ageas SA/NV (OTCPK:AGESF) Q3 2022 Results Conference Call November 9, 2022 3:30 AM ET
Company Participants
Hans De Cuyper – Chief Executive Officer
Christophe Boizard – Chief Financial Officer
Emmanuel Van Grimbergen – CRO
Antonio Cano – Managing Director, Europe
Filip Coremans – Managing Director, Asia
Conference Call Participants
David Barma – BNP Paribas Exane
Michael Huttner – Berenberg
Michele Ballatore – KBW
Jason Kalamboussis – ING
Vikram Gandhi – Societe Generale
Robin van den Broek – Mediobanca
Operator
Welcome to the Ageas Conference Call for the 2022 Nine Months Results. I’m 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 nine-month results of Ageas. I’m joined in the room as usual by my colleagues of the Executive Committee, Christophe Boizard, CFO; Emmanuel Van Grimbergen, CRO; Antonio Cano, Managing Director of Europe; and Filip Coremans, Managing Director, Asia.
As you know, financial markets have further deteriorated in the third quarter. In China, the CSI 300 Index lost another 15%, totaling a decrease of 22% over year. As previously communicated, this resulted in significant impairments in Asia, with net capital losses amounting to €125 million in the third quarter. Additionally, claims inflations worsened in the U.K. from 10% in the first half of the year to 13% as at Q3. The overall impact of inflation in Q3 in the U.K. totaled €38 million. Lastly, the continued hyperinflation in Turkey resulted in an additional accounting adjustment of €12 million on the quarter.
As mentioned in our earlier press release, these three market elements had a cumulative negative impact of €175 million on our net result over the quarter. However, I would like to stress that if you exclude from our nine-month results, the volatile elements brought by the markets, and that is to say the net capital losses in Asia, combined with the continued decrease of the discounting curve in China as well as the positive capital gains realized from the two M&A transactions realized in the U.K. and in India; then the group result, excluding RPN(i), would amount to €813 million over nine months, and that is up 11% from the comparable result last year. And you can find the details on this calculation on Slide 4 of the presentation.
This number illustrated a very solid operating performance realized across segments. And this is also reflected in our operating KPIs, which are all standing within our target range. In Life, despite the lower investment income, the Guaranteed operating margin reached a solid 87 basis points while the Unit-Linked operating margin stood at the top end of our target range at 39 basis points. In Non-Life, the combined ratio amounted to a strong 94.4%, and we reached our target in all product lines.
Our nonconsolidated entities also recorded an excellent operating performance, with an underlying result in Asia after the adjustments mentioned before, amounting to a high €458 million over nine months, significantly up compared to last year.
In terms of commercial performance, inflows increased by 3% year-to-date. We enjoyed a solid sales momentum in Asia and particularly in the third quarter as the strong growth in new business drove the Asian inflows up by 16%.
Our cash position remained at a high level of €1 billion, which provides us with adequate financial flexibility. Our solvency stood at a high 225%, and that is up by 28 percent points over the nine months as it benefited from the group’s strong operational performance and the rising interest rates.
As previously communicated, the deterioration of the financial markets will likely prevent us from reaching our initial guidance of €1 billion excluding RPN(i) for 2022. However, we maintain our commitment in terms of dividend for the year, and we already distributed, two weeks ago, an interim dividend of €1.5.
Before handing over to Christophe for more details on the results, I would like to add a comment on our long-term strategy. In our Impact24 strategic plan, we put a strong focus on pursuing new growth opportunities, and we have recently made some significant strides in that direction. Reinsurance was identified as a key engine for future growth, and we have announced our plan to accelerate in this area by entering into third-party reinsurance. Additionally, in order to grab the opportunities offered by digitization, we have partnered with eBaoTech and Amazon to leverage the strength of digital platforms and ecosystems, and we invested in the Belgian startup company Trensition to further develop the artificial intelligence-driven strategic intelligence platform.
And now, ladies and gentlemen, I give the floor to Christophe.
Christophe Boizard
Thank you, Hans, and good morning, ladies and gentlemen. As usual, I will give you more details by segment.
In Belgium, Slide 6, we, as usual, enjoyed a strong performance in both Life and Non-Life, and our net result amounted to €334 million, significantly up compared to last year. In Life, the Guaranteed operating margin reached 86 bps despite a lower investment margin due to the seasonality of realized capital gains. The Unit-Linked operating margin continued to exceed our target range, amounting to 41 bps. In Non-Life, the combined ratio stood at an excellent 92.9% over nine months, demonstrating a sound operating performance and the resilience of most product lines to inflation.
In Europe, Slide 7, the group net result amounted to €116 million. In Life, we recorded a solid result. The Guaranteed margin, although below the high level of last year, exceeded, nevertheless, our group target range by amounting to a strong 97 bps over nine months. In the meantime, the Unit-Linked margin continued its steady improvement and stood at 33 bps. In Non-Life, the result suffered from the worsening of claims inflation in the U.K., which reached 13% whereas 10% was foreseen in our reserves.
We have taken appropriate measures to address this situation by strengthening our reserve for outstanding claim to adequately reflect the current inflation. We have prioritized profitability over volumes, and we have thus already adapted our prices accordingly. However, it will take a few quarters before it is fully priced in our book.
In Turkey, the persistent hyperinflation resulted in an additional accounting negative impact of €12 million in the third quarter, totaling €28 million over the nine months.
In Asia, Slide 8, the nine months results, which amounted to €167 million, was severely impacted by the market environment. The sharp decline of the Chinese equity market resulted in €173 million net capital losses year-to-date. Additionally, the continued decrease of the discount rate curve in China impacted the net result by €168 million over nine months. However, when excluding these market impacts as well as the €50 million accounting capital gain recorded in India following the increase of our stake in the Life joint venture, the underlying result amounted to a very high €458 million, significantly up compared to last year. This illustrates the excellent operating performance recorded across the region. Therefore, we feel confident in our ability to reach our guidance of an underlying result of €500 million to €550 million in Asia for the full year.
The Reinsurance segment on Slide 9. Here, the result amounted to €48 million, driven by the traditional protection business, which benefited from reserve releases, whereas as the quota share reinsurance included the impact of higher inflation in the U.K.
Before commenting on our capital position, I would like to add a word on our investment portfolio. The revaluation of our bond portfolio in the context of higher interest rates resulted mechanically in a decrease of the unrealized capital gains. By contrast, on the assets that we actively trade like our real estate and equity portfolios, we still benefit from a strong level of unrealized capital gains of, respectively, €2 billion and €500 million.
As mentioned by Hans, our group Solvency II ratio — I am on Slide 11 now. The group Solvency II ratio increased to a high 225%, largely above the group target of 175%. The strong contribution from operations amounting to 17 percentage points over nine months, including six percentage points in the third quarter, largely above the market — largely above the impact of the accrued dividend clearly illustrates the group solid underlying performance. This translated into a high operational free capital generation of €846 million for the whole group over nine months, Slide 12.
The Solvency II scope companies contribute €651 million. And please note that this number includes the impact from the sale of the commercial line in the U.K. for an amount of €60 million. But even if we restate by this €60 million, we end up with a very high number, and this high number was achieved with a strong support of Belgium, whose contribution roughly doubled compared to last year. Main reason for this is the reclassification of part of the equities to long-term equities, with the decrease of the SCR associated to this.
On the Solvency II scope companies — on the non-Solvency II scope companies, mainly in Asia, the operational free capital generation amounted to €317 million. And the general account consumed €122 million.
One last comment on the non-Solvency II entities. The high operational capital generation of €830 million does not fully result in a free capital generation of the same magnitude due to the capital required to support the growth.
I have now reached the end of my presentation, and we are now ready to answer any questions you may have. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] First question from David Barma from BNP Paribas Exane.
David Barma
My first question is on solvency. Could you please talk a bit about the drivers of the neutral effects from markets in 3Q? And if you can give us a rough estimate of the updated market sensitivity on rates, especially — and also, you mentioned a model change in the third quarter. What’s included in there, please?
And my second question is on cash upstream. Are you able to give us a guidance for 2023 cash remittances at this stage?
Hans De Cuyper
The first question, I give on Manu for solvency.
Emmanuel Van Grimbergen
Okay. Thank you, Hans. Good morning. So I would like to take you to Slide 45, where you have the evolution of our solvency. And so your question is more specific on the impact of market movement, which is neutral in the third quarter.
So what we have observed in the third quarter are for the different market drivers, some small pluses and some small minuses but not really big impacts. So I guess, behind your question is also interest rate because we are in an environment where interest rates increased quite sharply. And at the end of the day, we have also really to realize that the move in interest rate is not only the increase, but it’s also the fact that we have a parallel — that we have a nonparallel increase in interest rates. So the short-term end of the curve increased much more than the long-term end of the curve, and we are now in Q3 with the flattening of the curve. And that impact is, let’s say, less positive than what we can expect out of the sensitivities.
So that’s one aspect. And the other one and also linked to interest rates is the fact that when you have a rise in interest rates and your guarantees are out of the money, which is the case today, and it was not the case at the beginning of the year where interest rates were close to zero or negative, then you start also to have an impact on your mass lapse. And that you can see also in — on Slide 52, where you have the composition of our SCR by driver. And you see that the Life underwriting SCR is increasing quite materially, while the market SCR is decreasing.
So that was, I think, on your first question. And then the second question was driven — was more focused on the model change that we introduced in this quarter. And the model change that we introduced this quarter is related to mass lapse. And it’s — to a certain extent, it’s a regulatory-driven model change which better meets the Solvency II regulation. And — but just one word on the technicality. What we have done is we are also including all variable cash flows like variable expenses or commission, and that is a better reflection of the impact of mass lapse on our SCR calculation. And that has an impact that is explaining a material part of the model change, at the end of the day, is a more regulatory-driven model change.
Hans De Cuyper
Okay. Thank you, Manu. David, on your second question, guidance for cash upstream, of course, it’s too early to give you concrete numbers. But first of all, if we look at our consolidated entities, you will see in the detailed solvency that solvency is actually very strong everywhere and so that we would not see any issues on the normal upstreaming level out. For instance, as you know — for Belgium, for instance, that is 100% upstreaming of the net profit.
The only question you might have is, of course, related to China because as you see, China result is heavily impacted by the capital gains situation. But there, again, it is too early to make conclusions, but let’s not forget that dividend is applied on China on the local cash result. And of course, there is also a relationship with the solvency.
Now that being said, we have no concerns on the overall Impact24 commitment on upstreaming. We stick to that. Secondly, with the strong solvency that we have at the group level as well as the strong cash position that even if there would be any volatility coming from the dividend from China, we should — we will be able to absorb that at a group level. And that’s why we can reconfirm our guidance on the dividend for next year.
Operator
Next question from Michael Huttner from Berenberg.
Michael Huttner
I had two questions. One is on the VIR for the year and maybe — because I still don’t understand it. Maybe you can say whether the VIR is a loss or you never get the money back at some stage.
And the second is on the excellent results in Belgium and Europe in Non-Life. And I just wondered if you could talk a little bit about the impact of inflation on the European. So what would it be the number excluding or normalizing for Turkey and the U.K.? And for Belgium, is the 89.7% or 92% at nine months, how sustainable that is?
Hans De Cuyper
Okay, Michael, thank you. Well, first one, I’ll give to Filip, and then Antonio will zoom in on the inflation in Europe for you.
Filip Coremans
Yes. Thank you, Michael. On valuation interest rate impact, let’s first recapitulate what we said. So we had this year €168 million impact for Q3. Last year, that was €136 million. And our outlook of that, that we shared with the analysts beginning of the year was a range of €150 million to €200 million expectation for the year. But that was in a range of interest rates in China, [2.75%], [2.85%]. Today, the long-term interest rate is around [2.70%], hovering around that. So our expectation for VIR impact by the end of the year, for this year is hovering around €250 million. So there is still a material impact to be expected in Q4.
Now VIR is a strange animal. Indeed, as you say, is it a loss? Is it not a loss? It’s an ambiguous concept. And the reason is because only the liabilities in the nonpar front are revalued with that valuation interest rate, but the assets are kept at hold to maturity. So what it actually does, it increases a little bit, obviously, the margin looking forward because the yield on the bond portfolio stays quite level where the liabilities are valued at lower interest rates.
So it’s a marginal uptick every time you see that VIR impact. And over the cycle, obviously, it depends on the asset liability management gap and rates looking forward. But in fact, it is smoothening out a margin increase over the years, which corresponds with the bonds in the portfolio. So that is why in the underlying, we take it out. It’s a cyclical effect that it’s partially noneconomical, but that is what we explained before. So I hope that clarifies and reconfirms.
Antonio Cano
There was still a second question, and I might — I’ll — Slide 2 explain a bit the good results Non-Life in Europe and inflation. It’s a big question, and I’d like to actually answer it as simply as possible.
Belgium, you could say that inflation, at the end of the day, has no limited impact in the results as we have been able to adequately start increasing prices. In fact, it’s a practice we always do. The bulk of the business, more than 50% of the business, for sure, is kind of automatically indexed as mainly in the household book, but also in other lines of business, we have a discipline to correctly and gradually increase rates. So there, you could say we’re kind of anticipating or in lockstep with the inflation.
Portugal, also very limited impact. The impact we see there is more on medical inflation, but it’s difficult to put a number there because also the mix of claims changes. But for simplicity, let’s say that it’s limited.
Now in Turkey, obviously, it’s extremely complicated. We still have inflation running at 85%. There, I could refer to the numbers that Christophe was referring to the impact of hyperinflation on inflation accounting, which was €28 million year-to-date. So you could say that’s the impact of inflation. Obviously, it’s much more complicated than that in Turkey.
And then in the U.K., the inflation, as I said during the last call, it’s on material damage, so attritional damages where we see the inflation, we don’t see any inflation on the large losses. And there, we have seen an uptick in that attritional inflation from 10% to 13%. Again, that’s a simple number. But behind it, it’s slightly more nuanced because we do model that at product and even parallel basis. So it’s a mix of — and that has meant that the results of the quarter itself has been impacted because of this higher inflation, and also the outstanding attritional claims reserves have been impacted, and that was a number that, I think, Hans also mentioned in his introduction of €38 million.
Michael Huttner
Can I just ask one quick? The — what I really want to know is the number for next year. Is that — based on all this, can you give a feel for where is it up or down in terms of combined ratio? Will it be slightly more expensive or less expensive given the rising inflation, frequency, et cetera?
Antonio Cano
I think anybody’s guess is good enough here. The expectations are that inflation will start to decrease gradually. So you would have less of a negative impact of inflation, but putting a number there, I don’t dare.
Hans De Cuyper
You have some markets, Michael, where we catch up at premiums, catch up with inflation or sometimes with a bit of delay. So there, I think we might see some effect, but indeed, it is very difficult to estimate where it will go.
Antonio Cano
If I just can add. I think in Belgium, we have this automatic indexation, and we are keeping step with inflation. So don’t expect there better or worse results, we can kind of neutralize. And in the U.K., we have been raising our prices during the year on a cumulative basis. So over the last 12 months, we are close to a 20% increase of our prices. Now inflation is slightly below that. If inflation drops and the premiums that we’ve issued these months starts to flow through the earning numbers, you would expect a positive evolution in the U.K. result, obviously. And Turkey will — a lot will depend on the political situation.
Operator
Next question from Michele Ballatore from KBW.
Michele Ballatore
Yes. Again, on inflation. Of course, I mean, I think procurement, I believe, is an important component of your — you tackling with inflation in Belgium. I’m wondering, on this specific factor, what is the outlook for next year? And there are some contracts that will be renewed on the upwards, let’s say. And also in the U.K., if you have the same kind of effect.
The second question is on Taiping Life. The core solvency ratio, I believe, is 103%. What is the impact for the dividend outlook from this company?
Antonio Cano
Michele, I’ll take your first question. Indeed, procurement is an important aspect of the Belgium operations and why they’re keeping inflation impact under control. And indeed, some contracts will renew in the coming months. So we’ll see what the outcome. Obviously, the prices will go up. But then again, even today, we are already increasing our rates. So we’re kind of already anticipating the increase of costs that will flow through for these types of contracts next year. And then we’ll see. But I think the difference will still be slightly positive.
On the U.K., we do not typically have these long-term contracts. As you know, the U.K. has a peculiar way of working with what is called third-party damage, whereby it’s actually the insurance company of the counterparty that is not at fault that passes on its cost. So that is much more difficult to control. For the claims that we manage, we also have these types of arrangements, but they’re less important than in Belgium.
Filip Coremans
Thanks. On your question on outlook on solvency dividend on Taiping Life, maybe a few comments. First and foremost, the 103% is the core solvency ratio. The lower benchmark on that is actually 50% from a regulatory perspective. The comprehensive solvency ratio of Taiping Life is at 206%. It is noticeably down versus the previous quarter because of the cap system in C-ROSS. That is a fact.
Now the second thing I want to say, dividend does not necessarily depend on the result only of Taiping Life, not under IFRS, but also not under CAS, but on their retained earnings, and there is room. The question then is, will they be able to have sufficient solvency at the end of the year to allow a normal or a reasonable dividend upstream? That is definitely the intention to do that if that is possible because you have to think of Taiping Life a bit like AG for Ageas Taiping Life to CTIH. It’s their flagship, and CTIH does require dividend upstream from its entities to service its debt and its operating expenses. The parallel is more or less like that. So the intention of CTIH Taiping Life is definitely to pay a reasonable dividend if solvency permits, and it’s something that we work on.
Now looking forward, even if Solvency were to come under pressure, there is still the possibility for Taiping Life to look at other capital instruments to support that looking forward because the Chinese regulator has opened that window last year. So we look at reasonable dividend expectations on Asia, for sure, on China potentially. But as Hans indicated, even if that were to be lower for a year, it wouldn’t disrupt our dividend commitments as a group.
Michele Ballatore
Sorry, you were referring to other capital instruments for — can you clarify that?
Filip Coremans
Taiping Life has no core Tier 2 instruments outstanding at this moment, and that’s a window that the regulator has opened last year.
Operator
Next question from Vikram Gandhi from SocieteGenerale. Sir? Okay. Maybe Mr. Gandhi, you are not on the Q&A. Now we can take Jason Kalamboussis from ING.
Jason Kalamboussis
Yes. Just having some quick, basic clarifications. One, could you talk in Belgium specifically about workers’ comp, which you are seeing there with price increases you have already put through? And how do you see that for next year?
The second is just quickly on the reserve releases. Can you specifically say how much it was in the U.K.? They seem to be much larger than anything we have seen for a number of quarters. Do you expect this to be also the case in Q4 if inflation stays at these levels?
And a quick question is just on the FX in Q3. How much of positive effects are there in the Asian numbers?
Antonio Cano
Jason, maybe on worker’s comp in Belgium. Just be aware that the rates that are applied are rates like percentages on salaries. So if salaries go up, automatically, your premium goes up. It’s also, obviously, the average claim. So there is — it’s an automatic indexation. On top of that, we did increase the rate itself certainly for some segments. So all in all, you could say that the business has a kind of certainly partially automatic indexation mechanism built into it. We don’t see any worrying signs now on worker’s comp in Belgium.
On the reserve releases in Europe, that’s, to a very large extent, linked to Motor, U.K. Motor, large losses or bodily injury claims. Remember we had in 2019, 2020 a kind of a big spike certainly compared to our peers in the cost of large losses. So a lot of that were provisions set up for losses we thought would wind up being serious losses. That’s no longer the case. And that’s a trend we actually have seen during the course of ’21 and ’22. So in that sense, there is really nothing special to mention there. They are quite significant releases in the U.K. for those large losses. They have been in the last quarters.
So just, again, these are the large losses, which is a very different story than the attritional smaller claims where the inflation is playing out. And I would say in the other regions in Europe, you also see the normal release of previous years as we’ve seen in the past. So yes, the number might look high, but there is no really specific story behind it.
Hans De Cuyper
Okay. Jason, on your second question, the positive effects in the Asia numbers, but if you talk about exceptional effect, there was only one, and that was the €50 million capital gain realized from our step-up in Ageas Federal Life Insurance in India for the quarter. By the way, when we present the €813 million result, we have already adjusted for that. And also when we talk about the €458 million underlying for Asia, we also have adjusted for that. So all these numbers have — are filtered with the exceptional capital gain in India. And that’s actually the only, I would say, positive exceptional effect in Asia.
Christophe Boizard
Hans, we can mention the FX and the FX on Asia is €15 million positive. €15 million, 1-5.
Jason Kalamboussis
Perfect. Just on the prior year reserve releases. So I understand that’s — so related to ’19 and ’20. But does this — is it likely to continue in Q4, first quarter of next year? Or is there still a lot to be released? Or we are reaching a bit the end of — on that front?
Antonio Cano
There’s always volatility in these releases. But given that our reserving policy has not fundamentally changed and if the ultimate settlements are not fundamentally changing, you should expect the continued release of previous years, yes.
Operator
Next question from Vikram Gandhi from Societe Generale.
Vikram Gandhi
Can you hear me?
Hans De Cuyper
Yes, we can hear you, Vikram. Yes, Vikram, we can hear you.
Vikram Gandhi
Okay. Excellent. And sorry about this. Okay. So I’ve got two quick questions. One is on the Reinsurance, which you flagged as an area of growth. So a few things related to that. How comfortable are you growing the Reinsurance exposure in the current environment? What are the lines of business that the group is likely to focus on? And whether this growth might need capital injection into the [Reinsurance] unit? I mean from an NCP movement perspective, since I’m aware that it’s the holdco that writes reinsurance. So technically, there’s not going to be any cash movement. But from an NCP evolution perspective, maybe we see from left pocket-to-right pocket movement. So that’s question one.
The second one is on the U.K. and Continental Europe. Now the group, of course, is reporting them as one segment, which is Europe. But can I just check whether internally there are still two different solvency ratios running in parallel since I think it’s still two different entities we’re talking about. And if so, would you be able to share what the individual solvency numbers were at the nie-month stage?
Antonio Cano
Okay, Vikram. On Reinsurance, so the current scope of the Reinsurance activity is the internal reinsurance of quota shares LPT treaties with the European entities. That continues. That is, in fact, business that we know that’s the business written by AG, the U.K., Portugal. Then there is what we call the protection part of reinsurance, what you would say is the actual reinsurance whereby the cedant companies go to the market, and there, we act like an internal reinsurance alongside external parties. And there, we tend to keep a very small slice of that business. We ourselves also place that back into the market. And that, again, that’s the U.K., Belgium, Portugal. But therein, there is also some internal protection covers that we offer to our JVs, say, Thailand, Turkey, India.
And then — and I think that’s probably what you’re referring to. As of January next year, we’re going to start writing reinsurance for real third parties. That’s going to be a very gradual movement. We’re doing very slowly. We are just increasing the breadth of our teams to do that. And we will focus, obviously, on risks that diversify well with the risks that we have within our own group already. So the European windstorm, we have plenty of that. So we’re going to look at other cat covers across Europe. And the focus will be Europe, by the way. So more Southern, Eastern Europe cats. We have some appetite also for Motor treaties. We might participate in some terrorist pools, but it’s going to be very gradual.
And on the capital allocation to that, as you’re saying, it is a bit less pocket by pocket. We estimate a limited, say, ring-fencing of capital around that, starting with about maybe €30 million, 3-0, for the first year. So we’re not going very, very, very fast, but steady.
And yes, it’s maybe a bit of a pity that we can’t be a bit more aggressive today, and we won’t, by the way, because the market seems to be very, very, very hard. So the price conditions, et cetera, are really tough for ceding companies.
Hans De Cuyper
Okay. On solvency, I give it to Emmanuel.
Emmanuel Van Grimbergen
Okay. Thanks, Hans. So on solvency, I’ll take you on Page 11, where you have indeed the solvency of Europe beginning of the year, 171%; Q3, 189%. And it’s a combination of several entities, of which the two main entities are Portugal and U.K. So we don’t disclose entity by entity. But what I can say is that one or all entities are well capitalized and within our target capital and risk appetite. So there is absolutely no issue. And what I can also say as an additional comment is that certainly, Portugal is a — the entity is in Europe. That is the highest capitalized in that region.
Operator
[Operator Instructions] Next question is from Robin van den Broek from Mediobanca.
Robin van den Broek
Maybe a follow-up question on the solvency of Taiping Life. I noticed that our core solvency has dropped to 103%. I was just wondering what this exactly means and if there’s a risk of a capital injection coming because, according to my understanding, I think a Tier 2 issuance would not feed into this core solvency ratio. That’s the first question.
Then secondly, is it correct that wage inflation for the insurance sector is only coming through for the 1st of January 2023? And I was — can you comment on what the wage inflation will look like based on current expectations and maybe any plans to offset this pressure on your profitability?
And thirdly, I guess this is something a little bit more difficult for you to comment, but I’m going to ask anyway. The situation around closing and the liquidity needs seems to be evolving. I think a few weeks ago, there was a commentary that they have to sell $11 billion of assets to basically fulfill their liquidity needs. And according to the article that I’ve read, it didn’t really see that Ageas was mentioned as one of their core holdings. Can you talk about the conversations you’ve had with Fosun as a shareholder and maybe also talk about the potential of the Belgian government funds that basically stepped in to pick up Ping An’s stake before because any willingness basically to see something similar happen there? Those are my questions.
Filip Coremans
Maybe repeating what I said before, the core solvency ratio on Taiping or in China is — the benchmark there is not 100%, but it’s the minimum capital requirement ratio of 50%. So from a capital injection requirement perspective, that is not going to be triggered by anything near 100%, right? That’s one. There, the comprehensive solvency ratio is still at 206%.
Secondly, related to strengthening core solvency ratio, it indeed comes from own funds, let’s say, core Tier 1 but also the possibility, and that is what I refer to has been opened by the regulator to — for the issuance of core Tier 2, for example, given a very long-dated subordinated core Tier 2 instruments like Perpetual and so on, could be used to strengthen also the core ratio.
Hans De Cuyper
Okay. I’ll take your second and third question. Wage inflation, I think the automatic wage inflation, actually, we only have in Belgium. We can expect a number there around 10%. And indeed, that will come in January for the Belgium business. But that being said, Belgium also does manage its business with an overall expense ratio and expense level. And they — of course, they are carefully considering mitigating actions to absorb maximally the impact of this wage inflation. And as Antonio already said, more than 60% of the Non-Life products also are automatically premium-inflated. So the cost charge in that premium is also inflated with the same percentage. So we don’t expect the impact on bottom line to be material. In the other countries, there is no automatic. So that will all depend on the market evolution, and that will be fully in line with peers.
The last question on Fosun and their liquidity needs. Indeed, there, you — we have seen, I would say, some messages around Fosun in the press. Of course, we have open contacts with Fosun as a very important shareholder. The only thing I can tell you is what you have read in the press. The Belgian newspaper was in contact with Fosun, and there, they clearly got a message that, at this moment, Fosun was quite happy with the profile of Ageas and its management. And at this moment, they were not considering selling their stake. So that is, I think, the only information available.
And indeed, FPIM, as you know, has become, I would say, also an important shareholder for us, with 6.3%. That was indeed a one single transaction, which they bought from Ping An. But of course, we would not be part of any discussion. If there would be one between Fosun and FPIM, so I cannot — I can’t comment on that one besides what is publicly available information.
Operator
We have a new question from Michael Huttner.
Michael Huttner
I had three. One, you’ve kind of answered, but on the operating capital generation, the €846 million figure, can you say what the run rate is? Because you did say the model changes and you also reclassified the equities.
Then secondly, on the U.K. So you sold the commercial lines. You sold the Tesco business. You basically — as I understand that, you’ve got mainly U.K. Motor left, and you’ve kind of merged it with the rest of Europe, so it has become a little bit invisible. Does it mean that you might sell the rest or you’re considering? Or are you reviewing or whatever form of words you could use?
And then on the Reinsurance capital consumption. The €30 million figure is lovely. It’s very reassuring. Can you just say — you’ve got the Taiping rebid. How much capital is that consuming or growth or whatever?
Christophe Boizard
So Michael, I will give you the answer on the all your questions, the question related to the operational free capital generation. And first, let’s maybe elaborate a little bit more on the U.K. The sale of the portfolio could have been interpreted as an M&A, hence, excluded from the operational free capital generation, but we decided — but it was before, and it was already there at the end of Q2 to include in operational for two reasons.
The first one is that there is no sale of an entity, and then it was more a management decision, and management decisions are typically recognized in operational free capital generation. And the specific mention I gave in my speech, here, we have €48 million of capital gain. We have some release in the SCR, a little bit of a loss on geographical diversification, and the total impact is €50 million. The purpose of isolating this is to demonstrate that even if you restate by this €50 million, the OFCG on the European side is quite strong. We don’t have really a run rate. What I can refer to is the guidance we gave before when we only disclosed the European part.
So if you want to make the parallel with the former guidance, which was to achieve on the consolidated part between €500 million, €530 million a year, you could say — you could make the simple calculation — the following simple calculation. You take the operational free capital generation for consolidated entities. You deduct this €50 million, which is kind of exceptional. Then you have to deduct the consumption of the general account, which was included before. And you end up with a figure, which is around €470 million. So if you compare with the €530 million for the whole year, we are above.
So at the end, my simple answer is, vis-à-vis the former guidance, we are above. Then what we are studying is to issue a new guidance on the consolidated Europe plus Asia, but that’s not available now.
Hans De Cuyper
Thank you, Christophe. Let me comment on M&A U.K., well, you have seen, of course, and that is in line with what we have said [previous] quarters that we are focusing — being focused in our U.K. business on the retail market. And so that’s why commercial line was divested. For us — U.K. is a core market for us. We are not changing our view because we have now been impacted the quarter on inflation. We do assume also with the new pricing guidelines that a permanent effect of inflation will, at the end of the day, drip into the premium setting and restore profitability. Remember that over the last two years, we had very attractive profitability in the U.K. So we are not changing our view on the U.K. as a core market, but it will be a very focused business on specific segments.
And then on Taiping Re, I give it to Antonio.
Antonio Cano
Yes. On Taiping Re, first, let me clarify, the €30 million I mentioned, that’s the external Reinsurance business we write out of the balance sheet to Ageas. It is totally unrelated with the Taiping Re activity. And the Taiping Re activity has its own capitalization and solvency. Just to add, bear in mind, the fact we have two entities there, that is the Hong Kong-based entity, which has a solvency, I remember, around certainly above the 200%, I think, 230%, and there’s the China Mainland operations Taiping Re, which is also comfortably capitalized. So in that sense, there is no specific capital drain from Taiping Re.
Filip Coremans
If I may add, Antonio. The solvency ratios of Taiping Re as well as Taiping Re China have been published, I think, last week or the week before. So you can find them, and in fact, on Taiping Re, the solvency ratio is at 293%, and on Taiping Re China, it’s at 177%.
Operator
We have a new question from Jason Kalamboussis.
Jason Kalamboussis
Yes, two quick questions. The first one is on the — on Asia. Could you give us some color? I mean in the second quarter, we have the lockdowns, but you have benefited, I think, from a bit of exceptional critical illness sales that were accounting for about €50 million that helps there. So are these €50 million kind of going to come off somewhere? More specifically in Q3 would help to have good underlying figures. And do you see finally the Q4 as being a bit seasonally low as usual? Or do you see it being different like it was last year?
And the second question is just on [SFPI]/FPIM, just a question. Do you see the Belgian government — is there a limit? I mean if they were to take, for example, Fosun was to sell the stake, do you have any limit above which you would feel comfortable for the Belgian state to be in there? So with the 6.3%, they take the whole stake of Fosun, if it was for sale, and they go to 16%, does it sense — is there a level above which you, as a CEO, don’t feel comfortable, Hans? Or you would say, actually, I don’t have any say in the discussion, full stop, or whatever the level of the Belgian government is within the Company.
Filip Coremans
Jason, just if I may ask you clarify whether you’re talking about the results or about the commercial development.
Jason Kalamboussis
The commercial development but with an impact on the results that means…
Filip Coremans
I think commercially — I go back to the beginning of our messages. Commercially as well as fundamentally, underlying operational performance is very much on track. And we see resilience in China, both in gross written premium as well as in new business. And we have seen quite strong rebounds in Southeast Asian commercially.
In terms of results, the best guidance we gave is what Hans said at the beginning. We see the underlying result develop quite well, as you noticed from the slides. And there we — initially of the year, we said we think that underlying Asia would reach something around €500 million. We’re now guiding more €500 million to €550 million range. And from what you can see that, that is trending to the higher end of that range.
Secondly…
Jason Kalamboussis
I was looking for the products as well in China. So within the product that you are selling, is there any change between second quarter, third quarter and the commercial momentum there?
Filip Coremans
Well, the commercial momentum in China, I think, is quite resilient. Year-to-date, we saw about 12% growth in GWP, be it corrected for FX, it was about 2% over the Q3. Actually, it was a bit higher even because in Q3, we had a better momentum, I would say. It was 15 — 17% up in the quarter, 6%, corrected for FX, so we saw strong resilience there.
The new business volumes overall, and I think it’s also in the press release, were quite strong. I think year-to-date, new business volumes were up, I think, even 13% or more, actually more in China. The VANB margins in China are slightly under pressure because of the lower interest rate. So in terms of VANB, we don’t expect the same growth pattern, but fundamentally, it is delivering. The fourth quarter is always a little bit a question mark how fast we will start the year-end campaigns. That is still being discussed, but at this moment, the first figures for the fourth quarter coming in indicate continued strong momentum.
Hans De Cuyper
Okay. Your second question on FPIM. Well, first of all, of course, we always welcome shareholders who have confidence in our strategy, and we’re very happy with FPIM as a shareholder. Remember that FPIM came in a little bit on an incentive given by the government, and the government has identified a few industries, four to be exact, on which they want to make sure that Belgium can keep on playing a key role in that industry in the country. And the financial industry is one of them. So then, of course, naturally, you come at Ageas.
They are very busy today in all these four industries on investing and so on. Whether they do more, honestly, I don’t know. I’m also, of course, not a part of that discussion, but I’m absolutely not uneasy about it. Again, today, FPIM has a 6.3% share in Ageas. They do not have a Board seat. So the context we are having with FPIM at Ageas level are like we are having with all shareholders as specifically the important shareholders to also acquire information, nothing more, nothing less. And they do not execute any influence on the management or at the strategy. All that is done by management and the Board of Directors.
There is, of course, investment partnership with FPIM already for many, many years, but that is fully at AG. AG is an important investor, for instance, in Belgium infrastructure, and we often — or they often do that together with FPIM, but that is completely separate from the shareholding that FPIM is holding in Ageas today. And by the way, that is nothing new, that this investing together in the Belgium is already happening for many, many years.
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 the main conclusions.
Disregarding the volatility brought by the financial markets, the group delivered a strong operational performance, reaching all the operating targets set in the consolidated entities and recording a high underlying result in Asia. This solid operating performance contributed to driving the group solvency ratio further up, amounting to a high 225%, and it resulted in a strong operational free capital generation of €846 million for the whole group over nine months.
With this, I would like to end this call. Don’t hesitate to contact our IR team should you have outstanding questions. Thank you very much 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 your attending. You may now disconnect your lines.
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