Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its Q3 2018 Results. The telephone lines will be in listen only mode during the company's presentation. Before handing this conference call over to Mr.
Lard Vriese, Chief Executive Officer 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 any statement 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 securities.
Good morning, Mr. Friese. Over to you.
Thank you, operator. Good morning, everybody, and welcome to this Q3 analyst call. I will start today's presentation by talking about the highlights of the 3rd quarter results and the business developments in the past quarter. Delfin Rueda, our Chief Financial Officer, will then take you through the details of the financial performance and talk about the free cash flow capital position. After wrapping up the presentation, I will open the call for Q and A.
Jan Hendrik Erasmus, our Chief Risk Officer, is also with us today to answer your questions. So let's move to Slide number 3, the highlights. NN Group's operating result of the ongoing business for the Q3 of 2018 was 4 €463,000,000 which is up 7% compared with the same quarter last year. The higher operating result was driven by improved underwriting performance at Netherlands Non Life in both the disability and accident and the property and casualty books as well as €48,000,000 of private equity and special dividends at Netherlands Life. Lower expenses also contributed to the increase as we have continued to extract the synergy benefits from integrating Delta Lloyd.
We achieved further cost savings of €33,000,000 this quarter, bringing the total cost reductions in the business units in the scope of the integration to €269,000,000 compared with the full year 2016 expense base. We are therefore progressing well towards our target of €400,000,000 by the end of 2020. In terms of commercial performance, total new sales in the 3rd quarter amounted to €328,000,000 down 14% in the same period last year. This was mainly due to increased competition in the COLI market in Japan as well as lower volume of group pension contracts up for renewal in the Netherlands Life, which, as you know, are skewed to the Q1 of the year. Our balance sheet and capital position remained strong.
NN Group solvency ratio at the end of the third quarter was 2 39%, up from 2 26% at the end of the Q2 of 2018, reflecting operating capital generation and positive market impacts. Free cash flow to the holding company was €293,000,000 bringing the cash capital at the holding to €1,900,000,000 at the end of the 3rd quarter. Let's move to Slide number 4. Our ambition is to be a company that truly matters in the lives of our stakeholders. For our customers, this means developing innovative solutions and value added products that meet their needs.
Let me give you some examples of how we're doing this across our businesses. NN Bank has recently launched mortgage products specifically geared to the needs of senior citizens and for expatriates wanting to settle in the Netherlands. A new accidental health insurance is being sold online in Poland and is a unique solution for children covering a broad range of accidents and care assistance. We also look for ways to enhance the customer experience. For example, our non life business in Belgium has a service called My Advisor at Home, whereby an advisor is available within 24 hours to assess the damage and it takes care of all the necessary arrangements and repairs throughout the claims handling process.
Our asset manager and then investment partners uses partnerships to support its growth ambitions and to reach customers through new channels. For example, in Japan, where NNIP and Rakuten Securities have announced a new investment service for retail investors. We take our social and environmental responsibilities seriously. ESG factors are embedded in our investment process, and we are also incorporating these in our product. BeFrank is the 1st pension provider to introduce a sustainable impact dashboard, which allows employees of pension schemes to monitor the impact of their contributions on waste production, water consumption and CO2 emissions.
Let's now turn to Slide 5. As you know, we have a target to reduce the administrative expense base for the business units and scope of the integration by $400,000,000 by the end of 2020, of which at least half by the end of 2018. The integration of Delta Lloyd is progressing well. So far, we have reduced expenses by a total of €269,000,000 compared with the 2016 expense base. Looking ahead, we will continue to drive efficiency throughout the organization.
However, please bear in mind that the expense reduction will not always be linear from quarter to quarter and some units may at times see expense increases to support growth and make the necessary investments. We have submitted the application to include Delta Lloyd Life and known Life in our partial internal model, and we are on track to have this expanded partial internal model approved by the end of this year. This will allow us to complete the legal mergers of the Dutch life and non life entities in 2019 as planned. I will now hand you over to Delfin Rueda. Delfin, over to you.
Thank you, La, and good morning, everyone. Let me start with NN Group's 3rd quarter operating results of the ongoing business, which was 7% on last year at €463,000,000 This increase was driven by an improved underwriting performance at Netherlands Non Life and higher dividends at Netherlands Life as well as a reduction in administrative expenses. This was partly offset by a lower technical margin at Netherlands Life as well as lower operating results at Insurance Europe and Segment Other, mainly due to nonrecurring benefits in the Q3 of 2017. The net result of EUR 788,000,000 represent an increase of 7% on last year. In addition to the higher operating result this quarter, we also recognized an additional divestment result of €56,000,000 related to the sale of ING Life Korea.
Moving on to Slide 8, I will take you through the Q3 performance of the individual segments. Starting as usual with our largest segment, Netherlands Life hosted a higher operating result, supported by €48,000,000 of private equity and special dividends as well as lower administrative expenses. This was partly offset by a lower technical margin as last year included some nonrecurring benefits and favorable mortality experience variances. The operating result of Netherlands Non Life increased to EUR 46,000,000 versus EUR 1,000,000 a year ago, reflecting an improved underwriting performance in both disability and accident and property and casualty and also lower administrative expenses. The current quarter also benefited from favorable claims experience and a €5,000,000 private equity dividend.
It is encouraging to see that both D and A and P and C reported a combined ratio below 100% this quarter, with the total combined ratio coming to 97.1%. Needless to say that the claims experience is volatile from quarter to quarter and that we will continue to implement measures to structurally reduce the combined ratio to 97% or below. At Insurance Europe, the lower operating result reflects a lower investment margin and EUR 5,000,000 of nonrecurring benefits related to the Life business in Greece in the Q3 last year. The lower operating result at Japan Life was mainly due to higher DAC amortization on surrenders, which was partly offset by higher fees and premium based revenues driven by higher in force volumes. The operating result of asset management of EUR 43,000,000 was due to lower fees, partly compensated by expense reductions.
Finally, the operating result of the segment Other was EUR 28,000,000 versus €41,000,000 last year, which included a total of €38,000,000 of nonrecurring benefits compared with EUR 14,000,000 in the current quarter. This quarter also reflects higher results at the reinsurance business. On the other hand, the banking business saw continued pressure on the interest margin, partly compensated by lower administrative expenses. Moving now to the next slide, which shows our cash capital position. The holding company cash capital increased to €1,900,000,000 at the end of the Q3 of 2018 from €1,800,000,000 at the end of the 2nd quarter.
The free cash flow during the Q3 was €293,000,000 driven by €338,000,000 of dividends received from subsidiaries. This was partly offset by €193,000,000 of capital flow to shareholders, representing the cash part of the 2018 interim dividend of €127,000,000 and share repurchase in the current quarter for an amount of €66,000,000 As always, details of the dividends upstream by segment can be found in the appendix of this presentation. To finalize my presentation, I will take you through the developments in NN Group's solvency on Slide 10, starting with the movement for the quarter. Our Solvency II ratio increased to 2 39% at the end of the 3rd quarter, up from 2 26% at the end of the previous quarter. Operating capital generation and market impacts each added 7 percentage points to the ratio this quarter.
Markets had a positive impact to Own Funds, mainly driven by the widening of peripheral government bond spreads to which we are underweight compared to the reference portfolio. Real estate revaluations and higher interest rates also contributed positively to the ratio. I will finish off by mentioning a couple of other items that may be relevant. Firstly, let me remind you that the 2018 interim dividend paid in September was already deducted from the Solvency II ratio at the end of the second quarter. Furthermore, as Lars mentioned, we are on track to get approval for including the main Dutch Delta Lloyd entities in the Partial Internal Mobile by the end of this year.
This will be taken into account in our solvency ratio when approved. And lastly, we currently expect that the proposed corporate tax rate reduction in the Netherlands will have a negative upfront impact on our Solvency II ratio, if and when enacted. Economically, of course, this will be positive, resulting in higher capital generation and profits over time. And with that, I pass you back to Lars for the wrap
up. Thanks, Delfin. NN Group has delivered another solid set of results for the Q3 of 2018, posting an increase of 7% of the same quarter last year, with Netherlands Life and Netherlands Non Life reporting higher operating results. The integration of Delta Lloyd continues to progress well. Total expense reductions to date amount to €269,000,000 as we continue to extract the synergies of the integration and drive efficiencies throughout the organization.
Our balance sheet remains strong with a cash capital position of €1,900,000,000 and of 2 39 percent at the end of the 3rd quarter. We are on track to have the expanded parcel internal model approved by the end of this year and to complete the legal mergers of Dutch Life and Non Life entities in 2019 as planned. This quarter's performance confirms that we are progressing well in executing our strategy, which focuses on successfully integrating Delta Lloyd, further improving the operating performance of all of our segments, accelerating the transformation of the business model and continuing to allocate capital rationally. Now before we go into Q and A, let me just mention the second press release that we issued this morning, in which we announced termination of the warrant agreement with ING for a consideration of €76,000,000 As you are aware, NNNNG entered into this warrant agreement at the time of the IPO in 2014. We are pleased to have completed this transaction as it eliminates a potential share dilution.
I will now open the call for your questions and hand over to the operator.
Thank you, Mr. Friese. Ladies and gentlemen, we will now start the question and answer session. The first question is from Mr. Cor Klas, ABN AMRO.
Go ahead please, sir.
Good morning. Cor Klas, ABN AMRO. Congratulations, by the way, with solving the warrant for this. Further, a couple of questions. First of all, on the bank.
Could you give some bit more clarity about the dividend upstreaming from the bank going forward, taking into account that the capital consumption of the growth of the bank is not so large anymore because year to date, the mortgage book has been quite flattish. So what can we expect from different payments from next year onwards? And also maybe related to that, what might be the Basel IV impact on a fully loaded basis for the bank? It will not be much probably because you already have standard formula, but could you have an indication the 16.4% CET1 ratio might change as a result of Basel IV? My second question is about Solvency II.
Could you give a little bit more clarity about the factor in the 4th quarter? You highlighted like the corporate tax rate effect. What percentage effect could that be on the Solvency II ratio and the Delta Lloyd to the parts internal model in the 4th quarter? What might that be? Or could that might be compensated corporate tax effect?
And if you might have done some or thinking about some reinsurance deals in the Q4 and what the market effects might be in Solvency II in the Q4? Those are my questions.
Yes. Thank you, Cor. So I'm going to hand over to Delfin, actually for both questions. So Delfin De Bank and Solvazi II.
Thank you, Cor. So you're right that the bank has already found a level of profitability and return on equity that allows them to fund their own growth. And in addition to that, to contribute further to dividends going forward. So they started with a small dividend in the last quarter, in Q2, of €8,000,000 And we will expect that depending on the profitability and the evolution on the solvency, this will continue to be the case. But you have to, of course, assume that these are going to be relatively moderate dividends coming from the bank going forward.
It's well capitalized, as you said, with a common equity Tier 1 ratio of 16.4%. And you are also absolutely right that Basel IV won't have a material impact on that. On your question on Solvency II, on the corporate tax rate reduction first, maybe a caveat to mention that still this has not been approved by the Dutch Parliament, but we do expect that changes in the corporate tax are going to come through. And if we were to look at the impact that the current proposal of corporate tax reduction will have on our solvency to ratio, it will be around 10 percentage points. But I also very important to indicate that this is obviously a positive aspect in terms of the contribution to the net profit and the capital generation going forward.
Obviously, that will depend also at the level of the solvency ratio that is very sensitive to the level of the solvency ratio when these taxes are going to be implemented as it affects mainly the solvency capital requirement due to the reduction on the DTA. In terms of the PIM, as we have mentioned in the past, we continue in the process. We do expect to have approval before year end, so we are doing everything on our hands to get into this goal. And don't forget that there is a benefit that is currently in place on the standard formula on the calculation of the SCR under the standard formula for Delta Lloyd Life. And that benefit that at the end of last year was EUR 350,000,000 will be lost.
That's why we have said that there's going to be we expect maybe a net positive, but a moderate impact due to the introduction of the PIM.
The market effects in the 4th quarter?
Market during Q4 was 7 percentage points. The main impacts were due to the reduction on the spreads of government bonds, particularly peripheral bonds, but also we benefited for revaluation of equity and real estate.
And the impact of the maybe just to add, the impact of the movements quarter to date have been broadly neutral on our solvency ratio quarter.
The next question is from Mr. Ashik Musaddi, JPMorgan.
About what you're thinking about M and A at this point, I mean, clearly, there are few opportunities at the moment in Belgium and in Holland, and those are not that big M and As as well. We are talking about $300,000,000 $400,000,000 So can you share some thoughts about what you're thinking and how you're positioned for those potential deals? Any thoughts on that? Would you be considering, not considering? So that's the first one.
Second question is with respect to debt. I mean, one of the investor concerns on NN Group is around your high leverage. I mean, the way we look at high leverage is your Solvency II is fully capped. And even on an IFRS basis, it looks a bit high. So I mean, what can you potentially do to reduce your leverage?
And would that be a hurdle leverage ratio? Would that be a hurdle to do any sort of buybacks early next year? Any thoughts on that would be great. And then last thing, last question would be around your solvency to capital generation. I mean this year for the 1st 9 months you have generated around 30 6%, 39% capital or 40% capital, and that too is net of dividends.
So how should we think about what really worked this year basically? Why is the capital generation so high? Thank you.
Okay, Ashik. Thanks for your questions. I'm going to take the first one on M and A, and then Delfin will talk about the leverage and about the capital generation, right? So first on M and A. If we have an opportunity to strengthen our business, we will look at it and evaluate it carefully.
And if it makes sense and it complies with the financial and non financial criteria that we have for this, then we will look at it and we will transact. The same thing it happened with Delta Lloyd at the time. We've also last quarter announced 2 smaller transactions in the Czechoslovak Republics. Our priority is in markets where we already have a presence, because we believe that you understand the business that you would acquire and you can extract synergetic benefits and increase scale in the markets that you're present. We would evaluate opportunities in the Netherlands, but also outside of the Netherlands in markets where we already have a presence.
But please note in the Netherlands, our priority is obviously the integration of Delta Lloyd and extracting the full value of that. But if we can strengthen the business further, we will look at that. Delfin, over to you.
Yes. Thank you, Asik. Let me, for a moment, disagree on your assessment that there is a high level of leverage. We are certainly very comfortable with the level of debt. If you look at our fixed charge coverage ratio of close to 15 times in this quarter for the last 12 months.
We calculated always on a last 12 month basis. That is certainly quite coverage of the interest expense. Also taking into account that NN Group is especially cash generative in relationship to the IFRS results, the fact that the majority of the operating result converts into actual cash to the holding company in terms of remittance basically gives you an actual interest cover, which is very high. If you combine that with the fact that the cost of debt is relatively cheap at this point of time and the fact that we have a very high level of financial flexibility. Due to our solvency, the level of cash capital upholding, I don't think that the level of debt can be categorized as being high or of any concern, which that answers, if you like, your question in terms of any plans in terms of reducing the level of debt, we currently don't have.
I think that we are comfortable with the current debt structure.
Thanks, Alfine. But is it fair to say that if what you're saying, if I understand it correctly, is it fair to say that leverage will not be a constraint if you were to consider doing a share buyback?
Yes. So there is a leverage is not a constraint for that. Then in terms of the Solvency II capital generation, you're right. In the 9 months up to September, we have had a very positive growth of the solvency ratio, increased by 40 basis points. 17 percentage points was related to operating return, and we have a very good positive impact related to market.
But I think that if you were to look back to the time since the introduction because markets are always can be volatile, can be positive or negative, and we have gone through a period of relatively positive impact. But if you were to look at from the start of introduction of Solvency II, we have actually in this, I think, 11 quarters, operating returns increased by 52 percentage points, where markets only contributed 22 percentage points. So it will come up or down, but it's a measure. Or if you were to look at it at NN Group in the current form, which is after the acquisition of Delta Lloyd, I. E, from the Q2 of 2017, basically, we also have 43 percentage points increase in the capital generation, of which 29, the majority of it, came from the operating return, with only 21% coming from market.
So the explanation this quarter is strong operating capital generation, but also positive impact on markets, as you mentioned.
Thanks. That's very clear. Thanks a lot.
The next question is from Mr. William Hawkins, KBW. Go ahead please.
Hello. Thank you very much. I've only got one question really. Is there an are there any important actions that are awaiting the legal entity mergers next year before they can be executed? I'm kind of thinking in terms of where you are with the Delta Lloyd operational integration process, is there any operational action that has to await legal entities?
Your expense efficiency so far have been running incredibly well, but I wonder if there's going to be the need to increase the investments once the legal entities are merged. And also, I don't know if any capital management decisions that you may make have the legal entity merger as a precondition?
Yes. Thanks, Will. As we've said before that we aim to our objective is to merge the legal entities of the large life and non life businesses in the Netherlands in 2019. There's a lot of things that need to happen for that. We are working toward that.
It's so as Delfin already mentioned, I mentioned in my script on the slides, parcel internal model approval and expansion, I think, is an important step in that. Of course, we need to obtain a declaration of no objection from our regulator for those legal entity mergers, and there's a number of other steps that we need to do. Now the operationally, we are progressing well and the operational integration itself is not a, let's say, a factor that would be hampering the legal entity mergers. So in that sense, we're on track. When it comes to the expense reductions, we have we are very pleased to see that we're now at EUR 269,000,000 of expense reductions and well on our way of the EUR 400,000,000 target by the end of 2020.
We do need to be mindful though, and we're very pleased, and I compliment my teams for doing so. Having said that, we do need to caution that we're now entering into the complex part of the integration process, which has all to do with migrating technology platforms and migrating portfolios into technology platforms of companies that have been in existence for a very long time. So I would be a bit careful to just look at the extrapolation of the past quarters and take the same speed for the cost reductions. So while we're confident that we will get to the €400,000,000 by to the end of 2020, that you should be careful just extrapolating as a proxy the speed at which we did that over the last couple of quarters. Also, indeed, it may be volatile in that sense in the quarters over time because you do need to invest also to get to the underlying expense reductions in technology, for instance.
But so far, I must say we're well underway.
And just on the other part of that question, I mean, with regards to how you manage capital, is the legal entity separation at the moment and then integration at all relevant to how you think about capital management? Or is it just a sort of tick in the box irrelevant to how you're managing the group as a whole?
No. The main benefit of managing in if the legal entity are merged, the main benefit that we have for that is operational. And in governance, it just simplifies life in that sense, which I think is helpful and that's the main benefit of it.
The next question is from Mr. Matthias De Wit, Kempen. Go ahead please.
Yes, good morning. I have 3 questions, please. The first is on the capital generation. Again, if I could come back on that. The EUR 300,000,000 owned as a dollar upside, 1st of all, in there.
And just linked to that, to what extent are the cost savings already captured in that number? It's not entirely clear because some of them are reflected upfront in the best estimates, at least for the Life business. That's mostly the case. And then secondly, on the capital ratio of the Dutch Life entities, wonder if you could provide pro form a for the merged entity, including the impact of the legal merger. And is there any target you have in mind for managing the Dutch entity going forward?
Yes. Thank you, Matthias. Delfin, can I hand over to you for this?
Thanks, Matthias. The question on the capital generation, the 3 approximately €300,000,000 no, it's not rounded up. It's actually slightly up. In terms of the cost savings already captured in the operating capital generation. You're right, it depends everything that is related to savings in the Life business and also the long term non Life part, as long as it was already reflected in the assumptions, do not have an additional benefit.
Any deviation, meaning if cost savings are larger than what it is assumed on those assumptions, then they will be reflected when the assumptions are reset. However, for both the short term Non Life business as well as the other areas, the holding, the asset management, the bank, Belgium, to a large extent, they are being reflected as they are being generated. In terms of the pro form a of the merged entities in the Netherlands, it will be a simple add on of the Own Funds and the SCR of both entities will come to 2 35% solvency ratio. And we have not set any particular target, but you have seen that the dividends coming out from Netherlands Life increased from usually €150,000,000 per quarter. It increased at €175,000,000 Obviously, the level of solvency is high.
And as we have said, it is our priority to maintain a stable payment from the subsidiaries, always with the aim to, over time, release some of the surplus capital in the different legal entities. Okay, Mathias.
Thank you.
I hope it was clear. Just to make sure there's no misunderstandings, that is €300,000,000 as Delfin indicated is slightly rounded down and not rounded up. So it's in fact a little bit north of the EUR 300,000,000.
The next question is from Mr. Farooq Hanif, Credit Suisse.
On the market movements, can you explain what the percentage point impact was from real estate revaluations? And remind us what's going on there and what could continue to happen going forward. Secondly, on capital management and your answer to Will's question, I mean, there is a dependence, isn't there? Because if you merge entities, you said that you would reduce your cash target at the holding. So I was just wondering what your latest thoughts are on that and if you can give us any guidance.
And lastly, just on, again, the question on operational capital generation. At what point are you going to feel confident in giving us kind of a vision of what you see as a regular smooth capital generation number every quarter? Because obviously, a lot of your peers do that. So I'm just wondering cheekily whether you would be willing to say, look, this is it.
Yes. So on the first and the third question, Delfin, but it's maybe also good to give you an Hendrikan opportunity. So can you do the second question about the capital management dependence for the merger, merger of the legal entities and etcetera.
Yes. Farooq, you're right to refer to the 1 in 20 requirement. But at the moment, you see the solvency of both the legal entities in the Netherlands, the life entities, is very strong. So at the moment, that 1 in 20 stress requirement is not having a big impact, and this will therefore also not have a big dependency here for the legal merger.
Just going back on that, you I think you did say that you would give the new target for the holding cash if that happens. So you're saying that's already happened?
We are going to stick to our guidance on the target cash capital. I mean, the range of €500,000,000 to €1,500,000,000 remains the range. What we said is that we might be comfortable at different parts of that range through time. But certainly, the range of €500,000,000 to €1,500,000,000 is something we plan to leave unchanged.
And with that, Farooq, I'd like to hand over to Delfin for the other questions you had about market movements and the potential run rate numbers.
Yes. Thank you very much, Farooq. Real estate revaluations in the quarter represented a little bit more than 1 percentage points on the market movements. What to expect going forward? Impossible to say.
It is very much dependent on what is going to be the valuation of real estate, particularly commercial real estate going forward. On the range for the cash capital at holding, already Jean Henrik explained clearly that we will maintain that range between the €500,000,000 and €1,500,000,000 percent. And in relationship to our run rate of operating capital generation, as you know, is relatively difficult to say, although by now, you have already got, I think, 11 quarters of operating capital generation, and you have seen what is the evolution. And when I look on this capital generation, there's been around the EUR 300 300,000,000 around the 300,000,000 over the last quarters. On capital generation, you know that we have also benefited from regular release on the solvency capital requirement, which obviously depends on the speed, on the runoff of the individual life portfolio in the Netherlands, but also of the runoff of the Japan Closed Block VA portfolio.
And keep in mind, as we have mentioned, that by 2019, this runoff is very much coming to an end. And as a consequence, that benefit of a decrease in the SCR will be more mitigated. So I think that in terms of operating capital generation, what you have seen this quarter in terms of the movement on Own Funds and the change in solvency capital requirement is nothing unusual. Whenever there is something special, we tend to mention there.
Can I just on back going back on the real estate revaluation? Obviously, the number that's in market variance will be the one that's above your long term assumption. Can you remind us what your long term assumption is for real estate?
Yes. For the real estate, it's a 4.4% assumption. And obviously, what it comes through the market variance is whatever additional rental yield that comes on top of this 4.4 percent, but also the revaluation of the real estate as well. So the combination of these 2 will come through market variances.
Thank you very much.
The next question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Go ahead please, sir.
Yes, good morning, everybody. So the first one is again on the unfunded capital generation. I think you have been consistent at around EUR 0.3 billion, even a bit north of that. Looking at the cost cutting in the pipeline, when do you expect to hit the rounded EUR 0.4 €1,000,000,000? Will that be early 2019?
Could you talk around that? And also year to date, could you provide kind of the figure? Because we have rounded figures per quarter, but I'd like to get a kind of year to date figure. And then the second one was on the dividends from the life entities. So the combined Solvency II ratio is 2.35%, if I understood correctly.
Is there any room for distributing excess capital from the Life subsidiary post merger? And then sorry, I missed the I joined the call a bit late, but what was the reason of the weak technical margins in the Netherlands? That will be useful. Thanks.
Okay, Delfin. Four questions. I think can you take them?
Yes. Good. Thank you, Benoit. So I hope I
helpful area.
In terms of the operating capital generation and when we will reach the EUR EUR 400,000,000, difficult to say. There are different dynamics here. You know that the capital generation is driven by changes in interest rates and spreads for every single quarter. So the impact on the UFR drag, the release of the risk margin as well as the expected market yield on our credit fixed income securities, including government bonds, vary actually from 1 quarter to another. So that gives us some variability there.
Also, within this operating capital generation, you have new business, the operating variances and the contribution from Japan Life, Asset Management and the Pension business. So obviously, we do expect that as we move to higher yielding assets, that we will have an additional contribution. We also expect that with improvements in the underwriting result on our Non Life business that we will have some improvements there. And also with the selective growth in areas like Europe and Japan. Then you will have other aspects like the release of the solvency capital requirement as the runoffs of Japan Closed Block BA, as I mentioned before, will reduce And to some extent, to the movement to higher yielding assets, the SCR or if the growth of new business justified might not contribute as much to the reduction or even add to the SCR.
So there are a few parts, but I think overall, our targets and objective is to increase, of course, this operating capital generation over time, driven mainly by the improvement in the operating results of the company as well as the movement to higher yielding assets. In terms of
second question Year to date figure for the operating capital generation.
Year to date figure for the operating capital generation is around €900,000,000 And the combined ratio of 2 35%, of course, it provides room for excess capital dividends. But as I said before, we do prefer to have regular contributor to dividends to the holding company. So we are happy with the current rate of dividends coming from this segment. And for the time being, we'll maintain it like that until we change, of course, that approach. In terms of the technical margin in Netherlands, I think we gave an indication to expect between 40% 45 percentage points.
And this is basically what we have seen this quarter. So nothing too unusual. There was better results in the past, but this was a little bit higher in the previous quarter. But between €40,000,000 and €45,000,000 between €40,000,000 and €50,000,000 I think is something that is reasonable with the inherent volatility for this technical margin.
And just to avoid misunderstanding, Benoit, when Delfin slightly so it's net of life we're talking about and it's 1,000,000 as a percentage. So it's €40,000,000 to €45,000,000
The next question is from Mr. Albert Ploegh, ING. Go ahead please.
Yes. Good morning all. Three questions from my end. First one on the private equity gains. Can you remind us what, let's say, at the end of Q3, more or less the size of the book is and how you accounted for?
Is it basically the equity matches or the fair value accounting? So I'd like to understand better how it really exit gains or some fair value gains that could impact the quarterly numbers. That's the first question. Second question is on Japan. On the COLI market, you mentioned increased competition.
In Q2, I mean, the new sales were up still, I think, 18% of them not wrong there. And you mentioned the bank insurance channel being strong in the Sumitomo partnership. So can you help us a bit to understand what's going on in the Japanese clothing market? And finally, on the Dutch Non Life business, clearly very good underwriting result. Premiums are still pretty flattish.
But can you maybe give some of the feeling, let's say, on the pricing trends? So what is the underlying really growth in gross written premiums? And what is the impact, let's say, of pruning the portfolio, which, of course, has a negative impact on the gross written premiums?
Yes, Albert. Private Equity, I think that's Delfin. Delfin, can you do private equity? I'll take care of the Japan question and the non life question.
Yes. Thank you very much, Albert. So I think you're touching into a little bit of a complicated matter of how this flows through the profit and loss account. So we'll be happy to explain that more extensively offline. Maybe I'll try quickly.
The majority of our private equity investments are classified as associates and joint ventures and a smaller amount, they are classified as available for sale. So depending the dividends comes from associates and joint ventures or from available for sale, the treatment is slightly different. So for associates and joint ventures, the dividends are reflected in the investment margin. But at the same time, this is offset by a negative revaluation below the line. So that basically have not have no net P and L impact, but it is reflected in this manner.
However, for those that are available for sale, as for example, it is the case for our investment in Korea, these dividends are reflected in the investment margin, but are only offset by a change in the revaluation reserve, basically with a lower equity value on the balance sheet. I do expect that with this clarification, you got a bit of a feeling that how this comes, but we'll be happy to explain it offline as well.
Yes. That is fine offline, no worries.
Yes. So on the Japan COLI, let's first talk about Japan COLI. The our Japan business over the last years has seen a marked growth in the segment that it has been operating in for 30 years. So we're quite a specialist and very well positioned in that segment. We have seen competition increasing.
And as
you know, we prioritized margins over volume. And I may also point out that we have moved and shifted to a different kind of product mix to improve the margins. And as in Q2, we have presented a value new business increase of 36% to demonstrate our efforts there. But indeed, we are seeing more competition. And of course, we are well positioned, so we're fighting against that competition as well.
So we've launched, for instance, a new product last week to maintain commercial momentum. And this is something that we'll work through. And also, the relationship with Sumitomo but also other distribution channels is working very well, and we have good confidence in our growth prospects in that market in the future. When it comes to the Dutch Non Life area, well, as Delfin mentioned, I think earlier on the call, we're quite pleased with the way that the program that we've rolled out and announced a year ago at the Capital Markets Day is taking effect. At that time, we said that we need 12 to 24 months for the measures to take their full effect.
And it's a wide range of measures, as you know, combination of cost reductions, pruning indeed of the portfolio for those products and that we believe we don't we can't get an appropriate return on through the cycle. And also looking at each risk, making sure that it's priced well, price increases where needed and where we believe it's appropriate. So we're doing a lot of things to do that. And if you look at the last 4 quarters actually, and I know that events like storms, etcetera, are part and parcel of this business. But in order for us to gauge whether the measures are taking effect, we're actually taking looking through the storm effect.
And then you see for 4 quarters in a row already step by step improvement. And this quarter, I think the important thing that we've seen both visibility and accident and P and C improving. In terms of the underlying premium, indeed, it's flattish as a total, which is the combination of the pruning on the one hand, but then also price increases and premium increases on repricing risk as one of those measures that is coming through. So the overall is flattish.
But do you think you're getting closer to some kind of inflection point to show some more meaningful gross written premium growth? Or is it still too early to expect that in 2019 for example?
That's indeed too early to say that. Don't forget that we are really focused on profitability improvement here. Our objective is to structurally improve this business with a combined ratio of 97% or below. And that's our objective for this business, to make sure it's structurally in a good and profitable situation.
The next question is from Mr. Henry Heathfield, Morningstar. Go ahead please, sir.
Good morning all. Thank you very much for taking my call. Just on the back of actually that last question on non life, Just kind of interested in particularly on the pricing in the P and C portfolio that you've put through and whether that's kind of been finalized or how far through that are you basically, whether there's more to come more broadly in the Non Life segment? And then the second question is on the motor business. That seems to be improving quite nicely, but the operating environment in the Netherlands seems to be quite a harsh one.
And I was wondering, I think basically average claims on the liability side have increased quite markedly around 40% over the past 4 years because of the discount rate and whether you will be able to hold on to the price improvements that you put through if the discount rate starts to rise again and the average claims cost starts to fall?
Yes. So Henry, when it pertains to the overall environment, I would say, what I observe is rationality improving in the market in general in terms of how much how far along are we in the measures that we're taking to improve the profitability of this business. As I said, we haven't reached our target, right? And we want to have it 97% or below. Don't forget the last piece of that as well.
The 97% is one thing where or below, we should not forget that either. And I want to have it structurally in that place, and that's really our priority. So this is something that will take more time to for all those measures to be implemented and to take their full effect. And as I the kind of guidance we gave for that last year is that we need like 12 to 24 months before those measures would take their full effect. So I think that's where we are.
We're still working through this, happy with the progress, but still a lot of work to be done. Thank you. Yes?
Sorry. Yes?
Are you kind of are you just sticking to pricing within Property and Casualty kind of going forward? Or will there be some more broader pricing improvements, you think, within the
Well, we are always evaluating the importance of having risks appropriately priced, whether they are in the P and C book or in the disability and accident book. So we go through this product by product, risk by risk, and that's how we work. On the motor business, yes, we saw an improvement this quarter on the Motor business. But again, also there, we believe that we have not implemented all the measures on cost reductions, etcetera, that we aim to implement. And don't forget that we also want to build structurally a capability in a stronger place on using data analytics to consistently and more quickly react to any actions that we feel we need to take for migration of the risk and as a result, the necessary pricing of that risk.
So we will continue to work on that as well.
Do you I mean, do you think that on the average liability side, the average kind of claim on the liability side of the motor book, When that does start to come down, I mean, I think that will start to come down over the next kind of half decade or something. Are you going to be able to hold on to that pricing that you've been put through? Or is that going to compress again?
I think, Henry, that I'm not sure, but I think that this is more U. K. Market specific than I would say for our kind of business.
The next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead please.
Yes. Hi. Thank you for taking my questions. Basically following up, following on the last questions. If we look at the improvement of your combined ratio, we see that it is mostly due to the decrease of the claims ratio.
Could you say what part of this is due to the underwriting improvement as you also had a favorable claim experience. And the expense ratio actually went up year from year. When did you expect the expense ratio to decrease? Because I was from the impression of the Investor Day, it would take more time to improve the claims ratio and less time to truly improve the expense ratio. And then a small following question on the change in the corporate tax.
Will there be a P and L impact? Your DTAs are relatively low. Your DTLs are higher. Are we seeing valuation movements there that need to be transferred to the P and L?
Yes. Thanks Bart for your questions. So first, on the expense ratio, there were some noise, I think, in the expense ratio from last year given the Deloitte acquisition. I think this is better to be explained offline. What I do see, and you can see that from the numbers, is that we saw an increase a decrease of the expenses this quarter of the Non Life company of around 12%.
So I think also there, the expense reductions are taking place. When it comes to the overall movement of claims, we saw that the D and A combined rate was 94.3%. That's so the claims improved compared with the last quarter and the comparative quarter in the Q3 of 2017. When you look at P and C, we've seen a gradual improvement that we had a little bit of a good claims experience, especially in the fire book this quarter, which I think is important to mention. So the change in corporate tax rate on the P and L, Joven?
Yes. Thank you very much, Bart. Of course, the change in the tax rate will have an impact on IFRS because the corporate tax rate will be smaller. But at the time of introduction, it can also and it will also have some impact, but that will be a split between the profit and loss and also another part will come through equity due to the impact on the revaluation reserves. That is actually one of the largest aspect of the deferred tax liabilities and therefore impacting the balance sheet.
But you already gave a quantified idea of that?
No. I think it's I mean, if you look at it from the perspective of our balance sheet of what is the impact, it will not be that meaningful, but it is too early in order to consider to have a proper estimate on that.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead please.
Yes. Good morning, everybody. Sorry to come back on the private equity dividends, but there tends to be a habit to fully exclude them from your operating results whenever you report them. So I just want to follow-up on Albert's question and basically ask you, do you think it's fair if these are fully deducted? My understanding is that if there's no cash upstream basically from the private equity dividend side that you basically incorporate 0 in your operating results, I would say that yes, a return of, I don't know, 10% up to 10% would be quite reasonable on your €700,000,000 book.
That's question 1. The second one is on IFRS 17. It will probably be dragged out a little bit, but one of your peers in the Netherlands has shown that the shadow accounting is a pretty sizable offset on how the financial leverage ratio will behave after that adoption. I was just wondering, earlier on the call, you seem quite confident on leverage. Is this something that could change that narrative?
Or you quite comfortable that on the IFRS 17, your leverage ratio will not go up too much? And the last question is really on, yes, the level of excess capital. I mean, we're your your feelings about how your balance sheet looks like are similarly comfortable at compared to that point in time? Thank you.
Yes. I will hand over to Delton in a minute. But about the habits, I hope you would agree with me that we're not apologizing for having good returns from our private equity book. So we're quite pleased with them. But I would like to hand over to Delfin on the questions you had.
Yes. No, thank you, Robin. You're absolutely right. Private equity and public equity dividends is part of our investment return, and it will continue being part of the investment return. Maybe we are a bit guilty to highlight this.
We were trying to provide useful information in order to see the deviation from 1 quarter to another because these don't come always in the same quarter, doesn't come with the same amount in order to make you better informed of how this might be coming through. But absolutely, the returns on private equity will impact our IFRS, but also our Solvency II operating return on an ongoing basis. So it's a very important element of our investment portfolio. So it's not fair to exclude them from our investment return nor to our capital generation. The level of private equity, by the end of September, were around EUR 800,000,000 IFRS 17, we, of course, don't use Seattle accounting.
And the impact of IFRS 17. That, as you might have already noticed, yesterday, the ISB announced a delay of 1 year on the implementation of IFRS 17 and IFRS 9 to 1st January 2022. And it's a bit early in order to see what impacts that will have as it will fundamentally change how we measure liabilities and profit recognition. So that applies to all insurance companies. So it will be closer to market value, will be but still maintaining difference with Solvency II.
Your last question
Yes. So, Ramon, on your last question regarding capital and the deployment of that. Yes, we no doubt we have a strong Solvency II ratio, which is the increase driven by operating capital generation, as discussed this morning. And by markets, the cash capital position is in a good place and the balance sheet overall as well. But as you know also, we said it this morning, our focus is on the integration of Delta Lloyd, on the improvement of the performance of the businesses and on accelerating the transformation of the business model.
And there is a lot to do on the integration. For instance, the largest units in the Netherlands, The PIM expansion, that was mentioned this morning. The legal mergers, the Life and Non Life businesses and entities, especially in the Netherlands. And as we said before on deployment, capital in excess of our ambition will be returned to shareholders over time, unless we can put it to work in value creating opportunities.
Okay. Thank you.
And the next question is from Mr. Jason Kalambuches, KBC. Go ahead please.
Yes. Hi, Ben. I just got 2 quick questions. The one is on the non Life side. When I look at the dividends that were up streamed, it was €8,000,000 versus €20,000,000 in Q2.
I would have thought can you explain I would have thought that with a better combined ratio and basically reflecting what we see in the quarter, I don't understand very much the difference with the Q2. And the second question is just quickly on the private equity. I think the banking peer has given a sort of guidance. Could you give guidance? Or shall we probably take as more normalized a level we saw last year?
Or you prefer to leave it at the answers you have given so far?
Delfin?
Thank you, Jason. Basically, the dividends that we pay in this quarter for Non Life were basically taking into account also the results of previous quarters. So you don't just pay the dividend of the profits of the quarter. So I would not read too much into the level of dividends from Non Life as we do expect going forward that it will continue contributing regular dividends to the holding company. And as we have said in the past, this capital generation is more or less approximately to the level of their operating result in terms of the solvency of capital.
Also take into account that the level of capitalization of the Non Life company is lower compared, for example, the level of capitalization of the Dutch life entities, which, of course, give us much more margin in order to have a more stable dividend quarter per quarter. In terms of the guidance for Private Equity dividends, I think is maybe the only thing that I can mention is the guidance that we provided in terms of the contribution to our operating return, which was somehow higher, which is 6.5% expected return. So sometimes, we'll have significantly higher than that. Sometimes, we might have lower than this. And that difference on the Solvency II capital generation will be reflected in market variances.
There are no further questions. Mr. Friese, back to you, please.
Yes. Thank you very much, operator. I would like to thank everybody for their questions. And before we end the call, let me conclude by saying that we have reported another solid set of results for the Q3 of 2018. We're progressing well with the integration of Delta Lloyd and extracting the synergy benefits, and our balance sheet and capital position remains strong.
Our focus remains on delivering on our strategic priorities and creating long term value for all our stakeholders. I wish you all a pleasant day, and thank you very much for being here.