Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its 4th Quarter 20 17 Results. Before handing this conference call over to Mr. Lars Vriese, Chief Executive Officer of NN Group, let me first give the following statements 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 statements 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. Thank you, operator. Good morning, everyone, and welcome to our conference call to discuss NN Group's results for the Q4 of 2017. I will kick off today's presentation by talking about the highlights of the 4th quarter results and I will also take the opportunity to look back at the acquisition and the integration of Delph Lloyd in 2017 as well as the financial and commercial developments in the past year. Delfin Rueda, 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. 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 with the highlights. NN Group's operating result of the ongoing business for the 4th quarter of 2017 was €345,000,000 This is an increase of 22% compared with the same quarter of 2016 and was driven by the contribution of Delta Lloyd. The net result for the Q4 was €700,000,000 supported by the higher operating results, capital gains on the sale of public equity securities and positive revaluations on real estate and private equity.
On the commercial side, our insurance businesses reported a 34 percent increase in total new sales at constant currencies compared with 2016. The value of new business increased 61% on a full year basis. I will talk more about this on a later slide. Our balance sheet and capital position remains strong. Free cash flow to the holding company was €336,000,000 in the 4th quarter, driven by €370,000,000 of dividends from our subsidiaries.
This was offset by the repayment of $575,000,000 of senior notes that matured in November and the repurchase of owned shares under the share buyback program. On balance, the cash capital of the holding stands at €1,400,000,000 at the
end of
the Q4. The Solvency II ratio of NN Group at the end of 2017 was 199%, which is after a 5 percentage points deduction for the proposed 2017 final dividend. We are today announcing a proposed final dividend for 2017 of €1.04 per share, bringing the 2017 full year dividend to €1.60 per share. This represents a 7% increase on the 2016 full year dividend per share. I will now turn to Slide number 4.
We completed the acquisition of Delta Lloyd in the first half of twenty seventeen, in fact, within six months of announcing the recommended offer at the end of 2016. This included the successful tender offer launched in February, the issue of senior debt to finance the acquisition, the transaction with Funds Nuts' Aura and finally the legal merger in June. This momentum has continued throughout the year as we integrate the businesses. The management teams for all the business units and support functions were in place by the summer and their integration plans were submitted in the second half of the year. Most head office departments are already integrated.
We have started rationalizing systems and portfolios and products are being rebranded from Delta Lloyd to NN. As announced at the Capital Markets Day in November, we expect that the integration will lead to total cost synergies of €350,000,000 by the end of 2020, half of which we expect to have achieved by the end of 2018. We have got off to a good start with total cost savings at the business units in the scope of the integration of €133,000,000 in 2017. We've also seen a reduction of around 900 internal and external FTEs in the Netherlands and Belgium. Of course, there were some quick wins by stopping redundant projects and removing the Delta Lloyd head office cost, but we will continue to drive further efficiencies in order to extract the synergies of the combined company.
Finally, on January 1, 2018, the first legal mergers of business units were completed with Delta Lloyd Bank merging into NN Bank and Delta Lloyd Asset Management merging into NN Investment Partners. Let's now move on to Slide number 5. While the successful integration of Delta Lloyd is one of our top priorities, we never lose sight of our aim to enhance the customer experience and continue to innovate our business model. Let me give you some examples of some of the product distribution initiatives in the past year. We currently have 6 Spark Labs located in Europe and Japan, which provide an out of office environment to foster innovative ideas and infuse innovative thinking into NN.
They also initiate and pilot new concepts. We also look for partnerships or investment opportunities with FinTech Companies to accelerate our innovation efforts. For example, we recently invested in Right Indemn, which offers digital customer driven claims management solutions. In April 2017, Sumitomo Life started offering NN Life's Japan's COLI products through its sales network of around 30,000 agents. This has supported the strong increase in sales of Japan Life.
In November, our business in Turkey entered into a strategic partnership with hesapkurdu.com, a leading online loan aggregator for mortgages and consumer loans, giving us an online presence in that country and letting us reach a wider client network to cross sell our products. HNN in Greece has renewed its bank insurance agreement with Piraeus Bank for the distribution of its products. And in Poland, we have launched a partnership with PLAY, the largest telecom provider in the country to provide health insurance through its insurance market platform. Let's turn to the next slide. Slide 6 shows our strong commercial performance in 2017.
Total new sales of our insurance businesses increased 34% in 2017 versus 2016 when measured at constant currencies. In Europe, we saw higher sales across the region, while in Japan, we saw higher sales of COLI products launched in 2017 and sales through the Sumitomo partnership, which started in April. The Delta Lloyd businesses in the Netherlands and Belgium also contributed to the increase. Now as you know, our focus is on profitable growth. The value of our new business in 2017 was €345,000,000 up 61% from 2016.
At Insurance Europe, the higher value new business was supported by the continuing shift to higher margin protection products. And the higher value new business in Japan was mainly driven by higher sales and improved product mix and an increase in interest rates. Our asset manager and an investment partners has now reported 6 consecutive quarters of net inflows of 3rd party assets. For full year 2017, the total inflow of 3rd party assets was €5,100,000,000 This was offset by an outflow of affiliated assets. We are increasingly focusing on the quality of the asset flows, aiming to attract assets into those investment strategies where we have a particular expertise, such as emerging market debt and multi asset.
Finally, our Banking business continued to grow its mortgage portfolio, which increased to €17,600,000,000 at the end of 2017, including the addition of the portfolio of Delves Lloyd Bank. So let's move to the next slide. On Slide number 7, I would like to recap on our performance for the full year 2017. To start with, the 2017 operating result before tax of the ongoing business increased 29% compared with 2016, mainly driven by improved results at most segments as well as the contribution of the Delta Lloyd businesses for a total amount of €205,000,000 This was partly offset by the Non Life business where improved results in Property and Casualty were offset by an unfavorable claims experience in disability and accident. As I mentioned earlier, we announced a new expense target in November, whereby we aim to reduce 20 16 administrative expense base of the units and scope of the integration by €350,000,000 In 2017, we managed to lower expenses by €133,000,000 so we are well on our way to reach our new target by the end of 2020.
The net operating return on equity of the ongoing business for 2017 was 10.3%, up from 8.1% reported in 2016. And finally, we aim over time to generate free cash available to shareholders in a range around the net operating results. Bear in mind that this can be volatile from year to year. In 2017, the free cash flow was impacted by the capital injection into Delph Lloyd Life as well as a deduction for the provision related to ING Australia Holdings. And Delfin Roeda, our Chief Financial Officer, will go into the details of our free cash flow later in the presentation.
So let's turn now to Slide number 8. We have today announced that we are proposing a 2017 final dividend of €1.04 per share. And this brings the total 2017 dividend to €1.66 an increase of 7% on the 20 16 dividend per share. The 2017 dividend represents a payout ratio of around 45 percent of the 2017 net operating results of the ongoing business, in line with the envisaged 40% to 50% payout ratio in our dividend policy. The proposed dividend will be voted on at the Annual General Meeting of shareholders on the 31st May.
As we announced at the time of the Delta Lloyd transaction, we anticipate a double digit increase in the 2018 dividend per share versus 2017. In total, NN has returned more than €2,700,000,000 to shareholders in the form of dividends and share buybacks since the IPO in 2014, including the proposed 2017 final dividend announced today. This demonstrates our commitment to return excess capital to shareholders unless we can deploy it in other value creating opportunities. And with that said, I would like now to hand over to our Chief Financial Officer, Delfin Rueda. Delfin?
Thank you, Lars, and good morning, everyone. Let me start with the 4th quarter results. NN Group reported an operating result of the ongoing business of €345,000,000 in the Q4 of 2017, up 22% on the same quarter in 2016. This was driven by the contribution of the Delta Lloyd businesses of €104,000,000 which includes non recurrent benefits of €36,000,000 as well as favorable experience variances. This was partly offset by a lower technical margin at NN Life due to negative nonrecurring impacts as well as unfavorable claims experienced in the group income portfolio at NN Non Life.
The net result for the Q4 of 2017 was €700,000,000 The increase compared with 2016 was driven by the higher operating result and higher capital gains and revaluations. These were partly offset by higher special items, mainly relating to restructuring expenses as well as the amortization of acquisition intangibles. Moving on to Slide 11, I would now like to take you through the 4th quarter performance of the individual segments. Let me start with the 4th quarter operating result of Netherlands Life, which increased to €170,000,000 mainly driven by the inclusion of Delta Lloyd and a higher investment margin, offset by a lower technical margin and lower fees and premium based revenues. Please note that the current quarter reflects private equity dividends of €31,000,000 in the investment margin and non recurring negative items of €33,000,000 and negative mortality and morbidity experienced in the technical margin.
The operating result of Netherlands Non Life increased to EUR 25,000,000 driven by the inclusion of Delta Lloyd and an improved underwriting performance in Property and Casualty. This was partly offset by an unfavorable claims experience in the group income portfolio in disability and accident. Altogether, the combined ratio for the segment Netherlands Non Life improved to 99.6% from 101 100.1 percent in the Q4 of 2016. The operating result of Insurance Europe increased to €68,000,000 reflecting higher fees and premium based revenues, partly offset by higher administrative expenses. The current quarter also includes the contribution of Delta Lloyd Belgium.
Although the chart shows only a moderate growth of the operating result of Japan Life in euros, it increased 18% on the Q4 of 2016, excluding currency effect. This reflects higher fees and premium based revenues and an improvement in the technical margin, partially offset by higher expenses. The increase in the operating result of asset management was driven by the contribution of Delta Lloyd, which included €10,000,000 of non recurring performance fees. The improved results of the segment Other in the 4th quarter reflects higher operating results of the Banking and Reinsurance businesses, while the holding result was lower. Now let's turn to Slide 12, which shows the expense savings.
As Lard already mentioned, we aim to reduce the administrative expense base for all the business units in the scope of the integration by around €350,000,000 by the end of 2020. We are making good progress. Compared with the full year 2016 expense base, we have already achieved total cost savings of €133,000,000 This reduction represents around 38% of the total targeted cost savings. Please note that the expense reduction will not be linear and that some units may at times see expense increases to support growth. However, as announced at the Capital Markets Day, we expect 50% of this cost reduction target to be achieved by the end of this year.
On the next slide, I would like to take you through the free cash flow of NN Group. The holding company cash capital position was €1,400,000,000 at the end of 2017. On Slide 13, we show the movement in the holding company cash capital during the Q4 as well as for the full year 2017. The free cash flow during the Q4 of 2017 was €336,000,000 including dividends of €370,000,000 received mainly from the Dutch units. This was offset by the repayment of senior notes for an amount of €575,000,000 in November and the shares repurchased in the quarter for an amount of EUR 117,000,000 The share buyback program was completed at the end of December.
The total free cash flow for 2017 was €881,000,000 driven by dividends for a total amount of 1.8 €1,000,000,000 received from all business segments. This was partly offset by the €500,000,000 capital injection into Delta Lloyd Life as well as a deduction for the provision related to ING Australia Holdings. Details of the dividends upstream per segment can be found in the appendix to this presentation. On Slides 1415, I will take you through the developments in our Solvency II ratio. NN Group's solvency ratio was 199% at the end of the Q4 of 2017, down from 204% at the end of the Q3.
This ratio reflects a 5 percentage points reduction for the proposed 2017 final dividend of €348,000,000 that we announced today. The operating capital generation for the Q4 added 5 percentage points to the ratio and includes a contribution from Delta Lloyd of approximately €40,000,000 to Own Funds. Please be aware that going forward, we will no longer report contribution of Delta Lloyd separately as the integration of businesses and legal mergers of entities means that this is no longer possible. The market variances, which lowered the ratio by 5 percentage points, reflects mainly the tightening of corporate spread of corporate credit spreads. Please note that the reduction of the UFR by 15 basis points in January this year will reduce the Solvency II ratio by approximately 5 percentage points in the Q1 of 2018.
Let's turn to Slide 15 for the full year. The Solvency II ratio was 2 41% at the start of the year. As you can see, the acquisition of Delta Lloyd had a total impact of 51 percentage points to the ratio. This reflects the inclusion of Delta Lloyd's Own Funds and SCR as well as the gas paid to acquire the company. The total operating capital generation in 2017 was €1,400,000,000 of which €1,100,000,000 was the growth of Own Funds and around €300,000,000 the decrease of solvency capital requirement.
The operating capital generation includes the contribution from Delta Lloyd for 3 quarters for a total amount of approximately EUR 100,000,000 to Own Funds as well as a release of the SCR. Market variances can be volatile quarter on quarter, but we were actually but were actually quite small on a full year basis. Finally, the cash flow to shareholders represent the 2017 interim and final dividends. And with that, I pass you back to Lars for the wrap up.
Yes. Thank you, Delton. We have today presented NN Group's 4th quarter and full year results for 2017. I am pleased with our performance with most segments reporting improved full year results and also with the strong contribution of the Belk Lloyd businesses. At our Non Life business, an improvement in the P and C results this year was offset by a deterioration in disability and accident.
And given the nature of the business, adverse events can happen and can have an impact on the non life results, such as in the Q1 of this year when we expect to see a loss from the severe storm that hit the Netherlands in mid January. We are implementing a range of measures to sustainably improve the Non Life performance. Our balance sheet remains strong with a Solvency II ratio of 199 percent and a cash capital position of €1,400,000,000 This robust position allows us propose a final 2017 dividend of €1.04 per ordinary share. Looking forward, we have defined several priorities. Firstly, we will deliver on the Delta Lloyd transaction, have been successfully integrating Delta Lloyd into NN Group and extracting the envisaged synergies.
Secondly, we will continue to further improve the performance of our businesses. Our third priority is to use technology and innovation to transform our business model and improve our service to our customers. And finally, to continue to allocate capital rationally. 2017 was a memorable year in which we completed the acquisition of Delta Lloyd and started the integration of both companies. This has demanded a huge effort and focus from all our employees.
I'm especially proud of the resilience and professionalism of everyone at NN Group and their commitment to always deliver an excellent customer service. I will now open the call for your questions.
Thank you, Mr. Friese. Ladies and gentlemen, we will now start the question and answer The first question is from Mr. Johnny Vo, Goldman Sachs.
Just two questions, please. Just in terms of the operating capital generation of Del Floyd, it was £40,000,000 this quarter, which was lower than last quarter. And given the changes with UFR and the movement of rates in 2018, how should we think about where that capital generation should be or what level that cap rate generation should be at per quarter? And then the second question, just in terms of CMI data in the U. K.
Has shown longevity improvements have reduced. Have there been new CMI tables in the Netherlands? And what is the sensitivity of this to the solvency of Delta Lloyd, given the prudency of its reserves? Thanks.
Yes. Thanks, Johnny, and good morning. The first question will be answered by Delfin Rovaida and then I suggest the second question on longevity to be discussed by Jan Hendrik Erasmus. So first, Delfin, over to you.
Yes. Thank you, Johnny. The operating capital generation of Delta Lloyd in the quarter was a little bit lower, and that was and that is not a surprise due to the, let's say, volatility that we see from 1 quarter to another. In the previous quarters, it was somehow higher. And I think that going forward, we would expect slightly higher operating capital generation than this 40 that comes in the quarter.
Certainly, what we have seen in Q4 does not reduce our expectation of capital generation, operating capital generation within Delta Lloyd. But please keep in mind that going forward, this is the last quarter that we will report Delta Lloyd contribution on a separated basis as we following the legal mergers and integration of the business that won't be possible anymore.
Okay. And Henrik?
Thank you, Johnny, for the question. Yes, we've also had a new table from expectancy than in the previous table. We have reflected that already in our assumptions. And of course, I would say that we do that in a rational and disciplined way. So we don't just take the population statistics.
We consider many factors when setting our actual best estimate assumption.
Okay. Thank you.
The next question is from Mr. Matthias Stivitz, Kempen and Co. Go ahead please.
Yes. Hi, good morning. Two questions. First is on the technical margin in the Dutch Life business, €5,000,000 Even if I exclude the €33,000,000 one offs, you flagged, I guess, to a number significantly below where you were in the previous quarter. So I understand there is some negative mortality and morbidity results.
So I just wonder if you could say anything on what we could expect in terms of normalized technical margins for Church Life. I think you mentioned €35,000,000 per NN in the past. So maybe you could update us on that. And then the second question is on the own sense generation. If I take the €1,100,000,000 for 'seventeen, is that a number that includes any material positive or negative variances?
And could you also share if there is an important drag included in that number from linked to the growth of the Japanese business? Because I think it's the GGAAP numbers you take for the own funds. So that could also be helpful if you could comment on that.
Yes. Thanks, Matthias. Delfin, can you take
those questions? Yes. Thank you, Matthias. So the technical margin in NN Life in the quarter has show a negative performance. We have always flagged that there is from 1 quarter to another based on the experience variances.
We have seen that in the previous quarter. We see we saw some positive evolution on the technical margin. We have seen that as you know overall. When you look at the technical margin for the full year of €180,000,000 somehow provides better reflection of excluding this volatility. So maybe before I bring other explanations there, To your last question, which I think is probably the most relevant, we do expect around €40,000,000 to €50,000,000 per quarter, although with this in technical margin for Netherlands Life, including Delta Lloyd, although with reduction of the portfolio due to the runoff and also some negative result trend results for longevity going forward.
Maybe if we go for the on fund generation for the full 2017, We flagged, if I recall properly, in the Q1 of this year. We flagged a positive coming from the move from the separate account to the general account, and I think it was around €50,000,000 or so. So that would be one off. We have always emphasized that the on phone generation is going to fluctuate somehow. So 2017, with the exception of that one off, I don't I wouldn't mention anything extraordinary.
Just to remind you that 2017 only reflects Delta Lloyd for 3 quarters.
Yes. And in terms of Japan,
is there
an important negative contribution in all fronts because of the growth of Japanese business?
Yes. Of course, it does. The drag for the new business, but also includes the positive of the growing in force. And as a consequence, of course, it depends on the rate of the growth. It would be larger than the increase.
But in general, over time, we will see the growth of the in force profit to go. And as you know, Japan has been growing very nicely, both commercially and in terms of profitability, IFRS profitability over the year 'sixteen sorry, the year 'seventeen, and we see that momentum continuing.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, please.
Yes. Good morning, gentlemen. I think somewhere around Christmas, IOPA issued a paper on the dynamic volatility adjuster. And if you look at your SFCR, you could conclude specify on what your base case and worst case assumption is? I appreciate that this is a lengthy process, but maybe some early thoughts here would definitely be appreciated.
And secondly, it's a bit cheeky, I guess, but your free cash flow for 2017 is €900,000,000 well below the net operating result of €1,200,000,000 given your guidance, should we expect to catch up in future few years?
Well, thanks, Robin. So the first question, Jan Hendrik. The second one maybe Delfin. Yes, so first, Jan Hendrik.
Thank you, Robin, for the question. Yes, we have, course, taken note of the YOPAP opinion. And I guess what they're trying to do is to create a level playing field somehow. One of the key principles they're looking for there is to create the right risk management incentives. That means that you shouldn't somehow benefit from this dynamic vola as you move down the credit curve.
Now that is very similar to the DNB's view, which they already expressed in 2015. So given how EIOPA's view is now very
On your second question, Robin, it depends how you look at the free cash flow in 2017. Maybe as a reminder, it does include a capital injection of free cash flow in 2017 was €1,400,000,000 In any event, the key message here is that every quarter or even for the full year, the free cash flow can be higher or lower than the net operating result and but that over time, we expect to be approximately at the same level.
The next question is from Mr. Cor Kluis, ABN AMRO. Go ahead please.
Yes. Good morning, Cor Kluis. Couple of questions. First of all, on the storm in the Netherlands, the EUR 75,000,000 expected cost, could you indicate what kind of reinsurance you have for fire insurance in the Netherlands and at which level that would kick in basically because it was, I think, somewhat higher than expected? And are you also thinking about changing your P and C or FHIR Reinsurance policy somewhat going forward?
So that's my first question. Second question is about the solvency tool ratio, given what happened year or at least the last 2 weeks in the Capital Markets. Can you give some update on how that Solvency II ratio developed year to date? We know, of course, the UFR effect, but also the especially the market effect year to date. Just permit me two questions.
Yes, Cor, thank you very much for your questions. Both will be taken by Jan Hendrik. And on the storm, by the way, it was quite a big storm in the that hit the Netherlands. And don't forget that we have a 28% market share, roughly in fire, which is, of course, the area that is most affected by this. But maybe on Henrik, on the reinsurance side, how is that going to be treated?
Thank you, Cor, for the question. Yes, of the €75,000,000 you'll see €50,000,000 emerge in the unit or segment non life. The remaining €25,000,000 will be in our internal captive reinsurer. And in non life, we kept roughly €50,000,000 We have a combination of per event and aggregate cover. We actually did slightly increase our reinsurance coverage this year.
So, of course, we consider it all the time in a rational and disciplined way also based on risk versus return, what is the marginal benefit of reinsurance versus the capital cost and benefits. On the Solvency II ratio, yes, we of course see the market volatility. It's been a very interesting few weeks. Year to date, I would say that apart from the change in the UFR, which we flagged as a 5 percentage point change to our ratio, it's been flat. There's been many offsetting elements in there, but the volatility net outcome is broadly flat.
The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please. Yes.
Hi, good morning. Just a couple of questions. First of all, given that there are a lot of one offs in the NN Life, Netherlands Life business, can we get some sense as to what is the recurring number? Because if I look at Slide 11, last year was 1 63, this year is 170, but then this year you include Delta Lloyd as well. So how should we think about a normalized run rate?
Is $8.96 a good guide? Or should it be higher? Should it be lower? So that's one question. Second thing is, can you give us some color about the cash flows?
So you're expecting to generate around $1,400,000,000 a year. Your dividend cost is around $600,000,000 a year. So what are you doing to going to do with the remaining $800,000,000 going forward on an annual basis? Any color on that would be really helpful.
Yes, Ashik, thank you very much. The first question will be taken by Delfin. Let me give you some color on the capital allocation on your question number 2. As you know, 1st of all, we aim for a sustainable dividend, a regular ordinary dividend that we wish to do. And secondly, the second piece of the commitment is that we any excess cash that we have over time that cannot be deployed in value creating opportunity will go back to shareholders over time.
That's our main thing here. So Delfin, maybe the first question.
Yes. Asik, thanks for your question. I mean, you're using the term recurring figure. And as you know that I am a bit adverse on talking about run rates or recurring. We have seen volatility, particularly in the profitability of Netherlands Life in the previous years.
We have provided guidance for the future of maintaining the operating result around the same level of the 2017. 2017, of course, is including Delta Lloyd for only 3 quarters. But I think that the actual result of Netherlands Life for the full year is the base that we use for making that statement.
That's great. And just, sorry, going back
to the first to that question on capital.
How should we
think about 2018 2019? Is there any near term cash outflow you're expecting apart from deltilar apart from dividend in the sense like do you have any debt repayment planned? Or is there any capital injection required anywhere? I'm just trying to get a bit of sense that if you accumulate $800,000,000 a year, you're already at the higher end of your cash flow number that you aim to reach. So what are you going to do like in this year and next year?
So any planned stuff? Or maybe something will come up next year? So any thoughts?
Well, as I said earlier, I mean, we were comfortable with the overall balance sheet. You know, we've repaid $575,000,000 of the notes that matured in November. There is, let's say, a natural point in 2020, where a number of €300,000,000 is going to mature. At that point in time, we will see what we're going to do with that. In the meantime, our guidance is, I think, pretty clear.
We aim for a sustainable ordinary dividend, and any excess cash that we have over time will be returned to stockholders unless we can deploy it in value creating opportunities.
The next question is from Mr. Benoit Petrar, Kepler.
Two questions on my side. The first one will be on the dividends from the Dutch Life business in 2018. Obviously, you are in the middle of the merger, also the moving the move to the passenger model. So what could be the kind of level for 2018? Do you still aim for something which is going to be above the net operating results?
Or is there is this target to be kind of for 2019, 2020? So maybe a level there will be useful. And then just maybe on the kind of distribution agreement you have with ING Bank. Could you talk a bit about the growth you see now on the bank insurance distribution? I've seen ING pretty vocal now that they want to cross sell more products and actually push insurance more in their distribution network.
So you could benefit from that, I guess. And it would be useful to summarize a bit where you are and where you have the big relationship with them, I mean, many outside the Benelux, obviously?
Yes. So let me comment on the second question and then the first question on the evidence for Dutch Life will be taken by Delfin. We have a very good constructive relationship with ING in many So we operate already for many years in many markets with ING in the form of distribution. And it is something that we like and we collaborate very well with them and will help to support their ambitions in growth wherever we can of insurance business. I think next to that, we have also worked hard to increase the bancassurance platform over the last years.
And what you can see is that we have struck a deal with Piraeus Bank in Greece where we have lengthened and extended the duration of the bancassurance agreement in Greece. We have a new bancassurance agreement in place in Poland, for instance, and in other markets across Europe. And also in Japan, we've increased the level of partnerships that we have with banks, with other distributors, but also with Sumitomo. So we are really positioning ourselves for continued growth momentum that we have been building over the last years where we focus where we did 2 things. I think, first of all, we've moved the product set to more protection and fee based products, which increased margin, the profitability the products, which is the second thing that we've done.
And the third thing is to build out the distribution and maintain the cost and it's under control. And the result of it is that you can see over the last periods already a momentum building on growth, 34% on constant currencies for the full year 2017. And also proof testament to this is the value of new business that has grown more than 60% throughout the year. So we will continue that momentum and continue that focus on profitable growth moving forward. With that, Delfin, on the Dutch Life dividends.
Yes. Thanks, Benoit. Netherlands Life had very high dividends in 2017. Part of that was the additional €300,000,000 dividend that NN Life paid in the 2nd quarter in order to facilitate the capital injection within Delta Lloyd Life. In the last quarter of the year, NN Life increased the dividend to €175,000,000 And that basically shows the increased capital generation within the segment Netherlands Life.
And as you know, it's our overall philosophy to maintain sustainability and stability as much as possible from the dividends coming from both our subsidiaries, but also in our dividend to our shareholders. At the end of the year, both entities, legal entities within the segment Netherlands Life are very well capitalized at 217% for NN Life and 150 percent for Delta Lloyd Life. And maybe just to remind you that there is the intention to merge both entities at the beginning of 2019. So that basically, I think it gives you an indication that we will aim for some sustainability of the dividends coming out of the segment Netherlands Life.
So I should strip out
the kind of €300,000,000 from the €1,000,000,000 plus you've paid this year and that could be kind of the level for 'eighteen?
Yes. I think that the €350,000,000 was an extraordinary dividend, if you like, for the Q2, as I explained. And as you know, the statement that we gave about the remittances being the free cash flow to be above the net operating result is always a midterm objective. So it doesn't have to necessarily hold for any particular period of time.
The next question is from Mr. Farooq Hanif, Credit Suisse.
I noticed that you've had a dip in unrestricted Tier 1 capital in your Form 2 ratio. You haven't really talked about this in the past, but to what extent is that going to be a kind of a barrier to you distributing capital? So what kind of target levels? Or what how do you think about that unrestricted Tier 1 coverage of your capital requirements? Does it concern you, for example?
That's question 1. Question 2 is, with the cost savings that you're putting through, I think you might have discussed this in the past, but is there going to be a positive capital impact that we'll see? And then when will that come through and also in capital generation? And then lastly, what are your plans and expectations for VNB in the Netherlands? Because I mean, there are good reasons why they why it's low, which you've explained in the past.
But I mean, when do you think that's going to start turning more positively given the ability to change product mix and cost savings?
Yes. Let me take that last question from you, Farooq. Thank you very much for your questions. And then I'm going to ask Delfin to comment on the other questions that you have. So on growth in the Netherlands.
I think value new businesses in the Netherlands has been, I think, a representation of a relatively low base over the last year. So it has been a representation of, I think, the level of market growth that you see in the Netherlands when it comes to life insurance sales. We believe that most of the dominant theme in the Netherlands in the coming years is the move, the transition, very gradual transition from defined benefit to defined contributions. Now we are very well positioned for that. Certainly, after the acquisition of Delta Lloyd, since we in order to win longer term in that defined contribution world, there are a couple of things that are very important.
The first one is a large installed client base, which given the size of the platform we have in the Netherlands to help our clients move with their sponsor schemes over time from defined benefits to defined contribution. Number 2, an efficient cost efficient platform, so you can compete successfully in that new world that will emerge over time. That is something that is behind, of course, our drive to use the scale effect also of the synergies to extract the savings and to drive unit cost down. And thirdly, to have a good asset management capability, which is well recognized and a brand that is trusted as a result for this kind of pension business. And also that, I think, given where we are with the platform, is a great opportunity for us longer term.
Now value new business, there is, of course, the question whether if you move to the defined contribution world, which is more of an asset management kind of world, whether value new business is the appropriate metrics for it. So as we will progress over time, we will ensure that we give you more insight into how we will grow into that business. Having said that, please note that sponsor plans from defined benefit to defined contribution is a very gradual process. Now because the in stock, the accrued benefits and these plans are on the balance sheet for a very long time. So with that, Delfin, can you get into the unrestricted Tier 1 discussion?
Farooq. So we don't have any specific target for restricted Tier 1 or for Tier 2. So we obviously see the opportunities to increase our restricted Tier 1 or Tier 2 whenever the opportunity comes. At this point of time, I think we are very well capitalized with a solvency ratio of 199% for the group, and our subsidiaries are at good level of solvency. So we don't see our level of capital or its composition being any barrier for our growth, our plans.
Just to mention that for restricted Tier 1, we still have approximately €400,000,000 of untapped capacity. For Tier 2, that will be around €200,000,000 But as I said, we don't need to raise capital at this point of time.
Just coming back on that, sorry. I mean, my question was more on unrestricted Tier The its coverage of SCR is low, and it looks low versus, let's say, some very sort of companies that you could pull up. I mean, is that not something that concerns you or you have a regulator a regulation discussion about? Or is it really not something that you really think about?
No. There is no discussions ongoing or internal fear about the level of I guess you are talking in terms of what is the percentage of unrestricted Tier 1 versus the total. And I think that first and most important is what is the total. And from there, one has to optimize that when the opportunities come. So the composition of our Tier 1 is the result of the acquisition of VENTALOID, and we are comfortable with it, and we don't see at this point of time any need to amend it.
And we I would add maybe, Delfin, that we also have some non available own funds in many parts of the business. There is also some Tier 3 that is inadmissible. And our sensitivities that we published also today also reflect the impact of any tiering already. So you can see for yourself that we have a strong solvency ratio and the sensitivities are all being managed actively and strong forward looking capital generation.
Okay. Thank you.
Then on the cost savings, I think we indicated at the Capital Markets Day that we had already realized around €350,000,000 of capital synergies. Then we also indicated that there could be additional benefits but limited and mainly in the area of the reduction of the solvency capital requirement if the partial internal model for the Dutch Life and Non Life businesses of Delta Lloyd are incorporated as we plan later this year. Please do recall that the positive impact of bringing Delta Lloyd to the Partial Internal model will be partially offset by the loss of the longevity hedge benefit that currently is in place in the standard formula ICR of Delta Lloyd Life. In terms of the cost savings, this come through into the Solvency II operating capital generation as and when they are realized by the different entities that are not Life businesses. So for the entities like Asset Management, the Holding and the Short Tail Non Life business, these savings do come through solvency at the time that they are realized.
For the life insurance businesses, this is more complicated as it interacts with the unit cost assumptions embedded in our best estimated liabilities. And at Q4 'seventeen, we have, of course, updated these best estimate assumptions as well as deducted the restructuring cost for the non solvency 2 entities. And this is something that going forward for the Life businesses will have to do every quarter. So additional capital benefits will come to the extent that cost savings are higher than are currently estimated for.
The next question is from Mr. Trevor Moss, Berenberg. Go ahead please.
Good morning, gentlemen. Actually, I thought I'd canceled. So anyway, never mind. Two areas of questioning, please. The first would be relating to group disability, where you've had 2 quarters in a row of pretty poor claims experience.
I wonder whether you could just delve into that a little bit more closely, whether you think it's some bad pricing or whether you think bad claims experience, whether you think it's going to be recurring, I. E. What's the sort of outlook going forward? Have we dealt with this issue or was it just bad luck? The second really, I guess, was in relating to the cash position.
And Lard's been sort of suitably vague about what you might want to do with your excess cash, which is fair enough, I suppose. So a couple of specific questions. Do you see any impediments to the ongoing high level of remittances in 2018 and beyond? And secondly, do you envisage any further capital injections being required in the areas around the group? Thank you.
Well, thanks, Trevor, for both questions. I'll take the group disability one and Delfin will take the cash position. On the group disability one, first of all, you were saying that we're 2 quarters with poor claims experience. That's not the case. Q3 was in Q3, we flagged there was quite some volatility coming from the individual disability, while in this quarter, we flagged the group disability as a concern.
So that's the first thing I want to say. Now on the group disability and the group income, what happened is that we experienced higher claim in what we call sickness pay. This is a result of employees in the companies that have this kind of coverage that are getting well later than we originally expected. So I think that's we need to follow and monitor obviously closely how that will develop moving forward, and we will take action in pricing or other components if this is needed. Then, Delfin, the cash position.
Yes. So in relationship to any possible impediment for the remittances from the subsidiaries to continue, nothing special to highlight. In terms so we see all the business units been able to finance their own growth and basically dividend to the holding, but decisions were to be taken according to their situation going forward. In terms of the capital injections, when you look at the capital injections in 2017, they were high because of the €500,000,000 injected in Delta Lloyd Life. There was some capital injection into Greece in order to finance the bancassurance distribution agreement with Piraeus, a little bit in Turkey, but not very material.
And some but we have seen that even the bank that in the past has been always a recipient of capital injection is now at a good return on equity and provided a good return. And we do not expect any need to inject capital into the bank going forward.
Okay, Stefan. Thank you very much.
The next question is from Mr. Stephen Haywood, HSBC.
You had a 36,000,000 euros nonrecurring benefit in the Delta Lloyd business in the Q4. I see there's a £10,000,000 from the asset management business of Delta Lloyd. But could you provide a bit more detail on what the other £26,000,000 came from in this nonrecurring benefit? And second question is on your expense savings and restructuring charges. I think at the current run rate of £133,000,000 expense savings in 2017, You'll achieve your €350,000,000 target, like 1 year early, well ahead of schedule in 2019.
Can you give a bit more color on how the expense savings are going to materialize over the next couple of years? And the restructuring costs, I mean, the high level restructuring costs in Q4 was €100,000,000 or €100 €4,000,000 or €2,000,000 something like that. Is this sort of restructuring cost going to continue every quarter? And I know you said they're going to be front loaded. And does it mean that the restructuring costs will finish by the end of 2018?
Yes. Thank you very much, Stephen, for your questions. I'll say something general about the expense reduction target and our progress to that, and then I'll hand over to Delfin to expand on that and on the other question that you have. So far this year, we've achieved 133 €1,000,000 And we're, of course, pleased with the progress that we're making as we have a €350,000,000 target of which we want to achieve half by the end of 2018, and we're well underway. So that's good news.
However, please also note that this €133,000,000 also included some low hanging fruit, stopping project spend, for instance, on projects that were no longer necessary. And cost reductions, in general, are not easy, but we're, of course, pushing forward. And we will try to, of course, do as much as we can. And if we can get more, then we will certainly try to do that. But please also know that cost reductions are also not quarter by quarter a linear necessary a linear pattern as we also need to sometimes invest, etcetera, to get access to these cost saves.
So I will now hand over to Delfin for the other pieces of the question.
Yes, Stephen. Indeed, the restructuring costs tend to come earlier than the actual savings. I think, as Lard has already indicated, we don't expect the same linear progression on the savings nor on the restructuring expenses. If savings are larger, they might come with the need of doing further restructuring expenses. This will continue up to 2020, but of course, we do expect that over time the restructuring expenses will be lower.
So I was forgetting the first question, but I was kindly reminded by my colleagues here.
Thank you.
On the €36,000,000 non recurrent of Delta Lloyd, indeed, you mentioned it, €10,000,000 is related to the performance fee of Delta Lloyd Asset Management. The rest is different aspects, more or less equally split between life, non life and Belgium, and it includes different aspects.
Okay. Nothing specific then?
No, nothing specific and nothing that could read. So it is, as I said, a near evenly spread between the 3 units, Delta Lloyd Life, Delta Lloyd Non Life and Belgium.
And the next question is from Mr. Robin van den Broek, Mediobanca. Go ahead please.
Yes. Good morning again. Sorry for being a drag on HoldCo cash. But at a couple of markets there, I think you referred to the merger of the live units potentially lowering your HoldCo cash target. Since that is up for beginning of 2019, when would be the logical point in time to maybe revise your wholesale cash target to €500,000,000 to €1,000,000,000 rather than the €500,000,000 to €1,500,000,000?
Yes, Delfin? Yes, Robin. Indeed, we did mention that with the merger of the legal units, basically, the need to hold cash capital at holding after a 1 in 20 event reduces. And that's why we indicated that the need would be from now being more on the higher side of the range to be below the range. But we did not provide it any indication of changing the target range itself.
It's more a question of the level of comfort within that range. So the range of between €500,000,000 and €1,500,000,000 is unless we change for other reasons. Following the merger of the legal entities, we do not intend to change it due to that.
The
next question is from Mr. Bart Jooris, Degroof, Go ahead please.
Yes. Good morning. Thank you for taking my questions. Both on P and C in non life, the ratio was 98.3% in the last quarter. Can I assume that there is some nonrecurring benefit in there from valproloid normal life?
And what would be, let's say, a good starting number to look at for the coming years? And then secondly, also there, could we assume that there are no longer problems with the large fire claims in Delta Lloyd?
Yes. Thank you very much, Bart, for your question. Now what we saw in Q4 is the 2nd quarter in succession with improved B and C results, benefiting from good experience in the fire portfolio. We had a combined ratio of 98% for the quarter. Now this is encouraging, of course, as we continue to implement a range of measures to structurally improve the Non Life profitability.
But I do want to say, this is not a straight line journey. So our objective for the total Non Life company to have 97% or below is not something that we want to hit 1 quarter, but we want to have that as a structural profitability view. And that, of course, takes quite some that takes a bit of time for all these measures to come to fruition. We've given at the Capital Markets Day the guidance that we expect 12 to 24 months that we need to for the measures to take their full effect. And of course, then you also have ups and downs in the nature of the business, for example, the large storm that we flagged that happened in the first quarter of in January, in the Q1 of 2018.
Yes. But excluding the storm, could we see like 98.3% as a level you can improve on further on?
We will continue to improve.
Is this still already?
Well, we can again, we have 2 quarters, which are encouraging. But to us, it should be an structural overall improvement, 97% or below. And we said that we take a lot of measures to get there, both expense reductions as underwriting improvements and the like. And that is something that will not be a straight line journey to get the total non life company into that place, and we're going to take a bit of time to get there.
Okay. Thank you.
The next question is from Mr. Benoit Petrarque, Kepler. Go ahead please.
Yes. Sorry, 2 follow-up questions. First one will be on the cost assumptions in the Solvency II calculation. So how much of the €350,000,000 cost cutting have you been able to substantiate in your cost assumptions? And I was wondering how much still you need to take going forward?
And then the last one will be just briefly on the UFR drag for 2018. So how much will that be post UFR adjustment on the 1st Jan? I was just wondering on that one.
Nelson?
Yes. So as I said, we have to take our best estimate assumptions, including expense assumptions when calculating our solvency every quarter. So we have basically based this on our best assumption now of the evolution of expenses going forward. You always have to do that in a prudent manner, but I would not expect special increases or substantial increases in terms of capitalization due to these cost savings going forward. As I mentioned before, unless our cost reductions increases and therefore, the best estimate assumptions improve over time.
So don't estimate or expect that there's going to be a significant one off increase on solvency due to further capitalization of this cost savings.
But let's say the recurring capital generation will therefore not be impacted by future cost cutting because you have already taken that into account
to the level you've Correct. Of those that we have already recognized within our business plan and we are confident that are able to be obtained, these are already reflected in our cost assumptions. However, this is the case for the Life businesses. No doubt that for the non Solvency II entities for investment management, for the bank, savings in the holding and other or the short tail non life business, it does going to be reflected as basically the expenses are obtained and that will be reflected when the actual expenses happen. In terms of the lowering on the UFR drug, absolutely.
We have explained and it's very logical that as we have the heat in our solvency due to the decrease on the UFR or when the interest rates go up and the benefit of the UFR decreases, that will result into increase on the operating capital generation as the UFR drug reduces. We prefer not to quantify the sat amount because that fluctuates from 1 quarter to another, also depending on the evolution of the interest rates after year 2020. But indeed, there's going to be a positive impact in the quarters to come due to this decrease of 15 basis points on the UFR.
Great. Thank you very much
Mr. Friese, there are no further questions.
Well, thank you, operator. Thank you all for your questions. Before we end the call, let me just round off by saying that 2017 has been a memorable year. We completed the acquisition of Delta Lloyd. We're making good progress in integrating the 2 companies and significant cost synergies already have been realized.
Ultimately, we aim to bring together the best of our businesses and cultures to create a stronger and better company. I wish you all a pleasant day.
Ladies and gentlemen, this concludes the NN Group conference call. Thank you for attending. You may now disconnect your line. Have a nice day.