 basis points. So yes, so I think it's in line with expectations. And Jos, maybe for you, the question on Aegon and the portfolio?

Yes. On the bank, I already made a comment, and I don't think I need to repeat that. We are quite happy with the acquisition and with all the assets that are part of the acquisition. Of course, the Pension business, the P&C and Disability business, but especially also TKP, which is a pension admin corporation. And given the upcoming pension reform in the Netherlands, it provides us the possibility to be all over the place in the pension market as well in the pension buyout market, in the pension DC market, in the IORP market. So there are no assets involved in the transaction where we are not happy with. That would be my answer to your question, Nasib.

Yes. And on the rate sensitivity, I think the short answer is that we are a genius because we are in an optimal situation where we -- where you can be. And -- but that also results in the fact that the sensitivity for rates going up or down is both negative on the ratio. But just to give some color on what's happening over there, what we have seen over the -- actually of the last year is that we benefited from higher rates in our ratio, that's also actually what happened. On one hand, you lose a bit of reported eligible own funds, but the required capital went down as well. It's exactly what happened during 2022. We are now at the point that you actually see that lapse risk becomes more dominant in the portfolio, and when interest rates increase further, you actually see -- don't see the SCR low -- yes, lowering because of the fact that the [ mass lapse ] becomes a bit more dominant in the portfolio. And that's actually the change to what we have presented for H1 and what we have presented for full year. I hope that's clear to you, Nasib.

We are now going to proceed with our next question, and the questions come from the line of Michele Ballatore from KBW.

Yes. So 2 questions. The first question is on the Disability, the profitability of the Disability segment, which was particularly good, I believe, in the second half. If you can maybe give some indication or more color on the outlook compared to the 2022 performance? And then the second question is on the outlook on the mortgage business in general, what you see in -- for 2023?

Thanks, Michele. On the Disability business, the Disability business indeed performed quite well over the last year. We always divide our Disability business in 3 parts. The first one is Individual Disability, second is Sickness Leave, and the third one is Group Disability. In Sickness Leave and Individual, we are quite happy with the development of the performance over the last year. We're not yet very happy with the development in Group business, so there, we already announced premium increases to increase the profitability of that area, and that needs to kick in, in 2023. In terms of dynamics, what one could expect in a period where the economy is under pressure. And I think we are not in a negative economy yet, but there is pressure that Sickness Leave results, in general, remain stable, or even will increase a little bit because people don't dare to call in sick. And yet, first thing one might expect in the Individual Disability because if the economy slows down, business owners with their own business sometimes call in sick earlier than they would do in a growing environment. Having said that all, we expect that the development in general will be fairly stable going forward. Positive still increases in the Group business, and Individual and Sickness Leave stable, and further uptick in the profitability will come from growth of the portfolio. Outlook on mortgages. Well, this morning, there was a news flash that in the Netherlands, house prices went up again. There -- where we have seen 2 consecutive months that house prices went down. Our assumption is, and we have lowered the expectation on our new business in mortgages. Our assumption is that given the increased interest rates, there's still high prices of houses that there will be a gradual slowdown of the market in mortgages. Having said that, we still expect that we can do a significant portion of mortgages and that will be more than enough to replace mortgages on our own balance sheet and also feed the mortgage funds that we still have for external investors.

We are now going to proceed with our next question, and the questions come from the line of Ashik Musaddi from Morgan Stanley.

Just -- sorry, I have a follow-up question. I mean I was just thinking about the funding of Aegon deal. So if I remember, it's EUR 4.9 billion, and of which you have already raised EUR 1.6 billion through debt and equity. And then I guess you will be issuing 2.7 billion shares to Aegon, that leaves about EUR 600 million, EUR 650 million gap. Now if I look at your cash at the holding company, it's about, say, EUR 570 million. and your solvency of subsidiaries are just all right as well, EUR 162 million and EUR 186 million. So I mean, can you just give us a bit more color on how you're going to fund that additional cash? I mean, I remember you had mentioned that EUR 0.5 billion will come from in-house, but if you could just remind us where that EUR 0.5 billion is expected to come from, that would be helpful.

The EUR 0.5 billion will be funded by our sales. And if you take a look at the slide where we present the solvency ratios of the 2 [ upsells ], and you look at the remark just on the lower side of the page, there you will see the answer to your question. It's on Page 15. So it will come from -- partially from the Life entity and partially from the Non-life entity, and then there will be roughly around [ EUR 150 million ] open, and we will deal with that opportunistically.

We are now going to take our last question, and the questions come from the line of Farquhar Murray from Autonomous.

Sorry for holding up the call a little bit. Just 2 questions from me. Firstly, on the time lines around the Aegon acquisition, you seem to have scheduled in the employer entities merger in October. Can I infer from that, that you've got maybe a bit more comfortable about closing a bit closer to, say, July than you might have originally thought, and perhaps what might have helped there? And then secondly, just coming back more generally to Non-life pricing. There have been a legitimate anxieties about claims inflation and how pricing might respond. We had a little bit of [ motor ] competition earlier last year. And how has market discipline developed later in 2022 and this year so far?

Okay. To your first question, we are still aiming at closing the transaction first of July. And the first of October is the earliest date that we assume that we will be possible to merge the 2 entities, and that will depend on whether we will proceed fast enough in all the discussions we will have with the workers' council and with the unions on harmonizing labor conditions. And we, by the way, already started with that. So that's why we still are aiming at the earliest date of the first of October. And as with everything that we have said on this transaction, if we can speed up things, we will, of course, do so. But I think the first of October as earlier date is quite realistic. Then on your second question, Farquhar, I think the discipline in the Dutch-regulated entities in the Netherlands, if I take a look at the larger Dutch insurance companies, which are regulated by DNB, we still do see quite some discipline in pricing and underwriting. There are some international insurance companies not any more regulated in the Netherlands, which are quite aggressive in their pricing, especially in newly started direct lines. It doesn't harm us at the moment, but let's hope that the Dutch market remains disciplined and is not going to react at -- towards the price levels that we, nowadays, from some of those companies, see. In terms of inflation, maybe the remark I made earlier, we do see in our -- in claims, a slight increase in the average claim, but the claim frequency is still low. So therefore, in general, we don't see a large uptick in the claims ratio yet. Having said that, we are preparing a slightly price increase somewhere around the mid of this year, and it will be low to mid-single-digit price increase in our P&C portfolio to cover the expected impact of inflation going forward, and that will kick in from the -- as from the first half in the individual portfolio and in the SME portfolio because most SME contracts have the renewal date in late December, it will kick in from the end of this year.

We have no further questions at this time. I will now hand back the conference to Michel Hülters for closing remarks.

Michel points to me to close the conversation. Well, thanks for joining us. I think you can imagine that we are quite happy with the results we delivered. We are happy with the progress we've made in the preparation of the transaction with Aegon, confident that we will be able to get the DNO and also from the competition authority and that we, somewhere around the first of July, can announce closing. Most of you, we will meet tomorrow at our lunch meeting. So if there emerge further questions during the day and tomorrow, we will be happy to take them tomorrow. Thanks for joining, enjoy the day, and have a nice evening.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.