Ageas SA (AGESF) CEO Hans De Cuyper on Q3 2020 Results - Earnings Call Transcript
Ageas SA AGESF) Q3 2020 Earnings Conference Call November 13, 2020 3:30 AM ET
Company Participants
Hans De Cuyper - CEO & Director
Christophe Boizard - CFO & Executive Director
Filip Coremans - MD, Asia & Executive Director
Antonio Cano - MD, Europe & Executive Director
Manu Van Grimbergen - Chief Risk Officer & Executive Director
Conference Call Participants
William Hawkins - KBW
Farooq Hanif - Crédit Suisse.
Michael Huttner - Berenberg
Fulin Liang - Morgan Stanley
Vikram Gandhi - Societe Generale
Ashik Musaddi - JPMorgan Chase & Co.
Albert Ploegh - ING Groep
Jason Kalamboussis - KBC Securities
Robin van den Broek - Mediobanca
Operator
Ladies and gentlemen, welcome to the Ageas Conference Call. I am pleased to present Mr. Hans De Cuyper, Chief Executive Officer; and Mr. Christophe Boizard, Chief Financial Officer. [Operator Instructions].
Please also note that this conference is being recorded. I would like now to hand the call over to Mr. Hans De Cuyper, Chief Executive Officer; Mr. Christophe Boizard, Chief Financial Officer. Gentlemen, please go ahead.
Hans De Cuyper
Good morning, ladies and gentlemen. Thank you all for dialing into this conference call and for being with us for the presentation of the results of Ageas for the third quarter of 2020. I'm happy to be hosting this conference call for the first time as Ageas' new CEO. I'm joined in the room by Christophe Boizard, our CFO; and Manu Van Grimbergen, our Chief Risk Officer; and as usual, Filip Coremans and Antonio Cano are also in the room.
And as you may have seen in our press release 2 weeks ago, their roles within the group have evolved. Filip is now Managing Director, Asia, while Antonio became Managing Director, Europe. This change, which reflects the growing importance of a dedicated regional focus for the group will enable us to strengthen our business oversight within the Executive Committee. Moreover, they will both have transversal responsibilities within the group.
Antonio will remain responsible for Reinsurance, which is becoming more and more important for Ageas and for Real Estate, more specifically working on how we could expand our strength in real estate to the benefit of the entire group. As for Filip, he will continue to be in charge of innovation and business development.
Before commenting on our results, I would like to quickly mention the group news flow, which has been quite intense recently. Firstly, as announced, our AGM took place on the 22nd of October and approved the payment of the remaining part of our dividend, which has been paid last week. Therefore, the gross cash dividend of €2.65 per share over the 2019 exercise that we had announced in February has now been fully distributed to the shareholders.
The €435 million cash out related to the payment of the remaining part was almost fully covered by the €427 million dividends that have been received from Belgium early this month.
Secondly, on the M&A front, we have announced several transactions in the past few months. Shortly after announcing the acquisition of an additional 23% stake in our live joint venture in India, IDBI Federal Life, we have announced our intent to further expand our successful collaboration with China Taiping through the participation in the capital increase of Taiping Reinsurance, leading to a 25% stake.
We are very happy about this unique opportunity to partner up with one of the top Asian reinsurance companies with an outstanding track record and a promising growth potential. We have also announced the divestment of our stake in Tesco Underwriting in the U.K., which will enable us to focus on our core business relying on our strong partnerships in the broker market, while further developing the direct business.
And lastly, you may have seen our press release yesterday, announcing that Fitch has confirmed our A+ rating with a stable outlook. So now back to our results. In Q3, we enjoyed a very strong operational performance undermined by equity impairments. In Life, our result, which amounted to €160 million was impacted by €35 million negative capital gains compared to a positive contribution of €56 million capital gains in Q2 last year. This was due to impairments in Asia on specific bank stocks listed in Hong Kong.
In the European consolidated entities, despite a reduced amount of capital gains and the lower recurring financial income, the guaranteed operating margin stood this quarter at a solid 88 basis points within our target range, thanks to a strong underwriting performance.
Over 9 months, although gradually improving, the guaranteed margin remains nevertheless still below target following the adverse evolution of the equity markets in the first quarter of 2020 and the COVID-19 impact on real estate revenues. The group unit-linked margin also improved within the group target this quarter at 30 basis points.
In Non-Life, we recorded an excellent net result of €130 million this quarter. As we continued to benefit from lower claims frequency, especially in Motor. Over 9 months, this favorable claims experience fully offset the impact of the adverse weather in Q1 and led to an excellent combined ratio of 90%.
On the commercial front, inflows were 4% up this quarter. Recording strong 11% growth in Asia at constant FX, thanks to a full recovery in China, a 7% growth in Belgium from unit-linked commercial campaigns and a 6% increase in the U.K. We are currently experiencing a second lockdown across Europe. Which brings uncertainties around the financial markets and the overall economy.
The resilience demonstrated by our operations during the first 9 months of the year gives us confidence on our ability to overcome the second wave of the pandemic. Of course, we have to remain prudent in these uncertain times. However, providing no major negative impact from the financial markets would take place in the coming months. We feel confident in our ability to deliver results close to our initial guidance of €850 million to €950 million, excluding the one-off - the positive one-off impact from the fresh operation and the impact from RPN(i).
The fact that we expect to end the year close to our guidance despite benefiting from virtually no capital gains so far this year compared to €197 million for the first 9 months of 2019 illustrates the strength of our operational performance. This also demonstrates the clear benefit of relying on a diversified portfolio, both in terms of products and geographies.
Lastly, I would like to emphasize the strength of our balance sheet. We enjoy a robust 194% Solvency II position comfortably above our target of 175% and a solid cash position, which stood at €1.5 billion, of which €0.4 billion is ring-fenced for the settlement and €0.3 billion is set aside for the ongoing M&A transactions.
Furthermore, our operations rely on a solid asset portfolio, which has remained stable over the first 9 months of the year, and therefore, I feel that we are well armed to face the continuous turbulent times. Ladies and gentlemen, I will now hand over to Christophe for details on the results.
Christophe Boizard
Thank you, Hans, and good morning, ladies and gentlemen. As you can see on Slide 5, our 9-month result amounted to a high €994 million or €662 million, if you exclude the €332 million of net capital gains related to the tender on the fresh securities realized in the first half of the year and will not be available for dividend distribution.
Over the period, the COVID pandemic had a contrasting impact on our results. Our Life activities suffered from equity impairments and from lower recurring financial income, mostly from real estate and dividends. On the contrary, our Non-Life activities with their limited exposure to commercial lines benefited from reduced claim frequency, mostly in Motor.
Overall, we estimate that the COVID-19 pandemic had a negative impact close to €100 million on our result over 9 months as the €215 million lower capital gains and recurring income recorded in Life were only partially compensated by the €120 million positive impact from lower claim frequency in Non-Life.
As usual, I will give you now some comments per segment. Slide 6. In Belgium, our Life result was up this quarter, driven by a strong operating performance. Life guaranteed operating margin stood at 85 bps, above the level of Q3 last year despite lower capital gains and a reduced recurring income from real estate.
Over 9 months, the guaranteed margin is still below target as it has not yet fully recovered from the impact of the Q1 equity impairments. But quarter-after-quarter, we are catching up and this should continue in the fourth quarter with the help of capital gains realized in real estate. 3 deals are indeed already closed, and they will generate capital gains of around €65 million.
In Non-Life, we had strong results, thanks to lower claim frequency mostly in Motor, also, to a lesser extent, in Q3 than what was experienced in Q2. Over 9 months, this fully offset the impact of the storms in Q1 and resulted in an excellent combined ratio of 89.3%. On the commercial front, Life inflows increased this quarter. A successful sales campaign in unit-linked boosted the sales and compensated for the lower inflows in guaranteed products. Non-Life inflows continued to be resilient like in previous quarter.
In the U.K., Slide 7. In Q3, the result was also supported by continued low claim frequency and strong prior year releases, mainly in Motor, while claim related to business interruption, even cancellation of rental insurance remained very limited. Therefore, the combined ratio amounted to a strong 88.2% despite ongoing sector-wide claims inflation in Motor, and a volatile pricing environment. Inflows were up this quarter, driven by new commercial deals, mainly in household, while Motor inflows remained broadly flat compared to the third quarter of last year.
In Continental Europe, Slide 8, we recorded a solid net result, mostly driven by Non-Life. The performance of our Non-Life operations was strong in Portugal, thanks to continued lower claims frequency in Motor, which, combined with benign weather and the continued focus on expense management led to an excellent combined ratio of 83.6% over 9 months.
A solid result generated in Turkey, despite claims frequency back to normal level in Q3, was, as often, mitigated by the adverse FX rate evolution. In Life, our guaranteed operating margin, although impacted by a lower level of capital gains remained above target this quarter, thanks to a solid underwriting margin and continued efforts on expense management.
With regards to the sales. In the current low interest rate environment, Portugal is shifting its product portfolio towards unit-linked and protection products. However, the growth in unit-linked in the quarter could not compensate for the decline in guaranteed products. In Non-Life, inflows continued to prove resilient, with growth in Portugal in all business lines and a strong growth in Turkey at constant exchange rate.
In Asia, Slide 9. The solid operating performance was undermined by negative financial market impact such as equity impairment and the unfavorable evolution of the discount rate curve in China. We indeed recorded this quarter a €50 million negative net capital gains due to the drop in value of some specific Chinese high dividend stocks at the time of the Q3 closing.
Shortly after the closing date, the stocks partially recovered, but we applied our very prudent rules and took impairment this quarter. As you may remember, our impairment rules differ from the ones in place for local accounts, and these impairments were not recorded in typing local accounts. Therefore, the hit we took was not alleviated by any mitigating technical elements, making it more severe for Ageas.
Excluding these market impacts, our result was firmly up in Asia, which illustrates our solid underwriting performance. The better Non-Life result was supported by ongoing lower claim frequency, driven by the continued lockdown measures. The rebound in inflows recorded in Q2 continued in Q3. Inflows were up 11% at constant FX, driven by China, where the economic activity picked up earlier than in the rest of the region.
The Reinsurance segment on Slide 10 recorded a positive net result of €37 million this quarter, again supported by lower claim frequency in the operational entities. Over 9 months, this more than compensated for the negative impact of the storms in Belgium and in the U.K.
Moving to the capital position now. As mentioned by Hans, our group Solvency II ratio, Slide 12, stood at a strong 194%, comfortably above our target level. You may remember that our solvency decreased in the first half of the year following the tender of the FRESH and the negative market movements, mostly on yield and equity. This quarter, our solvency was up by 2 percentage points, supported by a solid operational performance and spread tightening.
Our operational free capital generation, Slide 13, which benefited from the strong non-life operational performance in Q2 and in Q3 amounted to €573 million, including €132 million dividends from our noncontrolled participations. Therefore, we are confident but that we will reach this year our operational free capital generation guidance of €500 million to €540 million for the Solvency II scope.
And this is the end of my presentation. As a conclusion, I will highlight the kind of unexpected impairment in China, if they had not been recognized, we would have presented record results, and this proves that the underlying results are extremely strong. And I will repeat what I said at the end of my Q2 speech, saying that the profile of the group based on personal lines proved to be extremely resilient in these troubled times and Q3 is a confirmation of this. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions]. We have a first question from William Hawkins from KBW.
William Hawkins
You've already touched on some of the details, but I wondered if you could just, first of all, help me normalize the 9-month results. I think you've given some of the detail. Maybe if you could just kind of list it, that would be helpful?
And I suppose behind my question is if I just adjust the 9 months for the FRESH deal, you're at €662 million, and that actually annualizes close to €900 million, and so given that you're saying you still expect only to be close to your target range, which starts at €850 million, I'm not really sure what the 4Q negatives, in particular, are going to be.
So the question from that is, could you help me normalize the €920 million for all the things you've talked about? And on the basis of that normalization, why are you still being so conservative in your guidance for this year?
And then lastly, if I may, please. On the back of that, could you just talk about your comfort range going into 2021? Because in theory, you still got a business plan to be growing your earnings, and so if you're a €850 million to €950 million for this year and you're expecting you're going to be close to that or could even be in it, should we still be expecting that earnings can grow in 2021? Or are there headwinds that we need to be concerned about?
Hans De Cuyper
Maybe on the underlying, I think the first point I'll give to Christophe, I will come back to you on the outlook for the fourth quarter and related to our ambition level as far as in 2021. Maybe, first, some comments on the underlying.
Christophe Boizard
Yes. You are right. So the first and the prominent element is obviously the FRESH impact and divided into two operation, as I said, it is €332 million. But you are right, there is a lot of other things. The most striking element is obviously the lack of capital gains. There is a slide in the presentation, saying that this year, we have recorded almost no capital gain. And I think if we had to restate vis-à-vis normal levels, I would add something around €150 million, that's something which would be more in line with our long-term view on capital gains. You remember that it is based on 5% global return on real estate and 7% on equity, so €150 million.
Then on weather impact, we are slightly above historical levels. So it is around €30 million, but I'll let you judge if it is worth taking that into account. But then we have some other big elements.
And the last one I will mention, taking only the biggest figures is the VIR effect in China. You know the discounting effect on the result that flows through P&L. And on this effect is estimated at around €80 million this year. So these are the main elements, Will.
Hans De Cuyper
Okay. Thank you, Christophe. On Q4 and our statement related to our guidance. What do we expect in Q4? First of all, Motor frequency I think we assume to be performing strongly because in some of our markets, Belgium, Portugal, U.K., we are in partial or full lockdown. So we assume that these strong results can continue. But on Non-Life, you should also take into account, and we have still some uncertainty on that element that some business lines work with usage-based premium, and I'm talking about liability, our workmen's compensation, where customers pay an advance payment in the beginning or throughout the year. And there will be a final calculation on for instance, numbers of employees and all these things will, of course, be impacted by the temporary or permanent unemployment to give some examples. So we still have some uncertainty there, how the final premium settlement will end throughout the year.
The second element mentioned already for the previous quarter is China and the impact on field, which we assume to be in a similar range as it has been over the previous 3 quarters, meaning something, sorry, in the range of €30 million a quarter.
Thirdly, of course, subject to volatility in the financial markets. And then specifically, looking at 2 elements. One is further effect on yields from parking business, which we assume will go to similar levels as we have seen in the first half of the year as well as commercial real estate, although they are not in a full lockdown but in some partial lockdown. And then, of course, the additional risk that remains on impairments.
So these are, I think, the key elements. I would say, if all these turn out positively in the third quarter, then I agree with you, we should arrive within range. But with these uncertainties, we want to be a slightly more conservative and saying close too.
Last question, 2021. Well, budgeting, I think, has never been as difficult as this year because we have no idea how the COVID will continue next year and how economies will or will not recover the coming years. So we are now in full preparation of budget and business plan cycle, but it is too early to give you any guidance in this respect.
William Hawkins
If I may just come back very briefly, can I assume that the VIR impact that you're talking about for this year, like the €80 million that you referred to, that just becomes a 0 next year on the assumption that there's no change in the interest rates, right? These are all the onetime changes adjusting for how the interest rate in China has moved, right?
Antonio Cano
Let me take that question. We're not exactly the valuation interest rate, as you know, used in China is a 750-day moving average. And while in the fourth quarter, we see it go down with about 10 basis points. There will still be some decline in the course of next year before it flattens out. Of course, the 10-year government yield in China has rebounded a lot from the lows in March, where it was even touching something like - I'm trying to find a figure even 3-point - 2.5. It has rebounded to 3.20, 3.26 now, but the averaging effect will play through so it is improved, certainly, but there is still a negative effect to be expected next year.
Operator
Next question from Farooq Hanif from Crédit Suisse.
Farooq Hanif
Firstly, slightly aligned to Will's question. Can you help us with trying to sort of normalize Asia? So as we can have a go perhaps at the discount rate impact, and we can try to make an estimate of realized gains. But when we strip those 2 elements out, what's the best way to model it? Would you say the year-to-date, for example, profit, excluding those items, if we compare that to liabilities, is that sort of - would you say it's a reasonable sort of normalized margin if we do that? And aligned to that also, what happens to the - for example, the banks that you own, given that they have recovered under your impairment rules in Q4? So that's question one.
Question two. Going to Tesco, can you remind us again of what your thinking was in closing the deal? Because you were just getting to profitability, it's obviously an important distribution channel. Just wanted to understand what happened there in making that decision? And then lastly, a quick detail question. In 4Q, would you have any exposure to earthquake risk in Turkey?
Christophe Boizard
The specific point on the 3 banks. So your question is what will happen to our result if the shares recover. They have already recovered. You know that impairment threshold is 25%, but they have regained more than half of this 25%, so they are up. The sad part of the story is that there are long term equity, which means that we cannot hope but they will be sold in the near future. So they will stay like this.
And you know that one way to recover impairment is to sell the shares as it was the case before. But now I think that we cannot hope to have any recovery in the short-term because they are held for a long period of time. The benefit brought by this share is the high dividend. The dividend is around 7% on these stocks.
What can happen in the future, the positive element on the result. But now I am entering into, let's say, more detailed approach and this will happen next year. If these shares are still under their book price in the TPL accounts, TPL will be obliged to recognize an impairment under the 360-day rule of impairment. And in that case, something will happen because this loss could be at least partially compensated by some, what I call, in my speech technical elements, for instance, a movement on some profit sharing reserves, for instance, to compensate for the impairment.
So this could occur for Q2 because the first formal closing where this 365-day rule will apply in the TPL account is Q2, since they close their account only twice a year. So the positive could come in Q2 through some compensating mechanism put in place in the local accounts of TPL. That's the precise question.
Antonio Cano
Well, regarding your question relating to normalization of the Asian result. If you look at the results this year-to-date, we had recorded or reported €258 million to €257 million. And in fact, net-net, the amount of capital gains in there is 0 year-to-date. And the impact of the VIR valuation interest rate adjustment, as Christophe mentioned, is around €80 million, €90 million. So underlying, ignoring these 2 components, you could say we would have been around €340 million on a normalized basis.
Now that being said, the fourth quarter in Asia is always weaker than the previous quarters for many reasons, but an important one is that in China, they start to focus on the new year. And preparing the year-end or the beginning of the next year campaign. So traditionally, our fourth quarter results in Asia are not as strong as the others.
Now I'm not going to try to build your models on the spot forward looking projections, which is what Hans said, is an exercise that is in our budget mix. But the most important drivers are indeed the overall, I would say, growth in the business volume, which is translated in one hand in the new business figures, which we disclose, but be with a quarter delay in our tables. And obviously, indeed, the assets under management, which gives a balance sheet view.
But that is too short, I would say, through the cutting the corner. A lot depends on the quality of the new business that is being sold. And thereafter refer to the tables which really close with a quarter delay, which are on our website.
Hans De Cuyper
Thank you, the question on...
Operator
Next question from Mike Huttner--
Antonio Cano
Sorry, sorry, sorry, there was still two questions open. On Tesco, well, very briefly, at Tesco actually indicated that they wanted to end the partnership, which was to end anyway in 2021. So we have anticipated that for 1 year and so we arrived at a mutually beneficial deal. So we have closed that. There's no really any other story behind that. I think Tesco wanted to bring their interactivity and the bank closer together. And as we published, we will realize a small capital gain on that deal. And on Turkey, I can also be very brief. Our exposure is about a €1 million. So it's fairly low.
Hans De Cuyper
If you can just add that on Tesco, we also plan to have a cap gain of €9 million in the transaction, but that will only be realized next year.
Operator
And the next question from Michael Huttner from Berenberg.
Michael Huttner
My first question is really - I don't know it just pretty well, so apologies if you might have spoken about that in previous investor days. But is there a point in terms of government bond yields in Europe interest rates, where you kind of reach a cliff edge where the Life business does not make money anymore. Because I look at these margins, and I'm amazed. We have negative interest rates in lots of countries, and your guaranteed margin year-to-date, 59 bps, okay in Belgium. But the Q3, 85 bps, where is the point where you can say with, "ouch! It hurts?" And then the second question is a really simple one. It's a like, please, please give me some comfort. Can you talk about the buybacks for next year?
Hans De Cuyper
Maybe the first one on the investments on the Life side, and then I assume you talk about the Life guaranteed. Well, first of all, main - our main market, of course, is Belgium. In Belgium, we always manage the portfolio as a whole. So that means that we take the total customer return, so guarantees plus the profit sharing, and we look at it compared to the yield of the portfolio. And that includes, of course, also the high historic yields. Then you add the new business you write during the year at the new money rate, at the new money rate for fixed income was close to 1.5% for the first 9 months.
So this is not only government bonds. So the new business or the new investments have been diversified government bonds, corporate bonds, but also more and more, for instance, infrastructure financing, where you have or you can benefit from government or some regional guarantees. We also have, I think, given up a little bit of liquidity. Liquidity is not an issue for most Life insurers. And so we have I think, expanded, for instance, the portfolio in mortgages, which is also a very attractive investment from a solvency point of view.
So new money rate just below 1.5% for the first 9 months. And then we see, in total return, how we can make the margin. An important element in that margin over the year, and there, you have some important seasonality is the capital gains. The capital gains are then coming from equities or for real estate and real estate, often, these are a few material deals that we do throughout the year, and it happens to be this year that actually, most of these transactions will be done in the fourth quarter.
I can tell you, I think Christophe just mentioned that €65 million of capital gains have been already realized in 3 real estate transactions this quarter, and there are still a few more in the pipeline and on schedule. And so that you put all together to make that operating margin towards the end of the year.
Is there a risk of going off the cliff? Well, the key point, of course, is that based on the new money rate, you also define your guaranteed rates that you give to customers, and that is approaching 0. So - and that is something we are actively managing. I think it will be complex to sell with interest rates below 0, but at no guarantee, investing at just below 1.5, I think we are still in a comfortable position today.
And lastly, both in Belgium as in Portugal, we are also mitigating the impact by focusing more on unit linked business. So we have not announced nor decided to close the guaranteed business, but we definitely push towards new business. And to give an example, AG launched a very successful commercial campaign in August and September, together with the bank on the unit-linked side, bringing in €250 million new business, unit-linked.
Christophe Boizard
If I may add something, so indeed, we have 1.5% of new money yield on fixed income. And by the way, this is rather stable because this specific quarter, Q3 did 1.6%, so we don't have a very a declining trend. So 1.5% over the year. But on the top of this, we have the contribution of other asset classes like real estate. And on real estate, the long-term view is 5%. We have a 10% allocation. So this adds 0.5%. So all in all asset classes together, we are at around 2% new money yield. And the 5% return on real estate is guaranteed over the future years by the very high amount of unrealized capital gains. So we have an excellent visibility over the future on realizing this 5%. So all asset classes together, 2%.
Antonio Cano
If you want to see that in more detail that profile, I can recommend you to look at in the booklet because there you see for Belgium, how the assets - fixed income liabilities will evolve as well as the interest rates and the margin on the whole portfolio. Second question you have was on buyback. Well, the only thing I think we can say now is that to how to connect '21 cycle, we commit to this - to the statement. That is only be decided, I think, mid next year, traditionally, we decide that in August next year. And of course, as we always said, that is subject to potential M&A transactions, yes or no.
Operator
Next question from Fulin Liang from Morgan Stanley.
Fulin Liang
I just have two questions. The first one is a follow-up on the U.K. So since you disposed the Tesco channel, would that actually change your overall thinking behind owning U.K. business at all? So that's my first question. And the second question is on Asia. So I appreciate. So the large capital loss is due to a large owning of the bank. And this sounds like to me, is like you are essentially doubling down on your exposure to interest rate because if interest rate goes down, then your both assets and liabilities will be kind of negatively affected. And so I just wonder, is that the reason? So you think actually the interest rate in China will go up, so you double down. And then kind of maybe behind that, actually, how much you are involved in the strategic asset allocation of TPL?
Christophe Boizard
On our view on the U.K. and really to Tesco. As I said when I answered the question on Tesco, it is a Tesco Bank decision that they wanted to take over that activity. It doesn't change our view in the U.K. So we remain committed to our U.K. business.
Fulin Liang
Okay.
Christophe Boizard
Regarding your question on Asia, on the investment strategy and the reasoning behind these large positions that were taken in these top-tier banks. First and foremost, they were bought as an essential part of the long-term investment portfolio in the participating fund. So they're mostly back profit-sharing counters. And they are bought for the dividend yield. Let's be clear on that. These specific counters have a dividend yield historically between 6% and 7%. In the PAR front, of course, the liability structure is very long, and it's very difficult to find such long-dated fixed income instruments. So they have a place in the strategic asset mix. And the reasoning is from that angle, very sound. How we are involved in decision-making in terms of investment?
Well, there are - of course, it's our partner, is there in the lead, but let's not forget that we are very actively involved in the management, the appointed actuary in China is actually an Ageas appointee as well as the Chief Risk Officer of Taiping Asset Management. So we are definitely at the top table when these decisions are made. And of course, partners can have a difference in terms of risk appetite, and if that difference is material, as we have done in the past, we can take some hedging at the level of the group. But at this new moment, we feel that this is reasonably aligned with what we think is the right asset mix for the PAR front in China.
Operator
Next question from Vikram Gandhi from Societe General.
Vikram Gandhi
It's Vik from Societe Generale. Just a couple of questions from my side. Firstly, I appreciate the Belgian guaranteed life margins are gradually improving quarter-over-quarter. I'd just be interested in your thoughts around the leeway that you have in terms of profit sharing for the policyholders? And how do you think that is likely to play out at the end of the year? And secondly, I just wanted a clarification with your comments on motor claims frequency in the fourth quarter. Are you assuming it to continue to be lower? Or did you say that you assume it at more normal levels for the fourth quarter? That's all from my side.
Christophe Boizard
On your first question, if I understood, you asked about the leeway we have on profit sharing and what the outlook will be towards year-end. And correct me if I'm wrong, if that not was your question. So in Belgium, indeed, profit sharing is discretionary. So we have a lot of leeway. And the profit-sharing decision is something we put forward to the Board and General Shareholders meeting or in this case, the number of shareholders obviously limited. But that's a decision we take towards year-end, considering a lot of factors. But one of the key factors is, obviously, as Hans was saying, our target margin for guaranteed life in Belgium, that we want to remain between 85%, 95%. So - and indeed, as you're saying, there's quite some discretion in Belgium for that.
Hans De Cuyper
On your question on Motor claims frequency. Well, I think we only can try to estimate what the impact is from the previous month experience. And what we have seen is that you see a quite material drop in claims frequency during a full lockdown. But even that, I think, varies a lot from one country to the other. On the contrary, what we have seen over the summer period is that claims frequency actually went quite rapidly back to normal levels. And that is due to a few elements.
First of that is the agility in traffic, which of the drivers, which is not anymore, the same after a period of lockdown, also related to trucks, for instance, where trucks are not used to the cars anymore. And there is a number of cars on the road, which is increasing after a lockdown, but the speed, the average speed is not yet coming down. So we have seen actually quite a difficult few weeks immediately after the lockdown. Now we are in some of the countries back in lockdown, so we assume that we will see, but it's too early to say the claims frequency improving again during this 4 to 6 weeks.
But after that, and that will be then mid-second half of December, when it is winter time when we come out of lockdown, of course, it is very hard to guess what the impact is going to be. So that's a bit the outlook on frequency in Motor.
Operator
Next question from Ashik Musaddi from JPMorgan.
Ashik Musaddi
Just a couple of questions I have. One is on Asia, sorry, going back to Asian earnings again. I mean €260 million this year, year-to-date, there is no capital gain in that. So it looks like it is more or less normalized, given that the volatility, the VIR impact is going to stay. But how should we think about capital gain on top of this? So you mentioned that at the group level, your assumption is about €150 million. Can we get a bit more clarity on China level, on Asia level as well? I'm just trying to get a bit more sense on what should be the Asian earnings going forward with this VIR impact? I mean, are we talking about, say, about €400 million type number or are we talking about a bit lower, including capital gains? So that's the first one. Second one is, you still have about €1.5 billion cash, so what are your plans for that? I mean, do you look forward to do any bolt-on M&A anywhere? Any thoughts on that would be great. And just a small one on your next year guidance for EPS. I think based on the Connect 2021 plan, it's about, say, €4.8 to €5, if we use the 6% to 7% growth rate. I mean, how confident you are on that EPS number?
Filip Coremans
So first and foremost, having a target range, which we have now put at €300 million, €350 million for Asia this year. Obviously, this year, I would not count on too much capital gains. Let's be realistic. And with the VIR impact, we feel that we will be close, maybe just in - maybe just below that range, that is a reasonable expectation. And that would then be a year without capital gains. Now the capital gains in Asia have been quite volatile, as you will - without any doubt in August. And we tend not to rely too much on it in terms of thinking about our forward-looking statements. But as Hans said before, we are still in the middle of the budgeting exercise, which is complex. But let's be sure that, that range will not go down looking forward. But it's a little bit too early to make statements on that, Ashik, you would have to wait till Q1 results.
Christophe Boizard
Okay. Ashik, on the cash position. I mentioned it already. You can also see it in your deck. So the €1.5 billion cash position we are having today, €400 million is ring-fenced for the settlement and €300 something million for the already ongoing M&A transaction. So that brings us at a cash position, €700 million to 800 million today. And of course, we still have some potential at that capacity as well as a group if need be. So regarding M&A, the only thing I can say is you do see some activity in the market, and we react on that activity. Based on our principles of M&A and that we have always been transparent on them with strong financial discipline, but I cannot give you more indication than this.
Ashik Musaddi
And just on the EPS number, the...
Christophe Boizard
On the EPS, same remark that Filip made. 2021, we are now in the midst of the budget plan cycle. So it is too early to give you any indication there.
Operator
The next question is from [indiscernible].
Unidentified Analyst
Several questions on my side. So yes. Coming back on the guaranteed business in Belgium. Looking at the fall of the gross inflows versus the maturities you expect. Is that fair to assume that you will see net decrease of the technical provisions in the coming years, especially looking at the insurance - the insurance tax on new money, potentially your [indiscernible] the project will be a bit on the proration on the gross inflows.
And I was wondering if it could translate into a net decrease and by how much potentially, trying to figure out that. On the real estate portfolio, there's a lot of debate on the market on valuation levels, were not so much transactions, obviously.
So real estate agents seem to keep the pricing level quite still stable. But I was wondering if you do expect also in Q4 and probably next year, a bit more negative revaluations on the real estate portfolio. I don't think that will flow into P&L, but that could flow into Solvency II capital?
Third one was on the pricing of Non-Life, obviously, very low frequency on claims, do you plan to give back a part of this low frequency to the clients, especially if you get out of this second lockdown, we've, again, low frequency, what is your view on that going into 2021?
And then maybe just final on the AG Solvency II at 173%. What are your thoughts on the dividend for 2020? Are we - can we expect a 100% payout from AG again this year?
Antonio Cano
Yes. Sorry. Maybe I'll take the first question on the technical liabilities in Life Belgium. Well, they could go slightly down. They could go slightly up. Difficult to tell. It also depends on what the alternatives are for customers to save for their pension. And there would not be a major movement.
So I think the best guess would be a stable level of technical liabilities. If you want some delta that might be a gradual increase. So I'll leave it for that. On - maybe on the real estate, some comments, strangely, we've - so the couple of transactions we've already realized in the fourth quarter were at prices that were surprisingly high.
So we still see quite some appetite for quality real estate. So I'm not so sure if really activity has decreased. I don't have a really pan-European view on that. But in the markets, we are present, which is basically Belgium and France, we still see quite some appetite for real estate. And on negative revaluations, I think that focuses mainly on shopping center or retail valuations, for certain assets it might come under pressure, but things like warehousing, say, logistics or prime office space, we have no indications that revaluations are going down there.
I'll take maybe the other one [Technical Difficulty] of the price. You see, for example, in the U.K., a gradual price decrease on your new business. But in U.K., there are also other things playing like the SCA pricing review, et cetera.
Don't see in Portugal or in Belgium, any significant drops in premiums, neither big increases, either in motor. So I think let's not jump into conclusions that COVID will lead automatically to major drops in premiums. There are also other risks more negatively impacted by COVID like situations, I think about business interruption, et cetera.
There is some spillover on the reinsurance market. So reinsurance prices will harden. That will have an impact on pricing of direct insurers. So many things moving there, but I would not jump to conclusion saying that prices will decrease.
Manu Van Grimbergen
Okay. Albert, Emmanuel, I'll take the question on the solvency position of AG. So you refer to a ratio of 173%, which is a Pillar 1 ratio. And as you know, we manage our business based on the Pillar 2 ratio. So from a capital management point of view, from a risk appetite point of view, but also from a dividend point of view, we steer and we manage based on Pillar 2. And on Pillar 2, AG is still at a very comfortable and high level of 203%. Of course, Pillar 1, and that is something where we have been consistently communicated in that way. We have to keep an eye on Pillar 1, but we consider Pillar 1 more as a floor, but we prefer, and we manage the business based on Pillar 2.
Unidentified Analyst
The dividend will be 100% again? Or...
Christophe Boizard
A little bit, we don't know yet. It's too early. We are not yet at the end of the year. Again, if nothing changes and they apply the dividend policy, yes, then I can confirm. But it all depends how it will further evolve for the rest of the year.
It is too early to decide on the dividend. But they have specific rules on the dividend upstreaming. So today, I would say they are still within ambition. Maybe on your first question, a little bit of additional color on the liabilities in Belgium, actually, I refer to Slide 22 in your deck because you see that even in these circumstances, AG is able to grow the base of technical liabilities, which I think is very positive. More growth in unit-linked with a small decline on the guaranteed business.
And I think it is very important to dissect these technical liabilities because a lot of them are pension-related liabilities, corporate pension schemes as well as individual pension contributions, which are very, very stable, which is not something you swap overnight. And even we see an employee benefit if the company would decide to change plan from guaranteed to unit-linked, AG is very well positioned to make that transition in the business.
So I'm actually not too worried about the evolution of technical liabilities in Belgium. And then besides what Antonio said on pricing pressure on motor, your question was also to real rebate from the COVID crisis.
Well, first of all, we don't feel material pressure in any of the markets that we are, in all the markets where there have been some rumors, I must say, the regulator has always been very reluctant to accept the pressure because generally spoken, motor is not, I would say, in most markets, the most profitable segment of the markets and last but not least, let's not forget that COVID has a lot more impact than this.
You have the impact of financial markets. We also had - didn't have an excellent year on storms. It was a heavy year on storms in the first quarter. So there are a lot of elements that play in the profitability of Non-Life, which I think is very well understood by the regulator.
Operator
Next question from Albert Ploegh from ING.
Albert Ploegh
Yes. Two questions from my end. The first one is on the capital leverage. On your own definition you're at 17.2%. And the recent bolt-on M&A is mostly be paid out of the holding cash buffer, I think €260 million are still to be paid. At what point would you consider again, issuing - willing to look at and what capability could that bring or is this accounting that may be beyond repair, so to speak.
Christophe Boizard
So I can answer on the debt. So indeed, capital leverage 17.2%. You know that there are different ways of assessing the capital leverage. What is important to us is to keep this leverage to below the maximum imposed by the 3 rating agencies that we have. So with 17.2%, we have a lot of room vis-à-vis the maximum, and we could issue debt. So it depends. And the maximum differs from one rating agency to another. But at - we could easily issue €500 million of Tier 2 while being still far from the maximum of the 3 rating agencies, the leverage they consider as a limit. And so we have €500 million. The Tier 2 bucket has still some room, the room is close to €1 billion. But it's what I would call the regulatory room. Then if we refer to the leverage, we can issue €500 million, but we would be closer to the limit of Standard & Poor, but without hitting them, but we could be slightly more stretched going to twice this amount. So as I said, something close to €1 billion.
Manu Van Grimbergen
Thank you, Christophe. Albert, on your second question, M&A in Belgium and the fire of Intégrale. Indeed, you have seen that the National Bank has appointed a special, how do you call it in English, I don't know, responsible to manage the company. I understood that he has 2 clear tasks, first is to explore the sale of Intégrale with the partners or with the offers they got in the bidding process. Alternatively, is preparing and guiding liquidation of the company. We - I can be transparent that we did not make an offer, in the first round. We found it is difficult to meet, I would say, our financial conditions for an M&A file related to this company together with an asset mix that also raised some concerns. On the other hand, we are very well aware that for the importance of the sector and the important role that AG has in this sector finding a solution for the affiliates of all these enterprises as sectors, I think, is important. And so we have always indicated that we are available to help discussing a solution in case of a liquidation. But okay, they have appointed somebody. So we will wait and see what the next steps are.
Operator
Next question from Jason Kalamboussis from KBC Securities.
Jason Kalamboussis
Probably a couple more questions at my end. On the U.K., you had a charge because of prior year reserves. So you had a prior year reserve release. If you could quantify it or say if it was like close to €10 million that would be very helpful? And also, what are your thoughts on the underlying performance evolution ex the COVID impact for 2021? And the second question is Filip almost stole my question with his answers on the fourth quarter. Yes, in China, it is weaker. But could it be stronger due to the - especially versus last year on an underlying basis, due to the fact that you still have this 50,000 additional net agents? And also a bit related to this, do we have any tax one-offs that could come back in there?
Christophe Boizard
So on the U.K. and the previous year releases, maybe a good hint is if you go to the pack on Slide 33, there you actually see the previous year releases expressed as a percentage of net earned premium. Now if you do the math, you see that it's a rather big number. And the previous year releases in Q3 were a big number and bigger than the €10 million that you mentioned, I think for Motor, and that we saw pre-reinsurance would be more in order of €30 million certainly in Q3.
And those are actually a lot of those claims related to 2019. As you might remember, we struggled a bit in 2019 with our large losses, so bodily injury related large losses, where we seem to be a bit of the odd one out in the market. Well, it proves that with insights, our claims adjustors were a bit - quite conservative on many of those claims that today you actually see unwinding. So that explains the larger than usual previous year positive releases, which are always going to be large in the U.K., like they are in Belgium, which is the very nature of our reserving policy, which is conservative, always leads to significant releases.
If you look at that same slide up for 2018, '19, we already had something close to 10% of net earned premium as releases. So that's just a part of the business. Then your second question, I think you asked for a kind of what our expectations are for the U.K. I imagine without COVID or without any of the special items, well, they remain the ones that we expressed in the past. Now it's a bit trickier to pinpoint to the exact number because we have the big quota share in LPT business impacting also the U.K. But if you bunch them all up together, we will be again around this €70 million net profit on a steady base. So, I would say, fundamentally, not a big change.
Right. Regarding your question about what to expect on the, I would say, the commercial side in China for the last quarter. Well, I would not directly link that to the bottom line, Jason, if I may. But the commercial activity in China, as you could have seen also from the last quarter, has rebounded quite materially. So we saw growth held back by FX of 3%, 4% in China versus last year, which bodes well. And indeed, because you may have noticed in the tables we published, the value of new business over the first half of the year was not splendid. They started late with the year-end campaign last year, then they went in lockdown, but we see it's not disclosed, but we see strong recovery in Q3. And indeed, the focus is really on quality business through agency. So we expect fourth quarter as it was in the third quarter to be of good quality production.
But I would not immediately translate that in higher result expectations than what we have been talking about. That will mature, let's say, after that because they will be preparing already in December, if not of November, for the start of the New Year. But the commercial activity in China is back on track.
Jason Kalamboussis
I agree. That's very good to hear. Is it - by the way, if I may do a quick follow-up? Is it - sorry, there is first taxes. If you could also tell me if there is anything there? But also within the same scope, the profit-sharing lever, could it be used against the VIR? Because that was something that was mentioned, I think, about 6 months ago. And now it was mentioned more as part of the capital gains next year, so I was wondering if it can be used this year?
Christophe Boizard
Well, first, the tax effect, let's be very clear that supported the result in Asia or in China, particularly, last year, about €50 million. This year, there is no such thing, that is 0, that is normal business as usual situation. Last year, there was a kind of catch-up retroactively. That effect is no longer there. Then the second part was related to compensation for VIR in profit sharing. Well, I think the VIR effect is mostly related to the nonparticipating business lines. There is no very VIR impact on the participating side. There's a different treatment there, Jason. So it does not affect - there is no compensation in PAR.
Operator
Next question from Robin van den Broek from Mediobanca.
Robin van den Broek
Yes. Just firstly, a quick follow-up on Benoit's question on the Pillar 1. I think in the past, you said that €140 million is more the critical level for Ageas, and can you just confirm that number? Secondly, on free capital generation, the print is sort of weak.
If you look at the benefit from low frequency, which is driven by your SCR increase of €40 million withholding €70 million from your free capital generation, seems to be related to asset management actions in Belgium and some scope broadening in the U.K., could you please clarify those actions and what we could expect from that in future occasions?
And sorry to come back on Asia again, but if I look at the clean earnings in 9 months 2019, I think it's closer to €230 million. And as you just alluded to for this year, the first 9 months are close to €320 million. So it's a 30% increase.
Of course, Asia, we expect growth, but 30% is quite stellar. So I was just wondering if you could give some commentary on why the growth has picked up? And to what extent we should consider that to last also into 2021? And a small one also relation to Asia is Taiping Re. I think it should be - the deal should happen this quarter. So should we bake in €25 million for '22 - 2021 already? Or what should we do there?
Christophe Boizard
So the question on the free capital generation. So indeed, you are right. The SCR increase. And this is mainly due to the asset allocation where we are going to more to "risky assets." So for instance, in Portugal, we have more real estate. We increased equity in AG, there is a plan to increase equity with the idea of long-term equity, strategic equities with a favorable solvency treatment. So this has an impact on the free capital generation.
And indeed, this change in the asset allocation has a weight on the SCR. So what was not mentioned in my comment on the free capital generation is that you have 2 effect going in the opposite direction, you have some COVID benefit on the operational free capital generation, that's for sure. But at the same moment, this effect is more than compensated because the effect is above the COVID effect. It's more compensated by this SCR increase. And you know that the SCR is multiplied by 175 in the free capital generation. So all in all, this effect is more than offsetting the benefit we have coming from COVID-19. So asset allocation.
Hans De Cuyper
On the first question, so the 140% for AG Pillar 1, I'm not so sure whether we have ever had communicated this so clearly. But what I can absolutely say is that, obviously, if the Pillar 1 ratio go closer and closer to 100%, of course, we will need to take action. And one of those actions will be reduced dividend, that's for sure. But again, I really want to insist, we steer and manage on Pillar 2 solvency ratio.
Christophe Boizard
On why we have such a strong growth in the underlying results in Asia, maybe good to - because you mentioned 30%, in our mind, it's slightly less, but nevertheless, it is there. If we take out the effects of capital gain VIR and last year taxes and neutralize that as well as the VIR impact this year, we would have gone underlying, let's say, from €260 million to €340 million year-to-date.
So now in the €340 million in all honesty, there is also some positive of COVID in the Non-Life lines in Asia. So knock of €15 million, I would say, for that, which is in line. Then you have about 20% growth.
Now one of the effects there that comes into play and is also part of the reason of the impairment on the Chinese banks, they were just both let's say, in the days before their coupon payments. And that is a massive increase in the dividend payout in Asia, which, to some extent, is part of the impairment, if you think about it. So that has boosted the results without any doubt if you neutralize for the capital gain.
So I would moderate that growth in reality down a bit. But nevertheless, the growth indeed has been good. Now what can I say. In all honestly, this is not a growth rate you can project forward. I would be happy to tell you that it would be the case, but that I would not do. I would stick to what I said earlier, a bit too early to give clear expectations.
I am confident that we're not going to lower our guidance range and maybe up it a bit but that will happen when we announce our first-year result. Growth in line with overall business volumes, provided that the quality of the book of business that is being written is good, which we do disclose to some extent but with a quarter delay should guide you there.
Hans De Cuyper
Yes. Maybe the question on Taiping Re. So if all goes well with the regulatory approvals, et cetera, we could very well close the deal in Q4 this year. So the impact on the results for this year were obviously very minimal. If we close in Q4, it will probably be in December. And then going forward, I mean, the number you mentioned is good enough to start with.
Christophe Boizard
But we are confident on the closing this quarter. So next year, we should have a full year Taiping Re in the numbers. So that's right. Close to certain that the deal will be closed for the simple reason that Taiping Re does need this capital increase to be done by December 31. So that they have the underwriting capacity for 2021.
Operator
That was the last question for the moment registered. [Operator Instructions]. We have no more question for the moment. Back to you for the conclusion.
Hans De Cuyper
Ladies and gentlemen, thank you for your questions. To end this call. Let me summarize the main conclusions. We reported a third consecutive strong quarterly net results driven by an excellent Non-Life performance. The operating performance was solid, both in Life and Non-Life mitigating some specific impairments on Asian banks. Our solvency position was up and well above the target level. And lastly, given our solid results over the 9 months and despite the absence of support of capital gains up to now, we remain confident in our ability to achieve a result close to our initial guidance providing, of course, that no major negative impact on the financial markets would take place in the coming weeks. And with this, I would like to bring this call to an end. Don't hesitate to contact our IR team should you have outstanding questions. Thank you for your time, and I would like to wish you a very nice day.
Operator
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you very much for attending. You may now disconnect your lines.
