Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its Q1 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 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 LNG 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.
Yes. Good morning, everyone, and welcome to our conference call to discuss NN Group's results for the Q1 of 2018. I will start today's presentation by talking about the highlights of the Q1 results as well as our progress on the integration in the past quarter. Delfin Roeda, 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 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. NN Group's operating result of the ongoing business for the first quarter was €313,000,000 As you know, a severe storm hit the Netherlands in January and this quarter's operating result reflects the related total impact of €89,000,000 in our Non Life and Reinsurance businesses. This is more or less in line with our market share. The 1st quarter operating result also includes the contribution of Delta Lloyd while the operating result a year ago benefited from 41,000,000 of private equity dividends.
The integration is progressing well and we continue to drive improvements in efficiency. Further cost savings of €42,000,000 were achieved this quarter in the business units in the scope of the integration bringing total cost reductions to €175,000,000 compared with the full year 2016 expense base. This represents half of our targeted cost reduction of €350,000,000 by 2020, so well ahead of the earlier envisaged schedule and I will talk more about this on a later slide. Our balance sheet and capital position remained strong. NN Group solvency position at the end of the Q1 was 2 13%, up from 199% at the end of 2017, driven by a combination of positive market impacts and operating capital generation.
Free cash flow to the holding company was €198,000,000 bringing the cash capital to holding company to €1,600,000,000 at the end of the first quarter. New sales were down by just under 8% at constant currencies. At Netherlands Life, there was a lower volume of existing group pension contracts which came up for renewal this quarter. New sales at Insurance Europe increased driven by the contribution of Delta Lloyd Belgium while new sales in Japan remained broadly stable despite increased local competition. Let's move to Slide 4.
We have already achieved a number of milestones to integrate Delta Lloyd into NN Group. For example, Delta Lloyd Bank, Delta Lloyd Asset Management and Delta Lloyd Life in Belgium have been legally merged into the respective NN businesses and are now operating as combined entities. We are rebranding the Delta Lloyd products and services and rebranding has already been completed in Belgium and we expect this to be largely finalized at the other units by the end of the year. We are also in the process of relocating Delta Lloyd employees to NN locations. In terms of IT, the Delta Lloyd asset management portfolios have been transferred and are now running on NNIP's systems.
We have started decommissioning some head office systems while other systems at the business units can only be decommissioned once policies have been migrated. We are currently working on expanding our internal model to include the Delta Lloyd Life and Non Life entities and we aim to complete the mergers the life and non life companies in 2019. We are well on track, but obviously still have a lot of work to do and some of the more complex integration projects are ahead of us. Throughout the integration process, we make sure that we never lose sight of our customers. This was particularly evident following the January storm.
We were there for our customers in their time of need and were able to settle most of the thousands of storm claims within 1 month. Our focus is also on maintaining our commercial momentum by our commercial momentum by offering our customers innovative solutions and value added products, while at the same time writing profitable new business by focusing on value rather than volume. We continue to launch new protection products in Europe and we have opened a new innovation SparkLab in Spain to develop creative solutions and drive innovation in that country. So let's turn now to Slide number 5. At our Capital Markets Day last year, we announced our target to reduce the administrative expense base for all the business units in the scope of integration by around $350,000,000 by the end of 2020, of which 50% by the end of 2018.
As I mentioned earlier, the integration is progressing well and we have already realized a total cost reduction of €175,000,000 at the end of the first quarter. This means that we are well ahead of schedule. Now given the strong process so far and progress so far, we have announced today that we are raising the cost reduction guidance to €400,000,000 by the end of 2020 and be seen in the right hand graph on Slide number 5. We are confident that we can continue our track record of cost discipline and achieve the targeted cost reductions. And with that, I would like to hand you over to our CFO, Delfin Rueda.
Thank you, Larp, and good morning, everyone. Let me start with NN Group's operating result of the ongoing business, which was €313,000,000 for the Q1, down from €406,000,000 in the same quarter last year. This was mainly due to the severe storm in January, which had a total impact of €89,000,000 in our Non Life and Reinsurance businesses. The current quarter also reflects the contribution of Delta Lloyd, while the operating result in the Q1 of last year benefited from EUR 41,000,000 of private equity dividends. The net result for the Q1 was €399,000,000 versus €435,000,000 in the Q1 of 2017.
The decrease reflects the lower operating result, higher special items largely relating to restructuring expenses as well as the amortization of acquisition intangibles. This was partly offset by higher revaluations on real estate portfolio. Moving on to Slide 8, I will take you through the performance of the individual segments. The 1st quarter operating result of Netherlands Life was €212,000,000 reflecting the inclusion of Delta Lloyd, while last year's result included €41,000,000 of private equity dividends. The loss at Netherlands Non Life was largely due to a €56,000,000 impact of the January storm.
We also saw less favorable underwriting performance in both the individual disability and group income portfolios. The combined ratio for the segment Netherlands Non Life was 106.3% or 98.6% excluding the impact of the storm. Insurance Europe reported a higher result this quarter, driven by higher fees and premium based revenues and the contribution of Delta Lloyd Belgium. At Japan Life, we saw the result decrease 15% excluding currency effects, primarily due to less favorable mortality and surrender results compared with a strong quarter last year. This was partly offset by higher fees and premium based revenues as a result of a larger in force portfolio.
The higher operating result of Asset Management was driven by the inclusion of the Delta Lloyd activities as well as expense reductions. And finally, the loss in the segment Other was due in part to a €33,000,000 impact of the January storm and a claim from a legacy portfolio, which are reflected in the result of the reinsurance business, while the holding result includes some non recurring expenses. On the other hand, the Banking business reported a higher operating result driven by the inclusion of the Delta Lloyd activities as well as lower expenses and favorable risk cost, partly offset by a lower interest margin. Let's move on to the next slide, which shows our cash capital position. The holding company cash capital increased to €1,600,000,000 at the end of the Q1 from €1,400,000,000 at the end of last year.
The free cash flow during the Q1 was €198,000,000 driven by €256,000,000 of dividends received mainly from the Dutch units. Details of the dividends upstream by segment can be found as usual in the appendix of this presentation. On Slide 10, I will take you through the developments in NN Group Solvency II ratio. Our Solvency II ratio was 2 13% at the end of the Q1, up from 199% at the end of 2017. The operating capital generation for the Q1 added 4 percentage points to the ratio and includes a negative impact of €67,000,000 after tax related to the January storm.
Excluding this impact, the Onfon's capital generation would have been €300,000,000 with a contribution of 5 percentage points to the Solvency II ratio. Market variances made a positive contribution of 10 percentage points. This mainly reflects favorable movements in both government and corporate bond spreads and flattening of the curve as well as positive revaluations of our real estate investments. The column Other includes the negative impact of the reduction of the UFR by 15 basis points in January this year. Capital flows are 0 this quarter as we already deducted the proposed 2017 final dividend from the Solvency II ratio in the Q4 of 2017.
And with that, I pass you back to Lars for the wrap up.
Yes. Thanks, Delfin. We have today presented NN Group's results for the Q1 of 2018, which were impacted by the severe storm that hit the Netherlands in January. Notwithstanding this, the businesses continue to focus on driving performance and improving efficiency in order to achieve their medium term targets. The integration of Delta Lloyd is progressing very well and cost reductions are ahead of schedule.
We have today announced that we are raising the cost reduction guidance to €400,000,000 by the end of 2020 and we expect to achieve at least half of these savings by the end of this year. Our balance sheet remains strong in line with our disciplined capital management approach. The Solvency II ratio increased to 213% and the cash capital position to €1,600,000,000 at the end of the Q1. We are committed to delivering on the Delta Lloyd transaction by combining the strengths of our businesses and cultures and successfully extracting the synergies. We have seen encouraging commercial momentum and our customer satisfaction scores as measured by the Net Promoter Score have increased over the past year.
As we progress with the integration, we will never lose sight of our main objective, which is to provide an excellent customer service through innovative solutions and value added products. I will now open the call for your questions.
Thank you, Mr. Fraser. Ladies and gentlemen, we will now start the question and answer session. The first question is from Mr. Arjan Van Veen, UBS.
Go ahead please, sir.
Thank you. Can I ask a couple of questions, please? The first one, just on the capital position. So it's surprisingly very strong at 2 13%. I would assume it gets better once you implement the partial internal model for Delta Lloyd.
So you're getting back to levels that you're at when you're regularly paying buybacks. So could you maybe discuss a bit around that? What kind of what your criteria are surrounding a decision whether or not to do any form of capital return or increase dividend or the like? The second question was around the Netherlands Life results. The numbers remain somewhat weak and I understand.
There's obviously lower PE dividends in there, etcetera. But this quarter as well as last quarter are levels that look like Delta Lloyd is not even in there. So I was just curious if you can give a bit more color around your confidence that the earnings from the Netherlands Life division will bounce back to a level that we would have expected before the Delft Lloyd acquisition in terms of adding that back in, some of the changes you've done, the asset change, rerisking, etcetera?
Yes. Arjan, thank you for your questions. I will take the first one and I will ask Delfin to talk about the Life results. Yes, so about the capital position. Obviously, we're pleased with our Solvency II position and with the cash capital buffer of €1,600,000,000 and we're comfortable with our leverage position.
It's all about being disciplined and rational and that's what we aim to be in our capital allocation decisions. And you know that we have a policy that if we have capital in excess of our ambition, we will return it to stockholders unless we can invest it in a value creating opportunity including M and A. We aim for an attractive growing dividend per share. And I would like to remind you of our guidance that we expect a double digit increase of our dividend per share over the year 2018. Share buybacks, which we have done in the past, are an efficient way to return excess capital to stockholders, but obviously we'll take such a decision at the appropriate time.
Thank you, Arjan. So on your question on Netherlands Life, I mean, maybe good just to remind everyone that the medium term guidance that we have provided for Netherlands Life is to be broadly stable to the level of 2017. And the fact that we do, however, expect possibly higher free cash flows than the net operating result of Netherlands Life. In terms of the evolution in this quarter, you're right when you mentioned that the main driver for this apparent weaker situation is the lower Private Equity dividends that were very strong in the Q1 of last year. There was €41,000,000 in the last quarter.
However, this quarter, this is much more limited, only €7,000,000 And these Private Equity dividends are volatile, so it might happen in 1 quarter or another. In terms of the technical margin, I think is the quarter is very much according to the guidance that we have provided between €40,000,000 €50,000,000 per quarter. And we have indicated in the past that there is this pressure on the fees and premium based revenues due to the runoff of the portfolio. However, I can confirm, although we no longer disclose separately that the Delta Lloyd like business has contributed positively also to the segment.
And then, also in the past, you gave guidance around the margin there. Is it possible to reintroduce that?
We have seen I think you're referring to the investment margin as percentage of the assets under management. And you have seen that it has been more or less stable. So it was a bit higher in Q4. We are at approximately the same level as Q3 last year. And this margin between 80 and 85 basis points varies among other things, for example, on the contribution of dividends in the particular quarter.
This margin, just to remind everyone, is calculated as the last 12 months margin.
So 80 to 85 is a reasonable range from your point of view?
From 80 to 85 basis points is I think is a reasonable range to estimate. Of course, we have always indicated that can be a bit volatile from 1 quarter to another.
The next question is from Mr. Cor Kluis, ABN AMRO.
Good morning. I got a few questions. First of all, about the warrants that are outstanding owned by ING. Could you indicate how you look to debt? Is it possible that you might buy that back in the future?
Or how will you put fully diluted number of shares in it if it if the share price rises to the exercise price? So could you give some comments on that one? And secondly, on the cost cutting, the €50,000,000 extra, this is the 2nd upgrade basically after the acquisition. You show on Slide 5, I think on the right side, how the composition of the €400,000,000 is. But could you indicate where most of the €50,000,000 delta is coming from an extra cost cutting point of view?
And last question is about Solvency. The Solvency II ratio, of course, quite good. It's also dependent on macro factors, which was the big swing factor in the quarter, of course. Given what's currently going on in the macro environment, can you give some indication of how the Solvency II ratio developed in the Q2 at least until now? Those were my questions.
Yes, Cor, thank you for your questions. So what we're going to do is I'm going to do the cost question first and I'll ask Elphin to comment on the warrants and Jan Hendrik to comment on the S2 ratio question that you had. So on the expenses, we've raised our guidance today not only for the full period from €350,000,000 to €400,000,000 but also de facto for the year itself where we say that for the €400,000,000 we expect at least half to be done this year as well. We are doing that because we have a raft of programs running on this. And what we're seeing is that those programs allow us to be better in the way we can drive efficiency across the board.
And as a result, it's not a particular area that we expect the additional €50,000,000 to come. We just believe that the additional €50,000,000 we're able to do on the back of the programs that we have planned for. And that's why we've come out with additional guidance now because we're ahead of our plan and our experience so far has given us the confidence that we're doing the right things and that we're implementing better and also faster than expected and that's the background of this. Let me pass it on to Delfin on the warrants.
Yes. Thanks, Cor, for your question. On the warrants, maybe just to remind everyone, these warrants were established before the IPO by ING, gives them the right to exercise warrants for approximately 35,000,000 shares new shares, and that represents around 10% of the total capital. The warrants can be exercised up to July 2020 4. If they were the strike price is at €40 per share.
So if they were to be exercised at any point of time, the impact that it will have is capital increase in the equal amount of the exercise price. Obviously, if they are exercised, it's assumed that the share price will be above with some dilution effect for the existing shareholders later in the future. So we have not done any hedge or anything to protect this dilution, which is potentially in the future, and we will consider options as they come
along. Yes, Jan Hendrik? Hello, Cor. Thank you for the question. Yes, since the end of March, we've seen positive developments in equity markets and a slight increase in rates.
On the other hand, we've seen a slight widening in the high quality sovereigns that we have on the portfolio as well. So the net effect of these different movements is broadly neutral, I think.
The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please, sir.
Hi, good morning, Dimah. Ashik here. Just a couple of questions. First of all, let me ask the buyback question in another manner. So your cash at the moment is €1,600,000,000 and I'm hoping you'll generate decent cash by the end of the year.
Your solvency ratio is 2 13%, probably quite high compared to what 3, 4 quarters have been in the recent past. So you mentioned that you'll give clarity on buyback in the future, but why can we get some clarity on M and A? I mean, what sort of M and A would you potentially do? Is there anything in the pipeline that we should think about? That's number 1.
Secondly, is on deleveraging. Is there any need to delever at the moment? Because if I understand correctly, you don't have any call dates in the near future. So do you think you'll be using deleveraging you'll be doing deleveraging on an accelerated basis just the use of cash. So these 2 this one question.
The second one is, I noticed that you have moved around, say, roughly $3,000,000,000 of realized cat gains in the IFRS operating profit below the line. As an analyst, clearly, that's the way we look at it is one off. You don't really care about realized cap gains. But one of your peer in the Dutch market normalizes this realized cap gains in operating profit. So how should we think about that?
Do are we still looking like for like? Or should we be moving that to operating profit if it's always positive? I mean, dollars 3,000,000,000 is a big number over the past 4 years. Even if you normalize over 30 years, it's still like $100,000,000 a year. So these two questions would be appreciated if you can give some color.
Thank you.
Thanks, Ashik. I will take the first one and I will then pass on to Delfin for the question about the gains. On the leverage position, we're comfortable with leverage position that we have. There is indeed no maturities coming anytime soon. The first one is in 2020, another €300,000,000 that is up for maturity.
So we'll cross the bridge when we get there at that particular point in time. But we're fine with where and comfortable where we are with our leverage position. When it comes to M and A, a couple of things. Let me repeat what I said on that also at the Capital Markets Day on the 30th November. We have just acquired a large company, Delta Lloyd.
And our focus is on integrating those businesses and extracting the synergies. And we're pacing well on that at the moment. Then on the Netherlands for instance, we have a great platform, a thriving franchise with very substantial positions. So there is no need for large scale insurance M and A in the Netherlands. And therefore, when we look at M and A opportunities, we'll obviously judge them at their own merits and with a priority on existing businesses and existing markets where we are present.
But that's what I said earlier and I'm repeating that now today. So and with respect to your buyback question, as I think I've already answered that question on the first when Arjen asked it as well. So we want to be disciplined and rational in our capital allocation decisions and we're pleased where we are. And we will take any excess capital that we cannot put to work. We believe we have that over we'll go back to stockholders in the most efficient form.
So with that, I'll hand back to Delfin. Thank
you. Yes. On your question 6 of how to think about the capital gains is I mean, we could be discussing and debating for a while. I think that for the purpose of this call, I will keep it short. We do invest in our assets for not only the regular income like dividends and interest coupon, but in certain asset classes like private equity.
In equity, there is an important element of value creation that comes through the capital gains. And these are, from time to time, recognized below the line. So one has to assess how you want to think about it, but it's obviously a part of the expected investment result is expected over time to becoming below the line. Another way of looking at it is basically from leaving aside the IFRS perspective, looking it from a Solvency II generation point of view on which all investment assets are at market value and that we recognize every period of time the surplus of these returns versus the regulatory discount rate that we use to discount off our liabilities. And that is, if you like, a more stable and logical and comprehensive point of view.
But I do recognize that we don't have the same granularity in terms of reporting under Solvency II that we have under IFRS. I hope that answers
No, that's definitely the case that Solvency II, I mean, based on my understanding as well, is more relevant than IFRS. But the only reason I'm trying to flag this, it creates a bit of not like for like when I compare with your peers because the peer set numbers is always including cap gains, which could be big. And given that you have already realized $3,500,000,000 I mean it's a huge number for past 3.5 years. So that's why I was thinking like how should we think about that. But I got your answer and maybe we'll touch base offline at some point on
this one.
Thank you.
The next question is from Mr. Johnny Vo, Goldman Sachs. Go ahead please.
Yes. Thank you very much. Just a couple of questions. I mean, I'm quite surprised at how large your losses were for windstorms. Is this a fact of that there's overlap in exposure between Delta Lloyd's book and your book?
That's the first question. And the second question just relates to Delta Lloyd's solvency increase, which increased substantially. I mean, can you give an impact of what was going on with the Delta Lloyd book? Obviously, rates have gone up quite substantially since the start of the year. And how this impacts Delta Lloyd's capital generation going forward?
Thank you.
Yes. Thanks, Johnny. Indeed, the solvency ratio of Delta Lloyd Life is nearly 170 percent now. So I'll pass on to Delfin for that. But on the windstorm losses first, well to be honest it's in line with our market share, right?
We're a large player And certainly after the acquisition of Delta Lloyd, we have a very large fire book with and therefore, the loss that we incurred as a result of this heavy storm is really in line with our market share. So that's something so to me not surprising in that sense. Now we did give an estimate at the Q4 numbers which was only very shortly a couple of weeks after the storm. And obviously now we're a couple of months later and we can give you the tally now which is €89,000,000 and that's what we reported today. But I would say, yes, heavy storm in line with our market share on fire insurance and therefore to us not a big surprise.
I'll give it to Delta now for the S2 ratio on Delta Live.
Yes. Thanks. Johnny, on your question on the movement for Delta Lloyd Life Solvency, indeed, from 153% to 169% is a very positive evolution. The underlying reasons are the same as for the group. It comes from a strong operating return.
The market variances, the same elements that we have mentioned for the group, the flattening of the yield curve, the reduction on the credit spreads for sovereign bonds, particularly those that we hold in a larger proportion, Also, the increase of the credit spreads for corporate bonds, that is also positive for us, the flattening of the yield curve. So we actually have a very good quarter from a market perspective as most of the changes with the exception of Equities has been positive to us. And even in Equities, our portfolio has performed better than the indexes, the Dutch indexes on that front. In the case of Delta Lloyd, there has been a little bit higher proportion on the impact of the revaluation of the real estate that for the rest of the Dutch entities. But apart from that is the same logic.
The next question is from Mr. Matthias de Wit, Kempen. Go ahead please.
Yes, good morning. Three questions, if I may. The first one is on the cost savings, where you raised the target to €400,000,000 I wondered why you did not change the guidance for 5% to 7% growth in the operating result and for flat earnings in the Netherlands. So is that just because you expect some negatives elsewhere to which will offset these savings? And then on capital, just on a bit more detail would be helpful on the market variances.
Can you break them down between the different components you mentioned? I'm just trying to get an idea of the improvement in the economic capital position, so excluding items like flattening of the curve, etcetera. And then lastly, on the asset mix, there's not that much going on in terms of re risk during the quarter. So the mortgage book is rather static. Also another risk assets that there is not much of a shift out of sovereigns into risk assets.
So can you maybe provide some color on that and also on the outlook for the re risk? Thanks.
Yes. Thank you, Matthias. So Delfin.
Okay. So let me go 1 by 1 on your three questions. The first one on the cost savings, Let me remind everyone that our guidance for the growth of our operating result is a medium term guidance between 5% 7%. Obviously, since this medium term, and therefore, you can always expect positives and negatives. As a matter of fact, this quarter, we have seen some unusual amount of negatives, including the storm.
So we see no reason to change this guidance, which is, as I said, a medium term guidance between 5% 7%. In terms of the market variances, there has been each of them actually relatively significant. We mentioned, I think, that the probably not probably, the largest impact is coming from the movement on credit spreads. Then it is the increase in interest rates and the flattening of the curve that also have a significant impact, the real estate revaluations that we mentioned. And I think that overall, that explains the 10 percentage points increase in the Solvency II ratio in the quarter.
In terms of rerisking, I'm getting a bit boring on this in the sense that we continue with our very gradual process of finding, if possible, more illiquid assets, mortgages being one of them. And basically, we are, little by little finding these opportunities when it happens. During the quarter, there has been €1,000,000,000 invested in mortgages and other asset that provide a bit higher investment yield. But again, every quarter might be higher or lower depending on the availability of these assets and is more of a gradual process.
Okay. And if I understood you well, there is no major SER strain to be expected from the re risk, is that correct?
You mean from the rerisking? Yes, Matias. So in of course, we have seen also in the past some reduction, actually on our equity exposure that has had an impact on our reduction on the SCR. But in general, in particularly, the mortgages are not very unfavorable on the contract. The balance between the return, expected return and the regulatory capital consumption of mortgages continue making it a very attractive asset class for us.
Yes. Maybe to add to that, I think we do see as we look at risk and return when we do this move into high yielding assets, and Delfin is correct that when you sell something like equity and invest it in mortgages, then you would see a benefit, of course, where you sell government bonds and invested in mortgages, you
would see a slight increase in the
SCR, but you shouldn't look at one effect. You should always look at the joint effect on the portfolio. And gradually, what we try to do is to optimize the return for a given level of SCR.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead please.
Yes. Good morning, everybody. I wanted to talk about the quality of capital a little bit because it seems that your other bucket is only down 1% in your Solvency II evolution, where the interest on non qualifying debt should also be 1 percentage point. So, interest on non qualifying debt for qualifying debt should also be 1 percentage point. So it seems that you have a large offsetting factor, which presumably is non eligible funds becoming eligible.
So I was just wondering if you could maybe specify the headroom you now have in your tiering buckets. And the second question is on UFR drag. I can't remember that in I think it was in Q1 'sixteen that rates moved down and you mentioned that your UFR drag would increase by €100,000,000 per annum. I did some numbers myself and I think your overall UFR drag with Delta Lloyd is around €400,000,000 at the moment. And I was just wondering if could give some interest rate sensitivity to that number.
If rates were to go up, how much would your capital generation improve on the back of that? Those are my questions.
Yes. So thank you, Robin. Delfin will take your first question. And then sorry, and then I'm going to ask Jan Hendrik to talk about the UFR drag and interest rate sensitivities, etcetera.
Yes. Thank you, Robin. Indeed, the segment Other covers many different things. The biggest negative impact, as you rightly said, is the reduction of the UFR from 4.2% to 4.05 percent, and this has been reflected very much the impact according to the disclosed sensitivities. So you also pointed right to one of the element explaining the positive reduction of non eligible on funds, which come as a consequence of the increase of basic on funds.
But there are also many other aspects, among others, model and assumption changes, some positive impact of the legal merger in Belgium in resulting in a reduction of the SCR. So quite a few different elements impacting that change in the negative 1% in the segment other not segment in the bucket other.
And the headroom in your tiering buckets?
In terms of the tiering, there is approximately €600,000,000 for Tier 1 and approximately €200,000,000 for Tier 2. So a bit increase from the previous quarter in Restricted Tier 1 and more or less at the same level, slightly down for the Tier 2.
So Jan Henrik?
Yes. Thank you, Robin, for the question. The first thing to say is that when the UFR change happened, of course, it moved exactly in line with the sensitivity we disclosed before. So you can see from that and we also think, by the way, that the next 15 basis point change is also going to be roughly 5 percentage points. In terms of getting it back, you're right, it comes back over time.
Of course, exactly how quickly and how much depends a lot on where rates are at that point. But we think it will come back roughly. The way to think about that is roughly 7 to 8 percentage points of the reduction that you see is what you get back in capital generation when you look forward.
And if rates go up by 50 bps, say, what kind of reduction of the UFR direct would you expect? Or is that something you want to disclose?
I don't think we should go into the exact details on that. What I would do is to look at the sensitivity we've disclosed and extrapolate a bit from that, if I were you. And then I would take that effect and see the 7% to 8% per annum of that Own Funds movement.
The next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead please.
Hi, there. You alluded to some initial capital synergies in Q1 with Belgium. Can I just ask sort of roughly factually the phasing of more capital synergies? So it sounds like you may or may not get internal model approval, but you're hoping to get it this year. So there'll be potentially an uplift then.
And then would you also then get capital synergies in the Solvency II model if you can find them next year with the mergers? So do we basically have another sort of 2 main events for further capital synergies and an uplift in the ratio? 2nd point is on your private equity portfolio, can you remind us of the market value of that right now and what your expected return is? What you hope to get? And those are my questions.
Thank you very much.
Thanks, Farooq. So on the PIM, etcetera, Jan Hendrik, please, and on the private equity portfolio, Delfin. So Jan Hendrik?
Hi, Farooq. Thank you for the question. Well, our PIM major model change or expansion of scope is progressing according to schedule is what I can say. We are still hoping for approval by the end of the year and that is of course subject to DNB approval. With regards to capital synergies from that, the first thing is to remind you of the €350,000,000 benefit currently in our standard formula SCR in Delta Lloyd, which we also had in our annual report, which of course we first remove when we move to the internal model.
So any additional benefits first have to make good that difference. So we don't expect substantial benefits beyond that. And on the mergers, I think on the PIM at group level, of course, you get already the full diversification benefits. So there could be a benefit at sort of Netherlands Life level in terms of fungibility, but perhaps not a substantial benefit additional benefit from the legal merger at group level.
Maybe I can just quickly ask. So in 1Q, you mentioned Belgium the Belgium merger. What was the impact in other?
On the SCR, it was
On the tote, yes, yes.
So on the SCR, it was a small I mean, you can see in the box other, it's also rounding to less than 0.1%. So it's not substantial. These are all small benefits coming through. And as Elphin said, it's a number of different things in that bucket leading to the overall benefit that you referred to.
Other than on private equity?
Yes. Yes. On the Private Equity, we have approximately €1,000,000,000 of Private Equity Investments. And well, what to expect in terms of return, I guess, your guess is as good as mine on this. What yes, I think let's leave it on this.
So it's €1,000,000,000 And as we have seen so far, I mean, the return has been quite good. So when I look back into the last 14, 15 years of Private Equity, the return has been very good. But as they say, past performance is only an indication of what could be the future
question is from Mr. Albert Ploegh, ING
Bank.
Yes. Two questions from my end, more on the operational side. First on Japan Life. Yes, you explained why the technical results were weak in the quarter. Yes, should we then really see this as some kind of really one off?
Or could there be some follow on effect in the following quarters as well, especially on the lower surrender results? Also in Japan, of course, the cost base corrected for FX was up quite a lot. And the ISO is also a one off element in there, which is basically in the new kind of cost base going forward as well? And the second question operationally on the non life operations in Holland. On the stability business, if I recall, I think you were guiding more towards, let's say, normalized combined ratio there of 90% to 95 percent.
You're at the high end. We will note that reasons with the high claim trends, that's still unfavorable. Yes, how is this progressing? And how are you dealing with the book? I mean, should we basically expect the high end of that range to continue for the at least the coming quarters?
Or is there anything more you can share on that? That would be helpful.
Yes. Thank you, Albert. So first on the D and A, I will take that question and then I will hand over to Delfin for the Japan discussion. Well, first I'd like to mention that the Disability and Accident business is reporting a 95% combined ratio this quarter, which we believe is a very decent ratio for that business. Indeed, over the last half year, we have seen some negative claim developments in the individual business.
We've seen some group income. People on average staying sick longer than expected. Obviously, we're monitoring these things with very closely and we're taking continuous action to ensure that we maintain a good profitability level also moving forward. But I would say the 95% is a decent combined ratio for this business. With that, I would like to hand over to you Delfin for the Japan discussion.
Yes. Thank you, Albert for your questions. On Japan Life, more than the quarter in terms of technical margin being very low, I think is more than the Q1 of last year. It was extremely positive, extremely high. We highlighted that at that point of time as we do expect basically to see a marginal positive technical margin of the quarters coming from Japan Life.
As you can see under IFRS, we basically show the profits coming mainly from the fees and premium based revenues with the technical margin being and investment margin being a very low contribution. In terms of the cost, what we have seen is investments in order to facilitate our commercial effort. Also, the joint venture with Sumitomo, that has come very nicely in terms of increase of sales and in increased value of new business and also some investments to take care of additional regulatory requirements, but overall, investments in order to support the business increased value in force.
The next question is from Mr. Stephen Haywood, HSBC.
A couple of quick questions, I hope. With your cost savings being increased, has your restructuring charges increased as well? I know you gave guidance of about 1.5 times the actual cost savings. But if they're on the same program and the programs just appear more efficient, are the restructuring charges at the same level? Or have they actually increased?
And second question, on the Non Life performance, you gave an underlying combined ratio of 98 point 6%. How many quarters do you think there will be before you get to the sort of 97% target? Thank you.
Yes. Thanks, Stephen. Let me take the Non Life question, then I'm going to ask Delfin to comment on the restructuring charges. So first on the Non Life, indeed. So if you take out the impact of the storm, you're at 98.6% this quarter for the total Non Life business.
Now we have launched a program and explained that program at Capital Markets Day on how we wish to structurally improve the profitability of this segment and to get to the 97% or below combined ratio over time. And we've taken a range we're taking a range of measures, right? It's cost reductions, it's claims management efficiencies, it is calling non profitable products, It is price increases. It is assessing risk and making sure that we reprice risk etcetera. So we're doing that in a very granular way.
And we said that entire program will take time. It will take, we said, 12 to 24 months before that all these effects emerge and before these effects are coming through. The good news is we're seeing already in some pockets, we're seeing these effects already giving encouraging evidence. For instance, one example on the NN fire book, we've installed a task force to go through the fire business risk by risk and what we're seeing now for 5 quarters on a row is a positive contribution in that as a result of these measures. So yes, there can be some volatility obviously and large fires can always be there, but we see that already improving quite a bit.
And we're now doing exactly the same practice on the Delta Lloyd fire book. These are all kinds of the things that we're doing to improve it over time. And with that, I'd like to hand over to Delfin for the restructuring discussion.
Hi, Stephen. So as the cost savings increase, yes, you're right, there are some additional restructuring charges that will be included. So far, the guidance that we have provided of restructuring expenses being around 1.5x the savings, I think, is a good guidance. Up to this point of time, actually, we are a bit below. So we are at 1.3x.
However, this is also related to the nature of some of the savings that we have incurred that did not require investments themselves and maybe is a good opportunity to remind everyone that both the evolution of the expenses quarter per quarter as well as when do we incur in these special items restructuring expenses, there will be some volatility from 1 quarter to another. So it's not going to be linear.
Okay. Thanks very much.
The next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead please.
Yes. Hi. Most of my questions have been answered. So some follow ups here. You report next to the storm damages some large fire claims also in the Netherlands non life.
Is that keeping is that coming in at the savings, the raising of the estimate of the savings, you said €200,000,000 for this year. Could you give us an idea of the evolution you expect for 2019 2020 on timing? Thank you.
Yes. Thanks, Bart. So I'll take both questions. So first on the savings, as we said, we are ahead. We're very happy to report today that we've already reached the initial guidance that we gave of having half of the €350,000,000 done by the end of year, which is €75,000,000 and we're there already this quarter.
So that's encouraging. And as a result of that, we have given new guidance that we're going to €400,000,000 or raise the €350,000,000 to €400,000,000 of which at least half will be done this year as of the timing. And the remainder therefore will come through in 2019 2020. Then
But is that back end loaded completely or not?
Well, it's not linear obviously. This will over quarters will it's not a straight line, right? So it's over the quarters you will see some changes quarter by quarter, but the direction of travel is pretty clear. At least half of that number done by the end of this year, the €400,000,000 and the remaining in the next 2 years. Then on the fire claims, yes, we reported some large fire claims.
Just also pertaining to the previous answer that I gave, this is in the Delta Lloyd fire book. So we've seen in the NN fire book in the past also large fire claims. And by the way, that's the nature, right? You will always have some large fire claims coming through now and then as part of it, but the more structural direction of travel is obviously that we aim to improve the overall profitability also of that segment. And if you exclude the storm over the last five quarters, the NN portfolio has delivered a positive contribution and we're applying the same measures that we took on the NN portfolio also to the Delta Air portfolio.
So that's the color that I can give on that.
Okay. Thank you.
The next question is from Mr. Jason Kalambosis, KBC. Go ahead please.
Yes. Hi there. Three quick questions, if I may. The one is on the nat caps that you had. Would you consider to change your reinsurance arrangements?
And if so, in which direction? The second question was around the cost. You said that the new cost efficiencies that you announced are a bit everywhere. But if I was just to look, I think, at your percentages, there is the majority seems to be in Belgium and a little bit in Non Life. If you could confirm that, that would be great.
And the third thing is if I look at the combined ratio, so just the P and C one, it was 112.4%. If we exclude nat cats, it seems that it is around 100.6%. When do you think you're going to sustainably move below the 100% mark? Should we expect that in Q2 or further out in the year?
Yes. Thanks, Jason. So let me talk about the last question on the combined ratio and then I would like Jan Hendrik to discuss the reinsurance arrangements and I'd like Delfin to give to discuss the pie chart composition of the expenses, etcetera. So first on the combined ratio, I think I said it in earlier I answered in the earlier question as well that we believe we need 12 to at the Capital Markets Day at November 30, we said that we need 12 to 24 months for a range of measures to come through to get to the to contribute to the 97% or lower combined ratio. And again, on the D and A business, we're at 95% at this point.
So on the Nat Cat.
Yes. Thank you, Lard. Hello, Jason. Thank you for your question. We look at reinsurance very much to optimize risk and returns.
You have to look at the cost and the benefit. Of course, we change our program every year based on market pricing and also our own claims and Nat Cat curves and things. At the moment, we have a combination of 3 different types of reinsurance in place. The first one is Nat Cat per event cover. We also have some per risk reinsurance and then we have an aggregate policy in place.
The nice thing about the aggregate cover for this year is that if we were to have another storm of the same magnitude, the impact would be a lot lower. So yes, we are actively managing that and we'll certainly have a look at the pricing in the market next year and our own risk appetite.
So Delfin?
Yes, Jason. On the cost savings, we announced at the Capital Markets Day the cost savings and this is a 3 years program and also is based on the evolution of the absolute amount of operating results. So that means that apart from the cost savings, we have to compensate any inflation, any investments that we want to or we are required to do in order to keep growing. I'm saying that in order to say that it is not possible to do a perfect estimate of how these administrative expenses are going to evolve over time up to the end of 2020. But in general, you see in Slide 5 of the presentation what has been the savings so far with substantial savings already being done at NN Life and Non Life, but also at the level of corporate holding.
And going forward with the new savings, most all of the units will benefit. The one with a lower extent is the corporate holding and that also relates to some reallocation of the expenses, transfer of expenses charges from head office to the units that was performed this quarter. But in general, we can see, if you like, some more modest upgrade on the savings for Netherlands Life and Belgium and the more substantial ones for Non Life and Asset Management.
Thank you very much. If I may have just a follow-up. Are you on the reinsurance side? Are you basically happy with the outcome on how your reinsurance program worked on these storms?
The reinsurance program worked according to plan, yes. So there were no surprises there, of course. Are you asking whether we are happy that we had such a big €89,000,000 impact from the storm? Of course, we would have preferred not to have the storm. But part of insurance is that it is a long term game.
So you really have to look at the results over a much longer period of time to see whether it will in the end be profitable.
Okay, fair enough. Thank you very much.
The next question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Go ahead please.
Yes. Good morning guys. Two questions on my side. First one will be on the impact of the cost reduction on the unfunded capital generation. It has been pretty limited so far.
I think you have been reported figures around the €300,000,000 every quarter. What can do you expect actually cost cutting to flow a little bit more in the capital generation on the on fund side going forward? I'm asking because I see still on the Asset Management and Banking unit, for example, still relatively limited amount of cost synergies being, well, implemented. Also on non life, there's still a big cost cutting in the pipeline. So can we expect a bit more cost reduction basically flowing into the operating capital generation?
That will be the first question. And then maybe just on to come back on the share buyback, assuming no M and As, what will be the main trigger for the decision? What will be the main thing you are looking at in terms of taking the decision? Will that be holding cash moving towards a certain level, solvency II ratio, PMA approval on the Delta line models or just markets? Thanks.
Yes. Benoit. So let me take the second question first, and then I'm asking Adelphin to give some color on the first question. As you know, we have we take a holistic view when it comes to our capital. We look at very many components and dashboards that we have to assess the capital evolution and to arrive to our view whether the capital that we have is beyond our ambition.
And if it's beyond our ambition and we cannot deploy it in a value accretive way, then it will go back to stockholders. And we will take that decision at the time that we deem that appropriate. And most importantly, you always need to be disciplined and rational in the way you think about these things. So that's what we aim to do. With that, Delfin, the question on the costs.
Thanks, Benoit. Yes, particularly the units that you have mentioned, asset management, banking the majority of the business of Non Life, the benefits in terms of capital generation comes at the time of realizing the cost savings themselves. So what has already been saved, it has improved the capital generation, the operating capital generation from these units. And in the future, as there is further progress, the cost savings and the additional profits coming from these entities will contribute to the capital generation. It becomes more complex when we look at how the cost savings and the restructuring expenses affected the Life business, the long tail business, as at any point of time, we need to do a reassessment of the future expenses, including restructuring expenses.
So in the one hand, restructuring expenses impact negatively when you incur them, but also when you anticipate them that is going to be incurred. And on that sense, I would be expecting only a modest impact on the capitalization of these expenses, expense savings going forward.
Yes, great. Thank you very much.
And the next question is from Mr. Arjan Van Zijn, UBS.
Steven asked the question I had on non life, so no more questions for me.
And the next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please.
Thank you. Just one simple question I have, actually 2. So if I look at the Dutch market basically, most of the insurance, I mean, if I look at VIVA, if I look at ASR, Aegon as well as you guys, everyone is trying to do asset relisting and everyone has big plans. I mean, I think we are talking in like someone is talking about $5,000,000,000 asset relisking, someone is talking about $3,000,000,000 $2,000,000,000 And clearly, you have some plans as well. So how should I think about the appetite that is or say availability in the market of these illiquid assets.
So would be good if you can get some color because based on my understanding, everyone is trying to go towards mortgage market, but obviously, mortgage would have a finite market. It would not be like easy to do $15,000,000,000 in a year. So how should we think about that? How much time will it take if market wants to do that $15,000,000,000 $20,000,000,000 over, say, next, how many years will it take? So that would be the first question I have.
The second one is, I remember that Delta Lloyd used to have some interest rate exposure because they used to hedge the Solvency II ratio rather than hedging cash flows. Is that position still open? If interest rate actually go up, will there be economic benefits on Delta Lloyd cash flows? Or is it you have closed that position? Thank you.
Yes. Thanks, Ashik. So you Hendrik, over to you.
Yes. Thank you, Ashik, for these questions. On the first one, it's a good observation. Obviously, I can't comment on what other companies are doing. But if I look at what we see in the market, there is certainly more demand for high yielding illiquid assets than there is supply, which is also why we are doing this in a very rational and disciplined way and not putting a time line or forcing ourselves to stick
to a time line because
you don't want to put money where you're somehow chasing yield and not getting it at the right price. We are, of course, looking broader than mortgages, and we still have some residual appetite for mortgages. And you should also remember that we generate a lot of the mortgage book ourselves, so that flow will continue, and that is something we continue to rely on. When we look beyond mortgages, of course, we look at emerging market debt, we look at property, at some development property. We have quite a variety of other illiquid assets that we consider, but all of these things take time.
And the most important thing for us is that we invest in a rational and disciplined way after considering the
risk. Yes. But how should I think about the supply in the market? Is it I mean, is there any particular number like, for example, annual mortgage supply, say, €5,000,000,000 Clearly, we don't have any clue about EM debt and all those could be erratic. But at least we should have a bit of clarity about how much annual supply of mortgage is there, assuming the status quo, which is banks are still away from that and insurance is taking most of it, so
Yes. Again, on the annual figure for the supply of mortgages, it depends a lot on the property market, right, and how that flows in the Netherlands. And that will vary quarter to quarter. I think some new statistics came out last week, which will show you the aggregate supply of mortgages again.
Okay. Last week, it came out.
Or this week. I'm not sure. I saw something.
Okay. Sure. Thank you.
This week, yes. On the second question, maybe to cover the Delta Lloyd interest rate exposure, we have been gradually moving away from pure hedge of the ratio. That is out of line with what we normally do. We have said in the past that we aim to match asset and liability cash flows where markets are deep and liquid and where it makes sense to do that. So we continue to look at the duration and convexity.
We don't force ourselves to mechanically match every cash flow because we think it doesn't make sense given the liquidity that we or the lack of liquidity, frankly, at the long end that we see. But we are also not pursuing a pure solvency II sort of hedge, if I put it like that.
Okay. But somewhere, it's in the middle. So if rates actually go up, it will still be a bit economical benefit as well rather than just a number related benefit?
Yes. And you can see from our sensitivities that if rates go up that we will benefit also in our Solvency II ratio that we have disclosed, yes. Yes. Okay.
That's very clear. Thank you.
Thank you.
The next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead please.
Hi there. Thanks. I'm sorry for prolonging this call so much. But I'm just wondering why you're not worried about the massive shrinkage in pension volumes or the renewals in Q1. Is it because it's temporary?
Is it because you actually don't want that business? Just wondering what's going on. Thank you.
Yes. It's very simple, Farooq. This is Lard. The we're not worried at all because here's the situation. This every we have a large book of existing pension contracts, a lot of clients by the way that are with us for a very long time already.
So basically the vintage if you will, so these books have these contracts have durations, right? So on average 5 years, but some contracts are 3 years, some contracts are 7 years, and therefore they come up for renewal. And in 1 year, you may have more existing contracts that you already have in your books that are up for renewal that particular year. And then as you have been able to renew them, because they can also go to another provider, As you've been able to renew them, then you reported like the market practices in your APE numbers. Now it happens to be that by the way, most of these renewals are taking place as of the first of the calendar year.
So that's why you see it mainly in the Q1. Now this particular year 2018 is a year in which the nature of the existing stock of group pension contracts, there are just less pension contracts this vintage up for renewal than there were last year for instance. So nothing to do with our appetite to want to have pension clients or stuff like that. To the contrary, if you look at our market share in the pension market over the last period, it's actually increased.
Okay. Clear.
Thank you very much.
The next question is from Mr. Dario Sadowskas, KBW. Go ahead please.
It's actually William at KBW. My main question is for the conference call about why I can't answer a question using my phone. That's probably a technical problem. Try and be quick, sorry to drag the call out. Delfin, right at the beginning, you confirmed, I think, that Delta Lloyd had a positive impact on the Dutch Life results.
Can you just confirm that, that is before allowing for any expense savings that were attributable to the transaction? Or do you require the expense savings for that statement to be true? Secondly, the Non Life business, has the large losses this year interfered with the short term outlook for paying dividends to the center? Or are you still able to maintain the normal €100,000,000 or so just based on balance sheet strength? And then lastly, your free cash flow was visibly lower than net operating profits this quarter, particularly if we allow for the fact that net operating profits were distressed.
Again, I know that there's quarterly volatility, and we shouldn't just judge 1 quarter. But is it sort of fair to assume that to the extent that there still seems to be quite a structural gap relative to your statement that, that gap is going to be filled by upstream excess capital out of Dutch Life and therefore presumably is contingent on your solvency legal mergers that will be occurring next year? Thank you.
Yes. So William, happy to hear that the technical issues are over for your phone, so you can ask your questions and more than happy to take them. So I'm going to hand over to Delfin. But please note for the free cash flow statement that we always said it's a free cash flow. Our guidance has always been that our free cash flow generation is over time in a range around the net operating results of the ongoing business.
But anyway, so Delfin, over to you.
Yes, thank you, William. On your first question, the answer is yes. I can confirm that it was a positive contribution before and after the expense savings that applied to Delta Lloyd Life in the quarter. On your last question on the free cash flow, building on what Larp has already said, we have to see also the seasonality of some of the dividends that we pay over the year. And again, emphasizing that this free cash flow statement is around a midterm target.
And indeed, we can still confirm that it is valid. So one cannot look at 1 single quarter in isolation. There was a question on [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] The storm interfered a little. Well, obviously, the quarter has had a very negative impact on the results of the Non Life business and as a consequence on their surplus capital as well. We have the fortune of counting with very different business units, very well diversified from one area to another and sometimes we have more dividends coming from one unit than for another.
So it's fair to say that dividend capacity from the Non Life business has reduced after an €89,000,000 impact of the storm. You're right on that.
There are no further questions. Mr. Friesau, back to you, please.
Yes. Then I would like to thank you, operator. Well, thank you all for being on the call this morning and thank you all for your time and for your questions. Before we end the call, let me conclude by saying that I'm pleased with the progress that we are making to integrate Delta Lloyd into NN Group. The cost savings already realized are well ahead of our envisaged schedule and we have announced today that we are raising our cost reduction guidance to €400,000,000 by 2020.
Our businesses continue to focus on driving performance and improving efficiency in order to achieve their medium term targets. There's still a lot of work to do, but we are committed to delivering on our strategic priorities and create long term value for all our stakeholders. I wish you all a pleasant day.