Available solvency rose by € 802 million in 2014. The increase in the UFR effect as a result of the fall in interest rates played a major role in this rise. In accordance with regulatory requirements, the UFR has been applied since June 2012. The DNB solvency ratio (incl. UFR) stood at 285% at year-end 2014 (2013: 268%). The solvency ratio (excl. UFR) fell from 236% to 204%. This high solvency ratio is a reflection of a.s.r.’s robust foundation. Based on the standard model, the Solvency II ratio (SCR), which was calculated using the parameters known to date, was circa 175%.
The effect of market risks on the solvency ratio was as follows (in %-p):
Type of market risk Scenario 2014 2013
Total diversified
Equities -20% -18% -21%
Interest rate incl. UFR -1% 34% 30%
Interest rate incl. UFR +1% -23% -29%
Interest rate excl. UFR -1% -59% -17%
Interest rate excl. UFR +1% 27% -1%
Credit spread +0.75bps -16% -23%
Real estate -10% -12% -13%
In the calculation of the sensitivity of the solvency ratio including UFR to interest, the UFR is kept constant. The shock on the discounting curve for the liabilities is mitigated for maturities longer than 20 year through the application of the UFR. As a result, the assets are more sensitive than the liabilities including UFR. The solvency ratio including UFR increases with 34% when the interest-rates drop 1%. In case the UFR is not applied, the liabilities are more sensitive to interest-rate movements. The shock on the discounting curve for the liabilities is not mitigated and the present value of the cashflow after 20 year is higher. The liabilities excluding UFR are more sensitive than the assets. The solvency ratio excluding UFR decreases with 59% when the interest-rates drop 1%.
The sensitivity to spread decreased, mainly due to a refined method to determine spread-duration. The sensitivities to interest changed as a result of the significant decline of the interest-rate curve. The ultimate forward rate (UFR), as prescribed by the regulator, starts from the assumption that the curve used to discount the insurance liabilities will converge to a level of 4.2% between year 20 and year 60. From year 20, the difference between the economic curve (as observed in the capital market) and the curve inclusive of UFR will visibly increase. Given the current extremely low interest rates, the difference between the curve exclusive of UFR and the curve inclusive of UFR has grown exceedingly large.
Hybrid capital Profit for the year Equity 5,000 4,000 3,000 2,000 1,000 0 Total equity 2013 Total equity 2014 Pr
ofit for 2014 Unr
ealized
revaluation
Revaluation of
real estate Impact of
IAS 19
Hybrid issue Other (incl. dividend and hybrid capital
14% 381 156 22 -527 186 -184 7% 79% 18% 10% 72% 3,799 3,833
2014 annual report Report of the Executive Board
a.s.r.’s interest rate risk policy seeks to manage the interest rate sensitivity of the balance sheet based on an economic curve. Because of the large difference between the economic curve and the curve inclusive of UFR, the difference between the solvency position inclusive and exclusive of UFR will increase in the event of an interest rate shock. a.s.r. upheld the policy for hedging the interest rate risk based on an economic curve in 2014 subject to the condition that the effect of an upward interest rate shock of 1 percentage point on the Solvency II ratio (inclusive of UFR) cannot exceed 10 percentage points. The Solvency II ratio is calculated based on the curve inclusive of UFR. As a result, the extremely low interest rate climate has caused the sensitivity of the solvency position exclusive of UFR to increase in the event of a drop in interest rates.
Funding
As an insurer with a robust capital and liquidity position, a.s.r. has only limited need for external funding. As a result, a.s.r. makes limited use of money and capital markets. a.s.r. does aspire to have access to a broad and balanced spectrum of funding options. Access and costs of the money and capital markets may vary over time. Given that a.s.r. always has a range of funding options, it can guarantee its strong liquidity position, even when the markets are poor and the business is under stress. This is in keeping with the prudent policy and financial robustness that a.s.r. pursues.
At present, a.s.r. achieves this both in terms of secured and unsecured financing by keeping its programmes up-to-date. This ensures access to the money and capital markets, which means that a.s.r. has plenty of options for meeting its financing requirements with the necessary flexibility where needed and appropriate. Over the past year, the market lent itself very well to raising liquidity and capital because of record low interest rates. a.s.r. also saw opportunities for renewing the duration of its capital, and hence creating capital security, and for optimizing its capital structure. As a result, a.s.r. decided in 2014 to raise new capital; the issue of a € 500 million hybrid loan marked a successful step towards further balance sheet optimization within the scope of Solvency II. The proceeds from the bond loan were used mainly to repurchase existing bonds. In addition to a capital increase under all capital regimes (Solvency I, Solvency II, ECAP and S&P), the market transactions also resulted in lower average finance costs for a.s.r. overall and in further expansion of its already robust balance sheet.
a.s.r. also contracted a senior bank loan of € 250 million for the holding company in 2014. This liquidity was used mainly for general operational purposes, including the funding of a pension reserve that will be used to cover price inflation going forward. Combined with the financing options that are in place, a.s.r. currently has ample cash reserves to carry on its operations.
Dividend
The Executive Board intends to distribute € 138.9 million in dividend on ordinary shares. As in previous years, this represents 40% of the profit for the year after regular distributions on preference shares and hybrid instruments.
Ratings
a.s.r. seeks to secure an ‘A’ rating from Standard & Poor’s for the required capital of
ASR Levensverzekering N.V. and ASR Schadeverzekering N.V. On 15 August 2014, Standard & Poor’s confirmed the ‘A’ rating of ASR Levensverzekering N.V. and ASR Schadeverzekering N.V.
The Standard & Poor’s ratings were as follows at year-end 2014:
Standard & Poor’s ratings Type Rating Outlook Date
ASR Levensverzekering N.V. CCR A Stable 21 August 2012
ASR Levensverzekering N.V. FSR A Stable 21 August 2012
ASR Schadeverzekering N.V. CCR A Stable 21 August 2012
ASR Schadeverzekering N.V. FSR A Stable 21 August 2012
ASR Nederland N.V. (holdco) CCR BBB+ Stable 12 May 2014
2014 annual report Report of the Executive Board
2.4 Risk management
Risk management is an integral part of our daily business activities. a.s.r. applies an integrated
approach to managing risks, ensuring that our strategic objectives (customer interests, financial solidity and efficiency of processes) are realized. This integrated approach ensures that value will be created by identifying the right balance between risk and return, while ensuring that obligations towards our stakeholders are met. Risk management supports a.s.r. in the identification, measurement and management of risks and monitors whether adequate and immediate actions are taken in the event of changes in our risk profile.
a.s.r. is exposed to the following types of risks: market risk, counterparty default risk, insurance risk (life and non-life), strategic risk and operational risk. The risk appetite is formulated at both group and legal entity level and establishes a framework that supports an effective selection of risks.
The notes to the financial statements contain a detailed description of the risk governance, the risk profile and the related trends in 2014 (see page 124).