Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its Second Quarter 2018 Results. The telephone lines will be in listen only mode during the company's presentation. The lines will then be opened for a question and answer session.
Before handing this conference call over to Mr. Lars Freese, 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 historical fact. Actual results may differ materially from those projected in any forward looking statements. Any forward looking statements speak only as of the date they are made, 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, looking into 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.
Yes. Good morning, everyone, and welcome to our conference call to discuss NN Group's results for the Q2 of 2018. I will start today's presentation by talking about the highlights of the 2nd quarter results, the progress on the integration and business developments in the past quarter. Delfin Loretta, our Chief Financial Officer, will then take you through the details of the financial results and talk about the capital position and free cash flow. I will conclude the presentation with a wrap up, after which we'll open the call for Q and A.
And Jan Hendrik Erasmus, our Chief Risk Officer, is also with us today to answer your questions. So let's turn to Slide number 3. We are pleased to report a solid set of results for the Q2 of 2018. NN Group's operating result of the ongoing business was €508,000,000 with most segments showing improved results compared with the same quarter last year. The higher operating result was driven by improved underwriting performance in the Property and Casualty business at the Netherlands Non Life, €55,000,000 of private equity dividends at Netherlands Life and lower administrative expenses in almost all segments.
We continue to increase efficiency and extract the synergy benefits from integrating Delta Lloyd. The cost savings achieved this quarter in the business units and the scope of the integration amounted to €62,000,000 bringing total cost reductions to 236 €1,000,000 compared with the full year 2016 expense base. So we're well on our way to achieving our cost reduction target of €400,000,000 by the end of 2020. One of our priorities is to maintain a strong balance sheet and capital position. NN Group Solvency II ratio at the end of the second quarter was 226%, up from 213% at the end of the previous quarter, driven by operating capital generation and favorable market impacts.
Please note that this ratio is after the deduction of the 2018 interim dividend of €0.66 per share to be paid in September. Free cash flow to the holding company was €397,000,000 bringing the cash capital of the holding to €1,800,000,000 at the end of the second quarter. So let's move to Slide 4. The integration of Delta Lloyd into NN Group is progressing well. The head office functions have been fully integrated and systems have been decommissioned to eliminate double run cost.
We have already closed down 30% of the head office applications. The integration of Delta Lloyd Asset Management into NN Investment Partners is also complete. The Dutch funds have now been merged and rebranded and the majority of former Delta Lloyd systems have been decommissioned. In terms of rebranding, all P and C products, including health, now carry the national enabler on the label. The rebranded retail products are also available in the online customer portal and the NN app.
We've also rebranded the new business of the Delta Lloyd Pensions DC product. And at the beginning of June, all Aura and Delta Lloyd Internet savings accounts were converted into an NAND bank account. Another milestone reached in the Q2 was the submission of the application for including the deltoid entities in NN Group's partial internal model. We are on track to receive approval before the end of the year so that we can proceed with the mergers of the life and non life entities in 2019. We still have a lot more work to do to complete the integration by 2020, but we aim to keep the current momentum going in order to realize the benefits of the combined company.
Throughout the integration, we continue to focus on our business and on enhancing the customer experience. We aim to ensure the least possible disruption for our customers and business partners during this process and we are pleased to see that the customer satisfaction levels remain high. We measure the success of our commercial performance based on value rather than volume. So despite sales decreasing by 11% in the first 6 months of the year, we saw a 20% increase in value of new business compared with the same period last year. This was driven by higher sales and a more profitable business mix at Japan Life, while the impact of lower sales at Insurance Europe was more than offset by a more profitable business mix.
This also reflects our efforts to develop innovative solutions for our customers. Our Spark Labs are a breeding ground for innovative ideas and products, such as the urban bike insurance launched in Romania, And we also aim to anticipate new trends, such as in Hungary, where we launched protex. Me, a pay as you go life and excellent insurance product for customers with an active lifestyle who only want to ensure insurance cover for a few hours. So let's now turn to Slide 6. We have today announced an interim dividend for 2018 of €0.66 per share.
This has been calculated using our usual formulaic approach, being 40% of the prior year full year dividend per share. This brings the total capital return to shareholders in the form of dividends and share buybacks to €2,100,000,000 since the IPO. Our guidance for 2018 is unchanged. We anticipate a double digit increase of the 2018 full year dividend per share versus 2017. We remain committed to our dividend policy and this means that unless we can deploy excess capital in value creating opportunities, we will look to return that capital to shareholders in the most efficient way.
We issued a press release this morning announcing our acquisition of Aegon's life insurance business in the Czech Republic and its life insurance and pension businesses in Slovakia. This is a good example of the value creating opportunities that we are looking to invest in. This bolt on acquisition strengthens our position and distribution capabilities in these attractive markets. And with that, I would like to hand you over to Delfin Rueda. Delfin, over to you.
Thank you, Laut, and good morning, everyone. Let me start with NN Group's 2nd quarter operating result of the ongoing business, which was 26% at €508,000,000 This increase was driven by improved underwriting performance at Netherlands Non Life, private equity dividends at Netherlands Life and lower administrative expenses. The net result for the 2nd quarter was €463,000,000 versus €240,000,000 in the Q2 of 2017. The increase reflects the higher operating result and capital gains on the sale of government bonds, public equities and real estate. These were partly offset by a lower result of Japan Closed Block VA a higher special items, which mainly relate to restructuring expenses.
Let me also remind you that the net result last year included a €188,000,000 provision related to ING Australia Holdings. Moving on to Slide 9, I will take you through the Q2 performance of the individual segments. Starting with the largest segment, the increase in the operating result of Netherlands Life was mainly driven by €55,000,000 of Private Equity dividends as well as lower administrative expenses. The higher operating result at Netherlands Non Life was largely driven by lower administrative expenses and an improved claims experience in the Property and Casualty business, while the Q2 last year was impacted by a €40,000,000 strengthening of insurance liabilities. The combined ratio for Netherlands Non Life came to 97.9%.
This is obviously encouraging and shows that the measures we are taking are starting to take effect. However, more work needs to be done to structurally improve the combined ratio to 97% or below. At Insurance Europe, the operating result for the Q2 of 2018 included a nonrecurring negative impact of €5,000,000 while the Q2 last year benefited from nonrecurring items for a total amount of €7,000,000 The operating result of Japan Life decreased by 24%, excluding currency effects, primarily due to lower surrender results, impacting the technical margin and DAC amortization lines. Surrender and mortality results in Japan can be volatile from one period to another. However, we see continued growth in fees and premium based revenues, which is the longer term profit driver of the business.
The increase in the operating result for Asset Management reflects expense reductions partly offset by lower fees. Finally, the operating result of the segment Other was €4,000,000 versus a loss of €7,000,000 in the Q2 last year, supported by lower interest on hybrids and debt. The operating results of the banking business and reinsurance business were broadly stable. Let's move to the next slide, which shows the expense savings achieved to date. Back in May, we announced that we were raising the cost reduction guidance from €350,000,000 to the end of 2020 to €400,000,000 and that we expected to achieve at least half of these savings by the end of this year.
At the end of the Q2 this year, we had already achieved total cost savings of €236,000,000 compared with the full year 2016 expense base, with all segments within the scope of integration contributing to this reduction. This quarter was supported by €13,000,000 of nonrecurring benefits. We are making good progress, but let me remind you that expense reductions going forward will not be linear and that some units may, at times, see expense increases to support growth and make necessary investments. That said, we will continue to drive efficiency and cost discipline throughout the organization. Continuing to Slide 11, I will take you through the movement of our cash capital position.
The holding company cash capital increased to €1,800,000,000 at the end of the second quarter from €1,600,000,000 at the end of the Q1. The free cash flow during the second quarter was EUR 397,000,000 driven by €536,000,000 of dividends received from subsidiaries. This was offset by €229,000,000 of capital flow to shareholders, representing the cash part of the 2017 final dividend as well as shares repurchased under the buyback program to neutralize the dilutive effect of stock dividends. Details of the dividends upstream by segment can be found as usual in the appendix of this presentation. On Slide 12, I will take you through the developments in NN Group Solvency II ratio.
Our Solvency II ratio increased to 2 26% at the end of the second quarter, up from 2 13% at the end of the previous quarter. Operating capital generation and market impacts each added 7 percentage points to the ratio this quarter. Markets positively contributed to Own Funds this quarter. This was driven by the widening of peripheral sovereign and corporate bond spreads, the tightening of AAA sovereign spreads and positive equity revaluations. These items were partly offset by a step in of the interest rate curve.
The 2018 interim dividend that we will pay in September has already been deducted from the ratio this quarter. And with that, I will pass you back to Lard for the wrap up.
Yes. Thank you, Delfin. Ennen Group has today presented a solid set of results for the Q2 of 2018. The operating result increased 26% on the same quarter last year with most segments reporting improved results. We have reduced costs further, bringing total expense reductions into business units in the scope of the integration to €236,000,000 So we are well on our way to achieve our target of €400,000,000 by 2020.
Our balance sheet remains strong with a cash capital position of €1,800,000,000 and a Solvency II ratio of 226 percent at the end of the second quarter. And please note that the Solvency II ratio is after the deduction of the 2018 interim dividend of €0.66 per share. The integration of Delta Lloyd is progressing well and we have achieved some more milestones in the Q2, such as completing the integration of the asset management businesses and the head office, as well as submitting the application for including the Delta Lloyd entities in our partial internal model. We still have a lot of work to do. However, we are committed to successfully integrating Delta Lloyd and extracting the synergies.
At the same time, we will continue to improve performance, accelerate the transformation of the business model and allocate capital rationally. This morning, we announced changes to the management board with the appointment of strong successors for both Dorote and Robin, as well as 2 additional board members. This team will remain committed to our key priorities and further shape our company's journey with a strong focus on transformation, innovation and our role in society. I would like to take this opportunity thank Doerothe van Vredeberg for a significant contribution to NN Group, including successfully repositioning NN as a standalone company. We wish her all the best for the future.
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. Our first question is from Mr. Ashik Musaddi, JPMorgan.
Go ahead. Your line is open.
Just
a couple of questions I have. One is, I mean, if I look at the capital release, I mean, you did $100,000,000 of capital release in Q1, maybe rounding 2nd quarter as well similar. So can you give us some sense as to why you're still doing capital release and why is it not getting offset by any sort of asset re risking or something? So any thoughts on that? Or is it captured somewhere else in the capital flow model?
So that would be one. What's the outlook for the same release of capital? That's one. Secondly, you mentioned that Delta Lloyd legal entity merger is expected before the year end. If I remember correctly, your earlier guidance was early 20 19.
So is it fair to say that you're running ahead of your earlier guidance? And how should we think about buyback once the legal merger is done? Because I think that was one of the hurdles that you're looking for. The third thing is, if I look at your cash flow that you got from subsidiaries, it's still tracking very well. I mean, dollars 800,000,000 for first half, dollars 1,800,000,000 last year, dollars 1,600,000,000 a year before that.
So would you say there is any fundies in this $800,000,000 cash flow you got this year? Or is it more or less in line with what you have been doing? And when shall we expect cash from Delta Lloyd? Because it looks like Delta Lloyd has a 190% solvency II ratio already. So these three questions would be great.
Yes. Thanks, Ashik, for your questions. Let's do the following. So the first one on the SCR, Jan Hendrik, I'll take the second one. And then the third one on the cash flows, Delphine.
So first, Hen Hendrik, over to you.
Hi, Ashik. Thanks for the question. The SCR movement in the operating capital generation bucket mainly reflects the runoff of the Individual Life portfolio in the Netherlands, both in NN and Delta Lloyd and Japan Closed Block VA, partly offset by the new business written. So the changes in our asset portfolio will come through in the bucket other. And again, there we do see gradually that we are switching to high yielding assets.
Maybe a word of caution on the €100,000,000 it rounds to €100,000,000 So I would not just multiply that by 4 and come up with any kind of run rate. This number can be volatile from quarter to quarter, but over time, we do expect some release.
Yes. So the second question, so we said this morning that we've issued the request for well, the filings for the partial internal model and the inclusion of the Delta Lloyd entities in the partial internal model and then to the regulator, and the process is going well. So we aim for finalizing that before the end of the year. Subsequently, let's say, the legal mergers are more of a subsequent program after that. So that is something that we've given guidance on that we would do that in 2019.
That's the first piece. The second one is on the potential buybacks. Well, if you look at the capital position, we're comfortable with our capital position. If we believe we have excess capital, which we cannot deploy organically or inorganically to create value, then we will return it to stockholders over time in the form of buybacks or special dividends as we have done so, by the way, in the past. And we will decide on such potential capital returns at the appropriate time.
And with that, maybe get you to Delfin for the 3rd question.
Yes. Thanks, Asik, for your question. On the remittances from subsidiaries, no nothing extraordinary in the quarter apart from the fact that, as you know, the Q2 is where we do normally expect the majority of the dividends coming from the international operations. And also, in this quarter, we have dividends coming from the heavy number of joint ventures that contribute to the remittances from both Netherlands Life and Non Life to a smaller extent. There was also this quarter, but again, I would not consider that when it's the first time that it happens is a small dividend coming from NN Bank of €8,000,000
Okay. Just one more follow-up on, you mentioned that you look to deploy capital efficiently. But what sort of M and A are we talking about which could lead to no buyback scenario? I mean, are we talking about an M and A of $100,000,000 to $100,000,000 or are we talking about an M and A of around $1,000,000,000 which would make you not do buyback? Any thoughts on that or just too early?
Well, when it comes to M and A, our view is that we take M and A opportunities as they come, and we judge them at their own merits against financial and non financial criteria. We prefer, of course, in market transactions. The one that we announced this morning is a good example. I mean, strengthening existing businesses in Czechoslovakia Republics is a very logical step for us to take. And if there's an opportunity like the one presented itself, then we will look at it.
And if we believe it's rationally the right thing to do and economically makes sense, then that's what we do. So that's where our preference is when it comes to M and A.
Our next question is from Mr. Cor Kluis, ABN AMRO.
Cor Kluis, ABN. A couple of questions. First of all, on the acquisition in Czech and Slovak Republic, could you give which is quite logical, of course, could you give some data like premium size, book value, earnings in the last few years and how the market share will change as a result of these two acquisitions? So that's one. Second question is about asset management.
There was a €3,000,000,000 outflow on 3rd party assets under management. Could you update us on what you currently what the reason of this is? And if you have taken some actions to improve the net inflow, of course? And what have you been doing to change that going forward? And on P and C, the combined ratio was 100.9%, quite an improvement.
Was this more weather related? Or do you also see a structurally, from an underwriting point of view, an improvement already? Or is that too early? Those were my questions.
Yes, Cor, thank you for your questions. So let me start on, let's say, the acquisition we announced this morning in the Czechoslovak Republics and ask Belfmann to give some details on that as well. First on the market position, right? We have a market position in Life and Pension in Slovakia and a position in the Life business in the Czech Republic. And what this is adding in terms of market presence is another 3 percentage points market share for the Life business in the Czech Republic and similar in a plus 4% in the Slovak market.
And then when it comes to the pension business in the Slovak market, we are now becoming the number one where because of the number of clients that are being added pension clients that are being added in the Slovak Republic. So in that sense, it's a bolt on acquisition that builds on what we have, gives us access to different and additional distribution channels and as a result, strengthens the profile of our presence there. And Delfin, maybe to add on the financials.
Yes. Thanks, Cor. Well, maybe just to highlight the obvious that this acquisition is relatively small in the context of the NN Group. But of course, very important and relevant for our Czech and Slovak businesses as it would support with the spend synergies, maybe some limited capital synergies, but more importantly, with other distribution and position in the activities with a stronger commercial power. When we look at the acquisition, we always look at our financial returns and it met our metrics for doing such an acquisition.
Obviously, things will change going forward. I think that the latest available publicly available information in terms Aegon has disclosed of being €16,000,000 of profit before tax. And I think this is probably as much as we kept saying now, except or maybe to add that we do expect an internal rate of return of double digits as being in line with our financial criteria.
So when it comes to asset management, we saw some outflows, but also some inflows. So let me so it's a mixed situation with a net outflow as a result for the quarter. That was the outflows were due to some performance driven outflows, a shift to passive funds, some allocation calls by institutional investors. And also, we've acquired the Delroyd Asset Management, so there's some concentration here and there for certain investors in which they need to make some calls there. And that's also what we saw coming through as a part of that.
We also had a €500,000,000 of net inflows of assets, and there was positive market performance. We're continuing our focus when it comes to the asset manager on attracting high quality assets such as EMD, multi asset funds, which usually have a higher healthy margins that they earn. Maybe it's also good to know that we're also having other initiatives to attract 3rd party assets. We've signed a memorandum of understanding in April
with China Asset Management to provide
a platform for NNIP and product development opportunities and leverage each other's capabilities in European and Chinese Capital Markets. And NIP Japan has been appointed to act as an investment manager on behalf of Japan's largest bank, Japan Post Bank of a Japanese local feeder fund, which buys an offshore senior bank loan funded by Voya Investment Management. So that mandate is expected to grow over time substantially. So I think that is a good piece. I think the thing on the asset manager also this quarter is the integration, right?
I mean, the integration of Delta Lloyd and NNIP completed now, done. And therefore, we also see the efficiencies as a result coming through. Then on Property and Casualty, and by the way, the asset manager obviously had an improved result this Q. If we then go to the Non Life business. The Non Life business, as Delfin said in his opening remark, has had a good quarter in which we see the impact of the program to improve structurally the non life company's profitability, Sterling's showing encouraging signs.
But again, we there's more work to be done to structurally improve the profitability of this business to our target of 97% or below. And it is also good to note that, of course, storms and weather related events are part of the combined ratio and part of our business. And that has happened in the Q1, and we will see these events coming through also in the future at some point in time. Having said that, if you want to track whether your program and your actions are actually getting some results, you need to look at the underlying ratio. And I'm also seeing that for 3 quarters in a row now, we're seeing combined ratios, excluding that January storm, below 100%, which I think is good as well.
So we're working through implementing rigorously traction. The expense reductions, by the way, are also well on track and, of course, more to be taken out by 2020. And that will support, of course, the combined ratio structurally structural development as well.
Our next question is from Mr. William Hawkins, KBW.
First of all, Lard, you make it very clear about reviewing excess capital against deployment opportunities in the future. But still, I find it vague about how you actually define excess capital in the first place. So can you just update us about what you're thinking is the binding constraint when you're trying to define your capital flexibility? That's question 1. Question 2, Delfin.
You repeated what I think was sort of the boilerplate comments about your cost savings that at some point there may be investments to support growth and make any other necessary investments. I think that's kind of a boilerplate statement. But I'm just wondering if you have any specific expectations upcoming that have made you kind of repeat it. So are there any particular investments that we need to be aware of that may hit the numbers? And then lastly, the private equity dividends, we know those kind of bounce around.
Is there any update you could
give us about what you might be thinking as kind of a normalized run rate for those? We seem to be getting to a stage where, at least my average for the past 3 years is about $120,000,000 per year. And therefore, what you've actually done in the first half is kind of normal, even if it was big in the second quarter. I'm wondering if you have any kind of feeling about the normality of private equity dividends. Thank you.
First, yes, William, thank you for your questions. So, Will, I'll hand over to Delfin in a second. First, on your first point about capital, we're comfortable, right, with our capital position. I mean, 226 percent, dollars 1,800,000,000 cash buffer, we're comfortable with our position. So let's make that clear.
We will remain to be disciplined in the way we deploy capital. That's our aim. As you know, we are open to M and A if it makes sense with a preference for bolt on and existing markets. It can be smaller M and A like we did this morning, can be other sized M and A, but it's all part of the opportunities that present themselves. And we will judge them all at their own merits.
And if we cannot deploy capital rationally in the business and organically or inorganic, then over time, it goes back to stockholders. And any potential capital returns, we will decide upon in the appropriate time. With that, Delfin?
Yes. Thank you, William, for your questions. The first on anything special of additional investments, not particularly, but please keep in mind that we are in mid-twenty 18. So we still have 1.5 years until the end of the program. And of course, in our different business units, there are different initiatives, a transformation program going on.
And it's only naturally to expect that not only due to inflation, but to specific investments that investments will also come that way. Then in terms of private equity dividends, maybe to confirm that our portfolio has somehow decreased from the past. It used to be around €1,000,000,000 There has been some disposals that has resulted in some of the dividends that we have received and recognized through the line investment income. And it's difficult to normalize. When I look back in 2016, the total amount of dividends were 72,000,000 In 2017, that was EUR 93,000,000.
Year to date, we've got in the first half of the year €62,000,000 both in 'sixteen and 'seventeen. We have some dividends coming from the investment in ING Life Korea. So I would have no indication why this should reduce or increase, but no particular guidance. And also in the timing of it, as I mentioned in the past, it depends on the particular exit strategies that the managers also decide for that. So we'll certainly be lumpy from 1 quarter to another.
Our next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead. Your line is open.
Hi, there. Thank you very much.
I noticed in Netherlands Life, the very strong investment margin, even if you take out private equity dividends and even if you adjust for the fact that it's the 2nd quarter. Just wondering, is there anything going on that we need to know about in terms of your kind of reinvestment yield and your policies to choose certain assets to optimize investment yield? Secondly, when you say an appropriate time for considering capital return, what is an appropriate time? Just your thoughts on that. That's it, really.
Thank you.
Yes, Farooq, thank you for your question. I don't have much to add to an appropriate time. The appropriate time is the time that we believe is the time at which this is relevant, and then we'll announce it if we believe that's the appropriate time. I don't have much more to say about that. So with that, I will add I will hand over to Delfin.
Yes. In Netherlands Life, well, we certainly saw a strong investment margin. And this was driven, of course, not only due to the private equity dividends that we mentioned explicitly, €55,000,000 but also there was the more or less normal level of public equity dividends of €50,000,000 during the quarter. Then when looking at fees and premium based revenues, they were these were lower than in the previous quarter Q1 because, as you know, there is seasonality in the renewal of the pension contracts. Technical margin has been more or less at the same level as the Q2 last year, which is within the range of what we consider being normal for the technical margin of Netherlands Life.
And as you know, this also we see from time to time volatility around these levels. Another element that has contributed to the good result is the reduction of expenses, of which part of it was a benefit this quarter due to some VAT returns. I think we mentioned €13,000,000 €15,000,000 for the total of the group. And an amount of that, more or less half of that, as you know, relates to the Netherlands Life segment, I mean, EUR 6,000,000. So nothing too particular, more stable technical margin and already seeing improvements on the administrative expenses coming down.
Our next question is from Mr. Matthijs de Wit, Kempen.
Yes, good morning. I got three questions, if I may. First one is on the Netherlands, the Life business. If I look at the costs, they're down €20,000,000 year on year. But you also mentioned that part of that was due to one offs.
So just wondering what the underlying improvement was and how we should think about the Dutch life expenses for
the remainder of the year.
And then just on capital generation, a small follow-up on earlier question on the SCR strain linked to the rerisking of the assets, which is apparently captured in that other bucket. Can you quantify for the first half how much that weighs on the capital generation? And then lastly, just to come back on the investment margin, it's trending down under IFRS, but I guess it's still increasing under the Solvency II framework, thanks to the rerisking you're implementing. Is there anything you could share on the Solvency II spread you're generating and how it has developed over the recent quarters?
Thank you, Matthias. So on the SCR, I will hand over to Thierry. But before that, it may be good if Delfin takes your questions about the Life company.
Yes. For Netherlands Life, Matthias, you mentioned this savings of €20,000,000 So you want, you can exclude the €6,000,000 that I mentioned before for the VAT reduction. So that would be, you like the savings so far. In terms of the investment margin, yes, you have seen that in the run rate of the margin currently is at 83 basis points, which is very much in what we mentioned in the previous call of having an investment margin of around 80 to 85 basis points. And indeed, we see through the operating capital generation that any transfer from government bonds into mortgages, for example, we see that reflected straight into the investment spread that we earn under the bucket operating capital generation.
We have so far not provided a disclosure of each of the items. But yes, you can perceive that part of investment margin not only being stable, but also depending on the rerisking potential increasing somehow.
Thank you, Delfin. Yes, so for the SCR, Jan Hendrik?
Matthias, yes, thank you for the follow-up. It wasn't very big in the bucket either. The key thing is that we look at risk versus returns. So moving to high yielding assets doesn't always mean that you have to, of course, allocate more to it. In the Q2, we did have a few portfolio changes, but also not all of them consume SCR.
Sometimes we have better for example, or slightly sharper hedging. So it's not very big in that bucket, but that is the right place to look for it.
We have a question from Mr. Johnny Vo, Goldman Sachs.
Just a couple of questions. Just in regards to the transaction that you recently did, it looks like or you announced this morning, looks like you paid about 2x book. In terms of the synergies that you said you were going to get, how much did you pay away in order to do this transaction? That's the first question. Second question, just regards to the dividend from Japan, which you did not receive 1 because of JGAP reserving.
When do you expect the dividend to resume from the Japanese business? And third question is just in regards to dividends from Delta Lloyd. It doesn't look like you've got a dividend from Delta Lloyd. But when I look at your 3 metrics, IFRS, capital generation and cash remittances. 2 of your metrics, cash remittances and capital generation, will exceed your IFRS number.
So I'm still a bit bemused by why your dividend is linked to an IFRS that yourself you don't necessarily gauge performance on fully?
Yes. Thanks, Johnny, for your questions. I'll hand it over to Delfin.
Yes. Good. Thank you very much, Johnny. So first question, well, I mean, you can look at an acquisition from different metrics. It's true, and you have seen that through the capital gain recognized by Aegon.
Another metric that you can look at it is the price of eligible on funds or based on Solvency II. And actually, that multiple is below one times. It doesn't really matter how you look from that perspective. What you need to look at is how much is the solvency capital that you are using in this acquisition and what is the cash flows and returns you're going to expect from it. That was the criteria on how we look at when we decided to do the acquisition of Delta Lloyd.
But also when you look at the actual cash outflows based on the price consideration and what we would expect in terms of dividends in the future, based on that is where we base our statement that, of course, everything is based on our expectations of spend synergies, how the business will perform into the future, but we do expect an internal rate of return of double digit. In terms of dividends, in Japan, yes, this year, we won't have any remittances coming from Japan related to restatement in the way that we calculated some dividends in the future. So basically, 2019 would be the next dividend that I would expect from Japan. And paying no dividends, now focusing on your third question from Delta Lloyd, At these levels, and I fully concur with you in terms of now the IFRS contribution that, of course, now is more and more difficult to measure as it's been integrated with the rest of the activities. But also the capital generation from Delta Lloyd, could justify dividends out of the subsidiary.
But we look at dividends more from a segment point of view. We plan to merge the legal entities of life and non life next year. So we do and you could safely assume that it's likely that dividends keep coming out of NN Life as it is better capitalized, but looking into account the capital generation from the segment as a whole. And finally, I think your last remark was on how to link our dividend to the IFRS profits. And I think it's, well, first, it's quite a standard in the industry to talk about dividend payout ratios.
And that's what we thought strongly at the time of the IPO. And we thought that it was prudent to assume a regular, very safe, ordinary dividend between 40% 50% of the operating result, leaving some extra room for extraordinary dividends or share buybacks or allowing for investing into further growth. Our objective here, when there is, if you like, tension between maintaining a sustainable, predictable evolution of the dividend per share or being within the range of 40% to 50%, the former has priority. So we do look at it as a regular, predictable, sustainable growth of the dividend per share. And if necessarily, we can deviate from the range of 40% to 50%.
We have a question from Mr. Stephen Haywood, HSBC. Your line is open. Go ahead, sir.
Hi, good morning. I've got a few questions on the free cash flow, particularly on the remittances. Sorry about all these small kind of minor parts. But ABN AMRO, the joint venture, the dividend coming up this quarter, is this capital release from any capital engineering? Or is it a yearly dividend?
Or do you expect it to be quarterly or annual there? Again, if you can sort of split that out between the Netherlands Life business and the normal ongoing kind of run rate of €190,000,000 Is all of the uplift from ABN AMRO here? Or is there additional uplift for any internal debt coupons that have to be paid to this quarter? And then on your NN Bank dividend, this €8,000,000 is great. It's good to see that it's finally dividending up.
Can you tell us whether this is an annual dividend or whether you might be doing this quarterly or am I getting too optimistic about a quarterly €8,000,000 from NN Bank. On the €139,000,000 other costs that you had in your free cash flow, I see there's a €58,000,000 for the subordinated loans, but the rest €80,000,000 seems quite high in comparison to last year, in comparison to the sort of run rate that you've seen in previous quarters. Could you give us an annual figure of the other holding company costs and debt costs that you'll see on a yearly basis, please? And then on a different topic altogether, back to the private equity dividends, Can you tell us whether you are including the disposals of private equity in as dividends or as capital gains below the line? Thank you.
Thanks, Stephen, for your questions. Delfin?
Okay. Thank you, Stephen. So let I'll try to not forget any of your questions. First, starting with the ABN AMRO joint venture. We do expect to have dividends going into the future.
They might be maybe at lower level. That has been the case this year as this was taking an opportunity to take some extra surplus capital from the joint ventures while maintaining it very well, maintaining both joint ventures, Life and Non Life, well capitalized. But we do expect going forward regular remittances from these profitable joint ventures. In terms of the dividend from NN Bank, Again, the NN Bank is able to finance their own growth and be able to pay dividends going forward. Although, I think that we should have some moderate expectations about the level of dividends coming from NN Bank.
In terms of the cost in the free cash flow for other, rightly so. You mentioned the €58,000,000 annual payment. So this is when the payment takes place only once a year of €58,000,000 as I said. The rest is basically a combination of holding expenses. Sometimes there are some adjustments on the taxes that have to pay from the holding as part of the fiscal unit in the Netherlands, but also special items relating to the holding company, new debt restructurings, for example, redundancies as we have seen.
Sorry, there is a final question on the private equity dividends. Well, it very much comes through the investment income when these are recognized. Otherwise, they are reflected on capital gains coming from revaluations of the equity. And when they are in the disposals is when it comes as part of investment income. When they are revaluations of equity as the rest of the equity, it is part of the movement of shareholders' equity and therefore not impacting the operating result.
Okay. So the pro legacy dividends are coming as part of the disposals of prodigy investments?
Yes.
Okay. And I just quickly follow-up on the Netherlands Life dividends to the holding company. Was there any additional uplift or from payment of subordinated internal loans?
Well, this is a regular payment. So every quarter, you've got approximately €15,000,000 of payment on the cost of the hybrid into the segment Netherlands Life, €10,000,000 in N Life, €5,000,000 for Delta Lloyd Life. There is a little bit coming from Non Life, a little bit from the bank. So yes, there is a regular quarter contribution on the payment of the hybrid debt that the group has injected into its subsidiaries. And that is reflected as part of the remittances in the chart that we regularly report.
Our next question is from Mr. Ashik Musaddi, JPMorgan.
Sorry, just one more follow-up question. So M and A, I mean, you have done a bolt on this morning, Czech and Slovakia, almost small, but it still helps your market position. How should we think about potential M and A in Belgium and Poland? I mean, if I think about Belgium, there has been recently, there has been some noise that SIBEAA could be up for sale. Would you be interested in a business like that?
Because post Delta Lloyd, I mean, your market share has doubled in Belgium. Would you be interested in things like SIBEAA? Secondly, are you what sort of business would you be looking in Poland, if anything, in Poland you'd be interested in? I mean, I've always heard that Poland is a tough market to get capital out. So would you be willing to inject capital in Polish business to do some M and A?
Any thoughts on that would be great.
Yes, Ashik, thank you for your question. When it comes to M and A, I hope you appreciate I cannot comment on specific names. As I said, we are open to M and A opportunities when they present themselves. We have a preference for in market transactions because for the obvious reason of strengthening structurally an existing platform that you have and benefiting from the in market trimmings as a result of it. Obviously, we'll judge it on its own merits and against very strict financial and non financial criteria in any of the markets where we would be operating in.
That would be our preference. And that's really what I can say because, as you know, these things cannot be they really have to be judged at the time that they come at the specific nature that they have.
Okay. But like one more follow-up. I mean, how should we think about, say, in asset management? I mean, is there anything you're looking at, at the moment in asset management of Belgium or nothing on the table at the moment?
Again, if we can strengthen our business, whether it's the asset management business, whether it's the insurance business, through M and A activity, with a preference for existing markets because of the logic that I just expressed of the market trimmings that it would have, benefits that it would have, we would look at it. But it's very difficult to give a blanket statements on that because they are really judged at their own merits against a rigorous set of financial and non financial criteria that we apply. And we always compare what we do with the alternative of deploying that capital in the form of capital return to our stockholders. So the key thing here is to be sensible and to be rational in the way you do this. And to always ask yourself, is it strengthening your business profile?
Are the economics correct? Are you a right owner of that business? And that's how we're looking at this.
Perfect. Thank you. Many thanks for this.
Our next question is from Mr. Bart Jooris, Degroof Petercam.
Yes. Good morning. Most of my questions have been answered. I have a follow-up question or a small part. The evolution at Enum Bank, you're talking about pressure that is compensated by synergy, savings and, let's say, low risk cost.
Assuming probably low risk costs are at the bottom, how far are you in the integration? Can you withstand further interest pressure, which is probably to be expected? So how could you grow the bank further in these circumstances?
I'll hand it over to Delfin.
Yes. Thank you, Bart. Indeed, NN Bank, I mean, had an operating result in the quarter of €35,000,000 which was very much stable versus the Q1 of this year or the same quarter of last year. So indeed, the pressure on the interest result is being felt as the mortgage margins have been decreasing. And this, of course, been partially offset by better margin on savings.
Also, the rate on savings accounts has lower has been coming down. In addition to that, Denen Bank has been benefiting from having less expensive long term wholesale funding that, of course, help maintain the overall intermediation margin for the bank. Very important, of course, is the decrease on the administrative expenses. And then here, although part of the integration is progressing very well, but still some savings are expected to come going forward. I think the most important consideration in terms of thinking about the growth of the bank is slightly very similar to what we have mentioned for our appetite for M and A is we look in it from the perspective of obtaining a proper return on the capital that is being used and therefore will be opportunistic according to the opportunities that the bank brings to grow.
The bank is very well capitalized with a common equity Tier 1 ratio of 16.2 percent and as a consequence can nicely grow by its own funds, by its own capital without requiring the group to support that growth.
Okay. But at current margin margins, do you see room for volume growth? Or do you not obtain your ROEs you want?
Well, in the because of some pressure on the margins, as a matter of fact, our growth in new mortgages slowed down somehow because we did not wanted to gain market share or volume per se. That's very much a feature that we try to keep as part of our disciplined approach to new business, not only in the bank or the Netherlands, but across of the group. And as a consequence, yes, if pressure on margins reduces, that might possibly result into lower volumes and lower growth of the bank.
Our next question is from Mr. William Hawkins, KBW. Go ahead. Your line is open.
Could you guys make some preliminary comments about IFRS 17, please? Do you expect visible implementation costs at some point? And would they be considered operating or non operating from your point of view? And then some other companies are being a little bit cautious about the upwards pressure that IFRS 17 could have on their leverage ratio, potentially making that a limiting factor. When you answered my earlier question, Lars, you didn't refer leverage at all as an issue for excess capital.
But I'm just wondering if IFRS 17 is something we need to take account of for your leverage. Thank you.
Thanks, Will. So our CFO will comment on the IFRS, right?
Yes. Thank you, William. So of course, IFRS 17 will result into implementation cost. So far, this has been not very significant, but we do expect that to accelerate in the second half of this year and especially also in 2019. Our intention, and I think we have communicated that in the past, is to recognize those nonrecurrent expenses as part of the special items, so below the operating result.
In terms of the impact on the leverage, it's still a bit premature to see what the actual implications of implementing the new standards for the new accounting standards for insurance contracts will come. I think that we when we at least how I look at our financial leverage with being at 27%, but more importantly, with fixed charge coverage of 14x. Also, this is, if you like, the normal metrics that the market looks at often, But there is also what I would consider very important, which is the interest cover, which is more based on the actual cash flows that any group or any holding company has in order to cover their external debt. And this has traditionally been very high for us because of this high correlation between the fungibility of our operating results on that sense. So I don't expect problems in relationship to the actual leverage of the company.
What precisely from an accounting point of view that might result, I don't know yet.
That's very helpful. Thank you.
Thanks, Will. Thank you for all your questions. Before we end the call, let me conclude by saying that we have reported a solid set of results for the Q2 of 2018. The integration of Delta Lloyd is progressing well and we are extracting the synergies as evidenced by the cost savings that we have realized. And our balance sheet and our capital position remains strong.
We are committed to delivering on our strategic priorities and creating long term value for all our stakeholders. I wish you all a pleasant day.