ageas SA/NV (OTCPK:AGESF) Q2 2022 Earnings Conference Call August 10, 2022 3:30 AM ET
Company Participants
Hans De Cuyper – Chief Executive Officer
Christophe Boizard – Chief Financial Officer
Antonio Cano – Managing Director, Europe
Filip Coremans – Managing Director, Asia
Conference Call Participants
David Barma – Exane BNP Paribas
Michele Ballatore – KBW
Benoit Petrarque – Kepler Cheuvreux
Fulin Liang – Morgan Stanley
Farquhar Murray – Autonomous Research
Michael Huttner – Berenberg
Robin van den Broek – Mediobanca
Operator
Ladies and gentlemen welcome to the Ageas Conference Call for the 2022 Six Months Results. I am pleased to present Mr. Hans De Cuyper, Chief Executive Officer; and Mr. Christophe Boizard, Chief Financial Officer. For the first part of this call, let me remind you that all participants will remain on a listen-only mode and afterwards there will be a question-and-answer session. Please also note that this conference is being recorded.
I would now like to hand over to Mr. Hans De Cuyper and Mr. Christophe Boizard. 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 six months results of Ageas. I’m joined in the room by my colleagues of the Executive Committee, Christophe Boizard, CFO; Emmanuel Van Grimbergen CRO; Antonio Cano, Managing Director for Europe; and Filip Coremans, Managing Director Asia.
In a turbulent first half of the year, unsettled by the conflict in Ukraine, a global drop in stock markets, growing inflation, as well as severe wind storms in the first quarter, Ageas posted excellent results with a net result excluding RPN(i) amounting to €456 million.
This reflects the very strong operating performance, especially in the second quarter, with operating KPIs excelling on all targets. In Life, both the Guaranteed and Unit-Linked operating margin stood at the top of our target — top end of our target range, respectively at 95 and 39 basis points, thanks to a high investment margin in Guaranteed and increasing volumes in Unit-Linked.
In Non-Life, the combined ratio amounted to a strong 94.9%, despite a 5 percentage points impact from weather. This illustrates the excellent underlying performance in all business lines.
In Asia, the results rebounded sharply in the second quarter, despite the continued negative impact from declining yields in China and the additional negative net capital gains. When excluding these market impacts, the six months underlying result stood at a very strong level.
On the commercial front, Ageas continued a good commercial start to the year, with inflows increasing in both Life and Non-Life, benefiting in particular from the positive sales momentum in Belgium, as well as from a strong catch up in China in the second quarter, with new business firmly up on high-value regular premiums.
In terms of cash position, we have received since the start of the year a record amount of €743 million dividends from our operating companies, which covered the holding costs and the €495 million dividend paid to Ageas shareholders, as well as the share buyback concluded over the first half of the year. Our total liquid assets remain therefore at a high level of €1.2 billion.
Our investment portfolio decreased from €82 billion to €76 billion. This is related to the revaluation of our bond portfolio in the context of higher interest rates. This is merely an accounting impact, given our matching principles, which leads us to hold bonds until maturity.
On the assets that we actively trade, mostly our real estate and equity portfolios, we still benefit from a strong level of unrealized capital gains of respectively €2 billion and €700 million. Lastly, our solvency amounted to a high 221%, up with 24 percentage points over six months, thanks to our strong operational performance and rising interest rates.
Given the strong operating performance of the first semester, we confirm our guidance for 2022 of €1 billion net result, excluding the impact of RPN(i) and providing no significant further deterioration of the financial markets in the second half of the year.
Additionally, we have decided to strengthen our commitment in terms of dividend for the Impact24 strategic cycle. At the time, we had indicated a progressive dividend for a cumulative amount of €1.5 billion to €1.8 billion. Today we feel confident that we can commit to an average DPS growth of 6% to 10% over Impact24, which would increase the lower limit to above €1.65 billion.
For the dividend relating to 2022, we intend to raise the DPS by 8% to 9%. And we are happy to announce that an interim dividend of €1.5 will already be paid by the end of October.
And now ladies and gentlemen, I will 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 net result for the first six months of 2022 amounted to €563 million or €456 million if you exclude the €107 million positive contribution from the RPN(i).
On Q2 alone, the result amounted to €291 million of which, €46 million coming from the revaluation of the RPN(i). As usual, I will give you more details by segment. All the figures are on a year-to-date basis.
In Belgium, slide 6, we recorded a high result of €245 million significantly up compared to last year with a very strong performance in both Life and Non-Life, despite some adverse weather in the first quarter.
In Life, our guaranteed operating margin amounted to 94bps, thanks to a strong investment result supported by capital gains. The Unit-Linked operating margin slightly exceeded the target range reaching 41bps, supported by increased volumes.
In Non-life, despite a seven-percentage-point impact from the February storm, the combined ratio stood at 94.6%. This demonstrates the excellent underlying performance in all business lines. On the Commercial front, the strong sales momentum continued with inflows in both Life and Non-Life increasing by 5%.
In Europe, now so on, slide 7. The net result of €95 million included a €60 million negative impact from the application of the IAS29 accounting rule, related to hyper inflation in Türkiye.
It is nevertheless worth noting, that the business of our Turkish Life operation AgeSa, continued to perform well and positively contributed to the group results in the first half of the year.
As a reminder, the net result realized in Europe also included a €45 million capital gain, coming from the sale of the Commercial lines in the U.K. Excluding these two exceptional elements, the Non-Life result was down compared to last year.
Indeed, the combined ratio increased to 97.7%, due to claims frequency now back to a normal level in Motor and to the February storm in the U.K. which had a three-percentage-point impact.
As you know, the insurance market in the U.K. has been unsettled in the recent months by claims inflation. Our result was also impacted as inflation has been above the 10% foreseen in our results.
However, we are adapting our pricing to protect the profitability of our business lines and we feel well armed to face the current difficult market environment. In Life, the performance was solid.
The Guaranteed margin although below the extremely high-level of last year, due to the non-renewal of a large contract in the first quarter, amounted nevertheless to a strong 102bps largely above our group target range. The Unit-Linked margin continued its steady improvement following the change in product mix and stood at 33 bps.
On a less positive note, Life inflows were down as Unit-Linked sales slowed down in Portugal in a volatile equity market. By contrast, Non-Life inflows continued to enjoy a solid commercial performance, increasing by 3% or 22 at constant exchange rate. You can see here the effect of inflation in Turkey.
In Asia, slide eight, the six months results which amounted to €161 million, suffered from €48 million net capital losses, resulting mostly from the decline of the Chinese equity market year-to-date. Better equity market just before the quarter closed helped limit this negative impact.
Additionally, the continued adverse evolution of the discount rate curve in China impacted the net result by around €100 million. When excluding these market impacts, the underlying result amounted to €312 million compared to €213 million last year with the same restatements.
This high level, which illustrates the solid operating performance, also include nonrecurring elements, in particular, favorable claims experience in the context of the Chinese lockdown that took place in the second quarter.
Additionally, the strong growth in new business resulted in lower expense overruns. And lastly, the result benefited from a favorable exchange rate. With all that and for the full year, we maintain our guidance of an underlying result amounting to €500 million.
Inflows in Asia benefited from a good sales momentum in the second quarter. In China, new business was firmly up, driven by high-value regular premium, which fully compensated for the later-than-usual start of the New Year opening campaigns in the first quarter. In Non-Life, inflows were strongly up across regions.
The Reinsurance segment now shown on slide nine. The Reinsurance segment was impacted through the quota share by the adverse weather in Belgium and the UK in the first quarter. This was mainly compensated in the traditional protection business by a favorable 2021 proportional results settlement.
As mentioned by Hans, our group Solvency II ratio, so I am on slide 11 now, increased to a high 221%, driven by a strong operational performance and increasing yields. Now, I am happy to report that, as promised during our deep dive event on Asia in March, we are now providing the operational capital generation and free capital generation for the entire group, including all subsidiaries and JVs. You can see the details on slide 12.
The operational capital generation, or the OCG, of the group amounted to €884 million, the largest part, nearly €600 million, came from the non-Solvency II scope entities. Non-Solvency II scope entities, you will understand that this is Asia, mainly.
The materially higher OCG of our non-Solvency II scope entities, as compared to their already strong underlying IFRS profit, largely stems from the value contribution of new business, which is not captured under IFRS 4. This will translate into IFRS earnings over time. Important to note that the OCG of the non-Solvency II entities, of course, doesn’t fully translate into free capital generation, given the increasing capital requirements, driven by the growth of this business.
During our deep dive session in March, I indicated the ratio of operational capital generation on market capitalization. On an annualized basis, this ratio over H1, the first six months, is around 22%. This also translates into a healthy return on total capital of around 10% and 12% if you exclude the sub debt.
Now let’s go to the operational free capital generation. So far, we have discussed the capital — the operational capital generation, now the free capital generation, so the OFCG. So the OFCG of the group amounted to a strong €569 million, including €452 million from the Solvency II scope and €211 million from the non-Solvency II scope companies, while the general account consumed €94 million.
These numbers compared to the €900 million, we communicated for the group over full year 2021. These results were released during the IR session in March. The contribution of non-Solvency II scope entities is in line with the €458 million generated over the full year 2022.
The high level of free capital generation from the Solvency II scope aligns with the performance on the operating target and the increased value contribution of new business under the current yield environment. This also includes some non-recurring elements, mainly the sale of the Commercial line in the UK, already mentioned and the evolution of the equity portfolio in Belgium.
And with this last comment, I have reached the end of my presentation. Thank you.
Question-and-Answer Session
Operator
Ladies and gentlemen, this concludes the introduction and we now open the call for questions. [Operator Instructions] And our first question comes from David Barma from Exane BNP Paribas. Go ahead.
David Barma
Thank you, and good morning. So my first question is on your new capital return policy. So right, the midpoint of your new DPS growth range basically puts you in the middle of the free cash flow targets of €1.7 billion to €2.1 billion that you gave at the CMD. So how should we think about those two targets combined now and about any additional flexibility on top? That’s my first question.
And then secondly on Asia, so a very strong result this quarter, but there seems to be a lot of moving parts and maybe non-recurring items. You mentioned the foreign exchange movements and favorable claims in the quarter. Can you help us understand the underlying resilience of the business in the second quarter please? Thank you.
Hans De Cuyper
Thank you, David. I’ll take the first question. And then I hand over to Filip for your question on Asia. Let me remind you what we stated under Impact24. The Impact24 and then there are the amounts that you just mentioned, free cash flow coming from the operating entities between €1.7 billion and €2.1 billion. We do not make any change on our ambition in that level. The range, I understand, is still relatively wide. But of course, we’re also living in very volatile times and this is a three-year ambition.
From that, we had announced that we would distribute €1.5 billion to €1.8 billion via dividend, and that the dividend would be progressive not going down. And that’s the part that we believe we can strengthen now if we take into account our solvency, our cash position, as well as our outlook on up-streaming. And so there we position ourselves, I would say in the higher end of the range, and we give guidance to 6% to 10%. And you will see that, actually for this year – well for 2022, we expect it to be approximately 8% in the mid of that range, and I think that is the guidance that you should also take into account.
So, no immediate change in FCF. We do make a change in dividends, and we’re also confident that, FCF will be supported by the OFCG, generated over the period meaning that we are also confident on the sustainability of this FCF as well as DPS.
With that, I give – maybe one final element here is that, you also make referrals to exceptional. Exceptions always remain possible. So a share buyback can be considered, if we have exceptional upstreaming or inflows at the group level, but that has always been the case and it will stay like that as well. Second question, I give to Filip.
Filip Coremans
Yeah. Thank you so much, Hans. Yeah, the results of the second quarter of Asia was indeed exceptionally strong. And I would almost say, three, four things came together boosting it. First and foremost, and that is something that we see also continue in July, we had very, very strong sales. And on an APE basis, the new business across the region grew with around 17%, and even at constant FX, it was up 7%. And don’t forget that in the first quarter, this was actually quite a meager number, because of the lack of the opening campaign in China. So, real strong sales, predominantly in China, but not only China, we saw strong growth rates in all the emerging markets actually in new business. That definitely helps the underlying result.
And the figures we see coming in for the beginning of the third quarter, continue to be strong, so I don’t put a question mark about – Commercial resilience is really good. Then another effect that Christophe mentioned is related to claims. And that is indeed something we noted, certainly, over the last quarter in China. The claims experience is very good. And that is – I put a caveat behind it, because it can have to do with the logging of claims, which was slowed down because of the lockdowns, to be confirmed.
And thirdly of course, FX the euro has definitely weakened, and that helps obviously the result of the companies who are non-euro like the results in Yuan were strong. So if you ask me to, what is about for the rest of the year, a lot will depend obviously, on the underlying not so much but on the total result a lot will depend on the future evolution of equity markets and VIR, and that’s the caveat we always place.
But underlying, I gave this guidance of €500 million beginning of the year. I would certainly, keep that, as the under bound. But given the weaker euro, we see that, the move in the range €500 million to €550 million rather.
Operator
Thank you. The next question is from Michele Ballatore from KBW. Please go ahead, sir.
Michele Ballatore
Yes. Thank you very much for taking my question. So I have two questions. So the first question is about the – in P&C in Belgium, especially in relation to the household to the property business segment. So, it was really strong. I mean, the combined ratio in Q2 was really strong, among the strongest probably in the past five years. So I don’t know, if you can add maybe more color on the – is there one-offs or particularly favorable experience there?
The second question is about the capital. I mean, considering the strong solvency what is – can you – if – I mean, I know you said, already about buybacks. I mean, can you clarify a little bit more? I mean, if you decide to do share buybacks I mean, when is the — when can we expect an announcement in that sense? I mean what is the policy? And then one final small question. Regarding the interim dividend, so is this — can you confirm this is a change in policy you’re going to distribute an interim dividend from now on? Thank you.
Hans De Cuyper
Okay. Thank you. I’ll give the first question to Antonio, for Belgium.
Antonio Cano
Yes. Hello. Good morning. On Belgium P&C household and specifically yes, it was indeed a very decent quarter a good quarter, relatively benign weather. And also bear in mind, that our household portfolio is indexed to the price construction index. So rates have been going up the last months. And we did not see a pickup in frequency.
As I said, it’s more on the favorable side. And we’re also able to control well the average claims costs, as we have a lot of claim repair that we do ourselves. And when we work with third parties, we tend to have longer-term agreements. So inflation is not really kicked in in a major way. So yes, a very good quarter benign weather. Rate increases are going through and inflation’s kept in check.
Hans De Cuyper
Okay. Thank you, Antonio. Well, I’ll take the two other questions. Well, first of all if there’s a change in policy, I would say not really because last year we have announced that Impact24 was a sustainable growth story, and that the sustainable growth story would lead to improving rewards to our shareholders reflected, in the dividend commitment that we took. So in that sense, what we implement now I would say, is a continuation and implementation of the strategy that we have announced last year.
Is share buyback is this the end of share buyback? Well last year, we have already said that it is not I would say, on our KPI board anymore. It is not automatic, but it is also not excluded. And that is I think the story we repeat now. When can we expect? Well, we don’t have fixed criteria for that. It is not depending on a certain solvency ratio or a certain cash position. We have also said last year, this is a mix of growth opportunities, investment opportunities, strength of the balance sheet and the solvency and then potential distribution to shareholders.
The current confidence we have on our performance on free cash flow, is reflected in the increasing dividend commitment that we take for the Impact24 cycle. We now also want to remind you, that indeed we had a very long track record of share buyback and that was supported by two elements: the strong underlying performance, of the business all these years.
But also, we had two regular exceptionals coming in from for instance, solving financial and legal legacy on the history of the company. And as you know, that second part, I think has been concluded successfully. And so from that side, financial legacy we should not I would say, expect major exceptional inflows anymore. So that also supports our view, on the sustainable growth story.
The interim, I would not state now, that is a change of policy but we feel that we — with the current strong balance sheet as well as solvency, we are very confident to already distribute an interim dividend. You will easily see that it is an increase compared to the full year dividend that we distributed, a few months ago to the high end of the range that we give, which you can assume as an indication of where we will land for 2022.
And maybe a final comment, but I think maybe at a later time Emmanuel, will also comment on it. Indeed the solvency is strong, also mainly driven by rising interest rates. Be aware that interest rates have already come down to some extent since the end of June. From the peak mid-June, we have approximately 1% in Belgium.
We have shown very strong resilience in our solvency ratio. We are very confident on that one. But we have a significant increase this quarter. We will see how interest rates evolve for the rest of the year and what the potential impact is on solvency, but we are very confident.
Yes, and the interim dividend I think I have explained that —
Michele Ballatore
Thank you.
Hans De Cuyper
whether going forward we will indeed pay an interim dividend while we will decide on this. But normally once we introduce an interim dividend that will be the case.
Michele Ballatore
Sorry, you will pay an interim dividend from now on.
Hans De Cuyper
Well, I think as I said of course you decide this year-on-year.
Michele Ballatore
Every year you decide.
Hans De Cuyper
But we can — once we have introduced the dividend which we do now, we can indeed and assume that that will be the case.
Michele Ballatore
Thank you.
Operator
Thank you. The next question comes from Benoit Petrarque from Kepler Cheuvreux. Please go ahead.
Benoit Petrarque
Yes, good morning everybody. So, A couple of questions on my side. The first one will be on distribution. So, the 6% to 10% dividend growth, just wanted to understand it better. So, is that a bit of a fine-tuning versus your original target of distribution, or does that reflect through underlying improvement of your business? I’m asking because I’m a bit surprised that you are well more positive on distribution at this stage of the cycle. We’ve seen versus a year ago quite some deteriorations across the board also volatile markets.
So, is that a reflection of higher rates flowing into investment returns? What is the underlying reason let’s say of this upgrade of your guidance? And on share buyback, yes, I mean it’s very strong on capital obviously. Do you see investment opportunities say for the coming 12 months? Do you have something in mind maybe more concrete plans there? So, that’s the first question.
Second one was on Asia. To come back on the question around the non-recurring items I understand the three moving parts, but could you provide a bit of a kind of estimate of the Impact? Is that a €50 million €60 million range of nonrecurring items in the second quarter? Could you just try to — could we get a bit of a quantification on those items?
And then the third one will be on the UK results which we don’t have anymore. So, could you maybe give us kind of KPIs combined ratios maybe net profit for the UK that will be extremely useful?
And then in terms of claims inflation in Belgium, so I think on — also you are pretty relaxed. Do you see any risk that claims inflation will be intensified in the coming quarters, or do you think it will remain under control as far as the Belgium ratio is concerned? Thank you very much.
Hans De Cuyper
Okay. Thank you, Benoit. If I understood you well I think I heard five questions. So, let me start with the first ones which I take and then I pass on to Filip and Antonio.
Indeed you could see it as a fine-tuning. Again let me go back to June last year when we have announced Impact24. We have changed actually our KPIs on distribution to shareholders. That was driven by a sustainable growth strategy that we have presented, but also to make KPIs that we would say they are more IFRS 17-proof. We can use them over the full cycle.
Of course we are now one year later. That means that our level of confidence changes and as you can see and I fully agree with you, we live in very volatile and uncertain times. But both in the first quarter as well as in the second quarter, I think we have been able to deliver strong results meaning that if we look at our solvency if we look at the cash position that we have been able to sustain quite well over these first six months of the year and also how we see the business performing and to a big extent recovering in Asia, I agree with you, we have I would say a higher level of confidence on that FCF between €1.7 billion and €2.1 billion coming from the opcos. And together with the current balance sheet we are then I think also happy to announce that we can raise that commitment on the DPS. And the DPS was I repeat €1.5 billion to €1.8 billion and progressive. We still stick to the range, but we say 6% to 10% actually meaning that we can now commit to a dividend that is at the upper end of that range. And I would say see it somewhere between €1.650 billion €1.7 billion and the €1.8 billion range that we have given.
Second question is on share buyback. Well, as always, we see and we work on potential investment opportunities that is not always M&A. We also I think have growth plans. You remember we have growth engines defined under Impact24, the world of digital platforms, the development of health, the development of protection and the development of reinsurance. So that is one element of growth and also I would say organic investment opportunities that we have.
On the M&A market, you know M&A market with rising interest rates have I would say a little bit slow. I think M&A market is in a little bit of wait-and-see position. But our M&A policy that we have announced last year has not changed with the first priority in everything that is related to in-market consolidation and diversification. That is something that is staying on the road. Whether there are complete files on the table, of course you will understand that I cannot disclose anything to you right now. You have seen that we have done one our step-up in India in the Life company. That’s one we have already announced.
And now I give for question three on Asia to Filip.
Filip Coremans
Yes. Thank you, Hans. Just to note on what I said, if you look at the actual result year-to-date we had the €161 million result and an underlying of €312 million, which includes a VIR impact as you noticed of €103 million and capital losses around €48 million. Now projecting the €312 million underlying forward, we mentioned a few items which we say they are maybe non-recurring or maybe to be reconfirmed. So that is the low claims that we experienced to be seen whether that is real or delayed. It was also the strong growth that we saw particularly in China in Q2, which in further note seems to continue in the beginning of this quarter and we have obviously also the positive impact of FX.
What I said is that rather than doubling the €312 million, we started the year with a guidance of €500 million. We see that rather go in the direction €500 million to €550 million because of the FX impact and the strong underlying. So to put it — a figure on it, around €40 million I would consider as let’s say maybe not necessarily recurring could recur, but then we will be very happy of which €10 million effects. And that would tally with that guidance. Of course, on the VIR and equity market volatility components, we always have to place the caveat because you will have noticed that interest rates in China have come to the lower end of the range that we used for guidance. So we see the impact close to €200 million also maybe a bit higher because of the weakness of the euro. So 2022 is not impossible.
Hans De Cuyper
Okay. Thank you, Filip. And then there was a question for UK and Belgium. So the last two questions Antonio can take.
Antonio Cano
Yes. So on UK, indeed we do not provide the full detail anymore. So I will not be too specific on the numbers. But you’ve seen some of our UK peers reporting. Inflation is an issue, particularly attritional inflation. We have been quite early in rising rates over the first six months of the year. You could say that we are in the 12% to 15% increase compared to the same period of last year. I think we’re a bit ahead of the pack. We have suffered there for a bit in topline, but we think you need that kind of rate increases to go for the attritional inflation. But overall, the results have been pretty good. We have strong releases also from previous years in the UK, so I would say overall pretty satisfactory results.
On Belgium, on the inflation. Well, you would expect indeed some more inflation later in the year. Having said that, we continue also to adjust our prices. So, we believe that we will keep pace with any rising inflation with rate increases when we can do that. So we are — certainly for the second half of the year, I’m pretty confident on Belgium. A more longer view on inflation, we’ll see up. There are some signals that things are leveling off a bit. But so, we can see for the rest of the year we’re pretty confident.
Operator
Thank you. The next question comes from Fulin Liang from Morgan Stanley.
Fulin Liang
Hi, thank you. So, the first question is actually as a follow-up on the Belgium claim inflation. And actually, I have the question on the other kind of side. So, what we heard from the other insurers that seems like the frequency benefit of like 10% to 15% after COVID is going to stay. And that means that, as long as your claim inflation is lower than — or the severity kind of inflation is lower than 10% to 15%. Would that actually cause the deflation kind of pressure to your pricing in Belgium? So that’s my first question.
And then secondly is, I guess related — sorry related to that one because you have a very good kind of combined ratio in Belgium. What is the sustainable level actually going forward? And then secondly is on the buyback. I understand that buyback will become as you said ad hoc, but surely you wouldn’t review this decision every quarter right? So, what would be the frequency you’re going to review this as ad hoc position? Is it going to be every year or is it going to be end of 2024 your three-year kind of strategic period? Thank you.
Hans De Cuyper
Okay. Fulin thank you. Well let me quickly take the second question first because I can be very short. Ad hoc is what it means, ad hoc. So as and when we feel there is an opportunity or — and most of the time it will come with an exceptional event impacting positively our cash, our balance sheet our solvency. But it is ad hoc. So, if you do will you do a regular check on this every quarter? No, that is not the plan. And then for Belgium I’ll give it to Antonio.
Antonio Cano
I am — your comment on lower frequency compared to the pre-COVID period. I guess you refer specifically to Motor. I’m not so sure if it’s here to stay this lower frequency. We do see increasing traffic. So yes, maybe the first six months were lower than the peak overtime. Not so sure if that will remain. So, we think that you will continue to adjust prices as inflation goes up, that’s very specifically for Motor.
On what the sustainable combined operating ratio is, well you know that what our target is. We’re in the — 95% to 96% range is a very sustainable combined operating ratio for Belgium. And in fact, as you will see we’re operating below that level. So, you will always have a bit of fluctuation, but for Belgium specifically I think it’s in the lower part of the combined operating ratio that’s very feasible.
Fulin Liang
That’s very good. Thank you.
Operator
Thank you. The next question comes from Farquhar Murray from Autonomous Research.
Farquhar Murray
Good morning, all and — so I apologize. I think Fulin has probably carried out most of the question I’m asking actually. But just to recap in terms of — what you’re seeing in terms of capital management from here, essentially you’re saying, look, we’ve got a higher free cash flow target — sorry, the free cash flow target is unchanged. There’s a higher dividend, but the baseline for a buyback is essentially zero going forward outside of kind of ad hoc events. Is that a fair understanding of where we are?
And then, just more generally, if I then take it basically, there’s no kind of ongoing regular buyback exercise discussion, i.e. the kind of August event that we’ve had for several years now is kind of beyond us and ended. Is that a fair and complete understanding of where we are? Thanks.
Hans De Cuyper
Thank you. Well, my answer is two times yes. So indeed, what you said is we have more confidence on the statement we make and we can put dividends in the higher end of that range. Confirming that confidence and showing it also to the investors with the interim dividend.
And secondly indeed, it will not be specifically in August that we will every year consider share buyback. We probably will have to talk every year in August about an interim dividend potentially.
Farquhar Murray
Okay, great. That’s very helpful. Thanks.
Operator
The next question comes from Michael Huttner from Berenberg.
Michael Huttner
Thank you very much. And I’m sorry if I repeat, I didn’t start with the call. Just three questions. First one is on the UK strategy. The second one is on Reinsurance cash flow. And the last one is on total cash flow.
So, UK strategy, you’ve been shrinking your business pretty much continuously since I started following. So you — I think you sold the Tesco business. You sold the renewals to I think AXA in Commercial lines. And now you folded the business into Europe. It’s kind of almost disappeared for us. Does it mean that should you make a decision to sell the business this would be less of an issue for you?
The second is on Reinsurance cash. So €743 million is the free cash flow, the cash upstreamed at the half year. Speaking to your very, very wonderful IR €750 million could be the figure for the full year. But my understanding is the Reinsurance cash is quarterly. So, does that imply that you don’t expect any profit from Reinsurance in the second half?
And then, in terms of the total cash, I think you said — so the dividend guidance effectively lifted, but their free cash isn’t. And I’m just wondering can you maybe reconcile those two? Is the — you’re raising the dividend, because you’re more confident on the free cash without changing the number or because you’re not doing buybacks, so that leaves you more cash for dividends. It’s — the answer, I hope for is, of course, that you think there will be more cash to come upstream. Thank you.
Hans De Cuyper
Okay. First questions on — first two questions are I think for Antonio.
Antonio Cano
Yes. On the UK indeed, we have been reducing the top line over the years, but it’s more about refocusing the business on what we believe are our core businesses where we are strong. If we look at that part of the business, it has actually been growing the last six months. But indeed, we sold the renewal book of our Commercial lines and a while back indeed, we did the Tesco biz.
We also stopped some unprofitable schemes that we had in the past. That also explains why the inflow has been coming down the last years. But it’s definitely our intention to grow the core business where we are active and we’ve actually seen that happening in the first six months of the year.
On the Reinsurance cash upstream, well, in fact, the Reinsurance segment upstream is 100% of its net profit. If we publish the results in a quarter then that quarterly result at — cash has been upstreamed. It is as simple as that. It’s 100% upstream of IFRS earnings.
Michael Huttner
Does it mean that, I can put a higher number for the €743 million, because maybe the Reinsurance would make €15 million a quarter?
Antonio Cano
Sorry, I did not really understand your question. You said a higher number?
Michael Huttner
Yes. So, €743 million is the cash upstreamed at the half year. If I assume that Reinsurance can do €15 million one-five a quarter then I would end the year somewhere around €770 million, €780 million?
Antonio Cano
No. If you want — yes, okay. So, yes. Sorry. So, if I get your question right Michael, so the Reinsurance business is upstreaming cash once a year.
Michael Huttner
Once a year.
Antonio Cano
Yes, once a year. And of course, you have quarterly results. And once a year, the cash is upstreamed. So, now they have upstreamed I think 87. I don’t have the number in front of me. Don’t expect the next quarter additional cash coming out of Reinsurance.
Michael Huttner
Okay.
Christophe Boizard
It’s treated like a normal opco.
Michael Huttner
Okay.
Hans De Cuyper
Okay Michael. CF, DPS, on FCF again we have a wide range of €1.7 billion to €2.1 billion. And we are one year in Impact24, but in a very volatile circumstances, still very confident on this range. There is no need, I think, or opportunity to change that range. We still have 2.5 years to go on delivering on this FCF.
On the other hand what you do see is that the balance sheet is strong, solvency is strong M&A activity is at a lower level in the market. And so that’s why of the upstreaming that we have identified we are confident to share a bigger part of this over the cycle to the shareholders via a stronger commitment on DPS. That’s how you should look at this.
Michael Huttner
Excellent. Thank you.
Operator
Thank you. The next question comes from Robin van den Broek from Mediobanca.
Robin van den Broek
Yes. Hi. Good morning everybody. I’ve got one question remaining, which is about the free cash flow generation, scoping you’ve done this year. I think you’ve narrowed it more towards the — yes, the non-Solvency II scope for NCPs, which show the result of €211 million net of required capital needs. Yet the cash in is still considerably lower than that of €133 million. I think in your introductionary remarks you also said that you have confidence that FCF will follow FCG. So on that side of the business, there’s still a gap. And I was just wondering how quickly do you think that that gap can be closed?
And maybe next to that just a remark, I mean, it seems that you’re shifting more capital return from buyback into dividends, which I’m not sure is a good signal to the market, because buying your own stock, means you think your stock is cheap. So, just wondering maybe a little bit of commentary around that. Why walk away from buybacks to cash dividend?
Hans De Cuyper
I’ll give the first question to Christophe.
Christophe Boizard
Okay. Thank you. Thank you, Hans. First, I would like to be really very precise on the wording and the definition. So what you are indicating is the €211 million that’s the operational free capital generation not the free cash flow, so the free capital generation. So where does the difference come from with the result? And what is the outlook vis-à-vis the dividend here? We have some kind of a prospective view.
And in this equation of OFCG, operational free capital generation, you have a component coming from the new business and the value of new business. So as I said in my speech, it will come over time. And there is kind — in the OFCG, you have some kind of a forward-looking element, so it is low, but it will be translated into IFRS results in the coming years. And this, at this stage, could be translated into dividends.
But please keep in mind that, the payout ratio in Asia is quite different from the one we have in Europe. We are in a growing environment. Even if the OFCG takes into account growing capital, I would say that there are — and Filip, who knows the partner very well, there are some behaviors. And these ideas of distributing a lot, is not really widespread within Asia.
We are making a lot of progress. We can see the progress made in China, because we are in the range 30% to 35% in TPL which can already be seen as very good. But in some ways it stands out Filip, when you — when we see.
So before giving it to Filip, so OFCG gives some forward-looking view about the potential, in dividend. This should be recognized over IFRS results in the future. And then, you have the Board decision vis-à-vis the potential to distribute a certain amount. And we have a lot of I would say, cultural behavior still there and Filip?
Filip Coremans
Yeah, I’ll try to be maybe a bit more precise. It’s — first and foremost, we obviously know that the free capital generation now substantially seems to exceed, the dividend that is actually up-streamed and that cap is us to close overtime. And we work on that. But there are specific reasons why that will take more time. It’s not a mechanical exercise, because that region is very much still in development.
In many of the countries we are working on distribution, diversification and investments in building agency channels. This may require more capital in certain of the companies. So that mandates to retain a little bit of flexibility there.
In Thailand, we have been extremely prudent last year with the declaration of dividend because of the negotiation of the new Bancassurance agreement. And Thailand has been impacted quite heavily by COVID. So there has been some restraint. We see that turn back to a more normal payout level looking forward.
Malaysia but also Taiping Re, the Hong Kong as well as the Malaysian regulator are looking at potential adaptations in the future of solvency regimes. So it’s normal that, I would say there is a little bit of prudence in the remittance versus the generation.
It’s a growth region and there are more moving parts than in the stable European region. That’s the main reason. But of course we will try to close that gap overtime and that will automatically lead to increased future dividend flows.
Christophe Boizard
But at least with all these explanations, at least as from now with this new KPI have this consolidated view on operational free capital generation the Asian component to at least we have a reference, we have a view on the potential.
Robin van den Broek
But doesn’t that mean if you keep growth going the value of the business will also always be part of your OFCG which will always lead to a drag, I guess, between the two? So should we just assume there’s a certain time lag between the two? Is that the best way of looking at it?
Christophe Boizard
As long as you will have a strong growth, you will have an OFCG which is well below the one of Europe, but…
Filip Coremans
Robin, you’re right. So yeah, you’re right. It’s maybe a bit theoretical side thing that we take. But in capital, there is present value in future profit in there whereas cash remains, that profit first has to be running through the P&L. So a present value of capital items, doesn’t mean that the cash is available immediate. There is indeed always a time lag between the two.
Hans De Cuyper
Okay. The second part — your second question, well thank you for your judgment there versus share buyback versus dividend. I appreciate of course, your view. We have as I said, a sustainable growth strategy. We believe in the long run that is best rewarded with the proper evolution of dividend. You cannot I think in perpetually, continue reducing your equity with share buybacks. And as you also know in the world of Solvency II, in the world of IFRS and IFRS 17 they’re always linked to your equity and capital positions and leverage ratios, debt capacity and so on.
So we believe for a recurring basis, that a very solid and strong dividend policy. And here I want to stress, that from our studies we come as one of the best DPS and dividend per share groups in Europe. And I think that you should also take into account. So on a structural recurrent basis, I think share buyback is not the ideal way, to reflect and reward our strategy. But that being said, and I said it already before, if there are exceptional positive circumstances it’s also not excluded. But that will be as for Fulin, has asked us on an ad hoc basis.
Robin van den Broek
Okay Thank you for that extra color.
Operator
Thank you. The last question comes from Fulin Liang from Morgan Stanley. Please go ahead.
Fulin Liang
Thank you and sorry, for a very, very quick follow-up question. So basically, you quote — you suggested your full year dividend is going to be 8% growth over last year. Basically, that’s kind of double your 1.5 by 2. Is that the information going forward as well? So your interim will be just half of the full year results — full year dividend. Thank you.
Hans De Cuyper
Well indeed and of course, we still have a half year to go. A decision will be made next year. But as you know, interim dividend is very often an indication, where the company plans to land on the final dividend. So in that sense I think your analysis is right, but decisions will be taken after we see the full year results at the end of the year.
Fulin Liang
Thank you.
Operator
Thank you. As there are no further questions, I would like to return the conference call back to the speakers.
Hans De Cuyper
Ladies and gentlemen, thank you for your questions. And to end this call, let me summarize for you the main conclusions. We had a strong second quarter both operationally and commercially and this translated into excellent operating KPIs, in the consolidated entities and a very high underlying….
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