Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its Second Half Year twenty twenty Results. The telephone lines will be in listen only mode during the company's presentation. The lines will then be opened for for a question and answer session.
Before handing this conference call over to Mr. David Niebeth, Chief Executive Officer of NN Group, where we first give the following statements on behalf of the company. Today's comments may include forward looking statements, such as statements regarding future developments in NN Group's business, expectations for its future financial performance and any statements not involving a historical fact. Actual results may differ materially from those projected in any forward looking statement. 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 of an offer to buy any security. Good morning, Mr. Kneber. Over to you.
Yes. Thank you, and good morning, everyone, and welcome to our conference call to discuss NN Group's results for the second half of twenty twenty. As always, I am joined today by Delfin Nueda, our Chief Financial Officer and Bernad Kaufmann, our Chief Risk Officer. And rest assured, we are sitting in a very large room at an appropriate distance from each other. I will start off this presentation with the highlights of the second half year results, including the strategic and commercial developments.
Delfin will then talk in more detail about the Solvency position and operating capital generation as well as the financial results of the group. After wrapping up the presentation, I will open up the call for Q and A. Let me start with the financial highlights shown on Slide 3. A lot happened in 2020. The global COVID pandemic affected the lives of all of us.
However, our employees showed exceptional resilience in adapting to remote working, And they continue to provide an uninterrupted service to our customers and support them through these difficult times. In financial terms, the pandemic had a limited direct impact on our operating result of around €50,000,000 Our balance sheet remains strong. The volatile markets and further reduction of interest rates had a positive impact on the stock of capital, which is a solvency ratio and a negative impact on the flow of capital, or in other words, OCG, which amounted to close to €1,000,000,000 in 2020. We saw new sales in Japan and Europe rebound in the second half of twenty twenty, which is testament to how well our brokers and agents in particular have adapted to new digital ways of reaching customers. The operating result for the second half of the year was up more than 9% compared with the same period in 2019.
Strong results at Netherlands Life reflect a higher investment margin as well as lower expenses. In our Non Life business, The lower underwriting results in disability and accident were partly offset by lower claims in property and casualty and the €26,000,000 contribution of VIVA Non Life, which became part of NN Group on the 1st April. The overall combined ratio was 95.7%. Further expense savings were made across the company, allowing us to achieve the cost Savings target of €400,000,000 As expected and as already flagged at the Capital Markets Day last year, Operating capital generation in 2020 was impacted by the exceptional market circumstances and slow interest rates. On top of this, in the second half of twenty twenty, we saw higher claims in our disability portfolio, higher new business strain in Japan as a result of improved sales, as well as the suspension of dividend payments by NN Bank following the recommendation of the ECB.
This was partly compensated by the accelerated shift to higher yielding assets and higher new business contribution from Insurance Europe. Delfin will talk more about the various drivers of operating capital generation later in the presentation. But let me confirm that the OCG of around €1,000,000,000 is very much in line with our expectations, And we are still very much on track to reach our target of €1,500,000,000 of operating capital generation by 2023. The year end solvency ratio is 2 10%, and this already reflects the deduction of the proposed 2020 Final dividend of €1.47 per share. Our strong solvency position allows for resilient capital returns in line with the commitments we have made in our dividend policy.
The 2020 full year dividend per share represents a growth of almost 8% on 2019. And we have also announced today a new share buyback program of €250,000,000 Let's turn to Slide 4. The new strategy that we presented at the Capital Markets Day in June last year is geared to creating long term value for all stakeholders. So in addition to our financial targets, we also measure our performance against non financial indicators Because we believe that if we take good care of our customers, employees and society as a whole, this also allows us to deliver solid long term reserves for shareholders. We continue to provide an excellent customer experience through the challenges of the pandemic, and this is reflected in a broadly stable customer satisfaction score.
I'm particularly proud of our employee engagement, which increased substantially with an overall score of 7.9. We aim to contribute to the transition to a sustainable economy through investing our assets responsibly, And we track this based on the percentage of ESG integrated assets under management, which increased to 74%. And we continue to play a part in supporting the communities in which we live and work through donations and gifts. We are pleased to have received external recognition for our ESG performance by again being included in the Dow Jones Sustainability Indices, both the World and the Europe Index. We announced these targets in June last year, so we are Still at an early stage of the journey to meeting these objectives by 2023.
However, we are working hard to improve our performance in all areas, And we intend to report our progress regularly. Now moving to Slide 5. All of our business units are implementing initiatives supporting our strategy to increase cash flow generation and drive growth in attractive markets. We took advantage of market opportunities in the first half of the year to invest in investment grade bonds, high yield bonds, equity and emerging market debt. We also made additional investments in mortgages, real estate and loans throughout the year, bringing the total investments in higher yielding assets to around €8,000,000,000 in 2020, most of which in Netherlands Life.
The additional returns that these investments generate are already visible in the higher investment margins. At Non Life, we are taking various actions to improve the results of the disability portfolios. We are continuing our drive for efficiency across the organization. Additional measures have been implemented in light of the pandemic. For example, in Japan, we shifted to a more digital branding strategy and restricted new hires to key areas only.
The 2020 result to reflect the contribution of the recent acquisitions of Vivat Non Life as well as the acquired life and pension business in Slovakia and the Czech Republic in 2019. These transactions have delivered better than expected returns, and the integration into NN is progressing well. At the same time, we have committed to regularly assessing all of our individual businesses against our financial and strategic criteria, and we are disciplined in deciding if we are the right owners. Last week, we announced the sale of our business in Bulgaria as we believe this is in the best interest of our local customers, business partners and employees as well as our shareholders. Similarly, we sold our broker business in Turkey in the Q4 of last year.
On the commercial side, we have launched many new products designed to meet customer needs. Let me give you a few examples. We entered the general insurance market in Romania with a new home insurance product. In Japan, we have recently introduced a second round of products that have been adapted to the revised tax regulations in that country. In the second half of the year, NN Bank introduced a new label called Vonu, which offers mortgage solutions for the purchase for improvement of energy efficient homes by linking the mortgage interest rate to the property's energy label.
Given the interest in the 1st months, we are confident that this unique proposition will show a healthy growth in the future. Responsible investment is at the core of the strategy of NN Investment Partner, our asset manager. Investment performance was strong across most funds in 2020, particularly in the sustainable and impact investing strategy. Underlining our belief that this approach is good for both the planet, but also for returns. I'd like to talk more about the commercial momentum on Slide 6.
The COVID-nineteen restrictions throughout 2020 meant developing new and improved ways to reach our customers and supporting brokers and agents with digital tools and online sales processes. It is encouraging to see that the sales both in Europe and Japan Picked up again in the second half of the year and that the value new business also increased compared with the same period in 2019 and the first half of twenty twenty. The mortgage markets in the Netherlands remained strong throughout 2020, and NN Bank originated a record level of mortgages, passing the €8,000,000,000 mark for the first time. The majority of these mortgages are transferred to the investment portfolios of our insurance companies and to the 3rd party mortgage fund offered by NNIP. Our asset manager saw strong inflows of new assets, Bringing total assets under management to €300,000,000,000 at the end of 2020.
Performance across the different strategies was very strong. The over €10,000,000,000 of third party inflows was mainly in the fixed income and emerging market debt strategy. Turning now to Slide 7. At our Capital Markets Day, we explained that a strong balance sheet is one of our priorities as it allows for resilient and growing long term capital generation. We target operating capital generation of €1,500,000,000 in 2023 as well as mid single digit annual growth of operating capital generation over time.
This is the basis for delivering on our dividend policy, which consists of a progressive dividend per share and an annual share buyback of at least €250,000,000 The uncertainty caused by the pandemic led various regulators to request companies to apply prudency around capital returns. We followed this advice and limited dividend flows from our subsidiaries to the holding during 2020. At group level, we were able to fully resume our dividend payments to shareholders and the share buyback program in August last year. Today, we are announcing a proposed 2020 final dividend of €1.47 per share, which will be tabled at our Annual General Meeting on the 20th May. We have also announced a new 250,000,000 share buyback program.
We have made a balanced decision on capital returns, taking several inputs into consideration. On the one hand, we have observed unprecedented market volatility in 2020 as well as regulatory caution with respect to capital returns. On the other hand, our balance sheet and capital generation is strong and resilient. All in all, our commitment to grow long term capital generation over time in combination with the capital return announcements made today underpin our attractive investment proposition. And with that, I will pass you over to Delfin.
Thank you, David, and good morning, everyone. Let me start, as usual, with the movement in NN Group's solvency ratio in the second half of twenty twenty. Our solvency ratio remains strong at 2 10% at the end of 2020 versus to 21% at the 30th June. There are quite a number of items that have impacted the ratio, so let me take you through them. Firstly, operating capital generation added 7 percentage points to the ratio.
I will talk more about the drivers of operating capital generation later. On balance, market movements had a neutral effect on the ratio, mainly reflecting the positive impact of higher equity valuation, offset by the negative impact of lower interest rates. The category other includes model and assumption changes And the reversal of the corporate tax rate change in the Netherlands as well as the additional capital requirement due to the move to higher yielding assets. Capital flows to shareholders reduced the ratio by 6 percentage points and represents the deduction of the proposed 2020 final dividend as well as the remaining part of the share buyback program that we resumed in August. Then we have included the bank in the calculation of the group solvency ratio at the end of 2020, in line with the new requirements of the Dutch Central Bank.
This had a negative impact to the ratio of around 9 percentage points. Our solvency ratio before capital flows and inclusion Fenen Bank actually increased to 225%. Let's now turn to Slide The 10, which shows the movement of the ratio over the full year. The solvency ratio was 2 And 24% at the start of 2020. Looking at the movements during the year, operating capital generation contributed 14 percentage points to the ratio.
This is lower than we expected at the start of the year, But is in line with the guidance that we gave at the Capital Markets Day and reflects the lower interest rates and the impact of the pandemic. We experienced extreme volatility in the markets, especially in the 1st 6 months of the year. But as we've seen before, The longer term market impact is relatively small, driven by our conservative asset mix. Market variances reduced the ratio by 4 percentage points in 2020, mainly due to the negative impact from credit spread movements, partly compensated by higher equity valuations. The category other includes various items, The main ones being the longevity transactions, the reversal of the government's planned corporate tax rate reduction in the Netherlands and the lowering of the UFR.
On balance, all these items had a positive impact on the ratio of 8 percentage points. Capital flows to shareholders of in total €1,400,000,000 reduced the ratio by 17 percentage points. We also had a couple of non recurrent events. One of them, the acquisition of Vivat Non Life and the other, The inclusion of NN Bank in the group solvency calculations. Together, this reduced the ratio by 15 percentage points.
Altogether, these movements brought the ratio to 210% at the end of 2020. Let's now discuss the operating capital generation in more detail on Slide 11. Total operating capital generation in the second half of twenty twenty amounted to €450,000,000 compared with EUR 653,000,000 in the same period of 2019. In the table on this slide, you can see the split by segment. At our Capital Markets Day, I already guided for a dip in operating capital generation in 2020 as a result of the exceptional market There was a net negative impact from the UFR drag and risk margin release due to the lower interest rates.
This was partly compensated by the higher investment returns generated from the shift to higher yielding assets. You can also see this in the breakdown by source that we have included in the appendix on Slide 20. Other items affecting operating capital generation in 2020 were the unfavorable developments in the non life disability and accident portfolio as well as the new business strain following higher sales in Japan. In addition, there was no contribution from the bank last year as it suspended its dividend payments on the recommendation of the regulator. On the other hand, operating capital generation was positively impacted by a higher new business contribution in Insurance Europe.
The next slide shows the movement in the cash capital position at the holding, Which was €1,200,000,000 at the end of December 2020 compared with €1,300,000,000 at the end of June And therefore, remains comfortably within our target range of €500,000,000 to €1,500,000,000 Total remittances received from subsidiaries amounted to €592,000,000 in the second half of twenty twenty, bringing free cash flow to €613,000,000 As David mentioned earlier, We followed the advice of regulators in the light of the uncertainty caused by the pandemic and limited The payment of dividends by some subsidiaries, including NN Bank. We intend to pay any suspended dividends in the future as and when the situation allows. As usual, details of all the remittances upstream by each segment can be found in the appendix of this presentation. The main cash outflow in the second half The year was the payment of the 2020 interim dividend in September, which included the catch up of the suspended 2019 final dividend as well as the shares repurchased under the buyback program. During the full year, we received €1,300,000,000 of remittances from subsidiaries and returned €1,000,000,000 to shareholders.
Besides these capital flows to shareholders, we also had other cash outflows during 2020 for the acquisition of Vibat Non Life and for the redemption of €300,000,000 of senior debt. Moving on to the next slide, I will take you through the IFRS financial results of the group. Starting on the left, NN Group's operating result Increased to €963,000,000 from €881,000,000 in the second half of twenty nineteen, which included €54,000,000 of nonrecurring benefits, while the second half of twenty twenty includes just €8,000,000 of nonrecurring benefits, As well as an estimated negative impact of COVID-nineteen of around €23,000,000 Excluding all these items, the increase of the operating result was mainly driven by the shift to higher yielding assets and higher dividends in the investment margin of Netherlands Life. On the right hand side, you can see that the net result for the second half of twenty twenty was €1,300,000,000 The increase compared with the second half of twenty nineteen is explained By the higher operating result as well as by a higher contribution from non operating items, including a €100,000,000 provision released following the completion of a tax audit of a legacy entity in Australia. I will now take you through the operating performance of the individual segments on Slide 14.
Starting as usual with Netherlands Life, which reported an operating result of €500,000,000 versus €397,000,000 in the second half of twenty nineteen. I already mentioned The higher investment margin as a result of the shift to higher yielding assets. On top of that, the life company managed to reduce its expenses further with the aim of lowering its cost base in line with the portfolio runoff. The result of Netherlands Non Life decreased to €103,000,000 Due to lower underwriting result in disability and accident, where we saw higher claims in the group income portfolio As well as the impact of the reduction of the discount rate used to calculate D and A technical provisions. On the other hand, there were lower claims in the fire and motor portfolios and inclusion of VBAN Non Life contributed €26,000,000 The combined ratio was 95.7 percent for the second half of twenty twenty.
Insurance Europe's operating result increased to €152,000,000 reflecting a higher investment margin in Belgium as well as higher pension fees in Romania. The operating result of Japan Life was €102,000,000 which is an increase of 6% excluding currency effects. This was driven by lower surrenders, reflecting increased persistency as well as lower expenses. Asset Management's operating result decreased to €78,000,000 mainly due to lower fees As the asset mix move more to lower margin strategies as well as ongoing fee pressure. The operating result of Banking decreased to €74,000,000 as the comparative period in 2019, including EUR 26,000,000 of non recurring premiums on mortgage sales to NNIP Dutch Residential Mortgage Fund.
On the other hand, the interest result was higher, thanks to lower funding cost as well as higher penalty interest As customers continue to refinance their loans, taking advantage of the loan mortgage rates. Finally, The operating result of the segment Other was minus €47,000,000 mainly reflecting The higher operating result of the reinsurance business, which included an €8,000,000 release of a claims reserve related to the non life disability portfolio. As David already indicated, the impact of COVID-nineteen on NN Group's operating Results has been limited with a full year negative impact of around €50,000,000 The last thing I want to talk about is cost reductions, which are shown in the next slide. At the Capital Markets Day in 2017, we announced our objective to reduce the 2016 cost base of the business units in the scope of the Delta Lotto integration by €350,000,000 by the end of 2020. And we later increased the target to €400,000,000 With additional expense savings of €23,000,000 in the second half of twenty twenty, we have now achieved total cost reductions of €404,000,000 just ahead of our target.
This does not mean the end of expense reductions. On the contrary, We will continue to focus on increasing efficiency throughout the organization, and this is reflected in the segment cost guidance that we have given. I will now pass you back to David for the wrap up.
Thank you, Delfin. Amid a global pandemic, our employees, brokers and agents showed incredibly adaptability to the new reality of remote working and online contact. And at the same time, have continued to support our customers with excellent products and services, which is reflected in the Ongoing commercial momentum shown by our businesses. NN Group has also shown great resilience during a turbulent year. Our balance sheet remains strong and our financial performance has held up well.
This allows us to deliver attractive and growing capital returns to our shareholders. Today, we announced a proposed final dividend of €1.47 per share as well as a new €250,000,000 share buyback program. The new strategy for NN Group that we presented in June is geared to creating long term value for all our stakeholders. All in all, we have made a promising start with the implementation of the strategy and have a solid foundation for delivering on both our financial and non financial targets. I will now hand you back to the operator to open up the call for your questions.
Thank you, Mr. Kneever. Ladies and gentlemen, we will now start the question and answer session. And the first question is from Mr. Benoit Petrarque, Kepler Cheuvreux.
Go ahead please.
Yes, good morning all. So two questions on my side. The first one is on the UFR drag going into 2021. So you had a kind of €130,000,000 deterioration of the UFR drag between H1 and H2. Obviously, you use a monthly reference for interest rate to calculate this UFR drug in H2.
And Going into 2021 with the increase of interest rate roughly 30 bps up versus year end, How much kind of will be the drag on the new basis? So is the EUR 560,000,000 definitely lower starting into going into 2021. Could you help us to quantify this UFR drug into 2021? That will be extremely useful. And then the second one is on the investment spreads again on OCG.
Clearly, 2020 has been a good year in terms of for the on the investment spread side with various spreads, especially in H1. And again, looking into 2021, do you expect a bit of spread decrease, let's use the levels we've seen in 2020. I think the corporate spreads are relatively low as we speak, and I was wondering if there is a small negative effect to be expected there. Thank you.
Yes. Good morning, Ed Buenav. Let me give the first question on UFR direct to Delfin. And Bernard will cover the question on investment spread in OCG.
Yes. Thank you very much, Benoit. Indeed, the changes in interest rate has quite a significant impact on the UFR drag. And I mean, we'll see the 30 basis points that we have seen already over the year, That will give you approximately €140,000,000 increase on the OCG. But of course, Keep in mind that interest rates are all the time moving in one direction or another, and it's always good to keep more of a medium term The trend, but indeed, setters paribus, the increase of the 30 basis points, would be around EUR 100 and €50,000,000 impact on non funds, on non CG.
Benoit, and on your question on investment spread and how this comes through in OCG, Our investments in 2020, the €8,700,000,000 in higher yielding assets David referred to, as we have Done these investments over the year, we expect the full impact to come become visible now in 2021, And we assume this to be an uplift of €170,000,000 in 2021. You're right. The risk premiums are moving, but the impact should be in this order of magnitude in 2021.
Okay. So I think there's another EUR 50,000,000 coming in on the OCG from the reinvestment. But on the stock of investment, you do not see any Specific pressure from the current low spread level. That's what you say?
Yes, right.
Yes, okay. Cool. Thank you very much.
The next question is from Ms. Phelan Wang, Morgan Stanley. Go ahead, please.
Hi. Thank you. I have two questions. Sorry to come back to the USR drag. Just so I am clear, in 2020, you reported of the whole year, you reported about 1,000,000,000 UFR drag.
But presumably, in normal year, if I'm looking at a normalized UFR drag in your sensitivity, you did actually that every 15 bps of drops of UFR would have about 300,000,000 Drag on own fund, is that KRW 300,000,000, let's say, if the interest rate remains flat, that KRW 300,000,000 would be a A drag would be a normalized number, right? And 2020, you have an extra about 700,000,000, mainly because the interest rate dropped by maybe 40 bps over the whole year. If interest rates actually goes up from here, which already actually went up from here, Now we would see some positive impact on the UFR drag on top of that 300,000,000 normalized. Is that the right way to understand it? And then secondly is on your Non Life.
I spoke to IR earlier today. So I understand the some of the so called lower capital generation on the loan life is mainly because You basically canceled the internal reinsurance, which basically which would You basically canceled out some of the pass through to external reinsurance. So you essentially retained a bit more Business with Yourself. Is that the plan going forward? And presumably, that will have positive OCG Contribution in the Future.
Is that fair? Thank you.
Thank you, Fulin. Let me give these Two questions
to Delfin.
Yes. Thank you very much, Fulin, for your question. Maybe because there is a lot of details here, it will be helpful that you call to Investor Relations to get into the details with a bit more details. But indeed, the sensitivity of the UFR drug to the changes in interest rates is Quite significant. And from I mean, the sensitivity that we gave you on the increase of 30 basis Points increasing by approximately €150,000,000 This is based on the sensitivities on the OCG that we have You know, published and that will be an increase from, let's say, a decrease in the UFR drug From what was the situation at the end of 2020.
In any event, I think it's fair to say that Even with the volatility in these interest rates, I think that is very important to highlight because this is always going to change from one month to another That we are comfortable with the target that we have set in terms of the OCG for 2023, but also that we expect Quite a rebound from 2020 that is for different factors that we could get into A very depressed level, but we see OCG improving from mainly near every segment into next year's and towards 2023.
Yes. And then the second question on capital generation for Non Life related to the internal reinsurance. Delfin?
Yes. Non life, as you have seen, has had a good result in terms operating result, but in terms of operating capital generation has been quite depressed. And one of the factors there for the full year, The reinsurance contract, the stop loss reinsurance contract for the individual disability, which was a 3 years contract, Terminated came to an end at the end of 2020. As a result, the solvency See capital requirement, the capital requirement increased and increased substantially. So that was €65,000,000 That is a nonrecurrent item that happened in 2020 due to the increase in the solvency capital requirement.
Thank you.
The next Question is from Mr. William Hawkins, KBW. Go ahead please.
Hi, guys. Thank you very much. I apologize. I think we all know there's more So NN and the ultimate forward rates, but my first question is on that. Delfin, so far your answers have been about sensitivity The changes in interest rates year to date, can I just come back if nothing had changed, I think I'm right?
Ultimately, the UFR is something that will amortize to 0 at Some point in the future. So if there weren't any change in the markets, what would this 978 be in 2021 2022? I'm just trying to get a feel for how amyloid is down. And I'm assuming I'm right one day it would be Zynrope. And adjunct to that, Can you just remind us what is the benefit of the UFR to your Solvency II ratio?
You wouldn't get any of these questions if the UFR didn't exist, but maybe that's another point. Second question please. Can you just remind us about how you're balancing capital distribution with M and A plans? I know you can't be too specific on M and A plans, but there is a worry given precedence for NN You say good stuff about buybacks and then they get suspended because you need to raise capital to do deals.
There's evidence
for that in the past. So bluntly speaking, I'm just trying to gauge the risk of suspending buybacks for M and A. And to the extent that there I suppose a more precise question from that is, can you remind us what your internal resources would be for any transactions before it started becoming vulnerable for the buyback. Thank you. Yes.
Thank you, William. Let me start with the question on M and A plans and what you call capital distribution. And then Delfin will come back on the UFR question and the UFR benefit to the ratio. Well, as you know, in general, all of our plans are based on organic growth and including the targets that we have set. And We have very strict criteria, strategic and financial criteria, before we would embark on M and A.
If you look at our capital return, we have a very clear capital return policy, and we're very committed to this. We're very serious around this. And this is around a commitment to return to shareholders, but obviously also to keep long term stable returns. Now this policy is around progressive dividend and around an annual recurring share buyback of minimum €250,000,000 And additional capital also to return unless we see value creating opportunities. Now if you we take this commitment serious, Like we have shown in 2020, I think in 2020, we had very challenging market circumstances.
There was the Vivad acquisition. Of course, there was the senior debt of €300,000,000 that was not refinanced, but still we obviously kept the €250,000,000 Share buyback ongoing. So I think that also shows that we take our commitments very, very serious. Yes. In terms of internal resources for transactions, yes, we're not going to speculate on this, but Clearly, we have a strong balance sheet.
We have flexibility in there. But at the end of the day, it is This is really about that on the one hand, we have our organic growth plans and any potential M and A would really have to meet both financial and strategic criteria before we would embark on that. Delfin, on the UFR.
Yes, Bill, thanks Thank you for your question. The UFR, I mean, 1st January, it decreased by 15 basis points. That in itself Has a positive impact of approximately €25,000,000 on our operating capital generation. The benefit of the UFR changes, of course, with the level of interest rates. It was certainly higher at year end That it is now based on higher interest rates.
The important thing is to know that this decrease is expected to run down In 10, 15 years, so you're absolutely right. After year 15, there is basically not more Benefit coming from the UFR, but equally important means that there is no UFR drag in Our operating capital generation and the capital generation, therefore, will keep be increasing gradually over that same period of time.
Thank you, guys. That's helpful.
The next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead please.
Hi, everybody. Thank you very much. Just going back on our favorite question on OCG. So when I add up some of the numbers that you've told us so far, I think you said 30 bps is €140,000,000 on the UFR drag. I think you said €170,000,000 on reinvestment in high risk assets.
And then of course, you had some one offs like the SCR impact of the internal reassurance in terms of the flow. I mean, when I add those numbers up, you're getting to quite a considerably higher number than the €1,000,000,000 guidance that you already gave. So is that sounding about right? I mean, I realize that there's going to be volatility, but getting to roughly $1,300,000,000 does that sound you to be the achievable target based on the numbers you've just told us and how much more re risking? I mean, are we going to see a similar sort of level every year?
So generally coming back on those questions. And then Secondly, going back to Will's question on M and A, I mean, being more specific, even more, I mean, Clearly, you've been linked in the press with targets in Eastern Europe. And I just kind of wondered about your ambition there or your ability to integrate given that you've just done a deal as you comment further? Thank you.
Yes. Good morning, Farooq. Let me just say a couple of things on the OCG first and then give it to Delfin. And then after that, I'll come back on So on OCG, Hedi, the number we came out with of close to €1,000,000,000 is very much in line with our own internal Expectation and as Delfin also said, we reconfirm our targets of €1,500,000,000 that we set in the summer. And just as a reminder, where is this increase do we expect to come from?
It's obviously the UFR and the portfolio development, A positive effect from both the lower UFR, the annual reduction as well as the runoff of the portfolio. So that's one element. The other element indeed is the shift to higher yielding assets at €170,000,000 that was mentioned is on a full year basis. Then improvements in non life, both underwriting and expenses. And then, of course, there is the inclusion of the bank, which didn't have a free cash flow Or OCG in 2020.
So that is another driver. And then, of course, new business. So new business Europe continuing to sell Profitable new business. So these are all important drivers which make us confirm the €1,500,000,000 target of OCG. So let me give it also to Delfin.
Yes. There is Not much more to add to this. Indeed, I mean, just maybe to complement, the investments, The move to higher yielding assets actually had estimated around €120,000,000 positive impact on the OCG in 2020. The €170,000,000 as David has explained is the annualized level for that. So when you look at As you know, 2021 compared to 2020, you can already expect another €50,000,000 or so Additional investment margin and particularly Non Life was really depressed in terms of OCG in 2020 For many circumstances, the impact on disability and accident actually on a Solvency II basis Come a bit higher than under IFRS, but more importantly, the €65,000,000 increase in capital requirement that It's been mentioned and it will come.
So the cost savings for Non Life coming from the acquisition of BVAT Non life, they are still to come through together with improvement on underwriting. So there is quite an upside for The non life contribution to operating capital generation. In addition, I think but I think these are the main elements. So That make us confident and that was, of course, if on top of that, you see some increase in interest rates that will make that Journey, as you know, easier, but we're not counting on that to remain.
Yes. Thank you, Delfin. And then on M and A and ability to integrate A business if we've just done a deal. Just to set the stage, I mean, we've done a small bolt on acquisition in Czech In Slovakia, with Aegon, that has progressing well. It's actually we had quite some benefits already From the deal, we just started also the integration of FIFA, which as you might have seen also is already adding to our results.
So these two items, the integration is actually progressing well. Is that by itself A fact or no. I mean, the non life company, obviously, in the Netherlands is actively integrating The business and then for Czech and Slovakia, there's still some ongoing integration activities on the back of the Aegon deal. In general, I wouldn't say that that is now an issue. What is, at the end of the day, very important is our own financial criteria and Strategic criteria that are determining whether we would enter into M and A.
Please keep in mind that really our base case is organic growth. So that is our base And you've also seen from the deals, I think, that we've done in the past that we would only do that if they make strategically sense and when we can make an attractive return. By the way, M and A also includes divestments. By the way, M and A also includes divestments, and we're actively looking at our portfolio. You might have seen that also we have divested Our broker business in Turkey and recently our Bulgarian Life and Pension business as well.
Okay. Thank you very much.
The next question is from Mr. Michael Hochner, Berenberg. Go ahead please.
Thank you very much. And all the other questions could be answered, Gerard. Two things. One thing is there is a little question. The negative You said that half on the year, but in the second half, the mortgage origination was never, unless I read the rules.
Sorry, Michael, we have trouble hearing you. Can you maybe speak up a bit? Yes, it's a bit better.
Sorry about that. So, Lucas and Liao are in the second half, I think, Ami Deschaffer, from Intermediation. So, Bari, you know what's happening there. And then
Sorry, Michael. We cannot hear you well. Maybe it's best that you dial in again To try and reconnect, and we'll make sure we'll get your question, but we can't hear you right now.
The next question is from Mr. Ashik Misali, JPMorgan. Go ahead, please.
Yes. Thank you, and hello, David. Just a couple of questions I have is, First of all, how do I think about dividend? Now clearly, you have grown the dividend at 8% this year. So does that mean that 8% is more or less what you were expecting when you gave the guidance of mid single digit Plus the lower share count related growth, is that something we can think about as a normal dividend growth that we should be expecting in a normal market situation?
So that's the first question. The second question is on M and A. Now clearly, you've been linked with Aviva Poland, which I think is an Which would make strategic and financial sense to you. But how do we think about your funding capacity for that? I mean, one thing is that your SDR has gone up, your own funds has gone up, so a lot of leverage capacity has opened up for you at the moment.
So how do we think about funding capacity? How much excess capital you have at the moment you believe? How much debt capacity you have? Would you consider doing raising equity if you need to do that M and A? Or you would mainly do it in house and you don't see much issues with that.
And given that it would be a reasonable sized Acquisition, do you have any sort of hurdles in terms of ROE, etcetera? What you would want to achieve with that With any such big size acquisition. And just one more question on the Japan recovery. I mean, how much I mean, Japan's recovery has been pretty strong this year after a soggy 2019. So how do we think about that going forward?
Do you think that we are in an end right now or there is still some lot of uncertainties on that? Thank you.
Yes. Thank you, Ashik. Let me give the first questions to Delfin, and then I'll come back on Japan.
Yes. Hi, Yacik. Thank you for your questions. Yes, we indicated that was a midterm guidance of Growing OCG and as a consequence, free cash flows mid single digit over time. And we also indicated that, Of course, because of the share buyback, the growth of dividends per share is obviously always above that level.
So I don't think there was anything unusual on the ordinary dividend paid in 2020 as full dividend. For your second question, I think the way I will answer it is in terms of our financial flexibility in general. I mean, 2 10 percent solvency ratio has also to be understood in combination with the Sensitivities to market shocks that we publish every 6 months and you have it as part of the press release within the appendix To say that we are very comfortable with the level of solvency and that we can absorb some deviations. And we have also Very well proved it in an environment of decreasing interest rates. In terms of our tiering capacity, if you like, we have the ability of Increase up to EUR1.3 billion in restricted Tier 1.
And we have depend how you look at Tier 2, If you look at Tier 2 and Tier 3 together, it's approximately €1,000,000,000 at year end. If you were to max the Tier 3 capacity, then it's Another €500,000,000 of Tier 2 capacity. In addition to that, our leverage ratio decreased slightly this At the end of year end versus June, as you know, we reduced the level of senior debt by EUR 300,000,000 In June earlier this year, so I think there is no doubt that there is financial capacity to continue with our regular capital distribution to shareholders as part of our plan And if necessarily, to take advantage of opportunities if they present themselves.
Yes. Thank you, Delfin. Then on Japan, indeed, Ashik, I think we've seen a strong recovery of sales in the 2nd half VNB grew to €46,000,000 versus €18,000,000 in 2019. Now granted, of course, 2019 was a very low level because the tax reform had just come out. But the good news is that we've always said that we believe that we can get the sales on a much stronger path also with the new tax rules, And we're starting to see this coming through.
So the EUR 46,000,000 is a first step. We're also introducing or we have introduced in February So more products in the COLI space that we're actually optimistic on that, that will further support the growth of Of our Japanese sales. So we feel we're still on track to deliver the €150,000,000 of EMB that we've set as a target for 2023. And I wouldn't say, I mean, there's clearly uncertainties in the world everywhere, but I wouldn't say that Japan, from that point of view, there's more uncertainty in Japan than in other markets. I would So it's comparable.
The good news is that we're well on track, and we see actually our sales channels being very active. Typically, brokers already do well. Banks are starting to pick up as well. Banks have been, across the globe, less active in insurance sales. But actually, November December, we've also seen starting to see a pickup of bank sales.
So that further supports, let's say, the trajectory that we're on in Japan.
That's very clear. Thank you, David. Thanks, Helveen.
The next question is from Mr. Stephen Haywood, HSBC. Go ahead, please.
Thank you very much. Looking at your operating cash generation, You had a negative 42,000,000 experience variance in there. Could you describe where this came from? And also, Did you take any mortality assumption changes or longevity assumption changes in the Netherlands last year Because of the improved, not a few tables. And then on the NN RE 13,000,000 dividend, Can you just tell me where that came from, which business unit?
Thank you.
Yes, Stephen, thank you. Delfin?
Yes. Thanks, Stephen. In terms of the negative experience variance in Netherlands Life, I think you have to take it It's always a volatile item. Actually, for the full year, because there were some, You like positive experiences in the first half, and this has been negative. But these are driven of Different factors there, some related to lapses and some other Small considerations there.
But overall, you should expect this to be around 0. And as I said, for the full year for For Netherlands Life, it was, I think, a minus €3,000,000 or something very, very limited. We had good technical result, and it was on the actual in 2020, We have some positive longevity results within the technical margin. However, we did not Really changed our longevity assumptions because of the new Mortality table that came in the Netherlands. So we're looking carefully into the no doubt A recent experience of increased mortality, we are a bit cautious, but I must say that there could be some upside on reviewing this within 2021.
In terms of the dividend from NN Re, I mentioned before the negative that there was in the capital requirement from Non Life Because of the cancellation of the reinsurance contract for the stop loss reinsurance contract for individual disability, Here you see the other side of the same coin as 75% of that reinsurance contract was reinsured with NNRE. NNRE has also got a release of their own capital requirement. In addition, Other parts of their business performed relatively well, and that explains the somewhat elevated dividend from NN Re
in the second half. Perfect. Thank you, Kevin.
The next Question is from Mr. Colm Kelly, UBS. Go ahead please, sir.
Yes. Thanks a lot. Thanks, David and Thank you for taking my questions. The first one is on the move to higher yielding assets. Clearly, this is key to the OCG target.
In the past, I think NN has predominantly done this through both residential mortgages and loans. But Given the size of the U. S. Ore drag now, does it require an even more accelerated strategy around investing in illiquid assets Beyond the typical illiquid assets that you have historically invested in or rather does it require more branching out into So there are liquid credits where maybe NN doesn't have a strong track record in. Related to that, does the regulator have full sight Into the types of liquid credit NN is looking to move into over the course of the 2023 plan?
And are they comfortable with that? And then my last question is related to M and A and thanks for your comments on financial capacity. My question is more related to the disposal strategy. You mentioned the Sale of the life and pensions business in Bulgaria. I appreciate it is small, but can you provide more detail on The rationale behind the sale of that business, was it a case of market positioning, I.
E, a lack of scale? Was it due to lack of market or business growth or was it due to insufficient returns on capital? It's in more detail And that would be appreciated. Thanks.
Sure. So let me start on the question on Bulgaria, and then Bernard can About the experience around high yielding assets. Yes, so the thinking around Bulgaria. Well, as you know, Bulgaria is a relatively Small country with 7,000,000 people. And also we have a relatively small business there.
The life business is small and then We have a pension position. So the combination of a relatively small market and a relatively small The business unit was the reason why we decided to divest. It was not related to a commitment a broader commitment on the region, but specifically on Bulgaria itself. The business itself, it was profitable in terms of new business margin and returns. It made 3,000,000 Profit, so from that point of view, it wasn't so it wasn't insufficient return on capital, but it was really the size and To be honest, also the potential upside or lack of upside that we saw in that market to get to a sufficient scale.
I think we've got a good price for it. €77,700,000 I think is a good value for that. So that's also helpful. And to be honest, I think it's also important, KBC has plans in Bulgaria and they I think it's therefore also they are also a Better owner that they can combine with their business, they're also a better owner for this business than we are. So those were some of the Rationales behind the sale of Bulgaria.
Then on higher yielding assets, Bernard?
Yes, Con, to give you some background on the strategy behind higher yielding assets. In 2020, We invested an additional €3,000,000,000 in mortgages. So that's also going forward our part of our strategy to build up our liquid But we also invested in EUR 2,500,000,000 corporate bonds, emerging market debt and around EUR 2,000,000,000 in equities, real So we are really looking into a broader investment universe in the strategy. We have planned as part of our strategy until 2023 to step up OCG contribution by €200,000,000 and like Delfin also pointed to, the assumption is that Given the UFR drag that we are not really have to change here our strategy. But As we are so well on track and we also see flexibility going forward, we are considering in a controlled way Also to look into the next years.
As this is a risk manager speaking, you can be sure that we do everything within our risk bearing And also, by the way, reviewing our investment universe is part of our day to day business. So again, look, we are here very well on track.
I'm sorry, just to follow-up on the regulatory side of the boat. Look, as you say, it is branching out into other type of liquids increasingly going forward than in the past. That is within your risk appetite intolerance, so I assume from a DNB perspective, are comfortable that with the path you're taking around the asset portfolio?
Yes, yes. So in all of the approaches or also discussions. This has never been a topic.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead please, sir.
Yes. Good morning, everybody. One follow-up question. I think the question is not too dissimilar from what Roop was trying to get at, but I'm just going to ask A little bit differently. For Life, your OCG in H2 was 266, if I just multiply that by 2 And I add the €140,000,000 UFR improvement driven by rates and I add the €25,000,000 Due to the 15 bps UFR reduction, I already get to €700,000,000 And I guess I have to add something related to the negative experience that we Just talked about and there's still some residual rerisking benefits to come on top of that level.
Could you just quantify those for me, please? And maybe a small clarification question, but the €140,000,000 €150,000,000 from UFR drag that you mentioned, I presume that includes Also the VA still being at a lower average according to current levels, H1 this year versus H2 last year, because I That was one of the key things that was a bit of a surprise in the UFR drug move in H2 in your reporting today. So that's question 1. And then secondly, more generically speaking, the sensitivities you provided are more for parallel modes. I was just wondering, if we were assuming steepening, I appreciate that you, in your sensitivities, have disclosed that for your Solvency II ratio itself, that's a negative.
So should we also assume that if there would be steepening that your OCG generation would be would basically get Stronger relative to your sensitivities as well. And lastly, the SCR contribution in H2 versus H1 was Strong. I was just wondering if in any way that could be driven by the new pension agreement where DB basically is now, I think, entirely That will not be renewed. So is that SCR contribution going to be structurally higher versus last year's level, so to speak? Thank you.
Yes. Thank you, Robin. Let me get the first question on life OCG to Delfin, and then Bernard will cover the sensitivities, and I will first come back on the pension reform in broad terms. So let's first go to Delfin.
Yes. Thank you, Robin. On the operating capital generation with about Life, Indeed, you should not take the second half as a normal level. So I think it will be Better to consider that the full year as this extraordinary effect on the life Experience is level out. The shift to higher yielding assets for 2021 And for Netherlands Life, it could easily be €50,000,000 higher than it is for 2020.
And we also have the €25,000,000 additional coming from the Decrease of the UFR, the 15 basis points already happened in January. So that together is already €75,000,000 Of course, and I think it's always dangerous to provide this guidance in relation to the impact of the change of the Interest rates on the UFR, because indeed, there are many factors affecting there, including as well The level of the volatility adjustment, but no doubt as the volatility adjustment decrease, Of course, the spread on the investment assets also tends to improve. So overall, we have a target for life of €900,000,000 for 2023, and we feel comfortable with that. The second question about sensitivities, I think, is better that Bernard takes it.
Yes, Robin. So the steepening is so we are Duration long, meaning the steepening of the curve is impacting our own funds Herna, as pointed out negatively, but that is mainly because of the Difference between then the discounting of our liabilities versus the investments on the long end And steepening then also leads exactly to this reduction of the UFR track over time. It depends a little bit on where it is. If it's the 20 to 30 year bucket, so a lot of our liabilities are, it will be higher than if it's a 30 to 40 Your bucket, and I don't have a number for it, but conceptually, This is moving in the direction that you suggested.
Okay. And then the question on the pension reform Related to the SCR, now the pension reform, and I know there's a lot in the media and there's a lot of talk about, but that The implementation of that is expected in, well, I guess, 2026, maybe 2025, but probably more 'twenty six. The pension reform by itself confirms, of course, that defined benefit is ceasing to exist and that everything will move to D. C. But in terms of practically what has been happening in the Life business, that was already the case.
We did very limited defined benefits business. Every now and then, we still do some renewals, but that's typically only in the context of to buy the employer some time To work it out either with his workers' council or union to agree on a new pension scheme. So Basically, we already see a slow runoff of the defined benefit book and a but all the new business It's pretty much already in D. C. Actually, we had a very good D.
C. Renewal season in terms of new business and renewal. Our market share is well, we don't have the final numbers yet though because it's early in the year, but we do estimate that we will have again at least a 40 Percent market share, so we're doing well in the DC space and the overall DC assets is now growing to 24,600,000,000. So to make a long story short, the transition from DB to DC is ongoing and will continue to go on. But keep in mind that the DB business, most companies leave their DB book paid up.
So therefore, it's really the new accruals that go to D. C, but The runoff of the DB book by itself goes slower, basically with the retirement of individual employees.
Okay. Thanks, guys.
There are no further questions, Mr. Kuehbeh.
Okay. All right. Then we will then start wrapping up, and we will, of course, circle back to the one person We lost unfortunately on the call. So thank you very much. Thank you for all your questions.
And before we close the call, let me just wrap up by saying that The strong financial performance and the capital position reported by NN Group today allows us to deliver on our commitment to attractive capital returns for shareholders and long term value creation for all of our stakeholders. Have a good day.