Good morning, ladies and gentlemen. This is the operator speaking. Welcome to the NN Group's analyst conference call on its second half and full-year results. The telephone lines will be in a listen-only mode during the company's presentation. The lines will then be open for a Q&A session. Before handing this conference call over to Mr. David Knibbe, Chief Executive Officer of NN Group, let me first give the following statement on behalf of the company: Today's comments are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those projected in any forward-looking statements. Such forward-looking statements may include future developments in NN Group's business, expectations for the future financial performance, and any other statements not involving historical facts.
Any forward-looking statements speak only as of the date they are made, and NN Group assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation or an offer to buy any securities. Reference is made to the legal information on the last page of the presentation. Good morning, Mr. Knibbe. Over to you.
Yes. Good morning, everybody, and thank you for your interest in our company today. We're well aware that this is a very busy morning. We're thrilled to talk to you through our messaging today, which contains a lot more than just an earnings release. I will commence by presenting the key messages, followed by business highlights that excite me. After that, I will run you through our new targets for 2025 and our stronger investor proposition. Annemiek will delve deeper into our capital position, financial performance in 2023, and the financial strength going forward. Moving on to our key messages. First of all, our business performance in 2023 has been strong, with OCG coming in at above EUR 1.9 billion in 2023, up 13% versus 2022 on a like-for-like basis and already above our 2025 target of EUR 1.8 billion.
I want to highlight the strong performance of Netherlands Non-Life, banking, and continued growth in Insurance Europe. While 2023 also included a favorable business environment, which is expected to return to normalized levels, we continue to expect underlying growth. Therefore, we increase our OCG target for 2025 to EUR 1.9 billion from EUR 1.8 billion initially. The second element I want to highlight is our solid balance sheet. We report a group solvency of 197% at the very upper end of our 150%-200% comfort range. The quality of this ratio is strong, as higher interest rates mean we're less dependent on the UFR benefit. We also took important steps to further optimize and de-risk our balance sheet. We announced two attractive longevity reinsurance transactions in December 2023.
And we removed uncertainty around the unit-linked file with the settlement we announced at the start of 2024. Thirdly, our robust balance sheet and strong business performance has also further increased our confidence in free cash flow. As such, we introduce an explicit target of 2025 of EUR 1.6 billion, roughly EUR 100 million higher than the implicit guidance we gave at our investor day in November 2022. This reflects higher remittances from NN Non-life and the bank and a continuation of growing remittances from Insurance Europe. With these developments in mind, we again gave a clear message on our sustainable capital return commitment towards shareholders.
We returned EUR 100 million also to you by raising the DPS over 2023 by 15% versus 2022 to get to a total dividend of EUR 3.20 and increasing our recurring annual buyback to at least EUR 300 million. We have consistently delivered on our capital return promises, as our track record since IPO in 2014 suggests. We have returned over EUR 10 billion to shareholders since then, which is almost equal to our current market capitalization. With today's step up on capital in mind, we have once again showed our commitment to shareholders. Going forward, our normal capital return policy applies from the higher base we announced today. The absolute amount available for dividend should grow in line with our long-term free cash flow growth ambition of mid-single digit.
The effect of the minimum annual buyback of EUR 300 million works as an additive feature to the DPS trajectory. Together, this should result in a dividend per share growth of approximately 8% per annum. We are pleased to announce that in January 2024, NN Life reached a settlement with all unit-linked related interest groups, which ends uncertainty for the affected customers in this longstanding industry issue. The total settlement amount is roughly EUR 300 million. Furthermore, we have provisioned EUR 60 million for hardship cases and customers not affiliated with one of the interest groups who have not received compensation previously. All legal proceedings will be discontinued, and no new legal proceedings may be initiated by the interest groups and affiliated parties. In addition, customers must agree to full and final settlement before receiving any compensation.
We are glad that with this settlement, we can finally close the unit-linked file. We have made considerable progress towards accomplishing our strategic KPIs, which ultimately drive our financial outcomes and add value to all stakeholders. Our ambition is to be an industry leader known for customer engagement, talented people, and contribution to society, including our efforts to tackle climate change. Let me highlight a few of them. First, I'm thrilled to report solid progress on our net promoter scores for the Netherlands, which remains on par, and for our international units, where eight out of 11 units score significantly on or above the market. We are committed to providing the best possible customer experience to further improve these scores, as this is an important driver for customer retention and new sales.
Second, as part of our effort to combat the impact of climate change, we are working towards achieving net zero greenhouse gas emissions across our businesses by 2050, including our investment and underwriting portfolios and our own operations. In our investment portfolio, we have achieved a reduction of 10% versus the 2021 levels, and we are on our way to get to the 25% by 2025. Third, we believe we should not only focus on reducing our existing footprint, but we should also invest in new climate solutions. We have made significant investments in climate solutions, including green bonds, for a total of EUR 10.8 billion, and we are already close to the EUR 11 billion targeted by 2030. Please allow me also to highlight some business angles that I find important.
Firstly, Netherlands Life, where we continue to see strong, stable remittances from the gradual runoff of the book, with now upside coming from the pension reform. We believe we're in a pole position to benefit from the pension reform, given we are the market leader in terms of scale, our number one broker satisfaction scores, and the widest product range. The opportunity is twofold. On the defined contribution side, we believe over time we can significantly benefit from a doubling of the addressable market share. We have already surpassed the 2025 AUM target of EUR 32 billion. 2023 saw a record net inflow of EUR 2.3 billion. We expect to generate 15-20 basis points earnings margin, which can benefit from operating leverage over time. Secondly, we continue to see a potential buyout market of EUR 25 billion.
We have already won one deal in 2023, and with the expected submission of pension plans by the funds in 2025, we expect to be able to do more. Buyouts are capital-intensive by nature, and volumes are likely to increase with limited competition. That is why, going forward, we aim to reach double-digit IRRs for the new RFPs. Secondly, for Insurance Europe, we witnessed OCG growth from EUR 253 million in 2020 to EUR 421 million in 2023, a stellar 18% CAGR. This growth reflects our successful push into higher margin protection products in the under-penetrated insurance markets, largely in CEE, as well as the contribution following the successful acquisition of MetLife. Underlying growth dynamics continue to support long-term growth prospects of mid to high single digit per annum.
However, more near-term, lower interest rates in CEE, and higher guaranteed rates in Belgium are weighing on the near-term growth prospects from the strong delivery in 2023. As such, we confirm our 2025 OCG target of EUR 450 million, which results in a 12% CAGR from 2020. Thirdly, we are a leading non-life player in the Netherlands, where pricing discipline has strongly improved on the back of mainly our own consolidation efforts. Our portfolio is more exposed to disability and fire, which offers further protection from adverse pricing cycles, which tend to start in motor, where we are underweight. This has contributed to strong OCG growth over the recent years, reaching EUR 460 million in 2023. Our Combined Operating Ratio for 2023 came in at 92.6% despite an accounting change in group income.
We also show delivery on our earlier given commitment that Netherlands Non-life can step up its free cash flow conversion closer to the level of the group. For 2023, we show a conversion of 80%. The net remittances to the group were equal to EUR 335 million. Besides strong business performance, we did benefit from positive experience. Normalized OCG performance is probably closer to the EUR 350 million, which we intend to grow a bit more than GDP. We are confident that we continue to show non-life results, and we therefore reconfirm our 91%-93% guidance and expect remittances with low volatility, bearing in mind the potential impact from storms. Based on our strong business performance, we are increasing our OCG target for 2025 of EUR 1.9 billion from EUR 1.8 billion before.
The upgrade in OCG target is largely driven by two factors: continued strong performance in non-life, which we expect to outperform on its EUR 325 million target, and two, sustained strong delivery of the bank, where OCG has benefited from higher net interest rate income and lower new business strain. This upgrade supports the continued strong capital return. I would like to conclude my part of the presentation with the same message I gave in the beginning. We have a resilient balance sheet with a solvency ratio of 197%, which is also of high quality. In combination with solid business performance, we upgrade our OCG target for 2025 to EUR 1.9 billion and a free cash flow delivery in 2025 at EUR 1.6 billion.
These developments allow us to increase our dividend per share in 2023 by 15% versus 2022 and set a higher annual buyback of at least EUR 300 million, with further upside if our group solvency ratio is sustainably above 200%. And with this, I would like to hand over to Annemiek.
Thank you, David, and good morning, everyone. Happy to be here to present NN's strong set of results. I'll start my part of the presentation by highlighting some of the management actions that contributed to the strength of our capital position, reduced balance sheet risk, and improved our results and prospects, such as the longevity deals and the capital injection into life. After that, I'll take you through our capital movements, ending up at a solid solvency level of 197% and our strong business performance that led to an OCG delivery of EUR 1.9 billion in 2023.
Although the trajectory of our solvency position has not exactly shown it in the recent years, our annual net capital build has been around 7-9 percentage points annually. While uncertainty remains, we see less obstacles on the horizon towards 2025 and believe there is more potential for that net build to show itself in 2025. And as David mentioned, on the back of our strong capital position, solid business performance, and increased confidence in remittances, we've also decided to give an explicit free cash flow target of EUR 1.6 billion in 2025. Based on this level of free cash flow and our REIT-based capital return promise, our net cash build is expected to be close to EUR 300 million-EUR 400 million per annum. As such, we keep ample financial flexibility on cash and capital despite our step up in capital return.
Let me highlight a few of our management actions that impacted the annual results of 2023 and prospects going forward. David already mentioned the unit-linked settlement, so let me start with the longevity transactions. We believe the deals executed in December 2023 are attractively priced. The impact for group solvency ratio was significant at +8 percentage points, while Netherlands Life even saw an uplift of 17 percentage points, both based on 3Q balance sheets. These capital gains come at a limited OCG loss of only roughly EUR 30-35 million per annum. The unit-linked settlement and the loss of OCG were part of the reasoning to inject capital into Netherlands Life. As David indicated, we continue to believe that Netherlands Life can deliver on its 2025 OCG target of EUR 1.15 billion.
This also means that Life can more than cover its current remittance pattern. Together with a solvency ratio of 196% for 2023 for Life, this solidifies a strong and stable remittance pattern going forward. Now, moving to solvency, our ratio ended the year at 197%, close to the upper end of our 150%-200% comfort zone despite the elevated mortgage margins in December. During 2023, we added 21 percentage points to our ratio with OCG, of which 12 percentage points have been returned to shareholders. Market variance was a pronounced negative at -12 percentage points, mainly driven by negative real estate revalues, while the impact from elevated mortgage margins at year-end was offset by favorable credit spread changes in H1. The elevated mortgage margin is not of great concern since we believe the default risk within our mortgage portfolios is negligible.
Also, stock and flow compensate for each other. We manage our capital position based on the long-term through-the-cycle average. During 2024, we've already seen a reversal of this high mortgage spread, and a return to mean mortgage spread would imply adding roughly 7% to the group full-year ratio. Other adds 2 percentage points, which also includes the longevity deal and the unit-linked settlement. In 2023, OCG showed a strong like-for-like increase of 13% to EUR 1.9 billion. This strong growth was primarily due to the robust business performance at Netherlands Non-life, a higher contribution from the bank driven by higher interest results, continued OCG growth of Insurance Europe, and favorable variances at our internal reinsurance business, which is in the segment Other. These impacts more than compensated for the lower OCG contribution from Netherlands Life, primarily attributed to unfavorable financial markets.
Correcting the performance of Netherlands Non-life for favorable items, such as the benign weather and the positive experience variances, would still result in a strong delivery on OCG of roughly EUR 370 million, which should be able to deliver annual growth in line with GDP. For the bank, we expect results to remain at elevated levels as we will not look for balance sheet growth, and we expect a relatively stable net interest margin at least during 2024. As indicated earlier, we believe Netherlands Life can still deliver on its EUR 1.15 billion target in 2025, although it is more reliant on how financial markets behave versus the beginning of the year.
Segment Other had an exceptional result, partly driven by the favorable items in NN Re, as I mentioned earlier, and going forward, we would expect that to move back to the earlier OCG guidance of around minus EUR 300 million. Despite the favorable elements in 2023, we see justification for the upgrade of the 2025 OCG target from EUR 1.8 billion to EUR 1.9 billion based on the strong underlying business performance and markets as of January 1st, 2024. Now, on operating results, as stated on several occasions before, the transition towards IFRS 17 will not affect our main targets and capital return policy. For your convenience, we've included several slides in the appendix that explain the primary drivers of the transition towards IFRS 17.
Overall, we've observed the robust business momentum displayed in the OCG of Insurance Europe, bank, and the internal reinsurer reflected in the operating result as well. Our net result decreased compared to 2022, which was influenced by the EUR 1.1 billion gain from the sale of NNIP. Excluding that gain, the net result has increased as financial markets had a less adverse impact compared to last year. Our net CSM growth for 2023 was 1.5% for the full year, which implies no growth in H2 2023. Few points to mention on this. One, the growth of Netherlands Non-life is seasonally concentrated to the first half of the year, and two, as indicated earlier, Japan's VNB has decreased substantially following the improvement order issued by the FSA.
We would expect organic CSM growth to remain subdued until recovery of new business volumes in Japan, which is not expected before the end of 2024. Now, moving from OCG and operating result to capital and cash buildup. On slide 18, you can see that we historically have a 7-9 percentage points net capital build per annum, which we consider sustainable even despite our increase in total capital return. For 2024, we still expect some regulatory headwinds of roughly 7 percentage points, such as the UFR reduction and the CCB countercyclical buffer at the bank. However, bear in mind that our full-year 2023 solvency ratio was based on elevated mortgage spreads. Return to the mean average would add around 7 percentage points to the ratio.
At this moment, and of course, we can't give any guarantees, we don't see any regulatory headwind for 2025. As for our real estate exposure, we're comfortable on our well-diversified and high-quality portfolio, of which 70% is exposed to residential and industrial, mainly logistics. We see high occupancy rates across the portfolio, and we have a proven capability to price for inflation. The current expectation is that small negative revalues in H1 2024 can be partially offset in H2 2024. There's still enough certainty outside the elements that I just discussed that could negatively influence our capital position, such as equity and other market impacts.
Nevertheless, in absence of large market movements, we could see our capital position moved to around 200% as per year in 2024, with the potential for our net capital build to actually translate in the solvency ratio looking more promising for the year thereafter, given the lack of regulatory headwind expected in 2025. Let's move from capital to free cash flow. As you remember, from our Capital Markets Day in November 2022, we guided for mid-single-digit free cash flow growth from our 2021 normalized free cash flow level of EUR 1.2 billion, basically implying a EUR 1.5 billion free cash flow in 2025. Based on our robust balance sheet and strong business performance, we feel increasingly confident on our free cash flow delivery, especially driven by Nonlife and the bank.
Of course, the actions taken and outlook given on Netherlands Life help build the confidence in the stable remittance pattern of Life that we've also shown in the past. We therefore now go for an explicit free cash flow target for 2025 of EUR 1.6 billion, which is more diversified by nature and effectively EUR 100 million higher than the implicit target we had before. Note that we will immediately transfer this EUR 100 million uplift to shareholders as it is roughly equal to the step up in capital return we announced today, roughly half of this via the exceptional increase in DPS growth of 15% versus 2022, and the other half via the EUR 50 million increase to our recurring buyback to EUR 300 million per annum.
On slide 20, you can see how this all translates into an expected annual cash buildup. With our increased capital return and new free cash flow target in mind, we should see a normalized annual cash build of around EUR 300 million-EUR 400 million a year, also more or less consistent with historic delivery and developing in line with our cash capital target range of EUR 500 million to EUR 1.5 billion. As such, both on net capital build and on net cash build, we feel we keep ample financial flexibility. So, to sum up, we have a strong balance sheet with improved capital quality, a robust investment portfolio, and sufficient financial flexibility.
Our strong business performance is translated into an increased OCG target as well as an explicit and EUR 100 million higher free cash flow target, which we pass straight on to shareholders via our improved capital return. We will continue to focus on capital return within our shareholder proposition. If our group solvency ratio is sustainably above 200, for which I've given some elements of guidance during the presentation, we will consider additional shareholder returns unless used for value-creating opportunities. Let me hand back to David for closing remarks.
Yes. Thank you, Annemiek. So, let me keep this short as I think we've been clear in what we want to say. Our robust balance sheet of strong quality paired with solid business performance has given us the comfort to upgrade our OCG and free cash flow targets, which has also resulted in a strong uplift of our capital return promise to shareholders, which I am sure everybody will appreciate. Thank you for your attention. I will now ask the operator to open up the call for Q&A.
Thank you, ladies and gentlemen. We will now start the Q&A session. To register for the Q&A, please press star one one on your telephone. As a reminder, in the interest of time, we kindly ask you to limit the number of questions to two. Your questions will be answered in the order that they are received. Please press star one one for your question or remark. Go ahead, please. We will now go to your first question. Your first question comes from the line of David Barma from Bank of America. Please go ahead.
Good morning. Thanks for taking my questions. The first one is on cash conversion. So your this keeps continues to go up. So with your new targets, we're around 85% conversion of OCG to cash. Is this a sustainable number for NN? Besides Japan, which is a bit of a special case on this, would you say we're at target conversion rate now for the other units? And then my second question is on Non-life, where the gap between IFRS and operational capital generation is quite hard; it's quite hard to bridge. Could you give us a bit of color and explain what the main dynamics are there, please? Because the OCG increase is quite a bit, but on IFRS, it's not as obvious. That would be very helpful. Thank you.
Okay. Thank you very much, David, and good morning. Cash conversion and the Non-life question on between OCG and IFRS. Annemiek?
Yeah. Thanks, David. To start with the free cash flow conversion, free cash flow OCG conversion was around 74% for 2023. We would expect the ratio to increase somewhat in 2025, reflecting higher net remittances as reflected in the updated free cash flow target. But also note that OCG can really be volatile, right, as a as a result of market movements. So rather than focusing on the conversion or giving any implicit targets on this conversion, we've now opted for an explicit free cash flow target of EUR 1.6 billion. So I guess that, that also provides a bit more clarity from that end. Now, on the question related to OCG and operating result of non-life, agree. It is it is quite difficult to reconcile, those.
In general, we would see a model and assumptions changes in the OCG on the, on the disability, business of non-life flowing through OCG as well, whereas it wouldn't flow through the P&C. If you would really look at the 2023 year 2023 full year 2023 result, the real difference is the accounting change that we had in the CSM release pattern of the group income business, which caused which was one of the reasons why the Non-life operating result went down. I guess most important to say is that we do confirm the 91%-93% combined ratio, even despite that change in the CSM release on the group income side.
Thank you.
Thank you. We will now take your next question. And your next question comes on the line of Cor Kluis from ABN AMRO – ODDO BHF. Please go ahead.
Hello. Good, good morning. and congratulations with the with the results and increased targets obviously. two questions. First of all, on, Non-life, your combined ratio was 95% in H2, and, at the PO we also saw a little bit higher combined ratio. Could you give some ideas about price increases that you all have already done and which you expect to do for the coming year? That is my first question. My second question is about Achmea, the life insurance company, which will potentially for sale. Could you give an update on your view market share-wise? Is that possible for NN to acquire or not? My last question is on the bank.
The cash flow and the remittance from the bank is going up. I think your growth assumptions are somewhat low enough for the bank. Could you give an update on that? Is that more the market, or is that more a choice of the company? That were my questions. Thank you.
Yes. Thank you very much, Cor. I'll take the question on Non-life and Achmea, and then Annemiek can elaborate on the remittances from NN Bank. I think if you look at the overall dynamics in the Non-life market, it continues to be a structurally better market that we have seen in the past. Now, there's always some volatility, you know, whether this is related to storms or some other items that could happen, but the overall trend is positive. If you look at what we have done in terms of pricing, we've been, and we spoke about this call earlier. We've always maintained a strategy of margin over volume.
Averages on premium increases is a bit difficult to say given that we are in a much more diversified way of pricing, but on average, you would probably see retail and SME in the range 5%-7% and probably motor, a bit higher, maybe 7%-10%, premium increases, but we've seen that the market is very able to absorb that, and we prefer a stable repricing pattern. So overall, as Annemiek was saying, we're comfortable with the 91%-93%, despite that there'll always be some volatility where the business is doing well. And also, we expect to continue that also through this pricing cycle. On M&A, yeah. Well, you know, how it works. I mean, we've had our targets all the targets that we've set are all based on organic growth, huh?
So, the EUR 1.9 billion, the EUR 1.6 billion free cash flow that Annemiek spoke about. So, when we look at M&A in general, we have very strict, strategic criteria. Does it strategically make sense? Does it add value? And financial criteria. And financial criteria are very related, of course, to the alternative, which is, you know, giving money back to, giving money back to, to shareholders. So, in the form of share buybacks, we've been very disciplined in the past on this and, we'll continue to be that also in the future. Specifically on market shares, well, the way it works, I think, in pensions, we have a market share around 40%. So, from an antitrust perspective, you could expect that, you know, there's no room to grow there in an inorganic way.
but the ACM and the antitrust organization do look differently at closed books where these type of dynamics do not play a role. Then, remittances from the bank. Annemiek?
Yeah. Thanks for your questions, Cor. Well, if you look at the bank, obviously, it had a large increase in OCG from EUR 35 million-EUR 133 million. And one of the reasons why we've updated our OCG guidance, our OCG target from EUR 1.8 million-EUR 1.9 million was also related to the bank. That higher OCG is also expected to translate into higher free cash flows. There is an additional reason for that. We thought initially that working towards the 2% countercyclical buffer, which basically leads to an increase in the total capital ratio target for the bank to 17.7%, was reached ahead of time.
That also meant that the bank for full year 2023 already proposed a dividend of EUR 44 million. 2021 is already distributed of that, so that's included in our 2023 remittance pattern already. And obviously, having reached that target state capital ratio of the bank going forward, there is a bit more room for remittances, especially as we would expect NIM to remain at elevated levels for 2024, potentially tailing off a bit towards 2025, and combined with a with a stable balance sheet. That is a deliberate choice. If you look at the group perspective, we have a fair chunk of mortgage exposure. We're very happy with that, but we're not necessarily looking to increase that further.
In addition, after the last, you know, year in terms of minimal dividend out of the bank, we also really want to focus on, on getting good OCG and free cash flow conversion from the bank as well.
Okay. Very clear. Thank you very much.
Thank you. We will now go to the next question. And your next question comes from the line of Benoît Pétrarque from Kepler Cheuvreux. Please go ahead.
Yes. Good morning. So, three quick shots on my side. The first one will be on the potential next step around share buyback. You've mentioned a very strong capital build of, of, of EUR 300 million-EUR 400 million per year. You also mentioned the, the treasury hold of 200% Solvency II ratio. You know, o at which metrics will you, be looking at going forward to take a potential decision on higher buybacks? Is that the Solvency II ratio 200% for a couple of quarters? So, what would be the kind of definition of a sustainable level on Solvency II ratio? And also, will you be looking at your holding cash? Do you have a minimum level in mind on holding cash?
The second question, just wanted to make sure that I got it right on the year-to-date impact on Solvency II. So, you have the spreads coming down on mortgages, which is +7%. Do you see other market movements relevant for us in the year-to-date on the Solvency II? And just finally, when will you update us on kind of the post-2025 OCG? Do you plan something for the rest of the year? Is there any CMD in the pipe? And do you see also upside potentially on the EUR 1.9 billion OCG from the pension reform? Thank you.
Yes. Thank you very much, Benoît. And good morning. Let me just quickly respond to your third question. Annemiek can answer the other two. So, we currently don't have that planned yet, a next capital markets day, but I'm sure we'll do that in the coming period. We just updated our targets for 2025, both for free cash flow and OCG. So obviously, you know, in due time, we'll come with newer targets once we're closer to 2025. Upside on the pension reform, yeah, that's possible. I think we view the pension reform as a possibility. But again, everything that we are aware of today is incorporated in the target that we have set of EUR 1.9 million for 2025.
After 2025, we still need to come back. But it is our expectation that also after 2025, we can continue on a growth path with OCG. Then for questions 1 and 2, let me give it to Annemiek.
Yeah. Hi, Benoît. I guess your first question was kind of really broken down into two questions, sir. Which metrics do you look at when determining the capital return and also what's a sustainable level? If you look at the metrics, we obviously have a three-pillar framework. So, we look at solvency ratio, cash at holding, and we also want to have a leveraged position that's in line with a single-A rating. Now, as a result of the EUR 1 billion injection that we did into life, the binding constraint between capital, so solvency and cash, is more balanced. In the analyst presentation, we've included indicative normalized buildups of 7%-9% on capital and EUR 300 million-EUR 400 million on cash, which probably means that it would also be relatively balanced still between cash and capital for 2024.
Capital builds up a bit quicker, but then we would have some regulatory headwinds. We will definitely be looking at both metrics. In terms of, you know, sustainability and when would you be sustainable above 200%, do you need X quarters or Y number of days for that? You know, if we take a step back, we just look at it. We have a very strong solvency ratio of 197%. It’s of better quality. We took all the management actions. If you look at the, you know, barring any market movements, unforeseen impacts, just based on the net capital buildup we would expect for 2024, and the expectation that regulatory items such as UFR reduction, countercyclical buffer, etc., could be offset by mean reversion of mortgage spreads, you would be looking at around this 200 level for 2024.
For 2025, we would be more positive because we're there, as I said also in the analyst presentation, we don't see any negative regulatory items. And that also comes and links a little bit to your question on year-to-date solvency ratio. We would expect it to be slightly up, and that's driven by positive impact from markets, mainly mortgage margin normalization, as you said. All the other market movements are kind of relatively marginal. So those are the big ones, driving the solvency ratio slightly up. But remember, we also have quite some regulatory items in 2024, huh? We have the UFR reduction, which is - 2 percentage points, FOLA reference portfolio, countercyclical buffer, that all comes in H1. So, if you take that into account, probably the ratio would be up slightly now.
Great. Thank you very much for that.
Thank you. We will now go to the next question. And your next question comes from the line of Nasib Ahmed from UBS. Please go ahead.
Thank you. Good morning. So, first question on the mortgage, spread, volatility action. You've indicated in the past it hasn't been economic to execute that, but, given that mortgage spreads are now in line with the storage levels, is this the right time to reduce that sensitivity? And then second one is on your debt capacity. You target a single-A rating. You give the debt capacity on a Solvency II eligible debt basis, but how much senior debt do you have capacity before you hit the single-A threshold? Thank you.
Thank you, Nasib. Maybe Annemiek, you can answer the question on debt capacity. And then Bernhard Kaufmann, our Chief Risk Officer, can talk about the mortgage spread volatility.
Sorry. My gun. Your question on leverage, we currently have a leverage ratio of 17.7%. We're comfortable with that ratio, obviously. We would have some flexibility in that, but it is our goal to obviously keep a single-A rating. So, there would be some room to increase that, and we'll just look at it opportunistically and when we need that.
Yeah. Thanks, Annemiek. Bernhard?
Yeah. Hi, Nasib. Mortgage spread volatility, like Annemiek already pointed out, is best to consider really normalized mortgage spreads. And why is this, again, the point-in-time client rates that are used for valuation just introducing artificial volatility? And, as the performance of the mortgage book is very solid, very low defaults, it's mainly a stock-and-flow item. The volatility dampener also would just have a limited time horizon, because it would have to be terminated with the introduction of the Solvency II 2020 review implementation. And it would be punitive on solvency in this environment. We see in the current market no reason for implementing it at a fine.
Perfect. Thank you. Can I just come back on the leverage point? What are you able to give, Annemiek, a top end of the 17.7%? Could it go up to 30%? What's the top end for a single-A rating for you guys?
It's not that clear, also not from a rating agency perspective, and it differs. But, you know, I would say if you would be for a prolonged period of time above the 30%, then it would could become an issue with the credit rating.
Perfect. Thank you.
We're currently A-plus, huh?
Thank you. We will now go to the next question. And your next question comes from the line of Andrew Baker from Citi. Please go ahead.
All right. Thank you for taking my questions. First is just on the OCG. So 2023 obviously had some one-offs in it. Just curious what you see as sort of a normalized number for OCG in 2023 and whether you have any guidance for sort of how that grows off the normalized base in 2024. Obviously, we have the 2025 number at this point. And then secondly, just on the sustainable growth in 200%, so coming back to that, has there been a fundamental change in the way you look at that? Because, I guess in the past, I've always viewed that as you look at it sort of more as client time. It feels like you're now looking at sort of over a one- to two-year period. So just curious there if, if anything's changed in your thinking on that metric. Thank you.
Yeah. Thank you very much, Andrew. Both questions are for, for Annemiek.
Yeah. Your question on, OCG 2023 and normalization, but also a bit on the expectation towards 2024 OCG. Well, I would say in summary, we would expect OCG to remain broadly stable in 2024 versus 2023, obviously depending on market movements. B ut we would expect that markets, as they were at the January 1st, would have a positive impact on NN Life. We would expect to see continued growth in Insurance Europe and in Japan Life towards their targets. And we would expect that in 2024 to be offset versus a lower contribution from NN Life, reflecting the favorable items that we saw in 2023 and also a bit always the lumpiness of the business.
And we had some large fires at the start of 2024, as well as a lower contribution from NN Re within the segment Other because really in Non-life and NN Re, if you look at 2023, that's where we would see some of the really favorable items in there. And for non-life, that was primarily related to positive experience, to benign weather, especially in the first half of the year, and positive experience variances, mainly also in group income for 2020 for 2023. As I said, you know, normalized the OCG level or a run rate for non-life in 2023 would be roughly EUR 370 million. And on the NN Re element there, we really also have seen positive experience variances, as well as some non-recurring lower-required capital, given that we had some cancellation of contracts there.
So those would be items that you would have to normalize for. And then for 2024, we would expect an OCG on current markets, which is roughly stable, stable versus 2023 on markets where they were at the start of the year. And then the question on sustainable above EUR 200 million, that hasn't changed. We've obviously made quite a step up this year in our capital return policy, which was also very much related to the management actions that we have been taken, the removal of the unit-linked overhang, the longevity transactions that we've done, the optimization of the capital structure within the group. We already flagged in January that we would expect that to lead to an exceptional DPS growth.
T hen if we look at the quality of that solvency ratio with a lower UFR benefit than historically, confidence in the illiquid assets, we've lost over the last one and a half years 15% of revalues on the real estate. And we have a bit more positive outlook on that for 2024, obviously. We're very comfortable with that. And that also gave us the opportunity to, given all the management action, do something additional this year. And now we're back on the capital return policy, also related to the sustainably above 200 that we had before.
Great. Thank you very much.
Thank you. We will now take the next question. Your next question comes from the line of Anthony Yang from Goldman Sachs. Please go ahead.
Hi. Good morning. And thank you for taking my questions. Just coming to slide 10 on the OCG target, just looking at the Netherlands Life, just assuming, just looking at the run-off part of the back book portfolio, could you give guidance how much OCG decline per annum? And that's question one. And then question two is on the strategic asset allocation in NN Life. Could you give an update on that and, what are our assets you're deploying into? Thank you.
Yeah. Thank you very much, Anthony. Let me give first the question on the strategic asset allocation for NN Life to Bernhard Kaufmann. And then, Annemiek will come back on the question of the outlook for NN Life for OCG.
Yeah. Hi, Anthony. So our strategic asset allocation currently is very near to our target asset allocation, and we're very comfortable with the current asset mix. And what we are doing is we continue to optimize our investment portfolio, and we'll do also a review of the strategic asset allocation later this year for NN Life, with potential positive contribution mainly coming then from shifts to private market assets. But that's mainly also within the current bandwidth.
Yes. Thank you, Bernhard. Annemiek on the NN Life OCG plans?
Yeah. On NN Life OCG, the target has remained what it was, huh? It's the EUR 1.15 billion that we had before. If you look at the result that we had last year, we were already close to that. This year was a bit lower. It was entirely driven by market performance. So it's not that a run-off plays a big role in that. If you would look at the SCR, if you would just look at the book, it runs off at around 3%-4% per annum. And basically, we've been able to cover that by continued cost reductions and also by the growth in DC, which we would also expect to be able to continue to do so. And the real increase that we would expect from current year to the EUR 1.15 billion target is really related to market impact.
Thank you. If I just follow up on the SAA, I think that's really helpful. But can I just follow up? Is there any particular asset class that you are investing more in?
Bernhard?
So I mentioned private market assets, which mean private loans, but these are the key asset class that we expect to also increase our exposure to. And green bonds is another area that is very much in line or we are investing in line with our targets around sustainability investments.
Cool. Thank you.
Thank you. We will now go to the next question. And your next question comes from the line of Iain Pearce from Exane BNP Paribas. Please go ahead.
Hi. Good morning. Thanks for taking my questions. The first one was just on the bank. I think you said that you basically expect NIM to be stable this year. Peer guidance has been a bit more cautious on sort of bank normalization earnings. So just wondering why you're confident around NIM being stable, obviously, as, as the interest rates get a bit more competitive. And then on the, buyout deal, could you give us a little bit more detail, A, around the, the deal that you've done, in, in H2? And secondly, on the sort of size of the buyout opportunity, it's EUR 25 billion is the number in the presentation.
That seems to be sort of trending down the more we hear from, from the different companies. Just wondering why that number seems to be heading in a in a sort of towards a smaller direction. Thank you.
Yes. Good morning, Iain. And, let me talk about the, the buyout market. Then, Iain, Annemiek can answer your question on the bank, Iain. Yeah, on the buyout market in detail, so we mentioned the EUR 25 billion. Now, we all know buyouts are lumpy. So this is still what we believe that is, roughly the market. It is possible that not so much the overall number, but maybe the timing is a bit delayed. There is some political discussion on the pension reform. I mean, the pension reform has been implemented, but we don't have a new government yet. And so there is some uncertainty. Could there be some changes on the pension reform? We don't think it will be very big, but there could be some.
Pension funds all submit their plans in 2025 to the regulator, also in terms of, you know, what is the future of the pension fund. So that might mean that also buyout, the bigger chunk of the buyout market will come a bit later in the outer years. Currently, there's a couple of buyouts in the market. We did an attractive one with Metro that still needs to be closed of around EUR 600 million. So far, given what we have seen in the market, you know, as you know, we were aiming for mid- to high-single-digit or high-single-digit IRRs. Going forward, given interest rate developments and, you know, also pricing dynamics, we're aiming for new proposals to be a double-digit return on the buyout market.
So that is the, the expectation, going forward. And that will apply as of, as of this year. On the bank?
Yeah. On the NIM of the bank, we're relatively confident on 2024. Wouldn't rule out indeed that it would be fading down, in 2025. One of the reasons that we're also comfortable there is that we're not seeking for balance sheet growth at the bank. So there's no need to fund, or to be highly aggressive on the savings side.
Perfect. Thank you.
Thank you. We'll now go to the next question. Your next question comes from the line of Ashik Musaddi from Morgan Stanley. Please go ahead.
Thank you. And good morning, David. Good morning, Annemiek. Just a couple of questions I have is, first of all, going back to one of the earlier questions around, potential M&A. Now, how do you see the combination of M&A, buyback, leverage capacity at the moment? I mean, because, I mean, clearly, your buyback commitment is very much visible. But let's say if you were to do M&A of about EUR 1 billion-EUR 2 billion, would you say that you have enough leverage capacity and some holding company cash that should be able to do the M&A without impacting the buyback or any color on that would be helpful or, if you can give some leverage capacity number, etc., that would help.
And the second thing is, I mean, thanks for increasing the guidance for OCG and free cash flow. But could you just remind us what is the gap between the two, EUR 300 million? What is it related to? And by when should this gap reduce, in the coming quarters or years? Thank you.
Yes. Good morning. And thank you, Ashik. Let me answer on the potential M&A. And Annemiek will then come back on the leverage and also on the OCG free cash flow ratio. Well, I think on M&A, as I said, there is clearly flexibility in our balance sheet in terms of our cash and our solvency position and leverage. But that is not new. So it means that we will continue to judge any potential M&A based on very strict strategic and financial criteria. Yeah, the financial criteria, we need to weigh it indeed against share buyback and giving money back to shareholders. You know, we've been very disciplined in the past on M&A, but also on maintaining our share buyback.
So, that is important for us that we also maintain that. But it's fair that we do have potentially financial flexibility on leverage and OCG, Annemiek?
Yeah. On leverage ratio, we touched- up on it earlier on the call as well. We currently have 17.7%. It's well in line with our rating ambition of single A. We're currently actually single A- plus. You know, as I said, if we would be structurally running at above 30%, that would be a bit on the high side. But it also indicates that we would have some room, obviously there, to re-lever. And it also, obviously, in case of M&A, it would also depend on the target. Is it an unlevered target? Is it a levered target? Obviously, you would have to look at the entire combination, and the total financial picture to be able to conclude on that.
Your question on OCG versus free cash flow and the difference, we won't expect that difference to go away. We are growing part of the business, specifically in Europe. So there will always be a bit of a difference between OCG and free cash flow. We would expect them to move kind of in tandem at this point in time. And bear in mind that there are also regulatory reasons why we cannot convert all that OCG into free cash flow. And some of the countries, we have to deal with local GAAP or dividend restrictions. Either it's accounting-driven or it could even be politically driven. Some of the countries, dividends from life insurance companies were banned for a while.
For pension companies, were banned. So that, that element, we would always have in there, given that we're an international company. And that's also one of the reasons why we now do not focus that much on that OCG free cash flow conversion. Also, given that OCG can actually be volatile due to markets, we've decided to give this explicit target on free cash flow.
It's very clear. Thank you. Thank you .
Thank you. We'll now go to your next question. And your next question comes from the line of Farooq Hanif from JP Morgan. Please go ahead.
Hi, everybody. Good morning. I just want to go back on the comments you made about CSM growth. So can you, I mean, can you talk about your confidence around the new business, improving for Japan, particularly? You kind of implied it was 2025, and also Insurance Europe, kind of what your confidence is around that and what kind of growth rates you think you could achieve. That's question one. Question two, going back on NII in the bank, I mean, are you just structurally less sensitive than other banks simply because, you know, you're, you're more of a mortgage business and you and, you know, you're not really, as you say, competing on deposits? You're just more matched. Is that is that a good way to think about NII? Thanks.
Hi. Good morning, Farooq. Let me say a couple of things on, on the underlying growth of, of our business in Japan and in Europe. And then Annemiek can cover the CSM part and the, and the question on the bank. Yeah, I think Japan, you guys know, huh? So there's a business improvement order pending. That order. We expect a muted amount of sales that is also coming through. And that's also what we expect for 2024. If you look at a more structural basis, then clearly the underlying market is there, huh? There's an underserved SME market, which is very underserved, and there's a protection gap. So fundamentally, it's still a very attractive growth market in Japan for us.
But we first need to get the business improvement order behind us. Similar for Europe, underlying there's still a protection need. We have strong distribution channels. So we do believe that we can continue. I mentioned some figures on Europe, but we do believe that we can continue to grow also sustainably in Europe. On CSM growth in the bank, Annemiek?
Yeah. Then how that the story in Japan, how it translates also into CSM. The organic CSM growth was 1.5% in 2024. We do remain optimistic that we can deliver a structural CSM growth in the midterm, but the level has to be seen because what we saw in 2023, with Japan actually basically having a negative organic CSM growth of -2%, we would expect that situation to continue actually also in 2024, until we start really doing new business in Japan. On Insurance Europe, we saw an organic CSM growth. And obviously, there, we are far more confident in the repeating nature of it. We've seen organic growth as David said in almost all of the jurisdictions that we operate in. So on Europe, we are definitely more positive.
And then for the total impact on organic CSM growth, we have to wait and see how Japan develops. Oh, yeah. And on the question on the bank NIM, you know, I think a simple balance sheet helps. Not sure if that would put us in a position to have a different NIM outlook. I think the main reason is really that we're not seeking any balance sheet growth for the next year. And we really want to focus the company also on OCG and on dividend. So there is just more; there's limited funding needs at the bank at this point in time. And that helps.
Thanks. Thanks very much. Thank you.
Thank you. We will now take our final question for today. And your final question comes from the line of Steven Haywoodd from HSBC. Please go ahead.
Good morning. Thank you very much. Just two questions from me. I noticed, in the back of the slides that your, your market move sensitivities on Solvency II have increased, a little bit. Now, obviously, for equity, mortgage spreads, real estate movements, you've got -12 percentage points sensitivities for these sensitivities. Can you explain what's going on here? And is it related to the, more sort of, lined up relationship between the group and NN Life now? And then secondly, on the debt side of things, I think you have about EUR 2.5 billion of, Tier 2 and RT1 capacity under Solvency II rules. But, have you got any, upcoming near-term calls, or refis to do? And what do you consider, you know, the best, sort of debt issuances, the senior versus the Tier 2 versus RT1 at the current market?
Yeah. Good morning, Steven. And thank you for your, for your questions. Bernhard will answer the question on the market sensitivities. And then Annemiek will answer the question on the debt capacity. And then I will close off the call.
Yeah. Hi, Steven. So the solvency ratio sensitivities on group level increased. Even so, asset mix and exposure has not really changed. And the reason is more a technical reason. It's mainly going back to that we have a lower tax recoverability in stress scenarios now, which is mainly linked to a cap that is in Solvency II on how much recoverability of taxes you can use in stress scenarios. And this is only on group level, Life level. This. There's no change in sensitivities. But this does not imply any changes for our strategic asset allocation or investment management.
Yeah. Then on your question, regarding financing, at the beginning of 2023, we actually redeemed EUR 500 million of senior notes. We didn't replace them because there was no financing need. So basically, it increased our flexibility further. We also, in 2023, refinanced an RT1 and a Tier 2, that was facing a first call date in 2024. And we raised EUR 1 billion of Tier 2, thereby already reducing part of the refinancing risk that we have for 2024. If we now look at the 2024, we have two call dates coming up in H1, to get roughly EUR 750 million, split relatively evenly on Tier 1 and on Tier 2. You know, in general, we're comfortable with the leverage position. We're comfortable with the current outstanding debt we have. And we will seek refinancing when we deem appropriate.
Thank you.
Okay. Thank you all very much for your questions, which we obviously appreciate regarding our strong results that we shared today. Worth mentioning that we remain committed to our capital return policy, which includes a progressive dividend and a recurring share buyback of at least EUR 300 million now. Obviously, we're excited to interact with many of you in the coming roadshows, conferences, and investor meetings. Have a good day.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.