Good morning, Mr. Friese. Over to you.
Good morning, everyone, welcome to our conference call to discuss NN Group's results for the fourth quarter of 2018. I will start today's presentation by talking about the highlights of the fourth quarter results. I will take this opportunity to look back on 2018, in particular at the progress we've made to integrate Delta Lloyd, as well as the financial and commercial developments in the past year. Delfin Rueda, our Chief Financial Officer, will take you through the details of the financial performance and talk about the free cash flow and the capital position of the group. After wrapping up the presentation, I will open the call for Q&A, Jan-Hendrik Erasmus, our Chief Risk Officer, is also with us today to answer your questions. Let me start with the highlights shown on slide number three.
NN Group's operating result of the ongoing business for the fourth quarter of 2018 was EUR 343 million, broadly stable on the same quarter of 2017. We saw improved results at the main insurance businesses, offset by lower results at the segment other and asset management. We continue to increase efficiency across the organization, reducing the expense base of the business units in scope of the integration by a further EUR 20 million in the fourth quarter, bringing the total cost reductions to EUR 289 million compared with the full year 2016 expense base. The integration of Delta Lloyd is progressing well, with the legal mergers of the life and non-life entities now executed as announced in December. This triggered the elimination of the goodwill allocated to Delta Lloyd Life, which is the primary reason for the net loss for the fourth quarter of EUR 533 million.
Our commercial performance was again strong, with total new sales in the fourth quarter of EUR 407 million, up by 8% at constant currencies on the same period in 2017. Value of new business, which we report twice a year, was up 13% when comparing 2018 to 2017. I will talk more about the commercial performance on a later slide. We are announcing today a proposed final dividend for 2018 of EUR 1.24 per share, bringing the 2018 full year dividend to EUR 1.90 per share. This represents an increase of more than 14% on the 2017 full year dividend per share. The NN Group Solvency II ratio at the end of the fourth quarter of 230% already reflects the full deduction of this proposed final dividend.
Finally, I'm pleased to announce today a share buyback program for an amount of EUR 500 million to be executed over a period of 12 months. Let's move to slide number four. As I already mentioned, the integration of Delta Lloyd into NN Group is progressing well, and we achieved several important milestones in the past year. In December, we received approval from the Dutch regulator to expand our partial internal model to include the Dutch Delta Lloyd entities, creating a uniform risk and capital management framework across our largest insurance entities in the Netherlands. As we reported, this resulted in a nine percentage point uplift to the Group Solvency II ratio. The legal mergers of the various Delta Lloyd and NN entities have now all been executed.
The operational integration of the head office and the asset management businesses are completed, and we continue to integrate teams, systems, and processes at the other business units. We will remove duplicate NN and Delta Lloyd's IT platforms by decommissioning applications once migrations are completed, which will support our aim to further increase efficiency. Perhaps more importantly, we now offer most of our products and services under the Nationale-Nederlanden brand, truly becoming one company for our customers and advisors. Let's now turn to slide number five. Throughout the integration process, we have never lost sight of our customers, with the objective of helping them secure their financial future. We aim to provide products and services that meet our customers' needs.
For example, our international insurance businesses launched various new products, including a new protection product in Spain, offering various modular options tailored to a customer's profile and that of his or her family, as well as a health app giving customers 24/7 access to medical specialists. In Japan, we launched a successful new COLI product in November, providing coverage to business owners in the event of unforeseen accidents, the need for nursing care, or disability. We are seeing growing demand for products that contribute to a more sustainable future. Our asset manager has embedded ESG criteria across the whole investment process and offers responsible investment funds, such as the recently launched European Sustainable Infrastructure Debt fund. In 2018, we saw lower sales in the Netherlands due to a lower volume of group pension contracts that were up for renewal.
On the other hand, sales of higher margin businesses in Europe and Japan were up. Despite an overall decrease in total new sales, the value of new business for 2018 was up 13% on 2017. I will now move on to slide number six. On this slide, I would like to briefly recap on our performance in 2018 in terms of the medium-term financial targets that we have set for the group as a whole. To start with, we have achieved total expense savings to date of EUR 289 million compared with 2016 full year administrative expense base. We are well on our way to reach our target expense reduction of EUR 400 million by the end of 2020. The operating result for 2018 grew 3% versus 2017, compared with our target of 5%-7% annual earnings growth on average for the medium term.
Adjusting for non-recurring items in both years, the growth was 7%. Delfin will talk more about the development of the operating units and operating results on a later slide. Let me just remind you that this is a medium target, and we expect growth in some years to be higher than in others. Finally, we aim over time to generate free cash available to shareholders in a range around the net operating result. In 2018, the free cash flow of EUR 1.2 billion was broadly in line with the net operating result for the year, whereas the free cash flow in 2017 was impacted by capital flows related to the Delta Lloyd acquisition, as well as a deduction for the provision related to ING Australia Holdings. Delfin will go into the details of our free cash flow later in the presentation. Let's now turn to slide number seven.
We have today announced that we are proposing a 2018 final dividend of EUR 1.24 per share. This brings the total 2018 dividend to EUR 1.90, an increase of more than 14% on the 2017 dividend per share. This is in line with our guidance of a double-digit increase in the dividend per share, as 2018 is the first full year of incremental cash flows from the Delta Lloyd acquisition. The 2018 dividend represents a payout ratio of 50% of the 2018 net operating result of the ongoing business. The proposed dividend will be voted on at the annual general meeting of shareholders on the 29th of May. We remain committed to our dividend policy in which we aim for a sustainable ordinary dividend per share.
This also means that unless we can deploy excess capital and value-creating opportunities, then we will look to return that capital to shareholders in the most efficient way. The acquisition of Aegon's life insurance business in the Czech Republic and its life insurance and pension businesses in Slovakia in 2018 is an example of a value-creating investment that we believe will strengthen our position and distribution capabilities in these markets. In view of our robust capital position, we have announced that we will execute an open market share buyback program for a total amount of EUR 500 million. We intend to cancel all the shares acquired under this program. This share buyback program demonstrates our disciplined capital management, as well as our commitment to returning excess capital to shareholders.
At the same time, we believe it is essential to maintain a strong balance sheet and the financial flexibility to be able to pursue value-creating corporate opportunities going forward. I will now hand over to you, Delfin.
Thank you, Lard. Good morning, everyone. Let me start with NN Group's operating result of the ongoing business for the fourth quarter of 2018. This was broadly stable at EUR 343 million compared with the fourth quarter of 2017. The current quarter reflects a higher technical margin at Netherlands Life, higher results at Insurance Europe and Japan Life, as well as expense savings across the organization. Our non-life business reported an improved combined ratio in both disability and accident, and property and casualty. The total combined ratio for the fourth quarter was 96.4%, reflecting the various measures that we are taking to improve performance at this unit, as well as a generally favorable quarter in terms of claims experience. On the other hand, we saw lower results at the holding, mainly due to a non-recurrent charge and a revised method for charging head office expenses to the segments.
Lower results were also reported by the reinsurance and banking business and asset management. Please note that our asset management business benefited from EUR 10 million of non-recurrent items in the fourth quarter of 2017. Taking as a whole, the group's operating result for the current quarter includes negative non-recurrent items of EUR 10 million, while in the fourth quarter of 2017, including EUR 14 million of non-recurrent benefits. Excluding these items, the operating result for the fourth quarter of 2018 is 7% higher than the same period in 2017. The negative net result of EUR 533 million reflects the EUR 852 million impairment of goodwill that Lard mentioned earlier, as well as lower non-operating items and a higher tax charge. Let me remind you that this impairment is a non-cash item that does not have an economic, cash, or Solvency II impact.
Moving now to the next slide, which shows our full year 2018 results. The full year 2018 operating result of the ongoing business increased 3% compared with 2017 to EUR 1,626 million. The operating result in 2017 benefited from a total of EUR 104 million of private equity and special dividends, as well as non-recurrent items. While the operating result in 2018 benefited from EUR 38 million of such items. Excluding these items, the operating result increased 7% on 2017. This increase reflects improved results at Netherlands Life, Netherlands Non-Life, and Insurance Europe, and expense reductions, as well as the inclusion of Delta Lloyd from the second quarter of 2017, partly offset by a lower operating result at Japan Life. The full year 2018 net result reflects the elimination of goodwill, as well as higher special items relating to restructuring expenses and other projects.
The non-operating items mainly relate to capital gains on the sale of debt and equity securities, as well as the revaluation of real estate. Before we move on to the next slide, let me mention that we will be changing our segment reporting as from the first quarter of 2019 to include the banking business as a separate segment, and moving Japan Closed Block VA into the segment Other, as well as some smaller reclassifications. The impact of these changes will be reported in a pro forma financial supplement based on the new segmentation that we will publish on our website tomorrow. On slide 11, I will talk about the expense savings. As Lard mentioned, we aim to reduce the administrative expense base for all the business units in the scope of the integration by EUR 400 million by the end of 2020.
Compared with the full year 2016 expense base, we have already realized a total cost reduction of EUR 289 million, representing around 72% of the total targeted cost savings. While we continue to make good progress, please bear in mind that the more complex parts of the operational integration are still ahead of us. This means that expense reductions will not be linear, and that some units may, at times, see expense increases to support growth and make necessary investments. On the next slide, I will like to talk about our cash capital position. The holding company cash capital increased to just over EUR 2 billion at the end of the fourth quarter of 2018, from EUR 1.9 billion at the end of the third quarter. The free cash flow during the fourth quarter was EUR 329 million, driven by EUR 463 million of dividends from subsidiaries.
This was partly offset by capital flows comprising own shares repurchased for an amount of EUR 147 million, as well as the amount paid to terminate the warrant agreement with ING Group of EUR 26 million. Total free cash flow for 2018 was over EUR 1.2 billion. Total dividends received from subsidiaries amounted to almost EUR 1.6 billion. This was partly offset by EUR 298 million for holding company expenses, interest on loans and debt, and other holding company cash flows, and EUR 78 million of capital injections. Total capital flows to shareholders in 2018 amounted to EUR 645 million. Details of the dividends upstream by segment each quarter can be found, as usual, in the appendix of this presentation. On slides 13 and 14, I will take you through the developments in NN Group's Solvency II ratio.
NN Group Solvency ratio was 230% at the end of the fourth quarter, down from 239% at the end of the previous quarter. This ratio reflects the deduction of the proposed 2018 final dividend of EUR 415 million that we announced today, and which will be paid in June, as well as the termination of the warrant agreement. Excluding these items, the Solvency ratio was 237% at year-end 2018. The operating capital generation for the fourth quarter added six percentage points to the ratio. Market variance lowered the ratio by seven percentage points, mainly as a result of negative equity revaluations. The category Other reflects the expansion of the partial internal model, which positively impacting the ratio through a lower SCR.
This was more than offset by the impact of the reduction of the corporate tax rate in the Netherlands, which negatively impacted the ratio through a lower DTA in own funds and higher SCR. Economically, of course, the lower corporate tax rates will be positive, resulting in higher capital generation and profits over time. Let's turn to the next slide for the full year movement. The Solvency II ratio was 199% at the start of 2018, and increased to 230% at the end of the year. The total operating capital generation in 2018 was EUR 1.4 billion, of which around EUR 1.2 billion was the growth of own funds and around EUR 300 million the decrease of the solvency capital requirement.
This added 23 percentage points to the ratio. Market variances had a positive contribution to the ratio of 20 percentage points, mainly reflecting the favorable impact from movements in credit spreads, as well as positive real estate revaluation. This was partly offset by equity movements and movements in interest rates. Capital flows represents the 2018 interim and final dividends, as well as the impact of the termination of the warrant agreement with ING last November. Finally, as you know, the legal merger of Delta Lloyd Levensverzekering into NN Life was executed as at the 1st of January this year. We'll report just one ratio for NN Life as from the first quarter of 2019.
To give you an idea of the combined ratio of these two entities at the end of 2018, the simple sum solvency ratio of NN Life and Delta Lloyd Levensverzekering after the legal merger on 1st January 2019 is estimated at 231%. With that, I will pass you back to Lard for wrap-up.
Thank you, Delfin. Looking back on 2018, NN Group has delivered a solid financial performance, posting healthy operating results and further increasing efficiency throughout the organization. We achieved a number of important milestones in the integration of Delta Lloyd with the approval of the expanded partial internal model, the completion of all the legal mergers, and the rebranding of products and services to Nationale-Nederlanden. One of our priorities is to maintain a strong capital position. This has enabled us to propose a final dividend for 2018 of EUR 1.24 and to deliver on our aim for a double-digit increase of the 2018 dividend per share. We've also announced a 500 million share buyback program to be executed over a period of 12 months, showing our commitment to our dividend policy of returning excess capital to shareholders, unless it can be used for value-creating corporate opportunities.
Going forward, we will continue to focus on executing our strategy of successfully integrating Delta Lloyd, further improving performance, accelerating the transformation of the business model, and continuing to allocate capital rationally. I will now open the call for your questions.
Thank you, Mr. Friese. Ladies and gentlemen, we will now start the question and answer session. To register for the Q&A, please press star 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 for your question or remark. Go ahead, please. The first question is from Mr. Ashik Musaddi, JPMorgan. Go ahead, please.
Hi. Good morning, Lard. Good morning, Delfin. I have a few questions. First of all, thanks a lot for the dividend and the buyback. I think it is all going as per planned, but well done. Just on dividend outlook now, basically. If I think about your dividend, you have increased the dividend by 15%. You have done the buyback, which is around 4%. So it looks like the natural progression for DPS growth is at least 4% for 2019. What would you say on that? Do you plan to maintain a flat dividend cost or any thoughts on dividend? That would be great. Secondly is if I look at the capital generation, the organic capital generation before holding company cost, 2018 was very strong at around 23 percentage points, which is slide number 14.
Any thoughts on what the normal level should be, or is this, you reckon, a more normal level? The third one is, in terms of remittance, the Netherlands Life remittance, can you give us some guidance on that? Because now it is a legal entity, and you still have a strong solvency of around 230% in Netherlands Life. Any thoughts on what the annual remittance from Netherlands Life should be? Thank you.
Thanks, Ashik, for your questions. I will hand over to Delfin for the answers. Delfin.
Yes. Thank you, Ashik, for your questions. The dividend increase in 2018 was already announced to be double-digit because of incorporating for the full year the benefits of the integration of Delta Lloyd. It will be a little bit too much of a boost to assume a continuous growth of double-digit going forward, as our capital generation and the free cash flow generation is more or less in line in the medium term, expected to be similar to the net operating result. We gave the guidance over time somewhere between 5%-7%. Obviously, the objective is to continue with a stable growth of the dividend, and any decision on the dividend will be taken according to the circumstances at that time. Capital generation, indeed, I concur with your assessment that it was strong at 23%.
The question about how to normalize it is always a difficult one. As you know, the operating return and the Solvency II is influenced by several aspects, the business performance, the financial markets, the assumptions. Additionally, changes in tax rates, the UFR, as well as the level of interest rate, impact the operating capital generation. I think, however, if you take a step back and you look for the full year 2018, this 23%, which excluding the impact of the storm, was 24%. You can also look at the last six quarters since the acquisition of Delta Lloyd, and then it was 35 points increase over these six quarters with a relatively stable over that period. Even when I look from the start of Solvency II, since January 2016, capital generation there was 57 points or 52 points excluding the cost of the qualifying subordinated debt.
The point I'm trying to say is that although you cannot predict, already we have quite a few quarters on which you can see that more or less there is been a certain stability on this. Going forward, I think is, again, the volatility will maintain. Maybe just a few comments. One about the Japan Closed Block VA runoff, that as you know, that after we still expect a small release in 2019, but not material contribution later. Also, of course, our efforts to improve and grow our business is supposed to lead to improvement in the free cash flow generation. Elements like the decrease of the UFR also increases the operating capital generation going forward. This is just an example of the different elements that are changing every quarter.
In terms of remittances from Netherlands Life, there was an increase in the dividend coming from the Netherlands Life business from the normal EUR 150 million-EUR 175 million to reflect increased capacity, capital generation coming from this segment. As you have seen, we have maintained a stable dividend of EUR 175 per quarter. I think that the best guidance is that we will maintain, as you know, a stable dividend from the unit also, based on the strong capital Solvency.
Yeah, if I look at the Netherlands Life dividend for 2018, it was EUR 837. What's the difference between 175 times 4, which is EUR 700 and EUR 837?
Yes. In 2018, there was some dividends coming also from ABN AMRO, that you cannot just assume as being a recurrent amount going forward. We will, of course, expect some dividends coming from also ABN AMRO Levensverzekering joint venture, not to the same level.
Okay. Thank you. That's very clear.
The next question is from Mr. Matthijs de Wit, Kempen. Go ahead, please.
Hi. Good morning. Two questions as well, please. First of all, on M&A, you mentioned in the press release that you want to maintain financial flexibility for opportunities. Can you confirm whether or not this includes dividends, please? Just linked to that, if you were to finance large acquisitions or any acquisitions, could you use the excess capital sitting in the Netherlands for those, either through special dividends or through acquiring directly from the level of NN Life? Just a second question on asset management. We've seen a quite strong decline in fee margins during the quarter to, I think, an all-time low now. Is that expected to continue, the pressure you see on fee margins, or are we approaching a level you consider sustainable? Thank you.
Yes. Hi, Matthijs. Good morning. I'll take both questions. First on M&A. I will not comment on particular names. What I can say is that in general, we are always open to opportunities if they present themselves, especially with the priority of markets where we already have a presence, and M&A is a matter of opportunity and discipline. Both are very important to ensure that we take that into account. We do want to have financial flexibility for that, obviously, if these opportunities are there, and then we will assess them at their own merits. When it comes to NN IP, the margins, what you see happening over the last year at the asset manager is a couple of things. First of all, the asset manager did an outstanding job in integrating Delta Lloyd Asset Management quickly. That's been done, and they've concluded that in a good manner.
Secondly, you can see that a lot of expense reductions have taken place as well, where the asset manager has been confronted, like the entire industry, with fee pressures, and they have been able to withstand that by making sure the platform as a whole is more efficient. The third thing I would like to mention is that also the costs that needed to be absorbed as a result of the MiFID, so research costs as a result of MiFID regulation, has also been absorbed. Please take that into account. If you look at the entire context of the industry, it's been a difficult year for the entire industry. What I find actually quite encouraging is that in the fourth quarter, we saw that third-party net flows were flat.
The outflows that we saw early in the year with a combination of risk off or other investor considerations, but also combined with some investor considerations about concentration of mandates when integrating Delta Lloyd and NN IP. We see that in the fourth quarter, third party was stable, and that's good. We've launched a new plan, as you know, for the coming years, where we focus on building out commercial momentum in specific strategies, and we're going to continue to do that.
We also need to note, Matthijs, that in Q4 2017, we had, of course, a EUR 10 million number that was the performance fees related to Deloitte funds that we flagged at that point in time as a one-off, which you, in the comparable quarter, don't see back for the last quarter of 2018, as these funds have been integrated. The margins for the future, as we know in the industry, will remain under pressure. The focus on efficiency is going to continue.
Okay. Thank you. Maybe just on the possible financing of acquisitions through NN Life or by using the excess, is that something you consider realistic or not at all?
We maintain, in general, our flexibility for opportunities if they present themselves and if they adhere to the strict financial and non-financial criteria that we have.
Okay. Thank you.
The next question is from Mr. Cor Kluis, ABN AMRO. Go ahead, please.
Good morning. Cor Kluis, ABN AMRO. A couple of questions. First of all, on the Solvency II ratio development from the beginning of this year, given the fact that interest rates have been coming down somewhat and corporate credit spreads, of course, have come in somewhat. Solvency rate, this market effect would have some negative effect on the solvency ratio. Could you give an indication how large that market effect has been year to date? My second question is on the dividend from the bank. I think if I read it correctly, that in 2018 you only upstreamed in Q2 EUR 8 million from the bank. The bank makes almost EUR 100 million profit, good solvency ratio, and the mortgage book is not really growing at 2%. Why not upstreaming more capital from the bank?
If you have not yet done that, maybe you could hint a little bit on what you think about upstreaming of capital from the bank in 2019. My last question is somewhat M&A related, whatever case might come on the table. If the case will be a little bit larger, would there be a chance that you put a pause on the EUR 500 million share buyback? Do you feel comfortable with the cases that you have on the table that the EUR 500 million can be fully executed as you've mentioned today? Those were my questions.
Yeah. Thanks, Cor. Let me take the third question, and then Jan-Hendrik, can you do the first, and then Delfin the second question. First on acquisitions. Well, we've said in the press release that we maintain financial flexibility to do acquisitions if an opportunity arises. We also maintain the flexibility to stop or pause a buyback if we would go for very large M&A. That's all speculative. Let's say, yeah, I don't have much to add to that, to be honest. Jan-Hendrik, over to you.
Thank you, Lard. Good morning, Cor. There are some things that we'll see in the Q1 ratio that we already know. The first is the reduction of the UFR to 3.9%, which will have a 4% negative impact on the ratio in line with our sensitivities. There's also the buyback, which will come out of the ratio in one Q19, which you can work out the impact is going to be around seven points. EIOPA published an update of the VOLA reference portfolio as well, which will also be a small negative. On top of that, we saw, you're right, the markets, we saw equities increasing, corporate bond spreads tightening, and we've also seen a reduction in rates and also a bit of steepening, all of which if you look at our sensitivities, will be negative as I think you would expect.
Give some indication on the market effect, the negative size, percentage-wise.
Yeah, it's a little bit too early to say. I think if you look at the sensitivities, those are the best guidance I would give on that. They are moving very much in line with the sensitivities.
Okay. Thank you.
The next question.
Sorry, the dividend on the bank.
Yes, the dividend on the bank. Delfin, please.
Yes, Cor. The dividend of the bank indeed. Let's don't forget that the bank is only, if I'm correct, only eight years old. It was founded in 2011 and basically has gone first into breakeven, then increasing the profitability quite well. EUR 8 million of dividends in the second quarter of 2018. Going forward, we do indeed expect some dividends coming from the bank. Depending on their growth and other characteristics, I think what I would say is to expect some modest dividends coming from the bank going forward, including 2019.
Thank you very much.
The next question is from Mr. Johnny Vo, Goldman Sachs. Go ahead please, sir.
Good morning, everybody. Thank you very much for the questions. The first question. Now that the legal merger has been done, can you give us an update of the guidance of the cash buffer you want to keep at the holding company? I think previous guidance was EUR 0.5-EUR 1.5. Where is that number today? The second question is just in terms of the gross debt and leverage ratio. If I pro forma the leverage ratio for the final dividend plus the buyback, then you're not too dissimilar from where you were in 2017 post the Delta Lloyd deal. A little bit better off, but not that drastically. Is there a plan to reduce gross debt, or will de-leveraging come through growth in shareholders' equity? Thank you.
Thanks, Johnny. Delfin, can you take both questions, actually?
Yes. Hi, Johnny. The first question on the guidance on the CAS buffer stays the same, between 0.5 and 1.5. When we introduced the guidance, we did it in such a manner in order, it's relatively a wide range, but we did it with the eyes wide open, with the idea that this should be suitable for different circumstances, depending on the level of solvency of the subsidiaries. Basically, the guidance unchanged. In terms of the question on the amount of debt, I think that it's very important to just take into account, not to focus too much into leverage ratio. Because as you said, at the time that we did the acquisition of Delta Lloyd, we originally increased our leverage by EUR 2.5 billion. However, the fixed charge ratio increased from 2016-2017, from 12.8 times-13.5 times.
I think it's always very important to take into consideration the capacity to cover your interest. Just to give you an indication, currently our total debt basically has a cost of a weighted average of 2.2% after tax. I think that this is quite low, certainly in comparison to the cost of capital. Our financial leverage, as has been indicated by many different factors, is strong. Which actually doesn't come as a conclusion for that, is that we should not reduce the amount of leverage because the financial capability is there, and the cost of debt is relatively moderate. Also, keep in mind that since the acquisition of Delta Lloyd, we reduced already by close to EUR 1 billion immediately following the acquisition. Next year, we have EUR 300 million that will mature, senior debt, in June. Gradually, that will increase.
You're targeting another EUR 300 million debt reduction?
EUR 300 million is the senior debt in June next year that mature. Currently, our plan is not to refinance that. That will result in a reduction of leverage by EUR 300 million.
Okay. Thank you.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, please.
Yes. Good morning, everybody. Thank you for taking my questions. I would like to come back on the capital generation. Delfin, you mentioned that the 23 percentage point is there. You could see that as a sustainable rate. I was just wondering about the moving parts, because you mentioned the Japan Closed Block VA contribution will drop. The 0.3 reduction of SCR is more likely to go down to, I don't know, EUR 100 million maybe a year on the back of the individual Life drop in the Netherlands. That does include a multiplying effect to get to the 23 percentage point capital build. It seems to me that that 23 percentage point should actually come down. I appreciate that the corporate tax and the UFR will probably increase your own fund generation, maybe from EUR 1.2 billion to EUR 1.3 billion a year.
Still, if I look at the math, I would say that the 23 percentage point is a bit on the high side going forward. Your commentary there would be appreciated. On the Dutch remittances from Life, I guess the consistency in getting a similar number out every quarter is something that makes it very easily manageable from a regulatory point of view. I think you did mention before that the cash taken out from Life should be higher than the net operating results, but EUR 700 million seems to be basically in line. When is the natural point for you to step that rate up? Now that the legal merger's there, is that something you're thinking about shorter term, or are you sticking with the EUR 175 for now? I was also thinking about the Japan business dividend. Last year, you excluded that.
This year it should come back. Any visibility on what kind of number we can expect? Lastly, on the combined operating ratio, I think a very good progress this year. Q4 even below the 97% that is targeted. I was just wondering how sustainable you think that is, how many efforts do you still have on the planned to come through, and what kind of further expectation can we expect on the back of that? Thank you.
Thanks, Robin. Quite a number of questions. I will take the last one, and I'll ask Delfin to take the other questions. On the Non-life company. Yes, the combined ratio that we printed this morning for the total Non-life company is 96.4%. What I find encouraging is that we now see, of course, the storm that we had in January is part and parcel of our business, so don't get me wrong. If you want to look at to what extent the measures that you're taking are taking effect, you need to look at the underlying without the storm. Then I'm seeing five quarters in a row where our combined ratio is improving. That is encouraging as we aim to implement the range of measures that we announced at the Capital Markets Day at the end of 2017. It's a combination of many measures, as you know.
Underwriting price increases where necessary, also expense reductions. We've reduced, as you know, for this year, 2018, about 18% of expense reductions, where we target to reduce expenses of the Non-life company with 20%-25% of the full year 2016 cost base of EUR 481 million by the end of 2020. There is still room to go on the expense saving side. That's one thing. Secondly, we aim, of course, to continue to improve the underwriting results. Bottom line, pleased with the progress that we're making. Quite a number of quarters in a row. More to come. The key thing here is that our target is 90% or below. The important thing I always say is we need to make sure it's something that is sustainable.
It's a real capability that we need to build to ensure that we have a structural improvement of the Non-life results. I can dig deeper if you want, for now, I would like to.
Maybe just a short follow-up. Basically, we should look at this from 97% is in a bad year, and if it's a normal year, it should actually be.
We look at this that 97% or below is our target. We aim to structurally improve the profitability of this business. We are taking a lot of measures to do that. Also making sure we're building capabilities around pricing, analytics, and stuff like that. This is a program that we've announced a while back, and we'll continue to drive home. On the other questions, Delfin, can you be so kind as to take us one by one?
Yes. Thank you very much, Robin. In terms of the 23% capital generation, if it is sustainable, you are right indicating that there's a Japan Closed Block VA, and we have indicated that several times. We still have some run-off helping both the SCR and some release of the surplus capital coming through 2019, and then that will decrease significantly. Also keep in mind that the insurance business will continue contributing some contribution to the capital generation. There are also quite a few other things that still remain positive. The run-off of the individual life business continues. We have seen over the last quarters, and we expect that to continue, a positive impact in improving the excess return due to the gradual shift towards higher yielding assets.
The UFR has decreased, and as a consequence, although the own funds has been decreased, due to that, the UFR drag is lower and the operating return will continue. Also, and I think even more important, is that we are not staying still, and we are improving the performance of the group. That is coming not only through the non-life business, but also we have, as you have seen in the evolution of the value new business, very positive evolution, both in Europe and Japan. All those elements need to be taken into account. We have, however, as a policy, we don't try to give a forward-looking expectations of how this is going to evolve. We tend to be cautious because of the volatility that entails. I think I've mentioned a few more positives than negatives. That's very clear, Delfin.
Maybe one follow-up, because the SCR drop will reduce, right? When you look at 23 percentage points contribution for the Solvency II ratio, there is basically a multiplier effect on that because it's the denominator, not the numerator. I think your positives are more on the numerator side than on the denominator side. I think it's very supportive what you say, but I'm just wondering if these positives on the numerator side are enough to offset that.
Yeah. I think they are more than enough to compensate that. I think this multiplier with the SCR is being a bit exaggerated. I think the evolution of the own funds are very important, even if the SCR were to decrease. Also, keep in mind that when the SCR grows, it's also because we are writing new business that even in the same quarter or later on, will continue to contribute with additional on-fund generation. Maybe moving to your second question on the remittances. Maybe I will point to the pro forma combined solvency ratio at the end of the year for the Netherlands, for NL Life, of 231%. That I believe give some room in order to maintain some stability within the dividend. As I said before, we will just look at the amount of dividend according to the circumstances as they come.
Japan Life, you are right. I can confirm that in 2018, this was a special year for Japan Life because of particular Japan GAAP adjustment that was required to do on the reserving. Otherwise, we do expect to come and distribute dividends. In terms of the amount, as for the other units, we prefer not to be specific.
Okay, thank you very much.
The next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead please, sir.
Hi, everybody. Thank you very much. Just going back to Johnny's earlier question on holdco to cash. I get that you don't want to change the target, but when you do a 1 in 20-year stress test now, do you find the number is lower or higher than where you were at 2017, pre the merger? The second question is, again, I guess on economic capital. With spread widening and the introduction of Delta Lloyd into the partial internal model, presumably your dynamic VA impact in Solvency II will be much larger than it was disclosed last year. I was wondering if you could give us a picture of how much that is and whether I'm right. Thank you.
Yes, Farooq. Gentlemen, you take the first one, Delfin, and then Jan-Hendrik, can you take the second one? Delfin, please, over to you.
Farooq. Sorry, the microphone was not on. Good morning, Farooq. On the whole company cash, we indicated, of course, that after a 1 in 20, once we merge the legal entities, we would have some benefit and being on the lower range. Please keep in mind that because of the very positive evolution of the solvency of Delta Lloyd Levensverzekering at that time, that benefit was already obtained. There is not a big change from the level at the end of 2017.
Jan-Hendrik for the second question.
Hi, Farooq. The first thing to say about the dynamic VA is that it, of course, doesn't affect the own funds at all. In that case, we just use the EIOPA disclosed VOLA. We're really talking about the SCR here. You're right, when we expanded the scope of the internal model, of course, we also expand the scope of that mechanism. You will see an increase roughly proportional to the size of the business that is now included within the scope there.
You're probably not going to answer this, what is that % increase, roughly?
You could just look at the relative size of the liability and asset books, I think that estimate will be as good as any I could give you now. The whole point here is that is, of course, part of our approved internal model with DNB. What you see is that the dynamic VOLA is in fact an offset of what the VOLA would be in stress scenario. It's all part of an integrated model, I really think the key point is that there's no change here. This is our model that we had before. It's a slight expansion of it. Also the own funds are untouched by this mechanism.
Okay. That's okay. Thank you very much.
Ladies and gentlemen, if there are any additional questions, please press star one. The next question is from Mr. Albert Ploegh, ING Bank. Go ahead, please.
Yes. Good morning. A few questions left. One is that, one of the other Dutch peers this morning announced a charge related to some updated mortality and lapse assumptions in their Dutch business. Can you maybe comment on how you look at that and whether you already reviewed your own assumptions, also with Q4? The second question, coming back a bit to the non-life business, with indeed very encouraging trends. Looking at 2019 in terms of the gross written premiums, what is your best estimate currently in terms of growth? Because I guess you're still pruning also some portfolios, putting forward price increases. Will the net be some low single digit growth possible, or is that still too early given where you are in the whole optimization of that business line? Thank you.
Yes, let me take the non-life piece, Jan-Hendrik, can you do the mortality discussion?
On non-life, what we have seen actually in gross written premium for 2018 as a whole, we actually saw it moving slightly up. That is the combination, obviously, of many things. Yes, we do call product lines where we believe that through the cycle we shouldn't offer that any longer. There are price increases and rate increases, which of course, create a higher gross written premium. At the same time, it also depends on the lapses that you have on the contracts that leave your book. So far that has been a good and flattish type of trend overall. For 2019, we do not expect much difference in the approach that we're taking there. We're just continuing with the approach that we've seen so far. Over to you, Jan-Hendrik, for the mortality.
Thank you, Lard. Hello, Albert. Yes, we did update our assumptions in the fourth quarter. It's nothing special, just our regular assumption review process. We did also see in 2018 quite a few mortality tables being published. We did have a small update, and our assumption reflects the latest available information and our own experience, broadly neutral for the Dutch life businesses.
Okay, thank you for the clear answer.
The next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead, please.
Yes, good morning. Most of my questions have been asked. Could I just get some additional comments on, is there a specific reason why there are no private equity dividends this quarter? Should we see some kind of a catch-up in the first quarter of this year?
Delfin.
Hi, Bart. No, the short answer is no special reason. Private equity are volatile, so no particular reason.
Okay, thank you.
The next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead please, sir.
Hi there. Sorry, just one follow-up question. Can you give us some guidance on the tax rate given the changes that are going on in the Netherlands, on an IFRS basis? Thank you.
Thanks, Farooq. Delfin, can you do that?
Well, the corporate tax rate has been announced and agreed that will decrease to 22.55% in 2020, then it will decrease to 20.5% in 2021. As I think I mentioned before, this had a negative impact in our solvency. Obviously, that will result into a lower tax charge going forward. I think that's a positive change.
We can broadly use these numbers with an adjustment for other territories. Is that how we should model it?
I think, keep in mind that the effective tax rate in the Netherlands has always been relatively lower than 25% because of the investments, because some of them are tax exempt for the gains. The investment portfolio on equity above 5% is relatively high. Indeed, proportionally for the Netherlands, it will reduce by 4% by 2020.
Thank you very much.
The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead, please.
Hi, Ashik Musaddi. Just one follow-up question on M&A. If you want to think about any M&A potential in Holland, would you have a wish list like you want to do in DC, you want to do in individual life? Any thoughts on that? Where would you be restricted to do M&A because of the market share in Holland? I'm just talking about Holland, nowhere else. Thank you.
Don't forget, Ashik, please may I remind you that we took a very important step in the consolidation of the industry in 2017. Very willfully, as you know, and we're very pleased with the acquisition that we've done because we believe we have a very strong platform. Whatever consolidation will happen in the Netherlands, we have an outstanding strategic position to start with, and we fully focus on the integration benefits from that business. In general, anywhere else, everywhere we're looking for opportunities, if they are presenting themselves and with a priority on markets where we have a presence, and obviously, in those cases, as we assess them at their own merits, antitrust considerations are always a part of that.
Okay. Just one question. Would there be any restrictions on any businesses, I think because, for example, in group pension, you can't do that because you already have 30, 35% market share. Any areas where you have restrictions?
Well, those are considerations that we would take if an opportunity like this is in front of us, and if we are evaluating that opportunity. These considerations are not just one restriction. You need to think through how that would evolve. It's a more complex consideration you need to take there.
Okay, sure. Thank you.
There are no further questions, Mr. Friese. Back to you, please.
Thank you all for being on this call and for asking your questions. Now before we end the call, let me just conclude by saying that we have achieved a lot in 2018, both in terms of financial performance and in the progress that we made to integrate Delta Lloyd. We will continue to focus on delivering on our strategic priorities and on creating long-term value for all our stakeholders. I wish you all a pleasant day.