The conference is now being recorded. Good day, ladies and gentlemen. Before handing this conference call over to Mr. Lard Friese, CEO of NN Group, let me first give the following statement 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 statement not involving historical facts. Actual results may differ materially from those projected in any forward-looking statements. Any forward-looking statements speak only as of the date they are made, 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 securities. Good afternoon, Mr. Friese. Over to you.
Yes. Thank you, Brigitte. Good afternoon, everyone, and thank you for dialing in on this call. My name is Lard Friese. I'm CEO of NN Group, and I'm joined by Delfin Rueda, our chief financial officer, as well as Jan-Hendrik Erasmus, our chief risk officer. We issued a press release this morning announcing that NN Group and Athora have reached an agreement with Anbang on the acquisition of the activities of Vivat. Under this agreement, Athora will initially acquire 100% of the shares of Vivat, after which NN Group will acquire the VIVAT Non-life business from Athora for a consideration of €416 million. In addition, we will acquire the intercompany loans that the Vivat holding company granted to VIVAT Non-life for €150 million. On the following slides, I will outline why we believe that this is a compelling opportunity for NN Group, our shareholders, and other stakeholders.
Let's turn to slide number two. We believe that scale and diversification are essential to be able to deliver an attractive and sustainable customer proposition in the long term. Therefore, combining the VIVAT Non-life activities with the non-life business of NN Group is a logical step, both from a strategic perspective and from a financial perspective. Strategically, this transaction further strengthens our position in the non-life market in the Netherlands, adding almost 5% market share, mainly in the Property and Casualty segment. This additional scale will enhance our risk selection and underwriting capabilities. Financially, the acquisition will lead to both expense and capital synergies, resulting in an increase in free cash flow of approximately €50 million by 2022. We will finance the acquisition using existing cash resources while maintaining a strong balance sheet.
Please also note that this transaction does not affect the current share buyback program, which will continue as planned. We have a proven track record of successfully integrating companies and extracting the synergy benefits. Given that this is an in-market transaction with a business that we know and understand, we're confident that we can and will execute successfully. The acquisition of the VIVAT Non-life business by NN Group is subject to closing of the acquisition of Vivat by Athora. In addition, the acquisition of the VIVAT Non-life business from Athora is subject to the customary offer conditions, which include antitrust and De Nederlandsche Bank approvals. We expect to close the transaction in the first quarter of 2020. At closing, we will enter into a service agreement with Athora to ensure a smooth transition during the migration period of two years. Let's turn to slide number three.
The combination of Vivat and NN non-life activities will create the leading player in the Dutch non-life market, adding scale mainly in the motor and fire portfolios, as well as in disability and accident. As I already said, this additional scale will allow us to further improve underwriting and realize cost efficiencies. Furthermore, the combined company will be in a stronger position to invest in digital capabilities and innovation and to offer attractive products to our customers. In terms of distribution, we are adding another channel through the bancassurance agreement with de Volksbank, and we can also leverage on the digital and direct capabilities of Vivat. With that, I will hand you over to Delfin Rueda. Delfin, over to you.
Thank you, Lard, and good afternoon, everyone. The financial highlights of the transactions are shown on slide four. Our capital position remains strong after the transaction. The pro forma impact on our Solvency II ratio is around six percentage points. Let me walk you through the various elements in the Solvency II movement. Firstly, the transaction price for the non-life business of EUR 416 million is deducted from own funds. We include the own funds and SCR as reported by VIVAT Non-life at the end of 2018. Thirdly, the capital synergies reflect the expected diversification benefit in the SCR. Over time, we foresee some further capital synergies following the expected legal merger and application of the NN Group partial internal model. Lastly, we will have some assumptions alignments, mainly relating to P&C reserving.
As Lard already mentioned, the additional scale is expected to lead to pre-tax cost synergies of around EUR 40 million per annum by 2022. Driven, for example, by removing overlap in the complementary portfolios, IT, and oversight functions. We expect the incremental free cash flow to grow to EUR 50 million per annum by 2022. We also anticipate that the IFRS operating result will be roughly in line with the free cash flow over time. There could be a temporary negative operating result contribution in 2020, reflecting the impact of various day one alignments, as well as some portfolio churns and pruning. Following this, we expect profits to grow, driven by the realization of cost synergies, operational improvements such as combined ratio optimization, and the impact of shifting to higher yielding assets. The return on investment of this acquisition is expected to exceed our cost of capital.
This is consistent with our equity story of deploying capital in value-creating opportunities. Please note that we have also agreed to acquire the Tier 2 loans that the Vivat holding company granted to VIVAT Non-life for an amount of EUR 150 million. The coupons of these loans will provide an additional cash flow of around EUR 10 million per annum. I will now pass you back to Lard for the wrap-up.
Yes, thank you, Delfin. Let's go to slide number five. We believe that this transaction is both strategically and financially compelling. The creation of a larger, stronger, more efficient, and dynamic business will be beneficial for our customers. We will be better placed to offer attractive and relevant customer propositions, and further enhance our customer experience. The transaction is expected to deliver a double-digit return on investment. After the acquisition, the balance sheet remains strong. We can and will successfully execute on this transaction and deliver the benefits. We have shown that we can integrate a business and extract synergies, and therefore, we are confident in our ability to do the same with this one. This transaction reinforces our ambition to be a company that matters to all our stakeholders. I would now like to open the call for your questions. Brigitte, over to you.
Thank you very much. Ladies and gentlemen, we will start the question and answer session now. If you have a question or remark, please press star one on your telephone. Star one for your questions or remarks. Go ahead. The first question is from Mr. Ashik Musaddi, JPMorgan. Your line is open. Please go ahead, sir.
This is Ashik here. I just have a couple of questions. First of all, after this P&C deal, can you just give us some clarity as to what is your M&A appetite for the Dutch business? Are you still okay to do asset management deals, life deals, and P&Cs? Any thoughts on that, given that you're now pretty big in life and pretty big in non-life. The second question is, can you just give us some clarity as to what happens on the dividend and buyback for coming years? Is this deal accretive to the dividend from coming years, which is like 2020, 2021? When shall we see that accretion, and how should we think about buyback for any coming years from this one? Because you have used up around EUR 600 million cash.
The last one is there a possibility as to what assumptions you're using with respect to combination for this acquisition? Thank you.
Yes. Thank you, Ashik Musaddi. I will do the first one, then can you, Delfin, take the other 2 questions. The first one. To be honest, Ashik Musaddi, we have just announced this transaction this morning. We've worked today to work with media and investors to communicate this. The next step that we're going to do after today is to work on the closing, and that's going to be our focus for this. We hope to close, as we said in the press release, in the first quarter of next year. We have a thriving platform in the Netherlands, as you rightly point out, both after the Delta Lloyd acquisition and when this transaction is closed, we have indeed market leading positions in many areas. We're very pleased with that. I'd like to leave it at that.
When it comes to the other 2 questions, Delfin.
Yes. Thanks a lot. Ashik Musaddi, thanks for your 2 questions. The way I see this acquisition is not more, not less than another proof of our application of our capital management policy and our strategy, the same way that we have stated it over time. This is a transaction that provides a good return on our surplus capital with a return of double digits. As a consequence, the capital policy, including our dividend policy, stay unchanged. We will evaluate when we have surplus capital and how we will deploy that through the ordinary dividend, but also with share buybacks if the case were to be that. Important to say that based on our financial flexibility today, we can do the acquisition, funding it from our own cash at holding, and the current share buyback stay in that.
We plan to execute as planned with the EUR 500 million share buyback. If anything, of course, we do expect with the increase of the free cash flows that we have estimated at around EUR 50 million per annum. That will increase, of course, the available free cash flow generation, and with that, the dividend going forward. In terms of the combined ratio, as you can imagine, with significant cost savings, the main benefit on the combined ratio will be the reduction of the cost ratio. Also, we have proven but gradually included some improvements on the underwriting as well.
That's very clear. Thanks a lot.
The next question is from Mr. Matthias de Wit, Kempen. Your line is open. Please go ahead, sir.
Good afternoon, and thank you for taking the question. To come back on the cost synergies, can you provide maybe a bit more color on the breakdown between underwriting and cost on the one hand. Also, maybe on the phasing of the cost synergies. Is there anything you can say on that? Secondly, on disability. There has been regulatory change which means that it will become mandatory to take out disability insurance for self-employed. Just wondering if you consider that a major positive or whether that could drive growth going forward of the business. Lastly, is there anything you can say on how profitable VIVAT Non-life business is today? I think last year there was a reserve release. There was also the storm impact, so it's difficult to see how profitable it is at this point in time. Thank you.
Thank you, Matthias, for your questions. I will do the first two and hand over to Delfin for the third question. On the cost synergies. The synergies that we see in this business are synergies around technology. Migration for portfolio to target systems. Obviously, removal of overlaps in portfolios and in some roles that have overlaps. Those are some areas. There's multiple areas where we see the ability, after we've done, obviously, a good due diligence for the cost synergy. On the other point about the self-employed. What you're referring to is a headline agreement that has been struck in the Netherlands on the overall pension system in the Netherlands. As part and parcel of that, the position of the self-employed and whether or not they should have a mandatory with an opt-out disability insurance.
That area is an area which still needs its headline. This headline agreement is still, by the way, an agreement that needs to be voted upon by the members of trade unions. The second thing is that it's a headline agreement, there's a lot of details missing at this point, and it's very difficult to gauge what that particular element would mean at this point. We go to the third question, Delfin. Yes, Matthias. Well, there is some publicly available information of VIVAT Non-life. I think for their 2018 annual report, you see a net profit of EUR 9 million. I think it's fair to say that the overall profitability is limited at this point of time, and that there is room for further improvement of the underwriting result.
The way we have, of course, assumed how this evolved in order to assess valuation and assess the impact on NN Group going forward is that we expected the short-term, probably the first year after acquisition, there's been some negative impact on the operating result view, not only for a proven assumption in terms of the underwriting, but also in terms of potentially some reserve strengthening. Looking at also the fact that under IFRS, in the day one balance sheet, you need to recognize the net present value of future profits of the disability and accident business, and that's going to have some reduction of the profitability of the company.
Overall, we expect some proven improvement of the underwriting going forward and very significant cost savings, the reduction on the cost of insurance as well, and some other small things which will drive this improved profitability on the range of EUR 50 million as from 2022 onwards.
Okay. Thank you.
Ladies and gentlemen, if you have a question or remark, you can still press star one on your telephone. The next question is from Mr. Bart Joris, Degroof Petercam. Your line is open. Please go ahead, sir.
Yes, good afternoon. Thank you for taking my questions. I have basically three. Could you give us an idea of an estimate of the integration costs you foresee? On the other hand, you talk about cost synergies, but you also have new distribution channels. Do you see revenue synergies there, and do you have an idea how high these would be? Lastly, given the limited profitability of the business at Vivat, was there an improvement program foreseen already? Which guarantees do you have that that will be continued in the year that's in the, let's say, a little bit more than half a year, that's still going on before the closure of the deal?
Thank you, Bart. The estimation of the integration cost and question number 3 about the profitability, I'm going to ask Delfin to take care of that. Let me comment on the distribution channels. The distribution channels that VIVAT Non-life is using is mandated brokers, intermediaries, so let's say independent brokers, direct, and of course, the distribution agreement with de Volksbank, so a bank distribution channel. These channels are channels that of course, NN Group also operates. The Volksbank is obviously a new channel as we currently work with, on the banking side, with ING and with ABN AMRO. We expect some revenue synergies. We expect to improve the ability to drive profitability in the market by becoming larger, because in this transaction, we take out, of course, a competitor.
As a result, our strength in the distribution channels is also increasing in terms of our position that we have with our distributors. There is, on the revenue side also, reinsurance optimization that Delfin already mentioned earlier. We also need to be realistic here. There could also be some partly offset by some churn of existing customers. Those are kind of the comments that we can give on the revenue synergies and the way we thought about that. With that, I would like to hand over to Delfin for your other two questions.
Which were the integrating costs. Bart, I think it's early to be very precise about that. I think the restructuring cost we expect to be consistent with our own experience and with precedent transaction of similar size. This is, of course, an in-market transaction, and there will be some restructuring costs as it has happened also in previous transactions like Delta Lloyd. In terms of if the company has an improvement, if NN has an improvement program, I think that when you look at how the profitability of the company has evolved over the last years, there has been a very marked improvement of profitability. I think that they have done a very good job on the position they started with. We do expect that this will continue over 2019 and going forward.
Did you get any guarantees on that, or just a vote of confidence?
Maybe I can add, Bart, that we have a target of 97% or below for our combined ratio. As Delfin was just saying, actually, if I look at the improvement that we're seeing in the last 5 quarters, we've seen absent of the large storm, right, that we had in the first quarter last year. I know that it's part and parcel of our business, but if you want to track whether your measures are taking effect, you need to take that a little bit out of the way to see the underlying improvement. We're now seeing 5 quarters in a row of combined ratios below 100%. Also with an improvement track there. We've launched that program in the capital markets day of 2017. We, at that time, said that we needed 24 months for measures to emerge. We are gradually seeing that this emerged.
The recipe that we're basically applying for our own business is something that, as Delfin rightly said, is something that we also aim to apply to the acquisition once we close it. This has to do with expense reductions. It has to do with improvements on, let's say, repricing risk. Also on a case-by-case basis, and especially SME risks, looking at have we really got the right underwriting conditions in place. We also sometimes call products if we believe that certain risks cannot be managed through the life cycle in a profitable manner. That recipe will also be applied to that business to ensure that we also bring that business to a better place in terms of profitability.
Look, I appreciate that. My question was more about what was going on at Vivat during the time that still will pass before, let's say, the end of the year when you close the deal. Looking at results of 2018, there could be still some improvement be made over 2019. Do you have any agreement with them that they will not just, let's say, stay as is for the coming time?
Yes, Bart. As I said before, we have seen that existing management has improved the profitability of the business gradually and that they are doing the right thing. We do expect that for the rest of the year 2019 or until the date that the transaction is completed, that they will continue with the existing initiatives and perform in that way. If your question is if from a legal point of view, contractually point of view, we have a particular agreement of how this is going to evolve, the answer is no.
Okay. Thank you very much.
The next question is from Mr. Farquhar Murray, Autonomous. Your line is open. Please go ahead, sir.
Morning, gentlemen. Just three questions, if I may. Firstly, just in terms of the cost base that's coming across with regards to the EUR 40 million of synergies that you're achieving. I just wanted to frame that EUR 40 million. I just wondered if you could give us the cost base against which that's happening. Obviously, you got some of the non-life entity, but I just wondered if there's anything else in there. Secondly, on the additional capital synergies that will come after the immediate closing. I just wondered if you could put any kind of timeframe around that and perhaps some details as to where those are expected to potentially come from. Finally, just a little bit of follow-up on that question around kind of control over the business. Can I assume that management control of the non-life business will occur in one Q20?
Could I just get a little bit of detail around what the service agreement relates to in terms of which elements of the business come under that part, if that's possible? Thanks.
Yes, Farquhar, thanks for your questions. The first two, I'm going to ask Delfin to take the first question, then I will take myself.
Yes. The cost base for the non-life of Vivat, VIVAT Non-life, is administrative expenses of EUR 115 million. That was the administrative expenses base as of the end of 2018. You could use that as a reference for the synergies that we expected to achieve, the EUR 40 million. It's approximately 35% of that amount. In terms of capital synergies, the majority of the capital synergies are obtained already at day one, due to the diversification. Mainly the diversification benefits that happen at group level, as the non-life business diversify very well away from our majority life exposure that we have at the group. The additional benefit that will come following the legal merger and when we use the partial internal model of NN into the activities of VIVAT Non-life, this will be more limited, and it will happen once we agree with DNB, our regulator.
We will do that in due course. The majority of the capital synergies are already reflected as of day one and presented in the slide four that we showed before.
Yes, on your third question, Farquhar. Control over the business at the time of closing, so when we close the transaction. We aim to do that the first quarter of 2020, obviously, we are dependent on the timing of which regulatory approvals come in. When it comes to the service agreement, we are entering indeed with Athora at that time then on the service agreement. The reason for that is that Vivat Group is a group which has a holding. Services are provided by the holding for, let's say, the asset management and life company on the one hand, and the non-life business on the other hand.
What we then need to do is we, of course, then after closing, when we take control, over the business, we and Athora need to work together to ensure that continuity of services can be provided as we are disentangling that business and making sure that we can take out the non-life piece, subsequently integrate that non-life piece into NN Group. There is a time period that we need for that, and in that period, we need services. Those services obviously have already been agreed with Athora at that particular point in time to take effect in this. That's what this service agreement entails.
Okay, just to follow up on that. Are you going to use the full two years for the asset management kind of transfer then? It seems quite a long phase, that part of what you're doing.
No, let me be clear. The asset management and life remains with Athora. There's nothing that we this pertains solely to the non-life company that this transaction for us is in scope. What is not in scope is life and asset management. Asset management also goes with Athora.
All right. Thanks a lot.
Thank you.
The next question is from Mr. Robin van den Broek, Mediobanca. Your line is open. Please go ahead, sir.
With the regulatory approval attached to this, given the profile of the Vivat file, I guess, the regulator has already been looking at what's going on. Can you maybe comment a little bit into what extent this has been blueprinted already? Maybe you can share, yeah, the level of comfort you have on antitrust matters with regards to the ACM. Thank you.
Yeah. First, Robin, good afternoon. Let me take these questions. Obviously, we maintain good relations and professional relations with our regulator on an ongoing basis. Obviously, we need to apply for declarations of no objections, et cetera. That's a process which takes time. It's something that we have experience in, as you know. We just need to work with the regulator through this. I cannot speculate on the particular outcome of the timing of that, but we expect to close the transaction in the first quarter 2020. When it comes to the antitrust question you had, we foresee no issues on antitrust.
Okay. That's very clear. Thank you.
The next question is from Mr. Jason Kalamboussis, KBC. Your line is open. Please go ahead, sir.
Yes. Hi. Two quick questions. The one is, in the Netherlands now you have the number one position basically in non-life. What do you expect to be able to achieve? That means you are still in a fragmented market, but now you will be by far having a leading market share. If you could give a synergy and highlight how you can leverage this position and by when, that would be great. The second thing is for the combined ratio. As you said it, you're trending very well. Of course, maybe some, or at least I, had the expectation that maybe something, your target could be reviewed earlier. With the transaction, it's probably too much to ask. Do you find that you will have, for example, once you close the transaction, a review and again, a renewal of targets, or maybe not?
Basically something that could come in the second quarter of 2020. Is that a reasonable expectation? The last quick one is, when I look just at the presentation, you had the 2% market share loss in a certain way, looking at the Delta Lloyd presentation on the presentation today on how you present your market share. Of course, there are some business that you're happy to let go, some overlap of the clients. Is it something you could quantify on this transaction?
Jason, thank you very much. You were breaking up a little bit in the last question. Can you please repeat that, please? The third one.
Yes. In the last, if I look at the presentation you had for Delta Lloyd, you were showing a market share of I think 23%-24%. You say your market share is 21%. That is understandable because maybe you had an overlap with some Delta Lloyd clients. Probably there are some business that you shed as part of the merger. Basically there is some attrition. I was wondering if it's something that you could give any comments on what you would expect with the transaction today with Vivat.
Yes, I understand your question now, Jason. Thank you very much. Let's take them all three. The first one. Yes, we've said that this transaction adds 5% roughly to the current market share that we have, and indeed, we become a market leader in non-life. Obviously, with that, we have a large position in the Netherlands, the market leadership position, and we aim to use that additional scale to help drive profitability and drive synergies out of the platform that we have, which is a thriving platform, certainly after this acquisition. We have targets that we have set ourselves, 97% combined ratio or below. If you take a step back, those targets are in place already as you rightly point out. Let's take a step back, what we actually aim to achieve.
What we aim to achieve is that we aim to build a structurally sound, well-run, profitable, large non-life company. We aim to do that by using our scale to drive efficiencies and improve the expense ratio. Number 2, use the scale with all the data analytics and underwriting inputs that we get to improve the underwriting capability that we have. We also want to use that scale to attract people to fund the move to new technology, which allows us to far more quickly and responsive in the past, reprice and respond to changing market dynamics. As a result, what we aim to build is a capability that structurally is a sound and well-run non-life company with currently a target of 97% or below. We are making progress in the many measures that we are implementing.
We are aiming to also, after this acquisition, put similar medicine, if you will, to strengthen the profitability of the business as a whole. We are making progress. There's a lot more work to be done to obtain our objective of 90%, 97% or below. The ultimate objective is a sound, well-run, profitable, large non-life business leveraging the scale that we have. If we go to the point, I think I covered basically the 2 first questions you had. The third one has to do with Yes. We've said that there could be some churn as you take some measures, et cetera. We've done that also in the last acquisition that we did. If you apply measures to improve the profitability of your business, we've also culled product lines. Certain products we stopped, then you indeed may see market shares that have a slight shrinkage.
That could happen. The point here is not that we're going for market share. We're going for profitability as a priority. I think that needs to be taken into account.
Yes. If I may come back on a follow, just a quick follow-up on the churn point. Are there specific areas that you can identify and that you can see at this stage? Or it is more something that will come naturally as the integration takes place?
The process that we're going through also in our current business, where we do a lot of profitability improvement actions, underwriting improvement actions, premium changes and all that, we aim to do that very thoughtfully. There is not a one-size answer for this. We deliberately prioritize profitability over market share. That's, I think, an important message to give. The second one is, as a result of that, obviously you try to balance it. You want to make sure, for instance, if you look at car insurance, that you don't do a repricing across the book so that your good drivers, for instance, are being chased away from you, going through competition, and you're left with a relatively poor overall profile. You need to do that very thoughtfully, and that's what we do.
If at the end, all the actions combined in the end would lead to some attrition, the objective is profitability, not market share.
Fantastic. Thank you very much.
Ladies and gentlemen, if you have a question or remark, you can still press star one on your telephone. The next question is from Ms. Fulin Liang, Morgan Stanley. Your line is open. Please go ahead.
Hello. Just to ask two questions, please. The first one is to clarify that the return on investments, that investment, does that include EUR 150 of the internal loan? Do you plan actually to remove that internal loan after the deal is closed? That's question one. Second one is, apart from this EUR 150 million internal loan, VIVAT Non-life, apparently, if you look at their disclosure, they still have some other related party transactions with the other part of the Vivat holdings. I just wanted to please confirm that actually all this, the change of control wouldn't pose significant risk in terms of whatever the related party transactions with the rest of Vivat holdings. Thank you.
Yes. Thanks, Fulin, for your question. Can I, Delfin?
Yes, Fulin. On the return on investment, you can see it from different perspectives. Either you see that the cash outflow is relating to the price consideration, EUR 416 million. You can see it as including the EUR 150 million internal loans because it gives us also a cash outflow. Either way, you would have, well, different cash flows over the years, but to have an idea, it will be either EUR 50 million coming, if you take only the element of the cash or EUR 60 million, including the proceeds derived from the interest of the intercompany loan. We do not plan, and therefore, in both cases, as you get into our return on investment, the way we always look at it is in a very simple way. What is the amount of cash outflows and what are the inflows that are expected to come in?
That is what comes with return on investment of double-digit. Your second part of your first question related to if we have intention to cancel this intercompany loan. The answer is no. We also have Tier 2 loans with our other subsidiaries, and this is a very efficient way in order to capitalize the subsidiaries. The intention is to maintain this loan going forward. Just to make sure that there is no confusion there, let me say that there are no other loans or commitments. The intercompany transactions are something within the group which does not relate to third party, and of course, those will be clear in the normal course of business.
Thank you. My second question was about whether the change of control will change it or affect any of the related party transactions.
No, we're not aware of any change of control. I don't know if the other party transactions, if you are referring, for example, to our distribution agreement with Volksbank. Also here, there is no change of control that will interrupt this distribution agreement.
Okay, thank you.
Thank you. Mr. Friese, there are no further questions. Please continue.
Thank you, Brigitte. Thank you all for being available today at this call. Thank you for your questions. Before we end the call, let me just sum up by saying that we are pleased to announce the acquisition of VIVAT Non-life today. We think the acquisition is both strategically and financially compelling and will benefit all our stakeholders. I wish you all a very good remainder of this day, and for later on, a very nice weekend. Thank you very much.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for attending. Have a very nice weekend.